Tax Update Quickie

It has been more than six months since my last post. In that time I've been studying and testing for the Enrolled Agent certification. Having passed (presumably in flying colors: I'll never know), now I am waiting for the IRS to process my application and send my card or certificate. Following my last exam in December I proceeded to acquire the necessary certifications to volunteer in the VITA (Volunteers in Tax Assistance) program. In that time I also had to review several months of articles on tax updates for 2013, and there are some significant changes this year. These are just a few of them.

Many of the changes are the result of provisions that are expiring for 2013. Not much is being said about these because you can take them this year, but they won't be available on next year's return.These are the ones that might affect average individual taxpayers.

  • Adjustment for teacher expenses
  • Adjustment for tuition expenses
  • Election to deduct sales taxes as itemized deduction

Many of the expiring provisions relate to business so if you are owner, partner or stockholder, they may also affect you.

High Income Earners

Two significant changes in 2013 primarily affect higher-income earners. The Net investment income tax taxes investment and passive income to taxpayers making more than $250,000 (joint filers). The additional Medicare tax on earned income is also effective for the same taxpayers. While you may have intended to grin and bear it when you file your tax return next year, if you have not been making estimated payments during the year, you may face a penalty. Calculating the tax is a bit complex, but predicting net investment income for a year may be the biggest challenge for many taxpayers.

The additional Medicare tax is supposed to be withheld from your paycheck, but since the withholding is individually based and the tax return may be joint, you may have excess taxes withheld or not enough tax withheld. This is one of the elements of the new law that will require more individuals to monitor their tax liability throughout the year.

Same-Sex Marriage

A tax benefit that IRS didn't really plan for also occured in 2013 when the courts declared part of DOMA unconstitional and in effect legalized same-sex marriages for IRS purposes. Although the legality of same-sex marriage is a state provision, once a couple is married is one state, they are recognized as married for IRS purposes in all states. The IRS has issued numerous regulations and procedures to accomodate the change. Additionally, taxpayers can treat the new regulations respectively, so they can go back to prior years to find new benefits and file amended returns.

Amending Returns

This actually serves as a reminder to all taxpayers that they can amend their returns for roughly three years after filing if they miss something when they filed. Most elections (decisions) you make on those returns cannot be changed, but if you have deductions or credits that you failed to take, you can amend the return. Of course, you may have to amend subsequent returns if you have carryovers, etc.

Amending returns is as simple as creating a revised return for that year and then submitting the changes on 1040X and filing that. That is, if you have a simple return. You can download prior year 1040s and the 1040X from the IRS website. If you have a paid tax preparer file your returns, you might want to take prior year returns and tax documents with you when you file your 2013 return this year.

Even if previous year taxpayers said you did not qualify for a credit, it doesn't hurt to check it again. Being able to amend you return could be considered one way to get a second opinion. Since amending your return is limited to three years after filing, if you do not amend your 2010 return by April 15, you won't be able to amend it. Sorry, no extensions here.

Some of the things you may want to look for in prior year returns are the Earned Income Credit, Child Tax Credit, Dependent Care Credit, and the Education Credits.

It's Your Responsibility

When you file or amend your return, always keep in mind that you are ultimately responsible for your return and taxes paid, even if the tax preparer gets in trouble. If the IRS challenges your return, you will have to do more than pay what was not paid before. Taxes and penalties apply from the day your return was due.

Reportedly the big tax chains employ preparers with minimal training and at low pay rates, and some may take shortcuts to maximize your refund, whether you are due one or not. That puts you at risk. As tax laws become increasingly complex, the need to use a tax preparer with adequate training is even more important.

Tax Professionals

Although there are some good training programs for tax preparers, there are several designations that taxpayers should consider when looking for a tax preparer. CPAs (Certified Public Accountants) are often considered to be THE tax professionals to go to. Of course, that is only true if they are up to date on taxation issues. Tax Attorneys are also generally well trained to provide tax services although they may be more useful in tax planning or handling audits. Finally, the IRS has two designations (Enrolled Agent and RTRP) for tax preparers that have passed exams that demonstrate competence in tax matters. The Enrolled Agent designation is the more advanced designation indicating "special competence in tax matters." The RTRP (Registered Tax Return Preparer) is a new designation that the IRS is promoting as fulfilling the minimum requirements for tax preparers.

Like CPAs, Enrolled Agents and RTRPs are required to complete continuing education each year. Enrolled Agents are required to take Ethics plus 22 hours of qualified continuing education specifically on taxation. Since CPAs cover so many areas of accounting, CPA professional education requirements for taxation are not as strict as for Enrolled Agents. Although they generally must complete 40 hours of continuing education each year they do not have to be in taxation.

An ideal combination would be CPA and EA designations and there are a few of them. That punch insures that the professional knows taxation as well as many other aspects of business and financial planning crucial to representing taxpayers. That is my next goal, adding the letters C.P.A. to the E.A. that's still "in the mail."

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