Tag Archives: Taxes

College Tuition: Discover How Grandparents Can Help Their Grandchildren and Save Taxes Too

College-Tuition-Tax-Breaks

With college tuition coming due, families should consider tax efficient ways to pay for these expenses. Grandparents who wish to help their children with tuition costs can take advantage of some special gift tax breaks.

Grandparents have the usual annual present interest gift tax exclusion (now $14,000) and a lifetime exclusion (now $5,340,000). When a spouse joins in the gift (the called “spousal joinder”), these amounts double .

But these are not the only tax breaks available to a grandparent who wants to help the family. In addition, grandparents have an unlimited gift tax exemption for amounts paid for tuition. By using this special educational exclusion, such payments do not count against the annual gift tax or lifetime exclusions.

Here are the basic rules to qualifying these gifts for such unlimited educational exemption:

Unlimited Exclusion For Tuition Only

This exclusion from the gift tax for gifts of tuition is unlimited in amount. However, the scope of the exclusion applies to tuition only.

Books, Supplies and Other Items Not Covered

There is no exclusion for amounts paid for the following:

  • Board or other similar expenses that are not direct tuition costs.
  • Books
  • Supplies
  • Laboratory fees
  • Dormitory fees

See Treasury Regulations 25.2503-6(b)(2) for more details.

While Only Tuition Qualifies, This Educational Exemption Can Be For Part-Time or Full-Time Tuition

The gift tax is not imposed on amounts paid as tuition for a student to a qualifying domestic or foreign educational organization for the education or training of such person. See Code Section 2503(e)(1) and (2)(A).

Tuition payments for the student qualify where enrollment is part-time or full-time.

Qualifying Educational Organization

A qualifying educational organization is one which:

  • Normally maintains a regular faculty and curriculum and
  • Normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on.

See Code Section 170(b)(1)(A)(ii) and Treasury Regulation 25.2503-6(b)(2).

Direct Payment of Tuition to Educational Organization

The tuition payment must be made directly to the educational organization to qualify for this exclusion.

Critical Point:

Neither a payment to the student for delivery to the organization nor a payment Continue reading

US Citizens Living Outside America: Streamlined Foreign Offshore Procedure Offers Tax and Compliance Relief

United States Citizens Living Abroad: New IRS Streamlined Procedure Offers Relief

United States Citizens Living Abroad: New IRS Streamlined Procedure Offers Relief

A couple of weeks ago, I had someone come in my office who has lived abroad since he was 7 years old. He is a citizen of the United States and Netherlands. He has never filed United States income tax returns. We discussed the general rule that US citizens must file returns and pay tax on their worldwide income. This meant that he should be filing a Form 1040 Return each year.  It also meant that he should have been filing for the last 20 years or so of his adult working years a Form 1040 even though he is not living or working in the US.  We discussed that although there may be a  Netherlands tax treaty with the United States it does not eliminate the need to file tax returns.  To add insult to injury, there could be taxes due, along with a whole host of penalties.

In addition to income taxes, having a bank account in the Netherlands could subject him to the Foreign Bank Account Reporting (FBAR) rules and penalties for failure to file for at least the last six years.

To help certain United States taxpayers, the IRS has previously put in place procedures to deal with many foreign bank account problems and to reduce compliance problems. These programs are explored  in some detail at Foreign Offshore Accounts: IRS Third Amnesty Program and Electronic Reporting of Foreign Bank and Financial Accounts (FBAR), and Quiet Disclosures of Offshore Foreign Accounts.  However, these programs did not adequately address the tax and compliance hardships of many United States citizens living abroad.  To make things easier for these taxpayers, the IRS announced yesterday, June 18, 2014, a new Streamlined Foreign Offshore Procedures under IR-2014-73.  Here are the details:

Benefits of the New Streamlined Program:

A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with its requirements can avoid:

  • Failure-to-file penalties
  • Failure-to-pay penalties
  • Accuracy-related penalties
  • Information return penalties, or
  • FBAR penalties.

Even if returns properly filed under these procedures are subsequently selected for audit under existing IRS audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.

However, any previously assessed penalties with respect to those years, however, will not be abated.  Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

Retirement and Savings Plan Deferral Elections: For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by an applicable tax treaty. The proper deferral elections with respect to such plans must be made with the submission.

Eligibility For The Streamlined Program

In addition to having to meet the general eligibility criteria of these offshore programs, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures must:

  • Meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and
  • Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and
  • May have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and
  • Such failures resulted from non-willful conduct.

Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”):  Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.

Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.

What Has To Be Done To Qualify Under This Program

U.S. taxpayers eligible to use the Streamlined Foreign Offshore Procedures must do the following:

  • Income Tax Returns:  For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and
  • FBAR:  For each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs.
  • Tax and Interest Must Be Paid With Filings: The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.
  • Compliance Details:  There are other submission details and the IRS warns that “Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.”  So extreme care must be taken to comply with all the details of this IRS program.

Conclusion:

This is a very favorable development to US citizens living abroad who have no idea of their tax responsibilities to the United States.  As always, the devil is in the details, so tax counsel should be sought to insure that the various submissions meet all requirements under this Streamlined Foreign Offshore Procedures.  There is just too much at stake to do otherwise.

 

Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Copyright © 2014 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved. 

Philip Seymour Hoffman: Estate Planning Lessons For Us and Especially Women

Estate Planning For Philip Seymour Hoffman

Attribution: Josh Jensen      CC-By-SA-2.0

The sad and tragic death of Philip Seymour Hoffman at age 46 last month is yet another reminder of the importance of estate planning. Most of us go along each day not thinking or worrying about what would happen to our loved ones if we suddenly died.  Some, in an attempt to be conscientious, draft an estate plan but fail to keep such plan up to date.  But most people die without ever doing any estate planning leaving state laws and the courts to decide who should get their estate. When these matters are neglected, surviving family members can be left with momentous legal, tax and financial problems resulting in uncertainty and expensive attorney fees to sort it all out.

Background

Although Mr. Hoffman drafted his will in 2004, he failed to update it after having two children and even after some significant estate tax law changes.  Such changes and ten years usually triggers a meeting with your estate planning attorney. For more on a checklist of events that should result in a meeting with your estate planning attorney please explore Estate Planning Triggers.

Mr. Hoffman’s 2004 will leaves everything to the mother of his children, Marianne O’Donnell.  He was not married to her and this is where the problems start, at least from an estate tax perspective.

Federal and State Estate Taxes

It is estimated that Mr. Hoffman’s estate was around $35,000,000.  Currently, $5,340,000 is exempt from federal taxes (the so-called unified credit) with amounts above that amount being subject to a federal estate tax rate of 40%.  It would appear then that roughly $30,000,000 of his estate would be subject to estate tax at a 40% rate.  This would generate a whopping $12,000,000 in federal estate taxes!

New York also has an estate tax with an exemption of $1,000,000. This New York estate tax has graduated tax rate that goes as high as 16%.  It is estimated that roughly another $3,000,000 in will be paid in New York estate taxes.

Combined estate taxes: $15,000,000.

(Liquidity Side Bar:  Be aware that estate taxes are due nine (9) months after the date of death so hopefully Mr. Hoffman’s estate has enough liquid assets to avoid a forced sale of assets to meet his tax obligations.  Estate Planning Point:  It is not known if Mr. Hoffman had life insurance but having life insurance to provide for liquidity is sometimes essential.  In certain cases, the use of an irrevocable life insurance trust would allow for excluding the life insurance proceeds from being subject to estate tax.)

The point is that even though a meeting in 2004 may have explored marriage as a simple way to save estate taxes, Mr. Hoffman may, for whatever reason, not wanted to be married at that time.  It also could have been that his wealth was not that great in 2004.

But here is the object lesson:  Things change and so should one’s estate plan.

  • A later meeting to review his estate plan would have explored the huge estate tax benefit to being married.  No one is suggesting that people should get married only for tax reasons, however, under federal estate tax rules, inheritances to a surviving spouse are not subject to estate tax.
  • Double Estate Taxation:  Since they were not married, the amounts Ms. O’Donnell receives will be taxed twice.  First, the amount she receives above the unified credit will be taxed at Mr. Hoffman’s death.  When she dies the balance in her estate above her unified credit will be taxed a second time.  Marriage eliminates this double estate tax.
  • Marriage would have provided possible social security, retirement plan, income tax and other financial benefits.
  • If Mr. Hoffman wanted to get married but did not want his wife to have absolute control of his assets, a qualified terminable interest trust (a QTIP trust) could have been used to obtain the estate tax savings while providing income and principal to her during her lifetime.  The assets in this trust would pass to his children at her death.  This would have been the best of both worlds: saving estate taxes but still providing for his wife and children.
  • Sidebar:  A QTIP trust is often used in second marriages where there are children from a prior marriage.

One Strategy To Eliminate Estate Tax At His Death

In a perfect world, Mr. Hoffman could have created a so-called marital deduction trust and a unified credit or by-pass trust by funding each trust based on a formula clause tied to the unified credit applicable in the year of his death.  (Or he could have used the disclaimer trust discussed below to achieve this same result if he was married.) If he had implemented this estate planning strategy his 35,000,000 would have been split between Continue reading

The Biggest (Tax) Loser: Misguided Gifts of Real Estate By Uninformed Do It Yourselfers, Realtors & Attorneys

gift, income tax, estate planning

“Son, I am sick and getting old, so fill out a deed to transfer my house into your name now.”

With the increase of the federal estate tax exemption to $5,340,000 in 2014, most taxpayers are not subject to federal estate taxes.  The focus for many now has shifted to the income tax implications that arise when wealth passes to the next generation.  With no regard to the income tax implications, many times elderly people get the idea that the transfer of real estate to children during their lifetime is a good idea in trying to avoid probate and to make things easier for loved ones. Even uninformed realtors, attorneys and other financial advisers sometime make such a recommendation without knowing the tax impact.  However well-meaning, this uninformed strategy can have disastrous income tax results for the children recipients of such ill-conceived lifetime gifts.

Basis Rules:

It is important to understand the following income tax basis rules for calculating gain or loss:

  • Lifetime Gifts:  Children who receive lifetime gifts take a carryover basis in the property received.  The carryover basis is determined by what the maker of the gift originally paid for the asset plus any improvements made to the property.
  • Bequest At Death:  Beneficiaries who receive assets at the decedent’s death get a step up in basis to the date of death value of such assets received.

Basis Rules:  Illustrating How These Rules Operate

Example:  DIY Dad wants to avoid probate and to transfer during his lifetime his real estate to his son, Sad Son.  DIY Dad bought his house in the 1970s for $17,000 and made improvements during the years of $23,000.  As a result his adjusted basis is $40,000.  The house is now worth $540,000.  To save lawyer fees, DIY Dad asks Sad Son to draft a deed to transfer the property.  Sad Son does so and DIY Dad signs the deed and has it recorded with the recorder of deeds.

  • Since this was a lifetime gift, Sad Son takes a carryover basis for the house of $40,000.  Sad Son sells the house for $540,000 shortly afterwards and has a capital gain of $500,000 which he surprisingly  and shockingly learns from his accountant will cost him $100,000 (20% x $500,000) in federal taxes alone.  His accountant tells him there will also be state income taxes on this gain. Since Sad Son is a Pennsylvania resident, he will pay an extra $15,350 in Pennsylvania income taxes.  Total Taxes: $115,350.
    • Form 709:  Any lifetime gifts of over $14,000 require the filing of a Form 709, United States Gift Tax Return, in the year of the gift.  It should also be noted the IRS now checks recorded deeds.  For more on the IRS policing this area please see IRS Checking Real Estate Transfers For Unreported Gifts.
  • Alternate Universe:  DIY Dad consults with his tax/estate attorney who drafts a will that provides for the transfer of his house at death to Sad Son. Sad Son (who now legally changes his name to Happy) Son, has a basis of $540,000 upon his receipt of the house from the estate.  Happy Son, now sells the house and has zero, yes, zero capital gain (Sale Price $540,000 less basis of $540,000 = 0)!
    • Note: Certain states have inheritance taxes.  For example, in Pennsylvania there would be a 4.5% inheritance tax on the real estate, but this is a smaller cost than the capital gains tax that results from taking a carryover basis via a lifetime gift.
  • Fall Back Solutions:
    • If Sad Son stays in the house long enough to qualify the house as his primary residence and all statutory requirements for exclusion are met, he may then exclude $250,000 of the gain on the sale of the house once he sells the house.  If married and all statutory requirements are satisfied,  Sad Sam may be entitled to a $500,000 exclusion. Continue reading

Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks: A Must Read

2013 Year-End Tax Planning Guide For Small Businesses

The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year.  Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.

It is also important to know that the recent tax act known as ATRA has extended many tax breaks for 2013.  If any of these tax breaks are available, it would be prudent to take advantage of them before they expire.

Also keep in mind that ATRA increased ordinary income tax rates for individuals from 35% to 39.6% starting in 2013 so owners of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.

The following presents some year-end tax strategies that may prove helpful to small businesses and other businesses:

1. Accelerating or deferring income/deductions as part of a year-end tax strategy

A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and later year(s).  (Historical note:  For those of you old enough to remember, there was an income averaging rule built into the tax code.  That provision has long been abolished.)

So every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2014 (and perhaps beyond) if they expect income to rise next year or in the future.

The strategy of accelerating or deferring income and deductions may apply to a number of transactions affecting your business including but not limited to the following:

  • Selling property
  • Leasing
  • Inventory
  • Compensation and bonus practices
  • Depreciation and expense elections.

Cash Basis Small Businesses

Generally, a cash-basis taxpayer recognizes income when received and takes deductions when paid. Here are some more rules for cash basis taxpayers:

  • Income is generally taxable in the year received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. (This is the so-called the “constructive receipt” rule.)  Therefore, businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or something equivalent to cash.
  • However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax into the year or years in which payment occurs. Examples include:
    • Installment sales, on which gain is prorated and taxed based upon the years over which installment payments occur
    • Like-kind exchanges through which no gain occurs except to the extent other non-like-kind property (including cash) may change hands
    • Tax-free corporate reorganizations under Section 368 of the Internal Revenue Code.
  • Deductions, however, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deductible. Therefore, a supply bill does not become deductible in the year that the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill.
  • Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if delivered in due course a few days into a new calendar year).

Cash basis businesses that expect to be in a higher tax bracket in 2014 should shift income into 2013 by accelerating cash collections this year, and deferring the payment of deductible expenses until next year, where possible. In this situation, small businesses should try to collect outstanding accounts receivables before the end of 2013.

Accrual Basis Small Businesses

Basically, for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.  Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate shipment of products or provision of services into 2013 so that your business’s right to the income arises this year.

Taking the opposite approach:  If you will be in a lower tax bracket next year, an accrual basis taxpayer would delay delivering services or shipping products.

2. Tax Break For Small Business Expense Election Under Section 179

ATRA extended until the end of 2013 the enhanced Code Sec. 179 small business expense. Small businesses that purchase qualifying property can immediately expense up to $500,000 this year.  This amount is reduced dollar for dollar to the extent of the cost of the qualifying property placed in service during the year exceeds $2 million. If you plan to buy property (even computer software qualifies), consider doing so before year-end to take advantage of the immediate tax write-off.

Warning:  Remember that any asset must meet the “placed in service” requirements as well as being purchased before year-end.

Also included as qualified Code Sec. 179 property (only temporarily though) is “qualified” real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to an immediate write-off of up to $250,000 of the total cost of these properties.

Note, the Section 179 expense limit goes down to $25,000 and the phaseout threshold kicks in at $200,000 starting in 2014.  Also the qualified leasehold-improvement breaks end at the end of 2013.  If you are planning major asset purchases or property improvements over time, you may want to take advantage of this break before year-end.

Final note:  In addition to new property, Section 179 can be applied to used property.

3. Bonus deprecation

ATRA extended this additional first year depreciation allowance into 2013.  This bonus depreciation allows taxpayers to immediately deduct fifty percent (50%) of the cost of qualifying property purchased and placed in service in 2013. Qualifying property must be purchased and placed into service on or before December 31, 2013.

Qualifying property must be new tangible property (refurbished assets do not qualify) with a recovery period of 20 years or less, such as office furniture, equipment and company vehicles, off the shelf computer software and qualified leasehold improvements.

Note that bonus depreciation is not subject to any asset purchase limit like Section 179 property.

4. Accelerated Depreciation

ATRA has retained through 2013 the tax break that allows a shortened 15 year recovery period for qualified leasehold improvements, restaurant and retail improvement property.  Normally the recovery period for this type of property is 39 years so this is a huge tax break.

5. Increased start-up expense deduction

New businesses can take advantage of the increased deduction for start-up expenditures. This start-up expense deduction limit is $10,000. The phaseout threshold is $60,000. Thus, if you have incurred during 2013 start-up costs to create an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may benefit from this increased deduction. Entrepreneurs can recover more small business start-up expenses up-front, thereby increasing cash flow and providing other benefits.

6. Repair Regulations

The so-called “repair” regulations include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met.

The IRS with their issuance of final regulations relaxed many of the requirements contained in the earlier temporary regulations.  For example, the final regulations removed the ceiling requirements on deductions and now allows the de minimis rule for businesses that do not generate financial statement (applicable financial statements (AFS)).  This allows many small businesses to take advantage of these tax breaks.

The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property purchases. For example, a business could deduct hundreds of lap-top computers or scanners costing $500 or less each year.

Bottom Line:  The modified safe harbor may be easier for certain small businesses than the Section 179 deduction and 100% bonus depreciation. Most importantly, the regulations now allow taxpayers that do not prepare financial statements to use de minimis safe harbor.  This provides a great benefit for many small businesses that do not normally generate these statements as part of their regular business operations.

7. Compensation arrangements

Timing of Compensation:

In a regular C corporation, compensation paid to employees reduces the taxable income of such corporation.  Ideally, compensation should be used to eliminate taxable income at the corporate level or at least minimize such income.  It is imperative that the total compensation paid is “reasonable” in light of the services performed and industry norms. For more insights into the reasonable compensation issue please read Reasonable Compensation:A Favorite Issue For IRS Auditors.

Use of Retirement Plans:

Corporate retirement plans such as profit sharing, money purchase pension, and defined benefit plans can generate large tax deductions for the entity.  These plans are quite useful when compensation has already reached the highest level of reasonableness.

Important Points:

  • These corporate retirement plans must be drafted and signed before year-end to get tax deductions for that year.
  • These plans can generate a deduction even though the plan is not funded until after year-end, so long as funded by the due date (or the extended due date) of the corporate or entity return.  This gives the small business owner some after the taxable year-end planning flexibility.
  • For profit sharing, money purchase pension and other defined contribution plans, an employer can contribute up to $51,000 per participant.  For participants age 50 and older this amount can be $56,500 because of the catch-up contribution rules.
  • For defined benefit plans, the plan retirement amount and funding are determined by various actuarial computations.  The maximum future benefit can be $205,000 per year upon retirement.  Depending on the age of a participant this can result in a very large contribution each year and one far in excess of the amounts available under the defined contribution plans discussed immediately above.
  • There are various limits and rules specific to each of these plans and the particular make-up of the employees and their ages bear heavily in the proper choice of plan and the design of any plan chosen.

Additionally, and maybe more importantly, when compensation paid to owners is approaching their own:

additional taxes can be saved by making contributions to such plans instead of paying more compensation to the owner.  This can produce a double benefit:  huge income tax savings  and having money being put into a retirement plan to grow tax-free for the benefit of the small business owner.

Use of 2 ½ Month Bonus Rule:

Particularly relevant to employers at year-end is an annual bonus rule. Bonuses paid within a brief period after the end of the employer’s tax year are deductible in that tax year. Compensation is generally considered paid within a brief period of time if it is paid within two and one-half months of the end of the employer’s tax year.

Compensation and K-1 Distributions

Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a significant difference to a business owner’s overall tax liability for the year.  For example, for an S corporation, payment of salaries are subject to social security taxes while K-1 income is not subject to this tax.  The strategy here would be to pay less in salary and have more income reported on the Form K-1.  However, taxpayers can be in trouble here if they get greedy.  The IRS is policing this area to make sure that the salary paid is reasonable.  Therefore,   a reasonable salary must be carefully determined and supportable in a tax audit.

Deferring payments of accrued bonuses

In certain situations, it may be preferable to simply ask that your employer pay your bonus in the following year where you expect that your tax bracket will be lower.

8. Other Tax Planning Strategies and Ideas

Here are a number of other year-end tax planning strategies you may want to consider, depending on your particular tax and business situation:

  • Accelerating installment sale proceeds or electing out of the installment method;
  • Elect slower depreciation methods;
  • Determine if you can write-off any bad debts;
  • Consider changing your accounting method to advance income or defer expenses.  This one needs careful consideration, however, as accounting method changes can have a binding effect on taxpayers for many future years;
  • Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other;
  • Cost Segregation Study:  For those who have purchased, constructed or rehabilitated a building this year, a cost segregation workup may save taxes.  It identifies property components and related costs that can be depreciated faster than the building itself, generating larger deductions.  For example, breaking out costs for fixtures, security equipment, landscaping and parking lots may generate larger tax deductions.  Be careful to take into account the impact of the alternative minimum tax and to consider states that do not follow the federal tax rules.

Final Thoughts:

The above are not intended as a comprehensive list of year-end tax planning tools for small businesses.  The point here is that each business has its own unique tax and business situation.  A case by case analysis to determine which tax planning tools will minimize taxes is the best course of action for small businesses.

If I have missed something or if there is a strategy you want me to explore or explain more fully, please leave a comment below.  I would be glad to help.

For an analysis of what deferral or acceleration planning at year-end may work best for you and your business, please do not hesitate to contact me.

Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

 

Renewed Warning: IRS Tax Scam Alert and What To Do To Protect Yourself: Scary and Disturbing Tactics By Phony IRS Agents

NIgerianPhoneScam

“These scams are better scripted than some Hollywood movies.”
419 Nigerian Scam Victim

The IRS just renewed its October, 2013 warning about a pervasive phone scam that continues to target people across the nation, including recent immigrants. The Treasury Inspector General for Tax Administration called it the largest scam of its kind. As of March 20, this tax division reported that it has received reports of over 20,000 contacts related to this scam. It also stated that thousands of victims have paid over $1 million to fraudsters claiming to be from the IRS.

As some of you may recall, on Halloween the IRS announced (IR-2013-84) the newest and scariest phone scam.  Someone has a sick sense of humor out there.

This sophisticated and sinister phone scam targets taxpayers,  especially recent immigrants, throughout the country.

Details of This Phone Scam According to the IRS

In this scam, the thief poses as the IRS and makes an unsolicited call to their target. The caller tells the victim they owe taxes to the IRS. They demand that the victim pay the money immediately with a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.  As I said, this is really scary stuff.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. My advice: If you get such a call, hang up immediately!

“If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.”  Be aware that the IRS does not contract taxpayers in this fashion.  In almost all cases, the first IRS contact with taxpayers on a tax issue occurs by mail.

Other characteristics of this scam that may lead you to believe that this is a legitimate phone call and to intimidate you into giving them what they want  include the following:

  • These impostors use fake names and IRS badge numbers.
  • They generally use common names and surnames to identify themselves.
  • These con artists may be able to recite the last four digits of a victim’s Social Security Number.
  • These crooks spoof the IRS toll-free number on caller ID to make it seem that it’s the IRS calling.
  • They sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, these charlatans hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

As you can see, these guys are good.  Do not under any circumstances give them any information or pay them a thing no matter how threatened you may feel!

How To Protect Yourself

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, hang up immediately and call your tax attorney, your accountant or the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.  This way you know for sure you are dealing with the IRS.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), once again, immediately hang up and then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Other Scams

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS. The 419 Nigerian scam depicted in the picture above resulted in losses to many victims in that country.  No matter how believable or how much you are intimidated, never let your guard down and stay skeptical and vigilant.

Know How The IRS Operates

  • The IRS usually first contacts people by mail – not by phone – about unpaid taxes.
  • The IRS does not initiate contact with taxpayers by email to request personal or financial information. In this case, “snail” mail is a good thing.
  • They do not use any type of electronic communication, such as text messages and social media channels.
  • The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.
  • The IRS won’t ask for payment using a pre-paid debit card or wire transfer. The IRS also won’t ask for a credit card number over the phone.
  • Recipients should not open any attachments or click on any links contained in any message that seems to be from the IRS. Instead, forward the e-mail to phishing@irs.gov.

 

Bottom Line:

  • Be wary of any unexpected phone or email communication allegedly from the IRS.
  • Don’t fall for phone and phishing email scams that use the IRS as a lure.
  • Thieves often pose as the IRS using a bogus refund or warnings to pay past-due taxes.
  • If someone calls you about taxes, they will tell you whether it is the IRS or some state or local authority.  Get their name and badge number and do not give them any information or money.  Then hang up and call that taxing authority directly to get to the bottom of the situation.

Has anyone been a victim of this scam or other scams or fraud?  Please share your experiences in the Leave A Reply area below.

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As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips

Supreme_Court

Supreme Court Decision on DOMA Impacts Tax Rules for Same Sex Couples

Federal tax rules for same-sex couples have recently been issued in response to the Supreme Court decision in Windsor, No. 12-307 (U.S. 6/26/13). This landmark case invalidated a key provision of the 1996 Defense of Marriage Act (“DOMA”) and resulted in major changes in the tax landscape for many same-sex partners.

These new tax rules were laid out in I.R. 2013-72  on August 29, 2013 and Revenue Ruling 2013-17 on September 16, 2013 and are effective on that date.  (Note that taxpayers who wish to rely on the terms of this Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired. More on this below.)

Although there are still some unresolved issues, the following will lay out many of the basic federal income tax rules for same-sex married couples:

  1. State of Celebration Rule:  Same-sex couples that are legally married in jurisdictions that recognize their marriages are treated as married for federal tax purposes.
    • The rule applies even if this couple is currently living in a jurisdiction that does not recognize same-sex marriage.  The IRS states that this is consistent with its long-standing position (Rev. Rul. 58-66) that for federal tax purposes the IRS will recognize marriages based on the law of the state in where consummated and will disregard later changes in domicile.
    • For example, a same-sex couple validly married in New York will still be treated as married when they move to Pennsylvania.
  2. Married:  Being married is any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country.
  3. Domestic Partnerships:  Registered domestic partnerships, civil unions or similar formal relationships are not considered legal marriages.
  4. Married For All Purposes Under Federal Law:  Under the ruling, legally married same-sex couples are treated as married for all federal tax purposes, including income and gift and estate taxes.
  5. Federal Income Tax Benefits For Married Same-Sex Couples:  Married same-sex couples can now enjoy the tax benefits associated with  being treated as married for all federal tax provisions, including but not limited to:
    • Filing status
    • Claiming personal and dependency exemptions
    • Taking the standard deduction
    • Employee benefits
    • Contributing to an IRA
    • Claiming the earned income tax credit
    • Claiming the child tax credit.
  6. Married Filing Jointly or Married Filing Separately Only Option After September 16, 2013:  After September 16, 2013, legally married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.
  7. Two High Income Family:  In some cases, especially where both spouses are high wage earners this may result in greater taxes than under earlier law.
  8. Civil Unions In Certain States May End Up Paying Less Taxes:  Civil unions or domestic partnerships that can still file singly or as head of household may end up in better tax shape in certain situations.
  9. Prior Year Tax Refund Possibility: Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing married filing jointly for federal tax purposes for one or more earlier tax years still open under the statute of limitations.
  10. Statute of Limitations For Refunds:  Generally, the statute of limitations for filing a refund claim is three years from the filing date of the return or two years from the date of the tax payment, whichever is later.
    • As a result, refund claims can still be filed for tax years 2010, 2011 and 2012.
    • Special Situations: For example, agreements with the IRS to keep open the statute of limitations for tax years 2009 and earlier will allow taxpayers to file refund claims for such open years .
    • For how to file an amended return please read Amending Tax Returns with the IRS.
  11. Protective Claim: When the right to a refund is contingent and may not be determined until after the time period for amending returns expires, a taxpayer can file a protective claim for refund. The claim is often based on current litigation (constitutionality); expected changes in tax law; and other changes in legislation or regulations. A protective claim preserves the right to claim a refund until resolution of the matter.
    • Example:  Pennsylvania same-sex couples not considered married under current rules may want to file protective claims for any year where the statute of limitations period is ending.
  12. Fringe Benefits: Employees who purchased same-sex spouse health insurance coverage from their employers or other fringe benefits on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.
    • The IRS now provides a mechanism to pursue for filing refund claims under Notice 2013-61.  The notice provides two streamlined administrative procedures for making adjustments or claiming refunds.
  13. IRS Further Guidance: The IRS will be issuing further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before September 16, 2013.
  14. State Taxes: State tax return filing status is still controlled by state law.  If same-sex marriages are not legal in their state then they cannot file as married.  This is the case even though the marriage took place in a state where same-sex marriages are recognized.
  15. Estate Planning:  Review estate plans to take advantage of the federal estate and gift tax breaks now given same-sex marriages. For insights into estate planning please read Estate Planning 2013: Now What? A Must Read for Everyone
  16. Estate Tax Refunds: Additionally, claims for refunds of any estate taxes paid on deceased spouses that are still open under the statute of limitations should also be carefully examined.
    • Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement.

These are just some of the tax and financial implications in this area.  Same-sex couples affected by these changes should explore estate planning, retirement planning, employee benefits, and social security implications with their estate planning attorney, accountant and financial adviser team.

Stay tuned because this area will continue to evolve and change.

As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.