The North Carolina Senate had announced plans to reveal the new NC tax reform bill in early May. However, the press conference instead produced the outline of a measure that the Senate hopes to turn into a bill later in 2013. Citing pending reports of tax collections from April as part of the bill’s delay, the legislators provided the proposed tax changes that will combine to about $1 billion in tax cuts.Continue Reading...
Steve Oshin’s 2013 Annual Domestic Asset Protection Trust State Rankings were released and show the highest scoring state for DAPTs is Nevada.Continue Reading...
Parents are allowed to take a federal and state income tax deduction for each dependent child. However, North Carolina proposed Senate Bill 667 (Equalizer Voter Rights) in early April 2013 that will not allow parents to claim their child for state income tax purposes if their child has registered to vote at an address other than where the parent or legal guardian resides.Continue Reading...
Taxpayers make preventable mistakes every year that cause delays with their tax return processing. Knowing what these mistakes are may help you avoid unnecessary delays of your refund. Courtesy of the IRS, our North Carolina tax attorneys have listed five common mistakes taxpayers make when they filing their taxes in the hours or days before April 15th:Continue Reading...
Making withdrawals from retirement accounts before actual retirement is usually a last resort. Individuals fear penalties and taxes—expenses they were not anticipating when they took the financially responsible step to contribute to their retirement. In addition to potential penalties, withdrawing funds early means they may not be accessible when intended: Retirement.Continue Reading...
A new study reveals more employers will offer Roth 401(k)s to their employees in 2013. About a third of all employers surveyed by Aon, a human resource services provider, have plans to add a Roth contribution option. Since there are no income restrictions for Roth 401(k)s, the rising trend will catch the eye of many employees.Continue Reading...
Recently we wrote about North Carolina potentially joining several other states that are repealing state estate tax (or “death tax”). Last week, the North Carolina House Finance Committee approved repeal of the state’s death tax. If the repeal is enacted into law, soon there will no longer be any states in the Southeast that impose a death tax. (Tennessee’s death tax will expire in 2016.)Continue Reading...
What may become part of the “fiscal cliff” drop—and if not, it will be on the 2013 agenda—is the elimination of municipal-bond interest tax breaks. Muni-bond taxes help cover the costs of local utility services, community parks, and more. Currently, about $1 trillion dollars is invested in municipal bonds by individual investors.Continue Reading...
Last week the United States Treasury proposed new regulations for Charitable Remainder Trusts (CRTs), which affects the tax liability of distributions in 2013. CRTs are a common type of trust that allows assets to be donated to a charity while the donor receives income for the specified trust period. Trust grantors take advantage of income and estate tax deductions.Continue Reading...
A recent press briefing with Press Secretary Jay Carney touched on tax issues that will affect every American in 2013. Right now, Americans are ill-prepared for the approaching drop off the “fiscal cliff.” As tax cuts are about to expire in the New Year, how will individuals be affected?Continue Reading...
In Rev. Proc. 2012-41, the IRS has announced various inflation-adjusted tax figures for 2013. Among them:
- The annual gift tax exclusion will be $14,000 (for gifts of a present interest to any person).
- The annual gift tax exclusion for gifts to a non-citizen spouse will be $143,000 (for gifts of a present interest).
Also, in IR 2012-77, the 2013 retirement account contribution limits were released. For 401(k) and 403(b) plans, the limit will be $17,500.
The IRS has compiled a list of the top five errors on on 2012 income tax returns, both taxpayer-prepared and those prepared by paid preparers (I intentionally don't use the word professional, as many preparers have little training). However, given the immense complexity of our tax code, and human nature, even experienced CPAs and tax attorneys make mistakes. Software has certainly made tax return preparation easier, but it sometimes taxpayers and preparers may rely too heavily on tax programs and too little on independent research.
Despite all the wrangling in Congress, we are still facing income and estate tax increases in 2013, now only five months away. See if you might be able to utilize any of these planning tips from the Accounting Today article Midyear Tax Planning: Top 10 Tips in a Time of Uncertainly.
One thing the article does not address is planning by executors and trustees to minimize the impact of the coming top income tax rate of 39.6% and the additional 3.8% investment income surtax. Trusts and estates reach the highest income tax rate at $11,650 (for 2012). Executors and trustees should consult a CPA or tax attorney with expertise in fiduciary income tax matters.
The proposal provides for a continuation of the current income tax laws for one more year, preventing the scheduled expiration of the Bush tax cuts on December 31, 2012. This would be most meaningful for those individuals with income over $200,000 or couples over $250,000, as Democrats are calling for tax rates to automatically increase for these taxpayers.
The Bill also includes a one year continuation of the current $5.12 million estate tax exemption (with inflation adjustments), 35% tax rate and spousal portability of the exemption.
Two House Bills, which have already passed, provide for repeal of the new health care law and the dreaded $3.8 investment surtax that is also scheduled to hit in 2013.
However, with a Democrat controlled Senate, don't look for these Bills to become law anytime soon. Most likely, nothing will happen before the election.
See this article in Accounting Today for more on the Bill.
A self-directed IRA is an IRA held by a custodian that allows investments in a broader class of assets than allowed by most IRA custodians, such as real estate, promissory notes and private placement securities. Because they normally include such alternative assets, the risk and rewards of self-directed IRAs may be greater than those of traditional IRAs.
Self-directed IRAs are becoming increasingly common, and while there are many legitimate investments available, there is more risk of investors becoming defrauded due to the nature of the assets involved.
To help raise public awareness of how to avoid fraud, the Retirement Industry Trust Association and the North American Securities Administrators Association are offering a free webinar on July 18 at 2:00 p.m. Eastern. Click here to register.
Among the topics to be discussed are:
- What are self-directed IRA accounts and why are they useful?
- What are the warning signs of investment fraud in self-directed IRAs?
- What should investors do if they suspect fraudulent activity?
- How do securities regulators help protect investors who use self-directed IRA accounts?
Owners of self-directed IRAs should also be careful when purchasing and operating rental real estate within the IRA, as violations of a "prohibited transaction" could trigger tax penalties.
Now that the health care law has been declared constitutional, the remaining provisions will be going into effect. One little known provision is a new 3.8% investment income surtax, also called the health care surtax or the Medicare tax; it will go into effect on January 1, 2013.
This new surtax will be assessed on the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over the “threshold amount.” For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; all other individual taxpayers, $200,000. For trusts and estates, it is the beginning of the top income tax bracket ($11,650 in 2012).
Stated another way: 1) If your modified adjusted gross income (MAGI) is less than or equal to the threshold amount that applies to you, you will not pay this tax. 2) If your modified adjusted gross income (MAGI) is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount. Here are some examples of the application of the surtax.
Note that the surtax liability is determined on income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital gain rate is scheduled to increase for high-income taxpayers to 20% in 2013, so the total tax on capital gains (with the surtax) could be 23.8% in 2013 and beyond.
The good news is that there are some steps you can take this year to help you avoid or reduce the amount of surtax beginning in 2013. Also, 2012 is an exceptional year for estate planning in general. The federal estate tax exemption is $5.12 million, which allows a married couple to transfer as much as $10.24 million from their estate with no estate tax. Under current law, this exemption is scheduled to shrink to $1 million in 2013. Other Bush tax cuts, including income and capital gain taxes, are set to expire at the end of 2012. With the new 3.8% surtax becoming effective in January, 2013 is on track to have the highest tax rates we have seen in years.
Now, more than ever, you need the assistance of experienced tax professionals to advise you and help you implement the best plan for you and your family.
Note: The above content is adapted in part from information provided by the nationally recognized tax professionals at Keebler & Associates. The full text of the Health Care Act is available online, with the relevant provisions beginning at Section 1411 at page 946.
The Supreme Court's recent affirmation of the Affordable Car Act and the associated new taxes, including the 3.8% investment income surtax has many affluent taxpayers and their advisors concerned. However, individual investors aren't the only ones who will be affected by this new law, as the surtax applies to trusts and estates as well.
The surtax goes into effect on January 1, 2013 and will apply to trust and estate net investment income in excess of about $12,000 that isn't paid out to heirs or beneficiaries. Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income, but not distributions from IRA's and other qualified retirement plans. Trusts or estates that pay out 100% of income distributions will not owe a surtax, but the heirs or beneficiaries receiving the distribution will have to report the income, which will be used in their own individual surtax determinations.
For eligible estates and electing trusts, selecting the correct year end could considerably reduce the months in which surtax is owed on the estate. It may make sense to choose a December 31, 2012 year end where possible.
It's not too early for trustees, executors and their tax advisors to start considering implication of this new tax.
The Supreme Court’s recent decision to uphold the Affordable Care Act will have considerable tax consequences for both high-income as well as middle-class Americans. In approving “Obamacare,” the Supreme Court characterized the health care mandate as a tax, a label that the Obama administration has been resisting in favor of the term “penalty.” By whatever name, the law will impact a large portion of Americans in the following years as it is implemented. Below is a timeline of most of the major tax provisions of the new law:
- Effective in 2011, the penalty on non-qualified distributions from HSA’s doubled to 20%.
- Starting in 2012, all W-2’s must include the value of health care benefits provided to employees.
- Beginning in January 2013, individuals with over $200,000 annual income and married couples filing jointly with over $250,000 annual income must pay an additional 0.9% Medicare payroll tax on earned income.
- Beginning in January 2013, a 3.8% Medicare surtax will be owed on the lesser of net investment income or the amount by which adjusted gross income exceeds $200,000 for individuals or $250,000 for married couples filing jointly. Such investment income includes income from capital gains, interest, dividends, annuities and royalties.
- The itemized deduction floor for medical expenses for 2013 will increase to 10% of adjusted gross income.
- Beginning in January 2014, uninsured Americans will face an additional tax penalty, starting at the greater of $95 or 1% of income in 2014 and rising to the greater of $695 or 2.5% of income by 2016. Penalties for families will be fixed at a maximum flat penalty of $2085, yet families will still owe 2.5% of household income if that amount is greater. While the IRS does not have the power to put a lien on your house under the Affordable Care Act in order to satisfy the penalty, it could possibly confiscate tax return refunds or dip into available credit.
- Beginning in 2014, individuals with low income who purchase coverage will have access to a refundable tax credit.
- Beginning in 2014, businesses that don’t provide adequate coverage will face a non-deductible fee of $2,000 per employee (not counting the first fifty employees).
- Beginning in 2018, a 40% excise tax will be imposed on the portion of health care plans that exceed $10,200 for individuals and $27,500 for families.
What remains to be seen is whether the Act will be repealed by the Republicans after the election.
The IRS has announced plans for new streamlined procedures that will allow U.S. citizens residing overseas, including dual citizens, to get current with their tax filing obligations without facing penalties or additional enforcement action. Scheduled to go into effect on September 1, 2012, the new procedures will provide help to low compliance risk taxpayers who wish to correct previous failure to file timely tax documents, including income tax returns and Reports of Foreign Bank and Financial Accounts (FBARs).
Those eligible for filing under the new procedures generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years; taxpayers presenting higher compliance risk will still be subject to heightened review and possible audit. Under the new procedures, taxpayers will be required to file delinquent tax returns along with appropriate related information returns for the past three years, as well as delinquent FBARs for the past six years.
In addition to aiding overseas U.S. citizens with tax filing obligations, the IRS also plans to provide assistance regarding foreign retirement plan issues. Whereas tax treaties often allow for income deferral under U.S. tax law only if a timely election is made, the new procedures will allow for deferral in low compliance risk situations even where a timely election was not made.
Owners of individual retirement accounts might face increased scrutiny by the IRS in the near future, posing the danger of hefty penalties for account mistakes that have previously gone unnoticed. As this recent online Wall Street Journal article notes, the IRS recently has been cracking down on secret foreign accounts and high earners. Now its attention is likely to turn to IRA account holders as the agency implements more aggressive enforcement strategies in reviewing IRA accounts. The agency will report its new policy regarding taxpayer errors to the Treasury Department by October 15, but until then, account owners should take extra care to ensure that any past withdrawal and contribution errors are corrected proactively and to prevent future errors, as the penalties for such errors can amount to 50% of the amount IRA holders failed to withdraw.
Here are some rules to keep in mind when reviewing your account with your lawyer, CPA or financial planner.
- IRA owners are required to start making withdrawals from traditional IRAs by April 1 of the year after they turn 70½. Such withdrawals are calculated by dividing the total IRA balance as of December 31 of the year prior to turning 70½ by life expectancy, which can be found in IRS Publication 590.
- IRA owners who have a spouse more than a decade younger who is their sole heir must consult a separate life-expectancy table in the same publication.
- Workers whose money is in a 401(k) who don’t own more than 5% of the company do not have to make withdrawals from that account when the turn 70 ½, provided that they still work for the company sponsoring the account. However, withdrawals do have to be made if you roll your 401(k) over to an IRA, regardless whether you continue working for that employer after you turn 70½.
- Traditional IRA owners cannot contribute more than $5,000 a year, or $6,000 if age 50 or older. IRA owners also cannot contribute more than their “earned income,” which includes wages, commissions, and alimony, but does not include rental-property income, pension, or deferred compensation.
- Mistakes regarding excess contribution can be corrected before October 15 of the following year by withdrawing the excess amount plus interest.
- Inherited IRA accounts allow for tax-deferred growth and annual minimum required distributions. However, the person inheriting the account must make the required withdrawal and report it as ordinary income on his or her own tax return if the decedent account owner was over 70½ and failed to make the withdrawal for that year prior to death. Designated beneficiaries who inherit accounts from anyone other than a spouse must take withdrawals across their own life expectancies starting the year after the death of the original account holder. Beneficiaries who inherit an IRA account from a spouse can either roll the account into their own IRA or set up an inherited IRA and postpone taking required distributions until the decedent would have turned 70½.
The IRS has released the 2013 inflation-adjusted amounts for Health Savings Accounts (HSAs). The tables below show the values for 2012 and 2013.
High-deductible health plan: A health plan that meets certain requirements regarding deductibles and out-of-pocket expenses:
*Annual deductible contribution limit: For 2012 and 2013 the maximum deductible contribution to an HSA is as follows:
Source: 2013 data from IRS Revenue Procedure 2012-26
North Carolina has a new law, G.S. 105-134.6(b)(22), that grants business owners a deduction of up to $50,000 of their net business income from NC taxable income. The income must be reported on Form 1040 Schedules C, E or F, and no deduction for passive income is allowed. The North Carolina Department of Revenue just issued a Directive that answers FAQs on the new law.
Unfortunately folks like me who own small businesses that are incorporated cannot benefit from the deduction. However, those who own 100% of a business and want the protection that a separate legal entity provides can establish a limited liability company (LLC). A single member LLC is disregarded for tax purposes by the IRS, so the income is reported on the owner's Schedule C. At a tax rate of seven percent, the savings could equal $3,500 per year.
The IRS has just issued a Last Minute Reminder to Parents and Student; Don't Overlook College Tax Benefits. It provides a good overview and lots of links to other resources.
I wish there was a special benefit for parents who have more than two children in post-secondary school at once - I have four in college for at least the next two years!
While no substitute for the advice and assistance of a tax professional, The American Institute of Certified Public Accountants (AICPA) offers 10 Tips for Last Minute Tax Filers.
Remember, Failure to File and Failure to Pay penalties are 5% (each) of the amount of each due - if you wait five months, your total penalty could equal fully one-half of the tax due! And that doesn't include interest. Even if you can't get anything else done by April 17, the automatic extension could save you a lot!
In a recent federal District Court case, the co-executors of a decedent's estate were held to be personally liable for the decedents unpaid income taxes under the federal priority statute because they distributed assets of the estate, the distribution rendered the estate insolvent, and it took place after they had actual knowledge of the decedent's liability for unpaid taxes. U.S. v. David A. Tyler and Louis J. Ruch, (DC PA 03/13/2012) 109 AFTR 2d ¶2012-583.
This case should serve as a reminder that serving as executor is not a job to be taken lightly, and that one must take great care to follow the law ensure that one does not become personally liable to acts or omissions as executor. In my admittedly biased opinion, lay executors should always hire counsel to assist them - and follow counsel's advice. In doing so, they will often save the estate and themselves money in the long run, not to mention increased peace of mind.
Tax season is in full swing, and I was recently out of the office for a few days, so I'm a bit late in reporting this, but the provision to do away with the ability of most IRA beneficiary's to stretch distributions over their life expectancies is now back on the table as part of the Senate Highway Bill. See Page 28 for details.
Let's hope it goes away again, for good!
I've been a big proponent of planning to preserve the ability to "stretch" inherited IRAs over the life expectancy of the beneficiary, which allows for tremendous tax-deferred growth. In what came as a big surprise, to me anyway, Senator Max Baucus recently proposed requiring that most inherited IRAs be paid out within five years. Now, however, it appears that Baucus is backing off his revenue raising proposal. This brings a collective sigh of relief from IRA owners, financial advisors, custodians, and tax professionals.
I just came across this article, Closing Down the Estate, on SmartMoney.com. It gives a good overview of what an executor is responsible for from a tax perspective, but is by no means exhaustive. Since Executors can be personally liable for certain tax penalties, they should make sure to engage an experienced tax attorney or CPA to ensure that everything is done timely and correctly.
S Corporation owners who are service providers often take a low salary so that they can receive most of the firm's profits as a dividend, avoiding payroll taxes. When the salary is unreasonably low, or there are no other fee generating employees of the firm, doing so is particularly questionable. In the December 2010 Watson case, a CPA, whom you think would know better, was busted by the IRS for this practice. Mr. Watson took a salary of just $24,000 in a year in which his share of the profits was over $200,000. The U.S. District Court for the Southern District of Iowa ruled for the IRS and held that the compensation was unreasonably low and the dividends were properly reclassified as salary and subjected to payroll taxes.
To be safe, make sure you set a salary comparable to what someone in a comparable position would get, and if you you have no employees who are also bringing in fees, take virtually all of your net income as a salary. This will help keep in the IRS away, and let you contribute more to your retirement account, as your earned income will be much higher.
There a few federal income tax deductions and other provisions that expire this year:
- Tax-free distributions from IRAs for charitable purposes - Taxpayers who were at least age 70½ could make tax-free charitable distributions from an IRA up to $100,000.
- Contributions of capital gain real property made for conservation purposes - The expanded deduction (50% for individuals, 100% for qualified farmers and ranchers) of the value of a qualified conservation easement donated to a qualifying charitable organization. In 2012 and later, the deduction will be limited to 30% for all taxpayers.
- Deduction for certain expenses of elementary and secondary school teachers - The above-the-line deduction of up to $250 for unreimbursed classroom expenses.
- Deduction of state and local sales taxes - Taxpayers could choose to deduct, as an itemized deduction on Schedule A, state and local general sales taxes, in lieu of deducting state and local income taxes.
- Qualified tuition and related expenses - Certain taxpayers were allowed an above-the-line deduction (up to a maximum of $4,000) for qualified tuition and related expenses for higher education.
- Individual AMT exemption amounts - Individual AMT exemption amounts for 2011 are $74,450 (married filing jointly), $37,225 (married filing separately), and $48,450 (single and head of household). In 2012 the exemption amounts will decrease to $45,000 (MFJ), $22,500 (MFS), and $33,750 (Single/HoH).
It's possible that tax legislation in 2012 could retroactively extend these benefits. A host of other tax cuts will also expire on December 31, 2012, and I'm sure that Congress will at least attempt to address the issue next year. Stay tuned for more fun and games from Washington!
U.S. citizens must report and pay taxes on their world-wide income, even if living in another country. U.S. taxpayers are also required to disclose foreign bank and financial accounts (FBARs). It's important to know and follow the rules in order to avoid civil and criminal penalties.
The IRS has published a guide on income tax filing and FBARs for U.S. Citizens or Dual Citizens Residing Outside of the U.S.
In IR-2011-103, the IRS announced the pension and other retirement account contributions limit. Certain limits are set for below:
- The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
- The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
SIMPLE and SEP IRAs:
- The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
- The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
The IRA catch-up contribution limit for those aged 50 and over is $5,500.
The IRS announced today that the amount exemption from estate taxes will increase next year. For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.
For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts will remain at $13,000.
The IRS has announced that residents of the following North Carolina counties qualify for filing and payment relief due to Hurricane Irene: Beaufort, Carteret, Craven, Dare, Hyde, Pamlico and Tyrell.
The tax relief postpones certain tax filing and payment deadlines to October 31, 2011. Included are businesses that earlier received an extension until September 15, 2011 to file their 2010 returns, as well as individuals and businesses that obtained a similar extension until October 17. It also includes the estimated tax payment for the third quarter of 2011, which would normally be due September 15.
From IR-2011-80, issued on July 25, 2011:
The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:
- The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
- A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.
- The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.
The change to the two-year limit is effective immediately, and details are in Notice 2011-70.
Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.
By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.
Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.
The North Carolina General Assembly recently passed legislation that preserves the deduction on NC 529 College Savings Plan contributions for all North Carolina taxpayers, regardless of income. The adjusted gross income limitations that were scheduled to return in 2012 on the state income tax deduction for the NC 529 Plan have been eliminated.
The maximum annual contribution deductible from NC taxable income remains the same at $2,500 (individual) or $5,000 (married, filing jointly). 529 Plans offer tax-free growth when used for qualified educational expenses, and are protected from creditors up to $25,000 for each plan.
WASHINGTON — The Internal Revenue Service today reminds everyone who has a bank or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.
Many people in the U.S. have foreign financial accounts. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.
For 2010, the due date for filing the FBAR is Thursday, June 30, 2011, though some financial professionals will have until June 30, 2012 to file. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.
The FBAR is not an income tax return and should not be mailed with any income tax returns. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.
FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621.
Click here for a report of a recent plea bargain by a disbarred lawyer who was charged with hiding asset in UBS accounts in Switzerland.Continue Reading...
The U.S. Fourth Circuit Court of Appeals, under whose jurisdiction North Carolina falls, overruled a Tax Court decision and upheld a Treasury regulation that provides for a two-year statute of limitation on claims for innocent spouse relief (Jones v. Commissioner, docket no. 10-1985 (4th Cir. 6/13/11)). This is the third time a Tax Court ruling on this issue has been overturned by a higher court.
Married couples who sign and file a joint return are both liable for any tax and penalties due with regard to the return. Innocent spouse relief is often sought by a spouse who claims that he or she did not have any knowledge of the other spouse's fraud against the IRS.
From Announcement 2011-40:
WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Rates 1/1 through 6/30/11
Rates 7/1 through 12/31/11
For many people, the federal home sale gain exclusion is the single most valuable tax break available. But if you're getting divorced and selling a home, you may need to plan ahead to take advantage of the tax break. We'll explain why, but first, here's a little background information.
Gain Exclusion Basics If you're unmarried, you can potentially sell a principal residence for a profit of up to $250,000
Q. If I take the exclusion of capital gain tax on the sale of my home this year, can I also take the exclusion again if I sell another home in the future? A. Yes. With the exception of the two-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of a principal residence, as long as you meet the ownership and use tests.
Gain Exclusion Basics
If you're unmarried, you can potentially sell a principal residence for a profit of up to $250,000
Q. If I take the exclusion of capital gain tax on the sale of my home this year, can I also take the exclusion again if I sell another home in the future?
A. Yes. With the exception of the two-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of a principal residence, as long as you meet the ownership and use tests.
1. You must have owned the property for at least two years during the five-year period ending on the sale date (referred to as the ownership test).
2. You must have used the property as a principal residence for at least two years during the same five-year period (referred to as the use test).
To be eligible for the $500,000 joint-filer exclusion, at least one spouse must pass the ownership test and both spouses must pass the use test.
If you excluded a gain from an earlier principal residence sale under these rules, you generally must wait at least two years before taking advantage of the tax break again. The $500,000 joint filer exclusion is only available when both spouses have not claimed an exclusion for an earlier sale within two years of the sale date in question.
Of course, home sales often occur in divorce situations and the cash from this tax break can come in handy.Continue Reading...
While it's certainly not uncommon for taxpayers or tax preparers to make mistakes on tax returns, the IRS can also screw up, big time.
A couple of weeks ago an 86 year old client of mine received a letter from the IRS stating that she had taken a frivolous position on her 2009 tax return (which I prepared). The letter threatened that if she did not file an amended return within 30 days to eliminate the frivolous position, she would be fined. The letter did not refer to the nature of the frivolous position. Needless to say, my client was quite worried.
Having no idea what the IRS could have possibly found wrong with the return, I called, and spent many minutes on hold both before and during a conversation with an IRS agent. Finally the agent told me that it did not appear that there was anything wrong with the return, but that she would have her supervisor call me early the next week. Apparently, the fact that my client had had about $40,000 withheld thinking she would owe substantial tax on stock sales (she had mostly losses) triggered an alert by the IRS.
Of course, no one called. I called back and was told that someone would call me that afternoon around 2:00. No one called back, so after a few days, I placed my third call to the IRS. This time, I was informed was the return was fine, and that a letter of apology had been authorized and would be mailed out within a week.
So, happy ending, but my client will end up having to pay my fees for having to deal with the IRS to straighten them out. The thing to remember is that the IRS (NC Department of Revenue, etc.) can be wrong, and sometimes very much so. Sic your tax lawyer on them, and you may get very good news, as my client did this morning.
The distribution rules for inherited IRAs generally make it advantageous to have separate accounts, which can be done during your lifetime or by December 31 of the year following your death. If you plan to leave an individual retirement account (IRA) balance to several beneficiaries, consider splitting each beneficiary's share into a separate account during your life. Why is it so important to have separate accounts?
Your spouse has more alternatives available if he/she is the sole beneficiary. A surviving spouse can roll over the IRA to an IRA in his/her name or treat your IRA as his/her IRA. With the rollover IRA, the surviving spouse can name his/her own beneficiaries, thus extending the IRA's life, and can defer payouts until age 70 1/2. However, to roll over the IRA, the surviving spouse must be the sole beneficiary.
When there is more than one non-spouse beneficiary for an inherited IRA, distributions must be taken over the oldest beneficiary's life expectancy. By splitting the IRA into separate accounts, each beneficiary can take distributions based on his/her life expectancy.
An important estate planning strategy for inherited IRAs is the ability to disclaim all or a portion of the IRA. If a beneficiary disclaims an IRA within nine months of the decedent's death, the disclaimed IRA is not considered a gift and would then go to the contingent beneficiary. By splitting the IRA into separate accounts, you can better control what would happen if each beneficiary disclaims his/her share. For instance, your beneficiaries might be your two children, with your grandchildren named as contingent beneficiaries. With separate accounts, each child could decide whether to disclaim the IRA, knowing the proceeds would then go only to their children.
From an administrative standpoint, it is often easier to have only one IRA rather than several. But with separate accounts, you can ensure that your IRA is set up to work to the best advantage of your beneficiaries.Source: TrustCounsel's May 24 , 2011eNewsletter by BizActions.
On April 22, 2011, I posted an IRS Notice about a tax relief program for victims of the April 16, 2011 storms in North Carolina. As of May 9, 2011, residents who live in or own a business in the following counties are eligible:
Bertie, Bladen, Craven, Cumberland, Currituck, Greene, Halifax, Harnett, Hertford, Hoke, Johnston, Lee, Onslow, Pitt, Robeson, Sampson, Tyrell, Wake and Wilson
Taking care of an elderly parent may provide more than just personal satisfaction. You could also be entitled to substantial tax deductions even if your parent doesn't live with you.
Here are five tax opportunities you might have overlooked: Claim a dependency exemption.
Here are five tax opportunities you might have overlooked:
Claim a dependency exemption.If you provide a parent with regular financial support, check and see if you can take a dependency exemption on your tax return. Each exemption
- You must provide more than half of his or her financial support for the year.
- Your parent's "gross income" must be less than $3,650 in 2010. (The good news is that the non-taxable portion of Social Security payments don't count.)
Share and share alike. Do you and your siblings chip in to help support a parent? Generally, there's no tax break for furnishing a small amount of money, but there's an exception in the tax law that allows families to share a dependency exemption.
Relatives can set up a "multiple support agreement" by filing an IRS form. In essence, your family is pooling the support payments and allowing one sibling to take the dependency exemption. The next year, the group designates another member to get the tax break.
This way, your family reaps the benefits of an exemption that no one can qualify for alone. Consult with your tax adviser for more information.
Take a medical deduction. Perhaps you pay a large amount for a parent's health care or nursing home bills. You may be able to secure a tax write-off by adding the amount to your deductible medical expenses. (Keep in mind, however that the medical deduction is limited and you can only write off qualified payments that aren't reimbursed by insurance.)
Claim a credit for home-based care.You can also get a tax break if you pay someone to care for a parent while you work. Let's say you hire a nurse's aide to watch your 85-year-old father because he's unable to stay alone. You may qualify for a medical expense deduction for the cost of the aide, as described above, but you could also be eligible for a dependent care credit. The credit is usually worth more because it's a dollar-for-dollar subtraction from the taxes you owe. A deduction only lowers the amount of income used to calculate your tax bill.
To qualify for a dependent care credit -- just like the one available to parents with children -- you must work full or part-time. The credit is also available if you're a full-time student, disabled, or actively searching for a job. The exact amount of the tax break depends on your income.
Become a head of household. There is a separate, lower tax rate for single people who pay more than half of the costs of maintaining a parent's home. You may be eligible for "head of household" tax filing status.Source: TrustCounsel's May 3, 2011 eNewsletter by BizActions.
The IRS has issued interim guidance on the treatment under Code Section 67 of investment advisory costs and other expenses subject to the 2-percent floor under Section 67(a). Notice 2011-37.
In particular, the notice provides that, for taxable years beginning before the date that final regulations under § 1.67-4 of the Regulations are published in the Federal Register, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.
WASHINGTON –– Hiding income in offshore accounts, identity theft, return preparer fraud, and filing false or misleading tax forms top the annual list of “dirty dozen” tax scams in 2011, the Internal Revenue Service announced today.
“The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”
The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties.
Following is the Dirty Dozen for 2011:Continue Reading...
Health care reform doesn’t come cheap. How do we pay for it? More and increased taxes, of course, both this year and in future years, along with certain credits for health insurance premium costs. This is an outline of the many tax law changes as a result of the new health care laws, organized by affected parties and implementation date:
· Starting in 2011
o Over-the-counter medications are no longer qualified expenses for Flexible Spending Accounts, Health Savings Accounts, or health reimbursement arrangements
o 20% penalty for nonqualified distributions from Health Savings Accounts, up from 10%
The IRS is often accused of being heartless, but it does show some compassion to taxpayers who cannot complete an IRA rollover within the deadline because of extenuating circumstances. The General Rules Factors Considered by the IRS The IRS "will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." (IRS Revenue Procedure 2003-16) What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions. Facts of the case: The taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days. The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds. After reviewing the facts, the IRS accepted the widow's claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012) These are only a few of the examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.
In a series of private letter rulings, the IRS has granted taxpayers relief from tax bills and penalties.
For example, one taxpayer from Maine was unable to complete a rollover transaction on time because a major snowstorm made it impossible to get to the bank. The IRS granted a hardship waiver because bad weather was beyond her control. (IRS PLR 200406054)
In another case, a 68-year-old taxpayer who was diagnosed with progressive Alzheimer's disease made a series of withdrawals from his IRA to purchase a house -- even though he had other funds available. Based on a medical evaluation requested by his daughter, it was determined that the taxpayer was incapable of understanding the tax consequences of making IRA withdrawals. The IRS waived the 60-day rollover requirement. (IRS PLR 200401025)
Reprieves have also been given to taxpayers whose financial institutions made errors. And in another case, a widow who did not meet the rollover deadline was granted a waiver because she was still in mourning.
The General RulesNormally, you can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. (However, tax is automatically withheld unless the funds are directly transferred from one trustee to another.) The IRS has the discretion to waive the 60-day requirement if its imposition would
Factors Considered by the IRS
The IRS "will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." (IRS Revenue Procedure 2003-16)
What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions.
Facts of the case: The taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days.
The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds.
After reviewing the facts, the IRS accepted the widow's claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012)
These are only a few of the examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.Source: TrustCounsel's March 22, 2011 eNewsletter by BizActions.
The rule that made higher-income folks ineligible for Roth IRA conversions expired at the end of 2009. That made 2010 a big year for conversions, because even billionaires could make the transactions. If you are among the many who took advantage last year, that's great, but there's more to the story. You still have some major decisions to make in 2011.
Here's what you need to know.
When to Report the Taxable Income from a 2010 Conversion?
You have the option of deferring the taxable income triggered by a 2010 Roth conversion and then spreading it evenly over 2011 and 2012 (50 percent in each year). Other things being equal, the deferral option is obviously a good idea.
You also have the alternative option of reporting 100 percent of the conversion income on your 2010 return instead of deferring it to 2011 and 2012.
Now that the Bush-era tax cuts have been extended through 2012, the deferral option is the best choice for most taxpayers. However, there are exceptions.
If you believe you'll pay a significantly lower tax rate on the conversion income by reporting it all in 2010, you should probably do that. For instance, say your 2010 income was depressed, but 2011 and 2012 are looking good. In this scenario, reporting all the conversion income on your 2010 return and paying a lower conversion tax bill might make it worthwhile to pay the bill sooner rather than later.
You make the choice to report 100 percent of the conversion income in 2010 by including a certain form with your 2010 Form 1040. This is how you also make the deferral choice -- by filing an IRS form with your tax return. Your tax adviser will take care of the details.
Deciding Whether to Reverse an Ill-Fated 2010 Conversion
You have until the October 17, 2011 extended deadline for filing your 2010 Form 1040 to reverse an ill-fated 2010 Roth conversion by "recharacterizing" the converted account back to traditional IRA status. Note that the October 17, 2011 deadline applies whether you actually extend your 2010 Form 1040 or not.
Why would you want to reverse a conversion? Consider the following example.
Example: In 2010, you converted three traditional IRAs into three Roth accounts. We'll call them Roth IRA-1, Roth IRA-2, and Roth IRA-3. In 2011, the value of Roth IRA-3 takes a big dive due to horrible performance by the investments chosen for that account. If you take no action, you'll owe income tax on Roth IRA-3 value that no longer exists. This is not good! But you have until October 17, 2011 to reverse the Roth IRA-3 conversion by recharacterizing that account back to traditional IRA status. After the reversal, it's as if the Roth IRA-3 conversion never happened, so the related conversion tax bill simply goes away.
Example: In 2010, you converted three traditional IRAs into three Roth accounts. We'll call them Roth IRA-1, Roth IRA-2, and Roth IRA-3.
In 2011, the value of Roth IRA-3 takes a big dive due to horrible performance by the investments chosen for that account. If you take no action, you'll owe income tax on Roth IRA-3 value that no longer exists. This is not good!
But you have until October 17, 2011 to reverse the Roth IRA-3 conversion by recharacterizing that account back to traditional IRA status. After the reversal, it's as if the Roth IRA-3 conversion never happened, so the related conversion tax bill simply goes away.
Deciding Whether to Extend Your 2010 Return
If you did a Roth conversion last year, there may be two good reasons to consider extending your 2010 Form 1040 to October 17, 2011.
Reason No. 1: Extending gives you more time to decide if you should choose the deferral option (which would result in splitting the taxable income from your 2010 conversion evenly between 2011 and 2012) or choose the alternative option of reporting 100 percent of the conversion income on your 2010 return. As we explained earlier, the deferral option is probably the right choice in most cases, but it depends on how your 2010 tax rate compares to your expected rates for 2011 and 2012. By October, you'll have a better handle on those years than you do right now. So extending is a no-brainer. Do it by filing Form 4868 on or before April 18, 2011.
Reason No. 2: Filing an extension makes it simpler to handle the reversal of a 2010 conversion, if a reversal becomes advisable. If you extend your 2010 Form 1040, you report a reversal by simply showing no income from the now-reversed conversion on your return. That would be easy. But if you decide on a reversal after shipping off your return, you'll have to file an amended return (using Form 1040X) to delete the conversion income. That is still possible but not as easy.
The Bottom Line
The book is still open on your 2010 Roth conversion deal, because you must make important decisions in 2011. First and foremost, you may want to extend your 2010 return to give yourself extra time to make those decisions. Even if you've never extended before, doing it this time around might be a good idea. Consult with your tax adviser if you have questions about your situation.
Source: TrustCounsel's March 22, 2011 eNewsletter (BizActions).
WASHINGTON — The Internal Revenue Service today released the 2011 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.
Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 84-page document, The Truth About Frivolous Tax Arguments.
The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
The 2011 version of the IRS document includes numerous recently decided cases that continue to demonstrate that frivolous positions have no legitimacy.
Frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.
In addition, the document highlights cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes, and the imposition of criminal and civil penalties on taxpayers who claimed they were not citizens of the United States for federal income tax purposes.
Thanks to Keebler and Associates, LLP, CPAs for portions of this summary:
Limit the tax rate that certain individuals will get a benefit for their itemized deductions - For investors filing joint returns and having income over $250,000 itemized deductions would only reduce the investor’s tax liability by a maximum of 28%. For those investors who purchase securities on margin this limitation could be very costly. Short-term capital gains and interest income would be taxed at a rate of 35% yet the interest expense would only receive a 28% benefit. If an investor earned $100,000 of interest income and incurred $100,000 of margin interest expense, while the investor would have broken even on a pre-tax basis, he would be liable for $7,000 in tax.
Require a minimum 10 year term for grantor retained annuity trusts (“GRATs”) – Currently, investors are able to contribute property to a trust and retain an annuity interest in the trust. Any excess may be left to anyone the investor desires. The present value of the annuity is subtracted from the contributed amount, and any excess is treated as a gift to the beneficiaries of the trust. The Treasury publishes a discount rate to be used to determine the present value of the annuity. Many investors retain an annuity whose present value equals the fair market value of the property contributed to the trust. In such case, no gift tax is due, and if the trust can earn a rate of return higher than the discount rate, such excess is passed on to the beneficiaries free of gift or estate tax. However, if the grantor dies during the term of the trust, the assets in the trust are included in the grantor’s estate. In order to mitigate that possibility, many of these trusts are set up as two to three year vehicles. The proposal would be to set a minimum term of 10 years for any GRATs established after the date of enactment of the law.
Require ordinary treatment of income from activities for dealers of equity options and commodities – Under current law dealers of equity options, commodities and commodities derivatives treat their income from their dealer activities in Sec. 1256 contracts as 60% long-term and 40% short-term capital gains/losses. Dealers in other types of securities treat all of their income from dealer activities as ordinary income. The proposal would require such dealers to treat all of their income from such securities as ordinary.
Tax carried interests in certain partnerships as ordinary income – Under current law, the character of income flows from a partnership to its partners. Some partners receive their partnership interests in exchange for services rendered to the partnership. Such interests typically give the partner the right to receive a share of future income from the partnership. At the time the interest is received, the partner would not be entitled to any proceeds if the partnership were liquidated, so there is no taxable income at the time the interest is received. In the future, the partners’ character of the income received from the partnership interest retains the same character that the partnership received. In many cases such income may be either qualified dividends or long term-capital gains, which are taxed at a maximum rate of 15%. The proposal would treat the income on a partnership interest that was not acquired for cash or property as ordinary income, if the partnership is an investment partnership. Gains upon the disposition of such an interest would also be treated as ordinary income. A partnership would be an investment partnership if the majority of its assets are investment type assets, such as securities, real estate, commodities, interests in partnerships, cash or cash equivalents.
Modify rules on valuation discounts – Based on judicial decisions and statutes enacted in many states, valuation discounts are allowed in determining the fair market value of property subject to gift and estate tax even though current tax law states that interests transferred intra-family should not be discounted for “applicable restrictions”. The proposal would grant the Treasury the authority to write regulations that would define a category of “disregarded restrictions” that would be ignored in valuing property for estate and gift tax purposes.
Require accrual of income from the forward sale of stock by a corporation – Under IRC Section 1032 a corporation does not recognize income or loss from purchases and sales in its own stock. This rule applies when a corporation enters into a contract to issue shares in the future for a sum certain. However, if the corporation issued shares currently and received payment for those shares in the future, a portion of the payment would be treated as taxable interest income. The proposal would impute interest income on the transaction in which the shares are issued in the future. While there are real differences between the two transactions in that there are new shareholders at the time the shares are issued, the Administration believes that the two are economically equivalent and should receive the same tax treatment.
Limit Generation-Skipping Transfer Tax Exemption to 90 Years - GST tax exemption (currently up to $5 million) allocated to trusts would last for only 90 years, after which it would expire. This would mean that distributions from the trust after that time would be subject to the 35% GST tax.
Since many states have eliminated or lengthened the rule against perpetuities that limited the time trusts could be in existence, this provision would have a substantial effect on trust creation and administration, severely limiting the use of dynasty trusts.
Make Permanent Portability of Estate Tax Exemption Between Spouses - For 2011 and 2012, a surviving spouse make make use of the predeceased spouse's unused $5 million estate tax exemption. The proposal would make this permanent.
Click here for the Green Book that contains explanations for the proposals.
Today the IRS announced a new special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The initiative is available through Aug. 31, 2011.
While it is legal to hold assets offshore, the assets must be disclosed to the IRS, and U.S. citizens must pay tax on all earnings worldwide.
See IR-2011-14 for details of the Initiative.
From the North Carolina Department of Revenue:
Taxpayers across the nation will have until April 18, 2011, to file 2010 federal returns, extensions, and payments that ordinarily would be due April 15, 2011. The extra time is provided because April 15 falls on Emancipation day, a legal holiday in the District of Columbia.
For individual income tax purposes, North Carolina will follow the April 18 extended filing date and consider any returns and payments that would have been due on April 15 as filed on time if they are filed and paid by April 18. The extended deadline applies to the following State forms and payments:
- 2010 State individual income tax returns, whether filed electronically or on paper
- First quarter 2011 individual estimated income tax payments
- Estates and Trusts
- Applications for extension for any of the above tax forms
The extended deadline does not apply to corporations that file franchise and corporate income tax returns due on April 15, 2011, or to first quarter 2011 corporate estimated income tax payments.
Last week I was interviewed regarding income and estate taxes in 2010 and 2011 offering tips and insights based on what I see in my practice. Click here for the text and the podcast.
IRS Launches the IRS2Go App for iPhone, Android; To Check Refunds, Get Tax Information
Video: IRS2Go: English
WASHINGTON — The Internal Revenue Service today unveiled IRS2Go, its first smartphone application that lets taxpayers check on their status of their tax refund and obtain helpful tax information.
"This new smart phone app reflects our commitment to modernizing the agency and engaging taxpayers where they want when they want it," said IRS Commissioner Doug Shulman. "As technology evolves and younger taxpayers get their information in new ways, we will keep innovating to make it easy for all taxpayers to access helpful information."
The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.
Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.
"This phone app is a first step for us," Shulman said. "We will look for additional ways to expand and refine our use of smartphones and other new technologies to help meet the needs of taxpayers."
The mobile app, among a handful in the federal government, offers a number of safe and secure ways to help taxpayers. Features of the first release of the IRS2Go app include:
Get Your Refund Status
Taxpayers can check the status of their federal refund through the new phone app with a few basic pieces of information. First, taxpayers enter a Social Security number, which is masked and encrypted for security purposes. Next, taxpayers pick the filing status they used on their tax return. Finally, taxpayers enter the amount of the refund they expect from their 2010 tax return.
For people who e-file, the refund function of the phone app will work within about 72 hours after taxpayers receive an e-mail acknowledgement saying the IRS received their tax return.
For people filing paper tax returns, longer processing times mean they will need to wait three to four weeks before they can check their refund status.
About 70 percent of the 142 million individual tax returns were filed electronically last year.
Get Tax Updates
Phone app users enter their e-mail address to automatically get daily tax tips. Tax Tips are simple, straightforward tips and reminders to help with tax planning and preparation. Tax Tips are issued daily during the tax filing season and periodically during the rest of the year. The plain English updates cover topics such as free tax help, child tax credits, the Earned Income Tax Credit, education credits and other topics.
Follow the IRS
Taxpayers can sign up to follow the IRS Twitter news feed, @IRSnews. IRSnews provides the latest federal tax news and information for taxpayers. The IRSnews tweets provide easy-to-use information, including tax law changes and important IRS programs.
IRS2Go is the latest IRS effort to provide information to taxpayers beyond traditional channels. The IRS also uses tools such as YouTube and Twitter to share the latest information on tax changes, initiatives, products and services through social media channels. For more information on IRS2Go and other new media products, visit www.IRS.gov.
Related Item: IRS Goes Mobile With IRS2Go
There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.
Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.
Who Benefits Most
The qualified charitable distribution opportunity is beneficial for taxpayers who:
1. Have reached age 70 1/2.
2. Make charitable donations, but don't itemize deductions. (Under the normal rules, only itemizers get tax-saving benefits from charitable gifts).
3. Make large charitable donations, but their deductions would be delayed by the 50 percent-of-AGI limitation.
4. Want to avoid being taxed on required minimum distributions that they are forced to take from IRAs.
5. Are looking for a quick and easy estate-tax-reduction strategy.
A qualified charitable distribution is a payment of an otherwise taxable amount out of a traditional or Roth IRA directly to an IRS-approved public charity. No more than $100,000 can be donated during any one year. However, if both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate $100,000 limitation.
As things currently stand, the ability to take advantage of this strategy is scheduled to expire at the end of 2011, but Congress may extend it again.
Income Tax Advantages
Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you'll be affected by unfavorable AGI-based provisions -- such as the rule that can cause more of your Social Security benefits to be taxed and the rules that can reduce or eliminate deductions for medical expenses and passive losses from rental real estate.
In addition, you don't have to worry about the 50 percent-of-AGI limitation that can delay itemized deductions for garden-variety charitable donations of cash.
Finally, a qualified charitable distribution from a traditional IRA counts as a payout for purposes of the IRA required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2011 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay income taxes on. In effect, you can replace taxable required minimum distributions with tax-free qualified charitable distributions that go to your favorite charities.Continue Reading...
Do you think you have to pay income tax on large ($500k++) Roth IRA conversions at the top marginal tax rates? Think again. I have recommend the following strategy to several of my clients. In most cases, you can stay with your current investment manager.
By utilizing the Jagen™ investment strategy, you may be able to lock in a 24.5*% rate on big IRA conversions.
A lot of advisors don’t like the idea of clients paying taxes early. They adhere to the mindset of “never pay a tax if you don’t absolutely have to.” Some advisors also still believe that clients might be in lower tax brackets later in life and don’t want to recommend taxable transactions at today’s top federal rate of 35%. But what if clients didn’t have to pay at top rates today? A Roth conversion at a 25% or less tax rate now will almost guarantee long-term tax savings for high net worth clients with large IRAs. How many clients with large IRAs will be in a retirement tax bracket less than 25%?
Jagen™ funds are eligible IRA investments and offer access to very high level institutional money management platforms. In addition, the Jagen™ fund design provides for a variance between the net asset value (NAV) and fair market value (FMV) of each investor’s interest in the funds.
For example, an investor might have an IRA holding Jagen™ fund units valued at $1 million NAV. This same account may only have a $700,000 FMV based on a qualified appraisal of those fund units. The reason for this valuation adjustment involves various features of Jagen™ funds which must be taken into account when determining FMV. Each fund is privately owned by a limited number of investors and fund units are not traded on open exchanges. Investors must commit to holding their fund units for specified terms. Thus FMV will typically be less than NAV during the holding period.
From today's IRS Newswire:
For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.
Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:
- Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes (add link to Schedule A). In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
- Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
- Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.
This afternoon, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation, negotiated by the White House and select members of the House and Senate, provides for a short-term extension of tax cuts made in 2001. It also addresses the Alternative Minimum Tax (AMT) and Estate, Gift and Generation-skipping Transfer taxes.
Two-year extension of all current tax rates through 2012
- Rates remain 10, 25, 28, 33, and 35 percent
- 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
- 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease)
Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012
- Reunification of estate and gift taxes
- 35% top rate and $5 million exemption for estate, gift and GST
- Alternatively, taxpayer may choose modified carryover basis for 2010
- Unused exemption may be transferred to spouse
- Exemption amount indexed for inflation in 2012
AMT Patch for 2010 and 2011
- Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly). It also allows the nonrefundable personal credits against the AMT.
Extension of “tax extenders” for 2010 and 2011, including:
- Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
- Above-the-line deduction for qualified tuition and related expenses
- Expanded Coverdell Accounts and definition of education expenses
- American Opportunity Tax Credit for tuition expenses of up to $2,500
- Deduction of state and local general sales taxes
- 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
- Exclusion of qualified small business capital gains (IRC§1202)
Temporary Employee Payroll Tax Cut
- Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.
Source: Financial Planning Association
From today's press release from the American Institute of Certified Public Accountants:
The American Institute of Certified Public Accountants has asked the Internal Revenue Service to issue guidance about how to apply carryover basis rules for the assets of taxpayers who died in 2010 in order to settle their estates. Basis is generally the original purchase price of an asset, such as stocks or property.
“The carryover basis regime is new and unfamiliar, and the April 18, 2011, due date for filing the information returns allocating the basis adjustments to particular assets is rapidly approaching,” the AICPA said.
The traditional “step-up basis” method, under which heirs were permitted to use the fair market value of the assets at the time of the decedent’s death, was repealed for 2010 by the Economic Growth and Tax Relief Reconciliation Act of 2001 and replaced with carryover basis. Under carryover basis, heirs use the decedent’s original cost of the assets as their basis when calculating taxes due, but the executor is allowed to increase the basis of the assets up to $1.3 million. An additional $3 million increase is permitted if the assets are passed to the surviving spouse.
Among the specific questions for which the AICPA requested guidance are who will make the basis allocation if the estate does not have an executor, what happens to the decedent’s suspended passive losses, will the basis allocation form be a stand-alone form or a form attached to the decedent’s final Form 1040, how do the rules apply to community property, and how are net operating loss carryovers and capital loss carryovers measured?
[Emphasis added] Click here for a copy of the AICPA letter.
Senator Max Baucus, Chair of the Senate Finance Committee on Finance, introduced the "Middle Class Tax Cut Act of 2010" which would make the Bush income tax cuts permanent for those making under $250,000 per year.
Today I was alerted to the existence of a draft of the IRS from that will be required to be filed for estates of decedents dying in 2010 with estates in excess of $1.3 million. IRS Form 8939 - Allocation of Increase in Basis for Property Received from a Decedent. The due date is April 15, 2011.
This form is necessitated by the Modified Carryover Basis rules that replaced the estate tax for 2010. Each decedent's estate gets $1.3 million worth of basis to allocate to appreciated assets, with an additional $3 million for assets going to a surviving spouse. IRC Section 1022. The allocated basis will effectively eliminate capital gains tax liability for assets sold soon after death.
Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.Continue Reading...
Three of four prominent IRA experts have either already utilized a Roth conversion or plan to do so, and the fourth says he plans to if the market gets even worse.
Click here to see what Ed Slott, Robert Keebler, Seymour Goldberg and Natalie Choate have to say about their personal Roth conversion decisions.
While I have attended programs by Slott, Keebler and Choate, I certainly don't have the same status in the tax world as do they (nor their wealth, I would venture to guess). But for what it's worth, at age 49 I am leaning against doing a Roth conversion for two primary reasons: 1) Even with the coming tax increases, I believe my tax rate during retirement will be lower that it is presently, and 2) I don't want to spend my cash reserves paying the taxes that will be due as a result of the conversion.
No, not little green men, but non-citizens. This list, complete with links to the IRS website, is courtesy of Brian Dooley, CPA, MBT:
The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code.
2. Resident Aliens
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.
3. Nonresident Aliens
A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax.
4. Dual-Status Aliens
You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.
5. Source of Income
A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.
6. Income Types
In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways.
7. Tax Withholding on Foreign Persons
Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.
8. Taxpayer Identification Numbers (TIN)
Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.
Note: Resident Aliens are also subject to U.S. Gift and Estate Tax laws, as are non-resident aliens with regard to U.S. real property.
Roth IRAs are a great tax saving vehicle. The reason: Investments held in a Roth IRA are allowed to build up federal-income-tax-free. Later on, you can take federal-income-tax-free withdrawals. Obviously, a zero tax rate is the best rate going.
In addition to being great tax saving tools for retirement, Roth IRAs also provide tremendous estate planning advantages - especially if you can get a large portion of your wealth into an account.
Unfortunately, getting lots of money into a Roth IRA is not so easy. It can take many years of annual contributions. However, there's also one very quick way - by converting an existing traditional IRA or SEP account into a Roth IRA. There are no limitations on the size or number of converted accounts. Naturally, under tax law, there is a price for allowing you to jump start your Roth IRA savings program with a conversion. Even so, it may be worth the price.
Roth Conversion Basics
A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you're deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So the conversion triggers a current income tax bill. In most cases, however, this negative factor is outweighed by the following positive factors.
* You don't have to pay the 10 percent premature withdrawal penalty tax on the deemed distribution that results from the Roth conversion transaction. This is true even if you're under age 59 1/2 when the conversion takes place.
* Your conversion tax bill is significantly lower, thanks to the individual income tax rate cuts made in the 2003 tax law. Some people believe the tax rates we have today could be the lowest rates we'll see for the rest of our lives. No one knows, of course, but now could be a good time for a Roth conversion.
* The value of the traditional IRA (or IRAs) you want to convert may still be down because of poor investment performance in recent years. However, a lower account balance means a lower conversion tax bill, which is a good thing.
(See below for an important future change regarding an income limit for Roth conversions.)
Under prior law, an individual with modified adjusted gross income (MAGI) above $100,000 could not convert a traditional IRA into a Roth IRA. But the income limitation was eliminated beginning in 2010. For Roth conversions that occur in 2010 only, half of the taxable income triggered by the conversion generally can be reported in 2011 and the other half in 2012. For conversions in 2011 and beyond, all the income must be reported in the conversion year -- as under prior law.
There are only two requirements for tax-free withdrawals. You must:
1. Have a Roth account that's been open for more than five years.
2. Be age 59 1/2 or older.
You or someone you love may be ready for a retirement community living arrangement, which typically includes lifetime residential accommodations, meals, and some degree of medical services. These facilities can be quite expensive. The good news: Unexpected tax write-offs may help offset the cost.
The tax-saving idea is that you may be able to deduct part of the retirement community's one-time entrance fee and ongoing monthly fees as medical expenses on your Form 1040, regardless of your current health status. Since the fees we are talking about here can be quite large (see right-hand box), meaningful deductions may be possible despite the limitation on medical write-offs. (You can only deduct medical expenses to the extent they exceed 7.5 percent of your adjusted gross income.)
Court Decision Shows the Way
For recent proof that substantial deductions are possible, we can point to a 2004 Tax Court decision. Source: Delbert L. Baker v. Commissioner (122 TC 143 (2004). In 1989, Delbert Baker and his wife bought into a resort-style retirement community. It provided four living arrangement categories:
- Independent living with minimal medical services,
- Assisted living with more medical help,
- Special care (for victims of Alzheimer's and dementia), and
- Skilled nursing with maximum medical services.
The Bakers paid a one-time entrance fee of about $130,000 plus monthly fees of over $2,000 in exchange for lifetime residential and medical care privileges for both spouses. (This was back in 1989. Today's prices would be much higher in many areas.)
According to a recent article on WSJ.com, the additional 3.8% tax that starts in 2013 will also apply to undistributed income in estates and trusts, starting at about the $12,000 mark (making the top rate 44.4%). This will make planning for distributions to beneficiaries that much more important, as most beneficiaries will be in lower tax brackets.
Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Sander Levin (D-MI) announced that they have reached an agreement on continuing the IRA Charitable Rollover and many other tax saving extensions.
Both the House and Senate previously passed bills to extend these provisions, but since there were different tax offsets in the House and Senate bills, prolonged discussions were necessary to come up with mutually acceptable tax increases.
The House plans to vote on the bill the week of May 24. As for the Senate, Baucus has indicated that he believes that he will get the 60 votes necessary to pass the bill.
Source: GiftLaw eNewsletter (May 24, 2010)
Currently the maximum federal tax rate for qualified dividends and long-term capital gains is 15%. This is great for people like Warren Buffett, who live off of investment income. However, these low tax rates for wealthier investors will soon be a thing of the past.
Unless legislation is passed to continue the current rates for qualified dividends, next year all dividends will be taxed at ordinary income rates. The top rate for ordinary income, currently 35%, goes up to 39.6% in 2011. Then, in 2013, the 3.8% investment income surcharge kicks in, making the total maximum rate 43.4%.
The long-term capital gains rate will increase to 20% next year, and the surcharge beginning in 2013 will mean the top rate will be 23.8%.
These hefty tax increases will trigger a greater interest in tax deferral strategies such as cash value life insurance and tax-deferred annuities, and may motivate more intra-family income shifting strategies such as limited liability companies.
From TrustCounsel's today's eNewsletter:
There's no one legal structure that works best for all businesses. The most favorable choice depends on a number of factors, including the number of owners, your tax situation and whether or not you have employees. A limited liability company (LLC) may be a good choice because it provides flexibility, low maintenance, favorable tax treatment and most importantly, limited liability protection to keep your personal assets safe.
Dodging a Double Tax HitAn LLC can help avoid double taxation if you sell the company or some of its assets. Let's say your company buys a warehouse and later makes a profit selling it.
As a C corporation: You're liable for a combined federal and state tax bite of as much as 40 percent. Now you can take the gain left over after paying corporate level taxes as salary or a dividend distribution.
If you take the money as a dividend, your company loses a deduction and you pay personal taxes on the cash. Add your personal tax bill to the corporation tax bill to find out how much was paid in combined taxes. If you take the money as salary, your company keeps its deduction, but now payroll taxes kick in.
As an LLC: You are taxed only on your personal return and at low capital gains rates.
LLCs can work well for family businesses that have exposure to product or other liabilities, real estate enterprises, and service companies.
Discuss the specific benefits of various business structures with your attorney, keeping in mind that the laws regulating LLCs vary from state to state. Here is a list of general LLC issues to consider:
Don't be an April Fool, read these tax tips from the IRS (2010-62):
1. E-file your return Don’t miss out on the benefits of e-file. Your tax return will get processed quickly if you use e-file. If there is an error on your return, it will typically be identified and can be corrected right away. E-file is available 24 hours a day, seven days a week, from the convenience of your own home. If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days. Two out of three taxpayers, 95 million, already get the benefits of e-file.
2. Review tax ID numbers Remember to carefully check all identification numbers on your return. Incorrect or illegible Social Security Numbers can delay or reduce a tax refund.
3. Double-check your figures Whether you are filing electronically or by paper, review all the amounts you transferred over from your Forms W-2 or 1099.
4. Review your math Taxpayers filing paper returns should also double-check that they have correctly figured the refund or balance due and have used the right figure from the tax table.
5. Sign and date your return Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.
6. Choose Direct Deposit To receive your refund quicker, select Direct Deposit and the IRS will deposit your refund directly into your bank account.
7. How to make a payment People sending a payment should make the check out to "United States Treasury" and should enclose it with, but not attach it to, the tax return or the Form 1040-V, Payment Voucher, if used. Write your name, address, SSN, telephone number, tax year and form number on the check or money order. If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal. Whether you file a paper return or file electronically, you can pay by phone or online using a credit or debit card. Visit IRS.gov for more information on payment options.
8. File an extension Taxpayers who will not be able to file a return by the April 15 deadline should request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.
9. Visit the IRS Web site anytime of the day or night IRS.gov has forms, publications and helpful information on a variety of tax subjects.
10. Review your return…one more time Before you seal the envelope or hit send, go over all the information on your return again. Errors may delay the processing of your return, so it’s best for you to make sure everything on your return is correct.
The White House has launched an Tax Savings Tool on its website to assist middle-class taxpayers in getting the most out of the various Recovery Act tax credits.
The tax wizard asks for input about one's filing status, salary range, recent home purchases, college expenses, and other questions relating to various tax credits provided by the Recovery Act.
Vice President Biden stated that “The big guys know all the credits and deductions to claim during tax season, but we want middle-class families to know just how much is out there for them this year thanks to the Recovery Act and how to take advantage of it. From help with college expenses to credits for cost-saving, energy-efficiency home improvements, these Recovery Act tax credits not only provide some needed relief for working Americans, but also help them invest in their families’ futures.”Thanks to Brian Dooley, CPA, for this news.
My article, Tax Consequences of Equitable Distribution, which discusses the income tax issues involved in the division of property due to divorce, was just published in Core Compass, an online newsletter for real estate investors and their advisors.
The Reconciliation Bill (H.R. 4872), which passed the House and has gone to the Senate contains a 3.8% surtax on investment income for single taxpayers with modified adjusted gross income (MAGI) over $200,000, and married taxpayers with MAGI over $250,000. The tax, which will begin in 2013, is levied on interest, dividends, rents, royalties and capital gains, beginning in 2013, but not retirement benefits.
The Health Care Reconciliation bill includes a new 3.8% Medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties.
Under H.R. 3590, 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.
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...
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.
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:
Proposed Tax Increase
10 Year Tax Revenue
Income Tax Rates 33% and 35%
To 36% and 39.6%
Itemized Deductions Capped at 28%
Personal Exemption Phase-out and 3%
Floor on Itemized Deductions
Capital Gains Tax Rate 15% to 20%
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.
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.
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...
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...
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.
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...
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...
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)!
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...
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
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.
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.
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.
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.
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.
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.
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.
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!
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. :-(
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.
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.
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.
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.
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:
- 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.
- 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.
- Small business tax reduction
- Expanded college savings credit
- Create homebuyer's credit
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)
Senator David Hoyle (Chair of the Senate Finance Committee)
If you don't support the bill, there's a petition to sign. Make some noise, people!
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!
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.
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...
From IRS Commissioner Doug Shulman:
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.
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...
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.Continue Reading...
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.
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.Continue Reading...
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.
Here's a nice, easy to read Summary of the American Recovery and Reinvestment Act of 2009, which includes comparisons to prior law.
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.
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 PartsContinue Reading...
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.
(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.
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.Continue Reading...
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).
- 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)
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.
Click "Continue Reading" for the Senate Appropriations Conference Summary Report.Continue Reading...
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.
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!
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!
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.
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
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.
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...
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...
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.
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.
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.
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.
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...
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.
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
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 involving 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.
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.
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.
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.
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.
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.
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...
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.
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.
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."
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.
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.
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.
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.
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.
According to the IRS Commissioner:
- File Early.
- File Electronically.
- Use Direct Deposit.
Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15
Direct Deposit Payments
If the last two digits of your Social Security number are:
Your economic stimulus payment deposit should be sent to your bank account by:
00 – 20
21 – 75
76 – 99
If the last two digits of your Social Security number are:
Your check should be in the mail by:
00 – 09
10 – 18
19 – 25
26 – 38
39 – 51
52 – 63
64 – 75
76 – 87
88 – 99
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.
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
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.
The IRS recently published a notice naming four new frivolous income tax claims:
Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
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!
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.
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!
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.
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
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."
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.Continue Reading...
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.
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.
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.Continue Reading...
|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:|
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.
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.
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.
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
- 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.
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.