Delay for California Tax Refunds

This week, the California FTB posted FAQs about the 30-day delay for all refunds (please see our post from Jan 16 for more details on that announcement at http://ty-llp.blogspot.com/2009/01/california-delays-payments-for-tax.html) FAQs include:

• Should I wait to file my return?
• Is it possible that I will be issued an IOU?
• Am I entitled to receive interest because of the delay?

The FAQs are available at: http://www.ftb.ca.gov/refund_delay_2008.shtml

Employee or Independent Contractor?

The IRS is working to close the $345 billion "tax gap" -- the difference between what taxpayers actually pay and what they are legally obligated to pay. A significant part of the tax gap is from underpayment of employment taxes, so the IRS is increasingly focused on employers misclassifying employees as independent contractors. So how do you decide whether a worker is an employee or an independent contractor? For the answer to this and other tax questions, please visit our new Frequently Asked Questions page at http://www.ty-llp.com/about_faq.html. We welcome suggestions for new FAQs, which can be emailed to TaxCPA@rocketmail.com.

Returns due February 2

The following payroll tax and information returns are due February 2: Federal (http://www.irs.gov/)

• Forms 1098, 1099, and W-2s must be furnished to recipients.
• Form 940 (Annual Federal Unemployment - FUTA - Tax Return) due for 2008.
• Form 941 (Employer's Quarterly Federal Tax Return) due for the fourth quarter of 2008.

California (http://www.taxes.ca.gov/)

• DE 6 (Quarterly Wage and Withholding Report) due for the fourth quarter of 2008.
• DE 7 (Annual Reconciliation Statement) due for 2008.

2008 Standard Deductions

The majority of individual taxpayers claim the standard deduction, rather than itemizing their deductions. For 2008, the standard deductions are as follows:

• Married Filing Jointly $10,900
• Head of Household $ 8,000
• Single or Married Filing Separately $5,450

Special rules apply if another person can claim the taxpayer as a dependent (e.g., a 19-year-old college student claimed as a dependent on his parents' return). The lengthy IRS publication on standard deductions, dependents, and filing status is available at http://www.irs.gov/publications/p501/ar02.html#en_US_publink100041982.

Identity Theft

The IRS recently posted: "Ten Things the IRS Wants You to Know About Identity Theft." One fact is that the IRS never initiates communication with taxpayers about their tax account through emails. If you receive an e-mail or find a Web site you think is pretending to be the IRS, forward the e-mail or Web site URL to the IRS at phishing@irs.gov. For all 10 facts about identity theft, visit http://www.irs.gov/newsroom/article/0,,id=202865,00.html

Man hired by subcontractor sues general for injuries

A general contractor hired a subcontractor, who then hired an independent contractor to do the work. The independent contractor fell into a hole at the project site. The injured man filed suit against the general contractor. The trial court granted summary judgment in favor of the general contractor. The injured party appealed, and the appellate court sent the case back to the trial court, ruling that the non-employee of the subcontractor has the right to sue the general contractor. If the independent contractor wins, general contractors could face a slew of lawsuits from non-employees hired by subcontractors. If this were to happen, general contractors would likely require any workers hired by subcontractors to be employees, not independent contractors. We will be watching for the trial court's ruling. The complete article is available at: http://www.claimsjournal.com/news/west/2008/12/09/96170.htm

No Required Minimum Distributions for 2009

Under the tax law, individuals must start taking distributions from their retirement plans (such as IRAs and 401(k) plans) by the year they turn 71 1/2. The 2008 Recovery Act (signed into law on December 23) suspends these rules for 2009. So individuals age 71 1/2 and older are not required to take retirement distributions in 2009. This allows taxpayers with other assets for living expenses to leave funds in retirement accounts, and hopefully see their investments recover. The IRS has answers to frequently asked questions about these rules at: http://www.irs.gov/retirement/article/0,,id=96989,00.html.

A Call for Tax Simplification

This month, the head of the Taxpayer Advocate Service released her annual report to Congress, which said the complexity of the tax law is the most serious problem facing taxpayers. This certainly is not surprising. The report found that:

• Taxpayers spend about 7.6 billion hours a year complying with tax-filing requirements.
• Taxpayers spend $193 billion a year complying with income tax requirements, an amount that equals 14 percent of the total amount of income taxes collected.
• The number of words in the tax code has reached 3.7 million.
• Over the past eight years, changes to the tax code have been made at a rate of more than one a day – including more than 500 changes in 2008 alone.

Let's hope Congress listens. The complete report is available at http://www.irs.gov/advocate/article/0,,id=202276,00.html.

AFRs for February

The Applicable Federal Rates (AFRs) for February are as follows (based on compounding annually, semiannually, quarterly, and monthly): Short-term (≤ 3 years): 0.60% / 0.60% / 0.60% / 0.60% Mid-term (> 3 years but ≤ 9 years): 1.65% / 1.64% / 1.64% / 1.63% Long-term (> 9 years): 2.96% / 2.94% / 2.93% / 2.92%

Hardship Distributions from 401(k) Plans

If their employer's 401(k) plan allows for hardship distributions, employees may receive early distributions from their 401(k) account if they have an "immediate and heavy need" due to such expenses as:

• medical expenses
• costs relating to the purchase of a principal residence
• tuition and related educational fees and expenses
• payments necessary to prevent eviction from, or foreclosure on, a principal residence
• burial or funeral expenses
• expenses for the repair of damage to the employee's principal residence

It is important to keep in mind that all 401(k) distributions are subject to federal and state income tax. In addition, most distributions received before age 59 1/2 are subject to a 10% federal tax penalty and a 2.5% California tax penalty. These penalties are in addition to income tax on the distributions. (Exceptions to the penalty are listed in the previous blog post.)

For FAQs about hardship distributions, please visit: http://www.irs.gov/retirement/article/0,,id=162416,00.html

Tax on Early 401(k) Distrbutions

People may consider taking early distributions from 401(k) accounts when facing financial difficulty, but those distributions can be costly. In addition to regular income tax on retirement distributions, federal law imposes a 10% penalty on distributions received from 401(k) plans before age 59 1/2, unless a distribution is:

• made on or after the account holder's death,
• made on account of disability,
• made for certain unreimbursed medical expenses (which must be incurred in the same year the distribution is received)
• due to an IRS levy,
• made as part of a series of substantially equal periodic payments over life expectancy,
• a qualified reservist distribution,
• made after separation from service after age 55,
• made to an alternate payee under a qualified domestic relations order, or
• made from an employee stock ownership plan for dividends on employer securities held by the plan.

California imposes another 2.5% tax on early 401(k) distributions not meeting one of these exceptions. So, unless an exception applies, Californians pay 12.5% in penalties on early 401(k) distributions in addition to income tax.

A plan loan may be a better alternative to a distribution. If your plan provides for loans and certain conditions are met, you could receive the funds tax-free.

Answers to 401(k) FAQs are available at http://www.irs.gov/faqs/content/0,,id=199909,00.html.

California Delays Payments for Tax Refunds

State Controller John Chiang announced today he will begin delaying, for 30 days, payments for tax refunds for individuals and businesses that overpaid their 2008 taxes. He is also delaying many other payments, including payments to businesses for services and products they provide to the State; assistance to more than 1 million aged, blind and disabled Californians; and disbursements to State agencies that use the payments to fund public services ranging from public safety to health and welfare. Chiang said: "Delaying these payments will get us through the next few months, but it will not solve the problem. Only the Governor and the Legislature have the power to avoid this drastic and painful path. They have a narrow window of opportunity to quickly enact a sound solution to bridge the State’s cash and budget deficit, and I urge them to seize it." The complete press release is available at http://www.sco.ca.gov/eo/pressbox/index.shtml.

Read This Before Choosing a Tax Preparer

The IRS issued a document Tuesday titled "Read This Before Choosing a Tax Preparer." In it, the IRS says: "If you will be paying someone to do your tax return, choose a tax preparer wisely. You are legally responsible for what’s on your tax returns even if they are prepared by someone else. So, it’s important to find a qualified tax professional." Even if you do not choose ThomasYork as your preparer, we encourage you to follow this counsel. The entire article can be viewed at: http://www.irs.gov/newsroom/article/0,,id=120129,00.html

Shorter Extension for 2008 Partnership & Trust Returns

Partnerships & trusts that file an extension must file their returns one month earlier than in years past, as they will now be granted a 5-month extension instead of the 6-month extension of previous years. Income tax return due dates for 2008 calendar year taxpayers are as follows: Corporations: Original 3/16/09... Extended 9/15/09 Partnerships & Trusts: Original 4/15/09...Extended 9/15/09 Individuals: Original 4/15/09... Extended 10/15/09

Individual Estimates Due January 15

Individual taxpayers who are required to make quarterly estimated payments must make their 4th quarter payments by January 15.

Starting in 2009, California will require certain high-income taxpayers to make payments electronically. This e-pay requirement does not apply to any fourth quarter state estimates due January 15.

The first date an individual may be subject to mandatory e-pay is April 15. We will be in contact with our clients to whom these rules apply, but you are always welcome to contact us with questions.

More information on the California electronic payment requirements for 2009 is available at: http://www.ftb.ca.gov/individuals/Mandatory_e-pay.shtml.

Form 1099-MISC due February 2

All required Forms 1099 and W-2 must be furnished to recipients by February 2, and furnished to the IRS by February 28. The requirements regarding Form 1099-MISC (Miscellaneous Income) are lengthy and complex, as this is the "catch-all" 1099 form. Here are some of the most common reasons for filing a 1099-MISC:

• Medical and health care payments of $600 or more (Box 6)
• Attorney fees of any amount (Box 7)
• Rent payments of $600 or more to an individual or unincorporated entity (e.g. Partnership or LLC) (reported in Box 1)
• Fees for services paid to an individual or unincorporated entity, such as a subcontractor or director, of $600 or more (Box 7)

More information on the 1099-MISC is available at http://www.irs.gov/instructions/i1099msc/ar02.html#d0e819, or you may contact us with your 1099 questions.

IRS Guide to Individual Income Tax

The IRS has released its annual comprehensive guide to preparing an individual income tax return. This year's edition is 299 pages. If you would like help falling asleep tonight, you may access the PDF version of the publication at http://www.irs.gov/pub/irs-pdf/p17.pdf or the online version at http://www.irs.gov/publications/p17/index.html.

Tax Calendar for Small Business & Self-Employed

The IRS has provided a 2009 calendar with due dates for most tax filings required of small businesses and self-employed individuals. This does not eliminate the stress of managing deadlines, but at least it lists them all in one place. You can view a specific month in HTML format, print the entire calendar from a PDF document, or download the dates into a Microsoft Outlook calendar. The calendar is available at: http://www.irs.gov/businesses/small/article/0,,id=176080,00.html. The IRS welcomes feedback on the calendar, so please feel free to comment if you try it out, and we'd be glad to forward any feedback on to the IRS.

Applicable Federal Rates (AFRs) for January

The applicable federal rates (AFRs) for January for interest computed annually are as follows: Short-term (≤ 3 years) 0.81% Mid-term (> 3 years but ≤ 9 years) 2.06% Long-term (> 9 years) 3.57%

IRS Releases 2009 Inflation-Adjusted Numbers

The IRS & California EDD recently released certain amounts that are adjusted for inflation. Several of these numbers are provided below for your reference. Payroll: Social Security wage base $ 106,800 California SDI taxable wage limit $ 90,669 California SDI withholding rate 0.1 % Maximum contributions to retirement plans: 401(k), 403(b), or 457 – up to age 50 $ 16,500 401(k), 403(b), or 457 – age 50 + $ 22,000 IRA – age 49 and below $ 5,000 IRA – age 50 + $ 6,000 SIMPLE IRA – up to age 50 $ 11,500 SIMPLE IRA – age 50 + $ 14,000 Defined Contribution Plans – any age $ 49,000 Standard deduction: Single $5,700 Head of Household $8,350 Married Filing Joint $11,400 Married Filing Separately $5,700 Other amounts: Personal exemptions per taxpayer and dependent $3,650 Child tax credit for each qualifying child under age 17 $1,000 Annual gift exclusion $ 13,000

Annual Payroll Tax Return Available for Small Employers

Final regulations and procedures were issued regarding payroll tax returns for "qualified" (very small) employers, those whose estimated annual employment tax liability is $1,000 or less. An employer's annual employment tax liability includes social security, Medicare, and withheld federal income taxes. Qualified employers are eligible to file Form 944 (Employer's Annual Federal Tax Return), rather than Form 941 (Employer's Quarterly Federal Tax Return). Prior Notification – Some employers may have already been notified that they are eligible to file Form 944. If the employer prefers to file Form 944, no further action is required with the IRS. The taxpayer should file the Form 944 as instructed in the notice. Choosing to File Form 944 – If an employer has not been contacted by the IRS about filing Form 944, and the employer wants to file Form 944, the employer may request from the IRS a notification letter confirming the employer may file Form 944 by calling 1-800-829-4933 before April 1, 2009. Choosing Not to File Form 944 – If an employer received notification from the IRS with instructions to file Form 944, the employer is required to file Form 944 unless the employer opts-out because one of the following two conditions are met: (1) The employer anticipates that its employment tax liability for tax year 2009 will be more than $1,000; or (2) The employer wants to file electronically quarterly Forms 941 for tax year 2009 If these conditions are met, the employer may opt-out of filing Form 944 by following the specific procedures of Rev. Proc. 2009-13, which are available from ThomasYork by request.