Your Broker’s 1099 Statement Will Be Different for 2011

For years, the IRS has had the ability to identify the gross sales of taxpayers from broker transactions, including security (reported on a 1099-B) and property sales (reported on 1099-S forms). However, these identified only the sales price, quantity sold (for securities), and dates of the transactions. To determine the profit or loss, you must also know the tax basis of the property that was sold. Without confirmation of the basis, which up to now has been obtainable only from the taxpayer via an audit, the IRS has no way to verify the reported profit or loss from the sale, leaving this area open to abuse.

That will be changing starting in 2011, at least for security sales. Beginning in 2011, every broker who is required to file an information return reporting the gross proceeds of a security must include in the informational return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term.

Securities initially covered under this new requirement include: (a) shares of stock in a corporation, (b) notes, bonds, debentures, or other evidence of indebtedness and (c) commodities, contracts, or derivatives with respect to the commodities.

The requirement is being phased in and will generally apply to:

• Corporation stocks acquired after 2010,
• Regulated investment companies (mutual funds) and dividend reinvestment plans after 2011,
• Certain other securities (as determined by the IRS) after 2012.

The IRS estimates that more than one in three taxpayers who sold securities may have misreported capital gains and losses—in many cases because they misreported their basis—and it expects the new basis reporting rules to go a long ways toward correcting that problem. However, since the effective dates for broker basis reporting will be based on the acquisition dates of the securities, there will still be many sales in the years to come for which brokers may not report the basis because they lack the information. For these sales, the basis of the securities that were sold will need to be determined by taxpayers, as in the past.

Under this new reporting requirement, the gain or loss reported by a brokerage firm will be based on a first-in first-out (FIFO) method unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred. In the case of securities where the “average cost basis” method is allowable, brokerage firms are to use the “average cost basis” method unless customers notify brokers that they elect another acceptable method with respect to the account in which the stock is held.

This is a complicated undertaking and, undoubtedly, there will be some confusion in terms of matching basis with transactions. For example, under these new rules, a customer's adjusted basis is determined without regard to the wash sale rules unless the transactions occur in the same account. This will create basis matching problems where identical securities are held in other accounts.

If you have questions related to these new broker reporting requirements and how they might affect you, please give our office a call.

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Complete our Survey and Enter to Win an Amazon Kindle

We want to continue to be responsive to your needs while delivering a product of the highest quality. Go to www.surveymonkey.com/s/WFHCO to complete our Client Satisfaction Survey and you could win an Amazon Kindle!  The survey will only take 2-3 minutes to complete. At the completion of the survey, you will have the option of entering for a chance to win. The deadline to submit the survey is October 15, 2011.

If you have any questions, please call the office or email your question to info@wfhorne-co.com.

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Things to Know about Farm Income and Deductions

If you have a farming business, several tax issues can impact your tax situation. The following list includes some of those issues.

1. Crop Insurance Proceeds — You must include in income any crop insurance proceeds you received as the result of crop damage. You generally include them in the year they were received.
2. Sales Caused by Weather — If you are a cash-method farmer and sell more livestock, including poultry, than you normally would in a year because of drought, flood, or other weather-related conditions, you may be able to postpone reporting the gain from selling the additional animals until the next year. To qualify, your area must be designated as eligible for federal assistance.
3. Farm Income Averaging - You may be able to average all or some of your current year's farm income by allocating it to the three prior years. To qualify, you must be engaged in a farming business as an individual, a partner in a partnership, or a shareholder in an S corporation. Corporations, estates, and trusts cannot use this averaging method. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax; it only uses the prior year information to determine your current year tax.
4. Deductible Farm Expenses — The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is considered common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
5. Employees and Hired Help — Reasonable wages paid for laborers hired to perform your farming operations can be deducted. This includes full-time and part-time workers. You must withhold Social Security, Medicare, and income taxes on employees.
6. Items Purchased for Resale — You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and freight charges for transporting livestock to the farm.
7. Net Operating Losses — If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss back five years or over to future years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
8. Repayment of Loans — You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, the interest that you paid on the loan can be deducted.
9. Fuel and Road Use — Off-highway business use of vehicles qualifies for a refund of fuel excise taxes. You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.
10. Optional Farm Self-Employment Tax Method — A special method of computing the self-employment (SE) tax for farmers allows a taxpayer to continue SE tax coverage even in years when profits are small (or even when there is a loss). A taxpayer who uses one of the optional methods for figuring SE tax also uses the resulting imputed income when calculating the credit for child and dependent care expenses and the earned income credit.
11. Exclusion of Farm Debt Forgiveness Income – Generally, when a lender forgives or cancels a debt, the debtor must report the forgiven debt as cancellation of debt (COD) income on their tax return unless an exception applies. First, the farm debt is excluded to the extent that the taxpayer is insolvent. An additional farm debt is also excluded under a special farm debt exclusion, provided the indebtedness was incurred directly in connection with the trade or business of farming, and 50 percent or more of the aggregate gross receipts of the taxpayer for the three tax years before the tax year in which the discharge of the indebtedness occurs is attributable to the trade or business of farming. This exclusion is limited to the sum of the taxpayer’s tax attributes and basis of qualified property.

If you have questions related to the issues discussed here, or for other concerns you may have, please give our office a call. 

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Tax Breaks for Charity Volunteers

If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:

• away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals at 100 percent. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities; 
• the cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible); 
• if you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls; and 
• you can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution:

• get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why your presence is needed at the out-of-town location; 
• you should submit a statement of expenses if you are out-of-pocket for substantial amounts, preferably a copy of the receipts to the charity and arrange for the charity to acknowledge in writing the amount of the contribution; and 
• maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

Please call our office if you have questions related to your charitable volunteering expenses.

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Getting Older With No Retirement Savings in Sight?

One of the earliest lessons in life is that actions have consequences, and approaching retirement age without a substantial nest egg is one of those consequences. But if you are in this situation, you are not alone, as millions of other Americans are faced with the same need to save enough to retire comfortably.

Our priorities shift throughout our lives. Early in the life cycle, home ownership is a priority; that is usually followed by raising and educating children. However, as retirement approaches, the focus needs to shift toward retirement funding. By the time most people are 45 or 50, their children are on their own, the mortgage is close to being paid off, and there is more discretionary income to set aside for retirement.

If you are starting to think about retirement, there are three pitfalls you need to avoid: (1) Retiring on your birthday instead of your bank account, (2) not properly managing your risk and (3) retiring with too much debt.

A frequently asked question is "How much do I need to put aside for retirement?" The answer to that question varies with each individual. There a number of factors to consider: current income, existing savings, assets, how many years until you plan to retire, the lifestyle you want in retirement, and what you can afford to put aside.

If you want to make a rough estimate of the savings needed, determine your approximate income needs and calculate the amount of money you will receive, aside from your savings. These other sources could be your Social Security benefit, a pension, or an IRA or a 401(k) plan.

Add up all of the funds that will come from your Social Security benefit, pension, etc., and determine a savings goal that will, after retirement, provide the additional income needed for retirement. Be sure to factor in inflation and a reasonable rate of return, taking into consideration today’s tough economic environment. Also consider your existing savings and assets that help fund retirement.

Then start figuring out how to make up for the difference. Here are some suggestions:

1. Check to see whether your employer offers a 401(k), a 403(b), or some other type of voluntary contribution retirement plan. Take advantage of these plans and contribute the maximum you can afford up to the annual limit, which for 2011 is:

• $16,500 for taxpayers below 50 years of age, and
• $22,000 for taxpayers 50 years of age and over.

The contribution is before taxes, so making the contribution will lower your gross income and reduce your current tax bite. Also, if your employer matches a percentage of your contribution, that is free money for you.

2. If you have earned income (or receive alimony) but don’t have an employer plan to contribute to or if you can afford to set aside additional funds, you might consider an IRA. Here, you have a choice between a traditional IRA and a Roth IRA. Traditional IRA contributions can be tax deductible or not, depending on your income and whether you have an employer retirement plan. Roth IRAs are not tax deductible, but accrue earnings tax free. However, contributing to a Roth IRA can be complicated for higher income taxpayers. The IRA contribution limit for 2011 is $5,000 ($6,000 if age 50 and over). In some cases, a spouse can also contribute to an IRA based on the other spouse’s earned income.

3. Self-employed individuals can take advantage of a variety of available defined contribution retirement plans that allow contributions nearing 20% on the self-employed individual’s net income, limited to a maximum of $49,000 for 2011. There are also more complicated defined benefit plans available that allow substantially higher contributions.

4. There’s always the option of acquiring a second job or having the spouse acquire employment to generate more income. Invest your additional earnings or use it to pay off any outstanding debts. By getting rid of credit card balances, you also avoid unnecessary interest charges and free up your money for retirement savings.

5. Consider downsizing your home. You can potentially save on utility bills, repairs, and, perhaps, property taxes. Put those savings toward retirement. You might even think of relocating, if you live in an area with a high cost of living. Needless to say, proceeds from the sale that aren’t needed to pay off the old mortgage, other debt, etc. or used to purchase the new home should be put into savings for your retirement years. 

Be sure to periodically review your goals, as your financial situation and the economic climate may change and the plan may need to be adjusted. Please call our office for assistance in terms of assessing your financial resources and to help you plan for a financially secure retirement.

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Don't be a Victim of a Scam or ID Theft

The Internal Revenue Service is encouraging taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The IRS has noted an increase in tax return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates to which they are not really entitled.

Most paid tax return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities. Unscrupulous promoters deceive people into paying for advice on how to file false claims. In other situations, identity theft is involved.

Taxpayers should be wary of any of the following:

• Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
• Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS, enabling a payout from the IRS.
• Unfamiliar for-profit tax services teaming up with local churches.
• Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
• Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.

In some cases, nonexistent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return, which results in a fraudulent return.

 

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives. Promoters of these scams often prey upon low-income individuals and the elderly. 

 

They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone.

 

Unsuspecting individuals are most likely to get caught up in scams; the IRS is warning all taxpayers, and those who help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.

 

Above all remember that the IRS does not initiate taxpayer contact by e-mail. Whenever you receive an unsolicited or dubious solicitation that includes you providing your SSN, bank account number or other financial information, be skeptical. These scam artists can make communication look and sound like it is legitimate. When in doubt, call our office. Don’t let yourself be a victim of these scams.

 

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Next Year's Tax Refund May Be Lower

Taxpayers accustomed to receiving a tax refund every year should be aware of the fact that there are two tax changes for 2011 that could impact their tax liability, possibly making the refunds anticipated next spring lower or even resulting in tax due for taxpayers who normally have small refunds.

For 2011, Congress did away with the Making Work Pay tax credit, which was a refundable credit worth up to $400 ($800 for a joint return). Although the payroll withholding tables have been adjusted to compensate for the loss of this credit for employees by increasing tax withholding, these adjustments are not exact and not always suitable for each individual’s specific tax circumstances. For self-employed individuals who pay estimated taxes, there is no equivalent withholding adjustment. Thus, it is quite possible that the loss of this credit may adversely impact many taxpayers’ refunds for 2011.

Congress actually replaced the Making Work Pay credit in 2011 with a 2% (from 6.2% to 4.2%) reduction in FICA withholding for employees and a corresponding SE Tax reduction for self-employed individuals. This change can affect the 2011 refund or balance due for individuals who work for multiple employers and have earnings in excess of the maximum amount subject to FICA withholding for the year ($106,800 for 2011). When individuals have excess FICA withholding, the excess is refunded on their tax returns. Those accustomed to FICA refunds can, therefore, expect about a 1/3 reduction in their FICA refunds, which will also adversely affect the 2011 refund to be received or balance due to be paid next year.

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