Beware Tax-Related Identity Theft

by Jim Dieterle 16. December 2015 11:12
A recent study by the General Accounting Office found that nearly $25 billion in identity theft had been prevented by the IRS in the past year. That is the good news. The bad news is that in the same study the GAO reported nearly $6 billion was stolen from taxpayers through identify theft. For the unfamiliar, tax-related identity theft is defined by the IRS as: “when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund.” So what can you do to prevent this from happening to you? Here are a few tips: · Don’t keep your Social Security card or any document containing your SSN on your person · Only give out your SSN when absolutely necessary · Protect your personal computers and digital devices by using strong passwords and installing antivirus software. The problem is so pervasive that the IRS has published a Taxpayer’s Guide to Identity Theft. This provides guidance on reducing your risk, recognizing the warning signs that your taxpayer identity has been comprised, and what to do if that occurs.

Top 10 Tax Changes and Strategies For 2013

by Steven Sodini 1. November 2013 17:28
Top 10 Tax Changes and Strategies for 2013   With two months left in 2013, tax planning strategies should definitely be examined now, as there is still sufficient time for both individual and business taxpayers to make changes or adjustments to their income and deductions before year-end. However, in order to do so, most taxpayers will have to consider the changes made by both the American Taxpayer Relief Act of 2012 (ATRA) and the Patient Protection Affordable Care Act of 2010 (Affordable Care Act) before year end. To help assist taxpayers with their planning, we are going to examine our Top 10 Tax Changes and Strategies for 2013 below as follows: Individual Tax Rates In 2013 there will be a continuation of the "Bush-era" tax rates from 2012, but there will also be a revival of the 39.6 percent tax rate for the highest income earners. The AGI thresholds for the new 39.6 percent tax bracket in 2013 will be: Single ($400,000) Married Jointly and Surviving Spouse ($450,000) Head of Household ($425,000) Married Separate ($225,000)   These thresholds are scheduled to be adjusted annually for inflation for tax years after 2013. In addition, for estates and trusts, the threshold income amount is only $11,950 for 2013, so executors and trustees should consider making distributions to beneficiaries before year-end, so that amount of taxable income will not be included in the taxable income of the estate or trust, and will instead be passed through to the beneficiaries, who may be in a lower tax bracket.   Capital Gains and Qualified Dividends The top rate for capital gains and qualified dividends will also rise from 15 to 20 percent for individuals in the 39.6 percent income tax bracket based on the same income levels as noted above. Due to the rising capital gains rate, a taxpayer may want to consider using carryforward losses from 2012 as, barring a change by the IRS, carryforward losses from prior to 2013 will be able to be used to offset capital gains at the new 20 percent rate without an adjustment for the rate change. It may also by prudent in some case, for investors to sell off certain types of investments (ie, bonds) before year-end to generate additional capital losses to offset capital gains for the year if little or no capital loss carryforwards are available to the taxpayer. In addition, for dividends to be subject to the lower qualified rates, the underlying stock should be held for at least 61 days within a 121 day period.   Medicare Surtax on Net Investment Income and Compensation Beginning in 2013, many higher income taxpayers may also be liable for two new Medicare surtaxes. The first is the Net Investment Income (NII) Medicare surtax of 3.8 percent. Net investment income includes taxable interest, dividends, net capital gains, net rental income (except for real estate professionals), and net income from an activity in which the taxpayer is a passive participant. According to a Draft Form 8960 released by the IRS over the Summer, net investment income can also be offset by investment interest expenses and investment fees from brokers, but this could change once the final form is released in early 2014. The surtax on individuals equals 3.8 percent of the lesser of; the taxpayer’s net investment income for the tax year, or, the excess of modified adjusted gross income (MAGI) for the tax year over the threshold amount. The threshold amounts are:   Married Jointly and Surviving Spouse ($250,000) Married Separate ($125,000) Single and Head of Household ($200,000)   Because of this new surtax, any investment income in 2013 should be examined to determine whether or not it will be subject to the surtax. The IRS has also indicated that the surtax will be subject to penalties for underpayment of estimated tax, so to the extent this has not been considered for the first three quarters of 2013, a revised calculation should be done for the fourth quarter to determine whether any additional estimates are required. However, it should also be noted that there has also been no indication that the IRS will not allow the traditional estimate safe harbors to continue to be used for 2013.   The second is a separate Medicare Surtax of 0.9 percent of wages (or self-employment income) in excess of higher income level threshold amounts is also effective for 2013. The threshold amounts are the same as noted above for the NII tax. Employers are required to withhold for this additional surtax for wages paid above the threshold amounts shown above and unlike Social Security Taxes, there is no cap on the amount of compensation that is subject to this tax once the thresholds are exceeded. However, for self-employed taxpayers, careful attention should be paid to estimates, particularly for the fourth quarter.   To plan for both additional Medicare surtaxes, a taxpayer may also request that their employer(s) withhold an additional amount of income to be applied to the taxpayer’s income tax return for November and December, which will in turn spread the additional payments over all four quarters for estimate purposes. At this point, it does not appear that the thresholds for either of the Medicare surtaxes will be adjusted for inflation for tax years after 2013.   Pease Limitation The Pease limitation (named after the member of Congress that sponsored the original legislation back in 1990), which was eliminated with the Bush-era tax cuts, will now return in 2013. The Pease limitation reduces the total allowable itemized deductions by three percent of the amount of the taxpayer’s adjusted gross income that exceeds the set thresholds, but not more than 80 percent in total. Certain itemized deductions are excluded from the limitation such as, medical expenses, investment interest, and casualty, theft, or wagering losses. The thresholds will be adjusted for inflation for tax years after 2013. These new limits (along with the personal exemption limits below) should also be considered for 2013 estimate purposes. The 2013 thresholds for the Pease limitation are:   Married Jointly and Surviving Spouse ($300,000) Married Separate ($150,000) Single and ($250,000) Head of Household ($275,000)   Personal Exemption Limitation Much like the Pease limitation, an individual’s Personal Exemptions will also be phased out to the extent an individual’s adjusted gross income exceeds the same thresholds noted above.   Same-Sex Marriage Filing Status On June 26, 2013, the US Supreme Court struck down Section 3 of the Defense of Marriage Act in E.S Windsor, 2013-1 ustc 50,400. Under the court ruling, all same sex marriages that have been legally recognized under state or local laws (currently allowed in 13 states and DC), will also be recognized for federal tax purposes, regardless of whether the couple actually resides in a jurisdiction that does or does not recognize same-sex marriages. Therefore, for all tax returns filed on or after September 16, 2013, these couples must now file using the married joint filing status.   Estate and Gift Taxes After much uncertainty over the past decade, a permanent structure has now been provided for estate and gift taxes. Estate and gift tax rate is now capped at 40 percent with a $5 million exclusion adjusted annually for inflation. The annual gift tax exclusion has risen to $14,000 for an individual and $28,000 for a married couple who elects to gift-split. There is currently no limit to the amount of individual donees to whom tax free gifts may be made under the exclusion rules noted above, so maximizing the annual exclusion continues to be a popular tax planning idea.   Section 179 Expense For taxpayers involved in a owning or operating a business, there are changes in IRC Section 179 regarding expensing of qualified fixed assets used in business. For 2013, the annual dollar limitation for Code Section 179 expensing is $500,000 with an overall investment limitation of $2M (with a dollar for dollar phaseout above that limit). However, absent Congressional action, for tax years beginning after 2013 the dollar limit is expected to decrease to $25,000, with the phase out ceiling also scheduled to decrease to $200,000. Unlike bonus depreciation (discussed below), Section 179 allows both new and used business assets (including off-the-shelf computer software) to qualify for current deductions. In addition, Section 179 also allows expensing for certain types of qualified real property, including qualified leasehold improvements, but this is also scheduled to expire after 2013. Thus, taxpayers should strongly consider placing assets in service before year-end to take advantage of the taxpayer friendly current rules.   Bonus Depreciation Similarly, for 2012 and 2013, 50 percent bonus depreciation is allowed under the ATRA. However, after 2013, bonus depreciation is scheduled to expire completely, once again pending any Congressional extensions. At present, qualified property subject to bonus depreciation must be new (unlike Section 179 as noted above), must be depreciable under the Modified Accelerated Cost Recovery System (MACRS.), must have a recovery period of 20 years or less, and must be placed in service before January 1, 2014. Along with the expiration of bonus depreciation, the additional $8,000 of first year depreciation limitation for passenger automobiles under IRS Section 280F is also scheduled to expire after 2013, again subject to any Congressional extensions. As with Section 179 above, taxpayers should consider placing qualified assets into service before year-end.   Final Repair/Capitalization Regulations Final regulations have been put in place with guidelines to determine when taxpayers must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing, and replacing tangible property. These regulations will apply to tax years beginning on or after January 1, 2014. However, these Regs also provide taxpayers with the option to apply the final or temporary regulations to the tax years beginning after 2011 and before 2014. Even more importantly, the Final Regulations include a new de minimis expensing rule. This allows the taxpayer to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property. If a taxpayer has an Applicable Financial Statement (AFS) the Final Regulations allow up to $5,000 to be deducted per invoice. To take advantage of the rule, taxpayers must have written policies at the start of the tax year that specify a per-item dollar amount that will be expenses for financial accounting purposes. Even for a smaller business without an AFS, the Final Regs have a per item or invoice threshold amount of $500.
Categories: Tax

Should Olympic Medal Winners be Taxed?

by Steven Sodini 15. August 2012 14:15
The closing of the 2012 Olympic Games this past Sunday has left many of us wanting more, but more summer Olympics will have to wait another 1,450 days until the opening ceremony in 2016. However, the 2012 Olympic Games have left us pondering the question; should Olympic medals winners be taxed? Under the current tax code, Olympians who win medals must pay tax on the value of their medal, which in the case of a gold medal is about $675, a silver medal is $385 and a bronze medal is just under $5. Olympians must also pay tax on the honorariums from the U.S. Olympic Committee, which are $25,000 for gold, $15,000 for silver and $10,000 for bronze. For an American gold medalist in the highest tax bracket, this could result in a tax burden of almost $9,000.  Currently, legislators have introduced a bill that will exempt U.S. Olympic medal winners from paying tax on their medals and honorariums. The bill will not exempt the salaries or endorsements of the Olympians, but will attempt to alleviate tax on their success in the Olympic Games. Since introduction of this bill, both President Obama and Mitt Romney have expressed support for it. However, the bill has seen opposition from other legislators stating that other taxpayers should not have to burden additional tax for Olympic medal winners. Unfortunately, with the Olympic Games behind us, many of us are trying to remember what we used to watch before the 2012 Olympic Games, because for seventeen days we spent our free time dedicated to watching each Olympic event. However, with the success of American Olympians, the question remains: should Olympic medal winners be taxed?
Categories: Tax

OK, it’s a tax. How will you collect it?

by Kelley Owen 10. July 2012 11:15
  In a 5-4 vote, the Supreme Court has upheld “Obamacare”.  Specifically, the court held that the individual mandate (that portion of the law that requires all Americans to purchase health insurance or pay a “penalty”) is not in reality a “penalty” but rather a tax; and, is therefore a constitutional application of Congress’ power to tax.   The court acknowledged that the mandate “is plainly designed to expand health insurance coverage,” and noted that “taxes that seek to influence conduct are nothing new” – case in point, taxing of cigarettes.  And, the court reasoned, the mandate does not make the failure to buy health insurance a violation of the law.  It merely requires a payment to the IRS for such failure.  However, the IRS may find itself hard pressed to actually collect this “tax”.  The tax has no criminal or civil penalties for failure to pay and no interest accrues.  And in essence, the only way for the IRS to actually collect the “tax” is to take it out of any refund that the taxpayer may have coming due.  So, if taxpayers manage their withholdings so there is no balance due from the IRS, the IRS has no way to enforce collection. The individual mandate is just one aspect of the Affordable Care Act.   The overall effect of the law on businesses, both large and small, on individuals, both rich and poor, must now be ferreted out and implemented before the many deadlines come due.  Stay tuned…..  
Categories: Tax

Bonus Depreciation Introduced by House Democrats

by Tom Guappone 26. June 2012 10:41
Democrats on the House Ways and Means Committee introduced the Invest in America Now Bill of 2012 on June 20.  The bill includes legislation that would extend 100% bonus depreciation through 2012. The House Democratic bill is targeting businesses that would immediately benefit from the accelerated depreciation on the investments for machinery & equipment, computer software and other property.  Work on the bill is projected to begin the week of June 25. This should be the first of many bills that will be discussed to help the economy rebound through a comprehensive tax reform. For more information, please see the full article by the CCH News Staff. 
Categories: Tax

Landmark decision by the U.S. Tax court provides guidance for a defined value clause (formula clause gifts) used in the taxpayer’s gifting strategy

by Dennis Stuchell 18. June 2012 08:45
  In March of 2012, the U.S. Tax Court filed its memorandum of findings regarding a defined value clause used in the taxpayer’s gifting strategy in Wandry v. Commissioner (March 26, 2012).  Not only was the decision a big win for the taxpayer, but the Tax Court provided guidance for drafting a successful defined value clause.  The ruling is considered a landmark decision, because it allows tax-free ownership transfers from one generation to another with certainty and in an orderly manner." The current tax regime imposes a gift tax of up to 35% when taxpayers give assets away, with exceptions.  Individuals now get one $5.12 million lifetime exemption, and they can also give up to $13,000 of assets a year to an unlimited number of recipients. (In 2013 the lifetime break is scheduled to drop to $1 million and the top rate to rise to 55%.) This means an owner who wants to give a business to children or others, such as employees, can use these exemptions to transfer ownership tax-free. He can even use the $13,000 annual exclusion to transfer value bit by bit. In the Wandry case, Dean and Joanne Wandry, a Colorado couple, each gave units in a family-owned limited-liability company worth $1,099,000 to their heirs in 2004.  To avoid paying tax, they specified the gifts should equal the dollar amount of their exemptions - a key point.  (At the time of the original gifting, the lifetime exemption was $1 million and the annual exclusion $11,000.) In Wandry, as in other cases, the givers have to get a professional appraisal if - as is common - the company is hard to value. The Internal Revenue Service can contest the appraisal after the gift, as it often does.  In Wandry, the value rose about 20% after the IRS appraisal. That brings up an important issue: If values rise after an IRS challenge, must the giver write a big check for tax on the amounts above the exemption?  According to the Wandry decision, no. The judge held the couple intended to make a gift equal to their exemptions, so the excess was never actually given by them. No tax was due. Prior to the Wandry decision, often the best outcome is for a family to designate a charity to receive the excess. No tax is due, but the family gives up some control.  The Wandry case is a boon not only for business owners but also wealthy families with "family limited partnerships" or entities holding publicly traded stocks. Even though the stocks' value is easy to determine, submerging them in a nontraded company provides valuable discounts when units are transferred to heirs. The IRS may appeal the decision, so taxpayers who rely on it run a risk.
Categories: Tax

Why Is It So Difficult to Write Off Your Home Office?

by Steven Sodini 18. May 2012 10:00
These days almost everyone seems to work from home, at least occassionally. According to the U.S. Census, about half of all U.S. businesses are based at home, and most professionals work from home at least some of the time, so it’s only right that you should get a tax break for segregating part of your home over to your job. Wishful thinking. The IRS doesn’t think you deserve a write-off for reading your smartphone in the bathroom. For those who legitimately have separate spaces in their homes used under IRC Section 280A “exclusively and regularly” for work (and for employees, the use must also be for the convenience of the employer), the IRS offers some relief, but it’s not easy to claim. IRS Publication 587 for the home office deduction runs 34 pages, and only about a third of eligible taxpayers actually take it, because of the confusing legal history in this area, the recordkeeping requirements, the increased risks of audit by the IRS, and the difficulty determining what portion of the home is actually used for business in a given tax year. The convoluted history of this part of the tax code reveals how, over the years, work escaped from the offices and factories to invade every inch and hour of a person's life, particularly this day in age with the aforementioned smartphones, that allow a person to be plugged in 24-7-365.  A 32 page law review article titled "Simplication is not enough: An Analysis of the Home Office Deduction and the Home Office Simplification Act of 2009" in the 2010 Baltimate Law Review recounts the entire situation in detail.  However, what actually counts as a legitimate home office has been unclear from the start. Before 1976, the tax code had no specific home office provision, but employees who were required to work from home could write off some related costs.  In 1969, in Newi vs. Commissioner, the Tax Court ruled that George Newi, a TV ad salesman who spent three hours a night working from his converted den, could deduct a quarter of his rent, even though he worked after hours by choice when he could have returned to the office. That loose, fuzzy standard invited generous interpretation by people, including one individual who was actually an attorney for the IRS.  In Bodzin vs. Commissioner, Stephen Bodzin tried to write off part of his rent because he did some work at home in the evenings and on weekends. In 1975 (eight years after the tax return in question), Bodzin lost his case against the agency he worked for when an appeals court found that his home wasn’t his place of business. Rather, he sometimes, by choice, did some of his reading and writing at home. The following year, Congress later passed a tax reform law that narrowed the home office definition to prevent taxpayers from abusing the deduction, which caused even more confusion. In another case, Drucker vs. Commissioner, musicians for the Metropolitan Opera who spent 30 hours a week practicing in their homes were initially denied the break because a court ruled that their place of work was Lincoln Center; they won on appeal. In Commissioner vs. Soliman, an anesthesiologist who did paperwork at home because he had no hospital office was denied his write-off by the Supreme Court in 1993. “The facts in each case will vary, making it difficult to develop a bright line test,” the high court said.  This case in particular, set off a firestorm, because it completely denied a home office deduction for legitimate business expenses for numerous professions, including painters, carpenters, landscapers, construction workers, doctors, professors, musicians, artists, and sales professionals, because these types of professions effectively required the business to be conducted at other locations, rather than the home office. However, in 1997, Congress finally decided to correct the problems resulting from the Soliman decision, and passed the Taxpayer Relief Act to explicitly include home offices used for administration in businesses that have no other fixed location, which would give Dr. Soliman the tax break he requested years earlier.  However, as previously noted, the legislative solutions still treat self-employed individuals different from employees, as the latter are required to show additional evidence that the home office is for the convenience of the employer, rather than themselves, which is often difficult to prove. For the past decade, advocates for the home-based workforce have sought to give taxpayers the option to check a box for a standard $1,500 home office write-off. That would save them the difficulty of calculating what percentage of the home is dedicated to business—and therefore what share of rent, insurance, utilities, and maintenance costs can be deducted. Various versions of the proposal have languished in Congress for years to no avail. Unlike employees’ wages, business income and deductions can’t be easily verified by the IRS. In one analysis, 57 percent of sole proprietors misreported income, compared to one percent of employees. So the IRS doesn’t have much of an interest in making it easier to take the home office deduction, for fear that it could be easily abused to short-change Uncle Sam. That leaves a headache for those trying, legitimately, to write off the cost of a workspace that happens to be in the same place that they sleep.  Even the various proposals that have arisen over the years, do not address the primary problems of the disparity in the treatment of self-employed individuals vs. employees and the requirement that the home office be used on a regular basis, without defining what "regular basis" actually means.  A simple solution would be to repeal the "for the convenience of the employer" requirement for employees, which would then put everyone on equal footing and clearly defining "regular use" with some type of minimum use standard.  Unfortunately, the most recent attempt to clear of the legal confusion in this area, the "Home Office Simplification Act of 2009", died in committee, and no new legislation appears to be on the horizon, so the future in this area is still very much unclear.
Categories: Tax

Have an EIN? Action May Be Required

by Rocco Romano 19. March 2012 12:15
    The IRS is proposing that taxpayers that have an employer identification number (EIN) will be required to update their information with the IRS. At issue is that EINs - which are issued to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes – are commonly issued to representatives acting on behalf of an applicant.  However, that representative may subsequently lose its authorization to represent them. To address this, a proposed revision to Form SS-4 (Application for Employer Identification Number) would require the disclosure of the applicant’s “responsible party” and that person’s SSN, individual taxpayer identification number, or EIN. Note – it is proposed that this change would apply retroactively to all persons possessing an EIN, as well as to new applicants. To read more see the Federal Register, Volume 77, No. 50.    
Categories: Tax

IRS Expands “Fresh Start” for Unemployed

by Kelley Owen 16. March 2012 08:15
  In order to help struggling tax payers, the IRS announced a major expansion of its “Fresh Start” initiative. This will provide new penalty relief to the unemployed and make installment agreements available to more people.   Under the expansion, certain tax payers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. The dollar threshold for taxpayers eligible for installment agreements would be doubled, increasing the number of people who would qualify for the program.   One of the biggest factors a financially distressed taxpayer faces on a tax bill is the failure-to-pay penalties. A six-month grace period will be made available for certain tax payers. However, even with the new penalty relief available, the IRS continues to encourage taxpayers to file on time, or request an extension.   Expanding the installment agreements will allow more tax payers the ability to catch up on back taxes. The agreement will allow those who owe up to $50,000 in back taxes to enter into a streamlined agreement that stretches the payment out over a series of months or years, which will reduce the tax payer’s burden.   To read more about the changes in the “Fresh Start” initiative and the specific changes to the failure-to-pay penalties and installment agreements, see the full article on the IRS’ website.
Categories: Tax

FASB Plans To Save Some Time and $$

by Kevin McGarry 15. February 2012 16:00
  FASB is listening to its constituents. In response to feedback from respondents, FASB has put forth a proposal intended to reduce costs and simplify the guidance for testing indefinite-lived intangible assets, other than goodwill for impairment. Currently under Topic 350, Intangibles-Goodwill and Other, indefinite-lived intangible assets are required to be tested for impairment annually, or more frequently. In addition to these frequent tests, guidance for evaluating impairment indicators for long-lived tangible assets included in Topic 360, Property, Plant, and Equipment must not be ignored. However, responding to feedback, FASB decided to simplify the guidance testing. There were many concerns about the recurring cost and complexity of calculating the fair value of indefinite-lived intangible assets when the risk of impairment is unlikely. Therefore, it was suggested that the Board consider a qualitative approach or other alternative approaches for assessing indefinite-lived intangible assets for impairment. Under the proposal, Topic 350, Testing Indefinite-Lived Intangible Assets for Impairment, an organization can assess qualitative factors to determine whether performing the quantitative impairment test is necessary. This would save the organization from having to calculate the fair value of an asset unless the qualitative assessment shows that it is “more likely than not” that the asset’s fair value is less than it carrying amount. The amendments would be effective for annual and interim impairment tests performed for fiscal years beginning after June 15, 2012, and early adoption would be permitted. For more information, see FASB’s website.
Categories: Tax