2011 Tax Filing Season Gets Under Way with Many Changes

The IRS started accepting e-filed and Free File returns on January 14, marking the official start of the 2011 tax filing season. However, many taxpayers will not be able to file until some time in February while the IRS updates forms and reprograms its systems to account for legislative changes made late in 2010.

Individual taxpayers will have until April 18 to file their returns. Although the normal deadline, April 15, falls on a Friday, that day is a legal holiday in the District of Columbia, and because D.C. holidays affect tax deadlines in the same way federal holidays do, all taxpayers are being given an extra three days to file their returns.

The IRS has announced that taxpayers who itemize deductions on Schedule A, as well as those who take certain recently extended deductions, will not be able to file their returns until mid- to late February. See “Tax Law Changes Will Delay Start of Filing Season for Some Taxpayers.”

For the 2011 filing season, the IRS is again making available its online “Where’s My Refund?” tool, which can be found on the front page of its website.

PTINs

For paid tax return preparers, perhaps the biggest procedural change this tax season is that they must obtain and use a preparer tax identification number (PTIN) when preparing returns. The IRS has launched an online PTIN registration site where preparers can obtain or renew their PTIN. PTIN registration costs $64.25. Preparers can also apply using a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application.

Generally, on any tax return or claim for refund, the preparer—whether signing or nonsigning—must provide his or her PTIN. However, the IRS recently provided a list of 28 forms or series of forms that are not subject to the PTIN requirement—for a list, see “IRS Exempts CPA-Supervised Nonsigners from New Preparer Rules.”

Many CPAs have reported problems with the PTIN registration process, both online and using the paper form. See “PTINs a Pain for Some CPAs.”

E-Filing

While the vast majority of tax practitioners already e-file, this tax season marks the first year that e-filing is mandatory for individual returns. Specifically, tax return preparers who anticipate filing 100 or more federal individual or trust returns during 2011 are required to e-file them.

2010 Tax Changes

A number of pieces of legislation enacted during 2010 will affect returns filed this season, as will changes enacted in earlier years. The four biggest tax bills enacted in 2010 were the health care reform legislation (the Patient Protection and Affordable Care Act, P.L. 111-148, and the Health Care and Education Reconciliation Act, P.L. 111-152), the Small Business Jobs Act of 2010 (P.L. 111-240), and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312).

Changes Affecting Individual Returns

Itemized deductions and personal exemptions: The itemized deduction limitation is repealed for 2010 (and through 2012). This means that taxpayers can deduct the full amount of their itemized deductions in 2010. The personal exemption phaseout rules also do not apply in 2010 (and through 2012).

Alternative minimum tax (AMT): The 2010 Tax Relief Act included a patch of the AMT exemption amounts for 2010 and 2011. For 2010, the AMT exemption amounts are $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. The 2010 Tax Relief Act also extended (through 2011) the ability to use nonrefundable personal credits to offset AMT (under Sec. 26(a)).

First-time homebuyer credit: The Sec. 36 first-time homebuyer credit expired during 2010. It is available to eligible taxpayers who closed on their home purchase on or before September 30, 2010 (under a binding contract in place before May 1, 2010). The closing date deadline was moved during the year from June 30 to September 30 by the Homebuyer Assistance and Improvement Act.

Rollovers to Roth accounts: The Small Business Jobs Act allows rollovers from elective deferral plans to Roth-designated accounts. If a Sec. 401(k) plan, 403(b) plan or governmental 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. This provision is effective for distributions made after September 27, 2010. The taxable amount of the rollover must be included in gross income (although for rollovers in 2010, the taxable amount is includible in gross income half in 2011 and half in 2012).

Extended Provisions for Individuals

A number of credits and deductions that had expired for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers to claim on their 2010 returns. Those available to individuals include the $250 deduction for elementary and secondary schoolteachers for purchasing classroom supplies; the state and local sales tax deduction in lieu of a state income tax deduction; the deduction for tuition and related expenses; and allowance for tax-free distributions from individual retirement plans for charitable purposes.

For a list of extended provisions, see “Congress Resolves Many Tax Issues During Lame-Duck Session.”

Changes Affecting Business Returns

The Small Business Jobs Act introduced a number of changes that may affect 2010 business returns.

Small business stock: The act created a 100% exclusion of gain from the sale of certain small business stock under Sec. 1202. To be eligible, stock must be purchased after September 27, 2010 (this provision has been extended through 2011 by the 2010 Tax Relief Act).

Section 179 expensing: The Small Business Jobs Act increased the maximum amount a taxpayer may expense under Sec. 179 to $500,000 and increased the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011.

Bonus first-year depreciation: The first-year 50% bonus depreciation available under Sec. 168(k) was extended for one year by the Small Business Jobs Act to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). This amount was then increased by the 2010 Tax Relief Act to 100% for business property acquired after September 8, 2010, and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property).

Business credits: The carryback period for eligible small business credits under Sec. 38 was extended from one to five years. The Small Business Jobs Act also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer’s first tax year beginning after 2009.

Self-employed individuals’ health insurance: The Small Business Jobs Act allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009.

Startup expenses: The Small Business Jobs Act increased the Sec. 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 the amount of the deduction is the lesser of: (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.

Cell phones: The Small Business Jobs Act removed cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under Sec. 280A will no longer apply to cell phones.

Extended Provisions for Businesses

A number of business credits and deductions that had expired for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers to claim on their 2010 returns. These include the credit for research and development expenditures and various empowerment zone designations.

For a list of extended provisions, see “Congress Resolves Many Tax Issues During Lame-Duck Session.”