Electronic tax filing (or e-filing) is a process where tax returns are submitted to the Internal Revenue Service or your state’s department of taxation through the Internet or direct connection, usually without the need to submit any paper documents.  E-filing can be done through tax preparation software programs, Web sites run by software producers or state tax departments, or by your tax professional.

Have you e-filed your tax return yet?  According to the IRS, 87 million of the 145 million US personal returns filed in 2008 (about 60%) were filed electronically.  They have a goal of reaching 80% in the next few years.  To promote this goal, mandatory e-filing has been instituted for most federal returns prepared by professional tax preparers beginning in 2011 for tax year 2010.  In addition, 21 states already require tax professionals to file electronically, among them VA, MD, CA and NY.  The rest allow optional e-filing, but more and more are moving toward mandatory e-filing.  E-filing is also available for many business returns and is mandatory for certain payroll and income tax returns for larger companies. 

Like most people in the Mid-Atlantic states, I spent most of last week stuck at home as a virtual prisoner of the snow storms that pounded our area beginning on February 5.   During this period, the “busy season” for accountants and tax preparers, these lost work days could have been disastrous.  Fortunately, by using computer technology, most of the professionals in my firm were able to remain productive and work remotely from home. 

With the proliferation of computer technology and high speed internet connectivity over the past 20 years, telecommuting has become a more significant and pervasive movement in our economy.  Working from home or telecommuting has become routine for many workers.  For employers this technology can reduce costs for office space and aid in the recruitment and retention of quality personnel.  Likewise for employees, the use of telecommuting can not only aid in the balance of work and life, but also greatly expand the potential market for their services.

As the roads were finally cleared and I returned to the office, I was greeted by the February edition of The Tax Adviser which contained an excellent article by Ilya Lipin, discussing some of the tax ramifications of telecommuting.  Given my recent, albeit temporary foray into the virtual workplace, I was inspired to share some of the excellent information provided by Mr. Lipin as well as a few thoughts of my own regarding the tax ramifications of telecommuting.

The New Year commencing January 1, 2010 brought the repeal of Federal estate and generation skipping transfer taxes, while retaining transfers on gifts with the highest gift tax rate of 35%.  This dawn of the post estate tax era, which was created through legislation enacted in 2001, led some to conclude the best planning for certain taxpayers was to pass on during the one year window of 2010 and escape estate taxation.  Absent corrective legislation, estate and generation skipping transfer taxes will emerge again beginning in the 2011 year at pre-2001 tax rates and exemption levels.

While planning for death is a difficult subject for all, only the most abject avoiders of tax would seek death as a way out of transfer taxation.  While the Congress has been focused on many other priorities, most observers have believed the estate and generation skipping transfer tax laws in effect during 2009 would be extended.   Yesterday, Senate Finance Committee Chairman Max Baucus and Treasury Secretary Tim Geithner indicated support for legislation that would freeze 2009 rates and exemptions into the year 2010 and beyond, retroactive to January 1, 2010.

Because of the economic downturn in late 2008, the federal government allowed taxpayers to skip required minimum distributions from their IRAs and qualified retirement plans for 2009 only.  The purpose of the suspension was to avoid forcing taxpayers to sell stock while at its weakest if the taxpayer didn’t need the money.  As we move into the New Year, don’t forget that these required distributions are now back in place.

Required Minimum Distributions (RMDs) are payments that must be made from IRAs and employer-provided defined contribution retirement plans [401(k) plans, etc.] generally by April 1 of the year following the calendar year in which the taxpayer reaches age 70 and a half.  This minimum amount to be distributed is determined by dividing the account balance of the IRA on December 31 of the previous year by a certain number of years provided in IRS tables based on your current age.  For example, if the appropriate table has a distribution period of 22.9 years, and your IRA balance was $300,000 on December 31 of the previous year, your current RMD is $300,000 / 22.9 years = $13,101.  Failure to take the required amount out of your IRA will result in a 50% penalty tax.