Posted on March 19, 2010 by Greg Herman-Giddens
The Health Care Reconciliation bill sent to the Senate today includes a new 4% medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties. There is also a 1% increase in the employee Medicare tax on all earnings. Taxpayers with income under $100,000 will benefit from partial exemptions.
Congress has promised the two new taxes are temporary (10 years or so)- but don't hold your breath.
Posted on March 16, 2010 by Greg Herman-Giddens
From IR-2010-32:
WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.
“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”
Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.
The IRS urges taxpayers to avoid these common schemes:
Continue Reading...
Posted on March 6, 2010 by Greg Herman-Giddens
The IRS has announced that about 39,100 North Carolinians have unclaimed tax refunds, averaging $539 per person. The total due North Carolina residents is $32,919,000.
However, to collect the money, a return for 2006 must be filed with the IRS no later than Thursday, April 15, 2010.
Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury.
For 2006 returns, the window closes on April 15, 2010. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.
The IRS reminds taxpayers seeking a 2006 refund that their checks will be held if they have not filed tax returns for 2007 or 2008. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.
By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2006. For example, most telephone customers, including most cell-phone users, qualify for the one-time telephone excise tax refund. Available only on the 2006 return, this special payment applies to long-distance excise taxes paid on phone service billed from March 2003 through July 2006. The government offers a standard refund amount of $30 to $60, or taxpayers can base their refund request on the actual amount of tax paid. For details, see the Telephone Excise Tax Refund page on IRS.gov.
In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2006 were $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. For more information, visit the EITC Home Page.
Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2006, 2007 or 2008 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by calling 1-800-829-1040, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.
From IR-2010-24.
Posted on February 16, 2010 by Greg Herman-Giddens
The Tax Policy Center of the Urban Institute and the Brookings Institution contains fascinating (to a tax geek) and detailed information about taxes. Particularly informative is the information on the Obama Administration's 2010 income tax increase proposal.
Here's a table showing the proposed increases for 2011 and the estimated increased revenue over a 10 year period:
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Proposed Tax Increase
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10 Year Tax Revenue
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Income Tax Rates 33% and 35%
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$364 Billion
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To 36% and 39.6%
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Itemized Deductions Capped at 28%
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$291 Billion
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Personal Exemption Phase-out and 3%
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$208 Billion
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Floor on Itemized Deductions
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Capital Gains Tax Rate 15% to 20%
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$105 Billion
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Total
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$968 Billion
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The tax rate increases are bad enough, but I really hate not being able to take advantage of all of my itemized deductions! The IRS giveth, and then the IRS taketh away.
Posted on February 3, 2010 by Greg Herman-Giddens
On February 2, 2010, in Ododonnabhain v. Commissioner of Internal Revenue, the U.S. Tax Court held that a transgender woman's expenses for hormone therapy and sex reassignment surgery were medically necessary and therefore deductible for federal income tax purposes. The court found that "gender identity disorder" is a disease, and ruled that gender transition-related healthcare is non-cosmetic, medically necessary healthcare. However, expenses for breast augmentation were found to be cosmetic as the surgery did not treat the disease or improve bodily function, and therefore were non-deductible.
Posted on January 30, 2010 by Greg Herman-Giddens
In North Carolina it is not uncommon for persons to handle administration of a decedent's estate without hiring a lawyer or an accountant. Because of the complexity of the law and the likelihood that certain requirements or opportunities will be overlooked, I certainly don't recommend going it alone. This post is not intended to be a do-it-yourself guide, but simply an overview of the basic process. Complying with income tax requirements is the most complex part of the majority of estates.
A deceased individual's tax year ends as of the date of death. Thus, all of the items of income and deduction prior to that date are reported on Form 1040. The tax year for the estate begins on the date of death, and generally ends on the last day of the month 11 months later. A separate tax id number for the estate is necessary and must be obtained from the IRS. The tax id number is provided to all financial institutions in which the decedent owned an account for income reporting purposes, and is used for the estate checking account.
Continue Reading...
Posted on January 26, 2010 by Greg Herman-Giddens
IR 2010-012:
WASHINGTON — People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service.
Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card. [Emphasis added.]
Continue Reading...
Posted on January 16, 2010 by Greg Herman-Giddens
This posting is courtesy of attorney Marc Soss of Florida:
The aging demographics of the United States coupled with the Pension and Recovery Act of 2006 (the "PPA”) and Deficit Reduction Act of 2007 (“DRA”) have provided an excellent planning opportunity to create tax efficient vehicles to solve a clients’ long-term care planning needs. Beginning on January 1, 2010, a tax-free planning option will become available for individuals who desire to provide for long-term medical care by utilizing an existing annuity or life insurance contract purchased after 1996. While not a new concept (it dates back to 1997), the 2010 tax-free planning opportunity may be beneficial to an individual with a larger than needed life insurance policy death benefit, unaffordable monthly or annual premiums, an under-performing or matured deferred annuity contract, or the desire to incorporate long-term medical care into his or her estate plan.
Continue Reading...
Posted on January 4, 2010 by Greg Herman-Giddens
From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post is from today's Advisor's Forum Wealth Counselor and explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010.
Continue Reading...
Posted on January 4, 2010 by Greg Herman-Giddens
It's 2010! As of January 1st, the federal estate tax is no more and it may mean that you should revise your estate plan and related documents. Anyone with total assets over $1 million (including face value of life insurance, retirement, home equity, etc.) should make make sure there estate plan is up to date. Click "Continue Reading" to find out what the change involves, what happens next year, and what steps you might want to take now to ensure your wishes are carried out.
Continue Reading...
Posted on December 29, 2009 by Greg Herman-Giddens
Some financial advisors are warning against a Rush to Roth. The key to is to approach the idea cautiously and do a comprehensive analysis. Whether a Roth conversion makes sense is a highly individual decision, to be made in consultation with your advisors.
I did a Roth conversion the last time the IRS allowed us to pay the taxes over a couple of years, which was about 10 years ago. This time around, however, I'm not so keen on the idea.
I have not completed an analysis of my own situation at this point, but I will probably decide against a conversion of my traditional IRA, as most of the additional income would likely be taxed at combined federal and state rates of over 40%. Even with virtually certain future income tax rate increases, I expect that my taxable income will be lower in retirement. That's particularly true if I head to sunny Florida, where there's no state income tax! Plus, I'm not keen on giving Uncle Sam and the NC Department of Revenue $40,000 + of my savings - I may need it down the road (or even next year, as my son heads off to college)!
Posted on December 8, 2009 by Greg Herman-Giddens
From IR-2009-114
Watch Video: Year-End Tax Tips: English | Spanish | ASL
Watch Video: Record Keeping: English | ASL
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Some of these changes include the following:
Special Charitable Contributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
Continue Reading...
Posted on December 3, 2009 by Greg Herman-Giddens
Today the IRS issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Effective January 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 50 cents per mile for business miles driven
- 16.5 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
Posted on December 2, 2009 by Greg Herman-Giddens
Have you ever heard a friend, neighbor, or colleague state that they had found a way to get around paying income taxes, or that certain taxes weren't really legal? Don't believe them - many people, including several wealthy actors, have gotten into trouble with the IRS that way.
The IRS has a comprehensive analysis of frivolous tax arguments on its website.
Posted on November 30, 2009 by Greg Herman-Giddens
This from Howard Hinds of the Curbstone Group in Boston:
Master Limited Partnerships (MLPs) are excellent tools for estate planning:
1. MLP distributions (around 8% yield right now) are considered return of capital, meaning that distributions reduce your basis in the MLP, while allocated net income increases your basis.
2. Tax Shield: Because MLPs own large hard assets (like pipelines) with high depreciation (non-cash) expenses, allocated income to an investor is usually less than 20% of cash distributions in a given year for the first several years of ownership. This creates a tax deferral, which is recaptured when you sell the MLP.
3. When you sell an MLP: (a) the gains from your purchase price to selling price are taxed at capital gains rates, and (b) the difference between your purchase price and your basis (which has been reduced over time) is taxed at ordinary income rates.
4. But, if you die while holding an MLP, the tax deferrals you have accumulated over time are washed away along with the capital gains taxes, and whoever receives those MLPs after you die has a new stepped up basis, so those tax deferrals are not passed along. This can be a very big deal for someone who has owned Kinder Morgan Energy Partners since 1995 and they have $0 basis and the share price is $55 per share
So in addition to being great income vehicles for someone with large estate, MLPs can be great tax shields as well.
Posted on November 18, 2009 by Greg Herman-Giddens
Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.
There are several strategies available to help reduce the impact of these taxes:
- Structure accounts to provide the longest term payout possible (stretch).
- Name a Retirement Trust as Beneficiary
- Take the money out during lifetime and pay the income tax, then gift the remaining cash either outright or through an irrevocable life insurance trust. Or consider a Roth conversion.
- Take the money out during lifetime and buy an immediate annuity to provide a guaranteed annual income, to pay the income tax, and to pay for insurance owned by a wealth replacement trust.
- Name a Charitable Remainder Trust as beneficiary with a lifetime payout to your surviving spouse. The remaining assets would pass to charity at the death of your spouse.
- Give the accounts to charity at death.
Continue Reading...
Posted on November 17, 2009 by Greg Herman-Giddens
This courtesy of Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
The Tax Court rejected an argument made by the IRS that a donor should
not be able to claim a charitable income tax deduction for a
contribution to a private foundation because the donor effectively
controlled the private foundation. The case is Foxworthy, Inc. v. Comm,
T.C. Memo. 2009-203 (Sept. 9, 2009). This appears to be the first time
that the IRS has raised this argument in court, and it was soundly
rejected by the Tax Court.
The conclusion is helpful to also resolve questions about claiming
charitable income tax deductions for contributions to donor advised
funds and donor directed funds.
The cases that I have found where the courts disallowed a charitable
income tax deduction because of excessive donor control tend to occur
when the donor retains excessive control over the contributed property
(e.g., failure to deliver the property; retained possession of the
property; etc.). By comparison, the ability of a donor to advise or even
direct the specific charitable organizations that should receive grants
from a donor advised fund (Sec. 4966(d)), a donor directed fund (e.g.,
Sec. 170(b)(1)(e)(iii)), or a charitable remainder trust (Rev. Rul.
76-371, 1976-2 C.B. 305) has never before been an issue to prevent an
individual from claiming a charitable income tax deduction under Section
170. This new Tax Court decision buttresses that result.
Click "Continue Reading" for the excerpt of the Tax Court's opinion of the charitable deduction issue. It was just one of issues that the Tax Court addressed in its lengthy opinion.
Continue Reading...
Posted on October 24, 2009 by Greg Herman-Giddens
To help small business owners steer their way through all of the retirement plan options available, the IRS has come up with the IRS Retirement Plans Navigator. The site contains a comparison of the various plans and other helpful information and links.
Posted on September 25, 2009 by Greg Herman-Giddens
From IR 2009-85:
WASHINGTON ― The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.
Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.
Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.
Continue Reading...
Posted on September 21, 2009 by Greg Herman-Giddens
From IR-2009-84:
WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.
Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.
IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.
The IRS also announced that there will be no further extensions.
Posted on September 18, 2009 by Greg Herman-Giddens
A New York tax lawyer, of all people, was denied medical expense deductions for $100,000 or so in expenses for his prostitute and pornography habit. See the TaxProf's posting on the U.S. Tax Court case of Halby v. Commissioner, T.C. Memo 209-204.
Much more scintillating than than the tax problems of Obama's cabinet members and Charles Rangel!
Posted on September 14, 2009 by Greg Herman-Giddens
From the Wall Street Journal: Higher Taxes Are Coming: Are You Prepared?
Here in North Carolina, we've already been hit with higher taxes. Can't wait for the federal increases. :-(
Posted on August 10, 2009 by Greg Herman-Giddens
North Carolina Governor Beverly Perdue signed the Budget bill (SB 202) into law. The bill includes increased income and sales tax rates. See this post from Enrolled Agent Brian Strahle.
Posted on July 23, 2009 by Greg Herman-Giddens
Democrats in the North Carolina House and Senate reached a compromise on tax increases yesterday. Briefly, the proposal would:
- Increase income taxes by 2%
- Increase sales tax by 1% (to 7.75% in most counties)
- Increase cigarette taxes by 10 cents per pack
- Increase beer, wine and liquor taxes
The income and sales tax increases are supposedly temporary, for a two year period. There are no additional sales taxes for certain services as contained in the earlier Senate proposal.
The only good thing I can say about this proposal is that at least the increased income taxes can be deducted for federal tax purposes (for those that itemize deductions). Additional sales taxes would not necessarily be deductible for those who deduct income taxes rather than sales taxes.
Posted on July 14, 2009 by Greg Herman-Giddens
The U.S. Senate Finance Committee is considering instituting a 1.45% Medicare tax on investment income, including interest, dividends, capital gain, and partnerships and rentals. Currently long term capital gains and qualified dividends are taxed at a maximum of 15%, while the other types of income are taxed at ordinary income rates.
See this story on Bloomberg.com for details this proposal for paying for health care reform.
I personally would not object too much to this tax if it only applied to investment income over a certain amount, say $25,000 annually. With unavoidable multiple state and federal income tax increases on the horizon, I think we'll see an increased interest in retirement savings, life insurance and annuities as a way to defer taxes.
Posted on July 11, 2009 by Greg Herman-Giddens
Loans among family members, especially from parents to children, are very common. However, most people are not aware of the tax laws regarding such loans. With certain exceptions, if you make an interest free to loan to a family member (or friend, for that matter), the IRS will impute the interest income to you, meaning that you are required to pay tax on a certain amount of interest, even though you never received it. Here are the basics:
- Loans of $10,000 or less. No interest income will be imputed provided that the borrower does not use the money for income-producing investments.
- Loans of $100,000 or less. No imputed interest income provided that the borrower has less than $1,000 of total net investment income each year.
- Other loans. Make sure you charge (at least) the Applicable Federal Rate in place in the month during which the loan is made. These rates, set by the government, change monthly and depend on the length of the loan [(1) up to 3 years, (2) 3 to 9 years, and (3) over 9 years)].
- Promissory Note. Make sure you properly document the loan, with interest rate, payment terms and length of loan. Otherwise the IRS may treat it as a gift, which would require a filing a gift tax return and possible payment of gift tax. It also can help avoid family disputes in the event of the death of one of the parties to the loan.
- Deed of Trust/Mortgage. To secure the payment of the loan by the borrower's personal residence, the borrower can sign a deed of trust, which is then filed in the county Register of Deeds. The borrower can then deduct the interest payments for income tax purposes.
- See a Lawyer. To ensure that you don't run afoul of tax laws and otherwise protect yourself, consult with a tax lawyer, and have him or her prepare the necessary documents.
Posted on July 8, 2009 by Greg Herman-Giddens
Yesterday North Carolina Governor Beverly Perdue revealed her proposed tax plan, which is designed to raise $1.6 billion in taxes. Here are some of the highlights:
Income Taxes
- Reduce individual income tax rates, except for a two-year "emergency surcharge" on single taxpayers with income over $500,000 and married taxpayers with income in excess of $1 million.
- Reduce the corporate income tax from 6.9% to 5.9% beginning in 2011.
- Increase the gross premium tax paid by insurance companies to 2.25%.
- Stop the corporate income tax transfer to the public school capital fund.
- Apply the franchise tax to limited liability companies.
- Repeal privilege license taxes.
Sales Taxes
- Increase state sales tax from 6.75% to 7.75% through September 2011. Then rate would then decrease to 6.5%.
- Tax warranties, installations, repairs and some personal services.
- Tax recreation and entertainment, such as movies, concerts and amusement parks.
- Tax more online sales, courier services, and storage fees.
- Tax luxury services such as chartered jets and cosmetic surgery.
- Increase cigarette tax by 50 cents a pack, to 85 cents.
- Increase taxes on alcoholic beverages.
Tax Credits
- Small business tax reduction
- Expanded college savings credit
- Create homebuyer's credit
Compare this plan to the Senate and House proposals.
Posted on June 24, 2009 by Greg Herman-Giddens
Senate Bill 202, among other things, contains many tax increases for us in the Tar Heel state, to wit:
- Increase top income tax brackets to 8.25% and 8.5% (currently 7.75%)
- Raise the State sales tax from 6.75% to 7%
- Apply sales tax to repairs, warranties, installation, movies, athletic events, amusement events/activities, courier and delivery services, and internet sales.
- Require Limited Liability Companies to pay a franchise tax.
- Increase the liquor tax by 1.5%.
You may wish to contact the following Legislators to let them know how you feel about this proposed law:
Representative Paul Luebke (Chair of the House Finance Committee)
(919) 733-7663
Senator David Hoyle (Chair of the Senate Finance Committee)
(919) 733-5734
If you don't support the bill, there's a petition to sign. Make some noise, people!
Posted on June 10, 2009 by Greg Herman-Giddens
Despite criticism from members of both parties, the North Carolina House of Representatives' Finance Committee approved a proposed tax package yesterday. The proposal includes the following:
- Increase top income tax brackets to 8.25% and 8.5% (currently 7.75%)
- Raise the State sales tax from 6.75% to 7%
- Apply sales tax to repairs, warranties, installation, movies, athletic events, amusement events/activities, courier and delivery services, and internet sales.
- Require Limited Liability Companies to pay a franchise tax.
- Increase the liquor tax by 1.5%.
These and other increases would bring in an estimated additional $784 million in revenue for the next fiscal year.
Depressing to contemplate, indeed, but at least a 9 cent per six pack increase in the beer tax was defeated! At 53 cents per gallon, North Carolina still has one of the highest beer taxes in the nation. And that doesn't count the sales tax!
Posted on May 20, 2009 by Greg Herman-Giddens
The United States Tax Court, in Benz v. Commissioner, 132 TC No 15, recently ruled that a taxpayer taking a series of equal periodic payments as an exception to the 10% early distribution penalty for IRA withdrawals could also take advantage the early distribution penalty exception for payment of higher education expenses without the education payment being considered a modification of the series of equal payments.
Those taxpayers who treated a similar situation in the last three years as a modification of their series of equal periodic payments and ended up paying the 10% penalty should consider filing amended returns.
Posted on May 19, 2009 by Greg Herman-Giddens
President Obama's Green Book contains proposals for modifying the GRAT rules, eliminating valuation discounts for transfers of interest in many family limited partnerships and limited liability companies, and increasing income tax rates and limiting deductions for high income taxpayers.
Here's a nice outline prepared by Bob Keebler, CPA of Virchow Krause & Company, LLP in Wisconsin.
Continue Reading...
Posted on April 28, 2009 by Greg Herman-Giddens
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From IRS Commissioner Doug Shulman:
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March 26, 2009
My goal has always been clear — to get those taxpayers hiding assets offshore back into the system. We recently provided guidance to our examination personnel who are addressing voluntary disclosure requests involving unreported offshore income. We believe the guidance represents a firm but fair resolution of these cases and will provide consistent treatment for taxpayers. The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can.
In the guidance to our people, we draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement. We set up a penalty framework that makes sense for them — they need to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. Just to be clear, this is 20 percent of the highest asset value of an account anytime in the past six years. This gives taxpayers — and tax practitioners — certainty and consistency in how their case will be handled.
We have instructed our agents to resolve these taxpayers’ cases in a uniform, consistent manner. Those who truly come in voluntarily will pay back taxes, interest and a significant penalty, but can avoid criminal prosecution. [Emphasis added]
At the same time, we have also provided guidance to our agents who have cases of unreported offshore income when the taxpayer did not come in through our voluntary disclosure practice. In these cases, we are instructing our agents to fully develop these cases, pursuing both civil and criminal avenues, and consider all available penalties including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty.
We believe this is a firm, but fair resolution of these cases. It will make sure that those who hid money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily. As we continue to step up our international enforcement efforts, this is a chance for people to come clean on their own. Our guidance to the field is for the next six months only, after which we will re-evaluate our options.
For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government.
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Posted on April 24, 2009 by Greg Herman-Giddens
The North Carolina Senate Finance Committee is reviewing a plan to cut income and sales taxes while instituting new sales taxes on certain services.
For income taxes, the top rate would drop from 7.75% to 7.5%, while the lowest rate would decrease from 6% to 5.25%. The calculation of income taxes would also be made easier, using the federal adjusted gross income without having to make further changes to determine the NC taxable income. Credits would be allowed for charitable contributions and home mortgages, and the child tax credit would increase $25 to $125.
Corporate income tax rates, currently 6.9%, would be reduced over a two year period to 4.5%, but limited liability companies would be required to pay franchise taxes. The could be bad news for for LLC owners, would are currently required to $200 annually to the state for the privilege of operating the company.
And, to the benefit of professionals and other business owners, state and local privilege licenses would be eliminated.
Finally, the state sales tax would be lowered from 6.75% to 6.00%. Many counties, however, have local rates than are higher. Sales taxes would be instituted on heretofore untaxed services/items such as building repairs, extended warranties, and downloaded music and software.
Posted on April 14, 2009 by Greg Herman-Giddens
From the IRS Newswire 2009-041:
WASHINGTON — The Internal Revenue Service today issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.
“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”
Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes:
Continue Reading...
Posted on April 13, 2009 by Greg Herman-Giddens
From the IRS Newswire issue IR-2009-040:
WASHINGTON — The Internal Revenue Service offers last minute reminders to taxpayers who have not yet filed a tax return, paid what they owe or requested an extension of time to file as the April 15 tax filing and payment deadline approaches.
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Posted on April 1, 2009 by Greg Herman-Giddens
The Final Four is set for this weekend, and my beloved Tar Heels have a good shot at winning the title. In North Carolina and across the country, countless Americans have entered into NCAA office pools, and the winners will be determined Monday night. Winners take heed, however - make sure you know the applicable tax rules.
Under the Internal Revenue Code (and thus in NC also), gambling winnings must be reported as taxable income. You cannot claim an overall tax loss for gambling activities, but you can generally claim losses as an itemized deduction -- up to the amount of your winnings. (Professional gamblers report winnings on Schedule C.) Losses in excess of winnings are not deductible.
It's important to keep accurate records. Keep a diary or ledger of all your gambling activities that shows the type of gambling activity, the location, and the amounts won and lost. You can support the amounts with receipts, tickets, statements or other records that substantiate your claims.
Gambling income includes, but is not limited to winnings from lotteries, raffles, horse races, and casinos. It also covers cash winnings and the fair market value of such prizes as cars and trips.
P.S. Don't forget that in North Carolina, as in many states, most gambling activities, inlcuding office sports betting pools, are illegal. That does not mean that any winnings should not be reported, however. It's more likely that you will get penalized by the IRS for not reporting gambling winnings than you will be charged with a gambling criminal offense.
Posted on March 31, 2009 by Greg Herman-Giddens
Click "Continue Reading" to view the statements of Senator Max Baucus (D-MT) (chairman of the Senate Finance Committee) made on the floor of the Senate last week. He opposed an amendment proposed by Senator John Thune (R-SD) to President Obama’s budget. Obama proposes limiting deductibility for charitable gifts for high income taxpayers to a 28%. Senator Thune’s amendment would have eliminated this deductibility cap. The amendment failed - 48 for and 49 against.
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Posted on March 28, 2009 by Greg Herman-Giddens
From the GiftLaw eNewsletter:
Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications.
Sen. Baucus indicated, "By guaranteeing a little extra cash in the pocket of working moms and dads and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families."
The bill would make permanent many of the provisions enacted for tax relief during the past decade. Several of the provisions are intended to reduce income taxes for low and middle income taxpayers. The bill would not change the scheduled increase in the top two tax brackets in 2011 to 36% and 39.6%.
The middle class reductions:
1. For taxpayers in the 10%, 15%, 25% and 28% brackets, the rates are continued.
2. The alternative minimum tax exemption is indexed for inflation.
3. The zero percent long-term capital gain rate for taxpayers in the 10% and 15% bracket is continued.
4. The child tax credit is refundable for incomes below $3,000.
5. The marriage penalty relief for taxpayers in the 15% bracket is continued.
6. The adoption and exclusion caps of $10,000 per eligible child are continued.
Sen. Baucus proposes significant changes in estate taxes. Rather than repealing the estate tax in 2010, the exemption is frozen at $3.5 million per person ($7 million per couple), with the estate tax rate set at 45%. The exemption would be increased for inflation in $10,000 increments starting in 2011.
Farmers and ranchers would benefit from an increase in the special use valuation from $750,000 to $3.5 million. This would permit transfer of very valuable farms and ranches from parents to children who are actually operating the farm or ranch.
A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."
In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.
If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.
Note: If this bill becomes law, the first tendency of many couples with taxable estates will be to revise their wills or trusts to do away with the credit-shelter (bypass) trusts. However, there will still be compelling reasons to have such trusts. With a credit-shelter trust, growth in the value of the assets is also protected from estate taxes, while that is not necessarily true if a couple relies on exemption portability. In addition, the credit shelter (or marital) trust provides valuable protection from mismanagement, creditors, and future spouses.
Posted on March 20, 2009 by Greg Herman-Giddens
Here's a nice, easy to read Summary of the American Recovery and Reinvestment Act of 2009, which includes comparisons to prior law.
Posted on March 18, 2009 by Greg Herman-Giddens
First-Time Homebuyers Have Several Options to Maximize New Tax Credit
WASHINGTON — As part of the Treasury Department’s consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.
The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.
“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.”
First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.
Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000, or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.
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Posted on March 17, 2009 by Greg Herman-Giddens
The following is from my e-newsletter that went out this morning:
The American Recovery and Reinvestment Act of 2009, which was signed into law on February 17th, includes a multitude of federal income tax changes. This article summarizes some of the personal tax changes: 
One-Year AMT Patch Has Two Parts
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Posted on February 27, 2009 by Greg Herman-Giddens
Probably an increase in 2010 and a substantial drop thereafter.
From Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
President Obama has released his controversial budget. The proposal
that affects charitable organizations the most is that the tax benefit
that upper-income taxpayers would receive from their charitable gifts
would be limited to 28%, beginning in 2011. The same 28% limit would
also apply to tax savings from the home mortgage interest deduction.
Also the highest marginal tax rate would increase from 35% in 2010 to
the Clinton-era rates of as high as 39.6% in 2011.
So, if in 2011 a rich person gets an extra $100 of income and donates it
to charity, the extra $100 would be subject to a nearly 40% federal tax
rate but the charitable gift would only produce a $28 tax saving. The
rich person must spend nearly $12 in taxes to make the gift.
Five observations:
(1) Expect wealthy donors to prepay in 2010 contributions that they
would normally make in 2011 and 2012. The nation's charities
experienced this when Ronald Reagan lowered the highest tax rates from
50% to 28% as part of the 1986 Tax Reform Act. Gifts surged in 1986 but
fell in 1987. So, if the proposal is enacted, expect major gifts to
decrease in 2011 since some donors prepaid their gifts in 2010.
(2) There could be a boon in grantor charitable lead trusts in 2010
since a donor can get a charitable income tax deduction in the year that
the charitable lead trust is funded rather than in the year that the
lead trust makes its charitable gifts. Visualize it: the donor gets a
2010 charitable tax deduction and saves 35% yet the charity receives
gifts in later years when the donor would have only had a 28% deduction.
The donor and the charitable lead trust will likely increase investment
in tax-exempt municipal bonds in future years to avoid the higher 39.6%
marginal tax rate.
(3) If enacted, then 2010 will be a boon year to establish a private
foundation or a donor advised fund. A rich person can get tax savings
at a 35% rate in 2010 and then have grants flow out in later years when
the charitable gifts would have only produced a 28% rate tax savings.
(4) "Charitable IRA Rollover" will become especially attractive in 2011
and later years, if it is in fact extended. Rich people will really
want to keep taxable IRA distributions out of their income. They won't
mind the fact that they are losing a charitable income tax deduction in
2011. It would have only saved 28%. Charitable IRA rollover could
effectively save them the 12% on each gift.
(5) None of this might happen. The President proposed a budget, but it
is Congress that actually makes the budget and changes the tax laws. It
will be interesting to see how proposal works its way through Congress.
The complaints and the lobbying have already started.
Posted on February 25, 2009 by Greg Herman-Giddens
From today's IRS Newswire:
WASHINGTON — The Internal Revenue Service announced today that taxpayers who qualify for the first-time homebuyer credit and purchase a home this year before Dec. 1 have a special option available for claiming the tax credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.
Qualifying taxpayers who buy a home this year before Dec. 1 can get up to $8,000, or $4,000 for married filing separately.
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Posted on February 25, 2009 by Greg Herman-Giddens
Available here on the IRS website. Hopefully most us will see a little more money in our paychecks soon.
Click here for the text of the full announcement.
Posted on February 24, 2009 by Greg Herman-Giddens
From the IRS:
If you took an early distribution from your retirement plan, here are some things you need to know:
1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
2. Early distributions are usually subject to an additional 10 percent tax.
3. Early distributions must also be reported to the IRS.
4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.
7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
9. There are several exceptions to the additional 10 percent early distribution, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled. Other exceptions can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs).
10. More information about early distributions from retirement plans and the additional 10 percent tax can be found in IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
.
Links:
- Publication 575, Pensions and Annuities (PDF 227K)
- Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
- Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts (PDF 72K)
- Form 5329 Instructions (PDF 40K)
Posted on February 20, 2009 by Greg Herman-Giddens
On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (the 2009 "Stimulus Act").
The Act includes several provisions designed to offer a degree of financial assistance to individuals in the short and intermediate term, including a one-time $250 Economic Recovery Payment to individuals receiving Social Security benefits, Railroad Retirement benefits, Veteran's benefits, or Supplemental Security Income (SSI) benefits. In addition, up to $2,400 of unemployment compensation benefits received in 2009 will be excluded from gross income for federal income tax purposes. And, for individuals who lose their jobs on or after September 1, 2008, and before January 1, 2010, the Act offers assistance in the form of subsidized COBRA premiums--those who qualify will have to pay only 35% of the COBRA premiums needed to continue their health coverage, for up to 9 months.
The Act also features new and modified tax credits and deductions, including:
- A new "Making Work Pay Tax Credit" for 2009 and 2010 equal to 6.2% of earned income, up to $400 ($800 in the case of a married couple filing jointly); withholding schedules will be adjusted to increase current take-home pay to reflect the credit. The credit is phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
- A revised Hope education tax credit for 2009 and 2010, renamed as the American Opportunity Tax Credit. With an increased annual limit per student of $2,500, the credit is now available for the first four years of post-secondary education, and up to 40% of the credit is refundable. The credit is phased out for individuals with modified adjusted gross income exceeding $80,000 ($160,000 for married couples filing jointly).
- A revised first-time homebuyer tax credit, extended to include qualifying home purchases through November of 2009. The maximum credit is increased to $8,000, and the rules requiring that the credit be repaid are waived for qualifying homes purchased after December 31, 2008, and before December 1, 2009, as long as the home continues to serve as the individual's principal residence for 36 months. The credit continues to be phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
- A new standard deduction for state sales and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009 and before January 1, 2010. Individuals who itemize deductions will claim the deduction as part of state and local taxes paid, reported on Schedule A of IRS Form 1040. The deduction is capped at the tax attributable to a maximum purchase price of $49,500, and is phased out for individuals with modified adjusted gross income exceeding $125,000 ($250,000 for married couples filing jointly).
In addition, the Act increases the refundable portion of the child tax credit, and makes changes to the earned income tax credit that benefit families with three or more qualifying children, and married couples filing joint returns. Also, 2008 provisions relating to the alternative minimum tax (AMT), bonus first-year depreciation, and IRC Section 179 expensing were all extended through 2009.
Source: Townsend Asset Management Corp.
Posted on February 13, 2009 by Greg Herman-Giddens
Click "Continue Reading" for the Senate Appropriations Conference Summary Report.
Continue Reading...
Posted on February 11, 2009 by Greg Herman-Giddens
Click "Continue Reading" to view a chart that provides a side-by-side comparison of the tax provisions in the House and Senate versions of “The American Recovery and Reinvestment Act of 2009.” The House version is H.R. 1, as passed on January 28, 2009, with a 244 to 188 vote margin. The Senate version, S. 350, is the Senate Finance Committee version, with amendments.
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Posted on February 3, 2009 by Greg Herman-Giddens
Facing negative publicity over unpaid taxes, Tom Daschle withdrew his name from consideration as Secretary of Health and Human Services. Nancy Killefer, Obama's pick for Chief Performance Officer, also withdrew her nomination, citing her unpaid payroll taxes for a household employee.
Too bad Timothy Geithner (Secretary of the Treasury) didn't do the same. Now we have a tax cheat in charge of the IRS. As an honest taxpayer and tax lawyer, I am personally and professionally outraged!
Posted on January 31, 2009 by Greg Herman-Giddens
First it was Timothy Geithner for Secretary of the Treasury, and now it turns out Tom Daschle, nominated for Secretary of the Department of Health and Human, also failed to report income and pay taxes. Then there's Charles Rangel. What's up with these people? Mistake, error, omission - I call it tax fraud.
Call me idealistic, but I don't believe we should have tax cheaters running our country, especially the IRS and the Ways and Means Committee!
Posted on January 30, 2009 by Greg Herman-Giddens
Don't worry if you don't get your Forms 1099-B by tomorrow - the deadline this year is not until February 17. From the IRS:
WASHINGTON ― Many investors will receive their year-end tax statements later than in past years, but these forms are likely to be more accurate, according to the Internal Revenue Service.
A new law, enacted last fall, changed the deadline from Jan. 31 to Feb. 15, when brokers, including brokerage firms, mutual fund companies and barter exchanges, must furnish year-end Forms 1099-B to their customers. Where a broker furnishes these forms by mail, this means that the forms must be mailed, not received by that date.
Because Feb. 15 falls on Sunday in 2009, and Monday, Feb. 16 is a federal holiday, the deadline is Feb. 17 this year. In addition, the IRS said earlier this month that for calendar-year 2008 reporting, the Feb. 17 deadline also applies to other tax information that brokers report to their customers, including such items as interest and dividends, on a combined year-end statement.
This change is designed to make it easier for brokers to provide investors with accurate year-end statements on stock sales and other transactions. Inaccurate year-end statements that have to be corrected later often force investors to file amended individual returns.
In its 2006 annual report, the Information Returns Program Advisory Committee (IRPAC) recommended changing this deadline from Jan. 31 to Feb. 15. The report noted that, “Form 1099 reporting has become very complex over recent years. As a result, many broker dealers are currently experiencing 20% amended Forms 1099. There is insufficient time to make the necessary changes in January, verify the data, print the forms and mail them by Jan. 31.” IRPAC is a federal advisory committee that advises the IRS on issues related to information returns, such as Forms 1099.
The long-standing Jan. 31 deadline for providing other year-end forms remains unchanged. However, because Jan. 31 falls on Saturday, employers, banks and other businesses have until Monday, Feb. 2 to mail or otherwise make available various 2008 year-end tax statements. This includes forms in the W-2, 1098 and 1099 series.
Taxpayers can make the tax-filing process faster and easier and often avoid follow-up correspondence with the IRS by carefully reviewing all year-end statements. Make sure all social security numbers are correct, check income and withholding amounts and contact the issuer promptly, if any mistakes are found.
Posted on January 13, 2009 by Greg Herman-Giddens
Here are some of the current entries:
- Choosing a tax preparer
- Where you can get free tax help
- How e-file can make filing easier and getting you your refund faster
- How to file for an extension or to amend your return
- What tax records to keep
- First-Time Homebuyer Credit
An additional tip will be added each business day until April 15, 2009
In addition to the text tips, some audio files will also be available.
Choosing a tax preparer is a particularly important topic. I recently assisted a client whose previous tax preparer included fraudulent deductions on the client's returns (without his consent or knowledge), and made a mistake that cost the client almost $15,000. Luckily I discovered the mistake in time and we were able to get a refund.
Unfortunately, CPAs and tax attorneys can also make major mistakes on tax returns. If you are having gift, estate, or fiduciary income tax returns prepared, make sure that you use a preparer who is properly trained and experienced in preparing such returns. Given the potential penalties involved, it is not worth using the lowest cost provider.
Posted on January 12, 2009 by Greg Herman-Giddens
Conrad Teitell, one of the nation's most foremost charitable gift planning attorneys, has, on behalf of the American Council on Gift Annuities and the National Council on Planned Giving, written Congress urging changes to IRA distribution laws:
- Removing the $100,000 cap on IRA charitable rollovers
- Allow similar transfers to charitable gift annuities and charitable remainder trusts
- Make the law permanent
Click "Further Reading" for the full text of the letter and the proposed bill. The same letter was sent to House leaders.
BTW, Teitell is a former professor of mine, and a very entertaining speaker. I'll never forget how he incorporated a rubber chicken into a talk on income and estate rules relating to charitable giving!
Continue Reading...
Posted on January 5, 2009 by Greg Herman-Giddens
In a Private Letter Ruling issued late in 2007, the IRS approved a clever technique to leverage a gift to your favorite charity using your IRA and life insurance. Developed by Douglas Delaney, a CPA and attorney in South Carolina, the "CHIRA®" works something like this:
- The donor rolls over funds from a regular IRA to a self-directed IRA. The donor and the charity apply for the life insurance.
- An loan (with market rate interest due) is made to the selected charity from the donor's new IRA. The loan is secured by a new life insurance policy purchased by the charity on the life of the donor. The charity signs a promissory note payable to the IRA.
- The charity assigns to the IRA the portion of the death benefit equal to the outstanding loan from the IRA.
Here's an example for the CHIRA® website:
A 74 year old donor decides to loan $1 million from her IRA to her favorite charity. The charity uses $30,000 each year to purchase a $1 million life policy on her life. The death benefit is used to fully repay the loan. Today, the charity will have $970,000 to allocate to their charitable purposes as well as a prudent interest and premium reserve. Whether it is cash to sustain their budget for a few years, or to put shovels in the ground two years early, the CHIRA® plan provides immediate capital without income tax to the donor.
The IRS concluded that (1) this is not a prohibited transaction within the meaning of Section 4975 of the Internal Revenue Code which would terminate the IRA under Section 408(a)(3), and (2) is not a prohibited investment in life insurance by an IRA under Section 408(a)(3) of the Code. What this means is that this technique results in no taxable income to the donor.
However, this a complex, multi-step technique, and everything must be done correctly in order to achieve the intended consequences. If you decide that a CHIRA® makes sense for you, make sure that you consult with tax counsel to ensure that you will face no adverse tax consequences.
Click "Continue Reading" for the full text of PLR 200741016.
Continue Reading...
Posted on December 31, 2008 by Greg Herman-Giddens
Tired of all the taxes here in the good ole USA and thinking of moving to a tropical isle with little or no taxation? Besides the emotional and security issues, there tax penalties for leaving the U.S. In addition to providing tax relief to military personnel and veterans, the Heroes Earnings Assistance and Relief Act (HEART Act) of 2008 also contains a couple of provisions regarding expatriate taxation. Those who renounce their U.S. citizens in an attempt to save on taxes face the following:
- A tax on the net unrealized gain of worldwide assets, due at the time the individual leaves the U.S. The gain is based on the fair market value on the day before the expiration date, and assumes the assets were sold on that date. The first $600,000 on gain is exempt. Recognition of the gain can be deferred until actual sale only if proper security is furnished to the IRS.
- There is a 45% gift/estate tax due on transfers made by an expatriate during his or her lifetime or at death to a U.S. beneficiary. The beneficiary is liable for payment of the tax.
Posted on December 24, 2008 by Greg Herman-Giddens
This morning President Bush signed H.R. 7327, the “Worker, Retiree and Employer Recovery Act of 2008” (WRERA). The law suspends Required Minimum Distribution (from IRAs and qualified plans) requirements for 2009 and requires employers to offer non-spousal rollovers from qualified plans to inherited IRAs beginning January 1, 2010.
Posted on December 17, 2008 by Greg Herman-Giddens
From IR 2008-142:
WASHINGTON — The IRS has placed its comprehensive tax guide for individuals on IRS.gov, updating it for tax year 2008. The updated on-line version of IRS Publication 17, “Your Federal Income Tax,” contains more than 900 interactive links.
Publication 17 has been updated with important changes for 2008, including information on the new recovery rebate credit, new first-time-homebuyer credit, and an additional standard deduction for real estate taxes. It has been published annually by the IRS for more than 65 years and has been available on the IRS Web site since 1996.
As in prior years, the publication provides information on how to file an individual tax return, what to include as income, how to calculate capital gains and losses, how IRAs and other expenses can affect how much income to report, whether to take the standard deduction or itemize, and how to figure taxes and credits.
Publication 17 is available on line, however, those who do not have access to the Internet can call 1-800-829-3676 to request a free copy from the IRS. Printed copies will be available in January 2009.
Posted on December 12, 2008 by Greg Herman-Giddens
This update is courtesy of Barry C. Picker, CPA:
It looks as if Congress has passed, and sent to Pres. Bush, H.R. 7327; Worker, Retiree, and Employer Recovery Act of 2008, which among other things, suspends the excise tax on the failure to take a minimum distribution. In other words, it suspends the requirement to take a minimum distribution.
However, this provision is effective for 2009 RMDs; unfortunately for most retirees, the problem is that they have to take their 2008 minimum distribution that was computed on a higher asset value, and must take it now from a possibly depleted account. So retirees who have not taken their 2008 minimum distribution will have to sell potential loss assets to meet the 2008 distribution requirement. They could alternatively take a distribution in kind, but if asset values have decreased, they will have to take more shares in order to meet the distribution amount.
The Act states that it does not change the required beginning date for someone whose RBD would be in 2009, nor does it suspend (I think, someone can check me on this) the distribution requirement for someone whose RBD is 2008. So if someone dies, the after death determination of death before or after RBD is not changed. However, if someone is currently a beneficiary under the five year rule, 2009 does not exist, so if the fifth year is 2009, it’s now 2010. If the fifth year would be 2012 it’s now 2013.
Posted on December 9, 2008 by Greg Herman-Giddens
This is from IR-2008-138, issued today by the IRS:
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.
Special Charitable Contributions for Certain IRA Owners
An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
Continue Reading...
Posted on December 2, 2008 by Greg Herman-Giddens
Self-employed persons or small business owners such as home builders with big tax losses for the year should consider converting their traditional IRAs to Roth IRAs this year to "soak up" some or all of the loss. This planning could be even more beneficial given that the securities or mutual funds in the original IRA are likely to be depressed in value, which means less income will be realized.
Make sure you speak to your tax advisor soon if you think a rollover may be of benefit to you in 2008. This plan will not work if you have long term capital losses (e.g. from stock sales) rather than ordinary losses (for example, from a S Corporation or LLC), as only $3,000 in capital loss can be used to offset ordinary income.
Posted on November 25, 2008 by Greg Herman-Giddens
The Internal Revenue Service has issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:
- 55 cents per mile for business miles driven
- 24 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
Revenue Procedure 2008-72
Posted on November 20, 2008 by Greg Herman-Giddens
Contrary to what many of my clients assume, legal fees for general estate planning are not deductible for income tax purposes. Estate planning fees are only deductible to the extent that they represent income, gift, or estate tax planning or advice. Wong, Tax Court Memo 1989-683.
For a relatively sophisticated plan invovling credit-shelter and marital trusts, the deductible portion of the fee may be about 50% at most. The deduction is a miscellaneous itemized deduction, meaning it is subject to the two percent (of adjusted gross income) floor. IRC Section 67.
The effect of the 2% floor is that most people who pay for tax planning, who are generally high-income, do not get the benefit of the deduction.
Legal fees for business-related legal advice and services are deductible by the business. However, It is not proper to for a self-employed person to pay for their personal estate planning out of his or her business in order to get a deduction.
In any event, make sure you talk to your estate attorney and CPA to ensure that any deduction you take is lawful.
Posted on November 5, 2008 by Greg Herman-Giddens
Our top rate is now 7.75%, just slightly under Idaho's top rate of 7.8%. Even New York has a lower top rate. Before our top rate of 8.25% expired, we were tied for 9th place with Hawaii.
The top 10 States (including Washington D.C.):
- CA - 10.3%
- RI - 9.9%
- VT - 9.5%
- OR - 9.0%
- IA - 8.98%
- NJ - 8.97%
- ME - 8.5%
- DC - 8.5%
- HI - 8.25%
- ID - 7.8%
As for our lowest rate of 6% - we are the highest in the United States! That's right - number one. No State has a higher lowest income tax rate than North Carolina.
Posted on October 14, 2008 by Greg Herman-Giddens
Once you cease working for an employer, you have the option of rolling over to an Individual Retirement Account (IRA) any retirement plan (such as a 401(k)) established for you while employed.
In most cases, it is beneficial to do such a rollover because of the advantages offered by an IRA. However, in certain cases it might make sense to leave the funds in the original account. Read on:
Advantages of IRAs:
- Early retirement choices - Unlike in a 401(k), penalty-free withdrawals may be had from an IRA before age 59 1/2 under the "substantially equal periodic payments" rule. This rule allows an account owner to make withdrawals of a specific amount over the longer of a period of five years or until attaining age 59 1/2.
- More favorable beneficiary options - Some employer sponsored plans require non-spouse beneficiaries to take withdrawals from the plan over a five year period, lessening the opportunity for tax-deferred growth and triggering more income tax. With IRAs, non-spouse beneficiaries may "stretch" withdrawals over their lifetimes, creating tremendous growth potential for younger beneficiaries.
- Penalty-free withdrawals - With IRAs, these are allowed for higher-education expenses and first-time home buying. Not so with employer plans.
- Greater investment choices - Some employer plans have limited investment options, and only one account is permitted. IRAs offer much more freedom in choosing investments, and different accounts with different investment strategies (and/or beneficiaries) may be set up.
- Fee payment options - IRA administrative fees may be deducted from the account, or may be paid from non-retirement funds. The latter type of payments, which are not allowed in employer plans, are deductible as a miscellaneous itemized deduction.
Advantages of Employer Plans:
- Reduction of capital gains in company stock - company stock moved out of a 401(k) into a non-retirement account is taxed based on the value of the stock when purchased, rather than the date of transfer. If the stock is first moved to an IRA, this tax break is not available.
- Penalty-free withdrawals at age 55 - employees who cease employment at 55 (or anytime before 59 1/2) can take penalty-free withdrawals starting immediately. Except for the substantially equal periodic payments rule, IRA account owners must wait until 59 1/2.
- Avoidance of North Carolina income taxes - Certain retired government workers can claim an exemption from state income for their retirement plan payments. If the account was rolled over into an IRA, the exemption would not be available.
Posted on October 4, 2008 by Greg Herman-Giddens
The Emergency Economic Stabilization Act of 2008 (H.R. 1424) passed the House yesterday, and was quickly signed by President Bush. The law includes an extension of the IRA Charitable Rollover, which allows individuals age 70 and older to transfer up to $100,000 per year to public charities, tax-free. It is in effect for 2008 and 2009.
Posted on October 3, 2008 by Greg Herman-Giddens
Effective January 1, 2009, the $250,000 capital gain exclusion ($500,000 for married couples) for sales of former vacation homes that become one's personal residence will be limited. This posting by Charles Rubin provides a good explanation to the changes to IRC Section 121.
Posted on September 11, 2008 by Greg Herman-Giddens
Rep. Charles Rangel, chair of the Ways and Means Committee in the U.S. House of Representatives, owes the IRS $5,000 in back taxes for failing to report years worth income from a rental property. Ironically, his position means that he is one of Washington's most powerful influences on changes to the tax code.
Rangel himself admits that there is no excuse for his failure to report the income, but does not believe that he should step down. I beg to differ. I believe that he should resign immediately. A tax cheater in charge of changes to the tax laws? Makes no sense to me.
Posted on September 6, 2008 by Greg Herman-Giddens
This is a complicated but potentially very worthwhile strategies to pursue in estate in which the decedent owned valuable depreciable real estate (e.g. office buildings, shopping centers, or multiple rental homes). Thanks to Bob Keebler, CPA for the following memo:
A unique opportunity many lawyers, CPAs and trustees miss during the estate administration process is to recommend cost segregation studies. Such studies may be applied on both a going forward basis and for the open income tax years prior to an individual’s death. A cost segregation study simply allows the owner of real property to reclassify segments of what would otherwise have been treated as 27.5 and 39 year life depreciable property as 5, 7, or 15 year property.
Continue Reading...
Posted on August 1, 2008 by Greg Herman-Giddens
If you regularly give to your church, make sure you get an acknowledgment letter that complies with IRS regulations - otherwise you are not entitled to deduct the gifts. Furthermore, tax preparers should not include deductions for gifts unless the taxpayer can produce the proper receipts.
Here's Professor Christopher Hoyt's report a recent decision from the Tax Court on this issue:
By way of background, a gift over $250 is not deductible unless the
charity delivers a letter to the donor that states (a) the amount of the
donation plus (b) a statement that there were no goods or services
provided to the donor. (If there were any goods or services, then the
statement must describe the goods or services and set forth a good faith
estimate of the value of those goods or services.) Sec. 170(f)(8)(C);
Reg. Sec. 1.170A-13(f)(3)
Here the donors made tithes to their church but the church failed to
give the statement with the magic language. Despite the cancelled
checks and the Tax Court's acknowledgment that the tithes were
charitable gifts, the charitable tax deduction was disallowed. The
church finally sent a letter with the magic statement that there were no
goods or services after the donors were audited, but since the letter
was received after the return was filed so it was not "contemporaneous"
The court case stresses the need for all charities to competently send
to their donors a contemporaneous written acknowledgment for all gifts
of $250 or more.
Continue Reading...
Posted on July 24, 2008 by Greg Herman-Giddens
If you set up a Charitable Remainder Trust (CRT) in the past but now wish you could get a lump sum back from the trust, it may be possible to sell your interest in the trust. In a 2001 Private Letter Ruling (200127023), the IRS ruled that the sale of an income interest in a trust is a sale of a capital asset.
Thus, a CRT income beneficiary who has had that interest in the CRT for a year or longer can, in many cases, sell their interest and pay taxes at the current 15% long-term capital gain rate. (State taxes would be additional).
Given that the capital gains rates are at historically low levels, this can be a way to turn a long term income interest into a lump sum that can be enjoyed currently, while avoiding potential future increases in tax rates.
There are companies that will purchase interests in trusts, including CRTs.
Posted on July 14, 2008 by Greg Herman-Giddens
Democrat and Republican Senate leaders continue to clash over the tax extenders bill, which contains an extension of the $100,00 IRA charitable rollover and other income tax benefits. Stay tuned...
Posted on July 8, 2008 by Greg Herman-Giddens
These are the facts from a recent Private Letter Ruling from the IRS:
The Decedent had a "pour-over" will requiring that his probate estate be added to his living trust. The trust provided that upon Decedent's death distributions are to be made to certain beneficiaries with the remainder going to four charitable organizations. The Decedent had an IRA at the time of his death but there was no designated beneficiary as the named beneficiary was deceased. Therefore, the Decedent's estate became the beneficiary by default. The Trustee of the living trust and the personal representative of the estate proposed to satisfy the residuary bequest to the charities by assigning the IRA to the four named charities.
IRC Section 691(a)(1) provides that income in respect of a decedent (IRD) assets owned at death are included in the gross income of the estate or the person, who, by reason of the owner's death, acquire the right to receive the asset. A traditional IRA is an IRD asset (Rev. Rul. 92-47, 1992-1 C.B. 198). Under Sec. 691(a)(2), if a right to an item of IRD is transferred by an estate who received the asset by reason of the owner's death, the asset is included in the gross income of the estate.
However, the term "transfer" under Sec. 691(a)(2) does not include the transmission of an IRD asset at death if the transmission occurs pursuant to the right of the person receiving the asset by reason of a decedent's death by bequest, devise or inheritance. The IRS held that the transfer of the IRA in satisfaction of the Decedent's residuary bequest from his trust is not a transfer within the meaning of Sec. 691 and is thus not includable in the gross taxable income of decedent's estate.
The IRD will be considered income to the four charities, but since they are tax exempt organizations, no tax will be due.
To see the full text of PLR - 200826028, click "Continue Reading."
Continue Reading...
Posted on June 24, 2008 by Greg Herman-Giddens
As a result of the ever-rising gas prices, the IRS has increased the optional standard mileage rates for July 1 through December 31, 2008. For business, the rate is now 58.5 cents per mile, and 27 cents per mile for medical and moving. The charitable rate remains unchanged at 14 cents a mile. See
Announcement 2008-63.
Posted on June 14, 2008 by Greg Herman-Giddens
The Renewable Energy and Job Creation Act of 2008, the latest version of legislation featuring several tax extenders, alternative minimum tax relief and energy provisions failed to pass the Senate. Championed by Senate Finance Committee Chair Max Baucus, the bill faced stiff opposition from Republicans who objected to the tax offsets, most notably taxing offshore deferred compensation of hedge fund managers and delaying a business tax interest deduction until 2019.
Baucus has already crafted a revised bill, the Energy Independence and Tax Relief Act of 2008, which should be submitted to the Senate next week. Democrats oppose any tax extenders without tax offsets.
See my earlier postings under the heading
Pending Legislation for a more detailed description of the tax extenders, which include the IRA charitable rollover.
Posted on June 10, 2008 by Greg Herman-Giddens
With all of the universities in this area, this recent change in the law dealing with deferred compensation (IRC Section 409A) may be of interest to many local readers. The new law may affect faculty who have a 10 month teaching contract but elect to be paid over a 12 month period. See this
AAUP Tax Alert for details.
Posted on May 24, 2008 by Greg Herman-Giddens
On May 21, the U.S. House passed the Renewable Energy and Jobs Creation Act of 2008 (H.R. 6049). The act includes a one year extension of the Charitable IRA rollover and similar tax provisions and updated tax incentives for renewable energy. The state and local sales tax deduction, and tuition deduction extensions are also included.
The Senate and the White House support the continuation of the charitable rollover, but Bush will most likely veto the act in its current form since it includes $54 billion in tax increases and no extension of AMT relief.
Posted on May 19, 2008 by Greg Herman-Giddens
The House Ways and Means Committee passed H.R. 6049, the Energy and Tax Extenders Act of 2008, on May 15, 2008. The bill includes a one-year extension of the $100,000 IRA Rollover for taxpayers age 70 and over, as well as many other tax extenders and renewable energy provisions.
Included in the bill are one-year extensions on the deduction for state and local sales tax, a deduction for educational expenses, the teacher's expense deduction, a provision allowing non-itemizers to deduct a portion of property taxes, and an expanded child tax credit for low-income taxpayers.
Charitable-related extensions include the enhanced deductions for gifts of apparently wholesome food, gifts of books to schools, gifts of computers for educational purposes and favorable Subchapter S basis rules for gifts of appreciated property.
Charles Rangel (D-NY), Chairman of the Committee, commented that "This bill would provide critical tax relief to help working families cope with the rising cost of living. Furthermore, this bill would extend vital tax incentives for American businesses to help them invest in new technologies and remain competitive internationally." He also stated that the bill's energy provisions will "reduce our dependency on foreign oil."
Let's hope that's true! Look for passage of the bill by the House and Senate sometime next month.
This post is excerpted from an article in the May 19, 2008 Giftlaw eNewsletter.
Posted on April 23, 2008 by Greg Herman-Giddens
Excerpts from a recent IRS Memo:
WASHINGTON — Taxpayers who have filed their federal income tax returns and are expecting their refunds can use the Internal Revenue Service’s online tool, “Where’s My Refund?,” to check on the status of their refunds.
“Where’s My Refund?” is fast, easy, safe and convenient.
To get to personalized refund information, taxpayers should be ready to enter their:
- Social Security Number (or Taxpayer Identification Number),
- Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)),
- Exact refund amount shown on their tax returns.
Taxpayers can check on the status of their refund seven days after e-filing a return. For a paper return, check four to six weeks after mailing the return.
“Where’s My Refund?” also includes links to customized information based on a taxpayer’s specific situation. For example if “Where’s My Refund?” shows that the IRS was unable to deliver a refund, a taxpayer can change his or her address online. Taxpayers can avoid undelivered refund checks by having their refunds directly deposited into a personal checking or savings account.
If 28 days have passed after the IRS says it mailed a refund check, “Where’s My Refund?” enables taxpayers to initiate a trace.
Taxpayers without internet access can check the status of their refunds by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. The TeleTax refund information is updated each weekend. If you do not get a date for your refund, please wait until the next week before calling back.
Some scam artists are sending phony emails, including those relating to “Where’s My Refund?”, to trick individuals into revealing personal financial information that can be used to access their financial accounts. People who want to access the genuine IRS Web site and the “Where’s My Refund?” feature should go directly to the IRS Web site by typing the address, www.irs.gov, into the address` line of their Internet window. The only genuine IRS Web site is IRS.gov.
Posted on April 22, 2008 by Greg Herman-Giddens
On April 17, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill for 2008 and 2009 which would extend certain tax laws until December 31, 2009. The bill includes an increase in the AMT exemption for 2008 to $46,200 for individuals and $69,950 for couples, energy credits and tax extenders. The most notable extension is the Charitable IRA Rollover - IRA owners over age 70½ would be able transfer tax-free up to $100,000 directly to qualified charities, as was allowed last year.
I only had one client inform me that he did the full $100,000 charitable rollover in 2007, but I am certainly in favor of contuining this benefit. Taking the $100,000 as income and then taking a deduction for the same amount, if possible, is generally not as favorable from a tax standpoint.
Posted on March 27, 2008 by Greg Herman-Giddens
According to the IRS Commissioner:
- File Early.
- File Electronically.
- Use Direct Deposit.
IR 2008-51
Posted on March 18, 2008 by Greg Herman-Giddens
Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15
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Direct Deposit Payments
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If the last two digits of your Social Security number are:
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Your economic stimulus payment deposit should be sent to your bank account by:
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00 – 20
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May 2
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21 – 75
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May 9
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76 – 99
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May 16
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Paper Check
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If the last two digits of your Social Security number are:
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Your check should be in the mail by:
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00 – 09
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May 16
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10 – 18
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May 23
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19 – 25
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May 30
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26 – 38
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June 6
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39 – 51
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June 13
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52 – 63
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June 20
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64 – 75
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June 27
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76 – 87
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July 4
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88 – 99
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July 11
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An online calculator is also available to determine eligibility and calculate the amount of the payment for those who are not eligible for the entire $300 or $600 payments. IRS Announcement IR 2008-44.
Posted on March 6, 2008 by Greg Herman-Giddens
For those folks who are not legally required to file federal income tax returns but want to get their tax rebates this Spring (who wouldn't?), the IRS offers free online filing.
Information about eligibility requirements.
Posted on March 5, 2008 by Greg Herman-Giddens
This from Professor Chistopher Hoyt at the UMKC Law School, with good news for S Corporation owners:
The IRS released a revenue ruling that confirmed many of our hopes regarding charitable gifts of appreciated property by a Subchapter S corporation. Normally a shareholder's income tax deduction for an S corporation's business losses is limited to the shareholder's basis in the corporation's stock. The IRS confirmed that charitable gifts can qualify for better tax treatment. The IRS concluded that if an S corporation made a charitable contribution in 2006 or 2007 of appreciated property (such as real estate), the shareholder was entitled to claim a charitable income tax deduction that exceeded the shareholder's basis in the stock. This favorable tax treatment was a temporary measure contained in legislation that expired in 2007, but it is one of the "extender" laws (like "Charitable IRA rollover") and there is a good chance that it will be extended into 2008.
Rev. Rul. 2008-16; 2008-11 IRB 1
Posted on March 4, 2008 by Greg Herman-Giddens
The U.S. Supreme Court, in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), ruled that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions under Internal Revenue Code Section 67(a).
Later this year, the Treasury Department will issue final regulations under Reg. 1.67-4 in keeping with the Supreme Court's decision in Knight. The final regulations on bundled fees that include a portion for investment management will most likely include safe harbors or methods to calculate the portion fully deductible.
Since the final regulations will not be published prior to due dates for the 2007 returns, bundled trustee and executor's fees will be fully deductible for 2007 and prior years (tax years beginning before January 1, 2008) IRS Notice 2008-32; 2008-11 IRB 1.
Notice 2008-32 does, for 2007 and prior year returns, require allocation of "readily identifiable" expenses that are subject to the 2% floor of Sec. 67.
This works to the disadvantage of trusts in which a "custodial' or "administrative" trustee is used, with relatively low trustee fees, with separate (and generally higher) fees paid to the investment advisor, who handles the investment management. But, beginning this year, the playing field has been leveled to some degree.
Click "Continue Reading" the text of Notice 2008-32.
Continue Reading...
Posted on February 14, 2008 by Greg Herman-Giddens
If you are of of the many Americans eligible for a tax rebate this year, and are expecting a check in May, don't procrastinate. In order to receive a rebate, you must have already have filed your 2007 return. So forget the extensions and get your returns done by April 15!
Posted on January 17, 2008 by Greg Herman-Giddens
The IRS recently published a notice naming four new frivolous income tax claims:
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Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
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Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
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A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
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Certain instances of misuse or excessive use of the section 6421 fuels credit.
Needless to say, do not take any of these positions on your return!
Posted on January 8, 2008 by Greg Herman-Giddens
I previously blogged that employers would be required to allow post-death non-spousal rollovers of their retirement plans to IRAs starting in 2008. However, that did not come to pass:
This information is courtesy of attorney Phil Kavesh in California:
The IRS had previously announced that it would accept as part of the Technical Correction Bill to the Pension Protection Act of 2006 a provision that would require all corporate retirement plans to offer non-spouse beneficiaries a trustee to trustee lump sum rollover to an Inherited IRA, thereby allowing non-spouse beneficiaries to take advantage of RMD stretchout and avoid the one-year and five-year rules under most corporate retirement plans.
The Technical Corrections Bill recently passed did NOT include this provision and the IRS has decided not to move from its previous position that permitted each corporate retirement plan to decide whether or not to offer this rollover. This development means that those with corporate retirement plans who have reached normal retirement age and can take an in-service distribution or have retired and left their money in the plan should consider rolling it out to an IRA now, so that non-spouse beneficiaries may take full advantage of RMD stretchout. You may want to check the individual plan first, to see if it has been amended to allow the non-spouse rollover, as I anticipate that many plans will start to make this change over time. If the plan has already made the change, a current rollover would not be necessary.
For creditor, divorce and other protections for an inherited IRA, while still allowing the stretch, a standalone IRA/Retirement Plan Trust makes sense for most persons with retirement account values in excess of $200,000. See my posting on IRA Trusts.
Posted on January 6, 2008 by Greg Herman-Giddens
This in information is courtesy of the NC State Giftlaw Newsletter. Of broadest interest in probably the increase in the AMT exemption and the delay it will cause for early filers who expect refunds.
Continue Reading...
Posted on November 27, 2007 by Greg Herman-Giddens
Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
- 50.5 cents per mile for business miles driven;
- 19 cents per mile driven for medical or moving purposes; and
- 14 cents per mile driven in service of charitable organizations.
This represents a 2 cent increase for business miles, and 1 cent decrease for medical/moving. Doesn't make sense to me to have a decrease, given gas prices!
Posted on November 20, 2007 by Greg Herman-Giddens
I previously blogged about the 2007 income tax deduction available to North Carolina residents to contribute to a North Carolina 529 College Savings Plan account. A deduction of up to $2,500 is available for single taxpayers and up to $5,000 for married couples filing jointly. Initially the deductions were subject to income limitations, but no longer.
In addition, rollovers from 529 plans in other states are considered contributions, so those taxpayers (like me) who set up accounts in another state years ago when the NC Plan was lousy, can now do a rollover to the NC Plan and take a deduction, even without making any new contributions. Rollovers are allowed only once every 12 months.
Posted on November 9, 2007 by Greg Herman-Giddens
A veto would also kill the extension of the $100,000 IRA Charitable Rollover, which is scheduled to expire at the end of this year. Tax expert Professor Christopher Hoyt of the University of Missouri (Kansas City) Law School is betting there will be no veto. The following was released by Tax Analysts:
The White House November 8 threatened to veto the House's alternative
minimum tax patch and extenders package.
According to a statement of administration policy, the Bush
administration opposes the Temporary Tax Relief Act of 2007 (H.R. 3996)
because it couples an AMT patch with what it called "a tax increase on
other taxpayers."
The measure would provide a one-year patch of the AMT at a cost of
roughly $ 50 billion in 2008 and extend for one year several popular tax
breaks, including the research credit and the deduction for teachers'
classroom expenses, at a total cost of roughly $ 21 billion over 10
years, according to a Joint Committee on Taxation revenue estimate. Two
of the bill's largest offsets include provisions that would tax
nonqualified deferred compensation paid by offshore hedge funds to
investment managers and tax as ordinary income the carried interest
income of private equity partners performing investment management
services. A third large offset would implement an eight-year delay in
allowing worldwide allocation of interest expense.
The administration highlighted its opposition to tax provisions that it
warned would "undermine the competitiveness of U.S. businesses in the
global economy." The administration cautioned that lawmakers should
remove those tax provisions before passing the final bill.
The White House also said it disapproved of a provision in the bill that
would eliminate the IRS private debt collection program.
The House is expected to take up the bill November 9, but House Speaker
Nancy Pelosi, D-Calif., indicated November 8 that due to scheduling of
other bills, a vote on the package could slip into the following week,
since its timing was "not absolutely certain."
Posted on October 29, 2007 by Greg Herman-Giddens
The IRS will be offering a number of workshops for small to medium sized 501(c)(3) organizations on tax compliance issues. The cost is a bargan - only $45!
The closest one to North Carolina will be in Columbia, South Carolina on December 4,5 and 6. Click here for details.
Posted on October 28, 2007 by Greg Herman-Giddens
The following is from the North Carolina State University GiftLaw newsletter:
House Ways and Means Chairman Charles Rangel (D-NY) introduced this week the Tax Reduction and Reform Act of 2007 (TRRA 2007). The primary goal of TRRA 2007 is repeal of the AMT. As incomes have grown and the AMT exemptions have failed to keep pace, millions of American taxpayers are now facing a higher tax payment under AMT than under the regular income tax system. If AMT is left unchanged, millions of future taxpayers would transition from the regular income tax to the alternative minimum tax.
Because AMT was never intended to apply to middle income taxpayers, Chairman Rangel has proposed its repeal. However, under the "Paygo" rules of the Democratic Party, he must find an offset or tax increase to replace the estimated revenue loss under AMT of $831 billion over ten years. Therefore, Chairman Rangel proposes to replace the AMT with a new tax on higher-income persons. The new proposed tax is 4% on adjusted gross income over $200,000 and 4.6% on adjusted gross income over $500,000 ($250,000 for single taxpayers).
TRRA 2007 also includes a number of tax extenders and various other tax increases. Chairman Rangel recognizes that a comprehensive tax bill cannot pass this late in the legislative session and plans to hold hearings on major tax reform in early 2008.
TRRA 2007 would also extend the $100,000 IRA charitable rollover for year 2008. The unfavorable news is that the proposed surtax is on adjusted gross income and not taxable income. If a surtax were to pass on adjusted gross income, that would be a significant negative incentive for higher-income donors to make large cash gifts because they would lose part of their charitable deduction. Surtaxes previously have applied to taxable income. A surtax on taxable income is actually a charitable tax incentive, since a cash or appreciated property gift from a higher income person reduces both the income tax and the surtax.
Posted on October 27, 2007 by Greg Herman-Giddens
Beginning in 2008, retirement plans (such as 401(ks) must allow non-spouse beneficiaries to roll over to an IRA. The following is from Ed Slott, CPA:
The Pension Protection Act of 2006 included a provision that would permit non-spouse plan beneficiaries to do direct transfers from the plan to a properly titled inherited IRA and take stretch distributions over their lifetimes instead of being subject to the harsh payout rules of most company plans. This provision became effective in 2007.
The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetime as if they inherited from an IRA. That was the plan. But in January 2007, IRS issued Notice 2007-7 which stated that the provision was not mandatory for plans. This created confusion and controversy and took the wind out of sails of this provision. This was contrary to what Congress intended. Congress realized this and has proposed a technical correction to the law stating that the plans MUST allow the non-spouse direct rollover to an inherited IRA.
In light of the pending Congressional technical correction, IRS reversed its position and now says that the non-spouse rollover provision will be mandatory beginning in 2008.
Click here for the posting on the IRS website.
Posted on October 18, 2007 by Greg Herman-Giddens
Maximum deferral limits for 401(k) and 457 plans remain at $15,500. The limit for defined contribution plan increases to $46,000, while the SIMPLE limit is $10,500. See IRS News Release IR-2007-171 for full details.
Posted on October 17, 2007 by Greg Herman-Giddens
The IRS has issued a news release warning small businesses about certain trust arrangements being sold as welfare benefit plans. These arrangements are considered abusive from a tax standpoint in that they provide extra benefits to the business owner or key employees.
Small business owners should not adopt such plans unless the plan has been cleared with their tax adviser.
Posted on October 7, 2007 by Greg Herman-Giddens
Considering a second home? Read the
Vacation Home Survival Guide on forbes.com. A couple things to keep in mind that aren't mentioned are that second home in other states can trigger probate in that state, even possibly additional estate or inheritance taxes. Owning the home in a limited liability company (LLC) or living trust can help avoid probate, and an LLC can help protect your other assets if you rent out the home and are ever sued by a tenant.
Posted on September 6, 2007 by Greg Herman-Giddens
The North Carolina Long-Term Care Insurance Premium Tax Credit has been reenacted effective for the 2007 tax year through 2012. A credit of 15% of the premium costs, up to a maximum of $350, is allowable for each policy. The credit is restricted those under the following AGI limits:
Married filing jointly - $100,000
Head of Household - $80,000
Single - $60,000
Married filing separately - $50,000
Also, those that take a deduction as part of health care expenses on their Federal income tax return cannot take the NC LTC tax credit.
Click "Continue Reading" for the text of the statute.
Continue Reading...
Posted on August 1, 2007 by Greg Herman-Giddens
Whoever said the IRS isn't on your side?
Click here
Posted on June 28, 2007 by Greg Herman-Giddens
On June 25 the U.S. Supreme Court agreed to hear a case on whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuit Courts are in disagreement on this issue. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue.
North Carolina is in the Fourth Circuit, which has held that the fees are subject to the 2% floor. If the Supreme Court rules the other way, it will be a big benefit for beneficiaries of North Carolina trusts.
Posted on June 11, 2007 by Greg Herman-Giddens
Effective January 1, 2008, the "kiddie tax," which applies the parent's tax rate to children's unearned income over $1,700 (for 2007) will apply to dependent children under age 19 and dependent full-time college students under 24. Prior to 2006, the tax only applied to children under 14, but it was raised to 18 in 2006. See this article on Kiplinger.com for details and planning tips.
Posted on June 4, 2007 by Greg Herman-Giddens
Last week the North Carolina Senate produced its version of the state budget, which included:
• Reducing the state sales tax and the top income tax rate each by 1/4 percentage point, eliminating the last of a 2001 increase in both taxes. This would bring the highest income tax rate down to 8%. The top rate only applies to those with income over $120,000 per year. The House version of the budget did not reduce either.
- While the sales tax cut would benefit everyone, a quarter percent would not provide significant relief for anyone. A low-income person spending $10,000 annually on items subject to sales tax would only save $25 over the course of the year! Likewise, the cut in the income tax will not produce appreciable savings for high income earners. For someone with taxable income of $220,000 per year, there would be a savings of just $250. A taxpayer with income of $150,000 would pay only $75 less. Not that I'm complaining....
• No state version of the federal Earned Income Tax Credit and no funds to help counties pay their share of rising Medicaid costs. The House version did both.
Posted on April 20, 2007 by Greg Herman-Giddens
I recently attended a two day seminar by nationally recognized IRA expert Ed Slott, CPA. If the protection of a trust for IRA beneficiaries is desired, Slott says that the best way is to have the IRA paid to a Standalone IRA Trust. He cautions that IRAs should not be mixed with non-IRA assets.
Slott also recommends that for married couples, spouses with large IRA balances should use the distributions to pay for life insurance to be held in trust for the other spouse, and then make the children (or a trust for their benefit) beneficiaries of the IRA. This leverages funds that are subject to income and possibly estate tax into completely tax-free monies, and provides optimum "stretching" of the IRA, allowing maximum growth. I think this strategy should be used for any couple with large IRA(s) and a total estate exceeding $2 million.
Posted on April 19, 2007 by Greg Herman-Giddens
Robert Keebler, CPA, MST reports on Private Letter Ruling 200708084:
Designated Beneficiaries of See-Through-Trusts and the Life Expectancy used to
Determine the Payout Period of the IRA Distributions
In PLR 200708084, the IRS ruled that a trust is a qualified “see-through trust” and the
decedent’s son and daughter are the only individuals who have to be considered
“designated beneficiaries” because the trust pays outright to them. The lesson to take
from this PLR is that when there are beneficiaries who receive their trust benefit outright,
you do not have to look beyond those beneficiaries for potential contingent beneficiaries
in determining the oldest trust beneficiary.
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Posted on April 11, 2007 by Greg Herman-Giddens
In 2007, qualified North Carolina taxpayers may deduct contributions to North Carolina's 529 College Savings Plan up to $2,500 for individuals and $5,000 for married couples filing jointly. Earnings used for qualified college expenses are income tax free.
To qualify for the deduction, for taxpayers must have adjusted gross income below $60,000 (single), $100,000 (joint), $80,000 (head of household), or $50,000 (married filing separate). You should consult your financial, tax, or other advisor to learn more about how this may apply to your specific circumstances.
For more details, visit the NC College Savings Plan website.
Posted on April 3, 2007 by Greg Herman-Giddens
Today the IRS published a Notice entitled
IRS Urges Taxpayers to Avoid Common Mistakes, which includes common problems and how they can be avoided.
Posted on March 17, 2007 by Greg Herman-Giddens
Earlier this week the IRS published Notice 2007-30, which contains a list of 40 frivolous positions taxpayers should avoid taking on their income tax returns.
In 2006, the penalty for frivolous tax returns was increased from $500 to $5,000. The new penalty amount applies when a person submits a tax return, any portion of which is based on a position the IRS identifies as frivolous.
Four revenue rulings issued along with with the notice address particular frivolous claims frequently made to the IRS. The revenue rulings deal with:
- False arguments that wages do not constitute taxable income.
- Filing returns and paying taxes are voluntary.
- The IRS must furnish taxpayers with a summary record of assessment made on a Form 23C, “Assessment Certificate-Summary Record of Assessments”, before overdue taxes may be collected.
- Income is not taxable when the taxpayer declares that he is not a United States citizen because he is a citizen of an individual State or claims he is not a person as defined by the Internal Revenue Code.
The rulings emphasize the adverse consequences to taxpayers who fail to file returns or fail to pay taxes based on any of these frivolous arguments.
The courts have not only rejected these arguments numerous times, but also have imposed thousands of dollars in fines on taxpayers or their representatives for pursuing frivolous cases.
"Our rulings on frivolous arguments emphasize that the IRS and the courts reject these arguments about the validity of the income tax and ‘too good to be true’ schemes to eliminate tax liability," said IRS Chief Counsel Donald L. Korb.
The IRS continues to investigate promoters of frivolous arguments and to refer cases to the Department of Justice for criminal prosecution. In addition to tax and interest, the $5,000 penalty, taxpayers who file based on a frivolous position may be subject to civil penalties of 20 or 75 percent of the underpaid tax. Persons who bring frivolous tax cases in court may face an additional penalty of up to $25,000.
Related Items:
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IR-2007-37, Fraudulent Telephone Tax Refunds, Abusive Roth IRAs Top Off 2007 “Dirty Dozen” Tax Scams
All taxpayers, whether one uses a professional tax preparer or not, would be well-served to review Notice 2007-30.
Posted on February 27, 2007 by Greg Herman-Giddens
An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes. Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses. North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).
The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself. If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.
Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year. For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings. The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique. Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor. There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.
Check out www.savingforcollege.com for a plethora of information on 529 Plans.
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Posted on February 6, 2007 by Greg Herman-Giddens
In North Carolina, anyone can call himself or herself an accountant (as opposed to a Certified Public Accountant). No special training or education is required. If your taxes are very simple, you may be okay going to an non-certified accountant or tax preparation firm such as H&R Block.
However, if your return is at all complex, or you are looking for tax advice and planning assistance, your bet bet is to hire a CPA, Enrolled Agent, or Tax Attorney. Also, keep in mind that only these three professionals will be able to represent you in the event of an audit.
CPAs must pass an exam and have meet certain edcuational and experience requirements. Enrolled Agents have passed an exam administered by the IRS. Tax attorneys often have a masters degree in tax (LL.M..) in addition to a law degree. Some tax attorneys do not prepare returns, but those that do can often offer a different perspective from CPAs, who may tend to be more conservative.
This article on the Fox News website provides some additional information.
Posted on January 25, 2007 by Greg Herman-Giddens
An article in yesterday's Wall Street Journal discusses the problem of financial services firms providing late or amended Forms 1099. These forms, which show the amounts of interest, dividends and capital gains attributable to each investment account, are necessary for preparation of one's income tax returns. Both Wachovia and Morgan Stanley have obtained extensions from the IRS to file their 1099s, which will now be issued sometime in February. In recent years, the amount of amended 1099s issued after the January 31 deadline has also increased.
The problem is that if you file too early, you may later receive a late or amended 1099, which would generally necessitate filing an amended return.
If you use a CPA or tax service you may not have much control over when your return is prepared, but if you can do so, it probably makes sense to wait until March to file your returns, especially if you are a Wachovia or Morgan Stanley client.
Posted on December 29, 2006 by Greg Herman-Giddens
The Tax Relief and Health Care Act of 2006 was passed into law this week, extending the State and Local Sales Tax Deduction, the Higher Education Tuition and Fees Deduction, and the Educator Expense Adjustment. See this IRS news release for details, or see below for how to deal with the extended tax breaks on the 2006 Form 1040.
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Posted on December 28, 2006 by Greg Herman-Giddens
| For some last things to think about before getting set to get your estate plan in order for 2007, check out this recent article by Kay Bell published on Bankrate.com: |
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Have you been too busy to make your list, much less check it twice? No problem. We've got it right here.
Nah, we're not talking about that reminder sheet for your holiday shopping. This is your all-important year-end tax to-do list.
By checking off these 13 items by Dec. 31, you'll find your tax filing chore next year much easier. Even better, these year-end moves might net you enough tax savings so that you can easily pay for most of the gifts on that other list.
Tax planning can work to your advantage. You can lower your liability by paying certain expenses before Dec. 31 and by deferring income until after that date when possible.
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| 13 ways to cut your tax bill |
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Click on each numbered link to read more |
Posted on December 16, 2006 by Greg Herman-Giddens
From a recent IRS e-newsletter:
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law changes made last summer by the Pension Protection Act.
The new law offers older owners of individual retirement accounts a new way to give to charity. It also includes rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.
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Posted on December 4, 2006 by Greg Herman-Giddens
From the N.C. State GiftLaw eNewsletter this week:
In January of 2007, Rep. Charles Rangel (D-NY) will assume the leadership of the House Ways and Means Committee. Chairman Rangel has indicated that alternative minimum tax (AMT) reform will be a high priority. Large numbers of taxpayers from his district in New York City have substantial incomes and now are subject to AMT.
During the past five years, Congress has repeatedly passed an "AMT Patch." As more taxpayers have been subject to AMT, Congress has slowly and steadily increased the AMT exemption. However, with increasing numbers of taxpayers with higher incomes and reductions in top tax rates in 2001 and 2003, millions of American taxpayers are now facing alternative minimum tax.
Bills have previously been introduced in both the House and the Senate to repeal the AMT. If the revenues forgone by AMT repeal are calculated, the cost could potentially amount to a trillion dollars. Therefore, the major question on AMT repeal is whether or not to use offsets to create a "revenue-neutral" bill. "Revenue-neutral" is Washington language for a bill that will include some tax increases. Given the magnitude of the funds involved, the offsets may include higher rates for upper-income taxpayers.
Sen. Charles Grassley, who will be the ranking Republican on the Senate Finance Committee in January, issued a press release that warned about raising rates to pay for AMT repeal. He noted, "I hope the new Democratic leaders won't fall into traps on AMT repeal, such as counting on the revenue that AMT raises for more Government spending. It's ridiculous to rely on revenue that was never supposed to be collected in the first place. Another trap is raising taxes to pay for AMT repeal. It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."
Sometimes known as the "awfully mean tax," the AMT involves a complex set of rules designed to ensure that high-income taxpayers pay their "fair" share of taxes. Personally, I don't like seeing my itemized deductions being reduced because of AMT limitations. Even if I end up paying the same amount of tax due to tax increases, I support AMT repeal as small step in simplifying the tax code.
Posted on November 19, 2006 by Greg Herman-Giddens
Owning real estate in a self-directed IRA can seem like a great way to save for retirement. However, I have found that most clients want to structure the ownership and/or management of the real estate in such a way that they will run afoul of the prohibited transactions rules. Once they learn of the restrictions involved, they are not so keen on the idea. Real estate or business ownership in an IRA can work, but knowledgeable tax counsel should be consulted. Many attorneys and CPAs are not familiar with the laws regulating self-directed IRAs.
Check out this article by Lynn O'Shaughnessy: Sweat Equity in IRA Real Estate can be no-no
Posted on November 17, 2006 by Greg Herman-Giddens
The IRS is holding $92 million for about 95,000 taxpayers whose refund checks have been returned as undeliverable by the Postal Service. If you think you are due a refund that hasn't arrived yet, check out this
posting on the IRS website.
Posted on November 9, 2006 by Greg Herman-Giddens
- Each personal and dependency exemption will be $3,400, up $100 from 2006.
- The new standard deduction will be $10,700 for married couples filing a joint return (up $400), $5,350 for singles and married individuals filing separately (up $200) and $7,850 for heads of household (up $300).
- Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket will be $63,700, up from $61,300 in 2006.
In 2007, for the first time, inflation adjustments will increase the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayer's spouse is covered by a retirement plan at work.
Revenue Procedure 2006-53, containing a complete list of inflation adjustments, is on the IRS Web site and will appear in Internal Revenue Bulletin 2006-48, dated Nov. 27, 2006.
Posted on November 6, 2006 by Greg Herman-Giddens
Rev. Proc. 2006-51 increases the amount of foreign earned income eligible for exclusion from gross income to $82,400 for tax years beginning in 2006. The prior $80,000 exclusion provided by IRC §911 is adjusted for inflation for calendar years after 2005 pursuant to the Tax Increase Prevention and Reconciliation Act of 2005. Under prior law, the exclusion was not due for adjustment until 2008.
Posted on November 2, 2006 by Greg Herman-Giddens
From the IRS Newswire:
IR-2006-168, Nov. 1, 2006
WASHINGTON - The Internal Revenue Service today issued the 2007 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning Jan. 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
48.5 cents per mile for business miles driven;
20 cents per mile driven for medical or moving purposes; and
14 cents per mile driven in service to a charitable organization.
The new rate for business miles compares to a rate of 44.5 cents per mile for 2006. The new rate for medical and moving purposes compares to 18 cents in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October.
The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Runzheimer International, an independent contractor, conducted the study for the IRS.
The mileage rate for charitable miles is set by statute.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2006-49 contains additional information on these standard mileage rates.
