I haven’t come across many new issues this tax season, but, as usual, a few surprises have popped up.
Make Work Pay Credit Gone
Many are disappointed with the amount of refund or amount owed compared to last year, primarily due to the elimination of the Make Work Pay credit that could be as great as $800 for a couple. A credit is almost always better than a deduction because it is subtracted directly from the tax, whereas a deduction is subtracted from taxable income prior to the tax calculation.
Residential Energy Credits
As usual, many are confused about the Residential Energy Credit. Homeowners have new windows, insulation, furnaces, etc. installed by suppliers and contractors with the expectation that their taxes will be greatly decreased, a convenient sales tool. Actually, not all of the labor and materials qualify for the credit, and then the credit is only a small percentage of the cost, usually 10%, with dollar limits on specific items and with a maximum accumulative limit of $500 over the past five years. I had a salesman tell me about the credit while presenting his replacement windows for my seasonal lake property. What he didn’t say, or probably know, was that the credit is only for a primary residence. When challenged on this aspect, he moved on to the next selling point.
New York State Changes
NY State has added a new e-file requirement for individual taxpayers. Individual taxpayers who file their own returns using tax software are generally required to file electronically. A taxpayer who is required to e-file and fails to do so will be subject to a penalty and will not be eligible to receive interest on any overpayment until the return is filed electronically. They say that if your software supports the e-filing of your return, you must e-file, and if you are required to e-file but you file on paper instead, you may be subject to a $25 penalty. Looks like NY State is serious about automation and reducing paperwork. Why then have they discontinued the Form IT-150 short form (two pages), and now require the four-page Form IT-201 for full-year residents? Why not just reform the tax system and reduce the amount of paperwork that way?
Cost Basis Reporting – Valuable, But Not Entirely Accurate
We are hearing lots of talk about the new cost basis reporting by custodians, and confusion for taxpayers. The Form 1099Bs that are used for reporting security sales now include the original cost of the security or cost basis for the security sold (stock, bond, mutual fund, etc.). New legislation that took effect January 1, 2011, now requires the custodian to report this information to the IRS. This cost basis information is quite valuable for the taxpayer preparing income taxes because it eliminates the need to go back over months and years of statements showing when and for how much the security was purchased and reinvested capital gains and dividends, all of which go into the cost basis.
My first experience was enlightening. The cost basis for several mutual funds sold was accurate. They were purchased four years ago and reinvested all dividends and capital gain distributions. The US Treasury note that matured in 2011 at $18,000 was purchased in 2008 at a premium of about $19,300 because it carried an annual interest rate of almost 5%. The custodian showed a cost basis of $18,000.
Although the custodian included a notice that cost basis is furnished to the IRS, these securities I mentioned actually were not furnished to the IRS. Cost basis reporting is only for “taxable” (non-retirement) accounts. Cost basis is required for:
- Stocks acquired on or after January 1, 2011 and
- Mutual funds and some other less common security types acquired on or after January 1, 2012.
The cost basis information is valuable for the taxpayer, but not entirely reliable. The custodian has no knowledge of the cost basis of securities purchased through one custodian and transferred to another custodian. The responsibility for cost basis lies with the owner of the securities. Rockbridge Investment Management has historic cost information available for our clients upon request.
This year the filing deadline is April 17, 2012. Be sure to file by that date, or file a request for extension if your actual return is not ready. Be sure to estimate any amount owed and include it with the extension request. At least you will still have another six months to get your act together and get the proper return filed.