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TAX

Tax relief and health care acts shape 2011 returns

Return preparers face new regulations; information reporting expands.

By Paul Bonner
January 2012
2011 Tax Returns

As CPAs gear up for tax season, they’ll find the Form 1040 series for 2011 looking much the same as that of the previous year, but only because of Congress’ 11th-hour compromise late in 2010 to keep it so. Nonetheless, a number of new features affecting individuals and businesses, such as new information reporting forms, are debuting, so return preparers should be aware of developments in the past year that will affect 2011 tax returns.

For 2011 inflation-adjusted tax rates and updated amounts of various credits and other items, see the “Quick Guide” (click here to download). For inflation-adjusted items for the 2012 tax year, see the sidebar, “Looking Ahead to the 2012 Tax Year,” below.

The most significant event affecting 2011 returns was the signing on Dec. 17. 2010, of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act), P.L. 111-312, which extended the ordinary income tax rates introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), P.L. 107-16, and the capital gain tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27. The Tax Relief Act also extended a large number of other expired or expiring provisions.

Many of the tax provisions enacted in EGTRRA and JGTRRA had been set to expire after 2010. The Tax Relief Act amended EGTRRA and JGTRRA to postpone the sunset of the affected provisions until after 2012 and extended many other provisions to 2011 or 2012.

PRACTICE AND PROCEDURE
PTINs.
This tax season is the second for which tax preparers must register with the IRS and obtain or renew preparer tax identification numbers (PTINs). The IRS required preparers who registered and obtained a PTIN for the 2011 filing season to renew it for 2012 by the end of 2011. For more on PTIN renewal procedures, see Tax Matters on page 60.

Mandatory e-filing. This tax season, the threshold above which preparers must e-file most individual and fiduciary income tax returns drops from 100 returns they or their firm reasonably expect to file during the year to 11. A transitional rule allowing return preparers to paper file upon written request from the taxpayer expired at the end of calendar 2011 (Notice 2011-27). EITC due diligence. The U.S.-Korea Free Trade Agreement Implementation Act, P.L. 112-41, increased the preparer penalty under Sec. 6695(g) from $100 to $500 for each failure to exercise due diligence with respect to the earned income tax credit. The higher penalty is effective for returns required to be filed after Dec. 31, 2011.

EXTENSION OF EGTRRA AND JGTRRA PROVISIONS
Tax rates.
EGTRRA introduced a 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010 so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%, respectively. With the Tax Relief Act’s postponement of the EGTRRA sunset, those rates are scheduled to continue through 2012.

Capital gains. In 2003, JGTRRA also lowered the capital gain tax rate to 15% (0% for taxpayers in the 10% and 15% ordinary income tax brackets). These rate changes also had been scheduled to expire after 2010. The Tax Relief Act’s postponement of JGTRRA’s sunset continues the lowered capital gain tax rate through 2012.

Itemized deductions and personal exemptions. The Tax Relief Act also extended EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout for two years through 2012.

PAYROLL TAX REDUCTION
For 2011 only, the Tax Relief Act also reduced the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remained at 6.2%). The payroll tax reduction replaced the former making work pay credit, which expired at the end of 2010. However, while the making work pay credit was phased out for higher-income taxpayers, the payroll tax reduction applied to all workers who paid payroll taxes, regardless of income level, and should be reflected in box 4 on the taxpayer’s 2011 Form W-2, Wage and Tax Statement.

AMT PROVISIONS
The Tax Relief Act increased the alternative minimum tax (AMT) exemption amounts for 2010 and 2011 (also known as the AMT patch). For 2011, the amounts are $48,450 for unmarried individuals; $74,450 for married individuals filing jointly; and $37,225 for married individuals filing separately.

In addition, the Tax Relief Act extended through 2012 the 0% and 15% capital gain rates for the AMT; the AMT offset of the child tax credit; and the 7% AMT preference for excluded gain on the disposition of qualified small business stock. It also extended the offset of nonrefundable personal credits against the AMT, but only through 2011.

EXTENSION OF EXPIRED INDIVIDUAL PROVISIONS
The Tax Relief Act extended a variety of temporary individual tax provisions that had expired at the end of 2009 or were scheduled to expire at the end of 2010. They include tax credits, deductions and various tax incentives.

All of the following were extended for two years through 2012:

  • Marriage penalty relief (the increased standard deduction and expanded 15% bracket for married taxpayers filing jointly);
  • The $1,000 child tax credit amount (previously scheduled to revert to $500 after 2010) and the expanded refundability of the credit;
  • The increased starting and ending points for the earned income credit and the increase in the credit amount for families with three or more qualifying children;
  • The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one);
  • The American opportunity tax credit;
  • The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts;
  • The enhanced rules for student loan deductions introduced by EGTRRA;
  • The exclusion for employer-provided educational assistance (Sec. 127); and
  • The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships (Sec. 117(c)(2)).


The following provisions were extended for one year through 2011:

  • The treatment of mortgage insurance premiums as interest (Sec. 163(h)(3)(E));
  • The parity for exclusion from income for employer-provided mass transit passes and parking benefits (Sec. 132);
  • The allowance for tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)(8));
  • The temporary 100% exclusion of gain from the sale of certain small business stock under Sec. 1202, enacted by the Small Business Jobs Act of 2010, P.L. 111-240;
  • The deduction for tuition and related expenses (Sec. 222);
  • The state and local sales tax deduction (Sec. 164);
  • The deduction for elementary and secondary school teachers (Sec. 62(a)(2)(D));
  • The nonbusiness energy property credit (under the rules in effect before the American Recovery and Reinvestment Act of 2009, P.L. 111-5) (Sec. 25C);
  • The credit for first-time Washington, D.C., homebuyers (Sec. 1400C); and
  • The special rules for qualified conservation contributions by individuals (Sec. 170(b)(1)(E)).


HEALTH CARE TAX PROVISIONS
Although most of its major provisions will take effect in subsequent years, the health care reform legislation passed in 2010 contained some provisions that were effective in 2011.

Employees may see some new information on their Forms W-2 for 2011. The Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. This provision was originally mandatory for tax years beginning after Dec. 31, 2010; however, in Notice 2010-69, the IRS announced that employers will not be required to report the cost of employer- sponsored coverage on W-2s issued for 2011, due to the difficulty in preparing payroll systems for the requirement. However, employers have the option to report such costs in 2011, so some employees may see this information. It will appear in box 12 of the W-2, with a code DD. This reporting is strictly informational; the amount reported will not affect the individual’s tax liability.

Over-the-counter medications. Under the PPACA, amounts paid or incurred after Dec. 31, 2010, for medications obtained  without a prescription (except for insulin) are no longer reimbursable from health savings accounts (HSAs), Archer medical savings accounts (MSAs), health FSAs or health reimbursement arrangements.

Tax on HSA distributions. The additional tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses was increased to 20% of the disbursed amount, effective for disbursements made during tax years starting after Dec. 31, 2010. (Under prior law, the tax was 10% of the disbursed amount for HSAs and 15% for Archer MSAs.)

SIMPLE cafeteria plans. Starting in 2011, small businesses could start offering SIMPLE cafeteria plans. Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

BUSINESS PROVISIONS
Self-employment.
The self-employment tax rate for 2011 dropped from 15.3% to 13.3%, reflecting the one-year cut in the Social Security tax also applicable to employees. However, taxpayers taking the above-the-line deduction for one-half of self-employment tax can still claim the same 7.65% amount as in 2010—making the deduction equal to 57.51% of self-employment tax for 2011. However, a provision that for 2010 allowed self-employed individuals to deduct health insurance premiums from self-employment income for purposes of determining self-employment tax (Sec. 162(l)(4)) was not extended for 2011.

Depreciation. Property acquired and placed in service between Sept. 9, 2010, and Dec. 31, 2011, may be eligible for 100% depreciation.

Work opportunity tax credit. Employers who hire certain military veterans, young people and members of other targeted groups by Dec. 31, 2011, may claim a credit based on the employee’s wages (Sec. 51).

NEW INFORMATION REPORTING PROVISIONS
Stock basis reporting.
Individual taxpayers should also see more information on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which has been expanded to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stockbrokers and mutual fund companies will use Form 1099-B to report this information at year-end. They will also use the expanded form to report whether gain or loss realized on these transactions qualifies as long-term or short-term gain or loss. The payer is required to file the expanded Form 1099-B with the IRS by Feb. 28, 2012 (or April 2, 2012, if the payer files electronically) and provide it to investors by Feb. 15, 2012. Box 3 will show the cost or other basis of securities sold.

Credit card transactions. Beginning with calendar year 2011, payment settlement entities for traditional and online merchants will be required to report to a payee, as well as to the IRS, the gross amount of the payee’s reportable payment transactions within a calendar year. The payee is the party that accepts a payment card as payment or establishes an account with a third-party settlement organization to settle transactions. In a payment card transaction, the payee is generally the merchant or seller. This provision was enacted as Sec. 6050W by the Housing and Economic Recovery Act of 2008, P.L. 110-289, but became effective only in 2011. These payments are reported on Form 1099-K, Merchant Card and Third Party Network Payments, which may be furnished electronically.

The IRS in Notice 2011-89 provided transitional relief for 2012 from penalties under Secs. 6721 and 6722 for Forms 1099-K that are incorrect or incomplete, as long as the payer makes a good-faith effort to file and issue them correctly. The IRS also postponed until 2013 backup withholding with respect to amounts reportable under Sec. 6050W (Notice 2011-88). Form 1040, schedules C and E for 2011 tax years includes a line for payee taxpayers to report amounts reported to them on Form 1099-K, but the schedules direct taxpayers to enter a zero on the line.

Basis of inherited property. While most commentary and guidance has focused on the changes in estate and gift taxes for 2010 and 2011 as they relate to gift and estate returns, CPA practitioners may see effects of the 2010 modified carryover basis election on capital gains for 2011 reported by inheritors of the estates of 2010 decedents that made the election. Under these rules, the heirs receive inherited property with a basis equal to the lesser of the decedent’s basis or the property’s fair market value (FMV) as of the date of death (Sec. 1022(a)), plus any basis increase (up to the FMV of the property at the decedent’s date of death) allocated to the property by the executor of the estate.

The maximum amount of basis increase that the executor can allocate among all of the decedent’s assets is $1.3 million ($60,000 for estates of nonresidents who were not citizens), plus certain losses and loss carryovers of the decedent. Property transferred outright to the decedent’s spouse and qualified terminable interest property is eligible for an additional $3 million of basis increase. If the executor has made the Sec. 1022 election, the heir should receive from the estate a Form 8939, Schedule A, containing information about the property’s basis, date acquired, whether any gain on its sale would be ordinary, the amount of basis increase allocated to it and its FMV on the decedent’s date of death.

Individuals who inherited property from 2010 decedents may have already disposed of it before the estate made the carryover basis election and assumed that their basis was the FMV at the time of death. The estate’s subsequent election to apply the modified carryover basis rules may result in such individuals’ owing capital gain tax, due to the now lower basis of the property. The IRS has said that, in such cases, it will presume the recipient’s reasonable cause and good faith for any increase in the recipient’s tax liability due to the application of Sec. 1022 and will not impose failure-to-pay or accuracy-related penalties (Notice 2011-76). The IRS advises affected taxpayers to write at the top of an amended return “IR Notice 2011-76” to obtain the relief.



Looking ahead to the 2012 tax year
The IRS made inflation adjustments to the income tax tables and many tax credits and other items for tax years beginning in 2012 in Rev. Proc. 2011-52.

Separately, the IRS announced the 2012 contribution limits and other figures for pension plans and other retirement-related items (IR-2011-103).

The increases are greater than in the previous two years, when inflation was lower.

Besides revised income tax tables, the new revenue procedure included updated amounts for various items such as the personal exemption (which increases from $3,700 to $3,800) and standard deduction. The revenue procedure also gave new figures for the child tax credit, American opportunity and lifetime learning credits and the earned income tax credit—40 items in all.

The $13,000 annual gift exclusion is unchanged for 2012, although the estate and gift lifetime exclusion for decedents dying during 2012 goes up from $5 million to $5.12 million.

The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b) or 457(b) plans and the federal government’s Thrift Savings Plan increases from $16,500 to $17,000. The catch-up contribution limit under those plans for those age 50 and over is unchanged at $5,500.

The Social Security Administration announced that the Social Security wage base for 2012 is $110,100 (up from $106,800 in 2011).



Expanded toolkit offers 360 degrees of outreach resources, 365 days a year
In the midst of a difficult economy, and facing potential consumer confusion in the wake of the registered tax preparer program, firms of all sizes are confronting the dual challenge of holding on to current clients while successfully landing new ones.

To help CPAs meet these challenges and differentiate themselves from other tax preparers, the AICPA is building on a multiyear marketing and client-retention campaign launched in 2010 to assist members with their marketing and client-retention efforts. This year, the AICPA is expanding the toolkit to include materials to help CPAs explain and promote their value to clients.

“Many CPAs aren’t used to actively promoting themselves,” said Edward Karl, AICPA vice president–Tax. “In today’s climate, CPAs can’t afford to miss any opportunity to solidify their practices and build on their strengths.”

The enhanced toolkit includes customizable materials that allow members to reach clients and prospective clients from many different angles. These include short articles and concise, impactful messages for firm newsletters, sample social media posts and tax brochures that CPAs can use to stay connected with current clients and enhance client-retention efforts.

For potential clients and referral sources, tools such as a “Tax Saving Strategies” presentation provide a framework for in-house meetings and presentations to outside groups. CPAs can use them to highlight specific tax updates for 2012, while also incorporating the underlying message of how a CPA can add value.

One important feature of the toolkit is that many of the materials can be tailored for use by firms of different sizes. The importance of this is reflected in the results of the 2011 PCPS CPA Firm Top Issues Survey–growth and client retention clearly are on every firm’s agenda.

“We are sensitive to the fact that how firms attract and retain clients will vary by firm size,” explained Mark Koziel, AICPA vice president–Firm Services & Global Alliances. “We will be taking this into account in the development of these resources in order to better meet the needs of our members.”

Just as important, the toolkit has been designed with a busy, multitasking end user in mind. It comes with tips on making the best use of each resource and features an implementation checklist for incorporating the materials into a firm’s overall client-retention and acquisition strategies.

The AICPA is taking a direct role in getting the word out. “We’re here to support our members, and again this year, one of the things that means is continuing our advertising campaign,” said Jim Metzler, AICPA vice president–Small Firm Interests. “We’re placing radio spots and Web banners, using messages consistent with the materials we’re including in the toolkit that educate our audience on the value of working with CPAs and their distinguishing qualifications.”

Those efforts continue all the way through to the 360 Degrees of Taxes website: 360taxes.org. This public service resource is an extension of the 360 Degrees of Financial Literacy site. It has a more specific focus on supporting the position of CPAs as the premier providers of tax services, as well as enabling interaction with consumers throughout the year. The site serves as a forum for addressing individual tax questions and needs, a place to educate the public on the differences between CPAs and registered tax return preparers, and a guide pointing visitors toward a CPA in their local community.

The CPA value and tax services toolkit is available at aicpa.org/tax-toolkit.



Paul Bonner
is a
JofA senior editor–tax. To comment on this article or to suggest an idea for another article, contact him at
pbonner@aicpa.org or 919-402-4434.



AICPA RESOURCES

Publications

  • 2011 Tax Practice Guides and Checklists (#PTX1203D; #INITC12, interactive online version)
  • Managing Your Tax Season (#090560)


CPE self-study

  • 1040 Tax Return Workshop by Sid Kess (#735226)
  • 2011 Individual Tax Review Series: Beyond the Basics (#733634)
  • Annual Federal Tax Update (2011 Edition) (#731144)
  • Hottest Tax Topics for 2011 (#733135)


For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.

On-Site Training

  • 1040 Tax Return Workshop by Sid Kess (#IITW)
  • 2011 Individual Tax Review Series: Beyond the Basics (#TRBB)
  • Annual Federal Tax Update (#PTU)
  • Hottest Tax Topics for 2011 (#HOT)


Go to aicpalearning.org/on-site, then search for courses by “Alphabetical Index” or “Acronym Index.” For assistance, contact a training representative at 800-634-6780 (option 1).

The Tax Adviser and Tax Section
The Tax Adviser is available at a reduced subscription price to members of the Tax Section, which provides tools, technologies and peer interaction to CPAs with tax practices. More than 23,000 CPAs are Tax Section members. The Section keeps members up to date on tax legislative and regulatory developments. Visit the Tax Center at aicpa.org/tax. The current issue of The Tax Adviser is available at thetaxadviser.com.

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