If you own life insurance policies at your death, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds. The way around this problem is to not own the policies when you die. However, don’t automatically rule out your ownership either.
And it’s important to keep in mind the current uncertain future of the estate tax. If the estate tax is repealed (or if someone doesn’t have a large enough estate that estate taxes are a concern), then the inclusion of your policy in your estate is a nonissue. However, there may be nontax reasons for not owning the policy yourself.
Plus and minuses of different owners
To choose the best owner, consider why you want the insurance. Do you want to replace income? Provide liquidity? Or transfer wealth to your heirs? And how important are tax implications, flexibility, control, and cost and ease of administration? Let’s take a closer look at four types of owners:
1. You or your spouse. There are several nontax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback is estate tax risk. Ownership by you or your spouse generally works best when your combined assets, including insurance, won’t place either of your estates into a taxable situation.
2. Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds aren’t subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax-free. On the minus side, policy proceeds are paid to your children outright. This may not be in accordance with your estate plan objectives and may be especially problematic if a child has creditor problems.
3. Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the business under a split-dollar arrangement. But if you’re the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the business, the proceeds could be included in your estate for estate tax purposes.
4. An ILIT. A properly structured irrevocable life insurance trust (ILIT) could save you estate taxes on any insurance proceeds. The trust owns the policy and pays the premiums. When you die, the proceeds pass into the trust and aren’t included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.
Contact us with any questions.
Mortgage interest rates are still at low levels, but they likely will increase as the Fed continues to raise rates. So if you’ve been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that will help:
0% capital gains rate. If the child is in the 10% or 15% income tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you’d owe if you sold the assets yourself.
As long as the assets are worth $14,000 or less (when combined with any other 2017 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion. Married couples can give twice that amount tax-free if they split the gift. And if you don’t mind using up some of your lifetime exemption ($5.49 million for 2017), you can give even more. Plus, there’s the possibility that the gift and estate taxes could be repealed. If that were to happen, there’d be no limit on how much you could give tax-free (for federal purposes).
Low federal interest rates. Another tax-friendly option is lending funds to the child. Now is a good time for taking this step, too. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are still quite low by historical standards. But these rates have begun to rise and are also expected to continue to increase this year. So lending money to a loved one for a home purchase sooner rather than later might be a good idea.
If you choose the loan option, it’s important to put a loan agreement in writing and actually collect payment (including interest) on the loan. Otherwise the IRS could deem the loan to actually be a taxable gift. Keep in mind that you’ll have to report the interest as income. But if the interest rate is low, the tax impact should be minimal.
If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact us.
You can pay your child to work in your business and get paid for paying your child.
The basic mechanics of this are (a) you deduct the wages and (b) your child pays zero or very little in income taxes. The three points below elaborate on this:
1. The child (a single taxpayer) pays zero taxes on earnings up to the $6,350 standard deduction amount. Say you pay tax-deductible wages of $6,350. This reduces your taxes or gives you tax refunds. And the child pays no taxes. The government is the only player who is out any money.
2. The child can use the traditional IRA to avoid taxes on $5,500, for a total of $11,850 on which he or she can avoid taxes. You can pay this amount and reduce your taxes.
3. The child can use the 10 percent tax bracket, standard deduction, and traditional IRA so as to pay itty-bitty taxes on earnings up to $21,175 while you reap the tax benefits of paying your child this much larger amount.
To get this right, you need to pay the child on a W-2, have the child keep a time sheet, and create proof of a reasonable wage.
And you will be happy to know that the IRS has approved employing children as young as seven years old.
Here’s another benefit: If the child working for a parent is under age 18, both the child and the parent or parents are exempt from payroll taxes. In these cases, the parent operates a Schedule C business, or both parents are the sole owners of a partnership.
Corporations are not parents. They do not qualify for this exemption from payroll taxes. Even so, corporate hires of the owner’s children usually produce good tax benefits.
In summary, all business owners can achieve tax benefits by hiring their children, regardless of the type of business entity. But parents who are Schedule C owners or in spousal partnerships achieve more benefit because neither they nor their under-age-18 children are subject to payroll taxes.
If the hiring-your-child tax strategy sounds good to you, I can help you get this plan in place in an audit-proof manner.
If a substantial portion of your wealth is tied up in a family or closely held business, you may be concerned that your estate will lack sufficient liquid assets to pay federal estate taxes. If that’s the case, your heirs may be forced to borrow funds or, in a worst-case scenario, sell the business in order to pay the tax.
For many eligible business owners, Internal Revenue Code Section 6166 provides welcome relief. It permits qualifying estates to defer a portion of their estate tax liability for up to 14 years from the date the tax is due (not the date of death). During the first four years of the deferment period, the estate pays interest only, set at only 2%, followed by 10 annual installments of principal and interest.
A deferral isn’t available for the total estate tax liability, unless a qualifying closely held business interest is the only asset in your estate. The benefit is limited to the portion of estate taxes that’s attributable to a closely held business.
Estate tax deferral is available if the value of an “interest in a closely-held business” exceeds 35% of your adjusted gross estate. To determine whether you meet the 35% test, you may only include assets actually used in conducting a trade or business — passive investments don’t count.
Active vs. passive ownership
To qualify for an estate tax deferral, a closely held business must conduct an active trade or business, rather than merely manage investment assets. Unfortunately, it’s not always easy to distinguish between the two, particularly when real estate is involved.
The IRS provided welcome guidance on this subject in a 2006 Revenue Ruling. The ruling confirms that a “passive” owner may qualify for estate tax deferral, so long as the entity conducts an active trade or business. The ruling also clarifies that using property management companies or other independent contractors to conduct real estate activities doesn’t disqualify a business from “active” status, so long as its activities go beyond merely holding investment assets.
In determining whether a real estate entity is conducting an active trade or business, the IRS considers such factors as the amount of time owners, employees or agents devote to the business, whether the business maintains an office with regular business hours, and the extent to which owners, employees or agents are actively involved in finding tenants and negotiating leases.
Weigh your options
As you plan your estate, consider whether your family will be eligible to defer estate taxes. If you own an interest in a real estate business, you may have an opportunity to qualify it for an estate tax deferral simply by adjusting your level of activity or increasing your ownership in an entity that manages the property. Contact us for additional details.
A taxpayer was denied a foreign earned income exclusion under IRC Sec. 911(d)(1) for wages earned from working in Antarctica. To be eligible for this exclusion, one of the two requirements is that a taxpayer's tax home must be in a foreign country. The Court of Appeals for the Ninth Circuit affirmed the previous Tax Court ruling holding that wages earned in Antarctica are not eligible for the exclusion because under the Antarctica Treaty, and with established precedent, Antarctica is not under the sovereignty of any foreign nation, and therefore is not a foreign country within the meaning of IRC Reg. 1.911-2(h).
Summer is a popular time to move, whether it’s so the kids don’t have to change schools mid-school-year, to avoid having to move in bad weather or simply because it can be an easier time to sell a home. Unfortunately, moving can be expensive. The good news is that you might be eligible for a federal tax deduction for your moving costs. Pass the tests The first requirement is that the move be wo rk-related. You don’t have to be an employee; the self-employed can also be eligible for the moving expense deduction. The second is a distance test. The new main job location must be at least 50 miles farther from your former home than your former main job location was from that home. So a work-related move from city to suburb or from town to neighboring town probably won’t qualify, even if not moving would increase your commute significantly. Finally, there’s a time test. You must work full time at the new job location for at least 39 weeks during the first year. If you’re self-employed, you must meet that test plus work full time for at least 78 weeks during the first 24 months at the new job location. (Certain limited exceptions apply.) What’s deductible So which expenses can be written off? Generally, you can deduct transportation and lodging expenses for yourself and household members while moving. In addition, you can likely deduct the cost of packing and transporting your household goods and other personal property. And you may be able to deduct the expense of storing and insuring these items while in transit. Costs related to connecting or disconnecting utilities are usually deductible, too. But don’t expect to write off everything. Meal costs during move-related travel aren’t deductible. Nor is any part of the purchase price of a new home or expenses incurred selling your old one. And, if your employer later reimburses you for any of the moving costs you’ve deducted, you may have to include the reimbursement as income on your tax return. Questions about whether your moving expenses are deductible? Or what you can deduct? Contact us
In the quest to reduce your tax bill, year end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here are three strategies that can be more effective if you begin executing them midyear:
1. Consider your bracket
The top income tax rate is 39.6% for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold , consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6% bracket or you can’t avoid the bracket.)
You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).
2. Look at investment income
This year, the capital gains rate for taxpayers in the top bracket is 20%. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.
Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8% net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.
3. Plan for medical expenses
The threshold for deducting medical expenses is 10% of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)
Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.
These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult us now. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.
The health reform law requires firms with 50 or more full-time-equivalent employees to provide affordable coverage to their employees and dependents or pay a stiff fine. A dependent is defined as an employee's child under age 26 and excludes spouses. Last year, the Treasury Dept. announced that it was delaying the employer mandate for all firms until 2015. It's now giving employers with 50 to 99 full-time employees an extra one-year postponement...until 2016...to comply with the employer mandate and all of its rules, provided the businesses certify that they are eligible for the easing.
Concinnity LLC purchased 300 undeveloped acres and then entered into an agreement with the local county where it assumed responsibility for the costs and expenses to improve the land. The property later became the Elk Grove Planned Unit Development. Concinnity reported income from the sale of land within the development on its 2003?2005 tax returns as long-term capital gains. The Tax Court's Judge Goeke applied the five-factor test for determining whether a taxpayer held property primarily for sale to customers in the ordinary course of business to reach agreement with the IRS that Concinnity's partners incorrectly reported the partnership income as long term capital gains when it should have been reported as ordinary income. Cordell Pool, TC Memo 2014-3 (Tax Ct.).
Mr. Hart began an MBA program in 2009, at the time he was employed as a pharmaceutical salesman. During his enrollment in the program, Mr. Hart also held positions as an account manager for ADP Totalsource and an entry-level professional for Walgreen Co., and was unemployed for a portion of the time. On his tax return for 2009, Mr. Hart claimed his MBA tuition of $18,600 as an unreimbursed employee expense on Schedule A. The Tax Court disallowed the deduction for his MBA tuition expense because Mr. Hart was not in a trade or business in 2009 and his employers did not require him to enroll in an MBA program. Judge Kerrigan stated that being qualified to engage in a trade or business is different than "carrying on" a trade or business, and the Section 162 regulations specify that to be a deductible business expense, the taxpayer must already be established in a trade or business. Adam Hart, TC Memo 2013-289 (Tax Ct.).
The U.S. Department of the Treasury and the IRS Thursday issued a notice modifying the longstanding use-or-lose rule for health flexible spending arrangements. Participants now can carry over up to $500 of their unused FSA balances remaining at the end of a plan year.
The rule will go into effect in plan year 2014.
Effective immediately, employers that offer FSA programs that do not include a grace period will have the option of allowing employees to roll over up to $500 of unused funds at the end of the current 2013 plan year.
For nearly 30 years, employees eligible for FSAs have been subject to the use-it-or-lose-it rule, meaning that any account balances remaining unused at the end of the year are forfeited.
The current $500,000 Section 179 deduction limit applies to tax years beginning in 2013. Under current law, the limit will be a much lower $25,000 for tax years beginning in 2014. This presents a potential tax trap for fiscal year pass-through entities (e.g., partnerships and S corporations) with calendar year owners. Assets acquired and placed in service during the year beginning in 2013 and ending in 2014 will qualify for the larger limit, but the amount passed through to the owners will be reported on their 2014 tax return, when the much lower limit applies. In this scenario the excess amount will be wasted, it cannot be deducted nor can it be carried over. Although Congress may increase the Section 179 deduction limit for tax years beginning in 2014, there's no guarantee that it will come close to or equal the current $500,000 deduction limit.
The Supreme Court has declined to review the Ninth Circuit's decision that IRS properly refused to abate an estate's late filing penalty where the estate's accountant erroneously told the executor the return was extended for twelve months and the executor filed the return late but within the twelve months. Peter Knappe, Executor of the Estate of Ingborg Pattee
Businesses using this break can write off one-half of the cost of new assets with useful lives of 20 years or less. Leasehold improvements made to the interiors of commercial realty are eligible, too. The other half of the cost is recovered via regular depreciation. With all the gridlock in Congress, this easing may not be revived for 2014, so put assets in use by Dec. 31.
If you put a new heavy SUV in use in 2013, you can deduct much of the cost. Say your business pays $60,000 for a new SUV with a loaded gross vehicle weight over 6,000 pounds and puts it in use in Sept. First, the firm can expense $25,000, the cap for SUVs. Half the remaining $35,000cost..$17,500...is bonus depreciation. 20% of the $17,500 balance...$3,500...is normal depreciation. With 100% business use,the total first-year write-off is $46,000. Used SUVs do not get bonus depreciation.
Pay attention to your equipment purchases. Assets put in use by Dec. 31 can be expensed. For 2013, firms can expense up to $500,000 of assets put in use during the year. The $500,000 limitation phases out dollar for dollar once more than $2,000,000 of assets are placed in service during the tax year.
Both new and used assets are eligible for this break.
Unless Congress acts, the ceiling for next year will decrease to around $145,000 and the phaseout will start around $580,000. Take advantage of the higher limit now.
Taxpayer was the 75% owner of an S corporation that designed, assembled, and sold gift baskets and gift towers through wholesale and retail channels. A gift tower is a set of decorative boxes that contain different food items. In this action, the IRS sought to recover refunds paid to taxpayer based on a Section 199 deduction claimed by the S corporation on its amended tax returns for 2005 and 2006. In allowing taxpayer to keep the refunds, a California District Court agreed that the S corporation's production process "changed the form of an article" within the meaning of Reg. 1.199-3(e)(1) . The "complex production process relied on both assembly line workers and machines. The final products, gift baskets and gift towers, [were] distinct in form and purpose from the individual items inside." That is, the production process transformed individual items typically purchased by consumers as ordinary groceries into gifts that were usually given during the holiday season. U.S. v. Dean , 112 AFTR 2d 2013-XXXX (DC Central Cal.).
An expanding and strengthening economy may mean that Dec. 31, 2013 will be the end of the line for some stimulus-type tax breaks. Unless Congress acts, additional depreciation deductions under Code Sec. 168(k) in the placed-in-service year equal to 50% of the adjusted basis of qualified property (often referred to as bonus depreciation) generally won't be available for property placed in service after this year. Also slated for disappearance is the 15-year writeoff and special expensing allowance for qualified leasehold improvement property, retail improvements, and restaurant property. Finally, the overall Code Sec. 179 expensing limit is set to plummet to $25,000 for property placed in service next year. Thus, enterprises planning to purchase machinery and equipment or invest in eligible real estate assets during the remainder of this year or early the next should try to accelerate their buying plans, if doing so makes sound business sense.
The IRA's beneficiaries are set on Sept. 30 of the year following the death of the IRA owner. Normally, heirs get to take distributions from inherited IRAs over their lifetimes. But if just one beneficiary of the account isn't an individual, the IRA has to be cleaned out within five years for all beneficiaries. The problem can occur when the owner names a charity or college as one of the beneficiaries.
If the charity, school, etc., is paid off by Sept. 30, the remaining individual beneficiaries can take distributions over their lives, enjoying more tax free buildup inside the IRA.
Beginning January 1, 2014, taxpayers who complete a like-kind exchange of California property for property located out of state will be required to file an information return with the California Franchise Tax Board (FTB).
The information return must be filed for the year in which the exchange is completed and each subsequent year that the gain or loss is deferred. If the taxpayer fails to file an information return, and a required tax return is not filed, the FTB may estimate net income and assess tax, interest, and penalties.
In a 5 to 4 decision released on 6/26/13, the Supreme Court ruled a key provision of the federal Defense of Marriage Act (DOMA) unconstitutional "as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment." Edith Windsor brought a federal suit challenging Section 3 of DOMA, which defines a marriage as being between a man and a woman, after she was barred from claiming the marital deduction on the federal estate tax return of her same-sex spouse. As a result of the ruling, same-sex couples legally married in their state now will receive federal recognition of their marriage. The Court's ruling impacts more than 1,000 federal laws that refer to the definition of spouse provided in Section 3 of DOMA and paves the way for same-sex married couples to receive the advantages of income tax, social security, pension, bankruptcy, and health-related federal benefits extended to spouses. U.S. vs. Windsor , 111 AFTR 2d 2013-839 (Sup.Ct.).
An attorney and his wife donated cash and a conservation easement to a charity. Because of his concern about recent IRS's challenges to improper charitable contribution deductions for transfers of easements on real property to charities, the attorney (donor) obtained a comfort letter from the charity promising to refund the entire cash endowment and remove the conservation easement if the IRS disallowed the deductions in full. Nearly a year later, the charity sent a letter to the attorney, informing him that the terms of the comfort letter could affect the deductibility of the contribution and offering to withdraw the provision for refund if the IRS disallowed the deductions. However, the donor didn't ask the charity to withdraw the refund offer. The Tax Court concluded that the charity's formal offer to withdraw the refund provision indicated that it intended to honor its promise in the comfort letter (even if it may not have been legally enforceable). According to the Court, the comfort letter "rendered the gifts conditional and, thus, nondeductible." Lawrence G. Graev , 140 TC No. 17 (2013).
Mr. Ramirez, an "on-air personality," was employed by radio station KXTN in San Antonio to host a radio program six days a week and perform related services pursuant to his employment agreement. Outside of his duties as a radio personality, Mr. Ramirez sought additional sponsors, assisted them in developing ad campaigns, and promoted their products and services both during on-air time and at "off-air" appearances. The station acted as a conduit for payment of the promotional service fees and Mr. Ramirez's W-2 included his regular pay plus an amount broken out as talent and remote fees. On his 2007 tax return, Mr. Ramirez took a Schedule C deduction for $26,303 in expenses related to his promotional services though the $82,000 of promotional income was included with his wage income. After weighing a list of factors, the Tax Court determined the promotional work in question did favor independent contractor treatment and allowed Mr. Ramirez to reclassify the $82,000 of talent and remote fee income as Schedule C gross receipts. Juan A. Ramirez , TC Summ. Op. 2013-38 (Tax Ct.).
Errors can cost you in lost deductions. Now is your chance to get it right for 2013:
1. Failing to keep a log of deductible business driving. Whether you use your car for business, medical, charitable, or moving purposes, you need a record of mileage, including the date, destination, and purpose of each deductible trip. Keep a written record or use an app for this purpose.
2. Failing to keep receipts for tax-deductible items. Maybe you had unreimbursed medical expenses but you tossed the receipts. This year, be sure to retain all receipts that may generate a tax write-off for you. Unnecessary papers can always be discarded after your 2013 return is prepared.3. Failing to obtain required written acknowledgments for charitable donations. If you gave $250 or more to a charity, you must obtain a written statement for such donation, including words that it was made without receiving any goods or services in exchange. Be sure to get this paperwork before you file your return.
A unique advantage of a proprietorship is the ability to pay wages to children of the owner without incurring any FICA or FUTA payroll tax liability. Children of the owner under age 18 are exempt from FICA and those under age 21 are exempt from FUTA. The wage deduction may also help the parents reduce or avoid the additional 0.9% Medicare tax that will affect individuals with earned income exceeding certain thresholds in 2013. Because the child's wage income is earned income, some of it can be sheltered by the child's standard deduction ($6,100 for 2013). However, the wages paid to the child must be reasonable in relation to the actual work performed.
Here are some changes taxpayers might be facing in the coming years.
State Taxes and Property Taxes
Write off for State and Local Taxes might be eliminated. In 1986, Congress talked about eliminating the deduction but decided against it. Congress is talking about eliminating the deduction again in the current tax reform discussions.
This has always been a big concern. They might eliminate the deduction and replace it with a 10% to 12% tax credit. If they don't change it they may lower the $1,000,000 acquisition debt limit down to $500,000 and eliminate the interest deduction on second residences.
For Americans living within the US, the tax return is always due on April 15th or the following Monday (if the 15th is a weekend or a holiday). A two month extension is automatically given to citizens living abroad putting the expat due date (for filing purposes) at June 15th. The two month extension is automatic, but an additional extension can be filed for if needed. The filed-for extension moves the due date (for filing purposes) as far back as October 15th. Neither of these extensions apply to paying taxes. Any taxes owed, regardless of whether you are stateside or abroad, are due on April 15th.
There is a Monday, 6/17/13, deadline for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get two additional days because the normal 6/15/13 due date falls on Saturday this year. To use the automatic two-month extension, taxpayers must attach a statement to their return explaining which of these situations applies.
Several years after the divorce decree was entered and alimony set, the taxpayer's ex-wife wrote to the taxpayer requesting an increase in her alimony payments because she was unemployed and lacked health insurance to cover her medical expenses. The Tax Court noted the taxpayer's willingness to increase alimony was admirable, but denied his deduction for the portion of the alimony that exceeded the amount set in the divorce agreement because only an oral arrangement had been made?he didn't contact the state court to request a change in the amount of support or have evidence of any letters written in response to his ex-wife's request. To be deductible as alimony, IRC Sec. 71 requires the amount be includable in income by the recipient and be made subject to a written divorce or separation instrument. Daniel R. Martin , TC Summ. Op. 2013-31
On Thursday, the IRS issued the inflation-adjusted figures for the annual contribution limitation for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans for calendar year 2014 (Rev. Proc. 2013-25).
Under Sec. 223, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay the individuals? medical expenses. The limit on the contribution deduction is subject to an inflation adjustment each year. For 2014, the annual limitation on deductible contributions is $3,300 for individuals with self-only coverage and $6,550 for family coverage.
To be eligible to contribute to an HSA, individuals must participate in a ?high deductible health plan,? which is defined as a health plan with an annual deductible that is not less than a certain limit each year and for which the annual out-of-pocket expenses, including deductibles, co-payments, and other amounts, but excluding premiums, does not exceed a certain limit each year (Sec. 223(c)). As with the contribution deduction limitation, these limits are subject to annual inflation adjustments. For 2014, the lower limit on the annual deductible under a high-deductible plan is $1,250 for self-only coverage and $2,500 for family coverage, the same amounts that applied in 2013. The upper limit for these out-of-pocket expenses is $6,350 for self-only coverage and $12,700 for family coverage, amounts that have increased since 2013.
For most taxpayers, the tax deadline has passed. But planning for next year can start now. We want to remind taxpayers that being organized and planning ahead can save time and money in 2014. Here are five things you can do now to make next April 15 easier.
1. Adjust your withholding. Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you'll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages.
2. Store your return in a safe place. Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you'll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year's return.
3. Organize your records. Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.
4. Consider itemizing deductions. If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can bundle your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.5. Keep up with changes. Check-in periodically with us for updates and various tax law changes that may effect your current year and future year taxes.
In this Tax Court case, a deal seemingly too good to be true ended up being just that?the taxpayer, who is an attorney, had filed a civil suit against a BMW dealership for not honoring their online advertised price for a convertible. A settlement was reached with the dealership for $17,000; the taxpayer's lawyer kept his fee of $2,000 and issued the taxpayer a 1099-MISC for the $15,000 that he received. On the grounds that the settlement represented compensation to offset a sustained loss, the taxpayer did not include the proceeds as taxable income on his return. The court determined the settlement proceeds were indeed taxable as ordinary income since the taxpayer failed to show that his payment represented lost value to him. Unable to demonstrate reasonable cause, the taxpayer was also found subject to the Section 6662(a) accuracy-related penalty. Raphael Dang-Quang Cung . TC Memo 2013-81 (Tax Ct.)
The IRS Fresh Start program makes it easier for taxpayers to pay back taxes and avoid tax liens. Even small business taxpayers may benefit from Fresh Start. Here are three important features of the Fresh Start program:
Tax Liens. The Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien. That amount is now $10,000. However, in some cases, the IRS may still file a lien notice on amounts less than $10,000.
When a taxpayer meets certain requirements and pays off their tax debt, the IRS may now withdraw a filed Notice of Federal Tax Lien. Taxpayers must request this in writing using Form 12277, Application for Withdrawal.
Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers also need to request this in writing by using Form 12277.
If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.
Installment Agreements. The Fresh Start program expanded access to streamlined installment agreements. Now, individual taxpayers who owe up to $50,000 can pay through monthly direct debit payments for up to 72 months (six years). While the IRS generally will not need a financial statement, they may need some financial information from the taxpayer. The easiest way to apply for a payment plan is to use the Online Payment Agreement tool at IRS.gov. If you don't have Web access you may file Form 9465, Installment Agreement, to apply.
Taxpayers in need of installment agreements for tax debts more than $50,000 or longer than six years still need to provide the IRS with a financial statement. In these cases, the IRS may ask for one of two forms: either Collection Information Statement, Form 433-A or Form 433-F.
Offers in Compromise. An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount. Fresh Start expanded and streamlined the OIC program. The IRS now has more flexibility when analyzing a taxpayer's ability to pay. This makes the offer program available to a larger group of taxpayers.
Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS looks at several factors, including the taxpayer's income and assets, to make a decision regarding the taxpayer's ability to pay.
Some advice for taxpayers who missed the tax filing deadline.
- File as soon as possible. If you owe federal income tax, you should file and pay as soon as you can to minimize any penalty and interest charges. There is no penalty for filing a late return if you are due a refund.
- Penalties and interest may be due. If you missed the April 15 deadline, you may have to pay penalties and interest. The IRS may charge penalties for late filing and for late payment. The law generally does not allow a waiver of interest charges. However, the IRS will consider a reduction of these penalties if you can show a reasonable cause for being late.
- E-file is your best option. IRS e-file programs are available through Oct. 15. E-file is the easiest, safest and most accurate way to file. With e-file, you will receive confirmation that the IRS has received your tax return. If you e-file and are due a refund, the IRS will normally issue it within 21 days.
- Pay as much as you can. If you owe tax but can't pay it all at once, you should pay as much as you can when you file your tax return. Pay the remaining balance due as soon as possible to minimize penalties and interest charges.
- Installment Agreements are available. If you need more time to pay your federal income taxes, you can request a payment agreement with the IRS. Apply online using the IRS Online Payment Agreement Application tool or file Form 9465, Installment Agreement Request.
- Refunds may be waiting. If you're due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may be entitled to a refund. This could apply if you had taxes withheld from your wages, or you qualify for certain tax credits. If you don't file your return within three years, you could forfeit your right to the refund.
The Passive Activity Loss (PAL) rules allow real estate professionals to elect to treat all of their interests in rental real estate as one activity [IRC Sec. 469(c)(7)]. A taxpayer is a real estate professional if : (1) more than half of the personal services performed that year are in real property trades or businesses in which the taxpayer materially participates; and (2) more than 750 hours of services during that tax year are in real property trades or businesses in which the taxpayer materially participates. The Tax Court held that a taxpayer, who owned over 28 rental apartments and who also worked as a full-time research associate for a corporation, was not a real estate professional for PAL purposes. As a result, he could not use losses from the rental activities to offset his compensation and other income. Mohammad Hassanipour , TC Memo 2013-88 (Tax Ct.).
Her are tips for you about setting aside money for your retirement in an Individual Retirement Arrangement.
1. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA.
2. You must have taxable compensation to contribute to an IRA. This includes income from wages, salaries, tips, commissions and bonuses. It also includes net income from self-employment. If you file a joint return, generally only one spouse needs to have taxable compensation.
3. You can contribute to your traditional IRA at any time during the year. You must make all contributions by the due date for filing your tax return. This due date does not include extensions. For most people this means you must contribute for 2012 by April 15, 2013. If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year.
4. For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000. If you were 50 or older at the end of 2012 the maximum amount increases to $6,000.
5. Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.
6. You may be able to deduct some or all of your contributions to your traditional IRA.
7. You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit. The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly).
Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.
1. If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate
2. You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must also file Form 8283, Noncash Charitable Contributions, with your tax return.
3. If you receive a benefit of some kind in return for your contribution, you can only deduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.
4. Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which someone can sell the property.
6. You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.
7. To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.
8. You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.
9. If you donate one item or a group of similar items that are valued at more than $5,000, you must also complete Section B of Form 8283. This section generally requires an appraisal by a qualified appraiser.
If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed.
The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.
You may be able to take this deduction if one of the following applies to you:
- You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
- You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
- You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
- You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.
- There are also some rules that apply to how the insurance plan is established. Follow these guidelines to make sure the plan qualifies:
- If you?re self-employed and file Schedule C, C-EZ, or F, the policy can be in your name or in your business' name.
- If you're a partner, the policy can be in your name or the partnership?s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the partnership must reimburse you and include the premiums as income on your Schedule K-1.
- If you're an S corporation shareholder, the policy can be in your name or the S corporation's name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.
The IRS's annual Dirty Dozen list includes common tax scams that often peak during the tax filing season. The IRS recommends that taxpayers be aware so they can protect themselves against claims that sound too good to be true. Taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution.
The tax scams that made the Dirty Dozen list this filing season are:
Identity Theft. Tax fraud through the use of identity theft tops this year's Dirty Dozen list. Combating identity theft and refund fraud is a top priority for the IRS. The IRS's ID theft strategy focuses on prevention, detection and victim assistance. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft. This compares to $14 billion in 2011. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice. You may also call the IRS's Identity Protection Specialized Unit at 800-908-4490. Find more information on the identity protection page on IRS.gov.
Phishing. Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. If you receive an unsolicited email that appears to be from the IRS, send it to firstname.lastname@example.org.
Return Preparer Fraud. Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN). For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.
Hiding Income Offshore. One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution. Visit IRS.gov for more information on the Voluntary Disclosure Program.
Free Money from the IRS & Tax Scams Involving Social Security. Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don't exist. The schemes target people who have little or no income and normally don't have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.
Impersonation of Charitable Organizations. Following major disasters, it's common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. Taxpayers need to be sure they donate to recognized charities.
False/Inflated Income and Expenses. Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.
False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.
Frivolous Arguments. Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
Falsely Claiming Zero Wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, scammers use a Form 4852 (Substitute Form W-2) or a corrected Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.
Disguised Corporate Ownership. Scammers improperly use third parties form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.
Misuse of Trusts. There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.
U.S. citizens and residents who lived or worked abroad in 2012 may need to file a federal income tax return. If you are living or working outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship.
Here are six tips taxpayers with foreign income should know:
1. Report Worldwide Income. The law requires U.S. citizens and resident aliens to report any worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.
2. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Some taxpayers may need to file additional forms. For example, some may need to file Form 8938, Statement of Specified Foreign Financial Assets, while others may need to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Treasury Department.
3. Consider the Automatic Extension. U.S. citizens and resident aliens living abroad on April 15, 2013, may qualify for an automatic two-month extension to file their 2012 federal income tax returns. The extension of time to file until June 17, 2013, also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension.
4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. This means taxpayers who qualify will not pay taxes on up to $95,100 of their wages and other foreign earned income they received in 2012.
5. Don't Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income.
6. Get Tax Help Outside the U.S. Taxpayers living abroad can get IRS help in four U.S. embassies and consulates. IRS staff at these offices can help with tax filing issues and answer questions about IRS notices and tax bills. The offices also have tax forms and publications. To find the nearest foreign IRS office, visit the IRS.gov website. At the bottom of the home page click on the link labeled, Contact Your Local IRS Office. Then click on International.
If you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts to help you determine if you qualify for the home office deduction.
1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:
- your principal place of business, or
- a place where you meet with patients, clients or customers in the normal course of your business, or
- a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.
2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.
3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.
4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.
6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer?s convenience.
Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.
1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.
2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.
3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.
5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.
The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse. Here are 10 facts to know about the tax credit for child and dependent care expenses.
1. If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.
2. You can claim the Child and Dependent Care Credit for ?qualifying individuals.? A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.
3. The care must have been provided so you ? and your spouse if you are married filing jointly ? could work or look for work.
4. You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.
5. Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.
6. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.
7. If your employer provides dependent care benefits, special rules apply.
8. You must include the Social Security number on your tax return for each qualifying individual.
9. You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.10. To claim the credit, attach Form 2441 to your tax return.
Under IRC Sec. 71(b), one of the requirements for alimony to be deductible is that the obligation to make the payment must end at the death of the payee spouse. In this case, a taxpayer living in California was ordered by the court to pay $3,000 as family support. The support order indicated that the payments were for both spousal support and child support, but it did not make any specific allocations for each. There was no language on termination of the payments in the order. The Tax Court held that the entire amount of the payments were deductible alimony. The California Family Code does not address whether family support obligations terminate on the death of the payee spouse, so the court relied on the factually similar Berry case [TC Memo 2005-91 (2005)] where it found that there was no continuing payment liability. The court further noted that none of the payments qualified as child support since they were not "fixed" and child support cannot be inferred from intent, surrounding circumstances, or other subjective criteria. Brendon DeLong , TC Memo 2013-70 (Tax Ct.).
If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.
Here are 10 key facts from the IRS about mortgage debt forgiveness:
1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.
2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.
3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.
4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.
5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.
6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.
7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.
8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.
9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.
10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.
Small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another. Usually there is no exchange of cash. An example of bartering is a electrician doing repair work for a doctor in exchange for medical services.
The fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.
Here are four facts about bartering:
1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.
2. Bartering income. Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.
3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
4. Reporting rules. How you report bartering varies depending on which form of bartering takes place. Generally, if you are in a trade or business you report bartering income on Form 1040, Schedule C, Profit or Loss from Business. You may be able to deduct certain costs you incurred to perform the bartering.
The term capital asset for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.
Here are 10 facts on capital gains and losses:
1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.
2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.
3. You must include all capital gains in your income.
4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.
5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.
8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year's tax return. You will treat those losses as if they occurred that year.
10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. These amounts will carry over the subtotals from this form to Schedule D, Capital Gains and Losses.
If you paid for medical or dental expenses in 2012, you may be able to get a tax deduction for costs not covered by insurance.
1. You must itemize. You can only claim medical and dental expenses for costs not covered by insurance if you itemize deductions on your tax return. You cannot claim medical and dental expenses if you take the standard deduction.
2. Deduction is limited. You can deduct medical and dental expenses that are more than 7.5 percent of your adjusted gross income.
3. Expenses paid in 2012. You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amount that you paid.
4. Qualifying expenses. You may include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply.
5. Costs to include. You can normally claim the costs of diagnosing, treating, easing or preventing disease. The costs of prescription drugs and insulin qualify. The cost of medical, dental and some long-term care insurance also qualify.
6. Travel is included. You may be able to claim the cost of travel to obtain medical care. That includes the cost of public transportation or an ambulance as well as tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil. Instead of deducting the actual costs, you can deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012.
7. No double benefit. Funds from Health Savings Accounts or Flexible Spending Arrangements used to pay for medical or dental costs are usually tax-free. Therefore, you cannot deduct expenses paid with funds from those plans.
Buyers of new heavy SUVs put in use in 2013 can still get larger write-offs, since the new tax law extends 50% bonus depreciation through 2013. Assume a firm or self-employed person buys a new $65,000 SUV with a loaded gross weight over 6,000 pounds and places it in service before year-end. First, the business can expense $25,000 per Code Section 179. Second, half the remaining $40,000 cost of $20,000 qualifies for bonus depreciation in 2013. Third, 20% of the $20,000 balance, $4,000 can also be deducted as regular depreciation. If the SUV is used 100% of the time for business, the first year write off is $49,000. Note, the Section 179 deduction is limited to the business income earned during the year.
Some people must pay taxes on their Social Security benefits. If you get Social Security, you should receive a Form SSA-1099, Social Security Benefit Statement, by early February. The form shows the amount of benefits you received in 2012.
Here are five tips from the IRS to help you determine if your benefits are taxable:
1. The amount of your income and your filing status affect whether you must pay taxes on your Social Security.
2. If Social Security was your only income in 2012, your benefits are probably not taxable. You also may not need to file a federal income tax return.
3. If you received income from other sources, then you may have to pay taxes on your benefits.
4. You can follow these two quick steps to see if your benefits are taxable:
? Add one-half of the Social Security benefits you received to all your other income, including tax-exempt interest. Tax-exempt interest includes interest from state and municipal bonds.
? Next, compare this total to the ?base amount? for your filing status. If the total is more than your base amount, then some of your benefits may be taxable.
The three 2012 base amounts are:
$25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year;
$32,000 for married couples filing jointly; and
$0 for married persons filing separately who lived together at any time during the year.
In 2012, the highest income tax rate
(U.S./California combined tax rate) was 42.99%: Federal tax rate: 35%;
California tax rate: 12.3%.
2013, the highest income tax rate is 51.7% (Federal tax rate: 44.3%,
California tax rate: 13.3%; the 51.7% tax rate applies to wage earners).
For investors the top rate on net investment income is 50.92% (Federal tax rate: 43.4%, California tax rate: 13.37%) (A 20% tax increase over 2012).
The top tax rates apply to U.S. taxpayers who earn income over certain levels, see below.
2013 Income Taxes (U.S./California)
California Income Tax
Income over $250,000 is taxed at 12.3%. Income over $1,000,000 is taxed at 13.3% (don't forget the additional 1% mental health tax). These tax rates will apply through 2018.
2013/Highest California Tax Rate: 13.3%
U.S. Income Tax (2013)
Individuals (over $400,000), Heads of Household (over $425,000); Marrieds (over $450,000) Tax Rate is: 39.6%
Net Investment Income
Individuals/Heads of Household
(Modified Adjusted Gross Income ("AGI") over $200,000)
Married Taxpayers (over $250,000)
Married filing separately
(over $125,000) Tax: 3.8%
The 3.8% Medicare surtax on
net investment income is levied on the lesser of:
1. Taxpayer's net investment income; or
2. The excess of modified adjusted gross income over the applicable dollar threshold (modified AGI is AGI plus any tax-free foreign earned income).
Investment income includes: interest, dividends, capital gains, annuities, royalties and passive rental income. Tax-free interest is exempted, along with pay-outs from retirement plans such as 401(k)s, IRAs, deferred pay plans and pension plans.
(Wages and Self-Employment Income)
Individuals/Heads of Household
(Total Earnings over $200,000)
Joint Returns/Earnings over $250,000
Filing Separately/Earnings over $125,000 Tax: 0.9%
This surtax applies only to the employee's share of Medicare tax. Employers don't owe it. Employers will withhold the surtax once an employee's wages exceed $200,000. Employees will then calculate the actual tax due on their Form 1040 tax returns.
2013/Highest U.S. Tax Rate: 44.3%
(Includes Medicare Surtaxes on Net Investment Income and Earned Income)
Summary 2013/Combined U.S./California Tax (Top Rates): 57.6%
"Blended" U.S./California Tax (Top Rates): 51.7%
For taxpayers (individual) who have income over $400,000, including net investment income over $200,000 (modified adjusted gross income), and earned income over $200,000 (wages and self-employment income), the combined top tax rate is 57.6%, the "blended" top tax rate is 51.7%.
For investors (who do not have wages and self-employment income) the combined top tax rate is 56.7%; the "blended" top tax rate is 50.92%.
In addition, taxpayer wages of $113,700 (maximum Social Security wage base/2013) are subject to an additional $8,698 in "payroll tax", paid by taxpayer (who is an employee or self-employed), calculated as 7.65% of $113,700 (which includes 6.2% Social Security (FICA) tax, 1.45% Medicare tax).
Protecting taxpayers and their tax refunds from identity theft is a top priority for the IRS. This year the IRS expanded its efforts to better protect taxpayers and help victims dealing with this difficult issue.
When your personal information is lost or stolen, it can lead to identity theft. Identity thieves sometimes use your personal information to file a tax return to claim a tax refund. Then, when you file your own tax return, the IRS will not accept it and will notify you that a return was already filed using your name and social security number. Often, learning that your return was not accepted or receiving a contact from the IRS about a problem with your tax return is the first time you become aware that you?re a victim of identity theft.
How to avoid becoming an identity theft victim.
- Guard your personal information. Identity thieves can get your personal information in many ways. This includes stealing your wallet or purse, posing as someone who needs information about you, looking through your trash, or stealing information you provide to an unsecured website or in an unencrypted email.
- Watch out for IRS impersonators. Be aware that the IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information or notify people of an audit, refund or investigation. Scammers may also use phone calls, faxes, websites or even in-person contacts. If you?re suspicious that it?s not really the IRS contacting you, don?t respond.
- Protect information on your computer. While preparing your tax return, protect it with a strong password. Once you e-file the return, take it off your hard drive and store it on a CD or flash drive in a safe place, like a lock box or safe. If you use a tax preparer, ask how he or she will protect your information.
How to know if you are, or might be, a victim of identity theft.
Your identity may have been stolen if the IRS notifies you that:
- You filed more than one tax return or someone has already filed using your information;
- You owe taxes for a year when you were not legally required to file and did not file; or
- You were paid wages from an employer where you did not work.
Respond quickly using the contact information in the letter you received from the IRS so that we can begin to correct and secure your tax account.
If you think you may be at risk for identity theft due to a lost or stolen purse or wallet, questionable credit card activity, an unexpected bad credit report or any other way, contact the IRS Identity Protection Specialized Unit toll-free at 1-800-908-4490. The IRS will then take steps to secure your tax account. The Federal Trade Commission also has helpful information about reporting identity theft.
If you have information about the identity thief who used or tried to use your information, file a complaint with the Internet Crime Complaint Center.
For more information ? including how to report identity theft, phishing and related fraudulent activity ? visit the Identity Protection home page on IRS.gov and click on the Identity Theft link at the bottom of the page.
IRS Works to Protect Taxpayer Refunds, Detect and Resolve Identity Theft Cases
The IRS takes identity theft-related tax fraud very seriously and realizes that identity theft is a frustrating process for victims. By late 2012, the IRS assigned more than 3,000 employees ? more than double from 2011 ? to work on identity theft-related issues.
The IRS continues to enhance its screening process to stop fraudulent returns. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.
The IRS recently announced that a year-long nationwide focus on tax refund fraud and identity theft has resulted in more than 100 arrests in 32 states and Puerto Rico. In January 2013 alone, the IRS targeted 389 identity theft suspects resulting in 734 enforcement actions. To learn more, see IRS Intensifies National Crackdown on Identity Theft on IRS.gov.
Acting IRS Commissioner, Steven Miller, stated in a memo to agency employees that it may have to consider placing some employees on temporary furlough if sequestration occurs on 3/1/13. Employees would be provided at least 30 days' notice prior to executing a furlough. In addition to furloughs, the IRS has an ongoing hiring freeze and will look to cut operational and administrative costs for travel, training, facilities, and supplies.
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
- Child support payments;
- Gifts, bequests and inheritances;
- Welfare benefits;
- Damage awards for physical injury or sickness;
- Cash rebates from a dealer or manufacturer for an item you buy; and
- Reimbursements for qualified adoption expenses.
Some income is not taxable except under certain conditions. Examples include:
- Life insurance proceeds paid to you because of an insured person's death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.
All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering - the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.
If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.
Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn't miss when filing taxes this year.
1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.
5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.
7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.
8. Self-employed health insurance deduction - If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.
For tax years beginning January 1, 2013, the tax law imposes a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.
The applicable threshold amounts are shown below.
Married taxpayers filing jointly $250,000
Married taxpayers filing separately $125,000
All other individual taxpayers $200,000
A simple example will illustrate how the tax is calculated.
Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).
Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.
The taxpayer bought a house in San Francisco in 1963 for $26,000, lived in it for a number of years, and then moved out and rented it from 1979-2003. In 2004, the taxpayer sold the house for $572,000 and found a replacement rental property to qualify as an IRC Sec. 1031 exchange. The new property was in Eureka, CA, where the taxpayer's son and family lived. The five bedroom home required extensive renovation, which was performed by the son, who then moved his family in, and paid a monthly rent of $1,200. The IRS claimed that the Eureka house was acquired for personal purposes (i.e., to let the taxpayer's son and family live there for below market rent), and did not qualify for Section 1031 treatment. The Tax Court held that the Eureka home was purchased "for investment," and the transactions constituted a valid exchange. The monthly rent of $1,200 was a fair rental value since the son and his family assumed substantial responsibilities for renovating and repairing the house. William Adams , TC Memo 2013-7 (Tax Ct.).
An estimated tax underpayment penalty will not be imposed against taxpayers who underpay their estimated California personal income taxes to the extent that the underpayment was created or increased as a result of the personal income tax rate increases just approved by the voters with the passage of Proposition 30 (TAXDAY,2012/11/08, S.5 ). California law contains a safe-harbor provision for underpayments resulting from any provisionof law that is chaptered during and operative for the taxable year of the underpayment. (Cal Rev. & Tax Code§19136(2)(g)(1)) Consequently, taxpayers will not be required to make any catch-up payments.
Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.
The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers -- more than 120 million households -- should be able to start filing tax returns starting Jan 30.
The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.
"We have worked hard to open tax season as soon as possible", IRS Acting Commissioner Steven T. Miller said. "This date ensures we have the time we need to update and test our processing systems."
The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.
"The best option for taxpayers is to file electronically," Miller said.
The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.
The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.
Who Can File Starting Jan. 30?
The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major extender provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.
Who Can't File Until Later?
There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.
The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won't be accepted until later is available on IRS.gov.
As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.
Acting IRS Commissioner Steven T. Miller has said that the uncertainty as to what the tax law will be creates a risk for the entire tax system, including a strain on IRS, tax practitioners, and ultimately, taxpayers. In December of 2012, he said that in programming its systems, IRS has assumed that Congress will patch the AMT as it has for so many years in the past. But, if Congress fails to resolve fiscal cliff issues prior to the end of the year and IRS's assumptions are incorrect, the filing season will be delayed for many taxpayers. IRS will have to implement a massive reprogramming of its systems. In that event, given the magnitude and complexity of the changes needed, most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later. This would create two problems?lengthy delays of tax refunds and unexpectedly higher taxes for taxpayers who will be surprised that they are subject to the AMT.
IRS will have to implement a massive reprogramming of its systems. In that event, given the magnitude and complexity of the changes needed, most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later. This would create two problems?lengthy delays of tax refunds and unexpectedly higher taxes for taxpayers who will be surprised that they are subject to the AMT.
The Tax Court has concluded that a taxpayer, who also engaged in a consulting activity, wasn't a real estate professional for purposes of the passive activity loss (PAL) rules. He failed to show that more than half of the personal services that he performed during the year were performed in real property trades or businesses in which he materially participated. Kutney, TC Summary Opinion 2012-120
Pursuant to Rev. Proc. 2012-23 (2012-3 IRB 295) , the first-year Section 280F deprecation limit for qualifying vehicles purchased and placed in service in 2012 is $3,160 for autos and $3,360 for trucks and vans. These limits are increased by $8,000 [to $11,160 ($3,160 + $8,000) for autos and $11,360 ($3,360 + $8,000) for trucks and vans] to reflect bonus depreciation, but are reduced to the extent that business use of the vehicle is less than 100%. IRC Sec. 280F(d)(5) imposes these limits on four-wheel vehicles manufactured for street use with an unloaded gross vehicle weight (GVW) of 6,000 pounds or less. While larger vehicles escape these limits, IRC Sec. 179(b)(5) authorizes a separate $25,000 Section 179 deduction limit on vehicles rated at 14,000 pounds GVW or less that are not subject to the Section 280F limits?meaning autos, trucks, or vans over 6,000 pounds GVW.
As we near the end of 2012, it's worthwhile remembering that the Section 179 deduction limit is based on the business's tax year while the bonus depreciation limit is based on a calendar tax year. The Section 179 limit for tax years beginning in 2012 is $139,000, subject to a $560,000 deduction phase-out threshold, while 50% bonus depreciation is available to qualified assets placed in service by 12/31/12. Calendar-year businesses can get 50% bonus depreciation and a Section 179 deduction of up to $139,000 for qualifying assets acquired and placed in service in 2012. Fiscal-year businesses can acquire and place assets in service after 12/31/12 and still get a $139,000 Section 179 deduction, as long as they do so by the end of the fiscal year ending in 2013. But to claim 50% bonus depreciation, they must acquire and place the assets in service by 12/31/12.
Individuals and businesses making contributions to charity should keep in mind some key tax provisions that have taken effect in recent years, especially those affecting donations of clothing and household items and monetary donations.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2012 count for 2012. This is true even if the credit card bill isn?t paid until 2013. Also, checks count for 2012 as long as they are mailed in 2012.
Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. Exempt Organization SELECTCheck, a searchable online database available on IRS.gov, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2012 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity's unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor?s tax return.
- If the amount of a taxpayer's deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
- And, as always it's important to keep good records and receipts.
Taxpayers are required by IRC Sec. 6001 to maintain books and records that are sufficient to establish the amount of their gross income, and if they fail to do so, the IRS is entitled to reconstruct their income through the use of any reasonable method. In one recent case, the taxpayer was a licensed massage therapist who failed to file federal income tax returns for several years, dealt primarily in cash, and refused to cooperate in the examination. The IRS reconstructed her income for several tax years, with one year (1997) based on a credit application she submitted to JP Morgan-Chase Bank. Because taxpayer "did not produce any evidence beyond self-serving testimony that [the IRS's] income determinations were incorrect," the Tax Court sustained the IRS's income determination for 2007 and the other tax years at issue. Carol Trescott , TC Memo 2012-321
Whether you're a recent high school graduate going to college for the first time or a returning student, it will soon be time to head to campus, and payment deadlines for tuition and other fees are not far behind.
Here are some tips about education tax benefits that can help offset some college costs for students and parents. Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return.
- American Opportunity Credit. This credit, originally created under the American Recovery and Reinvestment Act, is still available for 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education at an eligible institution. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you don't owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.
- Lifetime Learning Credit. In 2012, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student.
You can claim only one type of education credit per student in the same tax year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.
- Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don?t itemize deductions.
IRC Sec. 61(a) provides that gross income includes income from whatever source derived, unless there is a specific exclusion. According to a Reuters article dated 8/2/12 entitled Will U.S. Olympic medalists get a tax break? : "Podium athletes get checks $25,000 for gold, $15,000 for silver and $10,000 for bronze and the winnings are taxable for Americans." Remember, former IRS Commissioner Mark Everson's 2006 statement that Oscar goodie bags qualify as taxable income and must be reported on the celebrity's tax return: "We want to make sure the stars 'walk the line' when it comes to these goodie bags." Furthermore, the medals themselves could be seen as valuable gifts that are taxable by the U.S. government. The article adds that the resulting tax liability would vary depending on the recipient's income and tax status: "It could be as much as 35% for, say, basketball players who are already in the top tax bracket; for many athletes it would be less." However, legislation to exclude U.S. athletes from federal income taxation of prize money won at the Olympics has been proposed by U.S. Senator Marco Rubio.
Taxpayer operated a Schedule C medical marijuana dispensary in San Francisco known as The Vapor Room. The IRS disallowed all Cost of Goods Sold (COGS) for lack of substantiation, and disallowed other reported expenses for lack of substantiation and for contravening IRC Sec. 280E , which disallows deductions from trafficking in a controlled substance. The Tax Court accepted an expert's opinion that average COGS for a medical marijuana dispensary is 75.16%, but adjusted that percentage for inventory given away or personally consumed. Wwhile the IRS and the Tax Court will "accept a taxpayer's characterization of several undertakings either as a single activity or as separate activities," there was no support for treating part of the dispensary's activities as caregiving services exempt from the disallowance rule in IRC Sec. 280E . A footnote states that the parties agreed, without further explanation, that IRC Sec. 280E disallows deductions for the dispensary's expenses, but not for COGS. Martin Olive , 139 TC No. 2 (Tax Ct.).
Most taxpayers get a refund from the Internal Revenue Service when they file their tax returns. For those who don't get a refund, the IRS offers several options to pay their tax bill.
Here are eleven tips for taxpayers who owe money to the IRS.
1. Tax bill payments If you get a bill from the IRS this summer that shows you owe late taxes, you are expected to promptly pay the tax owed including any penalties and interest. If you are unable to pay the amount due, it may be better for you to get a loan to pay the bill in full rather than to make installment payments to the IRS. That's because the interest rate and penalties the IRS must charge by law are often higher than what lending institutions may be offering.
2. Electronic Funds Transfer You can pay your tax bill by electronic funds transfer, check, money order, cashier's check or cash. To pay using electronic funds transfer, use the Electronic Federal Tax Payment System by either calling 800-555-4477 or using the online access at www.eftps.gov.
3. Credit card payments You can pay your bill with a credit card. Again, the interest rate on a credit card may be lower than the combination of interest and penalties the IRS must charge. To pay by credit card contact one of the following processing companies:
WorldPay US, Inc. at 888-9PAY-TAX (or www.payUSAtax.com),
Official Payments Corp at 888-UPAY-TAX (or www.officialpayments.com/fed), or
Link2Gov Corporation at 888-PAY-1040 (or www.pay1040.com).
4. Additional time to pay Based on your circumstances, you may be granted a short additional time to pay your tax in full. A brief additional amount of time to pay can be requested through the Online Payment Agreement application at IRS.gov or by calling 800-829-1040. There generally is no set up fee for a short-term agreement.
5. Installment Agreement You may request an installment agreement if you cannot pay the total tax you owe in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments.
6. Apply Using Form 9465 You can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill using the envelope you received from the IRS. The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.
7. Apply Using Online Payment Agreement If you owe $50,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at IRS.gov. You may still qualify for an installment agreement if you owe more than $50,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement.
8. User fees If an installment agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with lower incomes, the fee can be reduced to $43.
9. Offer in Compromise IRS is now offering more flexible terms with its Offer-in-Compromise (OIC) Program. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer?s tax debt for less than the full amount owed. An OIC is generally accepted only if the IRS believes, after assessing the taxpayer's financial situation, that the tax debt can't be paid in full as a lump sum or through a payment agreement.
10. Check withholding Taxpayers who have a balance due may want to consider changing their Form W-4, Employee?s Withholding Allowance Certificate, with their employer.
11. Fresh Start The IRS has a program to help struggling taxpayers get a fresh start. Through the Fresh Start program, individuals and small businesses may be able to pay the taxes they owe without facing additional or unnecessary burden.
During the summer many parents may be planning the time between school years for their children while they work or look for work. The IRS wants to remind taxpayers that are considering their summer agenda to keep in mind a tax credit that can help them offset some day camp expenses.
The Child and Dependent Care Tax Credit is available for expenses incurred during the summer and throughout the rest of the year. Here are six facts the IRS wants taxpayers to know about the credit:
1. Children must be under age 13 in order to qualify.
2. Taxpayers may qualify for the credit, whether the childcare provider is a sitter at home or a daycare facility outside the home.
3. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
4. The credit can be up to 35 percent of qualifying expenses, depending on income.
5. Expenses for overnight camps or summer school/tutoring do not qualify.
6. Save receipts and paperwork as a reminder when filing your 2012 tax return. Remember to note the Employee Identification Number (EIN) of the camp as well as its location and the dates attended.
With the Supreme Court (6/28/12) largely upholding the Affordable Care Act, taxpayers should continue preparing for the following provisions that become effective in 2013:
(1) employer-provided health Flexible Spending Arrangements (FSAs) will be limited to $2,500 per year,
(2) the hospital insurance portion of the FICA tax will be increased from 1.45% to 2.35% for wages over $200,000 ($250,000 if MFJ; $125,000 if MFS),
(3) medical expenses will be deductible as itemized deductions only to the extent they exceed 10% of AGI (7.5% threshold will still apply to taxpayers who turn 65 before the end of the tax year),
(4) taxpayers with modified AGI over $200,000 ($250,000 if MFJ; $125,000 if MFS) will be subject to a 3.8% surtax on net investment income, and
(5) employers who provide qualified prescription drug coverage for Medicare Part D eligible retirees, which is subsidized by the Department of Health and Human Services, will have to reduce their deduction for the coverage by the amount of the excludable subsidy.
The Social Security Administration (SSA) announced that Social Security statements may now be viewed online at www.ssa.gov/mystatement/ . The statements provides workers with an estimate of benefits under current law and an earnings record with Social Security and Medicare taxes paid over the working career. To get an online statement, a person must be 18 or older and be able to provide information that matches their SSA file. After verification, an account is created with a unique user name and password to access the online statement.
Expenses incurred by taxpayers when searching for new employment in the same trade or business are deductible as a miscellaneous itemized deduction. Therefore, they are deductible only for regular tax purposes and only to the extent they and other miscellaneous itemized deductions exceed 2% of AGI. While the costs of finding first-time employment are not deductible, since first-time employment by definition cannot be in the taxpayer's same trade or business, moving expenses associated with first-time employment are deductible if the time and distance tests are met. According to IRS Pub. 521 , Moving Expenses (For Use in Preparing 2011 Returns) : "If you go to work full time for the first time, your place of work must be at least 50 miles from your former home to meet the distance test."
Under the like-kind exchange rules of IRC Sec. 1031 , property in an exchange must be held either for productive use in a trade or business or for investment. The taxpayers sold an apartment building and then purchased a single family home for rental purposes in a like-kind exchange. They were eventually forced to sell their personal residence and move into the rental property due to their inability to find renters after a number of months and because of significant personal expenses they were facing. The Tax Court ruled that the taxpayers held the rental property with investment intent at the time of the exchange based on: (1) advertisements and showings to potential renters, (2) a wait of almost eight months before moving in, (3) the sale of their personal residence almost six months after purchasing the rental property, and (4) testimony about the taxpayers' desire to move only after their children were out of high school. Patrick Reesink , TC Memo 2012-118 (Tax Ct.).
The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both.
Here are eight important points about the two different penalties you may face if you file or pay late.
1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
Keeping good records after you file your taxes is a good idea, as they will help you with documentation and substantiation if the IRS selects your return for an audit. Here are five tips from the IRS about keeping good records.
1. Normally, tax records should be kept for three years.
2. Some documents ? such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property ? should be kept longer.
3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.5. For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov
If you need to make a payment with your tax return this year, the IRS wants you to know about its payment options.
Here are 10 important facts to help you make your tax payment correctly.
1. Never send cash!
2. If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal via tax preparation software or a tax professional.
3. Whether you file a paper return or electronically, you can pay by phone or online using a credit or debit card.
4. Electronic payment options provide an alternative to checks or money orders. You can pay taxes or user fees 24 hours a day, seven days a week. Visit the IRS website at www.irs.gov and search e-pay, or refer to Publication 3611, Electronic Payments for more details.
5. If you itemize, you may be able to deduct the convenience fee charged for paying individual income taxes with a credit or debit card as a miscellaneous itemized deduction on Form 1040, Schedule A, Itemized Deductions. The deduction is subject to the 2 percent limit.
6. If you file on paper, you can enclose your payment with your return but do not staple it to the form.
7. If you pay by check or money order, make sure it is payable to the United States Treasury.
8. Always provide on the front of your check or money order your correct name, address, Social Security number listed first on the tax form, daytime telephone number, tax year and form number.
9. Complete and include Form 1040-V, Payment Voucher, when mailing your payment to the IRS. Double-check the IRS mailing address. This will help the IRS process your payment accurately and efficiently.
10. For more information, call 800-829-4477 and select TeleTax Topic 158, Ensuring Proper Credit of Payments. You can also find out more in Publication 17, Your Federal Income Tax and Form 1040-V, both available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
The Internal Revenue Service has launched a new online search tool, Exempt Organizations Select Check, to help users more easily find key information about tax-exempt organizations, such as federal tax status and filings. Users can now go to http://www.irs.gov/charities/article/0,,id=249767,00.html, select a tax-exempt organization, and check if the organization:
Is eligible to receive tax-deductible charitable contributions (Publication 78 data, which is incorporated here). Users may rely on this list in determining deductibility of contributions (just as they did when Publication 78 was a separate electronic publication rather than part of Select Check).
Has had its federal tax exemption automatically revoked under the law for not filing a Form 990-series return or notice for three consecutive years (known as the Auto-Revocation List).
Has filed a Form 990-N (e-Postcard) annual electronic notice. (Most small organizations whose annual gross receipts are normally $50,000 or less are required to electronically submit Form 990-N, unless they choose instead to file a completed Form 990 or Form 990-EZ.)
If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax.
1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011 and 2012, the annual exclusion is $13,000.
2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
Gifts that are do not exceed the annual exclusion for the calendar year,
Tuition or medical expenses you pay directly to a medical or educational institution for someone,
Gifts to your spouse,
Gifts to a political organization for its use, and
Gifts to charities.
6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.
7. You must file a gift tax return on Form 709, if any of the following apply:
You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
You gave your spouse an interest in property that will terminate due to a future event.
8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone's tuition or medical expenses.
Deducting Charitable Contributions: Eight Essentials
Donations made to qualified organizations may help reduce the amount of tax you pay.
The IRS has eight essential tips to help ensure your contributions pay off on your tax return.
1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
In a circumstance that made national news and was the subject of the 1994 movie, It Could Happen to You , a waitress was given a winning lottery ticket by a regular customer who was unaware that he held a winning ticket from the Florida Lotto. The taxpayer and her family had an informal agreement indicating their intent to share any lottery proceeds among family members and "take care of each other." Before claiming the prize, she formed an S corporation to receive the winning installment payments in which she held 49% of the stock and distributed the other 51% among family members. The IRS determined that she made a taxable gift, but she argued that no gift occurred because, at the time of the transfer, there was an enforceable contract that required the transfer to her family. The Tax Court held that taxpayer made a taxable gift of 51% of the ticket's value because there was no enforceable contract among the family. The family's oral statements were too indefinite, uncertain, and incomplete. Tonda Dickerson , TC Memo 2012-60 (Tax Ct.).
If you paid someone to care for your child, spouse, or dependent last year, you may qualify to claim the Child and Dependent Care Credit when you file your federal income tax return. Below are 10 things the IRS wants you to know about claiming the credit for child and dependent care expenses.
1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.
2. The care must have been provided so you ? and your spouse if you are married filing jointly ? could work or look for work.
3. You ? and your spouse if you file jointly ? must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.
4. The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.
5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.
6. The qualifying person must have lived with you for more than half of 2011. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents. See Publication 503, Child and Dependent Care Expenses.
7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.
8. For 2011, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income, such as a flexible spending account for daycare expenses.10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax. See Publication 926, Household Employer's Tax Guide.
If you are a small employer with fewer than 25 full-time equivalent employees that earn an average wage of less than $50,000 a year and you pay at least half of employee health insurance premiums?then there is a tax credit that may put money in your pocket.
The Small Business Health Care Tax Credit is specifically targeted to help small businesses and tax-exempt organizations. The credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those already offering health insurance coverage to maintain the coverage they already have.
Here is what small employers need to know so they don?t miss out on the credit for tax year 2011:
- Qualifying businesses calculate the small business health care credit on Form 8941, Credit for Small Employer Health Insurance Premiums, and claim it as part of the general business credit on Form 3800, General Business Credit, which they would include with their tax return.
- Tax-exempt organizations can use Form 8941 to calculate the credit and then claim the credit on Form 990-T, Exempt Organization Business Income Tax Return, Line 44f.
- Businesses that couldn?t use the credit in 2011 may be eligible to claim it in future years. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.
Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions. The following seven facts from the IRS can help you choose the method that gives you the lowest tax.
1. Qualifying expenses - Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.
2. Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are:
Married Filing Jointly $11,600
Head of Household $8,500
Married Filing Separately $5,800
Qualifying Widow(er) $11,600
3. Some taxpayers have different standard deductions - The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.
4. Limited itemized deductions - Your itemized deductions are no longer limited because of your adjusted gross income.
5. Married filing separately - When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.
6. Some taxpayers are not eligible for the standard deduction - They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.
7. Forms to use - The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.
If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.
Here are six things the IRS wants you to know about the expanded adoption credit.
1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.
2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.
3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state?s determination for special needs children.
4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.
5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.
6. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.
Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.
The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes ? for example, to pay off credit card debt ? do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions ? such as insolvency ? may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.
The CPA taxpayer replaced his individually held partnership interest in an accounting firm with his 100% owned S corporation. For the audit years, the accounting firm paid $24,000 in compensation and made profit distributions of $203K and $175K to the taxpayer through his S corporation. An IRS expert estimated the FMV of taxpayer's accounting services to be $91K per year. The 8th Circuit upheld the District Court's findings (1) that the taxpayer was a qualified accountant with an advanced degree and 20 years experience, (2) who worked 35?45 hours per week as a primary earner in a reputable firm with substantial gross earnings, and (3) a $24,000 salary is unreasonably low compared to other similarly situated accountants. David Watson PC v. U.S ., 109 AFTR 2d 2012-XXXX (8th Cir.).
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.
Here are six things the IRS wants you to know about the Savers Credit:
1. Income limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:
- Single, married filing separately, or qualifying widow(er), with income up to $28,250
- Head of Household with income up to $42,375
- Married Filing Jointly, with incomes up to $56,500
2. Eligibility requirements To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person?s return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.
Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.
1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis ? which is usually what you paid for it ? is a capital gain or a capital loss.
3. You must report all capital gains.
4. You may only deduct capital losses on investment property, not on personal-use property.
5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.
8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.
There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Here are six key points the IRS would like you to know about self-employment and self- employment taxes:
1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
Determining your filing status is one of the first steps to filing your federal income tax return. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax.
Some people may qualify for more than one filing status. Here are eight facts about filing status that the IRS wants you to know so you can choose the best option for your situation.
1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple?s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.
6. A married couple may elect to file their returns separately. Each person?s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.
The IRS reopened the Offshore Voluntary Disclosure Program, which closed on 9/9/11. The third offshore program will be open indefinitely, until otherwise announced, and will provide the same penalty structure except for taxpayers in the highest penalty category. Participants will have to pay a penalty of 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure, which is up from 25% in the 2011 program. However, some will be eligible for a 5% or 12.5% penalty rate. Those who feel that the penalty is disproportionate may opt instead to be examined. As before, participants will have to file all original and amended tax returns and include payment of back-taxes and interest for up to eight years, as well as accuracy-related and/or delinquency penalties. News Release IR-2012-5 .
Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.
1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.
2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you?re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.
4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.
5. If you are a dependent, you may not claim an exemption. If someone else ? such as your parent ? claims you as a dependent, you may not claim your personal exemption on your own tax return.
6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.
The taxpayer took a four-month leave from his full-time marketing job to travel to different countries, take photographs, and journal his experiences to be used in a self-published book about his travels and the planning and execution involved. The Tax Court denied taxpayer's Schedule C losses from travel, meals and telephone expenses because he failed to show that his efforts were for the purposes of producing income and a livelihood. Even if writing is not the sole activity of an individual, it can qualify as a trade or business when there is some conscientious intent to produce income. Michael Oros , TC Memo 2012-4 (Tax Ct.).
You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.
Even if you don?t have to file for 2011, here are six reasons why you may want to:
1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year?s tax.
2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.
3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.
5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.
6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.
Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.
Under IRC Sec. 274(n) , the cost of meals furnished to employees in an employer-operated facility on the employer's business premises are not subject to the 50% deduction limit if the meals are excludable fringe benefits under IRC Sec. 132(e) . In this Chief Counsel Advice, the IRS held that the value of meals provided by an airline to its crew members through a third party vendor was not excludable as de minimis fringe benefits, and the airline was subject to the 50% deduction limit. The meals were catered on the planes and did not satisfy the requirement that they be provided at an "eating facility." Although the term eating facility is not defined in the statute of regulations, it implies a designated location for the preparation and consumption of meals. CCA 201151020 .
House and Senate approve bill temporarily extending the payroll tax cut
Late on December 22, House and Senate leaders agreed to end their stalemate over extending the payroll tax break. Under the agreement, for the first two months of 2012, a 4.2% Social Security tax would continue to apply to workers? pay (10.4% OASDI tax for self-employment income).
However, the agreement calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012. If an employee?s wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker?s individual tax return for 2012.
Both the Senate and House approved the bill on the morning of December 23. It will now be sent to the President for his expected signature.
Under the agreement, both Republicans and Democrats in the Senate and House will immediately appoint negotiators to a conference to forge a full-year extension of the payroll tax reduction.
The IRS doesn't contact taxpayers by email to alert them of a pending tax refund, inform them they are eligible for a tax refund, initiate taxpayer communications, or ask for detailed personal and financial information like social security numbers, PIN numbers, passwords, bank or credit card account numbers, or security-related information such as date of birth or mother's maiden name. Taxpayers receiving such messages should not release any personal information. Furthermore, they should not reply to the email, open any attachments, or click on any links to avoid malicious code that can infect their computers. More information on reporting scams and what to do if you've been victimized is available at www.irs.gov , keyword "phishing."
- If you turned 70-1/2 in 2011, you must take your first RMD before the end of this year unless you postpone it until April 1, 2012. However, postponement means taking two RMDs in 2012, which can adversely impact taxation of Social Security benefits in 2012 and result in increased Medicare premiums for Parts B and D in 2014.
- If you are still working, you can postpone your RMDs from company retirement plans until you retire; this rule does not apply to IRAs.
- RMDs for IRAs can be taken from one or more accounts. Total up all IRAs and then decide from which one or more accounts to take the distribution. This rule does not apply to qualified retirement plans; separate RMDs are required from each plan.
- No lifetime distributions are required from Roth IRAs for the owner, but beneficiaries usually must draw down the accounts over their lifetime (a special rule applies to spouses).
- The penalty for insufficient withdrawals can be waived if you ask the IRS to do so. You must explain why you failed to take RMDs and show that you remedied the situation as soon as you discovered the insufficiency.
State Warns of Phony Letters Demanding Tax Payments from Businesses
The California Board of Equalization is warning businesses of phony solicitations from the California Labor Compliance Bureau requesting immediate payment of a $275 "processing fee." The California Labor Compliance Bureau is not a government agency.
The requested fee is purportedly for labor-related notices that California employers are required to post at their businesses, informing employees of their legal rights under the National Labor Relations Act. Such notices are free and available at the NLRB's website.
The taxpayer, an elementary school teacher who taught classes in health, nutrition, and fitness deducted unreimbursed employee supplies of almost $9,000 for: (1) "candy and sugar" used as student incentives, (2) a computer, (3) classroom improvements and maintenance, (4) a specialty chair purchased because of a back injury suffered in relocating her classroom, and (5) fitness clothing. The Tax Court denied the deductions since gifts to students are not deductible, no matter how well intentioned; there was a lack of substantiation on the business use of the computer; the classroom improvements and specialty chair were not ordinary and necessary expenses of the job; and the fitness clothing was not essential in taxpayer's employment and unsuitable for general or personal wear. Eliana Farias , TC Memo 2011-248 (Tax Ct.).
Get ready to pay more employment taxes!!
The social security wage base will increase from $106,800 in 2011 to $110,100 in 2012. The increase in wage base will increase the employment taxes $409.20.
As in prior years, there is no limit to the wages subject to the Medicare tax, so all covered wages are subject to the 1.45% tax. The FICA tax rate, which is the combined social security tax rate of 6.2% (4.2% on the employee portion in 2011) and the Medicare tax rate of 1.45%, is normally 7.65%, while the self-employment tax rate is normally 15.3% (13.3% in 2011). The threshold for coverage for domestic employees will be $1,800 in 2012.
Home Office Deductions: The taxpayer operates a tax preparation business out of his home and uses one room regularly and exclusively as his office as required under IRC Sec. 280A(c) . He also built a bathroom for his clients' use that is across the hall from his office. In addition to home office deductions, the taxpayer deducted wage expenses for administrative assistance provided by his two daughters who he compensated by paying their credit card bills. The Tax Court allowed the home office deductions attributable to the area of the bedroom, but not the hallway and the bathroom since the taxpayer's children and personal guests occasionally used the bathroom. The court also denied the wage deductions since there was no evidence to substantiate the amounts paid. Luis Bulas , TC Memo 2011-201 (Tax Ct.).
Depreciation "Idle Asset" Rule: Under the idle asset rule, you can continue to take depreciation deductions over the useful life of the asset. The rule applies when the asset is available for use should the occasion arise, even though you don?t actually use it.A recent Tax Court Memo clarified this rule.
Charles Douglas , TC Memo 2011-214 (Tax Ct.).
Taxpayer operated a delivery company (taxed as an S corporation) that deducted $125,000 of the $135,000 purchase price of a Cessna 172 aircraft in 2007. Taxpayer's husband took flying lessons in 2007, but never advanced beyond a student license, and no one else in the company was licensed to use the aircraft for delivery purposes. The Tax Court dismissed taxpayer's attempt to employ the "idle asset" rule?the Cessna was used for training but was "simply never available for its alleged business function . . . ." Since the Cessna was not available to perform its intended function in 2007, the Tax Court disallowed the Section 179 (and related upkeep and storage) deductions. According to the Tax Court: "An aircraft cannot be considered ready and available for business use without a suitable pilot to fly it."
Detroit tax preparer accused of falsifying client income to maximize Earned Income Tax Credits
I found this article on www.accountingweb.com regarding a Detroit tax preparer was caught preparing false income tax returns. It made me wonder how many other tax preparers out there are doing the same thing for their clients. I assume the IRS plans to reduce the number of untrustworthy tax preparers with the new IRS Registered Tax Return Preparer competency exam. Every California Tax Preparer who is paid to prepare Form 1040 series tax returns are required to take and pass this test, unless practicing as a CPA, Attorney or Enrolled Agent.
It is more important today to work with a trusted CPA in order to protect yourself from being taken advantaged of by a dishonest tax preparer who is only looking out for their own bottom line and not yours.
The next few months may provide a last chance opportunity for taxpayers who itemize deductions to deduct state and local sales taxes in lieu of state and local income taxes.The option to deduct sales taxes is set to expire at the end of 2011. While it may be extended, there is no way of knowing what Congress may do. Accordingly, individuals who are considering the purchase of a big-ticket item may want to accelerate the purchase into this year to achieve a higher itemized deduction for sales taxes.