15 Tax Tips for Extended Clients

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Written by CPA Magazine

As the formal tax season ends, tax professionals are implementing the last of their dollar saving tactics for their clients that filed extensions. Three industry tax experts offer tips to deepen a tax professional’s expert advice to ensure all clients come back next year.

For many clients, tax time is a once a year thought that involves last-minute gathering and back-pedaling through papers. These tips help your clients stay more organized throughout the year by sharing these everyday tax-saving opportunities.

1.  Childcare expenses

Parents who work, attend school or are disabled may be able to write off childcare expenses for children younger than 13. The Child and Dependent Care Credit includes before and after-school care and day camp (overnight camp does not qualify). The credit amount depends on income, but is generally 20% to 35% of up to $3,000 in qualifying expenses per dependent, or $6,000 for 2 or more dependents.

2.  Standard mileage

Instead of calculating costs of using a vehicle for business, charitable, medical or moving purposes, you can use the IRS' standard mileage rates.

3.  Home office deduction

Whether you're self-employed or an employee, direct and indirect expenses for use of your home for business purposes may be deductible. The space must be regularly used as the principal place of business or for business meetings. The deductible amount is determined by the percentage of your home used and whether your gross business income is less than your total business expenses.

4.  IRA contributions

Depending on your adjusted gross income (AGI) and whether you're covered by an employer-sponsored plan, you may deduct up to $5,000 of contributions to a traditional IRA. If you're 50 years old or more, you can deduct as much as $6,000.

5.  Medical expenses

If medical and dental expenses for you, your spouse and dependents exceed 7.5 percent of your AGI, costs may qualify as an itemized deduction. Expenses meeting IRS criteria may include insurance premiums, fees paid to medical professionals, prescription drugs, transportation costs and hospital services.

6.  Charitable gifts

If you itemize deductions, you can deduct the cash amount or fair market value of the household goods donated to qualified organizations. Keep a copy of the bank record or official notification from the organization for monetary gifts. If you receive benefits in return for the contribution, you cannot deduct the value of the benefit.

7.  Mortgage interest

If you itemize, you can generally deduct the interest paid on your home mortgage(s). The deductible amount depends on the mortgage date, amount and how you use the mortgage proceeds.

- 2nd Story Software

8.  Tax (or At Least Interest and Penalty) Saving Opportunities on 2011 Tax Returns

Most of the tax changes for 2011 were not new tax breaks but changes in reporting requirements to reduce reporting errors on returns. The main new tax break for 2011 was the payroll tax reduction, which was done through the payroll system and does not need to be reflected on the tax return. Here are some tips on some new tax compliance requirements to help your clients avoid interest and penalties on their federal tax return.

9.  Form 1099B and Form 8949 – Stock Basis Reporting

Brokers for the first time for 2011 transactions are required to report the basis of stock acquired after January 1, 2011 on Form 1099-B. Taxpayers will be required to put this information on a new Form 8949, supplementing the capital gains reported on Form 1040 Schedule D. Several Form 8949s may need to be completed, depending on whether the transaction is reported on Form 1099-B and whether the Form 1099-B includes basis information. Tracking basis reporting on Form 8949 to basis reported on Form 1099-B will help taxpayers avoid having the IRS pull their return because the information on the return does not match the information reported by the broker.

10.  Repayment of First-Time Homebuyer Credit

Those taxpayers unlucky enough to have claimed the First-Time Homebuyer Credit in 2008 and who therefore got stuck with a repayment obligation do not have to file a Form 5405 again this year, as they did last year, assuming that there is no change in their situation, such as a sale of the home. There is also a new line on the Form 1040, Line 59b, for reporting the 2011 installment of the repayment of the First-Time Homebuyer Credit.

11.  Form 8938 – Foreign Asset Reporting

U.S. citizens and resident aliens with foreign assets have a new tax reporting requirement for those foreign assets to go along with the pre-existing Foreign Bank Account Reports (FBAR). Foreign assets exceeding certain values for the first time on 2011 returns have to be reported on Form 8938. The reporting requirement applies even if the foreign assets produced no taxable income. Careful attention to this reporting requirement can avoid significant penalties for failure to report foreign assets.

12.  Reporting 2010 Roth Conversions

Taxpayers who did Roth conversions in 2010 and elected the two-year spread of the tax on those conversions need to remember to include the first half of the taxable portion of the conversion amounts on their 2011 tax return.

- CCH

13. Extended Deadlines When Claiming Deductions for Simplified Employee Pension Plans

Typically, setting up an IRA or making retroactive traditional IRA, Roth IRA, Health Savings Account, SEP-IRA, and 401(k) contributions for the 2011 tax year must be done by the applicable tax return’s due date. However, taxpayers can take advantage of extended tax return deadlines when claiming deductions for simplified employee pension plans.

Businesses and self-employed taxpayers may set up SEP plans for employees by the entity’s tax deadline, fund the plan in the current year, and claim the deduction on the prior year tax return. For example, a self-employed taxpayer filing his/her 2011 taxes can set up a SEP by April 17, 2012, deposit the contribution, and then claim the deduction on the 2011 tax return.

Similarly, businesses and self-employed taxpayers can file an extension this year; pay any tax, penalty, and/or interest; claim the SEP deduction; and then deposit the SEP contribution before the extended deadline. If the return is filed before the extended due date, the contribution to the SEP can still be made after the return filing date as long as the plan is funded by the extended deadline.

Note: Any contribution made in 2012 should appear on the 2012 Form 5498 rather than on the 2011 form. This is because the IRS requires the contributions to be reported on the form for the year they are physically funded to the account instead of for the year to which the contribution applies.

14.  Traditional IRA: Another Tax Saving Option

Setting up a traditional IRA is another tax-saving option. However, it must be done by April 17; the extension deadline does not apply.

15.  Recharacterizing an IRA Contribution or Conversion

An additional possible tax benefit deals with recharacterizing an IRA contribution or conversion. If an IRA holder makes a traditional IRA contribution, but later discovers that s/he is no longer eligible for the tax deduction, it may be beneficial to recharacterize that contribution to a Roth IRA contribution. Likewise, if an IRA holder originally made a Roth IRA contribution, but wishes to take advantage of the tax deduction, s/he can recharacterize that contribution to a traditional IRA contribution.

October 15 is the last day to recharacterize any IRA contributions or conversions for the year if taxpayers filed their returns on time, which is April 17 for most individuals.

- RedGear Technologies

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