Taxpayers who were put on hold for filing by the IRS this year because of last-minute changes in the tax law can now send the tax collectors a Valentine return.
Feb. 14 is the first day tax filing will be allowed for individuals who itemize using Schedule A or who take a deduction for higher education or classroom material costs, according to the Internal Revenue Service. In January, the agency announced that this group of taxpayers would have to wait while the agency updated its systems because of Congress' changes to the tax law Dec. 17.
Local CPAs predict a flood of filings Feb. 14 but believe that the IRS system will be able to handle it.
"There may be an extended wait to get an acknowledgement from the IRS, but it will probably just be a couple of days," said Field Lange, a Fort Worth CPA with Lange & Associates. Normally, the IRS sends an e-mail within 24 hours of an electronic filing, Lange said.
Taxpayers filing electronically can still get a head start on their taxes because most software providers have announced they will accept these delayed returns immediately, said Clay Sanford, an IRS spokesman in Dallas. The software providers will hold onto the returns and electronically submit them after the IRS systems open Feb. 14 for the delayed forms.
I met with accountants at the Fort Worth chapter of the Texas Society of CPAs last week to discuss strategies for individual tax returns. Here are some of their tips:
Lower your tax bill
There are several ways to lower your tax bill for last year through contributions to individual retirement accounts, health savings accounts and taking advantage of the saver's credit. IRAs and HSAs don't need to be funded -- meaning you don't have to set up the accounts or put your contributions in the accounts -- until April 18, the date taxes are due this year, although you can file your taxes anytime before that. Just make sure you keep records of your contributions, advises Doug McDougal, a Fort Worth CPA. Also, remember that you must have a high-deductible health plan to qualify for an HSA.
The little-known saver's credit is available for individuals making up to $27,760 or married couples making up to $55,500 who also contribute to an IRA or retirement plan. The credit is 10 percent to 50 percent of your contribution, depending on income level, up to a maximum of $1,000.
If your home was foreclosed on last year and the bank resold the property for less than your mortgage amount, lenders in general forgive the difference still owed on the loan. This used to be taxable income but not now.
The bank will still send you Form 1099C to show the forgiven amount, but you do not have to report it as income. There is no phaseout for this undeclared income, and the amount can go up to $2 million. This tax law is in effect through 2012.
Pay your taxes
Unfortunately, the same deal is not made for those who negotiated down credit-card debt with a lender. The amount of your debt forgiveness is considered income and is taxable -- often a surprise to taxpayers, the CPAs said -- unless you can prove you went through bankruptcy or are insolvent. Make sure the bank sends you Form 1099C showing this debt forgiveness so you can match it with your tax return.
Gas-lease income is also taxable. Many clients are still surprised that income from a gas bonus or royalties is taxable, the CPAs said. Sometimes the amount is high enough that when combined with your regular income, you may have to pay quarterly estimated taxes through the year -- or be fined with a penalty plus interest if you don't.
To know whether you fall in this category, take your total taxes paid the year before and see whether the taxes on your new lease income will keep you within 110 percent of last year's tax bill, Lange said. If it does, you don't have to pay estimated quarterly taxes. If it's over that amount, you do. If you didn't pay quarterly taxes last year and you should have, you will be fined for that, as well as having to pay interest.
"I tell my clients I don't want to be an April accountant," McDougal said. "I want to know if you're getting regular gas payments, if your kids are going to school, if you lose your job. I want to know what's going on."
Claim your deductions
Take a deduction if someone moved into your home last year. Since the Great Recession, families and friends have been bunking up to save on living costs. Whether a grown child, elderly parent, relative or friend moved into your house last year, you may be able to declare them as a dependent if you paid more than 50 percent of their expenses, said Mike Dunlap, a CPA with Aldridge Griffin. That also holds true if you are supporting a parent in their own home or an institution, as long as you are paying more than half their expenses.
The sales-taxes deduction is back. This deduction for states like Texas, where there is a sales tax but no income tax, was extended for 2010. However, you still must itemize to be able to take advantage of it. Don't forget to add your city sales tax to the state sales tax tables to get the full deduction. Local taxes will increase your total deduction by as much as 25 percent.
Also, don't forget the other major add-on to the IRS tables: If you itemize deductions and bought a car, boat, aircraft, mobile or prefabricated home or home-building materials last year, add on that sales tax as well.
Energy credits were good for 2010 but reduced significantly for 2011. Homeowners who bought an energy-efficient furnace, air conditioner or water heater can qualify for a tax credit for 30 percent of the cost, including labor, with a cap of $1,500 in 2010
Renewable-energy projects, including solar photovoltaic and hot-water systems, small wind systems and geothermal heat pumps, were eligible for a tax credit worth 30 percent of total cost with no cap. New energy-efficient windows, insulation, sealant and radiant barriers also qualified for the 30 percent/$1,500 cap, but labor is not included.
The energy credits are available for purchases in 2011 but are not nearly as good, being reduced to a 10 percent credit and a $500 cap.
On the downside, there's no more property-tax deduction for taxpayers who don't itemize. For two years they were able to take a flat $500 individually or $1,000 for a married couple off income, as long as they paid some property tax. Congress did not extend this tax credit for 2010. The deduction of sales tax on new vehicles also was not extended, nor was the waiver on taxes for unemployment compensation.
For 2011, costs for over-the-counter drugs aren't automatically eligible for reimbursement from flexible savings accounts. If you filled up a basket or two at the drugstore with over-the-counter drugs to spend down your FSA, 2010 was the last year you could do this. Now expenses eligible for an FSA only apply to medications needing a doctor's prescription. The CPAs advise getting your doctor's approval, in writing, for over-the-counter drugs to fulfill this new requirement.
Teresa McUsic's column appears Fridays.