Costly IRS Mandate Slipped into Health Bill

A recent post by Chris Edwards on the Cato Institute Blog, Costly IRS Mandate Slipped into Health Bill, reviews a mandate included in the recent health care bill that increases reporting requirements for businesses.

A few wording changes to the tax code’s section 6041 regarding 1099 reporting were slipped into the 2000-page health legislation. The changes will force millions of businesses to issue hundreds of millions, perhaps billions, of additional IRS Form 1099s every year.

The current law requires businesses to issue 1099's to contractors, however the new law purchases to the requirements. As described by RIA, a firm that provides tax information, and quoted by Edwards,

The 2010 Health Care Act adds “amounts in consideration for property” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and “gross proceeds” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2)) to the pre-2010 Health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold is met in a tax year for any one payee. Thus, Congress says that for payments made after 2011, the term “payments” includes gross proceeds paid in consideration for property or services.

Edwards quotes Chris Hesse of LeMaster Daniels PLLC as saying, "Under the new law, businesses will be required to send a 1099 to other businesses for virtually all purchases."

The requirements are already being challenged. Representative Dan Lungren (R-Calif.) introduced legislation repealing the requirement. As reported by the On the Money, the Hill's blog on finance and the economy, Lungren thinks that the burden is not particularly wise.

"It is just one of the dumber things I have seen in Congress," he said, adding, "Imagine this: Goods and services purchased by a small business, from a supplier ranging from component parts of every American product, to phone and internet service, to the shipping service of Fed Ex or UPS, will now give rise to a new paperwork burden at tax time."

The proposal is apparently now waiting for the Ways and Means Committee.

High-Income Taxpayers Should Maximize Charitable Contributions, Itemized Deductions in 2010

The latest post on the Tax Policy Blog is High-Income Taxpayers Should Maximize Charitable Contributions, Itemized Deductions in 2010. It is the latest in a series that the Tax Foundation has written about the expiration of the Bush tax cuts. This post is about the likely expiration of  PEP and Pease, popular names for the personal exemption phase-out and a similar phase-out of itemized deductions for higher income filers. The post notes:

PEP and Pease have created significant problems, raising marginal tax rates and adding to tax complexity. In some cases, PEP and Pease push the marginal tax rate up substantially. Next year, under President Obama's budget, a married couple filing jointly with combined AGI of $254,550 would pay a 28 percent rate without PEP and Pease, but a 30.5 percent rate with PEP and Pease.

For more details, read the post, or check out the Tax Policy Foundation or the Tax Policy Blog.

How to fix an error on your individual income tax return

Does this sound familiar?

• You filed the return.
• You cashed the refund check, or you wrote out the check for the taxes you owed.
• When you were filing all of your tax paperwork you discovered you left something off of your return, or you received a notice from the IRS.
• You panicked.

Good news. There is no need to panic. File an amended return. If your CPA completed your return, call your CPA and ask him or her to amend the return. If your return is simple, you can probably do it yourself.

What you will need
Whether you prepare the amended return yourself or send it to your CPA, you will need a few things before you can get started.

• A copy of your return and instructions for the forms. (If you need prior year forms and instructions, you can call 1-800-TAX-FORM (1-800-829-3676). You can also download them from http://www.irs.gov/.
• Form 1040X and instructions (Do not simply re-file a new 1040, 1040A, or 1040EZ!)
• Any additional supporting documents
• Any letters or notices you received from the IRS

How to get started
The first step is to organize your documents. It is a good idea to group your documents into categories such as income, deductions, or credits. You’ll want to separate out documents that go with specific schedules. Once you have done that review the original instructions for the forms you filed. This should help you be certain that you understand the changes that you want to make.

The 1040X is a multi-purpose form. Taxpayers have many reasons for amending returns. This means that you may not need to complete all of the lines on the form. Be sure to check the instructions.

The simplest way to make your changes is to make notes in the margins of your original return. Once you have made all of your changes and reviewed them, you can enter the changes onto the Form 1040X. If you use tax software, be careful to follow the directions provided by the software company. Typically you will make a copy of the original file and modify the copy instead of working on the original. The software will also have an option to prepare an amended return.

Once you file the amended return, file it and all of your supporting documents with your other important papers. If you have a CPA, you may also want to send a copy of the amended return to him or her to keep in your files.

Deadlines
File Form 1040X only after you have filed your original return. It is important to realize that the interest and penalty clock rarely stops ticking. If your changes result in a higher tax liability, then you should file an amended return and pay the tax as soon as you possibly can so that you can avoid additional penalties.

If your changes result in a lower tax liability, then you may be due a refund. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after you paid the tax, whichever is later. There are some exceptions to this time limit for people who are unable to manage their own affairs. Check with your CPA or review Publication 556 Examination of Returns, Appeal Rights, and Claims for Refund

Free online training from the IRS

Did you know that the IRS offers free online presentations and webinars? Check out the IRS Video Portal  for

• Archived versions of live panel discussions
• Archived webinars
• Video clips
• Audio archives of tax practitioner phone forums

The portal offers a wealth of material for individuals, small businesses and tax practitioners.

Are you ready for the 2010 Alternative Minimum Tax? Get out your wallet.

The 2009 Publication 17 Your Federal Income Tax for Individuals contains this interesting note in a section titled, "What's New for 2010."

Alternative minimum tax (AMT) exemption amount decreased. The AMT exemption amount is scheduled to decrease to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).

The exemption amounts for 2009 were $46,700 ($70,950 if married filing jointly or a qualifying widow(er); $35,475 if married filing separately). This is not really news. The exemptions were scheduled to revert to this amount beginning in 2009, but Congress raised the exemption. A report by the US Treasury, "Tax Relief in 2001 through 2011" provides some explanation.

The AMT was a parallel tax system designed to make certain that very high income taxpayers would not be able to avoid paying income tax. A similar tax called the Minimum Tax was passed in 1969 after it was determined that a group of taxpayers with incomes over $200,000 paid no tax in 1966. Changes over time have lead to the tax now called the Alternative Minimum Tax. Testimony provided to Congress by a treasury official in 2007 explains the tax and its problems in more detail.

The problem with the AMT is that the calculations used to determine the tax base have not changed over time; or rather the law governing the calculations has not changed over time. Instead Congress has opted to pass temporary modifications each year. This creates a huge amount of uncertainty for taxpayers. In addition, even though Congress has opted to adjust the exemption amounts, more and more taxpayers pay AMT. A brief by the Tax Policy Center indicates that while the temporary 2009 exemption meant that only 4 million taxpayers paid the AMT that number will jump to 27.4 million if the exemption reverts to the lower amount. Assistant Secretary for Tax Policy Eric Solomon said it well in 2007 when he spoke to the Ways and Means Committee.

In many respects, the AMT illustrates how a good-faith attempt to address an issue in the income tax system can have enormous unintended and undesirable consequences. Today the AMT is imposing burdens on millions of taxpayers who were not its intended targets.

Write your senator or congressman and tell him or her that you want something done about the AMT. The web pages below contain links to help you find and write your elected representatives.

http://www.senate.gov/index.htm
http://www.house.gov/

You may find these IRS publications helpful. The resources below are for 2009. The 2010 versions will not be available until later in the year.

2009 Publication 17
2009 Form 1040 Instructions
2009 Form 1040A Instructions
2009 Form 6251 Alternative Minimum Tax—Individuals
2009 Form 6251 Instructions
2009 Form 8801 Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts
2009 Form 8801 Instructions

Take a look at the first 1040. The form and instructions are only four pages long.

The first Form 1040 was produced in 1913 after the 16th Amendment was ratified. The amendment said,

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The 1913 Form 1040 was three pages long, and it was accompanied by one page of instructions. The normal tax rate was one percent.

The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500 or $3,333.33, as the case may be.)

There was also an additional or super tax on taxable income above $20,000 as shown below.

Rate	on the amount over	and not exceeding
1%	$20,000	$50,000
2%	$50,000	$75,000
3%	$75,000	$100,000
4%	$100,000	$250,000
5%	$250,000	$500,000
6%	$500,000

How to calculate estimated taxes

If you owed tax additional tax this year, it is possible that you should pay estimated taxes. If you are self employed it is very likely that you should pay estimated tax. This is what the IRS has to say about the topic in Publication 505.

General Rule

In most cases, you must pay estimated tax for 2010 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2010, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:

• 90% of the tax to be shown on your 2010 tax return, or
• 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months.

You can use a worksheet to make a more accurate calculation. If all of your income is subject to withholding, you probably do not need to pay estimated tax. You will want to review your withholding with your employer.

You do not have to pay estimated tax for 2010 if you meet all three of the following conditions.

1.  You had no tax liability for 2009.
2. You were a U.S. citizen or resident alien for the whole year.
3. Your 2009 tax year covered a 12-month period.

 There are special rules for farmers, fishermen, certain higher income taxpayers, aliens, and estates and trusts.

• Farmers and Fishermen
• Higher Income Taxpayers (The percentage of 2009 AGI changes from 100% to 110%.)
• Aliens (Resident aliens should refer to Publiciation 505. Nonresident aliens should review Publication 519 for more information about Form 1040-ES (NR))
• Estates and Trusts (use Form 1041-ES, Estimated Income Tax for Estates and Trusts, to figure and pay estimated tax.)