Tax Breaks and More

Posted in Facts On Tax  on July 27th, 2015  by msheriff -  link

Dear Client:
Review your gift giving plans this summer, while there is still plenty of time to act. Don’t wait until the last minute to take advantage of tax breaks that can reduce your estate and income tax bills.

Make sure to use your gift tax exclusion. This year, you can give up to $14,000 to a child, grandkid or other person without gift tax consequences. If you are married, your spouse also can give $14,000 to the donee, doubling the tax-free amount to $28,000. The exclusion is going to remain $14,000 next year, too. If you don’t use up the full exclusion amount this year, any shortfall is lost forever. The unused amount cannot be carried over to 2016. Annual exclusion gifts help save estate taxes, too. The amount of these gifts aren’t added back to your estate, and future appreciation on them is out of your estate.

Some other gift giving strategies pack an additional bang for the buck. Direct tuition payments for students get two breaks. They don’t count against the $14,000 gift tax exclusion, and they reduce the size of your taxable estate. The same rule applies for direct payments of a person’s medical expenses. And note this easing for payments to 529 plans to help your kids or grandkids with college. You can put in as much as $70,000 per child free of gift tax this year… $140,000 if your spouse agrees. In most cases, the payins are out of your estate. Withdrawals are tax-free if used to pay for tuition, fees or books, plus room and board if the student is pursuing at least half the normal course load. But giving the maximum will wipe out your 2015 and 2016 gift tax exclusion and most of it for 2017-2019, too. Larger gifts are slightly less tax-favored. You will not owe any gift tax on gifts over $14,000 as long as you haven’t used up your $5.43-million estate tax exemption. And any future rise in the value of the assets you give away isn’t part of your estate. But the amount by which a gift exceeds $14,000 is added back to your taxable estate.

Turbocharge your donations to charity by giving away appreciated assets, such as stocks. The appreciation escapes capital gains tax and you get a deduction for the full value in most cases, as long as you’ve owned the asset for more than a year. But remember, deductions for donations are reduced when adjusted gross income tops $258,250 for singles, $284,050 for household heads and $309,900 for marrieds. Don’t donate an asset that has declined in value. If you do, the capital loss is wasted. You are better off taxwise selling the asset and donating the proceeds. The same goes if you plan to make a gift to a person. If you give the donee an asset that has lost value, he or she can’t turn around and sell the asset and deduct the loss.

One last idea: Consider a charitable lead annuity trust. It pays an annuity to charity for a set term, after which what’s left goes to the donor or other beneficiaries. Although interest rates have ticked up, the donor still gets a nice up-front write-off. That deduction can be used to offset income generated from a Roth IRA conversion, for example, letting the donor enjoy a lifetime of tax-free withdrawals from the Roth.

BENEFIT PLANS: Pension plans generally won’t be able to cash out retirees in pay status. IRS had been privately OKing plan sponsors’ requests to amend their plans to offer retirees in pay status a limited onetime window to take the actuarial value of their monthly benefit payments in a lump sum. This way, the pension liabilities of employees who take the buyout are wiped off the firm’s balance sheet. In addition, having fewer pensioners means that the company’s PBGC premiums are reduced. Now, the Service says it will issue new regulations banning this practice. They’ll provide that these types of plan amendments violate the minimum payout rules. The changes aren’t intended to apply to lump-sum offers made upon plan termination. The changes apply as of July 9, 2015. But lump-sum offers authorized prior to July 9 or firms that got private rulings before this date won’t be affected. Go to to see the complete details. 

States are starting to take the lead to boost retirement savings for workers. Some want firms without retirement plans to offer payroll deduction IRAs and enroll employees who don’t opt out. At the front of the pack is Ill. Under its law, employers in business there for at least two years and with 25 or more employees must offer automatic IRAs if the firm has no other plan. It’s set to begin in 2017, but could be delayed. The IRAs would be funded with employee payroll deductions at 3% of salary, but workers could change the paying percentage. No employer matching is required. Other states spearheading automatic IRAs include Ore., Calif. and Mass. Illinois’ program is similar to one repeatedly proposed by President Obama, except that his idea would cover even more businesses…those with at least 11 workers. 

A health-related tax break for retired public safety officers comes with a twist. A 2006 law allows them to exclude from income up to $3,000 a year of pension payouts that are used to pay for medical insurance or for premiums on long-term-care policies. To qualify, retirees must opt for the premiums to be deducted from their distributions and paid directly by the plan to a third-party insurer. Folks whose former employers don’t offer the election are not eligible for tax-free treatment, IRS confirms privately. They cannot claim the $3,000 exclusion by paying the medical premiums themselves.

DONATIONS: Failing to substantiate property donations costs a charitable write-off in this case. A veterinarian donated over $100,000 of fossils to a charity. Although he attached Form 8283 to his return and received letters from the group acknowledging the gifts, the fossils weren’t properly appraised by a qualified expert, which is mandatory when claiming a deduction over $5,000 for noncash donations. Nor did he obtain a contemporaneous written acknowledgment from the organization stating that he got nothing of value in return for his gift (Isaacs, TC Memo. 2015-121). 

EXEMPT GROUPS: A foundation that benefits a single family is not a tax-exempt charity. After a taxpayer died, the executors of his estate formed an organization to award scholarships in the performing arts to students of Hungarian descent. The Service originally OK’d its exemption, and the estate donated $2.6 million to it. But when the IRS later learned on audit that the group had provided scholarships only to nieces and nephews of the decedent, it revoked the exemption retroactively and a district court concurred (Educational Assistance Foundation, D.C., D.C.). 

Will IRS challenge religious nonprofits that oppose same-sex marriage? It’s unlikely. Last month, the Supreme Court ruled that same-sex couples have the constitutional right to marry. Some groups and lawmakers are concerned that IRS could revoke or deny the exemptions of organizations whose religious beliefs conflict with the case. But the Service has enough on its plate and doesn’t have the time or inclination to step into this divisive social issue. It’s still paying the consequences with Congress for playing politics when it targeted conservative tax-exempt groups. 

BUSINESS TAXES: An Uber driver is an employee of the company, a state agency decides. The firm claimed the driver should be treated as an independent contractor because she used her own vehicle to transport customers. The company asserted that supplying the driver with leads of people needing transportation didn’t indicate that it exercised control over her activities. But the agency said the firm had control over her because it screens prospective drivers and requires them to use vehicles that are 10 years old or less. Since the driver is an employee, Uber must reimburse her for mileage and tolls (Berwick v. Uber Technologies, Office of the Calif. Labor Comm.). The decision has been appealed. It’s important to note that the ruling applies only to the particular driver. It doesn’t mean all Uber drivers are employees. We will watch the case closely and report back on any developments. As we noted in our June 19 Letter, employee misclassification is a key issue for businesses. 

IRS says its worker classification settlement program has been a success. Firms that have consistently treated workers as contractors and given them 1099s come in and pay a modest fine and receive audit protection for prior years. Thereafter, the workers are treated as employees, get W-2s and become more tax-compliant. 

Employers get another reason to gear up early for the health reporting rules: Higher fines for incorrect forms. A new law substantially raised the penalties for firms that file incorrect information returns, as we noted in our July 2 Letter. The fines range from $50 a return if a mistake is corrected within 30 days of filing to $500 per return for intentional errors. These penalties aren’t limited to 1099s. The increased fines also apply to health care information returns. Employers with 50 or more full-time employees must report 2015 coverage data for each full-timer to IRS and workers on Form 1095-C, and give more information to IRS on Form 1094-C. Companies that have fewer than 50 employees that self-insure will use Form 1095-B and 1094-B for these purposes. So with the higher penalties, accuracy is paramount. 

Firms will be able to seek filing extensions for the health reporting forms. Employers can get an automatic 30-day extension for the Feb. 29, 2016, deadline (March 31 if e-filing) to file the 1094s and 1095s with the IRS by using Form 8809. Companies needing extra time can ask the Revenue Service for 30 additional days. IRS will soon announce the procedures for firms that want to extend the Feb. 1 date to give 1095 forms to employees. In that case, the maximum extension will be limited to 30 days, and businesses must give a valid reason why the extra time is needed. 

INCOME: IRS’s computers aren’t programmed to sniff out only under-reported income. They also flag over-reported income, as this case shows. A low-income filer with very little wage income claimed she made a $17,000 profit from a side business selling used clothing at a flea market. The $2,100 self-employment tax on her profit was dwarfed by the $8,000 in additional child tax credit and earned income credit that the extra income made her eligible for. But IRS’s computers froze her refund, and she couldn’t substantiate a large chunk of her profit, so the Tax Court decided that she was entitled to take just $700 in credits (Cadet, TC Summ. Op. 2015-39). 

Getting a 1099 form doesn’t always mean you have income for that year. A retired pro football player helped co-found and operate a nonprofit organization. He charged personal expenses on the charity’s credit card. When he left the group, it sent him a 1099 for that year reflecting that he had taxable income from charges incurred several years earlier that he hadn’t paid back. According to the Tax Court, the unpaid advances are taxable, but only for the years in which they weren’t repaid. Since the 1099 was issued well after that, it is invalid (Starke, TC Summ. Op. 2015-40). So in all likelihood, the Service won’t be able to collect tax on the unpaid advances because the statute of limitations has almost certainly expired for the earlier years.

PREPARERS: The fee to obtain or renew a preparer tax ID number is under attack again. It’s a serious challenge. The class action lawsuit alleges that the Service lacks the authority to assess the fees, which are now set at $64.25 for first-timers and $63 for renewals. In 2012, an appeals court in another case said the user fees are valid. The plaintiffs in this case say the 2012 decision was wrong and are hoping for a preparer-favorable result in a different court. We’ll report on any developments. 

ALIMONY: A lump-sum payment made to settle alimony obligations isn’t deductible. When finalizing a couple’s divorce, the court ordered the ex-husband to pay lump-sum alimony of $45,000 to his former spouse. He deducted the amount, but the Tax Court said no. Under state law, she had a vested right to the money, even if she died before payment. That nixes his write-off (Muniz, TC Memo. 2015-125). 

Transferring realty to pay alimony costs the deduction, the Tax Court says. A couple split up, and the court ordered the ex-wife to pay her former husband alimony. She decided to satisfy part of her alimony by transferring a home to him, and claimed that she could deduct the value of the transfer to him. But only alimony paid in cash or a cash equivalent, such as a check, is deductible (Mehriary, TC Memo. 2015-126). 

LIFE INSURANCE: Directing investments in a life insurance policy costs a taxpayer big-time: He’s taxed on all of the income earned in the policy, the Tax Court decides. Acting on the advice of his estate lawyer, a venture capitalist set up a grantor trust to buy private-placement variable life insurance contracts. The insurance company used the premiums to invest primarily in start-up companies in which the taxpayer owned an interest, acted as manager or sat on the board. The Court found in substance that through his agents, he chose investments, voted shares and was able to take cash. That’s enough to make him the tax owner of the assets (Webber, 144 TC No. 17). 

MARIJUANA: Businesses that sell marijuana have a heavy tax burden, as this case shows. They’re taxed on their income but can’t write off their business expenses, such as rent. A taxpayer in Calif. ran a center where users of medical marijuana could purchase and consume the drug and socialize. Even though it is legal in Calif. to sell and use medical marijuana, an appeals court said U.S. tax law bars write-offs for sellers of controlled substances that are illegal under federal law (Olive, 9th Cir.). The only exception is that these firms can deduct the cost of the marijuana. Even the Service now concedes this after originally having fought it tooth and nail. 

TAXPAYER SERVICE: On IRS’s wish list for the future: Offering taxpayers more online services. For example, giving them the ability to access their accounts electronically to review if they have a balance due, check their tax history and make online payments. Letting them self-correct their returns and update their names and addresses online. And allowing them to send secure electronic correspondence to the IRS and vice versa. But it has a long way to go to implement these technological priorities. With an ever-shrinking budget and no extra money in its coffers, don’t expect IRS to be at the forefront of technological innovation when it comes to taxpayer service.
Yours very truly,

Highlights for 2015

Posted in Facts On Tax  on July 24th, 2015  by msheriff -  link

Dear Client:
The health premium tax credit is valid. The Supreme Court handed President Obama a big win when it ruled that the premium tax credit is allowed to qualifying individuals who purchase insurance on the federal exchange, and is not restricted to those who obtain their coverage from a state-run exchange. The Court said the health reform law as a whole shows that Congress didn’t intend to limit credits to state exchanges. The rationale of the high court makes it untenable for a subsequent administration to issue regulations to try to limit the subsidies.

Also left unscathed is the employer mandate, which kicked in this year for firms with 100 or more full-time employees (50 beginning in 2016). Under this rule, employers must offer their full-timers affordable coverage that meets minimum value or pay a tax. An employer’s liability for the fine is tied to employees getting a credit for insurance bought on an exchange. If the Court had decided to limit the availability of the premium subsidies, the employer mandate would have been greatly weakened.

Lawmakers will now find it nearly impossible to repeal Obama’s health law, although many GOPers will continue their efforts to get the legislation off the books. But don’t rule out some pro-business changes under a Republican president: Reducing the 40% tax on “Cadillac” plans…those costing more than $10,200 for individual coverage and $27,500 for families or delaying its 2018 effective date. Hiking the 30-hour-per-week threshold needed to qualify as a full-timer for purposes of triggering the mandate that employers provide insurance to workers. And doing away with the medical device tax…the 2.3% levy now imposed on manufacturers of medical devices, with an exception for common retail items, such as glasses, contacts and hearing aids. The House has already repealed this tax without a revenue offset, but many Senate Democrats are hard-pressed to go along unless the GOP can find a way to make up for the estimated $25 billion in lost revenue.

Firms that reimburse workers for health coverage want Congress’s help. They’re pleading for a reprieve from the $100-a-day-per-employee excise tax. We have previously noted that businesses with arrangements to reimburse employees for premiums paid for individual health insurance policies or Medicare could be nailed by this stiff tax. IRS says these plans run afoul of the health reform law. The Service temporarily waived the tax for firms with fewer than 50 full-time-equivalent employees, but this relief expired June 30, and the agency has yet to announce any more waivers. S corporations are in the clear for now. They can continue to reimburse premiums for their more-than-2% owners without fear of the excise tax until IRS says otherwise. Legislators are sympathetic to their plight. Sen. Chuck Grassley (R-IA) and Rep. Charles Boustany (R-LA) have each recently introduced bills in Congress to let small employers continue these types of reimbursement plans on a pretax basis. And the American Institute of Certified Public Accountants has also weighed in. So if the Service doesn’t grant relief, it’s a safe bet taxwriters will do so.

SAME SEX COUPLES: Filing state tax returns will be easier for many same-sex married couples, now that the Supreme Court has said that they have a constitutional right to marry and that all states must recognize same-sex marriages performed elsewhere. Those who marry and live in one of the states that didn’t recognize their marriage prior to the high court’s ruling should now be able to use the same filing status as other married couples in that state and needn’t file separate state returns. Ditto for estate and gift tax planning in those states that impose the tax.

Many employers will benefit from the uniformity in state marriage laws. They’ll no longer need separate systems to manage benefits and calculate state taxes for same-sex married workers that differ from those set up for opposite-sex marrieds. For instance, in states that didn’t recognize same-sex marriage, workers were taxed on the value of health benefits for same-sex spouses but not for opposite-sex spouses.

SAVINGS PLANS: States get the go-ahead from IRS to offer ABLE accounts for the disabled. These accounts are similar to 529 plans and allow families to set aside funds to help the long term disabled maintain their quality of life. Nondeductible payins of up to $14,000 per year can be made to an ABLE for a person who became blind or disabled before age 26. Distributions of earnings from the account will be tax-free if the funds are used for housing, transportation, education, job training and the like.

New IRS regulations clarify the rules on these accounts. For example: Tax-free payouts can be made for basic living expenses to help a beneficiary improve the quality of life, such as a smartphone that helps an autistic child navigate and communicate better. The expenses needn’t be medically necessary, IRS says. An individual can have only one qualifying ABLE account at a time. Contributions must be made in cash. Securities cannot be contributed. ABLE payins are treated as gifts by the contributor for tax purposes. So if a donor puts in $14,000 this year, any other gifts by the donor to the beneficiary in 2015 will trigger the requirement to file a gift tax return. But no tax will be due unless the donor has already made more than $5.43 million of lifetime taxable gifts.

BENEFIT PLANS: The disabled can tap retirement accounts before age 59½ without penalty. But people who have diabetes don’t automatically qualify for this break, as this Tax Court case shows. A 45-year-old diabetic left his job and took a payout from his former employer’s plan. Shortly thereafter, he went into a diabetic coma and later had trouble performing basic tasks. The Court said he owes the 10% penalty on the payout because he couldn’t prove that on the date he received it, his illness prevented him from engaging in gainful activity (Trainito, TC Summ. Op. 2015-37). This is so even though the coma later in the same year left him sufficiently disabled.

Federal public safety officers will get a break on retirement plan withdrawals. Payouts at age 50 will be exempt from the 10% penalty, down from age 55. The easing is part of a new law expanding the president’s trade agreement powers and will take effect for distributions after 2015. Federal law enforcement officers and firefighters are eligible for this break, as are air traffic controllers. Withdrawals can be made from defined benefit and defined contribution plans. A similar easing for state public safety officers will be expanded to defined contribution payouts, too. 

DONATIONS: Donations to personal fund raising websites generally aren’t deductible as charitable contributions because they are earmarked for a single person or small group, an IRS attorney confirms. This includes contributions made on sites such as to assist with a person’s medical costs or to help a family who lost their home in a fire or storm. But gifts to charities that solicit donations on a fund-raising site can be deducted, provided the groups are 501(c)(3) organizations.

NEW TAX LAWS: A tightening on claiming tax breaks for education will kick in for 2016. Filers must have a 1098-T form from the college in hand before they file for the American Opportunity credit, the Lifetime Learning credit or the deduction for tuition taken on the front of the 1040. The idea is to help the Service better verify that claims for the credit or deduction are valid. Parents can still claim these breaks if the school sends a 1098-T to their dependent student. This requirement takes effect for 1040s for 2016 that will be filed in 2017. Filings for tax year 2015 aren’t affected. 

IRS won’t penalize colleges for mailing 1098s with invalid tax ID numbers as long as the institutions certify they properly asked the students for the numbers. But other penalties for filing incorrect information returns will soar. The basic fine will increase to $250 per 1099, up from $100 currently. Lesser penalties imposed when the 1099s are corrected by Aug. 1 increase as well. The $500,000 annual ceiling on businesses with gross receipts of $5 million or less that unintentionally file incorrect 1099s will rise to $1 million. The penalty ceiling on larger firms also doubles…to $3 million. The hikes will apply to 1099s filed for 2015. 

One other newly enacted tightening affects Americans working abroad: Child tax credits are limited for users of the foreign earned income exclusion… the special write-off for as much as $100,800 of income earned in a foreign country. Child credits for those claiming the break cannot exceed the filers’ U.S. tax liabilities. In other words, the credit won’t be refundable. This change will impact 2015 returns. 

GAINS & LOSSES: A stock’s worthlessness resulting from corporate fraud isn’t a theft loss, according to the Tax Court. Here, a couple purchased millions of shares in a public corporation on the open market. That stock later became totally worthless when the firm went under because of securities fraud committed by its executives. The couple said they should get a theft loss because the husband had direct contact with one of the corporate officers, who lied and misled him. But that’s not enough to convert the couple’s capital loss into an ordinary loss (Greenberger, D.C., Ohio). The loss would have been ordinary had the shares been bought from the fraudster. 

REAL ESTATE: Time spent as an investor doesn’t make you a real estate professional, the Tax Court says. Folks who spend over 50% of their total working hours and more than 750 hours each year materially participating in real estate activities can fully deduct rental losses. Here, the taxpayer’s time log showed 764 hours spent on five rental homes. But much of that was investor-related time, such as research on refinancing and other business opportunities. Also, he hired a real estate firm to manage the properties. So he doesn’t get the break (Padilla, TC Summ. Op. 2015-38). 

EXEMPT GROUPS: Bad news for IRS in a case challenging its scrutiny of a pro-Israel nonprofit. The organization claims that the Revenue Service improperly scrutinized its application for 501(c)(3) tax exemption because the group’s stance on Israel differed from that of the Obama administration and such special scrutiny is unconstitutional. IRS asked for the case to be dismissed on procedural grounds, but an appeals court agreed with a lower court’s ruling that the case can proceed (Z Street, D.C. Cir.). We’ll continue to follow this closely and update you when a court rules on the merits. 

ESTATE TAXES: IRS will no longer automatically mail estate tax closing letters to executors, starting with estate tax returns filed after May 31, 2015. The Revenue Service issues these letters to verify that either an estate’s 706 form has been accepted as filed or changes resulting from an audit have been agreed to. Executors of taxable estates typically wait for a closing letter to make final distributions to heirs because heirs can be held liable for unpaid estate taxes as transferees. Executors now must ask IRS for a closing letter. IRS says to wait at least four months after filing to make a request.

PREPARERS: Participation in IRS’s annual filing season program was less than robust. Only 11% of unenrolled preparers met all the requirements, the Service said. After a court struck down the agency’s plans to regulate preparers who aren’t CPAs, attorneys or enrolled agents, the IRS decided to offer a voluntary annual program to encourage continuing education and filing season readiness for these preparers. The qualification rules are tighter this year. To get a record of completion, unenrolled preparers will be required to take 18 hours of continuing education… two hours on ethics, 10 hours on federal tax law topics and a six-hour refresher course on federal tax law with a 100-question quiz. A score of 70% or higher is needed to pass. Preparers in states that have their own testing requirements, such as Calif. and Ore., as well as preparers who previously passed IRS’s registered tax return preparer exam, can skip the refresher course and test and take 15 hours of continuing education. 

And there’s bad news for unenrolled preparers who don’t opt into the program: They’ll lose the ability to represent their clients in audits or claims for refund on returns that they prepare and sign after 2015. Only folks in the voluntary program will be allowed to do so, but the practice rights of these participants will be limited. They cannot assist clients before IRS’s Office of Appeals or with collection matters. 

PENALTIES: Marijuana firms can get penalty relief for making payroll deposits in cash. Under new IRS guidance, businesses that are unable to open bank accounts or make other arrangements to deposit payroll taxes electronically can seek abatement of the failure to deposit penalty. To request relief from the penalty, a firm is required to submit a signed statement explaining the attempts it made to open a bank account and include corroboration, such as the denied application or a letter from the bank. 

IRS has a penalty abatement program for first-time late filers or payers. Under its First Time Abate program, if a filer has paid or arranged to pay the tax due and has been tax compliant for the past three years, IRS will OK a onetime waiver of the late payment and late filing penalties. The penalty for late payroll tax deposits is also covered, and the Service has extended the program to delinquent excise taxes. The abatement isn’t provided automatically…taxpayers have to ask for the relief. 

ENFORCEMENT: The Service is doing a poor job vetting its own contractors for tax debts, according to Treasury inspectors. Although the agency is barred under law from entering into contracts with corporations that have outstanding tax debts, it doesn’t make its contractors self-certify this fact prior to awarding them contracts or renewing their existing contracts. The inspectors identified 17 corporations that owed back taxes but were nevertheless awarded contracts. IRS vows to do better and will include the required self-certification language in all contract solicitations. GOP taxwriters are irate, claiming IRS is giving federal money to tax cheats. 

Continued cuts to IRS’s budget are hurting the agency’s collection efforts, Treasury inspectors say in a new report. They point out the fact that revenue officers collected 7% less money from delinquent taxpayers in 2014 than they did in 2011. Also, the number of collectors in the field has declined 28% over the past five years. Those that remain are working on old computers and using antiquated technology. But there’s one piece of good news for the agency: This smaller group of employees is working more efficiently, as the average revenue per case has spiked upward.
Yours very truly,

Statistics of Income Reveal Tax Increase for High-Income Taxpayers

Posted in Facts On Tax  on July 20th, 2015  by msheriff -  link

The IRS recently released the first statistics of income data available for the 2013 tax year. Taxpayers filed 147.7 million individual income tax returns for 2013. While AGI and taxable income both increased 0.8% from 2012 to 2013, total income tax increased 3.6% to $1.2 trillion and total tax liability increased 4.5% to $1.3 trillion. The larger percentage increase in total income tax and total tax liability relative to the AGI and taxable income coincided with the new higher marginal tax rates for ordinary income (increase from 35% to 39.6%), certain capital gain income (increase from 15% to 20%), the new 3.8% net investment income tax (NIT), and the new 0.9% Additional Medicare Tax. Correspondingly, the alternative minimum tax (AMT) decreased 22.7% to $22.5 billion for tax year 2013.

Total number of taxpayers in 2013 that were subject to the new Additional Medicare Tax was just under 2.9 million. Total Additional Medicare Tax was just over $6.6 billion, for an average of $2,306 per taxpayer who was subject to the tax. 

Total number of taxpayers in 2013 that were subject to the new net investment income tax was almost 3.1 million. Total net investment income tax was almost $11.7 billion, for an average of $3,786 per taxpayer who was subject to the tax. 

The Additional Medicare Tax and the net investment income tax were two tax increases signed into law as part of the Health Care Reform Act of 2010 with the intention of using the additional tax revenue to help pay for the cost of certain provisions contained in the Health Care law (otherwise knows as the Affordable Care Act – ACA). The estimated combined total tax revenue collected by these two tax provisions in 2013 equals $18.3 billion. The Joint Committee on Taxation originally estimated that the amount of revenue collected from these two tax increases in 2013 would be $20.5 billion. The IRS notes that the Spring 2015 Statistics of Income Bulletin is only an estimate based on a sample of returns filed, and that they are subject to sampling error. 

The TaxBook News

Taxpayer’s Loan Repayment Was Not an Effort to Avoid COD Income

Posted in Facts On Tax  on July 20th, 2015  by msheriff -  link

IRC section 61(a)(12) states that the discharge of indebtedness is includable in gross income. Whether a debt has been discharged depends on the substance of the transaction. 

In this case, the taxpayer was offered a job which included a salary, employee benefits, and a loan to the taxpayer for use in another business that he co-founded. The taxpayer agreed to work as an executive for his employer, as well as to work for the corporation that he co-founded. The two positions did not conflict with each other. The taxpayer’s employment agreement with the new employer stated that if he ever left his position, he would have to pay the loan. 

Years later, the taxpayer decided he needed to work for the corporation that he co-founded full time due to its rapid growth. Consequently, he resigned his position with his employer. The taxpayer’s resignation triggered his repayment obligation on the loan. But the employer did not demand repayment and no Form 1099-C, Cancellation of Debt, was issued to the taxpayer. About a year later, the taxpayer’s corporation went bankrupt. Three years later, the taxpayer agreed to go back to work for his previous employer. Six years after going back to work, the employer notified the taxpayer that he still needed to pay back the loan from his previous employment agreement. The taxpayer agreed, and proceeded to have payroll deductions from each paycheck to pay back the loan. 

The IRS claimed that the only reason the taxpayer (and employer) agreed to start paying back the loan was because the IRS had sent the taxpayer a notice of deficiency determining that he had failed to report cancellation of debt income (COD).

The court noted that the moment it becomes clear that a debt will never have to be paid, that debt must be viewed as having been discharged. The taxpayer argued that the debt was not discharged because he is currently making payments on the loan. The IRS said that the debt was discharged when the employer failed to take collection action after the taxpayer had originally resigned. Such inaction manifests the intention to forgive the loan. The IRS said that the taxpayer did not make a payment on the loan until after the commencement of the IRS audit which determined there was un-reported COD income. In other words, the IRS argued that the taxpayer only sought to repay the loan so that he could avoid payment tax on COD income. 

The court disagreed. A reasonable person would not agree to pay an unenforceable debt to save a fraction of that debt on taxes. Repayment of the loan costs more economically than paying tax on the debt forgiveness. The court said the taxpayer sought to repay the loan because he understood that it was his obligation to repay it. The IRS audit merely prompted the taxpayer and the employer to address an overlooked matter. The court ruled the loan was not forgiven and consequently, there was no COD income. 

The TaxBook News

Ringing in the New Year

Posted in Facts On Tax  on January 5th, 2015  by msheriff -  link

Dear Client:
  A new year rings in one set of tax rules. But changes are coming. Lawmakers chose to retroactively revive dozens of tax breaks for 2014, only to allow them to expire anew as 2015 begins. So taxpayers will again face uncertainty this year as they make their business and investment decisions. We expect Congress to renew all popular tax breaks again for 2015, although if the past is any guide, that might not happen until late in the tax year.

  Now let’s turn to what’s new for 2015. The employer mandate starts to kick in. Companies with 100 or more full-time-equivalent employees must offer health coverage to full-timers or pay a tax. Full-timers are those employed at least 30 hours a week on average, but there’s a good chance this number will be raised. Starting in 2016, firms with 50 to 99 full-time-equivalent workers will be subject to the pay-or-play rules, and the coverage offer will be expanded to dependents, including kids under age 26. The fines for noncompliance are stiff. One hits firms that fail to offer coverage to at least 70% of full-time workers in 2015 if even one full-timer opts to buy insurance through a government exchange and receives a tax credit to subsidize the premium. For this year, the fine is $2,084 times the number of full-timers employed, less 80. Next year, the penalty is much stiffer. The required coverage jumps from 70% to 95% of full-time employees, and only 30 full-timers are disregarded when figuring the tax. Another hits companies whose insurance is unaffordable. They’ll owe a tax equal to $3,126 for each full-timer who gets a tax credit for purchasing coverage on an exchange. Coverage is treated as affordable if the required premium contribution from an employee for self-only coverage doesn’t exceed 9.56% of the worker’s wages. To pass muster, the employer’s health plan must also provide “minimum value,” meaning that it must pay at least 60% of the costs of covered health services.

  On tap: Employer reporting of worker health coverage. Starting in Jan. 2016, firms with 50 or more full-time-equivalent employees must report 2015 insurance data for each full-timer to the Service and the worker on Form 1095-C. Reporting for 2014 is voluntary. The agency says it won’t delay implementing this reporting requirement, which IRS needs to help enforce the individual mandate against folks without coverage. Large employers must start preparing now for this new reporting obligation.

  The individual mandate’s fine for going without insurance is higher in 2015. The tax is typically the greater of two amounts: The basic fine or an income-based levy. The basic fine is soaring to $325 a person ($162.50 for each family member under 18), with a ceiling of $975…up $230 and $690, respectively. And the income-based levy doubles to 2% of the excess of household income over the tax return filing threshold. The income levels to qualify for the health premium credit also increase. The credit is available only to those with household incomes between 100% and 400% of the federal poverty level: $11,670 to $46,680 for singles and $23,850 to $95,400 for a family of four. Folks eligible for Medicaid or other federal insurance don’t qualify.

PERSONAL TAXES:  The income tax brackets for 2015 are a tad wider than last year’s, because of mild inflation during the 12-month period that is used to calculate the adjustments to the tables. This year’s tax rates did not change.

Marrieds: If taxable income is                                                    The tax is
Not more than $18,450                                                                10% of taxable income
Over $18,450 but not more than $74,900                                      $1,845.00 + 15% of excess over $18,450
Over $74,900 but not more than $151,200                                    $10,312.50 + 25% of excess over $74,900
Over $151,200 but not more than $230,450                                  $29,387.50 + 28% of excess over $151,200
Over $230,450 but not more than $411,500                                  $51,577.50 + 33% of excess over $230,450
Over $411,500 but not more than $464,850                                  $111,324.00 + 35% of excess over $411,500
Over $464,850                                                                            $129,996.50 + 39.6% of excess over $464,850

Singles: If taxable income is                                                      The tax is
Not more than $9,225                                                                 10% of taxable income
Over $9,225 but not more than $37,450                                       $922.50 + 15% of excess over $9,225
Over $37,450 but not more than $90,750                                     $5,156.25 + 25% of excess over $37,450
Over $90,750 but not more than $189,300                                   $18,481.25 + 28% of excess over $90,750
Over $189,300 but not more than $411,500                                 $46,075.25 + 33% of excess over $189,300
Over $411,500 but not more than $413,200                                 $119,401.25 + 35% of excess over $411,500
Over $413,200                                                                           $119,996.25 + 39.6% of excess over $413,200

Household Heads: If taxable income is                                     The tax is
Not more than $13,150                                                              10% of taxable income
Over $13,150 but not more than $50,200                                    $1,315.00 +15% of excess over $13,150
Over $50,200 but not more than $129,600                                  $6,872.50 + 25% of excess over $50,200
Over $129,600 but not more than $209,850                                $26,722.50 + 28% of excess over $129,600
Over $209,850 but not more than $411,500                                $49,192.50 + 33% of excess over $209,850
Over $411,500 but not more than $439,000                                $115,737.00 + 35% of excess over $411,500
Over $439,000                                                                          $125,362.00 + 39.6% of excess over $439,000

  Standard deductions for 2015 rise a bit. Marrieds get $12,600. If one spouse is age 65 or older…$13,850. If both are…$15,100. Singles can claim $6,300…$7,850 if they’re 65. Household heads get $9,250 plus $1,550 more once they reach age 65. Blind people receive $1,250 more ($1,550 if unmarried and not a surviving spouse). High-incomers lose their itemized deductions above a higher level this year. Their write-offs are slashed by 3% of the excess of AGI over $258,250 for singles, $284,050 for household heads and $309,900 for marrieds. But the total reduction can’t exceed 80% of itemizations. Medicals, investment interest, casualty losses and gambling losses (to the extent of winnings) are exempted from this cutback. Personal exemptions increase to $4,000 for filers and their dependents. However, this tax break is phased out for upper-incomers. It is trimmed by 2% for each $2,500 of AGI over the same thresholds for the itemized deduction phaseout.

  The 20% top rate on dividends and long-term gains starts at a higher level for 2015…singles with taxable income above $413,200, household heads over $439,000 and joint filers above $464,850. The 3.8% Medicare surtax boosts the rate to 23.8%. The regular 15% maximum rate applies for filers with incomes below these amounts, except that filers in the 10% or 15% income tax bracket still get the special 0% rate.

MINIMUM TAX:  AMT exemptions tick upward for 2015. They increase to $83,400 for couples and $53,600 for both singles and heads of household. The phaseout zones for the exemptions start at higher income levels as well…above $158,900 for couples and $119,200 for single filers and household heads. Also, the 28% AMT tax bracket kicks in a little later in 2015…above $185,400 of alternative minimum taxable income.

SOCIAL SECURITY:  The Social Security wage base increases this year to $118,500, up $1,500 from the cap for 2014. The tax rate imposed on employers and employees remains 6.2%, and the employer’s share of Medicare tax stays at 1.45% of all pay. The employee’s share is 1.45%, but the 0.9% Medicare surtax kicks in for singles with wages exceeding $200,000 and couples earning over $250,000. The surtax doesn’t affect the employer’s share. Self-employeds are also subject to the surtax.

  Social Security benefits rise 1.7% in 2015, on account of low inflation. The earnings limits are heading up, too. People who turn 66 this year do not lose any benefits if they make $41,880 or less before they reach that age. Individuals between ages 62 and 66 by the end of 2015 can make up to $15,720 before they lose any benefits. There’s no earnings cap once a beneficiary turns 66. The amount needed to qualify for coverage climbs to $1,220 a quarter. So earning $4,880 anytime during 2015 will net the full four quarters of coverage.

MEDICARE:  The basic Medicare Part B premium remains $104.90 per month in 2015. But upper-income seniors still have to pay higher Part B and D premiums if their modified adjusted gross income for 2013 exceeded $170,000 for couples or $85,000 for single people. Modified AGI is AGI plus any tax-exempt interest, EE bond interest that’s used for education and excluded foreign earned income. The 2015 Part B surcharge doesn’t change, while the Part D add-on rises slightly. The total surcharges on upper-incomers can be as large as $301.60 a month.

MEDICALS:  The annual caps on deductible contributions to HSAs inch up this year. The ceilings rise slightly to $6,650 for account owners with family coverage and to $3,350 for self-only coverage. Folks born before 1961 can put in $1,000 more. The limits on out-of-pocket costs, such as deductibles and copayments, will increase to $12,900 for people with family coverage and to $6,450 for individual coverage. Minimum policy deductibles increase to $2,600 for families and $1,300 for singles. The limits on deducting long-term-care premiums are a little higher. Taxpayers who are age 71 or older can write off as much as $4,750 per person. Filers age 61 to 70…$3,800. Those who are 51 to 60 can deduct up to $1,430. Individuals age 41 to 50 can take $710. And people age 40 and younger…$380.

ADOPTION:  The adoption credit can be taken on up to $13,400 of costs, a $210 boost. If the credit is more than a filer’s tax liability, the excess is not refundable. The full $13,400 credit is available for a special needs adoption, even if it cost less. The credit starts to dry up for filers with AGIs over $201,010 and ends at $241,010. The exclusion for company-paid adoption aid also increases to $13,400.

FRINGE BENEFITS:  The exclusion for U.S. taxpayers working abroad is a bit higher…$100,800. But the caps on transit passes and commuter vans fall sharply once again, to $130 a month. In late 2014, Congress reinstated the $250 cap, but only for 2014. The monthly limitation on employer-provided tax-free parking benefits remains $250. Employees covered by health flex plans can defer up to $2,550…a $50 hike.

EDUCATION:  The income caps are higher for tax-free EE bonds used for education. The exclusion starts phasing out above $115,750 of AGI for married couples and $77,200 for singles. It ends when AGI hits $145,750 and $92,200, respectively. The lifetime learning credit also starts phasing out at higher income levels… from $55,000 to $65,000 of AGI for singles and $110,000 to $130,000 for couples.

KIDDIE TAX:  The kiddie tax has a little less bite. The first $1,050 of unearned income of a dependent who doesn’t work is tax-free, a $50 hike. The next $1,050
is taxed at 10%, and any unearned income over $2,100 is taxed at the parents’ rate.

SAVINGS PLANS:  Many key dollar limits on retirement plans are a little higher this year: The maximum 401(k) contribution rises to $18,000, up $500 from 2014. Individuals who were born before 1966 are allowed to put in as much as $24,000. These payin limits apply to 403(b) and 457 plans as well. The ceiling on SIMPLEs increases to $12,500…$15,500 for individuals who are age 50 or older this year. Retirement plan contributions can be based on up to $265,000 of salary. The payin limitation for defined contribution plans increases to $53,000. Anyone making over $120,000 is highly paid for plan discrimination testing.

  The income ceilings on Roth IRA payins tick upward. Contributions phase out at AGIs of $183,000 to $193,000 for couples and $116,000 to $131,000 for singles. Deduction phaseouts for regular IRAs start at higher levels as well, ranging from $98,000 to $118,000 of AGI for couples and from $61,000 to $71,000 for singles. If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the spouse who isn’t covered begins at $183,000 of AGI and finishes at $193,000. The IRA and Roth payin caps remain at $5,500…$6,500 for those 50 and up. And the partial credit for retirement plan payins phases out at higher levels. For marrieds…at AGIs over $61,000. Household heads…$45,750. Singles…$30,500.

ESTATE AND GIFT TAX:  The estate and gift tax exemption for 2015 jumps to $5,430,000. The rate remains 40%. The gift tax exclusion stays the same…$14,000 per donee. Up to $1,100,000 of farm or business realty can receive discount estate tax valuation. And more estate tax qualifies for an installment payment tax break. If one or more closely held businesses make up greater than 35% of an estate, as much as $588,000 of tax can be deferred, and IRS will charge only 2% interest.

BUSINESS TAXES:  The standard mileage rate rises to 57.5¢ a mile for business driving, up 1.5¢. The rate falls to 23¢ a mile for medical travel and moving and remains at 14¢ for charitable driving. Standard rate users can also deduct the cost of parking and tolls. More small firms that offer health coverage can get a tax credit for doing so. The full credit is available only to firms with 10 or fewer full-time-equivalent employees and average wages of $25,800 or less, up by $400. The credit diminishes rapidly for companies with more employees and higher average pay, phasing out completely for businesses with more than 25 workers or average pay in excess of $51,600.

  Expensing is slashed. Only $25,000 of assets qualify, down from $500,000, and the $25,000 phases out once more than $200,000 of assets are put in service. 50% bonus depreciation lapsed, as have other breaks, such as the R&D credit and 15-year depreciation for restaurant renovations and leasehold improvements. Lawmakers will have to find time in 2015 to address the expired provisions. They will also continue laying the groundwork for fundamental tax reform.

  And the Supreme Court could throw a wrench into the health reform law. The high court will tackle the issue of whether health premium tax credits are limited to those who buy coverage on a state-run exchange. A decision against the government would nix credits to buyers of insurance on exchanges run by the feds. In addition, it would weaken the employer mandate because an employer’s liability for the fine is tied to its employees receiving a credit for insurance bought on an exchange. We’ll watch Congress and the Court closely and report on any developments.
Yours very truly,

Food for Thought

Posted in Facts On Tax  on December 15th, 2014  by msheriff -  link

Dear Client,
  This bull market may be a senior citizen… just a few months away from its sixth birthday, it’s already the fourth longest of the past four decades. But the old charger still has plenty of vigor, supported by a vibrant U.S. economy, lower oil prices, a healthier consumer and a strengthening greenback. In fact, with corporate earnings likely to grow 8% – 10% on average for the Standard & Poor’s 500 companies…

INVESTING:  U.S. stocks should offer an 11% total return over the coming year… a 9% gain for the S&P plus a two percentage point average dividend yield. Moreover, although share prices are carrying a bit of premium at 16 times estimated 2015 earnings, the market as a whole is well shy of past market tops. Still, it’ll take greater care to profit in 2015: More volatility and fewer firms lifted by a rising tide mean picking the right stocks is likely to be critical.

  Among the currents to be negotiated: Higher interest rates. The Federal Reserve is poised to nudge up rates, midyear of later in 2015. The moves will likely be modest and gradual. With overseas demand for the safety of U.S. assets remaining high and expectations of inflation, low… the impact of both short- and long-term rate hikes should be benign. But if the Fed acts more aggressively or sooner than expected or if bond yields run up, consider a shift to defensive stocks… companies that make the stuff we use every day. Think makers of toothpaste, cereal, diapers, toilet paper, laundry detergent and so on.

  Then there’s the oil price drop, which tarnishes the luster of energy firms. Note, though, that a few, including behemoths Schlumberger and Halliburton, have already been so beaten up that they’re looking like bargains to hold long term. The decline is a boon for companies that rely on oil-based raw materials. Chemical firms, such as PPG Industries, which makes automotive finishes, house paint and industrial coatings, are a good bet. Also Goodyear Tire & Rubber or the like. Lower gas pump prices mean consumers have more to spend elsewhere… good news for retailers. Consider Wal-Mart, Macy’s and discounter TJX Companies. But steer clear of Sears and J.C.Penney, which will both continue to struggle.

  And a muscled-up dollar. Big exporters and multinationals will feel the pain of products that cost foreign consumers more and overseas earnings that translate into fewer dollars. Conversely, firms that derive the bulk of their sales in the U.S. are likely to perform more favorably. Some candidates to consider: UnitedHealth Group, drugstore chain CVS, insurer Allstate and steelmaker Nucor. And these small caps: Krispy Kreme Soughnuts, Mueller Water Products and Regal Entertainment.

THE ECONOMY:  Strong third-quarter GDP growth reinforces our expectations for 2015. Momentum critical for a self-sustaining growth cycle is finally picking up, and a gain in the 3% neighborhood…the best since 2005…over the course of 2015 is likely. That compares with an expected annual gain of just 2.2% for this year. Consumer confidence should head higher in coming months…another bit of good economic news helping to buoy spending this holiday season and beyond. Lower prices at the gas pump and more-stable food prices will be big factors. Because consumers buy gasoline and food frequently, they tend to put a lot of weight on the direction of prices for those products, as well as on incomes and employment.

  Look for wage and price hikes to tick up in the weeks ahead. More midsize and small businesses say they expect to raise wages…many of them by 3% or greater. More companies also intend to kick average prices higher to preserve profit levels and meet rising supplier costs. Both moves reflect business owners’ brighter outlooks on future growth. They’re betting consumers will be willing and able to pay more. But no danger of inflation spiraling much higher. There’s still enough slack in the economy to hold the Consumer Price Index to about a 2% increase next year. Count on businesses to invest more in their own growth next year, too…bumping up capital spending by an average of about 7%, following an increase of 5% or less this year. With the economy poised for healthier, more sustained gains in 2015, corporations will put more of their gigantic cash hoards into new plant and equipment.

  Job growth in the West and South will pull further ahead of other regions next year. Bolstered by energy exploration and development in Texas, La. and Okla. in the South and by a thriving high-tech sector in the West, gains in the two regions have been running at a pace that is double that of the Midwest and Northeast. The Northeast is particularly vulnerable, with hiring muted across most of the region. The notable exceptions: NYC and Boston, where financial services continue to add workers. The region’s export-oriented industries…pharmaceuticals, aerospace and technology… will be hard hit if Europe’s economic woes deepen. Soft spots in the Midwest, too. Manufacturing is picking up only modestly in Chicago and even more slowly in St. Louis, Milwaukee and other key areas. Brisk new-car sales continue to make the auto industry a bright patch, however, and strong demand for new non-defense aircraft and aerospace products is a help.

ENERGY:  Another big drop in U.S. dependence on petroleum imports coming next year as domestic crude output keeps rising and exports of refined fuels mount. Net imports of oil and petroleum products are now down to 4.8 million barrels a day…the lowest in 22 years, despite the fact that the U.S. consumes much more oil today. Next year, the level figures to slip below 4 million barrels…about 20% of consumption. Expect domestic oil production to hit 9.5 million barrels a day in 2015, up from slightly under 9 million today and the highest production rate since 1971. Plus more exports of U.S. fuel to meet brisk foreign demand for gasoline, diesel and propane. Even U.S. crude will rise as a decades-old ban on most shipments of it overseas is loosened. Overseas sales are now nearly half a million barrels a day.

  Surging natural gas production in Pa. is leading to a local glut. Spot princes for gas coming from the Marcellus Shale have dropped below the benchmark U.S. level because output is rising faster than new pipes can be built. So some nearby users…factories in W.Va., power plants and homeowners in N.J…are enjoying cheap prices. Most users are paying more now than a year ago because of high demand last winter. Moving all that gas to outside markets will take three years. New pipelines are being built as quickly as possible to transport Pa.’s gas bounty. Most projects figure to be on line by 2018, speeding up deliveries to the gas hungry Northeast.

IN THE STATES:   Look for states to fiddle with funding formulas for road and bridge projects that involve private partners. The conventional way…giving private firms a share of money raised through tolls or user fees…isn’t yielding enough return, forcing a few private operations to go belly-up or try to get out of agreements. Some states will sweeten the pot with pay for firms that hit benchmarks such as prompt removal of snow, meeting construction deadlines and the like. States will still need to rely on such public-private projects. Federal funds for state projects continue to dry up, and gas tax revenues continue to decline as motorists opt for vehicles that get more miles per gallon than earlier models.

HEALTH CARE:  Don’t be surprised if the feds up the ante for employers that self-insure: A requirement to offer coverage of more “essential services”… hospitalizations, emergency room treatment, prescription drugs, etc. Most companies that self-insure voluntarily meet the federal essential services standards required of other big firms. But some…largely in retail, food service and other low-wage industries…do not, prompting critics to charge that self-insuring provides them with a giant loophole. The earliest such a change could kick in is July 1, and that’s not especially likely. Any administrative move to add the reg is sure to be challenged in court.

  Expect more employers to tighten up on prescription drug coverage. Increasingly, they’ll require insureds to try the least costly options first…generics over brand names and cheaper, older therapies over newer ones, for example. Payment for more expensive drugs may be approved only after other options fail. Another cost of relief tactic: Limiting quantities of drugs for episodic maladies…15 pills a month instead of 30 for treatment of migraines, insomnia and so on.

  Note the increased scrutiny of employer wellness programs by the EEOC, Equal Employment Opportunity Commission. Rewarding workers who exercise or otherwise adopt healthier lifestyles can cut health care costs over the long run. At issue: When is participation no longer truly voluntary, as the law requires. The commission is suing two firms that it says are effectively compelling participation. The EEOC will issue guidelines, but not till 2015. Meanwhile, err on the side of caution.

TECH:  Wireless firms face a big shortage of skilled workers to upgrade networks. Annual spending on U.S. wireless infrastructure will top $40 billion by 2016, adding demand for antenna technicians, engineers, tower climbers and other workers. Wireless firms say community colleges and tech schools don’t keep up with advances. A new job training program will help. The Dept. of Labor is partnering with wireless companies to train workers and standardize practices in the industry. Standards will be upgraded as the technology changes, with an emphasis on safety.

  Use of spoken commands and photos to search the web will grow rapidly. Baidu, the Chinese equivalent of Google, sees half of all searches by voice or image in just five years. Google, Apple and others predict quick transitions from text as well. Such searches will boost business productivity, letting workers find parts with photos or get necessary instructions without losing use of their hands. But they’ll pose challenges for marketers that depend on word searches to trigger their advertisements or to put their sites at the top of search results. Also coming: Advanced computer chips that will enhance digital photography. New chips and software will enable phone cameras to know whether a user is indoors or out and to determine when to shoot. At a soccer game? The picture will be taken when the ball leaves the shooter’s foot or when the goaltender dives to stop a shot.

BUSINESS COSTS:  Higher paper prices on the horizon…a 6% jump for publishing-quality paper as another mill is shuttered. It’s the latest in a series of consolidations and cutbacks as publishing increasingly shifts from print on paper to electronic ink. Tough new efficiency regs for rooftop air conditioners will raise prices charged by makers. By 2019, manufacturers will have to reduce by 30% the amount of power used by units typically installed on the roofs of big-box stores, office buildings, etc. Also: A hike of up to 6.5% in 2015 hotel rates under corporate contracts. Businesses are losing bargaining power as occupancy rates rise. This year…near 64%, the highest in 15 years. Contacts won’t include extras that clients are now used to, including business center services and free breakfasts, even access to fitness centers. Expect hotels to also drive a hard bargain when it comes to renting meeting space.

CLEAN WATER:  Uncle Sam is readying a big push to clean up the Great Lakes. The new plan will unfold over the next five years, at a taxpayer cost of over $1 billion. The goal is to build on efforts that have already markedly improved water quality. Among top priorities for federal agencies: Keeping fertilizers out of the lakes. Runoff from farms and urban areas sweeps nitrogen and phosphates into the water, causing fish die-offs and sometimes rendering water unsafe for residents to drink. Restoring coastal wetlands to better filter and block harmful pollutants. And replenishing native fish species by eradicating harmful invasive threats and removing dams to let migrating fish travel easily between streams and the lakes.

CONGRESS:  The GOP-led Congress will face two big obstacles in trying to end gridlock: Some of the party’s presidential hopefuls and the man they hope to replace. The challengers will try to push House and Senate leaders further to the right. But President Obama won’t hesitate to kill any measure that pushes back too much. Veto threats will force the Republican majority to scale back its wish list: Redefining full-timers and making minor changes instead of repealing Obamacare. Trading alternative energy incentives for approval of the Keystone XL oil pipeline instead of trying to reverse Environmental Protection Agency rules for coal plants. Delaying implementation of the Volcker rule, which curbs risky investments by banks, instead of striking down the entire package of financial services reforms. Don’t expect lower business or personal tax rates. Or entitlement changes. In many ways, the next Congress will look much like the one being replaced.
Yours very truly,

2014 Tax Reminders

Posted in Facts On Tax  on December 15th, 2014  by msheriff -  link

Washington, Dec. 5, 2014

Dear Client:
  2014’s tax rules still haven’t been finalized. But help is on the way as year-end nears. Congress had all year to revive a series of tax breaks that lapsed after 2013, but taxwriters procrastinated. 

 All major tax provisions will be reinstated: For individuals, the deductions for state sales taxes in lieu of income taxes, college tuition and up to $250 of teachers’ classroom supplies, plus direct payouts of $100,000 or less from IRAs to charity for folks 70½ and older. Also, letting debtors exclude up to $2 million of forgiven debt on primary homes. For businesses, 50% bonus depreciation, the R&D credit and higher ceilings on expensing assets.

  President Obama nixed a tentative deal by House and Senate negotiators that would have made a number of breaks permanent, including many key ones for businesses. Obama wanted more-permanent relief for lower- and middle-incomers. That, plus opposition from some Senate Democrats, put the kibosh on the proposal. But the House has OK’d a fallback plan…reviving all key breaks just for 2014. We expect the Senate to reluctantly accept the House bill. As a result, the extensions will expire a couple of weeks after the measure is signed into law. This means businesses and individuals will face the same uncertainty next year about the tax rules as they try to make their business and investment decisions.

  The final bill will contain a significant new break for disabled individuals: Tax-free ABLE savings accounts, similar to 529 college savings plans. Starting in 2015, states can set up ABLE programs so families can set aside funds to help the long-term disabled maintain their health, independence and quality of life. Nondeductible contributions to ABLEs of up to $14,000 a year will be allowed for those who became blind or disabled before age 26. Lifetime payins would be capped at the same level as the state’s 529 plan. Account owners would remain eligible for Medicaid. And account balances of $100,000 or less wouldn’t affect SSI benefits.

  Withdrawals will be tax-free if the funds are used for housing, education, transportation, job training and the like. This includes payouts of account earnings. Earnings used for nonqualified purposes are taxed and hit with a 10% penalty. Rollovers will be limited to another ABLE account for that individual or a disabled sibling. When an account beneficiary dies, amounts left in the ABLE after a state recovers some of its Medicaid costs would go to a designated beneficiary. The recipient owes tax on any remaining account earnings, but not the penalty.

  One revenue offset for ABLEs will help employers that use payroll agents. Currently, employers who use agents are on the hook for undeposited payroll taxes, even if the agent skips town. But IRS will set up a program next year to certify agents that post a bond, submit audited financial statements and pay a $1,000 annual fee. After 2015, a firm that uses a certified agent won’t be liable for the agent’s malfeasance.

HEALTH CARE:  More firms that reimburse workers for health insurance can owe a stiff tax, according to new IRS guidance. Many small companies have set up plans to reimburse premiums paid by employees for individual policies or for coverage bought on an exchange. Earlier this year, the IRS said that if these arrangements are done on a pretax basis, they violate the health reform law and likely trigger a $100-a-day tax per worker. But the Service also suggested after-tax arrangements were exempted. Now, IRS says they are not exempt. See for details.

BENEFIT PLANS:  Plans get help on advising payees of their rollover options for distributions. If a plan makes a lump sum payout or other payment that can be rolled over to an IRA or another plan, the payee must be given an explanation of the tax rules. The Revenue Service has updated its model summary that plans can use. It reflects tax law changes over the past few years, including in-plan Roth rollovers and the tax aspects of allocating pretax and after-tax payins when doing a rollover. For full details, including the rules for designated Roth accounts, see Notice 2014-74. And IRS has a helpful rollover table for owners of retirement plans and IRAs. See for permissible and impermissible rollovers.

IRAs:  An IRA owner gets off the hook after an ill-advised rollover to a SIMPLE IRA. Acting upon a financial pro’s advice to consolidate her retirement accounts, she had the custodian of her IRA transfer the funds to the trustee of her SIMPLE IRA. After she became aware that a SIMPLE cannot accept a tax-free transfer or rollover from a regular IRA, she asked for additional time to recharacterize the transfer into a second traditional IRA that she owned. In a private ruling, IRS OK’d her request.

  IRAs can invest in trusts holding gold, the Service says in a private ruling. The rules that prohibit direct investments by IRAs in bullion do not apply if the gold is held by an independent trustee. Shares in the trust are marketed to the public, including IRAs and individually directed plans, and are traded on a stock exchange. But redeeming trust shares for gold bullion will trigger a tax bill. The trust lets holders convert their shares into physical gold. An IRA that does such an exchange will be treated as acquiring a collectible, so the full value of the shares exchanged for gold by the IRA will be treated as a taxable distribution to the IRA owner.

EXEMPT GROUPS:  A break for an exempt organization that is changing its state of domicile: It needn’t reapply for tax exemption, according to this private ruling from IRS. Both the state the group left and the one it’s moving to treat the move as a continuation of its existence and not as the creation of a new legal entity. Also, the domicile change won’t affect its charitable purposes or operations. But while the group needn’t reapply for a tax exemption, it must report the change when it files its annual Form 990. Groups that change their domicile via a merger do have to apply again for exemption.

  A preparer’s error excuses a private foundation from a 10% excise tax on excess business holdings, IRS privately rules. While analyzing the group’s assets, the preparer miscalculated its stock holdings and didn’t realize that the foundation was deemed to own over 20% of a corporation. When the mistake was discovered, the group rid itself of the excess stock. That was enough for IRS to abate the tax.

  IRS is approving the bulk of exempt applications filed on Form 1023-EZ… the two-page form that can be used by groups with annual gross receipts of $50,000 or less and total assets of not more than $250,000. The agency has rubber-stamped over 95% of the forms filed since the program began in July, and many of the rejects are because of mismatches between the organization’s name and identifying number. The agency has vowed to do back-end audits of some of these applicants, but many tax pros feel that the Service lacks the resources to do an adequate job.

REAL ESTATE:  Letting family members use a rental unit can bar a rental loss deduction. A couple owned a rental home and personally used it one year for 14 days, which was more than 10% of the time that the house was rented to vacationers. The husband’s brother also paid rent to stay at the property for a week’s vacation. Use by a relative is treated as personal use by the owners, the Tax Court says. The only exception is if the relative pays a fair market rent and uses the property as a principal residence. So the brother’s short stay is added to the couple’s 14 days of personal use. This triggers the ban on deducting rental losses when personal use tops the greater of 14 days or 10% of days rented (Van Malssen, TC Memo. 2014-236). As a result of the excess personal use, the couple’s deductions on the property other than for mortgage interest and real estate taxes are limited to the rental income.

  A sale of an interest in a lawsuit nets capital gain treatment on the proceeds. A developer had an option to buy land on which he planned to build condominiums but the landowner reneged on the deal. The developer sued to force a sale and won. While the case was on appeal, he needed to raise cash, so he assigned his interest in the lawsuit for $5.75 million. The Tax Court said that amount is ordinary income because he eventually planned to sell the land to customers as part of his business, but an appeals court disagreed. Since he never owned the land, what he actually sold was his right to purchase the land, which qualifies as a capital asset (Long, 11th Cir.).

TAX DEBTS:  IRS gets its wrist slapped for being too inflexible about collecting a tax bill. A sculptor offered to pay back a tax debt of over $200,000 in installments. But when the collection appeals officer insisted upon filing a lien against him as a condition of OK’ing the payment plan because the balance due was so large, he rejected the deal. He claimed a lien would hurt his business and credit rating and was overkill. The Tax Court ruled that the officer abused her discretion by insisting on a lien and sent the case back for another hearing (Budish, TC Memo. 2014-239).

BUSINESS TAXES:  You can get a tax write-off for helping your kids, as this case shows. A father owned an S firm in the real estate development business. His teenage son was a local celebrity for his successful motocross racing, so the father had the company become a sponsor for his son’s racing. Over a two-year period, the firm paid $160,000 for motorcycles, equipment and other costs. Funding ceased when the son turned pro. The Tax Court said that most of the $160,000 was a deductible business expense because the firm got new business connections, favorable construction financing deals and other similar benefits from its sponsorship (Evans, TC Memo. 2014-237).

  A transfer of an interest in a mine for a royalty is a lease for tax purposes, the Service privately rules. A mining firm sold its stake in a joint mining venture in exchange for two royalties: A bonus royalty if the reserves top a certain amount and a sliding scale royalty triggered only after a production goal has been reached. Since the production royalty is treated for income tax purposes as a retained interest in the minerals, the transfer is not treated as a sale. Therefore, the royalty payments are taxed as ordinary income, and the firm can claim depletion on the income.

  Businesses paying limited liability companies have to issue 1099 forms if annual payments total $600 or more, IRS lawyers reaffirm in a memo to the field. There’s an exception if the LLC has filed Form 8832 with IRS and elected to be taxed as a corporation. Most LLCs choose to be taxed as partnerships or sole proprietorships.

  Income from data-mining software licensed to vendors is tax-favored, IRS says in a private ruling. The income is eligible for the 9% domestic production deduction. On audit, IRS agents took the position that the income was attributable to services and therefore did not qualify for the write-off, but IRS headquarters overruled them.

YEAR-END TIPS:  Our final set of 2014 tax reminders…to help you avoid last-minute errors. Check the balance in your flexible spending account. You must clean it out by Dec. 31 if your employer has not implemented either the 2½-month grace period or the $500 carryover rule. Otherwise, you will forfeit any money left in your account.

  Be sure you don’t run afoul of the gift tax rules with your year-end gifts. If you are making a gift by check, be sure the donee deposits it in 2014 if you want the money to count as a 2014 gift for gift tax purposes. Alternatively, deliver a certified check to the recipient this year. That will count as a 2014 gift, even if the donee does not deposit it into his or her bank account until next year. Remember that if you don’t use up the full $14,000-per-donee exclusion this year, you lose the shortfall forever. You can’t give a donee extra next year to make up for it. If you’re giving securities, endorse them over to the donee and deliver them by year-end if you want the gift to count for 2014. If you send them to the corporation late in the year to be retitled, the transfer process might not be completed by Dec. 31.

  Mail checks for tax-deductible items before Dec. 31 to ensure a 2014 write-off. You’re able to claim the deduction for this year even if the checks don’t clear until Jan. Thus, mailing a charitable donation in late Dec. will nail down the deduction for 2014. And make sure you know the tax rules if you are charging deductible items. For charges that you make with a retail store credit card, you are allowed to claim the deduction for the item only in the tax year in which you pay the bill. For transactions made with a bank credit card, you take the write-off in the tax year that you charged the goods, even if you pay the bill next year.

  More on escaping the estimated tax penalty. In our Nov. 21 Tax Letter, we suggested that if you expect to owe tax to IRS, having more income tax withheld from your Dec. paychecks or a retirement plan payout can help you beat the penalty. But we misstated the penalty exception based on last year’s tax. The levy won’t apply if you prepay 100% of your 2013 tax liability…110% if your 2013 AGI topped $150,000. We said that the 110% rule was based on your AGI for 2014. We regret the error.

ENFORCEMENT: IRS OKs too many improper fuel-tax-credit claims, Treasury inspectors say. Taxpayers who use fuel for off-road business purposes, such as on a farm or commercial fishing boat, can take a credit for the federal fuel tax they pay. However, the Service failed to follow procedures and manually screen about 4,000 credit claims of $10,000 or more. And the agency allowed many claims of around $600 or less, even though no business income was reported on the returns. The IRS now says it will tighten up screening of large claims and, if its limited audit resources permit, lower the threshold for examining small claims on returns without business income.

  More phony returns filed by prisoners are slipping through the cracks, according to Treasury inspectors. Unfortunately, IRS is still working out the kinks on sharing data with federal and state prison officials so the offenders can be punished.

  Unreported tip income is in IRS’s crosshairs. It will do a nationwide survey of consumer tipping practices so agents will have a better idea if workers in industries such as restaurants, hair salons and taxis are reporting all their tips. The last time the Service did a study on tips was over 30 years ago, so its statistics are outdated.
Yours very truly,

3 Keys to a Disciplined Business

Posted in Facts On Tax  on November 24th, 2014  by msheriff -  link

The recession put a lot of companies out of business. Yet, others survived were unscathed. We believe that the survivors all shared a trait we call financial discipline. 

The companies that survived (or even thrived) have three common attributes: (1) The have a commitment to accurate accounting; (2) They have a financial plan and compare results to the plan; and (3) The use expert resources to guide sound management decisions. 

If these three things can get you through a five-year recession, imagine what they can do in good times. Ready to implement financial discipline techniques in your company? Here’s what you need to know:

1) Take accounting seriously

Every business owner wants to run a profitable business, but few dedicate enough time to measuring the actual results. The only way to do this is to have a dedicated accounting function. Just as sales can’t happen without paying attention to prospects, financial insight cannot happen without paying attention to the numbers. While it might seem easy to “get along” without accurate accounting during the good times, a lack of clear financial records leads to bad decisions in the bad times… and can put the entire business in jeopardy faster than any other factor. 

2) Use financial reports to drive planning & forecasting

Many companies have a CPA for taxes, and a bookkeeper to balance the checkbook. These are important functions, but even an accurate income statement (or tax form) is worthless if the financial information is not used to steer the company. 

Knowing what the results mean is so much more important than just knowing what the results are. A mature finance function is one that dives deeper into the numbers to measure key performance indicators (KPIs) and plan for the future. Successful companies move beyond simple reporting to develop business dashboards and forecasts. 

3) Find an experienced co-pilot

Every CEO should have a CFO or finance expert in his pocket- one who is skilled in forecasting, budgeting, setting prices, working with banks, and generally, grappling with the complexities or financial statements. (This is generally not the bookkeeper, CPA, or banker.) It takes a specific skill-set to put financial results into a business context and drive complex decisions. Getting the right person keeps the business focused on metrics that drive healthy growth- and avoid catastrophe.

Don’t Wait For a Recession

Even without a Great Recession, every business has external forces that will affect them: weather, competition, labor issues and other unexpected events. How you deal with the “unexpected” is fundamental to whether you thrive in the face of adversity. So many businesses simply do not have the financial discipline to work through a crisis and come out bigger and better. Do you?

Is your business financially mature? Are you struggling with long-term planning or just getting through the current unknowns? Take the time and effort to get your organization to the next level of growth by building a mature financial function. Creating this sound financial structure will support your business for years to come- in good times and bad.

We are here to help!!!

Financial Insights

Posted in Facts On Tax  on November 3rd, 2014  by msheriff -  link compiled some wonderful insights to consider for this next year. 

Turbulent Times in Emerging Markets:

Emerging market investments may have the potential for higher avg returns over the long term, but there are risks.

Protecting Your Dependents with Life Insurance:

The primary purpose of life insurance is to protect your dependents financially in the event of your death. Properly positioned, the benefit from a life insurance policy can provide a steady stream of income for your family. It can also provide liquid capital to help pay estate taxes and other financial obligations.

Roth IRA Conversion:

This calculator can help you determine whether you should consider converting to a Roth IRA.

Year- End Tax Plans

Posted in Facts On Tax  on October 29th, 2014  by msheriff -  link

Washington, Oct. 24, 2014

Dear Client:
  Time to start making your year-end tax plans, even though this year’s tax rules aren’t finalized yet. As usual, tax writers are waiting until the last minute to revive a series of tax breaks that lapsed after 2013. These include the deduction for state sales taxes in lieu of income taxes and direct transfers from IRAs to charity of up to $100,000 for folks age 70½ and up. Despite lawmakers’ delay in reinstating the provisions, we think you can bank on them for 2014 and 2015. 

  The key to end-of-year tax planning is simple: You have to think about both 2014 and 2015 as you weigh your options. You want to cut your tax bill over both years, not just one. Most filers will save by accelerating write-offs into 2014 and deferring income to 2015, since tax rates aren’t changing. If you’ll be in a higher bracket next year, consider doing the opposite…accelerating income and delaying your deductions. State and local income taxes are one of the easiest write-offs to manipulate. Mailing your Jan. 2015 estimate in late Dec. lets you claim the deduction this year. Donations. You can accelerate contributions planned for 2015 into 2014, but you must charge them or mail the checks by Dec. 31 to ensure a 2014 write-off. Try to make your donations with appreciated stock that you’ve owned for over a year. This way, you deduct the full value and never pay capital gains tax on the appreciation. Medicals. If you’ve topped the 7.5%-of-AGI threshold (10% for filers under 65) or are close to it, think about getting and paying for elective procedures this year. Interest. If you make the Jan. 2015 mortgage payment on your residence before the end of this year, you can deduct the interest portion in 2014. However, unless you do the same thing in 2015, you’ll deduct only 11 months of interest then.

  Some filers can hop in and out of the standard deduction from year to year. If your itemizations just top the standard deduction amount, try shifting some to 2014 and take the standard deduction in 2015. If you don’t have enough this year to itemize, delay some and itemize in 2015. This year’s standard deduction for couples is $12,400, plus $1,200 more for those 65 and older. Singles get $6,200…$7,750 if 65 and over. Household heads get $9,100 plus $1,550 if they are 65. Next year’s base amounts will rise by $200 for joint filers, $150 for heads of household and $100 for singles.

  The alternative minimum tax can throw a monkey wrench into your plans. Paying your Jan. 2015 state tax estimate in 2014 won’t work. And interest on home equity loans is not deductible for the AMT unless you use the proceeds to buy, build or renovate your main home. If you exercise an incentive stock option in 2014, the discount you get is hit by the tax unless you sell the shares by Dec. 31. And you won’t benefit from a 2014 payment of a real estate tax bill due in early 2015. Taking certain types of deductions makes you more likely to owe the AMT. Many write-offs must be added back when you calculate AMT liability: Sales taxes, state income taxes, property taxes, some medicals and most miscellaneous write-offs. And large gains can trigger the tax if they cost you some of your AMT exemption. 

HEALTH CARE:  More on the hardship exemption from health reform’s individual mandate: Folks must nail down this exemption before filing. In our Oct. 10 Tax Letter, we noted that people without health insurance will owe a tax when they file for 2014 unless they have an exemption. Those seeking one of the 14 hardship exemptions must get an OK from the exchange before they can claim a waiver on their returns. The approval process will take a minimum of two weeks, according to the government. Individuals must submit a multiple-page application plus required documentation. If the exchange OKs the relief, the applicant will receive a certificate number that he or she will then enter on Form 8965 to substantiate the claimed exemption. Waiting too long to apply will likely delay your refund, especially if the feds end up being swamped by procrastinators who are unfamiliar with the exemption rules. Note that hardship exemptions won’t necessarily be granted for the full year. They’re usually given for the months of the hardship plus one month before and after.

BENEFIT PLANS:  Many key dollar limits on retirement plans will be a bit higher next year: The maximum 401(k) contribution is rising to $18,000, an increase of $500 over this year. Individuals born earlier than 1966 can put in as much as $24,000. The contribution limits apply to 403(b) and 457 plans as well. The ceiling on SIMPLEs will increase to $12,500…$15,500 for individuals who are age 50 or older in 2015. Retirement plan contributions can be based on up to $265,000 of salary. The payin limitation for defined contribution plans increases to $53,000. Anyone making over $120,000 is highly paid for plan discrimination testing. The income ceilings on Roth IRA payins are going up. Contributions phase out at AGIs of $183,000 to $193,000 for couples and $116,000 to $131,000 for singles. Deduction phaseouts for regular IRAs will start at higher levels, ranging from $98,000 of AGI to $118,000 for couples and from $61,000 to $71,000 for singles. If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse begins at $183,000 of AGI and finishes at $193,000. The IRA and Roth payin caps remain at $5,500…$6,500 for those 50 and up. U.S. citizens with Canadian retirement plans get a break from IRS. They’ll automatically qualify for deferral of U.S. tax on the income earned on their Canadian retirement accounts, provided they file U.S. income tax returns and report plan distributions in income. IRS is eliminating the rule requiring owners of registered retirement savings plans and registered retirement income funds to file Form 8891 to elect deferral and annually disclose payins, payouts and earnings. The relief doesn’t apply to those who have been reporting the undistributed earnings in taxable income on their 1040s each year. Rev. Proc. 2014-55 has all the details. But they’ll now have to report the value of the plans on IRS Form 8938 if the total value of all foreign financial assets exceeds the threshold for filing the form. The PBGC will start eyeing pension plans that cash out current retirees. Firms are offering lump sum buyouts to participants with deferred vested benefits or are transferring the obligations to an insurance company via an annuity contract to reduce the plans’ potential hit to their bottom lines. However, these measures also lower the premiums owed to the PBGC, which already is in financial difficulty. So the agency says it now wants notice of these de-risking moves, starting in 2015. Can plan sponsors rely on a procedural loophole to escape fiduciary liability? The Supreme Court will decide. Employees sued a 401(k) plan’s fiduciaries for not offering them the lowest-fee versions of investment choices. The lower court ruled for the participants, but only for funds that were first offered less than six years before the employees filed suit. Their claims for the other funds were time-barred. The high court will address whether the six-year rule lets plan sponsors off the hook.

FARM TAXES:  A big win for inactive farmers who are in the Conservation Reserve Program. CRP payments aren’t subject to self-employment tax, an appeals court says in the case of a taxpayer who leased a portion of his land acreage to others to farm and enrolled the other tracts in the CRP. The payments are exempt from SECA tax because they are akin to rental income from real estate (Morehouse, 8th Cir.). For now, the ruling benefits inactive farmers living in just seven states: Ark., Iowa, Minn., Mo., Neb., N.D. and S.D. Those who paid self-employment tax on CRP payments should file refund claims for all open tax years, citing this decision. The result is different for active farmers. In 2000, another appeals court ruled that CRP payments they receive from the government are subject to SECA tax. In 2006, IRS proposed expanding that decision to inactive farmers but never did so. Congress later exempted CRP payments to retired and disabled farmers from SECA tax, but left open the question about whether inactive farmers owed self-employment tax.

BUSINESS TAXES:  Profits of personal service corporations are taxed at a flat 35% rate. This rule applies if at least 95% of a firm’s activities involve services in the fields of law, health, engineering, architecture, consulting, performing arts or actuarial science, and over 95% of the company’s stock is owned by employees performing the services. Adding a subsidiary into the mix lets a personal service firm avoid this rule and use the normal graduated corporate rate schedule, the Tax Court says. In this case, a consulting firm had a subsidiary that operated a ranch at a loss that came close to offsetting the consulting profits. IRS said the consulting profits should be taxed at 35%. The Court ruled that because the companies filed a consolidated tax return and less than 95% of the total activities were consulting-related, the affiliated group wasn’t a personal service corporation (Applied Research Associates, 143 TC No. 17). Thus, the group’s small net profit was taxed at the graduated corporate tax rates. A moving firm can’t accrue a write-off for damage claims paid after year-end, the Service privately says. Even though customer claims for damaged or lost goods happen on a recurring basis, as many who have hired a moving company can attest, they aren’t the type of liability that’s deductible before the claims are actually paid. 

DONATIONS:  Doing a good deed won’t guarantee a tax deduction, the Tax Court decides. After their son died, a couple used the life insurance proceeds they received to fund a nonexempt irrevocable trust to give scholarships in his honor to needy kids. They took a charitable deduction when the trust paid scholarships to three students. The Court said the payouts weren’t deductible because the trust made the payments and the couple didn’t own the trust for tax purposes (Kalapodis, TC Memo. 2014-205).

WAIVED DEBTS:  Expect guidance from IRS on the tax implications of short sales of homes… selling a property for less than the outstanding mortgage loan balance. Many states, such as Calif., bar lenders from going after borrowers for any shortfall on a short sale when the home’s value is less than the purchase-money mortgage on it. IRS has privately ruled that in this situation, the forgiven debt isn’t treated as income from a waived debt. Instead, it’s included in the amount the selling homeowner realizes for figuring gain or loss on the sale, and if the house is the seller’s primary home, up to $500,000 of the gain can be excluded. Because the issue is so important, the agency is now considering publishing a formal ruling that taxpayers can rely on. A break is on the way for lenders and debtors on debt cancellation income. IRS will soon scrap the requirement that lenders must issue Form 1099-C to debtors when no payments have been received on the debt in the past 36 months. This rule has resulted in many mismatches with taxpayers and wasted the Service’s resources, because the trigger for filing the form isn’t based on the actual discharge of the debt. This will take effect once regulations nixing the 36-month rule are finalized next year.

SOCIAL SECURITY:  The Social Security wage base is going up next year to $118,500, a $1,500 hike over this year’s cap. The tax rate on employers and employees will remain at 6.2%. The employer’s share of Medicare tax will stay at 1.45% of all pay. The employee’s share is 1.45%, but the 0.9% Medicare surtax kicks in for singles with wages exceeding $200,000 and couples earning over $250,000. The surtax doesn’t affect the employer’s share. Self-employeds are also subject to the surtax. Social Security benefits are rising 1.7% in 2015…slightly more than in 2014. The earnings limits are heading up, too. People who turn 66 next year will not lose any benefits if they earn $41,880 or less before they reach that age. Individuals between ages 62 and 66 by the end of 2015 can make up to $15,720 before they’ll lose any benefits. There’s no earnings cap once a beneficiary turns 66. Changing jobs midyear? You may qualify for a Social Security tax credit. If your total compensation from your employers this year is more than the wage base, you can claim a credit on your Form 1040 for the excess Social Security tax withheld. But IRS is doing a poor job of policing this credit, Treasury inspectors say. IRS has procedures to identify discrepancies between the credit claimed on the return and the withheld amounts reported by employers. But the Service says its tight budget and limited resources prevent it from following up on all but the most egregious errors.

MEDICARE:  The basic Medicare Part B premium will stay at $104.90 a month in 2015. It will be the third year in a row that the basic premium hasn’t changed. But upper-income seniors will still have to pay higher Part B and D premiums if their modified adjusted gross incomes for 2013 exceeded $170,000 for couples or $85,000 for single people. Modified AGI is AGI plus any tax-exempt interest, EE bond interest that’s used for education, and excluded foreign-earned income. The Part B surcharge for higher-incomers won’t change, but the Part D add-on will increase slightly. The total surcharges can be as high as $301.60 a month.

TAX DEBTS:  Death is one way to beat a federal tax lien, as this case demonstrates. An individual co-owned a house with another person as joint tenants with a right of survivorship. He owed back taxes to IRS, which put a lien on his interest in the house. He died without paying his tax debt, and IRS sought to enforce its lien. But a district court ruled that after his death, the lien ceased to attach to the property because he no longer had an interest in it (NPA Assoc. v. Est. of Cunning, D.C., V.I.).

ENFORCEMENT:  IRS isn’t effectively monitoring sales of foreign-owned U.S. real estate, Treasury inspectors say. Buyers often must withhold 10% of the sales price when a foreigner sells an interest in U.S. real estate. Congress ordered the withholding to ensure that foreigners pay capital gains tax on the sales. To boost compliance, inspectors want IRS to revise Form 1099-S…the form for reporting sales proceeds… to show buyer information and to identify whether the seller is a foreigner. And it must step up its efforts in collecting taxes from folks residing abroad. Treasury inspectors report several weaknesses in IRS’s international collection efforts. Among them: Insufficient training on cross-border collection. Logistical challenges when contacting taxpayers by phone because of time zone and language differences. And working too many unproductive cases, as evidenced by the fact that over one-third of the inventory has been closed as uncollectible. The agency vows to do a better job.
Yours very truly,