ElectroFile Income Tax Service   Income Tax Service   Terry Hough, President
Terry Hough

January 28, 2012 Newsletter

We ‘Must Ask’ Questions

For our annual 1040 client interview questionnaire, we are adding some additional questions that recent law changes require that we ask this year. Please be prepared to provide answers to these questions if they apply to your tax situation.

Did you refinance an existing home this year?
If so, we need a copy of the settlement statement and the your use of the funds to determine if the money was used as improvements on the home or in some other manner. If used for improvements or refinancing existing acquisition debt the interest falls under the $1,000,000 acquisition debt limit and is deductible to that extent. If not, the money falls under the $100,000 equity debt limit and is deductible for regular but not AMT purposes. If the borrowing exceeds the $100,000 equity limit it is non-deductible personal debt unless a special 10-T election was filed.

We need copies of all Form 1099-K’s
Schedule C and E filers have a new line "1a" on the relevant schedule to report credit card and 3rd party payments. Clients who have used EBay and similar online retailers will suddenly have to report income they never reported before! In either case, this amount is reported to the IRS by these third-party merchants and must be appropriately reported on the tax return. If you fail to report these amounts, you will receive a CP-2000 letter from the IRS next summer regarding unreported income, so it is a wise thing to be prepared to answer this question during your interview with your preparer.

EIC checklist questions
There is a new requirement to attach the EIC due diligence checklist to the e-Filed 1040 this year. If you qualify for EIC, we will be asking (again) several questions regarding your dependents and your tax situation.

Do you have foreign accounts valued at over $10,000?
There are new regulations and filing requirements for foreign accounts. For clients with more than $10,000 in a foreign account remind them of the TDF-90.22 filing requirements, and for those with over $50,000 there is the potential additional filing requirement of IRS Form 8938.

Schedule E rental property detail questions.
The new Schedule E for 2011 requires detailed information, on a property-by-property basis of the type of property being rented, the number of days rented at FMV and the number of days used personally. While it may be difficult for you to determine those answers, they will be necessary to complete your return. For the future, it would be useful, if you are a rental property owner, to keep a calendar for each property illustrating days rented, days empty and available for rent, days under repair, and days used personally or at rented at less than FMV rental.

Do you have any HIRE employees still with you from 2010?
Schedule C filers who utilized the New Hire employer FICA exemption in 2010 may qualify for a $1,000 credit per Hire employee in 2011 if the employee was employed for at least 52 weeks and earned certain income amounts.

Do you have a mentally or physically disabled child?
If you are a parent with a disabled child, if the Social Security Administration has determined that the child is disabled before that child is age 22, the child may qualify under the much more beneficial amount of the parent’s Social Security and Medicare account. Without this determination the child will fall back to the much less beneficial SSI and Medicaid coverage. Many parents (and tax professionals) are not aware of this issue. If the you are a parent that has such a child you need to contact the Social Security administration immediately.

Did you transfer or was a home transferred from parent to child?
The IRS is placing heavy emphasis on unfiled gift tax returns, fraudulent estate tax returns, and Medicare fraud issues through the transfer of homes owned by aging parents to children without the appropriate forms being filed. If you have been involved in such a transfer, please discuss it with us immediately or during your interview.

Do you have a student loan?
The student loan interest deduction on the front of the 1040 is currently scheduled to expire 12/31/2012. One of the best pieces of advice we can give a client from both a tax and financial point of view is to focus on getting this paid off by 12/31/2012.

Can you substantiate charity and T&E?
We are required to ask our clients if they have records to substantiate any deductions claimed for charity, travel and entertainment expenses. We do not have to see the receipts, but we need to emphasize what these rules are and encourage you to meet the record keeping requirements.

Our office is located at
5200 W. Market Street
Greensboro, NC 27409

Phone: 336-852-9505
FAX : 866-616-0471
email:     taxservice@electrofile.com
website: ElectroFile Income Tax Service
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