GETTING READY TO PREPARE YOUR RETURN

Another timely updated year-beginning post re-run:

You should have begun to receive the various forms needed to prepare your Form 1040. Employers, banks, brokers, mortgage companies, mutual funds, etc. are required to provide taxpayers with W-2s, most 1099s and 1098s by January 31, 2012.  Some 1099s are not required to be delivered until mid-February.  If you have not received all your information returns by February 15th, contact the employer, bank, broker, or whoever and arrange to receive a duplicate copy.

When you receive your W-2s and 1099s check the figures against your own records to make sure the amounts reported are correct. Carefully compare the gross federal and state wages, federal, state and local income tax withheld, and Social Security and Medicare taxes withheld numbers on your W-2s to the amounts on your paystubs or other records. Also verify that the Social Security numbers on the forms are correct. If you find an error or discrepancy, contact the appropriate employer or financial institution for an explanation or a corrected copy.

If the federal and state wages are not the same I always attempt to reconcile the numbers. My home state of New Jersey does not allow a deduction from state wages for contributions to pension or deferred compensation plans other than a 401(k), or for employee contributions to flexible spending accounts for insurance premiums, medical expenses and dependent care. Third-party disability pay, which is usually at least partially taxable for federal purposes, is exempt from NJ state income tax and will not be included in the state wages amount.

If you do not receive a W-2 from an employer and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your paystubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for FormW-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

A word of warning for taxpayers who have brokerage accounts.  You should receive at least one “Corrected” Consolidated Year-End 1099 statement. It would be a good idea to wait a few weeks after receiving the original 1099 information before having your return prepared.

Here is another heads up. Insurance company and telephone company dividend checks mailed out in December or January often have a Form 1099-DIV attached. Do not separate the check and throw out the 1099-DIV by mistake thinking it is merely a check-stub. Conversely, check any 1099-DIV you receive from an insurance company or telephone company to see if there is a dividend check attached. I can’t tell you how many times I have found checks attached to 1099s given to me by clients at tax time.

Just because you receive a Form 1099-G for a state tax refund does not mean that the refund is taxable. A state income tax refund is only taxable to the extent you received a “tax benefit” from deducting state and local taxes paid on your Schedule A.

Let us say your total itemized deductions on a joint 2010 Form 1040 were $11,728, just above the standard deduction amount of $11,400. Included in this amount is a deduction for the state income tax withheld during the year of $1,723. Your 2010 state income tax return reported an overpayment of $531 and you received a refund check for that amount in May of 2010. In January you may receive a Form 1099-G from your state tax authority for the $531 refund. Only $328 of this refund is taxable on your 2011 Form 1040. As your itemized deductions exceeded the standard deduction by $328, you only received a “tax benefit” of $328 from your deduction for state income taxes.

If you did not itemize on your 2010 Form 1040, or you filed a Form 1040A, a state income tax refund is not taxable. If you elected to deduct state and local sales tax instead of state and local income tax on your 2010 Schedule A the refund is also not taxable.

FYI, many states have stopped mailing out paper Form 1099-Gs.  You must go to the website of the state’s Division or Department of Taxation or Revenue to download a copy.  So just because you did not receive a Form 1099-G in the mail does not mean that one was not issued by the state.

The IRS is very picky about matching names to Social Security numbers. If a Social Security number and name reported on your tax return does not match exactly the name in the files of the Social Security Administration the IRS will remove the name and dependency exemption of that person and automatically recalculate the tax liability as Head of Household, Married Filing Separately or Single.

If you have changed your last name as a result of marriage or divorce during 2011 make sure to notify the Social Security Administration of the change before filing your tax return. You do this by submitting a Form SS-5 to request a new Social Security card. Go to www.ssa.gov/ssnumber.

TTFN