Undelivered refund checks average $1,547 this year.

Taxpayers who believe their refund check may have been returned to the IRS as undelivered should use the “Where’s My Refund?” tool on IRS.gov. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Last year, more than 78.4 million taxpayers chose to receive their refund through direct deposit. Taxpayers can receive refunds directly into their bank account, split a tax refund into two or three financial accounts or even buy a savings bond.

The IRS also recommends that taxpayers file their tax returns electronically, because e-file eliminates the risk of lost paper returns. E-file also reduces errors on tax returns and speeds up refunds. Nearly 8 out of 10 taxpayers chose e-file last year. E-file combined with direct deposit is the best option for taxpayers to avoid refund problems; it’s easy, fast and safe.

The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and does not ask for personal or financial information through email.  Such messages are common phishing scams.  The agency urges taxpayers receiving such messages not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that can infect their computers.  The best way for an individual to verify if she or he has a pending refund is going directly to IRS.gov and using the “Where’s My Refund?” tool.  

ACTION ITEM: Contact the IRS if you did not receive your refund last year.

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The Mortgage Debt Relief Act of 2007 generally allows you to exclude income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.

Taxpayers must complete Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to report the exclusion of forgiveness of qualified principal residence indebtedness and attach it to their tax return. The cancellation of debt on a second home, credit card, car loan or student loan cannot be excluded from income under this provision and would generally be included in income on your tax return. But, there are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.

The cancellation of student loan debt will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation. Below are the other conditions when you can exclude the cancellation of student debt from income; The student loan must have been made by:

• the federal government, or a state or local government or subdivision;
• a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or
• a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.

ACTION ITEM: Cancellation of debt is a complicated issue and can have a significant tax impact. If you have had debt forgiven in 2011, consult with your CPA on your specific situation.

During its October, 2011 Special Session, the Connecticut General Assembly adopted, and on October 27, 2011, Governor Malloy signed into law, House Bill No. 6801, An Act Promoting Economic Growth and Job Creation in the State (the “Act”).

Program Overview:

Connecticut businesses can be eligible for tax credits of $500 per month for each new full-time job created. The tax credit is increased to $900 per month in the case of certain workers that have exhausted their unemployment benefits, are in or have been honorably discharged from the armed forces, or are receiving certain vocational services from the Bureau of Rehabilitative Services.

The credit can be applied against the corporation business, or personal income tax. Applicants must be subject to one of the foregoing taxes and have been in business for at least 12 consecutive months prior to the date of application.

Eligibility Requirements:

In order to be eligible, an employer with 50 or fewer full-time employees must hire at least one new full-time employee. An employer with more than 50 and fewer than 100 full-time employees must hire at least five new full-time employees. An employer with more than 100 full-time employees must hire at least 10 new employees. Each full time job to which the credit applies must:

1. Not have existed in Connecticut prior to the application date

2. Require at least 35 hours of full time work per week for not less than forty-eight weeks in a calendar year and not be temporary or seasonal

3. Be filled with a newly hired full-time employee who was not employed in Connecticut by a related party during the prior twelve months

4. Must not be an owner, member or partner in the business

5. Must be employed at the close of the income year of the qualified business

6. Must be created on or after January 1, 2012 and prior to January 1, 2014

7. Result in a net increase in full-time employment from baseline start date (application date) to the end of the reporting period.

Application Process: An eligibility application must be submitted to the Connecticut Department of Economic and Community Development. A review will then be conducted by the office and a tax credit eligibility letter is submitted to the applicant. To apply complete and submit the JET Application found at www.ct.gov/ecd/ under Business & Industry Development, Tax Incentives.

Congress recently passed and the President signed the Temporary Payroll Tax Cut Continuation

The IRS states” that nearly 160 million workers will benefit from the extension of this reduced tax and that this will have no effect on employees’ future Social Security benefits.”

Employers should implement the new payroll tax rate as soon as possible in 2012 but no later than Jan. 31, 2012. An employer that inadvertently over-withholds in January should correct for this, again as quickly as possible, but not later than the end of March.

The law also includes a “recapture” provision, which applies to employees who earn more than $18,350 during the two-month period of January and February 2012. The provision imposes an additional income tax on these employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350, and not greater than $110,100. The IRS notes that the Social Security wage base for 2012 is $110,100; $18,350 represents two months of this amount.

This recapture is an additional income tax liability for these employees for 2012, and can’t be reduced by credits or deductions, the IRS says. It will be payable in 2013, when the employees file their 2012 tax returns.

The recapture appears to be a way to address concerns about effectively administering the tax cut extension, while also ensuring that highly compensated employees didn’t benefit from a two-month extension more than lower-paid employees.

Of course, all this legislation over the “recapture” provision could be unnecessary if the extension is extended again through the end of 2012.

The Qualified Small Business Job Creation Tax Credit Program provides incentives to Connecticut’s small businesses to hire new full-time employees. Under this program Connecticut-based businesses with less than fifty employees are eligible for a $200 per month tax credit for each new full-time employee they hire. Below are the guidelines for the program, a link to the application and the contact.

Program Guidelines

Credit Length:

Taxable years 2010-2012

Credit Amount: $200 per month for each new full-time employee

Eligible Business
Structures: Tax credit applies to all business structures: corporations,
partnerships and LLC’s.

Eligible Business: Connecticut based-businesses with less than fifty employees

Eligible New Hire: A new employee residing in Connecticut that is hired between May 6, 2010, and prior to January 1, 2013, to fill a new full-time job. Full-time job means a job in which an employee is required to work at least thirty-five or more hours per week for not less than forty-eight weeks in a calendar year. Full-time job does not include a temporary or seasonal work. A new employee does not include a person who was employed in Connecticut by a related person with respect to the qualified small business during the prior twelve months. No qualified small business may claim a tax credit for any new employee who is an owner, member or partner in the business or who is not employed at the close of the income year of the qualified small business.

Application Process:

1. Company submits application with supporting documents and application fee of $100.00.

2. Application is reviewed by Department of Economic and Community Development, and if approved, an eligibility certificate is issued to the company.

3. Applications are now being accepted for 2011 hires, the deadline is 2/28/12.

4. Applications can be found on the CT Department of Economic Development website. Search for Connecticut Small Business Jobs Creation Tax Credit Program.

ACTION ITEM: Connecticut small businesses that have hired new eligible employees need to complete their applications as soon as possible to receive their credit.

The 1099-MISC form is used to report more than two dozen types of payments that must be claimed as income by the recipient. This category includes payments made by businesses as fees to attorneys, service providers and freelancers. Other types of payments covered by the 1099-MISC include reimbursement for auto expenses, awards and bonuses, commissions, prizes and vacation allowances for non-employees.

A payer of rents and royalties must also file this tax document
1099’s are issued to individuals, partnerships, single member LLC’s: Corporations are generally not issued 1099-Misc unless the payments are for attorney fess.  The IRS can charge significant penalties for failure to file accurate 1099’s.  1099 reporting is a “hot issue” for the IRS in an attempt to close the tax gap.

The most common 1099’s that need to be completed by business owners are for the payment of rent and nonemployee compensation.  Enter in Box 1 amounts of $600 or more for all types of rents paid. Enter in box 7 nonemployee compensation of $600 or more. Include fees, commissions, prizes and awards for services performed for your business by an individual who is not an employee but an independent contractor.

An Independent Contractor is an individual, a business owner or a company that you contracted with to do a specific project or consulting. The contractor provided a specialized type of expertise to you either intermittently or maybe just once during the year. This was a person who required no training from you, was not under your control and may have used their own equipment.

You didn't issue them a regular paycheck, withhold or pay any taxes, or provide any benefits.

A few examples of some likely independent contractors:

• Attorneys
• Accountants
• Bookkeeping Services
• Graphic Designers
• Architects
• Computer Maintenance and Repair Services
• Contractors
• Cleaning Services
• Consultants of various types: marketing, human resource, management, etc.

The IRS and your State Department of Labor have very specific rules regarding Independent Contractors vs. Employees. If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus penalties and interest.

To accurately complete the 1099, you will need the recipient name, address and tax identification number or social security number. All independent contractors should be given form W-9(Request for Taxpayer Identification and Certification) to complete prior to engaging their services and payment.  Having this form filled out up front will eliminate any year end tracking down of subcontractors.

All 1099’s need to be mailed to the IRS with Form 1096 by February 28th.   The 1096 is the necessary "cover sheet" summary you have to send to the IRS along with the 1099 copies. Reporting by state can vary, so check your state requirements.  Connecticut requires Form CT-1096 be filed with the state copy of the 1099’s attached.

Action Plan:  File all required 1099’s by the due date.

1) Have a Year End Planning Meeting with Your CPA

This meeting can be in person or over the phone, it really doesn't matter.  The only thing that matters is that it happens.  Most individual income taxpayers are on the cash basis.  This means, with some limited exceptions, for a taxpayer to take advantage of a tax strategy, it needs to happen in that tax year. This is where most of the heavy lifting is done, with the tax planning.   

2) Complete Your Tax Organizer

Most CPA's will send out a tax organizer in early January to their clients.  This will have the prior year's information preprinted with space to complete the current year's amounts.  Clients should complete this organizer as thoroughly as possible.  This will save your CPA time and, it should save you money on the fee.

3) File an Extension if Necessary

Individual income tax returns are due on April 15th.  If this falls on a weekend, the returns are due the following Monday. Sometimes, it may be necessary to file an extension. For taxpayers with investments in partnerships of LLC's they may not have received the required reporting on Schedule K-1 yet.  Additionally, self-employed people may want more time to fund their Simplified Employee Pension ("SEP").  Filing an extension will allow the return to be filed by October 15th. 

Keep in mind, the extension only extends the time to file the return.  It does not extend the time to pay the tax.  Any tax that is due needs to be paid by April 15th.  Also keep in mind that the first quarter estimated taxes are also due on April 15th.

4) Meet to Review the Completed Return

When the return is complete, have a meeting to review the returns.  Again, the meeting can be in person or over the phone. The first goal is to review the completeness of the returns.  If the steps above have been addressed, this part should be fairly straight forward.  The second goal is to set the stage for next year.  Do you need to adjust your withholding?  Or do your estimated taxes need to be adjusted? Now is the time to begin planning for this year.

ACTION ITEM: Take these 4 steps to Help Your CPA and Reduce Your Taxes.

Thomas F. Scanlon, CPA, CFP®

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The Nonbusiness Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.

• The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.

• The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.

• The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of nonbusiness energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.

• Qualifying improvements must be placed into service to the taxpayer’s principal residence located in the United States before January 1, 2012.

Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.

• The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.
• No cap exists on the amount of credit available except for fuel cell property.
• Generally, labor costs are included when figuring this credit.

Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer’s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer’s website or with the product packaging.
 
Eligible homeowners can claim both of these credits on Form 5695, Residential Energy Credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.

ACTION ITEM:  Consider purchasing energy efficient improvements prior to the year end.

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1) Harvest Capital Losses

Capital gains property includes stocks, bonds and mutual funds.  Currently, the stated rate on long term capital gains is 15%.  If you have a net loss after netting all of your gains and losses, the tax deduction is limited to $3,000. Any excess capital losses can be carried into the future.

2) Give Away Appreciated Property

Appreciated property is property that is worth more that its tax basis.  The tax basis is generally what you paid for an item.  By giving away appreciated property, you avoid the capital gains tax on this asset if you had sold it and then given the cash.

3) Maximize Annual Gifts

Taxpayers can make gifts of up to $13,000 per year to an unlimited number of people, without having to file gift tax returns or pay gift tax.  Granted, you don't get an income tax deduction for this. However, these assets will be out of their estate.  The federal estate tax exclusion is $5 million and the state of Connecticut exclusion is $2 million. In the current economy, many children and grandchildren need all of the help they can get.

4) Self Employed Individuals Should Consider Establishing a Simplified Employee Pension ("SEP")

While many taxpayers are eligible for an IRA or a Roth IRA, self employed individuals also have the option of establishing a SEP. A SEP allows a taxpayer to contribute the lesser of 20% of net income or $49,000 in 2011. Although, you do have until the due date of the returns including extensions to fund the SEP, it's good idea to plan now if you will be using this vehicle.

5) Connecticut Taxpayers Should Fund a Connecticut CHET 529 Account

Connecticut taxpayers should fund the Connecticut 529 Plan.  This is called the Connecticut Higher Education Trust or "CHET." Married couples filing a joint return are allowed to deduct up to $10,000 on their Connecticut income tax return.

6) Small Business Owners Should Accelerate Deductions and Defer Income

Many people own a small business; some even run their small business out of a home office. Most of these businesses are on the cash basis of accounting. Look at where you are profit-wise. By accelerating their expenses by paying them now and delaying billing, this will reduce taxable income.

7) Taxpayers Over Age 70 1/2 Should Consider Making Charitable Donations From Their IRA

Taxpayers over the age of 70 1/2 can make charitable donations from their IRA.  The distribution from the IRA is not included in their income.  On the other hand, they do not get a tax deduction for this; they do however get these assets out of their estate.  Additionally, this qualifies as part of their Required Minimum Distribution ("RMD").

ACTION ITEM: Here are 7 Smart Year End Tax Planning Moves.  But you better hurry.  The year will be over soon.

Thomas F. Scanlon, CPA, CFP®

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When the provision was included in the small business bill, realtors were among the first opponents of it, and worked to ensure that Congress understood the provision was an example of over-reach that would burden mom and pop property owners with extensive record keeping and paperwork.

Members of Congress and President Obama got the message and, in a rare example of agreement between Republicans, and Democrats, lawmakers agreed the provision needed to come out.

This expanded requirement for Rental Property Owners was repealed in May of 2011.

The 2011 Instructions for completing Form 1099-MISC, currently published still include paragraphs for this requirement.  Therefore when completing 1099’s for 2011 the following paragraphs should be disregarded:

• Treatment of rental property expense payments under What’s New on page 1.
• The second paragraph under Trade or Business reporting only on page 1.
• Rental Property Expense payments on page 3.

Action Plan: If you own rental property, breathe a sigh of relief.