Here are a few Income Tax issues to be aware of as we head into the filing season for 2011 Individual Income Tax Returns:

Changes to Federal Individual Income Tax Returns (IRS Form 1040):

Here is a non-exhaustive list of changes affecting the 2011 Federal Individual Income Tax Returns (Form 1040):

  1. Schedule D used to show all of the details of capital transactions as well as summary totals. Beginning with the filing of 2011 Returns, in most cases, the details for capital transactions will be reported on the new IRS Form 8949. Schedule D would only reflect certain totals.
  2. Self-employed health insurance is no longer deducted from Self-Employment Income for purposes of calculating the SE Tax. However, taxpayers will still be allowed a deduction equal to 50% of their SE Tax “above the line” on Page 1, line 29 of their Form 1040.
  3. There is a new line 59b provided for repayment of the First-Time Homebuyer Credit (discussed below in more detail).
  4. Schedule L is no longer used to figure the standard deduction for certain filers.
  5. Schedule M is no longer used since the Making Work Pay Credit has expired in 2010.
  6. A “Paid Preparer’s Earned Income Credit Checklist” (IRS Form 8867) must now be prepared and filed with every Federal Return for which an Earned Income Credit (EIC) is claimed. While the form is not filed for self-prepared Returns, it would be wise for every taxpayer to prepare Form 8867 to confirm eligibility.
  7. People mailing their Returns (i.e. not E-Filing) should double-check the proper IRS mailing address since the IRS has changed the filing location for certain areas.
  8. It is riskier than ever to be a paid tax preparer. Every year the government places greater burdens and higher penalties on preparers. The government is moving in the direction of making preparers guarantors that Returns are complete and accurate, even where the taxpayer (and not the preparer) is culpable for an error.

 

First-Time Homebuyers:

In 2008 Congress passed “The Housing and Economic Recovery Act of 2008” which included the “First-Time Homebuyer Credit”. Briefly, the First-Time Homebuyer Credit allowed certain qualified taxpayers a Federal Income Tax Credit of up to $7,500 when they purchased a principal residence.

In 2009, Congress passed “The American Recovery and Reinvestment Act of 2009” which extended the First-Time Homebuyer Credit and increased the Credit to $8,000. However, there was subtle but critical difference between buying a house in 2008 versus 2009.

 

  1. Homes Purchased in 2008:

Individuals who claimed a Credit under The Housing and Economic Recovery Act of 2008 must pay the Credit back to the Federal Government. The Credit must be repaid in 15 equal annual installments beginning with the 2nd tax year after the year that the Credit was claimed. The amount to be repaid is added as additional tax on the taxpayers Form 1040.

For example, if a 2008 Act Credit taken in 2008 was $7,500, then the taxpayer would have an additional tax of $500 each return ($7,500 / 15 = $500) beginning with the filing of their 2010 Returns. In some situations, if the residence is sold before the end of the 15-year period the repayment becomes accelerated into the year of sale. The 2008 Act Credit is essentially a 15 year interest free loan from the Federal Government with acceleration provisions.

 

  1. Homes Purchased after 2008:

Individuals who purchased their homes in 2009 (or later) and claimed a Credit under The American Recovery and Reinvestment Act of 2009 generally do not have to pay back their Credit. There are some exceptions where the Credit must be repaid. For example, a prorated portion of the Credit must be repaid where a taxpayer ceases to use the home as a principal residence within 36 months of the purchase Closing Date.

Repayments are calculated by preparing and filing the “First-Time Homebuyer Credit and Repayment of the Credit” Form (IRS Form 5405).

 

Civil Unions:

From the beginning, the government has had the authority to “anoint” one man and one woman in “holy matrimony”. Things are not as cut and dried as they once were. The Illinois Religious Freedom Protection and Civil Union Act allows people to create legal relationships other than “marriage”. Further, partners can enter into Illinois Civil Unions regardless of the genders of the partners.

 

  1. Illinois:

For Income Tax purposes, Illinois law does not distinguish based upon the gender of the partners in an Illinois Civil Union. Partners in Illinois Civil Unions must file their Illinois Returns either as “Married Filing Jointly” or “Married Filing Separately” (i.e. the same as those who are “legally married” under Illinois law).

  1. Federal Civil Unions Other Than Between a Man and a Woman:

Under the Internal Revenue Code, there are only 2 categories, “Married” and “Unmarried”. Under the “Defense of Marriage Act of 1996” (DOMA) the Federal Government does not acknowledge same sex Civil Unions. It is clear that partners in same-sex Civil Unions must still file their Federal Income Tax Returns as though they had no legal relationship with each other. Accordingly, they cannot file as either Married Filing Jointly or Married Filing Separately.

Proper care must be taken in preparing Income Tax Returns for same-sex Civil Union partners:

  • A separate Federal Individual Tax Return (Form 1040) must be prepared and filed for each partner.
  • Partners should determine whether they want to file their Illinois Returns as Married Filing Jointly or as Married Filing Separately.
  • Upon completing the mock Federal joint return, the figures should be used on the Illinois joint return. (For civil union returns the IL-1040 must be in paper form, and the mock Federal joint return should not be sent).

A more detailed explanation can be found here.

Civil Unions Between a Man and a Woman:

What is unclear is whether Illinois Civil Unions between a man and a woman are treated as being “Married” for purposes of the Federal Income Tax laws and related filings.

This issue was recently posed to the IRS by a tax preparer. The IRS responded in a letter stating:

“[T]he status of individuals of the opposite sex living in a relationship that the state would treat as husband and wife is, for Federal income tax purposes, that of husband and wife. Section 20 of the Illinois Religious Freedom Protection and Civil Union Act provides that “[A] party to a civil union is entitled to the same legal obligations, responsibilities, protections and benefits as afforded or recognizes by the law of Illinois to spouses. . . .” 750 Ill.Comp.Stat.75/20 (2011). Accordingly, if Illinois treats the parties to an Illinois civil union who are of opposite sex as husband and wife, they are considered “husband and wife” for purposes of Section 6013 of Internal Revenue Code…”

Although this response came directly from the Office of the Chief Counsel, it is not authoritative or binding in any way and merely serves in an advisory capacity. To our knowledge, there has not been anything more formal issued by the IRS regarding this topic. (A copy of the letter can be found here🙂

 

Name Changes:

What is your “real” name? Does the name used by you match what is on your birth certificate? Do you use a nickname? Have you legally changed your name? How does it compare with your name as registered with the Social Security Administration?

If you have ever changed your name, it would be prudent to be sure that whatever name you use on your Income Tax Returns matches the name on file for your Social Security Number.

If you have changed your name, you can prepare and file Form SS-5 (Application for a Social Security Card) to inform the Social Security Administration of your new name. You should also provide proof of your legal name change. Form SS-5 is available on SSA’s website at https://www.socialsecurity.gov/, or by calling 800-772-1213.

 

 

2/2012

Copyright ©, Keith B. Baker – 2012

This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.

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