Winter had to get here sooner or later. Usually, we get some of it, snow at least, during the deer season, but it didn’t happen this year. For the gun hunters, that lack of snow helped to make it a bit of a rough season. I think the Michigan Department of Natural Resources will conclude that about 20% less deer were harvested this year as compared to last year. That’s a lot of car-deer accidents waiting to happen over the next year.

The spring fishing might be real good this coming spring. Since there isn’t any ice so far, no fish are getting caught through the ice. If I remember right, the best ice fishing occurs during the first ice. There might not be any first ice this year, so that will leave lots of fish for us non-ice fishermen to catch later.

For the downhill snow skiers, the tubers, and the cross-country skiers, it has also been a bit of a tough season. Tough is not exactly the word the owners of various ski lodges might use. It has been a brutal season for them, and some of them might not make it until next year.

I think, weather-wise, we are becoming Indiana. I have family down there. They take great fun in rubbing in to me the fact that they can golf year around. Over the span of the winter, the golf courses down there close for a few days now and then due to snow and cold weather. Last week the Grand Rapids Press reported that Maple Hill Golf Course in Grandville has been open this winter except for a few days.

I wouldn’t claim to expertly know if this is a part of a pattern of global weather change, but it definitely looks like to me our weather is becoming more Indiana-like. The weather guys argue about the data collected, if it is technically correct, and if the conclusions made are correct. I’m not that sophisticated. What I look at is the items I discussed earlier. There is less snow during the deer hunting season. The only ice I see is being made by my refrigerator. Outdoor enthusiasts have less snow, and there is less cold weather for those outdoor enthusiasts to enjoy the outdoors. That’s good enough for me to say there is something going on.

Becoming Indiana doesn’t sound all that good to me, but with every change there are opportunities. What, if anything, can and should be done about becoming Indiana is beyond my pay-grade, but I am sure the opportunities available are being worked on even as I write this article.

Something else that is being worked on right now is tax returns. Over 120 million tax returns will be filed in the next three months by the taxpayers of the United States. A substantial percentage of those returns will be prepared and filed electronically by tax professionals like me and my associates at Action Tax Service.

Here are some pointers to help taxpayers choose that tax professional.

First, choose a tax professional that is available all year around. Our tax system is so complicated today that we could have questions at any time of the year. It’s vitally important to have the tax professional available to answer questions all 12 months of the year.

Second, choose a tax professional that is competent. There are visible ways that tax professionals demonstrate competency. All Enrolled Agents (EAs), certified public accountants (CPAs) and attorneys at law have demonstrated technical competence in order to attain their credentialed EA, CPA and attorney status. However, there are many non-credentialed tax professionals preparing tax returns. At this time, they just don’t have a credential to put behind their name.

Third, choose an experienced tax professional. There are some professions in which you go to college for four years, get a degree, and you are ready to go. The tax profession isn’t like that. A person in the tax profession for four years is just getting started. I have 23 years under my belt and I am still learning.

Fourth, get a price quote before making an appointment. There is no average price. Know what your price, or a reasonable range of prices, is before you have the tax professional begin the process of preparing your return. Most tax professionals will sign, and will expect the taxpayer to sign, an engagement letter identifying the services to be provided to the taxpayer in exchange for the agreed-upon price.

Use these four pointers to help choose a tax professional to prepare your tax return. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

It may seem like I am beating this topic to death, but since it is now 2012, I think it is important to review one more time all of the Michigan tax changes that took place on January 1, 2012.

I have been preparing Michigan tax returns since 1978 and there may be more changes that took effect on January 1 than perhaps all of the previous 33 years combined. Not one tax form is untouched. Almost every calculation is affected. Multiple forms became obsolete. About the only item that will not change is the actual tax rate. It will remain at 4.35%. Of course, it was slated to be lowered to 4.25% so even that technically was changed.

Many of those changes will result in either a tax increase or a refund decrease. Most businesses will see a tax decrease and many individuals will see a tax increase or a refund decrease. For purposes of this article, I am concerned with individuals who will see a tax increase or a refund decrease. I emphasize the “will” because these changes will affect a large percentage of the tax filing public.

The most visible change that was made was to the taxability of pensions. Now, for most people, all pensions—whether the pension comes from the state government, from the federal government, from a private company, from an insurance company, or from an individual retirement account—are lumped into the same basket and called “pension income.”

Previously, the taxability of the pension depended upon who paid the pension. Now, age of the recipient is extremely important. Except for seniors born before 1946, it makes no difference where the pension is coming from. For those taxpayers born before 1946, the 2011 rules will continue to apply. Only for taxpayers born before 1946, public pensions paid by a state government or the federal government are totally non-taxable. Only for taxpayers born before 1946, the first $45,842 for singles and $91,864 for joint filers of private pensions paid by a private company, from an insurance company, or from an individual retirement account is not subject to income tax.

For taxpayers born between 1946 and 1952, all pensions are thrown into the same basket and the first $20,000 for singles and $40,000 for joint filers is not taxable.

For taxpayers born after 1952, there is no pension exemption. Period. All pensions from whatever source are fully taxable.

These are historic changes made to the taxability of pensions. Incidentally, the Michigan Supreme Court gave its approval to these changes. In light of these changes, Michigan has revised their withholding form, MI-W4P. The form allows a pension payer to withhold Michigan tax from a pension.

However, other historic changes were also made to other tax provisions. Specifically, the homestead property tax credit formula was totally revised. These changes will also affect a tremendous number of taxpayers.

First, no homestead credit will be allowed for taxpayers having a homestead with a taxable value of $135,000 or more. There is no phase-out. If your homestead has a taxable value of $135,000 or more, there will be no homestead credit. In previous years, there was no maximum on the taxable value.

Second, there will be no homestead credit for taxpayers with total household resource income of more than $50,000. Previously, it took $82,650 to totally phase-out the credit.

Third, for seniors age 65 or more, a full credit will only be allowable for those with total household resource income of $21,000 or less. From $21,000 to $30,000, the credit reduces to 60%. From $41,000 to $50,000 the credit reduces to zero. Previously, seniors age 65 would receive full credit until income reached $73,650 and reduce to zero at $82,650.

These homestead credit changes are substantial and will reduce the credit many taxpayers, not just seniors, may have become accustomed to receiving. By reducing the credit, many seniors will receive a lower refund. Many non-seniors may ultimately have a balance due on their 2012 tax return.

Another set of changes eliminated all personal credits. That means there will be no credit for donations to public radio, TV, museums, libraries, homeless shelter, food banks, or community foundations. Among others, there will be no adoption credit, no city income tax credit, no historic preservation credit, and no college tuition and fees credit.

In addition, the earned income tax credit (EITC) will be limited to 6 percent of the federal EITC amount. Previously, Michigan allowed 20 percent of the federal amount.

Taking all of these changes together, I believe it would behoove taxpayers to discuss their 2012 Michigan tax situation with either a tax professional or do the research online at www.michigan.gov, Michigan’s website, to determine what withholding or estimated tax adjustments must be made. Michigan may assess penalties to taxpayers with a balance due of more than $500 when filing the 2012 tax return. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

Welcome to the 2012 tax season! For tax professionals, this is a day that was on the horizon as soon as the previous tax season ended on April 15, 2011. There weren’t a lot of changes that Congress made last year. Furthermore, this is an election year so there most likely won’t be many moves by Congress this year before the November election.

The party to the left—affectionately called by its supporters, the Democrats—won’t let the party on the right—affectionately called by its supporters, the Republicans—pass any law that might be perceived as giving them an advantage with the voters. By the same token, the party on the right won’t let the party on the left pass any law that might be perceived as giving them an advantage with the voters. That means common sense is thrown out the window in favor of trying to get elected or, what seems to be important, trying to make sure the other party doesn’t get elected.

Somehow, I think George Washington, John Adams, Thomas Jefferson, and the other founding fathers would not be amused. I can’t believe they would conclude that they fought and won a war of independence and then came together to agree on one of the greatest documents in the history of mankind, our Constitution, to see the debacle going on in Washington, D.C. today. In fact, I think they would be mortified. It’s not that Washington, Adams, Jefferson and the others weren’t passionate about our country and passionate in their beliefs about how the government should operate. They were strong personalities, so there were strong disagreements. They were, however, able to put the country first and work out their differences for the good of the country.

Shame on you, Barack Obama, Joe Biden, Harry Reid, Nancy Pelosi, John Boehner, Mitch McConnell, and most of the remaining members of Congress, for not putting the country before the party. What may be even worse, shame on us for electing these people for term after term. For the most part, either the people in Washington need to change how they do business or we need to find some new people who will act as Americans and not as Democrats or Republicans.

Well, I guess I should get off my high horse now and talk about the things that Roger Allen would like me to talk about: the world of taxes.

Just because there is a stalemate in Congress doesn’t mean that the Internal Revenue Service took the summer off. Quite the contrary, they have been working overtime refining old rules and proposing new rules.

We all must understand that the IRS is in a tough spot. They are charged with enforcing some very complicated tax provisions. If they are overzealous in that enforcement, they get in trouble. If they are lax in enforcing the laws, they get in trouble. Talk about walking a fine line.

One way they regulate the tax system is by regulating tax professionals. Anyone preparing tax returns for compensation today has to register with the IRS and receive a Preparer Tax Identification Number (PTIN). By registering, the IRS is compiling a complete database of tax professionals. Once the registration process is complete, they will be in a position to effectively monitor and regulate the entire database. Through May 2011, there were 751,493 preparer numbers in the database and the number is growing.

Unfortunately, the IRS is finding that some unsavory characters were given PTINs and are evidently preparing tax returns. According to a report recently released by the IRS, 962 prisoners or ex-convicts were granted PTINs; 43 of those prisoners were currently serving life sentences.

When applying for a PTIN, the question is asked if the applicant has a conviction in the last 10 years. If you were in prison for something that happened more than 10 years ago, you could legitimately answer no to that question. Perhaps the IRS might consider either adding another question to the application process, indicating whether or not the applicant is currently in prison, or they could do a background check on the applicant at the time of the application. Either method might ferret out those bad apples.

Prior to the advent of the PTIN process, there was no complete database. The partial one they had consisted mainly of credentialed professionals: CPAs, attorneys, and Enrolled Agents. These credentialed professionals have always been regulated through an IRS publication called Circular 230. Other non-credentialed preparers were not entirely known to the IRS and were not subject to Circular 230. Now the entire database of those preparing tax returns will be regulated by Circular 230.

I’m an Enrolled Agent, while all of my preparation staff have PTINs. Circular 230 now applies to all of us. I agree with this program. If someone is going to take money to prepare someone else’s tax return, they should be not only known to the IRS but also regulated by the IRS.

In addition, the IRS has created a new designation for tax professionals called a Registered Tax Return Preparer (RTRP). RTRP status is obtained by passing a required test. Anyone preparing tax returns who is not a CPA, attorney, or Enrolled Agent must pass the RTRP test by December 31, 2013, or that person won’t be able to prepare returns beginning on January 1, 2014. Once the preparer passes the test, he or she will be able to market himself or herself using the RTRP designation.

In the future, you will read more about the RTRP designation. I will keep you posted.

Why is regulating the tax professional industry important? In 2011, 66.9 million people paid a tax professional to prepare their return. More than one-half of all returns filed are completed by a paid tax professional. It’s important to know who these tax professionals are and to regulate them appropriately. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive in Rockford.
Contact Jerry at www.actiontaxservice.com.

It’s nearing December 31. For most tax-planning strategies, December 31 is a hard deadline.

I’m going to borrow from David Letterman and give you my Top 10 Action Tax Service Tax Planning Strategies. Since Herman Cain dropped out of the presidential race, I think it’s a fair bet that our current tax system is going to stay in place for the foreseeable future. Since our country is drowning in debt, I also think it’s a fair bet that after the presidential election, there will be major tax changes within that system. I believe those changes will result in tax increases. Our federal government will come to the same conclusion that was reached in the State of Michigan.

In Michigan, Governor Snyder determined that balancing the budget with smoke and mirrors wouldn’t work anymore. Changes were made. Some of them are painful.

At the federal level, continuing to print money isn’t the answer. It won’t work anymore and changes have to be made. Some of them will be painful.

In the meantime, there are items we might consider between now and December 31. Here are my Top 10 planning considerations.

1. Make contributions to your favorite charities. Write the check by December 31 or go online and use a credit card to make the contribution. In order to ensure you get the deduction, get a receipt. As I stated in last week’s article, the great credits available on the Michigan return for homeless shelters/food banks, public TV/radio, museums/libraries, and community foundations are all eliminated as of January 1, 2012. Make those contributions before the stroke of midnight on the 31st to get the credit on this year’s tax return.

2. Consider paying real estate property taxes in 2011. If you itemize, paying them in this year may prove beneficial. If you make the payment on December 27, 2011 and you file your return on February 27, 2012, you realize a tax benefit 60 days after spending the money. However, if you make the payment on February 12, 2012 and your 2012 tax return is not filed until February 27, 2013, you will wait for an entire year to pass before you receive a tax benefit. Of course, if you don’t itemize deductions, paying the taxes early is not beneficial.

3. Consider paying your last estimated payment to Michigan in 2011. Again, if you itemize, the paying of state taxes is a deduction on the federal return in the year paid. If you make the payment in 2011, you will realize that tax benefit sooner than having to wait a full year.

4. For those in business, consider buying equipment or vehicles in 2011. The write-off rules are very generous in 2011. Under the Bonus depreciation rules, in the right circumstances, new equipment may be totally written off in the year of purchase. If the equipment doesn’t qualify under the Bonus depreciation rules, perhaps the Section 179 depreciation rules will allow the business to write off the entire cost of the equipment.

5. Look carefully at unrealized capital gains and losses in your portfolio. Due to the Bush tax cuts, capital gains tax rates are historically low. This may not continue past next year. Consider realizing profits to take advantage of the low rates or to offset loss carry-forwards.

6. Make a contribution of those unused clothes or toys to one of the collection agencies such as Goodwill, Salvation Army or North Kent Community Services. They can be written off as an itemized deduction at the fair market value. Get a receipt. Itemize the items donated. Take a picture as visual proof of the items given. You might enjoy the tax savings more than you are enjoying a closet full of unused clothing or a box of old toys.

7. Gather receipts for energy credit property improvements such as insulation, exterior windows, exterior doors, certain qualified metal and asphalt roofs, and qualified high-energy natural gas, propane or oil furnaces. The energy credit is 10% of the qualifying expenditures, subject to lifetime limits of $500 of credit. Certain other restrictions apply, of course.

8. For the educators in the audience, the $250 above-the-line deduction was reinstituted for another year. Eligible educators are those who teach in kindergarten through grade 12, including teachers, counselors, principals or aides who have classroom time of at least 900 hours. Eligible expenses include supplies, computer equipment, books, and any other items that are used by the educator in the context of the classroom.

9. Take advantage of the qualified charitable distribution rule available for 2011. Taxpayers age 70-1/2 or older may direct distributions from their traditional or Roth IRA to be made to their favorite charities. The maximum that may be distributed to the charity is $100,000, but that is a pure $100,000. It is not part of the taxpayer’s tax return, so it is not subject to income limits or phase-outs. Since it’s not part of the tax return, the taxpayers do not get a deduction but they also do not have to pay tax on the distribution. It simply is not part of the tax return. Distributions do qualify as part of the taxpayers’ required minimum distribution. This rule does expire on December 31 and, as of right now, will not be allowed in 2012 so make sure the paperwork is all completed this year.

10.Consider talking to a tax professional for tax advice. Our tax system is extremely complicated today. There are loopholes that are big enough to drive a Mack truck through but there are also pitfalls that can trip up even the most astute taxpayers. Most tax professionals are putting in longer hours right now because they are tax planning with their clients. Getting technical advice on a subject today may be a smart thing to do.

Those are my Action Tax Service Top 10 items to think about as we wind down this year of 2011. I wish a very Merry Christmas to all reading this article. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Dr. in Rockford. Contact Jerry at www.actiontaxservice.com.

The Michigan Supreme Court on Friday, Nov. 18, upheld the constitutionality of the controversial Michigan pension tax changes made by our legislature last spring. Public Act 38, as signed by Governor Snyder, proposed taxing public pensions beginning on January 1, 2012.

Private pensions have always been taxed, but public pensions paid to retired school, federal and state workers have not previously been taxed. The Act placed public and private pensions in the same pot and proposed taxing all of them at the same rate. However, there was some question as to whether the legislature had the power to levy a tax on those public pensions.

Hence, the Michigan Supreme Court became involved in this sticky matter. It was asked to decide five issues.

1. Does or does not taxing public pensions “impair accrued financial benefits of a pension plan retirement system of the state…”? The pension recipients were promised a certain level of financial benefit upon retirement. Does taxing those pensions now reduce or impair that financial benefit?

2. Does or does not taxing public pensions “impair a contractual obligation in violation of the Michigan Constitution…”? Did the state have a Constitutional contract with the pension recipients to provide a promised level of pension benefit that would be reduced by the amount of tax incurred?

3. Does or does not taxing all pensions differently based on the date of birth “violate the equal protection of the law under the Constitution…”? People born before 1946 would pay no additional tax, so they were held harmless by the Legislature. People born between 1946 and 1952 would be impacted somewhat, while those born after 1952 would be extremely impacted by the bill. Is this legal?

4. Does or does not taxing all pensions differently based on the taxpayer’s total household resources “create a graduated income tax in violation of the Constitution…”? Michigan is a flat-tax state. Everyone pays at the same tax rate on their Michigan taxable income. The proposed law said taxpayers with total household resources in excess of $75,000 single and $150,000 joint were not entitled to a $20,000 single or $40,000 joint pension income exemption. Was this legal?

5. If the Supreme Court holds any part of the act as unconstitutional, does it make the entire law unconstitutional?

By a 4-3 ruling, the Supreme Court, with one exception, ruled in favor of the Legislature and Governor Snyder.

1. It ruled that taxing public pensions does not impair the accrued financial benefit promised to the recipients.

2. It ruled that taxing public pensions does not impair a contractual obligation of Michigan.

3. It ruled that it is legal to tax pensions based on the age of the recipients.

4. However, it did rule that it was not legal to tax people differently based on total household income. Michigan was indeed creating a graduated income tax when they proposed phasing out the $20,000/$40,000 exemption based on having household resource income of $75,000/$150,000.

5. Finally, it ruled that because one provision of the bill was not legal, throwing out that one provision did not make the entire law unconstitutional.

This was a victory for the Legislature and Governor Snyder of gigantic proportions. Taxing public pensions was the very foundation of the revisions instituted last year. Due to this victory, I am sure the governor joyfully celebrated the Thanksgiving holiday.

Now that the Supreme Court has ruled that pensions will be taxable, taxpayers will be receiving a MI W-4P from the pension provider. The MI W-4P is used to inform the pension provider how much Michigan tax must be withheld from the pension check.

In light of the Supreme Court’s ruling that the $75,000/$150,000 household income phase-out is unconstitutional, it appears that the form will be amended. I am sure the people in the forms department are working feverishly to implement an amended form throughout the entire system. It may even have been a working holiday for them.

In any event, the MI W-4P must be completed and sent back to the provider. If it is not sent back, the pension provider must presume that the pension is all taxable and, therefore, withhold tax at the rate of 4.35%. By checking the appropriate box on the form, taxpayers can declare that they were born before 1946, which basically tells the provider that the pension is nontaxable to Michigan; or taxpayers can declare they were born between 1946 and 1952, which makes the first $20,000 of pension nontaxable for singles and $40,000 for joint filers; or can declare they were born after 1952, which makes the pension all taxable.

We are getting many calls about properly preparing the form. Taxpayers with questions should contact a tax professional to help with the process. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service in Rockford. Contact Jerry
at www.actiontaxservice.com.