Five Fallacies About IRS Tax Return - Free Tax Filing

Jane Novack for Forbes writes: With the April 15^th deadline approaching, a lot of stressed out taxpayers are probably wondering why the process of filing tax returns can’t be made simpler. Why, for example, given all the information the Internal Revenue Service gets about us, can’t the IRS figure out what we owe?  A recent report from ProPublica and NPR, looked at the role TurboTax maker Intuit and anti-tax activist Grover Norquist have played in blocking the institution of return free filing. In the following guest post,  economist Arlene Holen, a senior fellow at the Technology Policy Institute and a former Congressional Budget Office and Office of Management and Budget official, makes the case for why return-free filing isn’t a viable option now. Holen is also the co- author of a longer 2010 report that makes the case against the IRS getting into business of preparing tax returns. The Institute counts Intuit among its many corporate supporters.

Arlene Holen writes: In the midst of juggling paperwork and forms during tax season it’s tempting to imagine a world where your income tax forms spontaneously appear in your mailbox or inbox, filled out by the good graces of the IRS, ready for signature, free of charge.  Return-free filing is touted in a recent piece by ProPublica and NPR, which makes the case that Americans could be spared needless frustration, anxiety and paperwork were it not for the lobbying efforts of Intuit, maker of TurboTax, and the pernicious influence of anti-tax activists. Unfortunately, the facts tell a different story and return-free filing advocates rest their case on a number of fallacies:

1) Return-free systems in European countries such as Denmark, Sweden and Spain are a model for the US. Studies of tax administration in other countries show that their return-free systems operate under far simpler tax codes than we have in the US.  The highly complex US tax code has special rules for retirement accounts, charitable deductions, capital gains, itemized deductions, and work expenses. Social and economic policies are implemented in the US code by numerous tax incentives that would make a return-free system difficult, if not impossible, to administer.

2) The government already has the information it needs to prepare your returns from your employer and your bank. Government preparation of returns would require payers of income—employers, financial institutions, even governments writing benefits checks—to incur costs by significantly moving up reporting deadlines for the IRS to get the information in enough time so that tax refunds are not delayed. Advocates of return-free filing conveniently ignore these third-party costs. A study I did for the Technology Policy Institute with Joseph Cordes of the George Washington University calculated that third-party costs would range from $500 million to $5 billion annually and would fall disproportionally on small businesses. Higher employment costs are not what we need when jobs are scarce.

3) Preparation of returns would be easy for the IRS; it would be doing essentially the same work it does now. The IRS is a hard-pressed agency, facing a budget crunch even as its workload is rapidly expanding under the Affordable Care Act. Its computer systems have long been plagued with problems and cost overruns, as pointed out by the Government Accountability Office and others. A 2003 Treasury report found that under the current complex tax code, providing taxpayers with pre-filled returns would add to the workload of the IRS. Clearly, additional investment in staff, equipment and facilities would be required.

4) Signing an IRS-prepared form would be voluntary; if you don’t trust the government you don’t have to. Under a return-free system, advocates argue that taxpayers would have the option of accepting a pre-filled return, making changes, or preparing their own return. However, taxpayers signing the form would nevertheless retain responsibility and liability for errors—even those due to the IRS. It is plausible that many would be unwilling to challenge an official IRS document even if it is erroneous, a problem particularly for low-income filers and those with English as a second language. Whose heart doesn’t race a bit when opening a letter with the dreaded IRS return address?

5) California’s ReadyReturn program has been popular with filers. People who use California’s return-free system report that they are happy with it, but the vast majority have declined to use it.  In the first year it was widely available, only 1.5% of those eligible (only those with the simplest returns are eligible) used ReadyReturn and in the second year only 3.2%. Last year, fewer than 90,000 taxpayers used the system out of roughly one million who were eligible.  Advocates blame a lack of marketing budget for the program but a more likely reason so few Californians use it is that checking a government-prepared return for completeness and accuracy requires much of the same work as preparing a return from scratch. California’s experience is consistent with a survey of potentially eligible federal taxpayers, conducted as part of the 2003 Treasury study.  Most respondents said that they were not interested in participating in a return-free program.

California’s tax agency says that ReadyReturns are cheaper to process than regular paper returns, but the study I did with Joseph Cordes found that such savings likely result from electronic filing rather than the government-prepared return itself. The IRS encourages electronic filing and the proportion of filers doing so is now close to 75%.

The estimated cost of the federal tax system to individuals and the government is roughly 10% of personal income taxes collected, not counting third-party costs.  Reducing those costs is a worthy goal. However, this would be best accomplished by simplifying the complex US tax code.  That is also the best way to minimize the aggravation of tax day.

Five Things to Know if You Need More Time to File Your IRS Tax Return

The April 15 tax-filing deadline is fast approaching. Some taxpayers may find that they need more time to file their tax returns. If you need extra time, you can get an automatic six-month extension from the IRS.

Here are five important things you need to know about filing an extension:

1. Extra time to file is not extra time to pay.  You may request an extension of time to file your federal tax return to get an extra six months to file, until Oct. 15. Although an extension will give you an extra six months to get your tax return to the IRS, it does not extend the time you have to pay any tax you owe. You will owe interest on any amount not paid by the April 15 deadline. You may also owe a penalty for failing to pay on time.

2. File on time even if you can’t pay.  If you complete your return but you can’t pay the full amount due, do not request an extension. File your return on time and pay as much as you can. You should pay the balance as soon as possible to minimize penalty and interest charges. If you need more time to pay, you can apply for a payment plan using the Online Payment Agreement tool on IRS.gov. You can also send Form 9465, Installment Agreement Request, with your return. If you are unable to make payments because of a financial hardship, the IRS will work with you. Call the IRS at 800-829-1040 to discuss your options.

3. Use Free File to request an extension.  Everyone can use IRS Free File to e-file their extension request. Free File is available exclusively through the IRS.gov website. You must e-file the request by midnight on April 15. If you e-file your extension request, the IRS will acknowledge receipt of your request.

4. Use Form 4868 if you file a paper form.  You can request an extension of time to file by submitting Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You must submit this form to the IRS by April 15. Form 4868 is available on IRS.gov.

5. Electronic funds withdrawal.  If you e-file an extension request, you can also pay any balance due by authorizing an electronic funds withdrawal from a checking or savings account. To do this you will need your bank routing and account numbers.

For information about filing an extension and the various methods of paying your taxes, visit the IRS website at IRS.gov.

Additional IRS Resources:

• IRS Free File
• Online Payment Agreement tool
• Form 9465, Installment Agreement Request
• Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return

Like Share Print Six Tips on Making Estimated Tax Payments

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax payments.

1. If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.
   
2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.
   
3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You should also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimates as accurate as possible.
   
4. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.
   
5. You should use Form 1040-ES, Estimated Tax for Individuals, to figure your estimated tax.
   
6. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. You’ll find more information about your payment options in the Form 1040-ES instructions. Also, check out the Electronic Payment Options Home Page at IRS.gov. If you mail your payments to the IRS, you should use the payment vouchers that come with Form 1040-ES.

For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax. Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

• Publication 505, Tax Withholding and Estimated Tax
• Form 1040-ES, Estimated Tax for Individuals
• Electronic Payment Options Home Page

How to calculate taxes owed on stock sales / Consider the options for determining your tax bill on investments

Jonnelle Marte for MarketWatch writes: Its’ crunch time for taxpayers. And some of the toughest number crunching falls to those trying to figure out how much they owe Uncle Sam for their investment income.  The taxman will likely take a bigger bite out of gains this year because of higher rates introduced by Congress’s last-minute deal, which created a new top tax bracket with a rate of 39.6%. There’s also the Affordable Care Act, which included new taxes on investment income.

Taxpayers generally have two options when calculating taxes owed after selling stock holdings, but there’s more flexibility for those who take action before selling the shares. “It’s important to look strategically at what your long-term holdings are and what you’re planning on selling over the next few years,” says Greg Rosica, tax partner in the personal financial services office for Ernst & Young.  Here’s the lowdown. 

Figuring out the tax basis of your shares

When you sell shares, the tax gain or loss is calculated by comparing your tax basis in the shares sold to the sales proceeds, net of brokerage commissions and transaction fees. That sounds easy enough, but in reality, the process can become complicated.

Say you didn’t keep track of your basis and have lost all of your transaction statements. What should you do? First, check to see if you can get the information from your broker. Since 2011, investment firms are required to report “cost basis” information for stock and mutual funds to the Internal Revenue Service if they have it, and to issue 1099s to investors. Some exchange-traded funds and dividend reinvestment plans have started reporting the information too.

If you inherited the stock, your basis is the market value as of the original owner’s date of death. That information might be in the estate documents. You can look it up if you know the date of death by using MarketWatch’s Historical Quotes feature on the BigCharts site. Things get tricky when the company in question has been involved in a merger, a spin-off or stock-split transactions.

Specific ID method vs. FIFO

When you sell all of your shares in a particular stock, your tax basis is the sum total of the cost of all your share acquisitions. But if you are only selling a portion of your shares, and you acquired some shares at different prices, you have two alternatives for calculating your tax bill.

The specific ID method enables you to designate which shares you’d like to sell. This is good, because you can reduce your tax bill by selling your highest-cost shares first. Remember though that sales of appreciated shares owned for one year or less are taxed at “ordinary income” rates, while stocks held for over a year are taxed at the long-term capital gains rate, which for most investors is lower than their income-tax rate. As a result, you could be better off selling slightly cheaper shares that you’ve held longer. To take advantage of the specific ID method, you must tell your broker at the time of the transaction which shares you are selling, in reference to the acquisition date and per-share price.

On the other hand, when selling losers, you are generally better off unloading shares held for the shorter period. That way, you’ll generate short-term losses, which can be used to shelter short-term gains otherwise taxed at those high ordinary income rates. (After you offset all of your capital gains, you can use the remaining losses to offset as much as $3,000 in ordinary income.)

The first-in, first-out method, which uses the basis of the shares purchased first, is generally unfavorable in a rising market, because it’s as though you’re selling your earliest-acquired (read: cheapest) shares first. However, when prices are going down, FIFO generally gives you decent results (possibly as good as the specific ID method.)

Wash sales

As with mutual-fund shares, you have to watch out for the “wash sale rule” whenever selling regular stock for a tax loss. Under this little trap for the unwary, your anticipated loss is prohibited if you buy shares in the same company within 30 days before or after the loss transaction. In essence, the IRS treats that as though you kept holding the same security, says Rosica. One way to avoid a wash sale is to purchase a similar, rather than identical, stock after a losing sale.

Changes In The IRS Independent Contractor Classification Program

Lisa Petkun for Pepper Hamilton writes: In September 2011 the Internal Revenue Service (IRS) announced a new voluntary relief program for worker status termed the voluntary classification settlement program (VCSP). Announcement 2011-64, 2011-41, I.R.B. 503. On December 17, 2012, the IRS modified four aspects of the VCSP, in Announcement 2012-45, and also temporarily expanded the program through June 12, 2013 (the VCSP Temporary Eligibility Expansion) in Announcement 2012-46.

The VCSP allows employers to voluntarily reclassify workers who were treated as independent contractors (ICs) prospectively in exchange for immunity for the past. The prospective voluntary classification is not required to be made for all workers, but must cover all of a class or type of worker. As part of the VCSP, an employer cannot have similarly situated workers who were reclassified as employees while others continue as independent contractors.

There are two primary benefits to the VCSP. First, there are no penalties and no interest, and the payment involved is very nominal. The amount due is calculated using the reduced rates of §3509 of the Internal Revenue Code (IRC), and is based on compensation paid in the most recently closed tax year determined when the VCSP application is filed. For 2012, under IRC §3509, the effective tax rate for compensation up to the Social Security wage base is 10.28 percent, and for compensation above the Social Security wage base it is 3.24 percent. For VCSP applications filed in 2013, the most recently closed tax year will be 2012, and therefore these 2012 rates will apply. The VCSP payment is 10 percent of the IRC §3509 rates. The IRS estimates that the 10 percent payment will equal just over 1 percent of the income the employer paid to its reclassified workers for the prior year.

The second benefit is that the employer and the IRS enter into related to these workers for past years. Therefore participants in the program will relinquish the independent contractor classification prospectively without implicating the past.

One negative aspect to the VCSP is that the employer must agree to extend the period of limitations for assessment of employment taxes. This extension is implemented as part of the VCSP closing agreement with the IRS.

To qualify for the VCSP, the employer must consistently have treated the workers in the past as independent contractors. The worker must have always been paid an as an independent contractor and not have been given the same benefits and same rights given to employees. The employer must have filed all required Forms 1099 for the workers for the previous three years. Finally, the employer may not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

To apply for the program, an employer must file Form 8952, Application for VCSP. The IRS asks prospective participants to file the application at least 60 days before the employer wants to begin treating the affected workers as employees. The IRS will review the application and inform the employer if it is accepted into the program. The IRS and the employer will sign a closing agreement and pay the amount due, as calculated in Form 8952, at the time of the closing.

The IRS stated that to date it has received 700 applications covering about 15,000 workers. However, the IRS had stated previously that it was considering changes to remove barriers to entering the program.

Four modifications have been made to the VCSP by Announcement 2012-45, based on taxpayer feedback. First, an employer under an IRS audit can participate in the VCSP as long as the audit is not an employment tax audit. The announcement also eliminates the requirement that an employer agree to extend the statute of limitations on assessment of employment taxes as part of its VCSP closing agreement. The announcement clarifies two other eligibility requirements. An employer is not eligible to participate if it is contesting in court the classification of workers from a previous IRS or Department of Labor audit, or if it is a member of an affiliated group in which any member of the affiliated group is under audit.

The VCSP Temporary Eligibility Expansion permits employers that do not meet all of the conditions for the original VCSP to reclassify workers for federal employment tax purposes. The VCSP Temporary Eligibility Expansion is available to employees who meet all of the conditions to participate in the original VCSP, except that they have not previously filed all required Forms 1099 consistent with non-employee treatment for workers proposed for reclassification. The settlement payment under the original VCSP is 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of IRC §3509. The settlement payment under the VCSP Temporary Eligibility Expansion is 25 percent of that amount. In addition, the employer must pay a reduced penalty for unfiled Forms 1099 for the previous three years. As under the VCSP, the employer is not liable for interest and penalties on the employment tax liability and will not be subject to an employment tax audit with respect to worker classification of the class or classes of reclassified workers for prior years.

Employers that wish to participate in the VCSP Temporary Eligibility Expansion must submit an application on or before June 30, 2013 using IRS Form 8952, with the phrase "VCSP Temporary Eligibility Expansion" inserted at the top of the Form. The original VCSP (with the modifications discussed above) continues to be available for employers who have timely filed Forms 1099 for workers it seeks to reclassify.

Employers who have not filed Forms 1099 for non-employee service providers may consider this reclassification opportunity as an alternative to other strategies to achieve compliance with federal tax laws governing employee classification, including bona fide restructuring of the relationship between service providers and service recipients, the use of a third-party employee leasing or staffing company, and voluntary reclassification outside of any government program. Those alternatives can be analyzed using IC Diagnostics" and other proprietary compliance tools of Pepper's Independent Contractor Compliance Practice. Taxpayers may also be eligible for a safe harbor from liability from employment taxes under Section 530 of the Revenue Act of 1978. Additional background on these alternatives can be found in Pepper'sClient Alert on minimizing IC misclassification liability.

Whether an employer should participate in the VCSP Program or Temporary Eligibility Expansion requires consideration of a number of factors, including (i) participation in the VCSP only addresses potential employment tax exposure and does not eliminate the potential exposure to other enforcement actions relating to overtime, unemployment taxes, workers compensation premiums and state and local income taxes, and (ii) the risk that reclassified workers will be alerted to the issue and use the reclassification to assert claims before administrative agencies and in private litigation seeking overtime pay, unpaid employee expenses, and/or employee benefits that would have been available to them if previously classified as employees. Neither the VCSP nor the Temporary Eligibility Expansion offers protection from these exposures. It should be remembered that the seminal Microsoft case, Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997), regarding the collateral consequences of reclassification, commenced shortly after Microsoft resolved its employment tax liabilities with the IRS. Consequently, employers must weigh carefully the pros and cons of participating in the VCSP or Temporary Eligibility Expansion.

Tax Credits for Education

Linda Thraysbule for MainStreet.com writes: After having her first child, Deborah Harris, 32, decided to go back to school. She decided to pursue a master's degree in fashion, a subject she had loved since high school.  Even though her husband works and she attends school part-time, paying for college can get costly.  “It’s not a financial burden yet, but I can see it becoming one if I don’t get a job,” Harris says.

For the past four years, she has been taking classes online at the Academy of Art University in San Francisco. Harris is roughly $100,000 in debt, a result of both undergraduate and graduate school expenses.

Aside from getting a student loan interest tax form ever year from her school, she wasn’t aware that she could deduct her education expenses on her tax return.

Harris is one of many taxpayers who either doesn’t know that tax breaks are available or forgets to file them.

In a 2009 IRS report, researchers found that tax filers didn’t always claim tax deductions that would maximize their benefits. The report showed that about 14% of filers failed to claim a credit or deduction.

On average, filers lost a tax benefit of $466, resulting in about $726 million dollars unclaimed in 2009.

“Lots of families aren’t aware that they can claim education costs,” says Mark Kantrowitz, publisher of finaid.org and fastweb.com, websites that provide student financial aid information. “Even if they are aware, they don’t know enough about these benefits, or that they could have claimed more.”

Take a look at five tax breaks that can help ease the burden of paying for a college education.

1. The American Opportunity tax credit (AOC) provides a tax credit of up to $2,500 per student based on the first $4,000 you spend for your college education, including tuition, fees and required course materials or equipment--but no room or board costs.

A student must be enrolled in a degree program and have taken at least half the full-time courses for at least a semester during the year.

“The credit is limited to four years,” Kantrowitz says. “And it’s often geared towards students pursuing an undergraduate education.”

To be eligible, your modified adjusted gross income must be $80,000 or less if you’re single, or $160,000 or less if you’re married and filing a joint return.

The tax credit is “phased out” for taxpayers with incomes above these levels. In other words, “if your income is $85,000, you only get to claim half of that tax credit--which is $2,500, so you can claim about $1,200,” according to Kantrowitz.

The Lifetime Learning Credit gives you a little bit of leeway. You can claim up to $2,000 for higher education—which can include graduate school, continuing education courses, or even taking a single class.

“You don’t have to seek a degree, but the training must be provided by a title IV school, like a local community college,” says Kantrowitz. “You need to check if that institution receives federal student aid.”

Tax filers are eligible if they have a modified adjusted income of $62,000 if single, and $124,000 if married and filling a joint return.

The good news is that this tax credit is available for an unlimited number of years. The bad news is that the difference between both credits is you won’t get money back for the Lifetime Learning Credit.

“The Lifetime Learning Credit can reduce your tax bill, but it’s not refundable credit,” said Karen McCarthy, a policy analyst at the National Association of Student Financial Aid Administrators.

In other words, if you owe Uncle Sam $2,500 in taxes, but you have a $2,000 tax credit, the credit will bring down your bill to $500.

But there’s also another catch.

“You can’t double dip,” says Kantrowitz. “You can’t use both credits for the same student in the same year.”

McCarthy recommends checking to see if you’re eligible for the AOC credit first because it offers greater benefits.

3. Another option is deducting tuition and fees from your tax returns. The deduction can reduce the amount of your income subject to tax by up to $4,000. The downside is that you can only claim $4,000 for the whole family, no matter how many of your kids are going to college.

You also can’t claim the deduction if you’re married and you filed separately, you have a modified adjusted gross income more than $80,000 if you’re single, or $160,000 if you’re married and filing a joint return.

4. 529 Plans For parents who want to get a head start on saving for their child’s education, there are state-sponsored college savings plans, called Section 529 plans, that function like a 401(k) plan. Instead of saving for retirement, you’re saving for college.

The interest you earn in a 529 plan is tax-free. And when you’re ready to dip into the plan to start paying for college, you won’t get penalized.

5. Deduct student loans For student loan borrowers, you can deduct your student loan interest if your modified adjusted gross income is $75,000 or less if you’re single, or $150,000 or less if you’re married and filing a joint return.

Student loan interest is interest you paid during the year on a qualified student loan.

Here are some expenses you can’t deduct from your tax returns:

• Room and board
• Transportation
• Insurance
• Medical expenses
• Student fees unless required as a condition of enrollment or attendance
• Same expenses paid with tax-free educational assistance
• Same expenses used for any other tax deduction, credit or educational benefit

Home Is Where You Hang Your Hat: The Significance Of Domicile Planning (establishing Florida as yout domicile for tax and/or asset protection planning purposes),

Jerome L Wolf and Michael Grohman for Duane Morris write A debtor, regardless of state residence, can seek protection from his or her creditors in the federal bankruptcy courts. However, the state in which the debtor resides or, more accurately, is "domiciled," will determine which assets the debtor may keep and which must be turned over as part of his or her bankruptcy estate.

Similarly, from an income tax perspective, many states, such as New York and Pennsylvania, impose a personal income tax on the taxable income of every person. In the case of a domiciliary, the tax is based upon the federal adjusted gross income, which means all income wherever and however earned. In the case of a nonresident, taxable income is based only on income derived from or connected with sources in that state (i.e., rents received from realty, compensation from a business, trade, or profession or occupation carried on in that state). However, even a nondomiciliary will be considered a resident of that state for state income tax purposes if he (i) maintains a permanent place of abode in that state; and (ii) spends 183 days of the taxable year in that state—the so-called "snowbird tax."

Lastly, although the exemption from the federal estate and gift taxes has now been "permanently" established at $5,250,000, many states that impose a state estate or inheritance tax have not correspondingly increased the exemption for its local transfer tax purposes.
Considering that the state of Florida has no state estate or inheritance tax, nor a personal income tax, the fact that Governor Cuomo and the New York State Legislature are finalizing arrangements to extend a high tax bracket for the state's top incomes may give New Yorkers pause to consider their annual net tax bill, not to mention the cost of passing their estates on to the next generation.

Similarly, from a financial planning perspective, Florida exempts the following assets from the claims of creditors and, therefore, has protected from inclusion in a federal bankruptcy estate: an unlimited "homestead" exemption for the principal residence; assets held by a husband and wife as tenants by the entireties; qualified deferred compensation plans, including IRAs and 529 college plans; life insurance policies; life insurance proceeds; annuities; and wage accounts. With respect to business property, Florida law specifically limits the rights of a creditor to a partner's interest in a partnership or a member's interest in a multimember limited liability company to a "charging order"—specifically excluding any other form of remedy such as attachment, foreclosure, etc.

For those who are considering a relocation to Florida, or at least establishing Florida as their domicile for tax and/or asset protection planning purposes, the following checklist of suggested steps should be considered to not only manifest an intent to change domicile to Florida but also, as significantly, to abandon domicile status in the former state.

Summary Checklist of Steps to Consider to Establish Domicile

A. A taxpayer has the burden of proving by clear and convincing evidence that he changed his domicile and abandoned his former domicile. A taxpayer needs to maintain records to establish the change of domicile. If there are substantial facts for and against the change of domicile, a taxpayer will lose the case since he will not have met his burden of proof.
B. Intent is the key to establishing domicile, and the following is a general list of the suggested steps one could consider taking in order to manifest an intention to change domicile to another jurisdiction. This list is not necessarily complete, and the feasibility or practicality of any particular suggested action may vary from case to case:

1. (a) If possible, sell or lease the residence in the former state of domicile.
   (b) If retaining a residence in the former state of domicile and continuing to be actively involved in or perform services with respect to a business conducted in that state, there are cases that hold that an individual has not abandoned the former state as his domicile. However, if the individual is only a passive or inactive investor in a local business (i.e., a limited partnership), case law has held that this issue alone will not be sufficient to challenge a change of domicile.
   (c) If the individual retains a residence and spends more than 183 days in the former state of domicile, he may be taxed as a resident for income tax purposes, even if he claims to have changed his domicile.
2. Own or lease and occupy a dwelling in Florida and move paintings, sculpture, jewelry and those items which are held "near and dear" to Florida. Move furniture, if appropriate, to Florida. Retain moving receipts. Change insurance policies to show Florida as the primary residence.
3. Spend as much time in Florida as is practicable and spend more time in Florida than the former state of domicile.
4. Keep required records to substantiate the number of days spent in the former state. Retain airline, telephone and credit card bills and maintain a diary to prove presence for each day of the year, in the event of an income tax audit.
5. Transact business in Florida and perform services with respect to a business located in Florida. Discontinue transacting business in the former state of domicile and discontinue performing services in the former state of domicile or with respect to a business located in the former state of domicile.
6. File in the office of the Clerk of the Circuit Court of the county of the Florida residence a Declaration of Domicile form indicating the change of domicile to Florida.
7. Register to vote in Florida and actually vote during elections. Cancel voter registration in the former state of domicile. Do not request or return absentee ballots for elections in the former state of domicile.
8. Claim Florida homestead exemption from real property taxes. The homestead exemption must be filed in person between January 1 and March 1 at the appropriate property appraiser's office. Renewals in subsequent years can be filed by mail. The exemption is available to individuals who are domiciled in Florida as of January 1, and who own real property (including condominiums) in Florida as of January 1.
9. File federal income tax returns with the appropriate IRS district for a Florida domiciliary. This center is currently Atlanta, Georgia, 31101.
10. Discontinue filing resident income tax returns in the former state of domicile. It may be prudent to discuss with an accountant the advisability of notifying tax officials in the former state of domicile of change of residence. An individual may still be required to file a nonresident income tax return to the former state of domicile for compensation for personal services rendered in the former state of domicile or for rental income from real or personal property located there.
11. Change testamentary documents to recite that residence is in Florida and have the testamentary documents reviewed by Florida legal counsel. If possible, execute the will and all related or ancillary testamentary and estate planning documents in Florida, in the presence of Florida witnesses and/or Florida Notary Public.
12. Pay automobile license fees to Florida by changing the registration of automobile to Florida. Obtain a Florida driver's license.
13. Transfer bank accounts and securities to Florida. If accounts are maintained in the former domicile, substitute the addresses of bank and brokerage accounts to show the new Florida address.
14. Move a safe deposit vault to Florida.
15. Use a Florida address in contracts, deeds, passports and all other legal documents.
16. Use a Florida address when registering at hotels.
17. Transfer church or temple membership to Florida.
18. Join Florida clubs. Change status in out-of-state membership clubs from resident to nonresident. Withdraw membership in any club outside Florida where domicile in such state is a prerequisite to holding such membership.
19. Give notification of change of address for all charge accounts and credit cards, and for all service providers in the former state of domicile, and notify the post office in the former state of domicile to forward all mail to the new domicile.
20. Establish relationships with and visit doctors and dentists in the new domicile.
21. Finally, in order to minimize the question of domicile from being raised by tax authorities in the former state at the time of death for inheritance tax or estate tax purposes, consider eliminating the necessity for local tax waivers and proceedings and eliminating the necessity for ancillary probate by converting real property interests to personal property and by transferring bank accounts and brokerage accounts to Florida.

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To Deduct Or Not To Deduct… (new standards for capitalizing or deducting dollars spent on tangible property)

Anita Wescott for ORBA writes:  In December, 2011, the IRS issued temporary regulations intended to set new standards for capitalizing or deducting dollars spent on tangible property. These regulations were originally effective for years beginning on or after January 1, 2012, but the effective date has been postponed to tax years beginning on or after January 1, 2014. Taxpayers have the option to apply the temporary regulations to tax years beginning on or after January 1, 2012.

Consistent with prior regulations, the new regulations center on a "unit of property." A "unit of property" is determined by the functional interdependence standard. Guidelines of particular interest for those involved in real estate include the following:

1. Each building and its structural components is considered a single unit of property.
2. Key building systems (like HVAC and plumbing) are separate from the building structure.
3. Leasehold improvements are a separate unit of property.

Taxpayers are required to capitalize improvements made on a unit of property based on relevant facts and circumstances. Improvements are divided into three categories: betterments, restorations and adaptations. Changes have also been made to reporting the retirement of a structural component of a building.

Routine maintenance remains deductible in the current year. Maintenance includes work that does not result in increased capacity, productivity, efficiency, strength or quality.
A de minimis rule allows materials and supplies to be deducted in the current year if the items are less than $100 and are expected to be consumed in 12 months or less. Also, a de minimis expensing rule allows a taxpayer to deduct amounts paid to acquire property that would otherwise be capitalized if the taxpayer has an Applicable Financial Statement, written accounting procedures for expensing property under certain dollar amounts and treats the expenditure on the financial statement in accordance with the written policy. An overall ceiling limits the amount that a taxpayer may deduct under the de minimis rule.

Also included in the temporary regulations are examples intended to clarify the treatment of roofs. Replacement of an entire roof or a significant portion of a roof that has deteriorated over time is classified as a restoration and must be capitalized. Replacement of shingles damaged in a storm or the cost of fixing a leaky roof (even if significant) may be considered a repair. The treatment is based on specific facts and circumstances in a particular case.

Finally, if these new regulations differ significantly from the way repair and replacement costs have been handled in the past, it may be necessary to request a change of accounting method (Form 3115) with the 2012 tax return filed. Most changes are automatic under Revenue Procedures issued in 2012, but guidelines should be followed to request the change.

The IRS is under pressure to clarify and simplify implementation of the regulations when they are issued in final form. The de minimis rules, dispositions and routine maintenance are potential areas under IRS consideration for revision.
While this guidance is meant to simplify reporting dollars spent on tangible property, this area is increasingly complex.

Tax Q&A: 1) Can I deduct assisted living expenses? 2) Can We Claim All The Real Cost to Send our Child to College?

USA Today writes: With the April 15 deadline fast approaching, you probably have questions. Whether you prepare your own tax return or pay someone to do it for you, we are here to help. Every day until April 15, members of the American Institute of Certified Public Accountants have agreed to answer tax questions from USA TODAY readers. Submit your questions to taxadvice@usatoday.com.

Today's question:

Q. My mother went into assisted living at the end of November. Because of increased dementia, she can no longer live alone. My sister and I recently sold her condo so that she will have funds to cover future costs. Mother's monthly income consists of a pension and Social Security. It is around $1,800 per month. She is also currently paying for assisted living with funds accumulated from IRAs, CDs and stocks. Those funds are going quickly, thus the sale of her condo. My question is, can she write off the cost of assisted living as a medical expense. Assisted living is running around $4,000 per month. Prior to assisted living, she was filing the short form rather than itemizing.

A. Depending on a few criteria, your mother's assisted living expenses may qualify for a tax deduction. First of all, even if they do qualify, they will only be deductible as an itemized expense and only to the extent that they exceed 7.5% of her adjusted gross income.

In order to qualify for the tax deduction, your mother must qualify as "chronically ill," which means she is unable to perform two or more "activities of daily living," which are eating, transferring, bathing, dressing and continence OR she must require constant supervision due to cognitive impairment (such as dementia).

Either way, in order to deduct her assisted living expenses, a qualified healthcare practitioner must certify her as "chronically ill" under these circumstances. If this hasn't been done (or you're not sure), speak with the facility's social worker or your mother's resident physician to see if her plan of care includes this diagnosis. For more information:

Publication 502: Medical and Dental Expenses

Kelley C. Long, CPA
Shepard Schwartz & Harris, Chicago

PREVIOUS QUESTIONS:

Q: Our son is a freshman attending an out- of-state university. We are paying tuition, travel expenses, car expenses including insurance, books, dorm and meal fees and travel expenses for trips back and forth during holidays and other visits home. Tuition amounted to $25,000 for the fall 2012 semester, and with the additional expenses we easily spent $30,000 per semester for the 2012/2013 year. Can we claim the costs besides tuition as deductions on our taxes for 2012?

A: For purposes of the tuition and fees deduction, student activity fees and expenses for course-related books, supplies, and equipment can be considered qualified education expenses but only if they have to be paid to the institution as a condition of enrollment or attendance. For example, even if you buy your books directly from the institution, they will not be considered a qualified education expense unless they are required to be purchased directly from the institution.

MORE TAX Q&A: Deducting property taxes, IRA distributions, business expenses

Expenses for insurance, medical expenses (including student health fees), room and board, transportation, and personal living expenses are not considered qualified education expenses even if the amount has to be paid to the institution as a condition of enrollment or attendance.

It's also important to note that if you are married filing jointly and your Modified Adjusted Gross Income (MAGI) is $130,000 or less, your maximum tuition and fees deduction is $4,000. If your MAGI is $130,001-$160,000 your maximum deduction is $2,000, and if your MAGI is over $160,000 no deduction is allowed.

The Tuition and Fees Deduction section of IRS Publication 970 gives all the details of the tuition and fees deduction.

Clare Levison, CPABlacksburg, VA

Wave Debuts Free Receipt Scanning And Management Tool To Add To Its Free Accounting Platform

Darrell Etherington for TechCrunch writes: Wave made an impact on the online accounting software space not by doing anything drastically differently from other young companies out there tackling the problem, but by doing it for free with an ad-supported model. Now, the startup is expanding its feature set into an area that many of those looking for accounting services have likely been missing from the original product with the debut of a free receipt scanner and companion apps.

The new Receipts by Wave product, which includes an iPhone app and online entry via the Wave web-based dashboard, is designed to make it possible for business owners to file receipts with their accounting software anywhere on the spot, instead of forcing them to lug around paper receipts to manage at a later date. Similar tools are offered by industry incumbents like Concur, but Wave’s (which will be supplemented by an email-based tool and an Android app soon) is unique in that it’s a free addition to an already free product.

Wave’s model is based around offering value to entrepreneurs and small business owners who want the kind of convenience offered by cloud-based accounting and finance tools, but can’t necessarily shoulder the subscription fees that often come along with those types of SaaS products. This receipt scanner, complete with OCR character recognition so that it actually parses the data contained on the piece of paper, rather than just storing an image for later use, helps further that goal according to Wave founder and CEO Kirk Simpson.

“We still love free, and we believe that Receipts by Wave is perfectly suited to our free model,” he said in an interview. “We are exploring additional functionality for which there may be an additional cost. But the core Receipts by Wave functionality is something we’re excited to make available to our customers at no charge, just like Wave’s accounting and invoicing tools.”

Wave, founded in 2010, recently rebranded to highlight its change in focus from just accounting to a wider variety of financial tools, including payroll and invoicing software. With over $19 million in funding and 600,000 users to date, it’s one of the more successful Canadian startups in recent memory. Simpson says this product addition will help not only in keeping those existing users satisfied, but should act as a competitive advantage to help attract new users, too.

“By putting invoicing, accounting, receipt scanning, reporting, payments, payroll and personal finance in a single tool, we expect to see more engagement from our existing users,” he said. “As well as more adoption by people who want to switch from spreadsheets and shoeboxes and/or other software — online or off — that doesn’t truly match their needs.”

The new Receipts by Wave app is available in the App Store for iPhone now, and on the web. It’s a strong addition to a strong product, and should help Wave make an even better case for why free, in this case, might actually be better than expensive when it comes to some SaaS offerings.

Death of stretch IRAs would boost life insurance / Tax benefits come to the fore if inherited retirement accounts get the ax

Darla Mercado for InvestmentNews.com writes:   Life insurance-based retirement strategies will look even more appealing if President Barack Obama's pitch to cap IRAs at $3 million becomes a reality.  Curbing growth of individual retirement accounts is expected to be in Mr. Obama's budget proposal, which will be released tomorrow. According to Bloomberg, the plan proposes that funds inside of a tax-preferred retirement account could not generate more than $205,000 in annual retirement income, pegging the maximum value of the IRA at about $3 million.  There isn't any word yet on how this provision would apply to Roth IRAs — which could become more popular if they are left untouched — or how amounts over the $3 million limit would be treated. 

However, experts view the move as deterring the use of inherited, or stretch, IRAs, which allow beneficiaries to extend the required minimum distribution over the course of that individual's life expectancy. As a result, the corpus of the IRA is preserved even longer and has more time to grow tax-deferred.

“I think eliminating stretch IRAs is what they're getting at, and they want to go back to saying that all the money has to be paid out within a few years after death,” said Ed Slott, an IRA distribution expert.

It's too early to tell where the proposal will go, but advisers and tax-planning experts believe that life insurance and other strategies may become more popular should the $3 million limit come to pass. 

Clients with large IRA balances could consider making a withdrawal, paying any applicable taxes and using those proceeds to buy a life insurance policy.
Retirement plan assets are “bad assets” in terms of estate-planning vehicles. Beneficiaries could start making withdrawals and end up stuck with income taxes. Meanwhile, life insurance pays out to beneficiaries free of income tax — and if it's structured in an irrevocable trust, it could pass through free of estate taxes.

“You are converting a bad asset to a good one,” said Jeremiah W. Doyle IV, an estate-planning strategist for BNY Mellon Wealth Management.
As far as coming up with supplemental retirement income vehicles for ultrahigh-net-worth individuals, cash value life insurance could also be a reasonable savings alternative because it grows tax-deferred, noted Matt Klein, managing partner at Matauro LLC, which specializes in life insurance planning. 

Universal life insurance, variable or indexed, could be positioned so that premium dollars are largely going toward cash accumulation. In this context, Mr. Klein noted, the death benefit isn't the sole purpose of the policy. Rather, it's the tax-deferred growth capability of the policy and the fact that clients can take tax-free withdrawals from the cash value to help fund costs in retirement.
Still, there is some risk in using these policies. For instance, during the market downturn in 2008, variable insurance policies took a beating because their underlying investments tanked. People who had optimistic illustrations that depicted strong market performance were blindsided when they ended up with policies with dwindling cash values that had to be propped up with even more premiums.

Any strategy that positions life insurance as a retirement savings and income vehicle needs to be closely monitored on a regular basis, Mr. Klein warned.
Further, this is more of a tax diversification play for retirement income, and it should be considered only part of the client's overall strategy.

“The trick is to make sure everything is healthy on an annual basis,” Mr. Klein said. “It's like if you bought a gremlin: It's the coolest thing in the world — if you take care of it.”
Should the $3 million limit become a reality, there are also some strategies for plan sponsors to help boost supplemental savings. 

Nonqualified plans could be a way to increase savings for highly compensated workers, too. Such concepts include supplemental compensation plans, which allow the employer to finance the worker's supplemental savings, and the death-benefit-only plan, in which the employer pays a benefit to the worker's beneficiary if the employee dies. 

These plans are already used in situations where employees earn so much money that they could save beyond the $17,500 annual limit in their 401(k) and the $5,500 limit for IRAs.
Employers typically use corporate-owned life insurance on the lives of these key employees to help fund the cost of providing these nonqualified benefits.
Still, nonqualified plans aren't available to all employers. Smaller businesses, such as S corporations and limited liability companies, might find this prohibitively costly to set up.

IRS Tax Deductions for handicapped child

Karin Price Mueller for the Star-Ledger in her column writes: Q. I have an adult handicapped child that I had to move to an assisted living facility because of my age. Because the cost of assisted living is not covered by her settlement or Social Security, I have to subsidize it. Can I claim this as a deduction on my income tax? - ML

Answer: Yes, you can — as long as your child is considered your dependent.

I that’s the case, you can include any medical expenses you pay for her, along with your own medical expenses, when determining your medical deduction on your tax return, said Gail Rosen, a Martinsville-based certified public accountant.  To determine if your child is your dependent, the IRS says you must pass the following tests, Rosen said:

a) You must provide more than 50 percent of the individual’s support costs

B) The individual must be related to you

C) The individual must not have gross income in excess of the exemption amount, which is $3,800 for 2012

d) The individual must not file a joint return for the year

e) The individual must be a resident of the united states, Canada or Mexico

Rosen said the costs of qualified long-term care services required by a chronically ill individual are included in the definition of deductible medical expenses.

But, if your child is in such an institution primarily for family or personal reasons, then only the portion of the cost that is attributed to medical or nursing care — excluding the meals and lodging — is deductible, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence.

You said your child receives social security, so you need to be careful in determining if she’s actually your dependent, Daquila said. If Social Security pays more than half, you could have a problem.

"In determining whether (your child) pays for more than half of her support, you need to add up all of her expenses during the year and determine who pays for more than half of her expenses,” she said. “If you pay for more than half of her support and she is considered a ‘qualifying child,’ then she would be claimed as a dependent on your tax return and all of her medical expenses could be deducted.”

Daquila said you can deduct the cost of medical expenses paid for you, your spouse and your dependents on schedule a (Form 1040).

For the 2012 tax year, you must have medical expenses that exceed 7.5 percent of your adjusted gross income to take the deduction.

IRS Tax Tips for Newlyweds

Jeff Brown for Mainstreet.com writes: So you’re a newlywed doing your taxes together for the first time. Congratulations!  And sympathies. There’s nothing less romantic than filling out a tax return, and irritations over money are among the most common sore points for couples. So in addition to the advice from a recent panel of experts, here are a few thoughts to make the process, if not smooth, a bit less bumpy. (If you got married this year, or will, read on for tips on making the 2013 return easier.)

For most married couples, the first issue is whether to file a joint return or one for married folks who file separately. But before this, you must be sure you are married in the eyes of the federal government -- you must be a man and a woman, and have been married and living together on Dec. 31, of the tax year – 2012 in this case. If so, you are considered to have been married for the whole year.

Most married couples can save money by filing a joint return rather than separate ones. That’s because the Married Filing Separately return doesn’t provide for a number of tax benefits available in the joint return, including things like deductions for tuition fees and student loan interest payments, the child and dependent care credit and the earned income credit.

Among the other drawbacks of separate returns, according to TurboTax, the tax software firm, are lower income limits that make it harder to deduct IRA Contributions.   Also, if you file separately, both of you must either claim the standard deduction or itemize – you can’t each do it differently.

So why would anyone file separately?

In a small percentage of cases when there is a large difference between the spouses’ incomes, separate returns can result in a lower combined tax liability. This mainly affects people living in states that don’t view all property as the couple’s community property. Community property states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin.

The other reason: When you file separately you are responsible only for your own return. With a joint return, you are both responsible for everything in it, and each of you must stand ready to cover the entire tax liability. In other words, if hubby won’t kick in his share, the wife has to pay it all.

A final option: filing as a married taxpayer who is the head of a household. This applies if you did not live with your spouse during the last six months of the year and you maintained a home for a child for more than half the year. This could save you money by, for example, allowing a larger standard deduction than you’d get by fling separately.

Still not sure what to do? That’s a common problem. Most people can’t be sure which filing status will work best without actually filling out the different returns. That will be less of a headache if you use a computerized system online or on your computer. Programs like TurboTax can walk you through the issue.

Once this decision is made, doing the return should seem familiar if you’ve been doing individual returns. Of course, if one spouse takes on the chore, the other spouse won’t be off the hook, because the one doing the work will need lots of information about the second spouse’s finances.

So, to make life easier for both of you, assemble all documents well ahead of time, and organize them into the necessary categories – W-2s for salary, 1099s for outside earnings and investments, lists of investments sold during the year and the cost when they were purchased, and so on.

Remember that if you file a joint return you are in this together, and you’ll both pay the price if one of you fudges on income, overstates business expenses or does some sloppy arithmetic.

Should you hire a pro? If you both felt you needed a professional tax preparer when you were single, maybe you should. But if either spouse felt comfortable doing a return as a single, the returns for married folks should not be any more challenging.

There may be an exception, though, if one or both spouses have dependent children from a previous marriage or relationship. You need to be certain that you and the child’s other parent are each doing things correctly, like determining who takes the tax deduction for a dependent. Maybe it’s worth paying a pro to be sure you do this right.

If you got married this year, or plan to, a few moves will make the 2013 return easier to do next year. Each spouse, for example, should file a new W-4 form at work to be sure the tax withholding is correct.

And, obviously, if one or both of you has changed address, make sure your bank, broker, mutual fund companies and lenders all know where to send your tax documents. Download and file IRS Form 8822, a change-of-address form that will assure the IRS sends all communications to your new address. And a spouse who has changed his or her name should obtain a new Social Security card by fling Form SS-5 so the name and Social Security number will match when the IRS reviews thereturn. If they don’t there will be problems.

Newlyweds should also sit down and go over their finances very carefully. A good budget helps you cut spending, and that could allow you to contribute more to retirement accounts like 401(k)s and IRAs, allowing you bigger tax deductions. You also should consult one another on matters like selling investments, so you can net out gains and losses to minimize capital gains tax.

And if either or both of you are self-employed or have a lot of investment income, be sure to file quarterly estimated tax payments. That way you’ll avoid interest and penalties, or a desperate scramble to come up with cash to pay tax due when you file your next return.