Tax Tips for Newlyweds

Looking for a gift to give after all those June weddings? How about some solid tax tips for the newlyweds?

Taxes may not be top-of-mind for most new couples, but there are some important tax issues they should be aware of, so the IRS put together the following set of tips..

  • New names? Whether one of the spouses takes the other’s name or not, the names and Social Securities on their tax return must match their Social Security Administration records – so if any names are changed, they’ll need to report it to the SSA with Form SS-5, Application for a Social Security Card. The form is available on www.ssa.gov, or by calling (800) 772-1213.
  • Congratulations – you’re in a new bracket! The spouses’ new marital status needs to be reported to their employers on a new Form W-4, Employee’s Withholding Allowance Certificate. And the IRS was quick to point out that the new couple’s combined income may move them into a higher tax bracket.
  • Yes, there’s an Obamacare angle. If either spouse bought a Health Insurance Marketplace plan got an Advanced Premium Tax Credit this year, they need to report any changes in circumstance, like income or family size. They should also alert their Marketplace is they moved out of its area.
  • Crossing the threshold. If either of the newlyweds is moving, they’ll want to let the IRS know, with Form 8822, Change of Address. (They should probably also let the Post Office know, too.) Don’t make them come looking.
  • Married? Filing jointly? If the couple is married as of December 31, that’s their marital status for the whole year for tax purposes – and that means they need to decide whether to file jointly or separately. Which one is better depends on the couple’s individual circumstances, so they’ll want to check out both possibilities.
  • New forms. Combined financial lives may mean a higher tax bracket, but they can also mean more benefits from itemizing – which would mean claiming those deductions on a Form 1040, as opposed to a 1040A or 1040EZ. This would be a good area for a friendly tax advisor to offer some advice …
  • More IRS resources. The tax services offers a host of resources for new couples, including videos (like this one on “Getting Married”) and more. No need to send them a thank-you card.

originally written BY DANIEL HOOD for accountingtoday.com

Tax Savings from a Home Office

With more and more people expected to be self-employed and working from home, knowing the ins and outs of the home office deduction can make all the difference between a refund – or an audit.

Following are a number of helpful tips to help home-business-owners (and their advisors) be sure they’re getting everything back that they can.

Business-only
One of the most important things to be sure of before you try to claim the deduction is that some part of the home has to be exclusively and regularly used as the principal place of business. A mixed-use area, like a kitchen, won’t qualify.

The simplified option
Self-employed folks with an office in their home don’t need to do a lot of calculations and add up all their home-office-related expenses – the IRS now offers a simplified option based on the size of the office: You take a standard deduction of $5 per square foot of workspace, up to 300 square feet.

You can go with individual expenses or the simplified option, whichever is larger, and you can change from year to year.

Common deductions
Some of the business owner’s heating, electric and utility bills can be deducted, and phone, Internet and other information services may qualify, too. Note that separate Internet connections and phone numbers can help keep track of expenses.

An office isn’t an office without office supplies — which is why computers, printers, toner, paper, paper clips, staplers, staples, staple removers and other critical equipment may also qualify.

Furniture and upgrades to the home itself, if related to the office, may also be deductible.

Leaving home
Many of those with home offices will find themselves travelling for business purposes – even if it’s just driving across town to a client. Parking, tolls and mileage (at 54 cents a mile for business-related travel) may all be deductible, to say nothing of airfare and hotel rooms.

Record-keeping
The IRS recommends keeping expense records for at least three years after filing. Among the records home-business-owners should be holding onto are cancelled checks, bank statements, vendor invoices, bills, receipts and mileage logs.

More information on having a home office is available in IRS Publication 587.

originally written BY DANIEL HOOD for accountingtoday.com

Summer Tax Tips for You and Your Children


The summer has started and summer camp bills have been paid. Summer camp is a great way to keep our children busy and looked after while we are working. But it comes at a steep price.
Summer camp costs are, on average, about $300 per week. And for our children who are graduating from high school, we are looking at college tuition fees coming due this August ranging from an average of $9,139 (for state residents at public colleges) to $31,231 (private college). There are some tax advantaged ways, though, to help pay these expenses.

The Child and Dependent Care Credit might be useful if a parent pays for camp for his or her children while working or looking for work. As the IRS points out in its Special Edition Tax Tip 2016-10, for the expenses to qualify, certain conditions must be met:

1. Care for qualifying persons. The expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify. Publication 503, Child and Dependent Care Expenses, contains more information.

2. Work-related expenses. The expenses for care must be work-related. This means taxpayers must pay for the care so they can work or look for work. This rule also applies to the taxpayer’s spouse if they file a joint return. Spouses meet this rule during any month they are full-time students. Spouses also meet it if they are physically or mentally incapable of self-care.

3. Earned income required. The taxpayers must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. A taxpayer’s spouse must also have earned income if they file jointly. Spouses are treated as having earned income for any month they are full-time students or incapable of self-care. This rule also applies to the taxpayer if they file a joint return. Refer to Publication 503 for more details.

4. Joint return if married. Generally, married couples must file a joint return. A parent can still take the credit, however, if the parents are legally separated or living apart.

5. Type of care. Expenses may qualify for the credit whether the care takes place at home, at a daycare facility or at a day camp.

6. Credit amount. The credit is worth between 20 and 35 percent of the allowable expenses. The percentage depends on the amount of the taxpayers’ income.

7. Expense limits. The total expense that can be used in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

8. Certain care does not qualify. Expenses do not include the cost of certain types of care, including:
• Overnight camps or summer school tutoring costs.
• Care provided by a spouse or a sibling who is under age 19 at the end of the year.
• Care given by a person whom the taxpayer can claim as a dependent.

Keep records and receipts. Taxpayers should keep all receipts and records for when they file tax returns next year. Taxpayers will need the name, address and taxpayer identification number of the care provider. Taxpayers must report this information when they claim the credit on Form 2441, Child and Dependent Care Expenses.

Dependent care benefits. Special rules apply if taxpayers get dependent care benefits from their employer. See Publication 503 for more on this topic.

Remember, this credit is not just a summer tax benefit. Taxpayers may be able to claim it for qualifying care paid for at any time during the year.

529 Plans
As for college, 529 plans have become very popular. At the end of 2012, over $166 billion was invested in the various state plans. While each state provides different tax benefits for its plan, on the federal level all plans are treated the same. Contributions are made after tax, earnings grow tax-deferred, and distributions are tax free if used for qualifying higher education expenses.
Qualifying higher education expenses include:
1. Tuition and fees as required for enrollment.
2. Books, supplies, computers and other equipment required for enrollment.
3. Expenses for special needs services for a special needs beneficiary (which must be incurred in connection with enrollment or attendance at an eligible educational institution).
4. Expenses for room and board, but only for students who are enrolled at least half-time. The room and board expense qualifies only to the extent that it is not more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

The taxpayer must contact the eligible educational institution for qualified room and board costs.
But distributions not used for qualifying higher education expenses are subject to tax—the previously untaxed portion of the distribution is taxed at the owner’s ordinary income tax rate plus a 10 percent additional tax. The 10 percent penalty is waived if a distribution is made:
1. Due to the death, impending death or long-term disability of the account’s designated beneficiary.
2. After the designated beneficiary receives a tax-free scholarship or fellowship grant; veterans’ educational assistance; employer-provided educational assistance; any other nontaxable payment (other than a gift or inheritance) received as educational assistance.
3. Because the designated beneficiary is attending a U.S. military academy.
4. Only because it is included in income because the qualified education expenses were taken into account in determining the American Opportunity Tax Credit (AOTC) or lifetime learning credit.
The Child and Dependent Care Credit and 529 Plan rules are complex, and this article only provides an outline of the requirements needed to take advantage of them. Both summer camp and college are significant investments. Enjoy the summer and tax clients should speak to their accountant or lawyer to make sure they can enjoy these savings.

Originally written BY MICHAEL SONNENBLICK for accountingtoday.com

Year-End Tax-Planning for Businesses & Business Owners for 2015

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later).

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

  • Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’ worth of depreciation deductions in 2015
  • Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015.
  • A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income.
  • If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.
  • To reduce 2015 taxable income, if you are a debtor, consider deferring a debt-cancellation event until 2016.
  • To reduce 2015 taxable income, consider disposing of a passive activity in 2015 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks to assure that you don’t miss out on any resuscitated tax-saving opportunities.

Year-end Planning: Reducing Exposure to the 3.8% Surtax on Unearned Income

General background – Certain unearned income of individuals, trusts, and estates is subject to a surtax (i.e., it’s payable on top of any other tax payable on that income). The surtax, also called the “unearned income Medicare contribution tax” or the “net investment income tax” (NIIT), for individuals is 3.8% of the lesser of:

  • net investment income (NII), or
  • the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

MAGI is adjusted gross income (AGI) plus any amount excluded as foreign earned income (net of the deductions and exclusions disallowed with respect to the foreign earned income).

For an estate or trust, the surtax is 3.8% of the lesser of (1) undistributed NII or (2) the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

For 3.8% surtax purposes, NII is investment income (see below) less deductions properly allocable to such income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in NII.

Investment income is:

  • gross income from interest, dividends, annuities, royalties, and rents, unless derived in the ordinary course of a trade or business to which the 3.8% surtax doesn’t apply,
  • other gross income derived from a trade or business to which the 8% surtax contribution tax does apply, and
  • net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the Medicare contribution tax doesn’t

The 3.8% surtax applies to a trade or business only if it is a Code Sec. 469 passive activity of the taxpayer or a trade or business of trading in Code Sec. 475(e)(2) financial instruments or commodities. Investment income doesn’t include amounts subject to self-employment tax, distributions from tax-favored retirement plans (e.g., qualified employer plans and IRAs), or tax-exempt income (e.g. earned on state or local obligations).

The surtax doesn’t apply to trades or businesses conducted by a sole proprietor, partnership, or S corporation (but income, gain, or loss on working capital isn’t treated as derived from a trade or business and thus is subject to the tax).

Gain or loss from a disposition of an interest in a partnership or S corporation is taken into account by the partner or shareholder as NII only to the extent of the net gain or loss that the transferor would take into account if the entity had sold all its property for fair market value immediately before the disposition.

Overview of year-end strategies – As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than unearned income, and others will need to consider ways to minimize both NII and other types of MAGI.

  • Illustration 1 – For 2015, Joan, a single taxpayer, estimates she will have MAGI of $200,000, consisting of $180,000 of salary and non-investment earnings and $20,000 of NII. Since Joan’s MAGI is not above the level that would subject her to the 8% surtax, her year-end strategy for the surtax will be to avoid-if feasible, from the investment and practical viewpoint-realizing any additional income before the end of the year that will cause her to be subject to the surtax.
  • Illustration 2 – Assume the same facts as in the first illustration, except that Joan’s MAGI will include

$200,000 of salary and non-investment earnings plus $20,000 of NII. Since all of her NII of $20,000 is now subject to the surtax, she should try to avoid, to the extent possible, having any additional NII for the balance of the year since any additional NII will also be subject to the surtax.

  • Observation – Since, in illustration (2), all of Joan’s NII of $20,000 will be subject to the surtax, an increase in income other than NII will have no effect on the amount of her NII that is subject to the
  • Illustration 3 – In January of 2015, Jack, a single, self-employed taxpayer, sold investment land for a

$100,000 gain and does not anticipate selling any other investments during the balance of this year. He won’t have other NII. He estimates that he will have $100,000 of self-employment earnings and other non-investment-income for the year. Thus, Jack will be exactly at the $200,000 threshold for single taxpayers. He should, to the extent feasible and practical, defer additional amounts of earned income over $100,000 to 2016, as every additional dollar of earnings over that sum will expose a dollar of his $100,000 NII to the 3.8% surtax. For example, if he gets extra business toward the end of the year, Jack should consider deferring some of his billings until after year-end.

Re-examine passive investment holdings – The 3.8% surtax applies to income from a passive investment activity, but not from income generated by an activity in which the taxpayer is a material participant. One subject a “passive” investor should explore with a tax adviser knowledgeable in the passive activity loss (PAL) area is whether it would be possible (and worthwhile) to increase participation in the activity before year-end so as to qualify as a material participant in the activity.

In general, a taxpayer establishes material participation by satisfying any one of seven tests, including: participation in the activity for more than 500 hours during the tax year; and participation in the activity for more than 100 hours during the tax year, where the individual’s participation in the activity for the tax year isn’t less than the participation in the activity of any other individual (including individuals who aren’t owners of interests in the activity) for the year. Special rules apply to real estate professionals.

  • Caution – Becoming a material participant in an income-generating passive activity wouldn’t make sense if the taxpayer also owns another passive investment that generates losses that currently offset income from the profitable passive

Taxpayers that own interests in a number of passive activities also should re-examine the way they group their activities. A taxpayer may treat one or more trade or business activities or rental activities as a single activity (i.e., group them together) if based on all the relevant facts and circumstances the activities are an appropriate economic unit for measuring gain or loss for PAL purposes. A number of special “grouping” rules apply. For example, a rental activity can’t be grouped with a trade or business activity unless the activities being grouped together are an appropriate economic unit and a number of additional tests are met. And real property rentals and personal property rentals (other than personal property rentals provided in connection with the real property, or vice versa) can’t be grouped together.

Once the taxpayer has grouped activities, he can’t regroup them in later years, unless a one-time-only “fresh-start” regrouping is allowed. But if a material change occurs that makes the original grouping clearly inappropriate, he must regroup the activities.

Use the installment method to spread out taxable gain on a sale. The entire profit from a sale ordinarily is taxable in the year of sale. But by making a sale this year with part or all of the proceeds payable next year or later, a non-dealer seller becomes taxable in any year on only that proportion of his profit which the payments he receives that year bear to the total sale price. The installment method can be a useful way to spread out gain and thereby avoid or minimize a taxpayer’s exposure to the 3.8% surtax.

Another advantage of installment reporting is that it can give the seller an important degree of hindsight in deciding whether to throw profit into 2015 or 2016. An individual who makes a qualifying sale in 2015 has until the due date of his 2016 return (including extensions) to decide whether to elect out of installment reporting and report his entire profit in 2015 or to defer that part of the gain attributable to payments to be received in later years. A problem here is that regardless of how the seller elects, the buyer will still be paying for the property in installments. If the installment method isn’t used, the seller will be paying taxes in the year of sale on income that won’t be received until a later year or years.

Use a like-kind exchange to defer gain recognition to a low-NII year. Under the like-kind exchange rules, if specific identification and replacement period requirements set forth in Code Sec. 1031 are met, gain or loss is not currently recognized on the exchange of property held for productive use in a trade or business or for investment for property of like-kind that will be held for productive use in a trade or business or for investment. Qualified intermediaries (QIs) and multiparty deferred exchanges may be used to structure like-kind exchanges, allowing greater flexibility in qualifying for income deferral.

A like-kind exchange may be appropriate for a taxpayer who wants to realize a gain on investment property this year, but defer gain recognition until a later year when his MAGI isn’t likely to exceed the applicable threshold. The taxpayer realizes the gain on the relinquished property this year, and recognizes the gain in a later year when he sells the like-kind property he receives in exchange for the relinquished property.

Adjust the timing of a home sale. When a taxpayer sells a home he has owned and used as a principal residence for at least two of the five years before the sale, he may exclude up to $250,000 in capital gain if single, and

$500,000 in capital gain if married. Gain on a sale in excess of the excluded amount will increase NII and net capital gain. And if taxpayers sell a second home (vacation home, rental property, etc.) at a profit, they pay taxes on the entire capital gain and all of it will be NII potentially subject to the 3.8% surtax.

It should be noted that the non-excluded portion of a home sale gain also increases a taxpayer’s MAGI. Thus, the taxable portion of a home sale may cause a taxpayer to exceed the threshold amount, subject part or all of the taxable home sale gain to the 3.8% surtax, and expose other NII to the 3.8% surtax.

  • Recommendation – A taxpayer who expects to realize a gain on a principal residence substantially in excess of the applicable threshold, and is planning to sell either this year or the next, should try to fine-tune the timing of the sale so as to minimize the gain’s exposure to the 3.8% surtax, and reduce his overall tax
  • Illustration 4 – A married couple will earn a combined salary of $290,000 for 2015. They plan to retire and move to a sunnier climate next Their combined earnings for 2016 won’t exceed $150,000. They plan to sell their principal residence for $1.2 million, and should net a gain of about $700,000, of which $500,000 will be excluded.

If they sell this year, they’ll have more than $464,850 of taxable income and will wind up in the top tax bracket (39.6%). Additionally, they will pay a $7,600 surtax (3.8%) and at least part of their $200,000 capital gain will be subject to a 20% tax. If they can wait until next year to sell at around the same price, and have no other gains or losses or other investment income, then only $100,000 of their home-sale gain will face the 3.8% surtax. The surtax equals $3,800, namely 3.8% of the lesser of (a) $200,000 NII; or (b) $100,000 (excess of $200,000 NII +

$150,000 of other gross income over the $250,000 threshold for marrieds filing jointly). Additionally, all of their capital gain on the home sale likely will be subject to a 15% tax.

Recognize losses to offset earlier gains – As year-end approaches, one way to reduce NII is to recognize paper losses on stocks and use them to offset other gains taken earlier this year. What if the taxpayer owns stock showing a paper loss that nonetheless is an attractive investment worth holding onto for the long term? There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the so-called “wash sale” rule precludes recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale). However, a taxpayer can substantially preserve an investment position while realizing a tax loss by using one of several techniques, such as buying more of the same stocks or bonds, then sell the original holding at least 31 days later, or selling the original holding and then buying the same securities at least 31 days later.

Use Roth IRAs instead of traditional IRAs – The 3.8% surtax makes Roth IRAs look like a more attractive alternative for higher-income individuals. Qualified distributions from Roth IRAs are tax-free and thus won’t be included in MAGI or in NII. By contrast, distributions from regular IRAs (except to the extent of after-tax contributions) will be included in MAGI, although they will be excluded from NII.

In general, a qualified distribution from a Roth IRA is one made: (a) after the 5-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for the taxpayer’s benefit); and (b) on or after he attains age 591/2; because of death or disability; or to buy, build, or rebuild the taxpayer’s first principal residence. As a bonus, Roth IRA owners do not have to take required minimum distributions (RMDs) during their lifetimes (Roth beneficiaries must, however, take required distributions from the account).

  • Recommendation – Higher-income employees should use designated Roth accounts if their retirement plans offer this option. A designated Roth is a separate account in a Code Sec. 401(k) , Code Sec. 403(b) , or Code Sec. 457 plan to which an employer allocates an employee’s designated Roth contributions and their gains and Instead of making elective, pre-tax contributions to his regular account, the employee directs that part or all of the contribution be made to a nondeductible designated Roth account within the plan. When a designated Roth account is set up within a Code Sec. 401(k) plan, it’s called a Roth 401(k). Note that unlike regular Roths, where contributions can’t be made by higher-income individuals, there is no income limitation on annual contributions to a designated Roth. Workers of all income levels are eligible to contribute to such retirement accounts.

Time conversions to a Roth IRA – Taxpayers who are thinking of converting regular IRAs to Roth IRAs this year should do so with care, as the move will increase MAGI, and therefore potentially expose – or expose more of – their NII to the 3.8% surtax. Some suggestions:

  • If possible, time conversions so as to keep MAGI below the applicable threshold
  • If the MAGI dollar threshold will be exceeded in any event, delay the conversion until next year if there is substantial NII this year but there will be low or no NII next Or do the reverse – accelerate a conversion into this year if there is low or no NII in 2015 but there is likely to be substantial NII in 2016.

Timing considerations for required minimum distributions – For the 3.8% surtax purposes, investment income doesn’t include distributions from tax-favored retirement plans, such as qualified employer plans and IRAs. But MAGI does include taxable distributions from qualified employer plans and IRAs, including required minimum distributions (RMDs) from qualified plans and IRAs.

Taxpayers nearing their MAGI threshold, or who already exceed it because of other income, may have an opportunity to plan RMDs to avoid exposing their NII to the 3.8% surtax. For example, taxpayers who attain age 701/2 in 2015 may delay taking their first RMD (i.e., for 2015) until their required beginning date of Apr. 1, 2016. This would be advisable where taking the first distribution in 2015 will cause the distributee’s MAGI to exceed the threshold amount that triggers the 3.8% surtax on NII, but deferring the distribution until next year will not have the same effect because the distributee’s income from other sources will be much lower. However, when deciding if deferring the first RMD makes sense, note that doing so does not absolve the taxpayer from making an RMD for the second distribution year (i.e., for 2016).

Overview Of Tax-Saving Moves For The Rest Of 2015

Year-end tax planning for 2015 must take account of the many important “temporary” tax provisions that have expired and may not be retroactively reinstated and extended before year-end (if they are extended at all). They include: the election to claim sales and use taxes as an itemized deduction instead of state income taxes; charitable distributions from IRAs for those age 70-1/2 and older; bonus first-year depreciation deductions for qualifying new purchases; and generous expensing limits. The key expired provisions are covered in this Tax Planning & Practice Guide, along with year-end planning moves to cope with the uncertainty they cause.

Effective year-end tax planning also must take into account each taxpayer’s particular situation and planning goals, with the aim of minimizing taxes. For example, higher income individuals must consider the effect of the 39.6% top tax bracket, the 20% tax rate on long-term capital gains and qualified dividends for taxpayers taxed at a rate of 39.6% on ordinary income, the phaseout of itemized deductions and personal exemptions when income is over specified thresholds, and the 3.8% surtax (Medicare contribution tax) on net investment income for taxpayers whose income exceeds specified thresholds (which are lower than the thresholds at which the phase-out of itemized deductions and personal exemptions begins).

While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, should consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up his business’s billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2015 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.

Inflation adjustments to rate brackets, exemption amounts, etc. – For both 2015 and 2016, some individuals will benefit from inflation adjustments in the thresholds for applying the income tax rates, higher standard deduction amounts, and higher personal exemption amounts.

Capital gains – Long-term capital gains are taxed at a rate of (a) 20% if they would be taxed at a rate of 39.6% if they were treated as ordinary income, (b) 15% if they would be taxed at above 15% but below 39.6% if they were treated as ordinary income, and (c) 0% if they would be taxed at a rate of 10% or 15% if they were treated as ordinary income. And, the 3.8% surtax on net investment income may apply.

Low-taxed dividend income Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. Converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income. However, the 3.8% surtax on net investment income may apply.

Traditional IRA and Roth IRA year-end moves – One can convert traditional IRAs to Roth IRAs. And, one can then recharacterize such a conversion and can even, possibly, reconvert the recharacterized transaction.

Expensing deduction – Unless Congress changes the rules, for qualified property placed in service in tax years beginning in 2015, the maximum amount that may be expensed is $25,000, and the beginning-of-phaseout amount is $200,000. In earlier years, the dollar limit was $500,000 and the beginning-of-phaseout amount was $2 million. However, despite what Congress does (or doesn’t do), some businesses may be able to buy much-needed machinery and equipment at year-end and currently deduct the cost under a “de minimis” safe harbor election in the capitalization regs.

First-year depreciation deduction – Unless Congress extends Code Sec. 168(k), property bought and placed in service in 2015 (other than certain specialized property) no longer qualifies for the 50% bonus first-year depreciation deduction. However, because of the half-year convention that generally applies in the computation of cost recovery deductions for property (other than real property) first placed in service during the current tax year, year-end purchases of depreciable property can achieve tax savings even if bonus depreciation is not extended. Under the half-year convention, a business asset placed in service at any time during the tax year-even in the final days-is generally treated as having been placed in service in the middle of that year.

Deduction for qualified production activities income – Taxpayers can claim a deduction, subject to limits, for 9% of the lesser of (1) the taxpayer’s “qualified production activities income” for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or (2) the taxpayer’s taxable income for that tax year. This deduction generally has the effect of a reduction in the taxpayer’s marginal rate and, thus, should be taken into account when making decisions regarding income shifting strategies.

Changes in individual’s tax status may call for acceleration of income – Changes in an individual’s tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered.

Alternative minimum tax (AMT) – Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not save taxes if the taxpayer is subject to the AMT.

Time value of money – Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

Estimated tax – For how the estimated tax rules can be affected when taxable income is shifted from one tax year to another.

Obstacles to deferring taxable income – The Code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain taxpayers use the accrual method, and limitations on the deduction of investment interest.

Charitable contributions – The timing of charitable contributions can have an important impact on year-end tax planning. Note that in earlier years (but not 2015, unless Congress extends this tax break), individual taxpayers who are at least 70-1/2 years old could contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduced their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. As explained, some taxpayers who would take advantage of this tax break for this year, if it were extended, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2015.

Net operating losses and debt cancellation income – A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. Also, a debtor who anticipates having the debt cancelled or debt reduced should consider steps to defer the resulting taxable income until 2016.

The Saver’s Credit

Under Code Sec. 25B, a low-income taxpayer can claim a tax credit for a portion of the amounts contributed to an individual retirement account, 401(k) plan, or other retirement plan. A credit is allowed for up to $2,000 of contributions to qualified retirement savings plans. The maximum credit is $1,000 for individuals and $2,000 for married couples. A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. However, the percentage of contributions for which the credit is allowed decreases depending on the individual’s adjusted gross income.

The credit is also reduced for any distributions from qualified retirement plans that the taxpayer, or the taxpayer’s spouse if they file a joint return, has received during the tax year, the previous two tax years, or the period of the following year before the due date for the return on which the return is filed, including extensions. A taxpayer can claim the credit in addition to any other deduction or exclusion that would apply to the contribution. Contributions for which the credit is claimed are treated as after-tax contributions and can be included in the taxpayer’s investment in the contract, thus reducing the amount of income included in distributions from the retirement plan.

Eligible Individuals

The saver’s credit is available for any individual, other than a full-time student, who is age 18 or over at the close of the tax year, provided the individual is not claimed as a dependent for the same tax year. The credit is not available for single taxpayers or married taxpayers filing separately with adjusted gross income (AGI) more than $30,000 for 2014, and $30,500 for 2015; heads of households with AGI more than $45,000 for 2014, $45,750 for 2015; or married taxpayers filing jointly with AGI more than $60,000 for 2014, $61,000 for 2015.

The AGI limits are adjusted annually for inflation. The AGI amounts for single taxpayers are one-half the indexed amounts for married taxpayers filing a joint return, and the limits for heads of households are three-fourths the indexed amounts for married taxpayers filing a joint return. These amounts are adjusted for inflation.

Amount of Credit

The saver’s credit is equal to a percentage, ranging from 50 percent to 0, depending on adjusted gross income (AGI), of the individual’s qualified retirement savings contributions for the tax year, up to a maximum amount of contributions of $2,000. For married taxpayers filing jointly, contributions up to $2,000 a year for each spouse can give rise to the saver’s credit.

Claiming the Credit

Taxpayers claim the saver’s credit on Form 8880, Credit for Qualified Retirement Savings Contributions, and attach the form to their Form 1040 or 1040A. The instructions for the form indicate how to calculate the credit. The saver’s credit is a non-refundable personal credit. Thus, the amount of the credit is limited by the taxpayer’s tax liability. Taxpayers can also take a projected saver’s credit into account in figuring the allowable number of withholding allowances claimed on Form W-4, Employee’s Withholding Allowance Certificate.  Call our offices if you have questions — (636) 946-2800.

 

How Does a Taxpayer File an Amended Tax Return?

A taxpayer discovers an error after filing his or her income tax return.  A change in filing status, income, deductions, or credits would require an amended return. So how does a taxpayer file an amended tax return? This could happen, for example, if an investment broker sends a corrected Form 1099 that changes the amount of dividends or capital gains earned by the taxpayer. Or a taxpayer who sold stock may recalculate the basis of the stock for determining gain or loss. A taxpayer amending his or her federal income tax return may also need to amend a state tax return, to reflect the change or correction.

An amended return would be needed if a partnership sends a corrected Schedule K-1 showing the amount of income or losses earned by the partnership. This could also happen if the partnership is slow to provide Schedule K-1 to its owners or beneficiaries, and the taxpayer files an income tax return before receiving the K-1.

Form 1040X

Taxpayers use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended return. Form 1040X can be used to change a previously filed Form 1040, 1040A, or 1040EZ. Form 1040X cannot be filed electronically; the instructions for Form 1040X indicate where to file the form. Taxpayers should file a separate Form 1040X for each year being amended, and mail each form in a separate envelope.

At the top of the form, the taxpayer should enter the year of the return being amended. Form 1040X has three columns for reporting the change or correction. Column A is used to show the amount(s) reported on the original return. Column C shows the corrected figures. Column B shows the difference between Columns A and C. On the back of the form is an area where the taxpayer can explain the specific changes being made and the reason for each change. The taxpayer should attach a copy of any form or schedule that is affected by the change.

Refund Deadline

To claim a refund, a taxpayer must file Form 1040X within three years after the date the original return was filed, or within two years after the date the tax was paid, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date. The IRS indicates that it may take up to 16 weeks to process an amended return.

For help on this issue and more, contact our office at (636) 946-2800.

How the IRS Resolves an Identity Theft Case

The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS’s resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.

Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.

Initiating an ID theft case

A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer’s name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.

For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.

The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.

Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer’s Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.

IDVerify.irs.gov

The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.

Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.

Resolving the case

After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent “Identity Theft Case Review Report” on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.

After resolution

The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must enter on their tax return instead.

The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.

Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.

Latest breach

The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS’s online “Get Transcript” application and illegally download these taxpayers’ tax transcripts. The IRS is concerned that the criminals intend to use taxpayers’ past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS’s filters for finding suspicious returns.

Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS’s expense, Koskinen stated.

IRS Requires Substantiation for Donations to Charity

The IRS requires substantiation donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS’s requirements.

Substantiation

One way to understand the IRS’s requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.

  • To deduct a contribution of cash, check, or other monetary gift (regardless of the amount), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
  • To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
  • If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
  • Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.

The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.

Tax Court sheds light

In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.

In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers’ residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).

The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.

This article is a very high level overview of the IRS’s substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details at (636) 946-2800.