In case you missed it, and the announcement is in news all over the place, the IRS will be open for business for 2013 tax returns on Friday, January 31, 2014. At this time there is no indication of further delays for certain forms. (In 2013, for 2012 tax returns, certain forms were not available until later in February or March.)
Businesses that advertise about filing before then are likely trying to mislead you, since little can be done before that date. Sure, the tax return can be prepared, but then it must be held until the IRS opens the door.
Update: The IRS will begin accepting entity/business tax returns (i.e., 1041, 1065, 1120, 1120S plus 720, 940, 941, and 2290) on Monday, January 13, 2014.
Thursday, December 19, 2013
Monday, December 16, 2013
But I din't get the money then!
Often people in business experience receipt of income in early January but soon thereafter receive a 1099-MISC indicating that the money was paid to them in the prior year. This is an important issue for cash-based taxpayers. What to do?
The issue is called "constructive receipt" and it does not qualify as simple.
The law states that constructive receipt occurs when you have access to or control of the money. If you receive a check in the mail, it is easy to see that you now have constructive receipt. Once the money is in your bank account, you clearly have constructive receipt on or before that point in time. This income must be claimed in the year that you have constructive receipt.
But what about that check you received January 2? Maybe it was mailed to you on December 31, so the payer will claim the expense for last year and issue you a 1099-MISC indicating that you were paid last year. But were you? If that check was mailed from across the country, then your constructive receipt will be when you received it. But if you could have stopped by the payer's office on December 31 and picked up the check, then you had constructive receipt last year regardless of when you actually received the check.
If your money is being held by a bank, then it is a bit more complicated. The facts and circumstances of your particular situation will dictate when constructive receipt occurred.
What do you need to do if your constructive receipt is in January but the 1099-MISC indicates that you received the payment in the prior year? First you will need documentation showing when you received the check in the mail. Be sure to keep the envelope showing the postmark as a minimum. You will also need documentation indicating how available the check was before January 1. Second there are some things that a tax practitioner can do to file your tax return postponing that income yet avoid an examination letter from the IRS. (That will be triggered automatically when the 1099-MISC information is not included on your tax return.) This is worthy of a conversation with your tax practitioner, so make that phone call!
Finally, have a merry Christmas!
The issue is called "constructive receipt" and it does not qualify as simple.
The law states that constructive receipt occurs when you have access to or control of the money. If you receive a check in the mail, it is easy to see that you now have constructive receipt. Once the money is in your bank account, you clearly have constructive receipt on or before that point in time. This income must be claimed in the year that you have constructive receipt.
But what about that check you received January 2? Maybe it was mailed to you on December 31, so the payer will claim the expense for last year and issue you a 1099-MISC indicating that you were paid last year. But were you? If that check was mailed from across the country, then your constructive receipt will be when you received it. But if you could have stopped by the payer's office on December 31 and picked up the check, then you had constructive receipt last year regardless of when you actually received the check.
If your money is being held by a bank, then it is a bit more complicated. The facts and circumstances of your particular situation will dictate when constructive receipt occurred.
What do you need to do if your constructive receipt is in January but the 1099-MISC indicates that you received the payment in the prior year? First you will need documentation showing when you received the check in the mail. Be sure to keep the envelope showing the postmark as a minimum. You will also need documentation indicating how available the check was before January 1. Second there are some things that a tax practitioner can do to file your tax return postponing that income yet avoid an examination letter from the IRS. (That will be triggered automatically when the 1099-MISC information is not included on your tax return.) This is worthy of a conversation with your tax practitioner, so make that phone call!
Finally, have a merry Christmas!
Friday, December 6, 2013
Change in Short Sale and Cancellation of Debt Income Rules?
Ouch! That's a long title! Long post too.
In the last couple of weeks California Senator Barbara Boxer received a letter response from the IRS on an inquiry made last May. The letter, from one IRS attorney, outlines what amounts to a potential change in taxation caused by a short sale of the primary residence.
Background: When the bank forecloses on you or agrees to forgive a remaining debt through a short sale, that cancellation of debt is considered income, or CODI. (The US Code can be found at http://www.law.cornell.edu/uscode/text. Title 26 is the Internal Revenue Code, or IRC. CODI is found in IRC §61(a)(12).) A few years ago Congress added an exception to this CODI for acquisition indebtedness within certain limits for a taxpayer's primary residence (IRC §108(a)(1)(E)). Unfortunately, this is expiring.
A couple of years ago the California Legislature established a law that restricted banks that agree to a short sale from pursuing additional relief on the mortgage. Some aggressive tax practitioners asserted the position that this changed the nature of the loan to be non-recourse; there is no CODI from the forgiveness of a non-recourse loan. That is great for taxpayers, and in fact we lost a client this year because we did not take this aggressive position (which we believe is contrary to law, as identified below).
News: The recent letter from the IRS indicated that this treatment of a mortgage resolved through a short sale would cause the loan to be non-recourse and therefore there would be not CODI. This would indeed be great news!
However, maybe it is not that simple. This is only a letter from one attorney, not a memorandum from the IRS Chief Counsel. Such letters do not carry any authority and, in the past, have at times been followed by authoritative communication that contradicted the letter.
In this case the position expressed, while very much desired by taxpayers, runs contrary to various court cases. (See the 1999 case Briarpark v Commissioner for a key landmark case.) More importantly, the letter directly contradicts Treasury Regulations 1.6050P-1(b)(2)(i)(F). (Treasury Regulations, or Regs, are extensive writings generated in support of the actual law or code, often at the direction of Congress. They are authoritative in court, subordinate only to the Code and the US Constitution.) Before the IRS should take the position presented in the letter, the Regs should be updated, and that process takes time....
Certainly this letter is gaining traction in the trade media. The California Franchise Tax Board has now stated that if the IRS takes that position that they will follow.
I will not speculate where this will go, but it will be interesting to watch, and I'll undoubtedly follow-up from time to time as we have new developments. Until then, if you hear about this "new rule" or "new position the IRS is taking," I suggest you contain your enthusiasm until this is resolved.
In the last couple of weeks California Senator Barbara Boxer received a letter response from the IRS on an inquiry made last May. The letter, from one IRS attorney, outlines what amounts to a potential change in taxation caused by a short sale of the primary residence.
Background: When the bank forecloses on you or agrees to forgive a remaining debt through a short sale, that cancellation of debt is considered income, or CODI. (The US Code can be found at http://www.law.cornell.edu/uscode/text. Title 26 is the Internal Revenue Code, or IRC. CODI is found in IRC §61(a)(12).) A few years ago Congress added an exception to this CODI for acquisition indebtedness within certain limits for a taxpayer's primary residence (IRC §108(a)(1)(E)). Unfortunately, this is expiring.
A couple of years ago the California Legislature established a law that restricted banks that agree to a short sale from pursuing additional relief on the mortgage. Some aggressive tax practitioners asserted the position that this changed the nature of the loan to be non-recourse; there is no CODI from the forgiveness of a non-recourse loan. That is great for taxpayers, and in fact we lost a client this year because we did not take this aggressive position (which we believe is contrary to law, as identified below).
News: The recent letter from the IRS indicated that this treatment of a mortgage resolved through a short sale would cause the loan to be non-recourse and therefore there would be not CODI. This would indeed be great news!
However, maybe it is not that simple. This is only a letter from one attorney, not a memorandum from the IRS Chief Counsel. Such letters do not carry any authority and, in the past, have at times been followed by authoritative communication that contradicted the letter.
In this case the position expressed, while very much desired by taxpayers, runs contrary to various court cases. (See the 1999 case Briarpark v Commissioner for a key landmark case.) More importantly, the letter directly contradicts Treasury Regulations 1.6050P-1(b)(2)(i)(F). (Treasury Regulations, or Regs, are extensive writings generated in support of the actual law or code, often at the direction of Congress. They are authoritative in court, subordinate only to the Code and the US Constitution.) Before the IRS should take the position presented in the letter, the Regs should be updated, and that process takes time....
Certainly this letter is gaining traction in the trade media. The California Franchise Tax Board has now stated that if the IRS takes that position that they will follow.
I will not speculate where this will go, but it will be interesting to watch, and I'll undoubtedly follow-up from time to time as we have new developments. Until then, if you hear about this "new rule" or "new position the IRS is taking," I suggest you contain your enthusiasm until this is resolved.
Wednesday, November 6, 2013
VITA Preparing Tax Returns
Maybe you have never heard of the Volunteer Income Tax Assistance (VITA) program. This program "provides no-cost Federal tax return preparation and electronic filing to underserved segments of individual taxpayers, including low- to moderate-income, elderly, disabled, and limited-English-proficient taxpayers."
Kudos to the IRS for not only having this program, but regularly checking up on the quality of the program. Without measuring how well something is working it is almost impossible to improve it. The IRS does this by sending "secret shoppers" to the VITA centers to have tax returns prepared. Then the accuracy of those returns are checked.
And the VITA program needs a lot of improvements! Testing the system in 2013 (tax year 2012) showed that the VITA program managed to file 51% of the returns correctly. Of course that means that 49% were wrong! Most organizations would not survive if they messed up half of everything they try.Recognize that the preparers VITA utilizes do have training. Also these tax returns are not particularly difficult ones. (The rules of the program limit those who can use the program.) But even then half the time they cannot get it correct.
As a professional practitioner, I am always amazed at how many people think we should be able to whip out a tax return quickly and charge very little. What about the hours and hours of study and preparation time? Seems people do not understand. Even for a return that does not include a lot of other issues, someone must determine that those other issues do not apply. So they must be considered.
As for the VITA program, they are improving - slowly. In 2012 their accuracy rate was only 49% - less than half prepared correctly.
Next I'll hear the demands for a simpler tax system. That always sounds simple until you start pealing that onion. There are a lot of reasons we have the complexity that we do. But that's for another day.
If you want to read the full report see http://www.treasury.gov/tigta/auditreports/2013reports/201340110fr.html.
Saturday, November 2, 2013
Forgiveness on Foreclosure
Beginning in 2008 the housing market in the US took a major hit, and along with it many homeowners started getting in trouble with their mortgages. In additional to losing their homes, many found that they were also getting hit with an ugly tax bill. From a tax perspective, there is no difference between a foreclosure and a short-sale - there is debt forgiveness (i.e., the unpaid mortgage) and that is generally taxable.
Congress stepped in and created a short-term provision in the tax code to provide relief. What many people missed (or try to ignore) is that this provision only applies to "acquisition debt" or the money borrowed to buy, build, or substantially improve your primary residence.
Refinancing that loan does not impact this to the extent of the previous mortgage amount. For example, assume you purchased that new home and borrowed $200,000 at the time. You have made payments on the mortgage and paid it down a small amount. Interest rates drop, and so you decide to refinance your mortgage. At the time you still owe $185,000 on the loan. Your new mortgage is $190,000 with the extra $5,000 used to pay the expense of the refinance (e.g., title fees, appraisal, etc.). Now your mortgage is $190,000, but your acquisition debt is only $185,000.
The key news on this is that the short-term provision that Congress created is due to expire on December 31, 2013. After this date there will no longer be this relief.
There are other issues that can affect the taxability of this debt relief. One of those is whether or not the loan, as taken out, was recourse or non-recourse. (Unfortunately lending institutions rarely use tax terms in their loan documentation so this is not usually clearly stated.) A qualified tax practitioner should be able to explore other options or a combination of options to see if any relief is available through other channels.
Congress stepped in and created a short-term provision in the tax code to provide relief. What many people missed (or try to ignore) is that this provision only applies to "acquisition debt" or the money borrowed to buy, build, or substantially improve your primary residence.
Refinancing that loan does not impact this to the extent of the previous mortgage amount. For example, assume you purchased that new home and borrowed $200,000 at the time. You have made payments on the mortgage and paid it down a small amount. Interest rates drop, and so you decide to refinance your mortgage. At the time you still owe $185,000 on the loan. Your new mortgage is $190,000 with the extra $5,000 used to pay the expense of the refinance (e.g., title fees, appraisal, etc.). Now your mortgage is $190,000, but your acquisition debt is only $185,000.
The key news on this is that the short-term provision that Congress created is due to expire on December 31, 2013. After this date there will no longer be this relief.
There are other issues that can affect the taxability of this debt relief. One of those is whether or not the loan, as taken out, was recourse or non-recourse. (Unfortunately lending institutions rarely use tax terms in their loan documentation so this is not usually clearly stated.) A qualified tax practitioner should be able to explore other options or a combination of options to see if any relief is available through other channels.
Thursday, October 31, 2013
Flexible Spending Account Changes
Flexible Spending Accounts (FSAs) have been around for about 30 years. These accounts, when supported by an employer, allow employees to stash money in the account pretax. That is, the employee's taxable income is reduced by the amount redirected to their account. This lowers their income taxes. The employee had to make an irrevocable decision generally around November for how much to divert the following year.
When the employee has out-of-pocket medical expenses (i.e., expenses not covered by insurance) they can submit receipts and get reimbursed from the account. Thus the employee is able to pay for medical expenses with pretax dollars. One especially nice feature is that if there are significant expenses early in the year, the employee can obtain reimbursement from the account before they put their own money into it. In other words, they do not need to first accumulate a sufficient balance. (If they terminate employment during the year the employer can withhold from their final pay check to cover any shortage.)
One of the problems with an FSA is its "use it or lose it" rule. Initially any amount still remaining in the account at the end of the year was simply forfeited. This means one must be very conservative in estimating what their out-of-pocket expenses might be the following year. To improve that situation, some years ago the rules were changed allowing employers to offer a grace period. This allowed money left over to be used in the first two and a half months of the following year (i.e., until March 15). This helped a lot. During the open enrollment period if an employee had considerable fund left, they would simply estimate lower for the following year and then first use the carry-over funds during the grace period.
Today it was announced that employers have a new option: They can now allow up to $500 of residual funds to simply be carried over. The two and a half months of the grace period does not apply. This will, for most employees, be much better.
If an employer chooses to allow the carry-over provision then they can no longer offer the grace period. Either feature can be included in the plan, but not both. It is up to the employer to modify their plan documentation to offer either provision before employees can enjoy the benefit.
When the employee has out-of-pocket medical expenses (i.e., expenses not covered by insurance) they can submit receipts and get reimbursed from the account. Thus the employee is able to pay for medical expenses with pretax dollars. One especially nice feature is that if there are significant expenses early in the year, the employee can obtain reimbursement from the account before they put their own money into it. In other words, they do not need to first accumulate a sufficient balance. (If they terminate employment during the year the employer can withhold from their final pay check to cover any shortage.)
One of the problems with an FSA is its "use it or lose it" rule. Initially any amount still remaining in the account at the end of the year was simply forfeited. This means one must be very conservative in estimating what their out-of-pocket expenses might be the following year. To improve that situation, some years ago the rules were changed allowing employers to offer a grace period. This allowed money left over to be used in the first two and a half months of the following year (i.e., until March 15). This helped a lot. During the open enrollment period if an employee had considerable fund left, they would simply estimate lower for the following year and then first use the carry-over funds during the grace period.
Today it was announced that employers have a new option: They can now allow up to $500 of residual funds to simply be carried over. The two and a half months of the grace period does not apply. This will, for most employees, be much better.
If an employer chooses to allow the carry-over provision then they can no longer offer the grace period. Either feature can be included in the plan, but not both. It is up to the employer to modify their plan documentation to offer either provision before employees can enjoy the benefit.
Wednesday, October 23, 2013
Income Tax Filing Season Delayed - Again
For those not following the news, earlier this month parts of our government shut down. Included in that was most of the IRS. (All kinds of political comments and jokes would fit well here, but that is not the purpose of this blog.)
Last week government employees returned to their jobs and began to assess the status of projects, schedules,etc. The IRS determined that they will not be prepared to accept 2013 tax returns by the planned date. So the filing season will be delayed - just like it was last year.
The IRS indicated that a final begin date will be announced in December, but that it will not be before January 28 and is expected to be no later than February 4.
However, the current continuing resolution that Congress used to reopen the government only allows spending to continue until January 15. Many in Congress have indicated that the shutdown was not a positive thing and certainly issues will be resolved to avoid another shut-down in January. However, the ideological groups are far from each other on how to move forward. Possibly as important as the current spending is our national debt, which is now over $17 trillion! (That is almost $54,000 per person. If we each just wrote a check....) We must address this, and there are no popular answers. Any bona fide approach is sure to jeopardize the re-election of whoever suggested or supported it.
Personally, I'm not banking on us avoiding another shut-down this January. Maybe we will, but those odds are not very favorable. That means the February 4 date could be in jeopardy....
Last week government employees returned to their jobs and began to assess the status of projects, schedules,etc. The IRS determined that they will not be prepared to accept 2013 tax returns by the planned date. So the filing season will be delayed - just like it was last year.
The IRS indicated that a final begin date will be announced in December, but that it will not be before January 28 and is expected to be no later than February 4.
However, the current continuing resolution that Congress used to reopen the government only allows spending to continue until January 15. Many in Congress have indicated that the shutdown was not a positive thing and certainly issues will be resolved to avoid another shut-down in January. However, the ideological groups are far from each other on how to move forward. Possibly as important as the current spending is our national debt, which is now over $17 trillion! (That is almost $54,000 per person. If we each just wrote a check....) We must address this, and there are no popular answers. Any bona fide approach is sure to jeopardize the re-election of whoever suggested or supported it.
Personally, I'm not banking on us avoiding another shut-down this January. Maybe we will, but those odds are not very favorable. That means the February 4 date could be in jeopardy....
Thursday, September 5, 2013
Tips Voluntary Again?
Income is taxable unless specifically excluded. That means all income. All world-wide income. For your favorite waiter or waitress at your favorite restaurant, the tip you leave them is taxable income. (They do not have to pay taxes on the amount they "tip out" to the cooks, etc.)
If the employee receives more than $20 in direct cash tips during the month, they are required to report it to their employer. (If they fail to report it then they are in violation of the law. They can still directly report it on their personal income tax return and pay the taxes then. If they ignore that income it is your basic tax fraud. IRS Revenue Agents love these - they are easy pickin's. But that's not the point here.) The employer reports the tip amount on their W-2.
All earned income is generally subject to payroll taxes such as FICA and medicare, or if self-employed, then self-employment tax (which is FICA and medicare). So back to our restaurant - the employer must withhold FICA and medicare from the employee's compensation on those tips. They also pay the employer's share.
But wait! The employer (presumably) did not plan on the employer's payroll taxes on the tips given to the employee. So that becomes an extra expense that is a tax. To compensate the employer is permitted a credit of this non-planned tax they paid.
Ever been to a restaurant that states that for parties of 6 (or 8 or 10 etc.) or more, a gratuity of 18% (or 20%) will be added to the bill? Aren't "tips" a voluntary "gift" that are "to insure promptness" by the service staff? How is that automatic "tip" voluntary for the patron?
It isn't. And the law agrees. And the IRS issued Revenue Ruling 2012-18 reminding us of this. These automatic "tips" are in fact a service charge. It all gets treated the same for the employee, but no longer for the employer! A "service charge" is something the employer controls, not the patron. So the employer's share of the FICA and medicare paid to the government on the behalf of the employee can no longer be claimed to be an unplanned expense. That means the employer will no longer qualify for a tax credit to offset that additional payroll tax. Now it is hurting the bottom line of the restaurant!
Some restaurants are already taking steps to eliminate the "automatic gratuity" for larger parties. One aid is to automatically list on the bill the calculated tip amount at various tip rates - to save the patron the effort to calculate it. (OK, to show the patron how much a reasonable tip really is!) Hopefully that works.
Now as part of a large party I will again be able to give generously when the service is good, and reduce that tip when the service is lacking.
For situations where expected tips are used to cover the minimum wage for employees the above works a bit different, but is still applicable. Revenue Ruling 2012-18 is posted at http://www.irs.gov/pub/irs-drop/rr-12-18.pdf.
If the employee receives more than $20 in direct cash tips during the month, they are required to report it to their employer. (If they fail to report it then they are in violation of the law. They can still directly report it on their personal income tax return and pay the taxes then. If they ignore that income it is your basic tax fraud. IRS Revenue Agents love these - they are easy pickin's. But that's not the point here.) The employer reports the tip amount on their W-2.
All earned income is generally subject to payroll taxes such as FICA and medicare, or if self-employed, then self-employment tax (which is FICA and medicare). So back to our restaurant - the employer must withhold FICA and medicare from the employee's compensation on those tips. They also pay the employer's share.
But wait! The employer (presumably) did not plan on the employer's payroll taxes on the tips given to the employee. So that becomes an extra expense that is a tax. To compensate the employer is permitted a credit of this non-planned tax they paid.
Ever been to a restaurant that states that for parties of 6 (or 8 or 10 etc.) or more, a gratuity of 18% (or 20%) will be added to the bill? Aren't "tips" a voluntary "gift" that are "to insure promptness" by the service staff? How is that automatic "tip" voluntary for the patron?
It isn't. And the law agrees. And the IRS issued Revenue Ruling 2012-18 reminding us of this. These automatic "tips" are in fact a service charge. It all gets treated the same for the employee, but no longer for the employer! A "service charge" is something the employer controls, not the patron. So the employer's share of the FICA and medicare paid to the government on the behalf of the employee can no longer be claimed to be an unplanned expense. That means the employer will no longer qualify for a tax credit to offset that additional payroll tax. Now it is hurting the bottom line of the restaurant!
Some restaurants are already taking steps to eliminate the "automatic gratuity" for larger parties. One aid is to automatically list on the bill the calculated tip amount at various tip rates - to save the patron the effort to calculate it. (OK, to show the patron how much a reasonable tip really is!) Hopefully that works.
Now as part of a large party I will again be able to give generously when the service is good, and reduce that tip when the service is lacking.
For situations where expected tips are used to cover the minimum wage for employees the above works a bit different, but is still applicable. Revenue Ruling 2012-18 is posted at http://www.irs.gov/pub/irs-drop/rr-12-18.pdf.
Thursday, August 29, 2013
IRS To Recognize Same-Sex Marriages
Today the IRS issued a press release indicating that they will be recognizing same-sex marriages that were legally married in jurisdictions that recognize their marriages. This was expected following the US Supreme Court setting aside a portion of DOMA back on June 26th.
This means that for 2013 these couples must file their federal tax return using either the filing status of married filing joint or married filing separate. Of course that means they will be subject to the various marriage penalties currently in our tax code.
Of particular interest is the clarification that the IRS will recognize these couples as married regardless of whether or not the current jurisdiction (e.g., state) where they live allows same-sex marriages.
It is worth noting that this does not apply to the following:
This means that for 2013 these couples must file their federal tax return using either the filing status of married filing joint or married filing separate. Of course that means they will be subject to the various marriage penalties currently in our tax code.
Of particular interest is the clarification that the IRS will recognize these couples as married regardless of whether or not the current jurisdiction (e.g., state) where they live allows same-sex marriages.
It is worth noting that this does not apply to the following:
- registered domestic partnerships,
- civil unions, or
- similar formal relationships recognized under state law.
Tuesday, August 27, 2013
Affordable Care Act Update - Individual Insurance Issues
Today Treasury (IRS) released final Regulations related to the ACA and minimal essential health insurance coverage for individuals. (The full 75 pages are available here for those wishing to read more.) Key items:
The calculations for the tax penalties for non-compliance are, as you might guess, rather complex. I'll save that discussion for another day.
- Individual coverage is measured month-by-month. This relates to whether individuals will have to pay tax penalties for failing to have coverage. Against recommendations, the IRS determined that a month's coverage is determined by the single-day rule. That is, if an individual is covered for any day in the month then they have coverage for the month. (The recommendation was to use a majority of days. But the IRS decided that the math is too difficult, in spite of the requirement that the insurance company will make the determination and send an information return to the individual. Go figure!)
- A taxpayer is responsible for insurance coverage for every person who qualifies to be a dependent, not for those who are actually claimed as a dependent. This includes "qualifying relative" who could be a parent or a roommate.
- There is no ability to shift the responsibility for insurance coverage to a non-custodial parent even if the divorce documents require that parent to provide the insurance.
- When adopting a child, the taxpayer is not responsible for coverage for the month of adoption or any month prior to that month. Conversely when giving up a child for adoption, a taxpayer is not responsible for coverage for the month the child was actually adopted or any month thereafter.
- Household income (used to calculate the tax penalty for non-compliance) includes the income for all those of the household required to pay taxes.
- Household income must be increased by the amount required to be paid by the taxpayer as the employee portion of the insurance premium for employer-sponsored insurance. (This amount is generally a salary reduction through a "cafeteria" plan and the employee's gross income, as reported on the W-2, is reduced by this amount. Thus it is simply added back on.) Note: This information is not generally reported to an employee but is available from the pay-stubs. Thus the taxpayer will need to maintain these records effective January 1, 2014.
- Pregnancy-related Medicaid is not considered essential medical insurance, and therefore will not enable a taxpayer to escape the non-compliance penalty. (However, the IRS intends to issue guidance to exclude this penalty for 2014 only for those who have pregnancy-related Medicaid. The reasoning is insufficient time to learn that this coverage is insufficient.)
- A self-insured group health plan is an eligible employer-sponsored plan.
- Retiree coverage under a group health plan is minimum essential coverage. However, an individual who is eligible for retiree coverage but does not enroll disregards that eligibility in determining qualification for the lack of affordable coverage exemption.
- Employer plans include those offered by a third party on behalf of the employer.
- Individuals who are members of a recognized religious sect or division of the sect who are adherents of the established tenets or teachings of the sect or division are eligible to receive a religious conscience exemption certification from an Exchange.
- An individual is exempt for a month for which the individual is incarcerated (other than incarceration pending the disposition of charges).
The calculations for the tax penalties for non-compliance are, as you might guess, rather complex. I'll save that discussion for another day.
Monday, August 5, 2013
IRS Misleading (Casualty Losses)
I have no idea how many people are signed up for and get regular email blasts from the IRS. (The IRS does not use email to contact individuals about their tax situation. If you get such an email message you can anticipate that it is phishing - do not respond.) Today I received a regular email blast message. I think it is misleading.
The IRS email blasts are generally helpful information although not often that helpful for tax professionals. Still, there are always opportunities to learn, so I receive and skim them for valuable nuggets.
Today's email blast deals with miscellaneous deductions, which is one area where we can itemize deductions to potentially reduce our tax liability. Other areas include medical expenses, state and local taxes paid, interest related to a mortgage on our personal residence or investments, charitable contributions, and casualty losses. Miscellaneous itemized deductions are separated into two groups - those subject to a limitation to the amount that exceeds 2% of our Adjusted Gross Income (AGI), and those that do not suffer this "hurdle" or "haircut."
Why do itemized deductions only potentially reduce our taxes? The laws created by Congress allow for a "standard deduction." Essentially we can deduct that amount without bothering to itemize and detail those deductions for the IRS. Only if we have a larger amount when itemized is it advantageous to "itemized deductions" on our tax return. (At one time this was referred to as the "long form.")
Enough background. What was misleading? When listing items that may be deducted as a miscellaneous deduction not subject to the 2% rule, they included casualty losses. Really?
Casualty losses are separately listed unrelated to the miscellaneous area. But we do not receive the benefit of the full loss. First, each separate loss from the year receives a $100 "haircut." So if your loss is $3,700, it is first reduced to $3,600. A second loss in the year of, for example, $4,200, is reduced to $4,100. So far so good.
But then the total of all losses are reduced by 10% of your AGI. So in our example the $3,600 and $4,100 is combined to equal $7,700. If your AGI is $40,000, then 10% is $4,000. So the $7,700 is reduced to $3,700. This is the amount that is figured into your itemized deductions.
So why do I see the email blast as misleading? The author of the email blast was focused on the miscellaneous deductions. In offering examples of those items that escape the 2% rule, they included casualty losses. While it is technically true that casualty losses escape the 2% rule, they have their own 10% rule! That is considerably less advantageous.
The "mistake" was in considering casualty loss to be a miscellaneous deduction; it is not - casualty losses are listed elsewhere on Schedule A Itemized Deductions. I doubt this will send too many taxpayers running too far in the wrong direction, but I think it best to at least start taxpayers going the correct way. But please, there is no reason to think the error was malicious; I think it was simply an error the author made while focused on the area of miscellaneous deductions.
The IRS email blasts are generally helpful information although not often that helpful for tax professionals. Still, there are always opportunities to learn, so I receive and skim them for valuable nuggets.
Today's email blast deals with miscellaneous deductions, which is one area where we can itemize deductions to potentially reduce our tax liability. Other areas include medical expenses, state and local taxes paid, interest related to a mortgage on our personal residence or investments, charitable contributions, and casualty losses. Miscellaneous itemized deductions are separated into two groups - those subject to a limitation to the amount that exceeds 2% of our Adjusted Gross Income (AGI), and those that do not suffer this "hurdle" or "haircut."
Why do itemized deductions only potentially reduce our taxes? The laws created by Congress allow for a "standard deduction." Essentially we can deduct that amount without bothering to itemize and detail those deductions for the IRS. Only if we have a larger amount when itemized is it advantageous to "itemized deductions" on our tax return. (At one time this was referred to as the "long form.")
Enough background. What was misleading? When listing items that may be deducted as a miscellaneous deduction not subject to the 2% rule, they included casualty losses. Really?
Casualty losses are separately listed unrelated to the miscellaneous area. But we do not receive the benefit of the full loss. First, each separate loss from the year receives a $100 "haircut." So if your loss is $3,700, it is first reduced to $3,600. A second loss in the year of, for example, $4,200, is reduced to $4,100. So far so good.
But then the total of all losses are reduced by 10% of your AGI. So in our example the $3,600 and $4,100 is combined to equal $7,700. If your AGI is $40,000, then 10% is $4,000. So the $7,700 is reduced to $3,700. This is the amount that is figured into your itemized deductions.
So why do I see the email blast as misleading? The author of the email blast was focused on the miscellaneous deductions. In offering examples of those items that escape the 2% rule, they included casualty losses. While it is technically true that casualty losses escape the 2% rule, they have their own 10% rule! That is considerably less advantageous.
The "mistake" was in considering casualty loss to be a miscellaneous deduction; it is not - casualty losses are listed elsewhere on Schedule A Itemized Deductions. I doubt this will send too many taxpayers running too far in the wrong direction, but I think it best to at least start taxpayers going the correct way. But please, there is no reason to think the error was malicious; I think it was simply an error the author made while focused on the area of miscellaneous deductions.
Sunday, June 30, 2013
DOMA and the US Supreme Court
This past Wednesday (June 26, 2013) the US Supreme Court overturned a portion of the Defense of Marriage Act, or DOMA. At the same time the court refused to consider an appeal of California's law on the same topic, resulting in the law aligned with DOMA also being set aside.
Many articles deal with the many things that will be changed as a result of the court's action. Authors report 1,000 to 1,400 changes that will be impacted by the court's action. I've no desire to compete with counting provisions, especially since some of those will not affect many couples. So I will address just tax issues in aggregate.
Without DOMA, federal tax law returns to looking to state law for how to treat couples. Thus if the state where the couple lives considers the couple married, then for federal tax purposes they will also be married. Conversely if a state does not recognize a marriage, then neither will federal tax law.
Some have reasonably asked about a same-sex couple who are married under the law in a state that has redefined marriage, and who then move to a state holding to the traditional and original definition of marriage, given to us thousands of years ago. Will the couple be considered married or not? The answer again lies in state law. Does the state where they now reside recognize any marriage granted by a different state? Some do, and some do not.
Note that this situation is not new to the tax world. For a long time tax preparers have dealt with the same fundamental issue centered on common-law marriages. Some states will consider a couple married who live together and present themselves as married. Other states do not. Thus depending on the state of residence, they may or may not be considered married for federal tax purposes (e.g., allowed to elect to file a joint return).
Similarly, if an unmarried couple lives together then one of the individuals might qualify to be a dependent of the other. But some states have laws prohibiting unmarried adults living together in a marriage-like relationship. Under federal law, tax benefits are not allowed if derived from an activity that violates the law. Thus couples living in those states which have laws against cohabitation may not claim that dependent tax deduction.
It is worth noting that being considered married is not always a benefit even though there are many advantages in the tax law. The Patient Protection and Affordable Healthcare Act (i.e., Obama-care) introduced new taxes that have a strong marriage penalty. (A surtax threshold is $200,000 for a single person but only $250,000 for a married couple.) The "fiscal cliff" bill (American Taxpayer Relief Act of 2012 passed in 2013) also institutes a marriage penalty in the boundary for a new highest tax bracket. There are also situations where being considered married will prevent a taxpayer from taking a tax deduction for contributions to a Traditional IRA or making a contribution to a Roth IRA.
The bottom line is that the rules of our tax system are never static. This court ruling gives us some changes, which likely can be applied retroactively to open years (generally 2010 and later) if an amended tax return will benefit the taxpayer. But there will certainly be many other changes yet to come in the year.
If you think that any of this might affect you, then I encourage you to meet with an Enrolled Agent or other licensed professional specializing in income taxes.
Many articles deal with the many things that will be changed as a result of the court's action. Authors report 1,000 to 1,400 changes that will be impacted by the court's action. I've no desire to compete with counting provisions, especially since some of those will not affect many couples. So I will address just tax issues in aggregate.
Without DOMA, federal tax law returns to looking to state law for how to treat couples. Thus if the state where the couple lives considers the couple married, then for federal tax purposes they will also be married. Conversely if a state does not recognize a marriage, then neither will federal tax law.
Some have reasonably asked about a same-sex couple who are married under the law in a state that has redefined marriage, and who then move to a state holding to the traditional and original definition of marriage, given to us thousands of years ago. Will the couple be considered married or not? The answer again lies in state law. Does the state where they now reside recognize any marriage granted by a different state? Some do, and some do not.
Note that this situation is not new to the tax world. For a long time tax preparers have dealt with the same fundamental issue centered on common-law marriages. Some states will consider a couple married who live together and present themselves as married. Other states do not. Thus depending on the state of residence, they may or may not be considered married for federal tax purposes (e.g., allowed to elect to file a joint return).
Similarly, if an unmarried couple lives together then one of the individuals might qualify to be a dependent of the other. But some states have laws prohibiting unmarried adults living together in a marriage-like relationship. Under federal law, tax benefits are not allowed if derived from an activity that violates the law. Thus couples living in those states which have laws against cohabitation may not claim that dependent tax deduction.
It is worth noting that being considered married is not always a benefit even though there are many advantages in the tax law. The Patient Protection and Affordable Healthcare Act (i.e., Obama-care) introduced new taxes that have a strong marriage penalty. (A surtax threshold is $200,000 for a single person but only $250,000 for a married couple.) The "fiscal cliff" bill (American Taxpayer Relief Act of 2012 passed in 2013) also institutes a marriage penalty in the boundary for a new highest tax bracket. There are also situations where being considered married will prevent a taxpayer from taking a tax deduction for contributions to a Traditional IRA or making a contribution to a Roth IRA.
The bottom line is that the rules of our tax system are never static. This court ruling gives us some changes, which likely can be applied retroactively to open years (generally 2010 and later) if an amended tax return will benefit the taxpayer. But there will certainly be many other changes yet to come in the year.
If you think that any of this might affect you, then I encourage you to meet with an Enrolled Agent or other licensed professional specializing in income taxes.
Friday, April 26, 2013
IRS Excessive Payments of Refunds
There is nothing new under the sun....
Earlier this week the Treasury Inspector General for Tax Administration (TIGTA) issued a report stating that the IRS issued undeserved refunds of between $11.6B and $13.6B for the Earned Income Tax Credit (EITC, or sometimes just EIC) in fiscal 2012. This is the only program that the IRS has identified as having improper-payment reporting. These erroneous refunds constitute between 21% and 25% of the total amount given out under the EITC program!
In spite of our federal financial problems, and the large tax gap that would address much of that fiscal problem, most members of Congress hold that the EITC program is working well! The purpose of the program is to provide additional incentive to unemployed or marginally employed to find work and earn more money. (Do we really have to provide incentives for people to earn money? Maybe those incentives are necessary if we provide for their needs without them having to work....)
But Congress does acknowledge that there are abuses in the system. As a revenue raising offset, Congress included in the US-Korea Free Trade Agreement Implementation Act a stiff penalty ($500 per tax return) for preparers who fail to ask for documentation to substantiate income and living situations for taxpayers receiving EITC and keep copies of those taxpayer's records (e.g., children's medical records) in the preparer's files. Congress also funded IRS audits of tax return preparation business to seek out situations for penalty assessment. Unfortunately, that net does not catch preparers who are not following other filing rules. Specifically, many preparers who regularly prepare fraudulent returns simply indicate that the return is "self-prepared" thus avoiding the visibility. Some have suggested that much of the fraud is from this group of preparers.
The TIGTA report also points out that the IRS is not in compliance with the Improper Payments Elimination and Recovery Act (IPERA) of 2010, which requires the IRS to make improvements in such areas. But I confess to having some sympathy for the IRS. It is a difficult situation to be in when your "boss" tells you to both jump left and jump right at the same time. The IRS is mandated by Congress to execute various welfare programs that they were not designed to implement. And they are also told to manage our nation's finances tighter. They are told to expedite the refund process and to improve the checking process before refunds are paid.
Soon the IRS will also be required to police our healthcare insurance system. More on that later....
For more information on the TIGTA report you can visit http://www.treasury.gov/tigta/press/press_tigta-2013-15.htm.
Earlier this week the Treasury Inspector General for Tax Administration (TIGTA) issued a report stating that the IRS issued undeserved refunds of between $11.6B and $13.6B for the Earned Income Tax Credit (EITC, or sometimes just EIC) in fiscal 2012. This is the only program that the IRS has identified as having improper-payment reporting. These erroneous refunds constitute between 21% and 25% of the total amount given out under the EITC program!
In spite of our federal financial problems, and the large tax gap that would address much of that fiscal problem, most members of Congress hold that the EITC program is working well! The purpose of the program is to provide additional incentive to unemployed or marginally employed to find work and earn more money. (Do we really have to provide incentives for people to earn money? Maybe those incentives are necessary if we provide for their needs without them having to work....)
But Congress does acknowledge that there are abuses in the system. As a revenue raising offset, Congress included in the US-Korea Free Trade Agreement Implementation Act a stiff penalty ($500 per tax return) for preparers who fail to ask for documentation to substantiate income and living situations for taxpayers receiving EITC and keep copies of those taxpayer's records (e.g., children's medical records) in the preparer's files. Congress also funded IRS audits of tax return preparation business to seek out situations for penalty assessment. Unfortunately, that net does not catch preparers who are not following other filing rules. Specifically, many preparers who regularly prepare fraudulent returns simply indicate that the return is "self-prepared" thus avoiding the visibility. Some have suggested that much of the fraud is from this group of preparers.
The TIGTA report also points out that the IRS is not in compliance with the Improper Payments Elimination and Recovery Act (IPERA) of 2010, which requires the IRS to make improvements in such areas. But I confess to having some sympathy for the IRS. It is a difficult situation to be in when your "boss" tells you to both jump left and jump right at the same time. The IRS is mandated by Congress to execute various welfare programs that they were not designed to implement. And they are also told to manage our nation's finances tighter. They are told to expedite the refund process and to improve the checking process before refunds are paid.
Soon the IRS will also be required to police our healthcare insurance system. More on that later....
For more information on the TIGTA report you can visit http://www.treasury.gov/tigta/press/press_tigta-2013-15.htm.
Wednesday, March 20, 2013
IRS to Waive Failure-to-Pay Penalty
Today the IRS issued notice concerning the failure-to-pay penalty that is assessed if we do not have our tax bill paid by April 15. This penalty is normally assessed even if the tax return is extended. This is because an extension is an extension to file, but not an extension to pay the tax due. That penalty is 0.5% of the amount due for each month or fraction there-of that payment is late.
This year has been difficult for most taxpaying citizens. Due to late changes in the 2012 tax law that didn't happen until January 2, 2013, no one could file taxes until late January. A large percentage of taxpayers could not file their taxes until roughly the first of March. The hold-up was not just the ability to file the return, but in some cases even to calculate the return. While a taxpayer could assemble their documentation on time, we tax return preparers were held up - and now dumped on!
So what is the relief? Taxpayers may not have to pay that penalty if they meet all of the following conditions:
In all, that is a nice thing. And believe it or not, such nice things from the IRS are not that rare.
This post is based on early information and will be updated if corrections are required.
This year has been difficult for most taxpaying citizens. Due to late changes in the 2012 tax law that didn't happen until January 2, 2013, no one could file taxes until late January. A large percentage of taxpayers could not file their taxes until roughly the first of March. The hold-up was not just the ability to file the return, but in some cases even to calculate the return. While a taxpayer could assemble their documentation on time, we tax return preparers were held up - and now dumped on!
So what is the relief? Taxpayers may not have to pay that penalty if they meet all of the following conditions:
- The tax return includes one of the 30 forms or schedules that were delayed.
- An extension is filed for the tax return.
- The extension includes an estimate of the ultimate tax liability.
- The estimated tax liability due is paid by April 15 based on the application for extension.
- The final additional tax liability is paid by the extension due date (October 15 for individual filers).
In all, that is a nice thing. And believe it or not, such nice things from the IRS are not that rare.
This post is based on early information and will be updated if corrections are required.
Monday, January 21, 2013
Fiscal Cliff Hits 2012
I have had people say to me: The fiscal cliff items are really all 2013, aren't they? The answer is that they are not. There are a number of items that changed 2012 retroactively, and thus the delay in our ability to file our tax returns (again) this year. Here's a list of 2012 items:
Individual Items
Individual Items
- Direct contributions to charity from an IRA is not treated as income, not deductible, but satisfies the RMD [IRC §408(d)]
- Option to deduct state sales tax instead of state income tax [IRC §164(b)(5)]
- Reduction in income for college tuition and related expenses paid [IRC §222]
- Educator expenses up to $250 [IRC §62(a)(2)(D)]
- Mortgage insurance premium treated as mortgage interest (potentially allowing it to be deducted from income) [IRC §163(h)]
- Higher limits for excluding income from employers for mass-transit and parking benefits [IRC §132(f)]
- Contributions of qualified real property to an organization for the purposes of conservation [IRC §170(b)(1)(E)]
- Treatment of certain dividends on regulated investment companies (e.g., mutual funds) for nonresident alien individuals [IRC §871(k)]
- Restored ability to directly expense capital expenditures back to $500,000 [IRC §179]
- Changes can be made to an election to use IRC §179 on a timely-filed amended return
- Off-the-shelf software can be expensed under IRC §179
- Allows use of IRC §179 up to $250,000 for qualified real property including [IRC §179(f)(1)]:
- Qualified leasehold improvements defined under IRC §168(e)(6)
- Qualified restaurant property defined under IRC §168(e)(7)
- Qualified retail improvement property defined under IRC §168(e)(8)
- Extends the period for acquisition of certain qualified small business stock that will have capital gains excluded if held 5 years (does not directly affect 2012 tax returns) [IRC §1202]
- Rules for adjusting basis of stock in a Sub-chapter S corporation related to charitable contributions [IRC §1367(a)(2)]
- Indian employment credit [IRC §45A]
- New markets tax credit [IRC §45D]
- Railroad track maintenance credit [IRC §45G]
- Mine rescue team training credit [IRC §45N]
- Employer wage credit for employees who are active duty members of the uniformed services [IRC §45P]
- Work opportunity tax credit (for non-veterans) [IRC §51]
- Qualified zone academy bonds [IRC §54E]
- Accelerated depreciation for business property on Indian reservations [IRC §168(j)]
- Enhanced charitable deduction for contributions of food inventory [IRC §170(e)]
- Election to expense advanced mine safety equipment [IRC §179E]
- Election for special expensing of certain qualified film and television productions [IRC §181]
- Deduction for specific income related to domestic production activities in Puerto Rico [IRC §199(d)]
- Modification of the tax treatment for certain payments received from controlled entities as it relates to unrelated business taxation [IRC §512(b)(13)]
- Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act [IRC §897(h)]
- Extension of exception for active financing income [IRC §953(e)]
- Treatment of payments between related foreign corporations [IRC §954]
- Empowerment Zone tax incentives [IRC §1391]
- Tax-exempt financing for the New York Liberty Zone [IRC §1400L]
- Temporary increase in limits related to the rum excise tax for Puerto Rico and the Virgin Islands [IRC §7652(f)]
- Extensions related to the American Samoa economic development credit
Tuesday, January 1, 2013
Fiscal Cliff Modified
About 2 hours ago the House in Congress voted to pass the fiscal bill that originated in the Senate. It certainly does not address everything, and there is plenty of work still to be done. But this blog is not intended to be a political platform, but general information on taxes.
The bill is over 150 pages in length and contains 104 major sections, some of which address more than one tax issue. This blog will not address all of these. Or most of these. Or even a fair minority. But here are some key points that affect a lot of individuals.
The bill is over 150 pages in length and contains 104 major sections, some of which address more than one tax issue. This blog will not address all of these. Or most of these. Or even a fair minority. But here are some key points that affect a lot of individuals.
- Two years ago Congress made a temporary adjustment to the payroll tax that employees pay, reducing the amount by 2%. That was extended for 2012 as the economy was still hurting. This temporary item has expired and was not extended. Some will lament this is a 2% tax increase, while others will acknowledge that a temporary reduction simply expired.
- AMT is a nasty tax issue that hits only the middle class. While it would be best if this simply went away, at least the annual "patch" was done with indexing for inflation. Finally there will be less ambiguity for those who attempt to create a tax strategy for the year. This will still hit some, but the conditions are now well understood by tax professionals.
- The Child Tax Credit is extended for 5 years (through 2017). That leaves the credit at $1000 per child per year through age 16. There are phase-out factors still.
- There are tax rate increases for those with Adjusted Gross Income over $400,000 ($450,000) for married but those details are too extensive to be treated here. Same for the return of certain phase-outs on itemized deductions and personal exemptions.
- Reduced long-term capital gain rates are extended for those with incomes below $400,000 ($450,000 if married). This too provides for some potential tax planning for some taxpayers.
- The deduction for college tuition was extended through 2013.
- The American Opportunity Tax Credit (replaced the Hope Credit for college tuition) is extended for 5 years (through 2017).
- School teachers expense deduction was extended through 2013.
- The treatment of mortgage insurance as interest was extended through 2013.
- The deduction of state and local sales taxes in place of state income taxes was extended through 2013.
- The ability to exclude from taxable income the debt discharged related to acquisition indebtedness on a principle residence was extended through 2013. (No surprise on this one!)
- The ability to make charitable contributions directly from an IRA and not have to claim the distribution as income (nor does one get to claim the contribution) was extended through 2013. Furthermore there are provisions to assist taxpayers who desired this but may not have done it "by the book." There is even a provision to do this in January 2013 as a 2012 act. This indicates a very favorable attitude of Congress toward this tax provision.
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