The American Institute of CPAs in a March 31 letter to House of Representatives voiced its “strong support” for a series of tax administration bills passed in recent days.
The American Institute of CPAs in a March 31 letter to House of Representatives voiced its “strong support” for a series of tax administration bills passed in recent days.
The four bills highlighted in the letter include the Electronic Filing and Payment Fairness Act (H.R. 1152), the Internal Revenue Service Math and Taxpayer Help Act (H.R. 998), the Filing Relief for Natural Disasters Act (H.R. 517), and the Disaster Related Extension of Deadlines Act (H.R. 1491).
All four bills passed unanimously.
H.R. 1152 would apply the “mailbox” rule to electronically submitted tax returns and payments. Currently, a paper return or payment is counted as “received” based on the postmark of the envelope, but its electronic equivalent is counted as “received” when the electronic submission arrived or is reviewed. This bill would change all payment and tax form submissions to follow the mailbox rule, regardless of mode of delivery.
“The AICPA has previously recommended this change and thinks it would offer clarity and simplification to the payment and document submission process,” the organization said in the letter.
H.R. 998 “would require notices describing a mathematical or clerical error be made in plain language, and require the Treasury Secretary to provide additional procedures for requesting an abatement of a math or clerical adjustment, including by telephone or in person, among other provisions,” the letter states.
H.R. 517 would allow the IRS to grant federal tax relief once a state governor declares a state of emergency following a natural disaster, which is quicker than waiting for the federal government to declare a state of emergency as directed under current law, which could take weeks after the state disaster declaration. This bill “would also expand the mandatory federal filing extension under section 7508(d) from 60 days to 120 days, providing taxpayers with additional time to file tax returns following a disaster,” the letter notes, adding that increasing the period “would provide taxpayers and tax practitioners much needed relief, even before a disaster strikes.”
H.R. 1491 would extend deadlines for disaster victims to file for a tax refund or tax credit. The legislative solution “granting an automatic extension to the refund or credit lookback period would place taxpayers affected my major disasters on equal footing as taxpayers not impacted by major disasters and would afford greater clarity and certainty to taxpayers and tax practitioners regarding this lookback period,” AICPA said.
Also passed by the House was the National Taxpayer Advocate Enhancement Act (H.R. 997) which, according to a summary of the bill on Congress.gov, “authorizes the National Taxpayer Advocate to appoint legal counsel within the Taxpayer Advocate Service (TAS) to report directly to the National Taxpayer Advocate. The bill also expands the authority of the National Taxpayer Advocate to take personnel actions with respect to local taxpayer advocates (located in each state) to include actions with respect to any employee of TAS.”
Finally, the House passed H.R. 1155, the Recovery of Stolen Checks Act, which would require the Treasury to establish procedures that would allow a taxpayer to elect to receive replacement funds electronically from a physical check that was lost or stolen.
All bills passed unanimously. The passed legislation mirrors some of the provisions included in a discussion draft legislation issued by the Senate Finance Committee in January 2025. A section-by-section summary of the Senate discussion draft legislation can be found here.
AICPA’s tax policy and advocacy comment letters for 2025 can be found here.
By Gregory Twachtman, Washington News Editor
The Tax Court ruled that the value claimed on a taxpayer’s return exceeded the value of a conversation easement by 7,694 percent. The taxpayer was a limited liability company, classified as a TEFRA partnership. The Tax Court used the comparable sales method, as backstopped by the price actually paid to acquire the property.
The Tax Court ruled that the value claimed on a taxpayer’s return exceeded the value of a conversation easement by 7,694 percent. The taxpayer was a limited liability company, classified as a TEFRA partnership. The Tax Court used the comparable sales method, as backstopped by the price actually paid to acquire the property.
The taxpayer was entitled to a charitable contribution deduction based on its fair market value. The easement was granted upon rural land in Alabama. The property was zoned A–1 Agricultural, which permitted agricultural and light residential use only. The property transaction at occurred at arm’s length between a willing seller and a willing buyer.
Rezoning
The taxpayer failed to establish that the highest and best use of the property before the granting of the easement was limestone mining. The taxpayer failed to prove that rezoning to permit mining use was reasonably probable.
Land Value
The taxpayer’s experts erroneously equated the value of raw land with the net present value of a hypothetical limestone business conducted on the land. It would not be profitable to pay the entire projected value of the business.
Penalty Imposed
The claimed value of the easement exceeded the correct value by 7,694 percent. Therefore, the taxpayer was liable for a 40 percent penalty for a gross valuation misstatement under Code Sec. 6662(h).
Ranch Springs, LLC, 164 TC No. 6, Dec. 62,636
State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures to be used when calculating the 2025:
State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures to be used when calculating the 2025:
- calendar-year population-based component of the state housing credit ceiling under Code Sec. 42(h)(3)(C)(ii);
- calendar-year private activity bond volume cap under Code Sec. 146; and
- exempt facility bond volume limit under Code Sec. 142(k)(5)
These figures are derived from the estimates of the resident populations of the 50 states, the District of Columbia and Puerto Rico, which were released by the Bureau of the Census on December 19, 2024. The figures for the insular areas of American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands are the midyear population figures in the U.S. Census Bureau’s International Database.
Notice 2025-18
The value of assets of a qualified terminable interest property (QTIP) trust includible in a decedent's gross estate was not reduced by the amount of a settlement intended to compensate the decedent for undistributed income.
The value of assets of a qualified terminable interest property (QTIP) trust includible in a decedent's gross estate was not reduced by the amount of a settlement intended to compensate the decedent for undistributed income.
The trust property consisted of an interest in a family limited partnership (FLP), which held title to ten rental properties, and cash and marketable securities. To resolve a claim by the decedent's estate that the trustees failed to pay the decedent the full amount of income generated by the FLP, the trust and the decedent's children's trusts agreed to be jointly and severally liable for a settlement payment to her estate. The Tax Court found an estate tax deficiency, rejecting the estate's claim that the trust assets should be reduced by the settlement amount and alternatively, that the settlement claim was deductible from the gross estate as an administration expense (P. Kalikow Est., Dec. 62,167(M), TC Memo. 2023-21).
Trust Not Property of the Estate
The estate presented no support for the argument that the liability affected the fair market value of the trust assets on the decedent's date of death. The trust, according to the court, was a legal entity that was not itself an asset of the estate. Thus, a liability that belonged to the trust but had no impact on the value of the underlying assets did not change the value of the gross estate. Furthermore, the settlement did not burden the trust assets. A hypothetical purchaser of the FLP interest, the largest asset of the trust, would not assume the liability and, therefore, would not regard the liability as affecting the price. When the parties stipulated the value of the FLP interest, the estate was aware of the undistributed income claim. Consequently, the value of the assets included in the gross estate was not diminished by the amount of the undistributed income claim.
Claim Not an Estate Expense
The claim was owed to the estate by the trust to correct the trustees' failure to distribute income from the rental properties during the decedent's lifetime. As such, the claim was property included in the gross estate, not an expense of the estate. The court explained that even though the liability was owed by an entity that held assets included within the taxable estate, the claim itself was not an estate expense. The court did not address the estate's theoretical argument that the estate would be taxed twice on the underlying assets held in the trust and the amount of the settlement because the settlement was part of the decedent's residuary estate, which was distributed to a charity. As a result, the claim was not a deductible administration expense of the estate.
P.B. Kalikow, Est., CA-2
An individual was not entitled to deduct flowthrough loss from the forfeiture of his S Corporation’s portion of funds seized by the U.S. Marshals Service for public policy reasons. The taxpayer pleaded guilty to charges of bribery, fraud and money laundering. Subsequently, the U.S. Marshals Service seized money from several bank accounts held in the taxpayer’s name or his wholly owned corporation.
An individual was not entitled to deduct flowthrough loss from the forfeiture of his S Corporation’s portion of funds seized by the U.S. Marshals Service for public policy reasons. The taxpayer pleaded guilty to charges of bribery, fraud and money laundering. Subsequently, the U.S. Marshals Service seized money from several bank accounts held in the taxpayer’s name or his wholly owned corporation. The S corporation claimed a loss deduction related to its portion of the asset seizures on its return and the taxpayer reported a corresponding passthrough loss on his return.
However, Courts have uniformly held that loss deductions for forfeitures in connection with a criminal conviction frustrate public policy by reducing the "sting" of the penalty. The taxpayer maintained that the public policy doctrine did not apply here, primarily because the S corporation was never indicted or charged with wrongdoing. However, even if the S corporation was entitled to claim a deduction for the asset seizures, the public policy doctrine barred the taxpayer from reporting his passthrough share. The public policy doctrine was not so rigid or formulaic that it may apply only when the convicted person himself hands over a fine or penalty.
Hampton, TC Memo. 2025-32, Dec. 62,642(M)
The IRS has issued comprehensive proposed regulations that would limit duplicated losses and inappropriate transfers of built-in losses between partners. The regulations seek to implement and fine-tune tax code provisions enacted in the American Jobs Act of 2004. They will have a significant impact as partnerships grow as the entity of choice for many business enterprises. Although labeled “proposed,” taxpayers should consider the IRS’s interpretation of the rules set forth in these regulations as current audit policy unless otherwise indicated.
The IRS has issued comprehensive proposed regulations that would limit duplicated losses and inappropriate transfers of built-in losses between partners. The regulations seek to implement and fine-tune tax code provisions enacted in the American Jobs Act of 2004. They will have a significant impact as partnerships grow as the entity of choice for many business enterprises. Although labeled “proposed,” taxpayers should consider the IRS’s interpretation of the rules set forth in these regulations as current audit policy unless otherwise indicated.
Built-in loss property
Property has a built-in loss if its basis exceeds its fair market value. Congress determined that where a partner had contributed built-in loss property to a partnership, and then transferred a partnership interest to another partner, both partners could claim the same loss. The problem also occurs when a partnership distributes the built-in loss property to another partner, and when a partnership makes liquidating distributions to the partner who contributed the built-in loss property.
Proposed regulations
The proposed regulations would restrict the loss deduction to the partner who contributed the built-in loss property to the partnership. If the partner who contributed the built-in loss property disposes of its partnership interest, the transferee does not succeed to the transferor partner’s basis adjustment (built-in loss). The regulations impose certain reporting requirements for the appropriate basis adjustments.
Scope of rules
For the regulations to apply, the built-in loss must exceed $250,000 immediately after a distribution of partnership property or a transfer of a partnership interest. The regulations would not apply if the partnership interest is transferred in certain nonrecognition transactions, such as tax-free reorganizations. Gifts do not qualify for this exception.
Tiered partnerships
Where there are tiered partnerships, the proposed regulations would also require mandatory basis adjustments. The adjustments must be pushed down to the lower tier where the built-in loss property is. Practitioners have indicated that it may be difficult to implement the basis adjustments where the upper-tier partnership does not control the lower-tier partnership. The IRS acknowledged that these requirements may not be particularly administrable.
Enron transactions
The regulations also address abusive transactions that allow a partnership to increase the basis of depreciable assets while decreasing tax-free the basis of preferred stock of a corporate partner held by the partnership. These types of transactions were developed by Enron Corporation and enabled a partnership to take duplicated tax deductions at no economic cost.
Taxpayers using real estate in their business often can generate significant tax savings and increase cash flow by using the technique of cost segregation. Cost segregation is the identification and separate depreciation of personal property components and land improvements. Like its predecessor, component depreciation, cost segregation allows a taxpayer to separately depreciate various elements of a building more rapidly than the underlying building itself.
Taxpayers using real estate in their business often can generate significant tax savings and increase cash flow by using the technique of cost segregation. Cost segregation is the identification and separate depreciation of personal property components and land improvements. Like its predecessor, component depreciation, cost segregation allows a taxpayer to separately depreciate various elements of a building more rapidly than the underlying building itself.
Real and personal property
Under MACRS, a building must be depreciated over 27.5 years (residential rental property) or 39 years (nonresidential real property), using the straight-line method. Cost segregation allows depreciation and recovery of the cost of personal property elements of the building over five to seven years, using an accelerated depreciation method (200-percent declining balance). Components that are not classified as personal property must be included in the building’s basis and depreciated over the appropriate period as real property.
Building elements are eligible for cost segregation if they are considered personal property under Code Sec. 1245 and under the former investment tax credit rules of Code Sec. 38. Classification as personal property under state law can also avoid state and local real property taxes.
Cost segregation study
To use cost segregation, the taxpayer must obtain a cost segregation study, which may be conducted by a cost segregation specialist. The specialist will conduct a feasibility study to determine whether a cost segregation study can provide tax savings. The building must be inspected, and the study must identify the components that may qualify as depreciable personal property. The actual installed cost of the component must be obtained.
The items of personal property must be identified in the study. The study should also provide the legal authority (regulations, cases, rulings, etc.) for treating an item as personal property or a land improvement, and should explain the methodology for determining the property’s depreciable basis.
Ideally, the study should be conducted before the building is placed in service (e.g. when the building is under construction or at the time of purchase), although the study can be conducted after a building is placed in service. The building does not have to be new. If the building is being purchased, the sales contract can allocate the sales price between real and personal property.
Taxpayers must generally provide documentation to support (or to “substantiate”) a claim for any contributions made to charity that they are planning to deduct from their income. Assuming that the contribution was made to a qualified organization, that the taxpayer has received either no benefit from the contribution or a benefit that was less than the value of the contribution, and that the taxpayer otherwise met the requirements for a qualified contribution, then taxpayers should worry next whether they have the proper records to prove their claim.
Taxpayers must generally provide documentation to support (or to “substantiate”) a claim for any contributions made to charity that they are planning to deduct from their income. Assuming that the contribution was made to a qualified organization, that the taxpayer has received either no benefit from the contribution or a benefit that was less than the value of the contribution, and that the taxpayer otherwise met the requirements for a qualified contribution, then taxpayers should worry next whether they have the proper records to prove their claim.
Cash donations
The taxpayer must provide records to prove a donation of any amount of cash (including payments by cash, check, electronic funds transfer or debit, and credit card). Acceptable records for cash donations of less than $250 generally include:
- An account statement or canceled check;
- A written letter, e-mail or other properly issued receipt from the qualified organization bearing the name of the organization and the date and amount of the contribution; and/or
- A pay stub, Form W–2, or other payroll document showing the amount of a contribution made from payroll.
Caution: A taxpayer cannot substantiate deductions through written records it has prepared on its own behalf, such as a checkbook or personal notes.
Cash donations of more than $250. If a taxpayer donated $250 or more in cash at any one time, the taxpayer must provide a contemporaneous written acknowledgment of the donation from the qualified organization. For each donation of $250 or more, the taxpayer must obtain a separate written acknowledgment. Furthermore, this written acknowledgement must:
- State the amount of the contribution; and
- State whether the qualified organization provided the taxpayer with any goods or services in exchange for the donation, and if so estimate their value; and
- Be received by the taxpayer before the earlier of (1) the return’s filing date or (2) the due date of the return, plus any extensions.
Note: The written acknowledgment ideally would also show the date of the contribution. If it does not, the taxpayer must also provide a bank record that indicates the date.
The acknowledgment must contain a statement of whether or not a taxpayer received any goods or services as a result of the donation, even if no goods or services were received. Even if the donation was for tithes to a religious organization, such as a church, synagogue, or mosque, the acknowledgment should state that the only goods and services received were of intangible religious value. The Tax Court has upheld the disallowance of charitable contribution deductions where the written acknowledgment omitted such a statement regarding goods or services provided.
Noncash contributions
As with cash contributions, the requirements for substantiating noncash contributions increase with the value of the contribution. For example, to substantiate noncash contributions of less than $250, taxpayers must show a receipt or other written communication from the charitable organizations.
To substantiate a noncash contribution between $250 and $500, the taxpayer must obtain a written acknowledgment of the contribution from the qualified organization prior to the earlier of the filing date or due date of its return. The acknowledgment must also describe the type and value of the goods and services, if any, provided to the taxpayer as a result of the donation.
To substantiate noncash contributions totaling between $500 and $5,000 or donations of publically traded securities, a taxpayer must complete Section A of Form 8283, Noncash Charitable Contributions. To substantiate noncash contributions of $5,000 or more (for example, donations of art, jewelry, vehicles, qualified conservation contributions, or intellectual property) the taxpayer must complete Section B of Form 8283. Generally, this would also require the taxpayer to obtain a qualified appraisal of the property’s fair market value.
A word about valuation. A charity is not obligated to provide a value to any noncash contribution; its written receipt only needs to describe the item(s) and note the date of the contribution. The taxpayer, however, is not relieved from making a good-faith estimate of value, which of course the IRS may dispute on any audit. “Thrift-shop” value is often used to value donations of clothing and household goods.
Caution: Last year the Treasury Inspector General for Tax Administration (TIGTA) issued a report finding that the IRS was not accurately monitoring the reporting of noncash contributions requiring completion of Form 8283. The IRS responded that it agreed that it needed to initiate more correspondence audits with taxpayers claiming noncash contributions without the necessary Form 8283 and appraisal.
Vehicles. A taxpayer who donates a motor vehicle, boat, or airplane to charity must deduct either the gross proceeds from the qualified organization’s sale of the vehicle or, if the vehicle is used within the charity’s mission, the fair market value of the vehicle on the date of the contribution, whichever is smaller. The taxpayer must also obtain and attach Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to its return in addition to Form 8283.
The requirements for substantiating charitable contributions can be complicated. Please contact our office with questions.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2014.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2014.
February 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 29-31.
February 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 1-4.
February 10
Employees who work for tips. Employees who received $20 or more in tips during January must report them to their employer using Form 4070.
February 12
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 5-7.
February 14
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 8-11.
February 18
Individuals. Individuals wishing to continue claiming the same number of exemptions from income tax withholding as in the previous tax year must submit Form W-4, Employee's Withholding Allowance Certificate, to their employer.
February 20
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 12-14.
February 21
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 15-18.
February 26
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 19-21.
February 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 22-25.
Businesses. File information returns with the IRS for certain payments made during 2013. These information returns include (but are not limited to) Forms 1097-BTC, 1098, 1098-C, 1098-E, 1098-MA, 1098-T, and all 1099 series returns.
March 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll date February 26-28.
Many higher-income taxpayers will be in for a big surprise when they finally tally up their 2013 tax bill before April 15th. The higher amount of taxes that may be owed will be the result of the combination of several factors, the cumulative effect of which will be significant for many. These factors include a higher income tax rate, a higher capital gains rate, a new net investment income tax, and a new Medicare surcharge on earned income, as well as a significantly reduced benefit from personal exemptions and itemized deductions for those in the higher income tax brackets.
Many higher-income taxpayers will be in for a big surprise when they finally tally up their 2013 tax bill before April 15th. The higher amount of taxes that may be owed will be the result of the combination of several factors, the cumulative effect of which will be significant for many. These factors include a higher income tax rate, a higher capital gains rate, a new net investment income tax, and a new Medicare surcharge on earned income, as well as a significantly reduced benefit from personal exemptions and itemized deductions for those in the higher income tax brackets.
Higher top income tax rate
The American Taxpayer Relief Act of 2012 made permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers filing jointly, $425,000 for heads of households). Income above these levels has now been taxed at a 39.6 percent rate rather than at the top 35 percent rate since January 1, 2013. Those amounts are adjusted for inflation after 2013 (for 2014, those threshold levels are $432,200, $457,600, and $406,750, respectively. Taxpayers with $150,000 of income above the threshold amounts, for example, must pay an additional $6,900 in tax in 2013 because of the additional tax rate of 4.6 percent).
Capital gains and dividends
The American Taxpayer Relief Act also raised the top rate for long-term capital gains and dividends to 20 percent, up from the Bush-era maximum 15 percent rate—again, applicable to all net long-term capital gains from transactions made on or after January 1, 2013. That top rate will apply to the extent that a taxpayer's income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households). Especially applicable to those investors who have been riding the recent stock market rally, a jump in the rate from 15 percent to 20 percent represents a 33.33 percent tax increase.
Medicare Taxes
Set into motion on January 1, 2013 by the Affordable Care Act of 2010, higher-income taxpayers have been required to pay an additional 3.8 percent on net investment income as well as a 0.9 percent Additional Medicare Tax on earned income.
In both cases, the income threshold levels for being subject to these new taxes are considerably lower than the 39.6 percent bracket and 20 percent capital gain rates. The threshold amount is $200,000 in the case of a single individual, head of household (with qualifying person) and qualifying widow(er) with dependent child. The threshold amount is $250,000 in the case of a married couple filing jointly and $125,000 in the case of a married couple filing separately. For the 3.8 percent net investment income tax, the threshold is adjusted gross income (modified for certain foreign-based income). For the 0.9 percent Additional Medicare Tax, the threshold is measured against compensation earned for the year (including self-employment income):
Net investment income tax. The 3.8 percent tax not only covers capital gains and dividends, but also passive-type income flowing from real estate, investments in businesses, and the like. The rules are complex, and many taxpayers will struggle with the extent to which income on their 2013 tax returns will be subject to the new net investment income tax. For income subject to this tax, the effective rate will increase to 23.8 percent on net capital gain and dividends and 43.4 percent on short-term capital gain and all other passive-type income.
Additional Medicare Tax. For tax years beginning after December 31, 2012, the 0.9 percent Additional Medicare Tax applies to employee compensation and self-employment income above the threshold amounts noted above. Covered wages for purposes of the Additional Medicare Tax include not only regular salary or payments for services rendered to someone self-employed, but also tips, commissions that are part of compensation, bonuses, reimbursements under nonaccountable plans, back pay awards, gifts by employers to employees and more.
An employer's withholding obligation for the Additional Medicare Tax applies only to the extent the employee's wages are in excess of $200,000 in a calendar year. For some dual-income couples with combined earned income above the $250,000 threshold but with no one earning more than $200,000, they may find themselves under withheld and subject to an estimated tax penalty as a result. Couples should remember that to prevent a reoccurrence in the future, an employee may request additional income tax withholding, which will be applied against all taxes shown on the individual's return, including any liability for the Additional Medical Tax.
Itemized Deductions Limitation
The American Taxpayer Relief Act officially the “Pease” limitation on itemized deductions. The new thresholds, first applied in 2013, are $300,000 for married couples and surviving spouses; $275,000 for heads of households; $250,000 for unmarried taxpayers; and $150,000 for married taxpayers filing separately.
The Pease limitation reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions by three percent of the amount by which the taxpayer's adjusted gross income exceeds this applicable threshold. The amount of itemized deductions may be reduced up to 80 percent under this formula. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.
Personal Exemption Phaseout
The American Taxpayer Relief Act also revived the personal exemption phaseout rules, at the same levels of adjusted gross income revived for the Pease limitation. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer's adjusted gross income exceeds the applicable threshold level. At the full phase out level, therefore, a family with four personal exemptions in 2013 will lose $15,600 in exemptions, creating $6,178 in additional tax at the 39.6 percent bracket.
Federal Estate and Gift Taxes
One bright spot for higher-income taxpayers is the change that took place starting in 2013 directly applicable to estate planning strategies. The American Taxpayer Relief Act permanently provided for a maximum federal estate tax rate of 40 percent with an annual inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012. Couples can combine exclusions and effectively exempt $10 million from estate tax (for 2013, the inflation-adjusted level is $10.5 million, rising to $10.68 million in 2014).
If you would like a further assessment of how the new, “higher-income taxes” will impact what you owe for 2013 this coming April 15, or if you would like to start now to implement a plan to minimize these taxes in 2014, please do not hesitate to contact this office.
Taxpayers who use their automobiles for business or the production of income can deduct their actual expenses for use of an automobile (including the use of vans, pickups, and panel trucks) that the taxpayer owns or leases. Deductible expenses include parking fees, tolls, taxes, depreciation, repairs and maintenance, tires, gas, oil, insurance and registration.
Taxpayers who use their automobiles for business or the production of income can deduct their actual expenses for use of an automobile (including the use of vans, pickups, and panel trucks) that the taxpayer owns or leases. Deductible expenses include parking fees, tolls, taxes, depreciation, repairs and maintenance, tires, gas, oil, insurance and registration.
Standard rate for business
Employees and self-employed individuals can use the optional business standard mileage rate, instead of tracking actual costs for depreciation, repairs and maintenance, tires, gas, insurance, oil and registration. Vehicle costs based on the standard rate are determined by multiplying the number of business miles traveled during the year by the rate. In addition to taking the standard rate, a taxpayer can deduct certain other costs as separate items, including as parking, tolls, interest on the purchase of the automobile, and state and local personal property taxes.
For 2014, the standard mileage rate for business travel is 56 cents per mile, a slight drop from the 2013 rate of 56.5 cents per mile. This allowance includes depreciation of 22 cents per mile for 2014. A taxpayer using the standard mileage rate must reduce the basis of the vehicle by the depreciation expenses included in the mileage rate.
(While the use of actual expenses may result in a greater deduction than using the standard rate, this must be balanced against the added recordkeeping and substantiation burdens.)
Substantiation and limitations
A taxpayer using the standard mileage rate does not have to substantiate the expense amounts covered by the rate. However, the taxpayer must properly substantiate other travel elements, such as time, place and purpose of the trip. Travel expenses must be substantiated either by adequate records or by sufficient evidence corroborating the taxpayer's own statement. To meet the adequate records requirement, a taxpayer should maintain an account book, diary or similar statement and documentary evidence to establish each element of the expense.
A taxpayer cannot use the standard mileage rate if it operates five or more vehicles at the same time, if it claimed a Code Sec. 179 expensing deduction for the vehicle, or if it claimed depreciation other than straight-line depreciation.
Other standard mileage rates
The IRS also provides standard mileage rates for medical and moving expenses. For 2014, the rate is 23.5 cents per mile (down from 24 cents for 2013). The standard rate for charitable expenses is set by statute and remains at 14 cents per mile. The various standard mileage rates for 2014 apply to miles driven on or after January 1, 2014.
The definitive arrival of the New Year does not spell doom for all tax savings opportunities for 2013. A few options remain to taxpayers:
The definitive arrival of the New Year does not spell doom for all tax savings opportunities for 2013. A few options remain to taxpayers:
IRAs
Taxpayers have until April 15, 2014, to make tax-deferred contributions to a traditional individual retirement account (IRA). The amount any one taxpayer may contribute to an IRA is limited to $5,500 per taxpayer ($6,500 for taxpayers age 50 or older).
This amount begins to phase out after the taxpayer has adjusted gross income (AGI) over a certain amount ($59,000 for single and head of household filers; $95,000 for married filers). The phase out is complete once the taxpayer’s AGI exceeds $69,000 (single and head of household filers) or $115,000 (married filers).
If the taxpayer has already contributed to an IRA for 2013 (including a Roth IRA), the allowed $5,500 contribution is reduced by the amount of those previous contributions.
HSAs
Taxpayers covered under a high-deductible health plan (HDHP) also have until April 15, 2014, to make tax-deferred contributions to a health savings account (HSA). An HSA is a tax-exempt trust or custodial account established for the purpose of paying the beneficiary’s qualified medical expenses.
Estimated tax
Taxpayers who realize they should have been making estimated payments of tax throughout the year can avoid penalties for the fourth quarter of 2013 by making an estimated tax payment on or before January 15, 2014.
Other notable tax deadlines, other than the looming April 15, 2014 deadline for individual returns, include:
March 15: Taxpayers who contributed funds during 2013 to an employer-sponsored cafeteria plan through a flexible spending arrangement (FSA) have until March 15, 2014 to use them on any qualified medical expenses. Generally taxpayers must use all funds contributed to an FSA before the end of the year, unless their employer has amended the cafeteria plan to allow a grace period up until March 15. Taxpayers who are unsure of whether or not their flexible spending arrangement provides this grace period should contact their employer.
April 1: Taxpayers that have traditional IRAs are required to start taking minimum distributions from their IRAs in the year in which they turn age 70½. These are called required minimum distributions (RMDs), and they are calculated based on the account holder’s life expectancy. RMDs are required for traditional IRAs, but not Roth IRAs.
Taxpayers who just turned 70½ during 2013 may delay the first payment until April 1, 2014. However, for all years thereafter, the taxpayer must take the RMD by December 31 of the tax year. This means that a taxpayer who delays his or her first RMD payment until April 1, 2014, will be required to report two RMDs in his or her 2014 income.
Account owners who do no withdraw the full RMD amount by the deadline will be liable for tax at the rate of 50 percent on the amount not withdrawn
For more information on the upcoming tax return filing season, please contact our offices.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2014.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2014.
January 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 25–27.
January 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 28–31.
January 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 1–3.
January 10
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 4–7.
Employees who work for tips. Employees who received $20 or more in tips during December must report them to their employer using Form 4070.
January 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 8–10.
Individuals. Individuals that did not pay their income tax for the year through withholding (or did not pay in enough tax through withholding) may make a final payment of estimated tax for 2013, using Form 1040-ES, Estimated Tax for Individuals.
January 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 11–14.
January 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 15–17.
January 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 18–21.
January 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 22–24.
January 31
Filing Season. The 2014 filing season officially begins.
Employers. Semi-weekly depositors must deposit employment taxes for payroll date January 25–28.
Information reporting. All employers must provide their employees with their copies of Form W-2 for 2013.
Payers of gambling winnings. Payers of reportable gambling winnings or withheld income tax from gambling winnings for 2013, must provide the winners with their copies of Form W-2G.
Nonpayroll items. Those who withheld income tax withheld for 2013 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members, file Form 945 and deposit or pay any undeposited tax under the accuracy of deposit rules.
Social Security/Medicare taxes. Employers who withheld Social Security and Medicare taxes report the withholding for the fourth quarter of 2013 on Form 941. Small employers may report withholding for the entire year using Form 944.
February 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 29–31.
Tax season is scheduled to begin shortly and, as in past years, there are some possible glitches to be mindful of. Already, the IRS has alerted taxpayers that the start of filing season will be delayed. Late tax legislation, although unlikely, could result in a further delay. Some new requirements under the Patient Protection and Affordable Care Act have been waived for 2014, but others have not. The IRS also is facing the prospect of another government shutdown in January.
Tax season is scheduled to begin shortly and, as in past years, there are some possible glitches to be mindful of. Already, the IRS has alerted taxpayers that the start of filing season will be delayed. Late tax legislation, although unlikely, could result in a further delay. Some new requirements under the Patient Protection and Affordable Care Act have been waived for 2014, but others have not. The IRS also is facing the prospect of another government shutdown in January.
Filing season
In recent years, the IRS has had to delay the start of the filing season to reprogram its return processing systems for changes in the tax laws. The 2014 filing season will also be delayed but not, as of today, because of new tax laws. The IRS operated with minimal staffing during the 16-day government shutdown in October and fell behind in its scheduled maintenance and programming of its return processing systems because employees were furloughed. At this time, the IRS expects the 2014 filing season to be delayed for possibly two weeks.
Before the shutdown, the IRS had anticipated opening the 2014 filing season on January 21, 2014. With a one- to two-week delay, the IRS would start accepting and processing returns no earlier than January 28, 2014 and no later than February 4, 2014. Individuals who file early in anticipation of receiving a refund will likely see their refunds delayed. The IRS is expected to make a final determination on the start date of the 2014 filing season in mid-December. Our office will keep you posted of developments.
Taxpayers are also waiting on some important final forms for the 2014 filing season, including Form 8960, Net Investment Income Tax. The Affordable Care Act created the new 3.8 tax on qualified net investment income, effective January 1, 2013. Additionally, the IRS has indicated that more guidance will be available for married same-sex couples. Since publication of the IRS's initial guidance, questions have surfaced concerning employee benefits, return filing and other issues affecting married same-sex couples and domestic partners (whom the IRS does not treat as married). Late-year guidance on either the 3.8 percent net investment income tax or same-sex tax issues may require last-minute changes in year-end tax strategies.
Another shutdown possible
The IRS is currently operating under a stop-gap funding measure, which ended the government shutdown in October. Funding under the stop-gap measure is scheduled to lapse after January 15, 2014. A House-Senate budget conference committee is attempting to reconcile competing fiscal year (FY) 2014 budget bills. So far, lawmakers appear to have made little progress.
A mid-January shutdown could further delay the start of the filing season. In a November 18 letter to IRS Acting Commissioner Daniel Werfel, the American Institute of Certified Public Accountants (AICPA) expressed concern that another government shutdown would result in a huge strain on taxpayers and tax professionals trying to timely file and report their income taxes by April 15. "The IRS keeping more essential positions working during January would help make the already delayed filing season operate as smoothly as possible," the AICPA told Werfel. The AICPA also recommended that the Taxpayer Advocate Service, which closed during the October shutdown, remain open in the event of another lapse in appropriations.
Tax legislation
Although many tax bills have been introduced in Congress, 2013 is likely to end without lawmakers tackling comprehensive tax reform. The House Ways and Means Committee and the Senate Finance Committee have both prepared discussion drafts on tax reform, covering a host of tax issues. One possible reason for the lack of movement of tax reform appears to be lukewarm interest, at best, from the House and Senate leaders. This could change in 2014 but it is too early to make any predictions.
One path for tax reform could be the House-Senate budget conference committee. However, as mentioned, the committee has not yet produced any concrete proposals. Several lawmakers have recommended that the committee strike a deal to lower corporate tax rates in exchange for businesses giving up unspecified tax breaks. Many Republicans want to keep scheduled across-the-board spending cuts in place for 2014 and beyond; many Democrats want to replace the spending cuts with new revenue raisers. The conference committee has a mid-December deadline to reach an agreement.
A package of so-called tax extenders-popular but temporary tax incentives-could move before year-end but more likely will be taken up by Congress early next year. Unlike last year, the expiring incentives do not affect 2013 returns filed in 2014. Eligible taxpayers will be able to claim the state and local sales tax deduction, the higher education tuition deduction, the teachers' classroom expense deduction, home energy tax breaks, and many others on their 2013 returns. If you have any questions about the expiring incentives, please contact our office.
Affordable Care Act
Starting January 1, 2014, the Affordable Care Act requires individuals to carry minimum essential health insurance (unless they are exempt) or make a shared responsibility payment. Tax credits and cost-sharing also kick-in next year. At this time, it appears unlikely that the Obama administration will delay the individual mandate. The employer mandate, however, is delayed. Employer reporting (and reporting by some insurers) will not apply until 2015, but is optional for 2014. Generally, employer reporting applies to employers with at least 50 full-time employees on business days during the preceding calendar year.
November was dominated by news of technical troubles for the online Affordable Care Act Marketplaces and the cancellation of some individual insurance policies that did not meet new standards. The White House has made getting the online Marketplaces running at 100 percent a priority and also gave states the option of allowing individuals to re-enroll in coverage that would otherwise be terminated. The fix is temporary and individuals will need to find alternative coverage for 2015 and beyond. Small businesses also may have received cancellation notices and should be exploring alternative coverage.
If you have any questions about year-end tax developments, please contact our office.
Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.
Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.
Health expenses
Health FSAs are designed to reimburse participants for certain health care expenditures, typically expenses that qualify for the medical and dental expense deduction. Medical supplies, such as eye glasses and bandages, are usually treated as qualified expenses. However, nonprescription medicines (other than insulin) are not considered qualified medical expenses.
Health FSAs are often funded through voluntary salary reduction agreements with the participant's employer under a cafeteria plan. In that case, they are very taxpayer-friendly because no federal employment or federal income taxes are deducted from the employee's contribution. The employer may also contribute to a health FSA. However, there are special rules which govern employer contributions.
Typically, participants designate at the beginning of the year the amount they want to contribute to their health FSA and these amounts are deducted from their pay. For 2014, an employee's salary reduction contributions cannot exceed $2,500. The $2,500 cap is very important because cafeteria plans that do not limit health FSA contributions to $2,500 are not treated as cafeteria plans, and all benefits offered under the plan are included in the participants' gross income.
Use-or-lose rule
As mentioned, the use-or-lose rule is a drawback to health FSAs. Unused amounts remaining in the health FSA at year-end are forfeited. Employers are not allowed to refund any unused funds in a health FSA. Critics of the use-or-lose rule argue that it has discouraged participation in health FSAs because many employees do not want to risk forfeiting unused funds. Often, participants have to scramble at year-end to use their health FSA dollars
Grace period option
A few years ago, the IRS modified the use-or-lose rule. The IRS allowed cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.
Carryover option
At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.
The maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. As we discussed, the carryover is optional. Employers can choose not to offer any carryover.
Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. The employer and not the participant decides. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.
Let's take a look at an example: Jacob participates in a health FSA under his employer's cafeteria plan. At year-end, Jacob has $255 remaining in his health FSA. Jacob's employer never offered a grace period but opted to allow participants to carry over up to $300 of unused health FSA dollars. Jacob can carry over all of his $255 in unused health FSA dollars.
If you have any questions about the new carryover option or health FSAs, please contact our office.
Notice 2013-71
Taxpayers generally prefer to accelerate deductions to reduce their current year income and taxes. In some situations, the tax code's accounting rules allow an accrual-basis employer to deduct a year-end employee bonus in the current year, even though the bonus will not be paid until the following year. A recent IRS Chief Counsel memorandum (FAA 20134301F) highlights some of the pitfalls that can affect when bonus compensation is deductible.
Taxpayers generally prefer to accelerate deductions to reduce their current year income and taxes. In some situations, the tax code's accounting rules allow an accrual-basis employer to deduct a year-end employee bonus in the current year, even though the bonus will not be paid until the following year. A recent IRS Chief Counsel memorandum (FAA 20134301F) highlights some of the pitfalls that can affect when bonus compensation is deductible.
Accrual Method
Under the accrual-method of accounting (in contrast to the cash-method of accounting), a liability is incurred, and can be deducted, in the year in which:
- All the events have occurred that establish the fact of the liability;
- The amount of the liability can be determined with reasonable accuracy; and
- Economic performance has occurred.
The first factor, the all-events test, is met when the event fixing the liability occurs and payment is unconditionally due. Although an expense may be deductible before it is payable, liability must be firmly established. The "fact of liability" depends on whether legal rights or obligations exist as of the close of the year, not the probability that the rights will arise in the future.
Bonus Plans
An employer may establish an arrangement or plan that will pay a bonus to its employees in the succeeding year, based on an evaluation of current year performance. Performance could be determined by objective factors, such as numerical goals set for the company or the employee. These bonuses may be deductible in the earlier year even though the employee, who must figure taxes on the cash method, won't need to recognize the income until it is paid. Or performance may be based on more subjective factors, such as an individual performance appraisal or the employer's discretion. These bonuses may be deductible in the later year. The requirements for awarding the bonus must be scrutinized, to determine when the liability becomes certain.
Is the liability deductible?
The IRS has stated that a bonus can be deducted in the current year if, under a bonus plan, the employee is notified in the current year the employee will receive a bonus, even though the bonus is not calculated or paid until the following year. An employer's bonus liability that is ascertainable by a fixed standard, such as a percentage of profits at the close of the year, accrues and is deductible in the current year even though the computations are not made until the following year.
A bonus is not deductible prior to payment if an employee must remain employed until the time of payment, and if a forfeited bonus reverts to the employer. However, even if an employee must be employed until paid, the IRS has ruled that a bonus is deductible under a pooled arrangement providing that any forfeited bonuses are reallocated to the employees as a group, where the minimum amount payable to the group is determinable through a fixed formula at the end of the year or by board action before the end of the year.
Employers may be denied a deduction in the current year if there are uncertainties or conditions on payment. As stated above, a condition that the employee must remain with the company until payment prevents accrual before the payment. A deduction is not available if the payment is subject to significant contingencies involving corporate affairs, such as approval by the board, or a requirement that the company attain a particular cash position. If there is no set formula, and bonuses will not be determined until after the close of the year, the bonuses do not accrue until the later year.
In the IRS memorandum, Chief Counsel determined that a bonus could not be accrued in the earlier year in the following situations:
- The employer retained the right to unilaterally modify or eliminate the bonus plan or the bonuses themselves at any time, in its discretion. The employer had no legal obligation to pay the bonus until it was actually paid.
- The plan requires a committee of the board of directors to act in the following year to approve the bonus computation and the payment of bonuses. There is no legal obligation because the committee must approve the bonuses, and that approval is not automatic.
- The bonus depends not only on objective formulas but also on the employee's individual performance score, based on appraisals that are not performed until after the end of the year.
There is a tension between the employer's desire to accelerate the deduction and its desire to retain maximum control over the payment of bonuses. An employer that wants to deduct the bonuses in an earlier year must be willing to relinquish some of its discretion to determine the bonus.
Stock held by an investor is a capital asset under the tax law. Gain from the sale of stock held for more than a year qualifies as long-term capital gain, taxed at a reduced rate (zero, 15 or 20 percent) compared to the rates that apply to ordinary income. To achieve these favorable rates, investors generally want to hold their stock for more than a year. (Note: Depending on economic conditions, an investor may decide it is better to lock-in gains by selling the stock, even if the holding period is one year or less and the gains would be short-term.)
Stock held by an investor is a capital asset under the tax law. Gain from the sale of stock held for more than a year qualifies as long-term capital gain, taxed at a reduced rate (zero, 15 or 20 percent) compared to the rates that apply to ordinary income. To achieve these favorable rates, investors generally want to hold their stock for more than a year. (Note: Depending on economic conditions, an investor may decide it is better to lock-in gains by selling the stock, even if the holding period is one year or less and the gains would be short-term.)
Trade Date
A transfer of stock traded on an exchange involves a trade date and a settlement date. Stock is considered purchased or sold for tax purposes on its trade date, when the trade is made, rather than on its settlement date, when the stock is delivered and payment is made. There is a gap between the trade date and the settlement date, with the trade date coming first. Conversely, if an investor wants to realize a loss in the current year from a sale of stock, the investor must ensure that the trade date is on or before December 31.
Holding Period
The stock's holding period is based on the trade date. The holding period actually begins on the day after the trade date and includes the day it is disposed of. The settlement date is not relevant when computing the holding period. The holding period is measured in calendar months, not days; thus, one month has elapsed on the same date of the succeeding month as the date of purchase, regardless of the number of days in the month.
Example. Benny buys stock on December 16, 2012 and sells the stock on December 16, 2013. Benny has held the stock for exactly one year; any gain will be short-term capital gain. The fact that the settlement date is not until December 20 does not lengthen the holding period. If Benny instead sells the stock on December 17, 2013, he will have held the stock for more than a year (one year and one day); any gain will be long-term capital gain.
For nonpublicly traded stock, the holding period begins with the receipt of title, and ends on the day of transfer, not the contract date.
Identification of Stock Sold
When the same stock is acquired on different dates, the first stock purchased is considered to be the first stock sold, unless the taxpayer can specifically identify the stock being sold. Securities left in the custody of a broker are adequately identified when the specific securities to be sold are indicated to the broker, and a written confirmation of the identification is received within a reasonable time. This identification process can also apply to stock issued without certificates. Stock acquired at different times (and usually at different prices) can be treated as different lots; the seller can identify the specific lot being sold.
Broker Reporting
Brokers report stock sales on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. For corporate stock purchased in or after 2011, brokers must report not only the sales proceeds but the dates of acquisition and sale, the type of gain or loss, and the cost or other basis.
Brokers must provide this information to their customers by February 15 of the succeeding year. Taxpayers should check the basis reported by the broker and should contact their broker immediately if they feel that the information is incorrect. The broker can issue a corrected Form 1099-B. If the broker reports an incorrect basis, and the taxpayer is not able to get it corrected, the taxpayer may have to go through the expense of substantiating the basis to the IRS.
Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.
Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.
SHOP
The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.
The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.
SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.
Code Sec. 36B tax credit
Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.
When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.
The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.
Employer mandate
The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.
In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.
Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.
Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.
HealthCare.gov
As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.
Enrollment
The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).
Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.
If you have any questions about these developments or the Affordable Care Act in general, please contact our office.
A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent's highest marginal tax rate. This is referred to as the "kiddie tax," and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.
A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent's highest marginal tax rate. This is referred to as the "kiddie tax," and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.
Does the kiddie tax apply to my situation?
The kiddie tax applies if:
- The child has investment income greater than the annual inflation-adjusted amount ($1,900 for 2013; $2,000 for 2014);
- At least one of the child's parents was alive at the end of the tax year;
- The child is required to file a tax return for the tax year;
- The child does not file a joint return for the tax year; and
- The child meets one of the following requirements relating to age and income:
- The child was under age 18 at the end of the tax year; or
- The child was age 18 at the end of the tax year and the child's earned income does not exceed one-half of the child's own support for the year; or
- The child was a full-time student who was under age 24 at the end of the tax year and the child's earned income does not exceed one half of the child's own support for the year (This does not include scholarships.)
Computing the kiddie tax
If the kiddie tax applies to a child, the child's tax is calculated as the greater of one of two items:
- The tax on all of the child's income, calculated at the rates applicable to single individuals; or
- The sum of two things:
- The tax that would be imposed on a single individual if the child's taxable income were reduced by net unearned income, plus
- The child's share of the allocable parental tax.
The allocable parent tax is the amount of the increase in the parent's tax liability that results from adding to the parent's taxable income the net unearned income of the parent's children who are subject to the kiddie tax. If a parent has more than one child with unearned income subject to the kiddie tax, then each child's share of the allocable parental tax would be assigned pro rata according to the ratio that its net unearned income bears to the aggregate net unearned income subject to the kiddie tax.
Which tax form should I use?
A parent with a child or children whose unearned income is subject to the kiddie tax must generally complete and file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, along with his or her tax return. However, if the child's interest and dividend income (including capital gain distributions) total less than $9,500 for 2013 ($10,000 for 2014), the parent may be able to elect to include that income on the parent's return rather than file a separate return for the child. In this case, the parents should complete Form 8814, Parents Election To Report Child's Interest and Dividends. However, the IRS cautions that the federal income tax owed on a child's income may be lower if the parent files a separate tax return for the child, which would enable him or her to take certain tax benefits that cannot be taken on the parents' return.
Divorced, separated, or unmarried parents
The kiddie tax is based on a parent's tax return, but what happens when parents do not file joint returns? Several special rules determine what should happen. If the parents are married, but file separate returns, then the child should use the return of the parent with the largest taxable income to figure the kiddie tax.
If the parents are married, but do not live together, and the custodial parent is considered unmarried then generally the custodial parent's return would be used. However, if the custodial parent is not considered unmarried, the child should use the return of the parent with the largest amount of taxable income.
If the child's parents are divorced or legally separated, and the custodial parent has not remarried, the child should use the custodial parent's return. If the custodial parent has remarried, the child's stepparent, rather than the noncustodial parent, is treated as the child's other parent. Similarly, if the child's parent is a widow or widower who has remarried, the new spouse is treated as the child's other parent.
If the child's parents never married each other, but lived together all year, the child should use the return of the parent with the greater taxable income. If the parents were never married and did not live together all year, the rules are the same as the rules for parents who are divorced.
Calculating the kiddie tax can become confusing as a taxpayer attempts to sort through the numerous rules governing who is subject to the tax, which income is subject to the tax, and how to report it properly. Please do not hesitate to contact our offices with any questions.
In 2014, individual taxpayers will receive some relief by way of the mandatory upward inflation-adjustments called for under the Tax Code, according to CCH, a part of Wolters Kluwer. CCH has released projected income ranges for each of the 2014 tax brackets as well as a growing number of other inflation-sensitive tax figures, such as the personal exemption and the standard deduction.
In 2014, individual taxpayers will receive some relief by way of the mandatory upward inflation-adjustments called for under the Tax Code, according to CCH, a part of Wolters Kluwer. CCH has released projected income ranges for each of the 2014 tax brackets as well as a growing number of other inflation-sensitive tax figures, such as the personal exemption and the standard deduction.
When there is an upward adjustment for inflation, the indexing of brackets can lower tax bills by including more of taxpayers' incomes in lower brackets-in the existing 15-percent rather than the existing 25-percent bracket, for example. The formula used in indexing showed relatively low inflation throughout 2013. Nevertheless, many 2014 figures therefore have increased.
In addition, tax planners will have more certainty moving into 2014. By enacting the American Taxpayer Relief Act of 2012 (ATRA) at the beginning of 2013, Congress permanently extended several of the formerly temporary provisions whose fate often hinged on end-of-the-year legislation. This ensures that in 2014 taxpayers will know for certain that the Alternative Minimum Tax exemptions and other important figures will be adjusted for inflation.
Tax Rates
The current tax rates, as enacted under ATRA, are: 10, 15, 25, 33, 35, and 39.6-percent. CCH projects that inflation during 2013 will raise the 2014 rate brackets for individuals as follows:
Joint returns. For married taxpayers filing jointly and surviving spouses, the maximum taxable income for the 10% bracket is $18,150 (up from $17,850 in 2013); for the 15% tax bracket $73,800 (up from $72,500 in 2013); for the 25% tax bracket $148,850 (up from $146,400 in 2013); for the 28% tax bracket $226,850 (up from $223,050 in 2013); for the 33% tax bracket $405,100 (up from $398,350 in 2013); and for the 35% tax bracket $457,600 (up from $450,000 in 2013). Above the 35% threshold, taxpayers will fall within the top 39.6% tax bracket.
Heads of Household. For heads of household, the maximum taxable income for the 10% bracket is $12,950 (up from $12,750 in 2013); for the 15% tax bracket $49,400 (up from $48,600 in 2013); for the 25% tax bracket $127,550 (up from $125,450 in 2013); for the 28% tax bracket $206,600 (up from $203,150 in 2013); for the 33% tax bracket $405,100 (up from $398,350 in 2013); and for the 35% tax bracket $432,200 (up from $425,000 in 2013). Above the 35% threshold, taxpayers will fall within the top 39.6% tax bracket.
Single filers. For unmarried single filers who are not heads of household or surviving spouses, the maximum taxable income for the 10% bracket is $9,075 (up from $8,925 in 2013); for the 15% tax bracket $36,900 (up from $36,250 in 2013); for the 25% tax bracket $89,350 (up from $87,850 in 2013); for the 28% tax bracket $186,350 (up from $183,250 in 2013); for the 33% tax bracket $405,100 (up from $398,350 in 2013); and for the 35% tax bracket $406,750 (up from $400,000 in 2013). Above the 35% threshold, taxpayers will fall within the top 39.6% tax bracket.
Married filing separately. For married taxpayers filing separately, the maximum taxable income for the 10% bracket is $9,075 (up from $8,925 in 2013); for the 15% tax bracket $36,900 (up from $36,250 in 2013); for the 25% tax bracket $74,425 (up from $73,200 in 2013); for the 28% tax bracket $113,425 (up from $111,525 in 2013); for the 33% tax bracket $202,550 (up from $199,175 in 2013); and for the 35% tax bracket $228,800 (up from $225,000 in 2013). Above the 35% threshold, taxpayers will fall within the top 39.6% tax bracket.
Estates and trusts. For estates and trusts, the maximum taxable income for the 15% tax bracket is $2,500 (up from $2,450 in 2013); for the 25% tax bracket $5,800 (up from $5,700 in 2013); for the 28% tax bracket $8,900 (up from $8,750 in 2013); and for the 33% tax bracket $12,150 (up from $11,950 in 2013). Above the 33% threshold, taxpayers will fall within the top 39.6% tax bracket. There is no 35% tax bracket for estates and trusts.
Standard deduction
The 2014 standard deduction will be $6,200 for single taxpayers; $12,400 for married joint filers; $9,100 for heads of household; and $6,200 for married separate filers.
2014 personal exemption
The 2014 personal exemption is projected to increase by $50, to $3,950, up from $3,900 in 2013. The phase out of the personal exemption for higher income taxpayers will begin after taxpayers pass the same income thresholds set forth for the limitation on itemized deductions.
Limitation on Itemized Deductions
For higher income taxpayers who itemize their deductions, there is a limitation on the amount of itemized deductions that can claim. This limitation was not in effect for several years, but was reinstated by ATRA for tax years beginning on or after January 1, 2013. The limitation will be imposed at income above the following levels:
For married couples filing joint returns or surviving spouses, the income threshold will be $305,050, up from $300,000 in 2013. For heads of household, the threshold will be $279,650 in 2014, up from $275,000 in 2013. For single taxpayers, the threshold will be $254,200, up from $250,000 in 2013. For married taxpayers filing separate returns, the 2014 threshold will be $152,525, up from $150,000 in 2013.
AMT Exemptions
ATRA provided for the annual inflation adjustment of the exemption from AMT income. Previously, this inflation adjustment had to be enacted by Congress each year. CCH projects that, for 2014, the AMT exemption for married joint filers and surviving spouses will be $82,100 (up from $80,800 in 2013). For heads of household and unmarried single filers, the exemption will be $52,800 (up from $51,900 in 2013).
If you have any questions about these or other inflation adjustments, please contact our office.
The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate"). One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.
The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate"). One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.
Employer shared responsibility payments
Very broadly, the Affordable Care Act imposes a shared responsibility payment (also known as a penalty) on an applicable large employer that either:
- Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in MEC (Minimum Essential Coverage) under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(a) liability), or
- Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(b) liability).
The amount of the employer shared responsibility penalty varies depending on whether the employer is liable under Code Sec. 4980H(a) or Code Sec. 4980H(b). The calculations of the payment are very complex but two examples help to shed some light on how they are intended to work. Example 1 is based on Code Sec. 4980H(a) liability and Example 2 is based on Code Sec. 4980H(b) liability.
Example 1. Employer A fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee over a 30-employee threshold, the employer would owe $2,000, for a total penalty of $140,000. The Code Sec. 4980H(a) penalty is assessed on a monthly basis.
Example 2. Employer B offers minimum essential coverage and has 100 full-time employees, 20 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee receiving a tax credit, the employer would owe $3,000 for a total penalty of $60,000. The maximum penalty for Employer B would be capped at the amount of the penalty that would have been assessed for a failure to provide coverage ($140,000 above in Example 1). Since the calculated penalty of $60,000 is less than the maximum amount, Employer B would pay the calculated penalty of $60,000. The Code Sec. 4980H(b) penalty is assessed on a monthly basis.
These examples are merely provided to illustrate how the employer shared responsibility payment is intended to work. Every employer's situation will be different depending on the number of employees, the type of insurance offered and many other factors. Please contact our office for more details.
IRS guidance
Since enactment of the Affordable Care Act, the IRS and other federal agencies have issued guidance on the employer shared responsibility provision. The IRS has defined what is an applicable large employer (generally defined as businesses with 50 or more employees), who is a full-time employee with certain exceptions for seasonal workers, and much more.
The IRS has not, however, issued guidance on reporting requirements by employers and insurers. The Affordable Care Act generally requires employers, insurers and other entities that offer minimum essential coverage to file annual information returns reporting information about the coverage. As originally enacted, this information reporting was scheduled to take effect in 2014, the same year that the employer shared responsibility provisions were scheduled to take effect.
Delay
In early July, the Treasury Department announced that information reporting by employers, insurers and other entities offering minimum essential coverage will not start in 2014 but will be delayed until 2015. The IRS followed-up with transitional guidance. Information reporting by employers, insurers and other entities offering minimum essential coverage is waived for 2014. However, the IRS encouraged employers, insurers and others to voluntarily report this information. The IRS reported it is working on guidance and expects to issue regulations before year-end.
Because information reporting has been delayed, the Affordable Care Act's employer shared responsibility provisions are waived for 2014. The IRS explained that the transitional relief is expected to make it impractical to determine which employers would owe shared responsibility payments for 2014. As a result, no employer shared responsibility payments will be assessed for 2014.
Individual mandate
The January 1, 2014 scheduled start date of the Affordable Care Act's individual shared responsibility provisions is not delayed. Unless exempt, individuals must carry minimum essential health coverage after 2013 or pay a shared responsibility payment (also called a penalty). The Affordable Care Act exempts many individuals, such as most individuals covered by employer-provided health insurance, individuals enrolled in Medicare and Medicaid, and many others.
After 2013, individuals may be eligible for a new tax credit (the Code Sec. 36B credit) to help offset the cost of obtaining health insurance. The credit is payable in advance to the insurer.
The January 1, 2014 scheduled start date of the Code Sec. 36B is also not delayed.
Small employers
Qualified small employers will be able to offer health insurance to their employees through the Small Business Health Options Program (SHOP). Enrollment for coverage through SHOP is scheduled to begin October 1, 2013 for coverage starting January 1, 2014. For 2014, SHOP is open to employers with 50 or fewer employees. Beginning in 2016, SHOP will be open to employers with up to 100 employees.
After 2013, the small employer health insurance tax credit is scheduled to increase from 35 percent to 50 percent for small business employers (and from 25 percent to 35 percent for tax-exempt employers). However, the credit is only available after 2013 to employers that obtain coverage through SHOP. This credit is targeted to very small employers with the credit gradually phasing out as the number of employees reaches 50.
If you have any questions about employer reporting or the employer shared responsibility payment-or any questions about the Affordable Care Act-please contact our office.
For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.
For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.
Before claiming any charity-related tax benefit, whether for a donation or volunteer activity, you must determine if the charity is a "qualified organization." Under the tax rules, most charitable organizations, other than churches, must apply to the IRS to become a qualified organization. If you are uncertain about an organization's status as a qualified organization, you can ask the charity. The IRS has a toll-free number (1-877-829-5500) for questions from taxpayers about charities and also maintains an online tool at www.irs.gov/charities.
Time or services
An individual may spend 10, 20, 30 or more hours a week volunteering for a charitable organization. Precisely because the individual is a volunteer, he or she receives no remuneration for his or her time or services and cannot deduct the value of his or her time or services spent on activities for the charitable organization. Unpaid volunteer work is not tax deductible.
Vehicle expenses
Vehicle expenses associated with volunteer activity should not be overlooked. For example, many individuals use their personal vehicles to transport others to medical treatment or to deliver food to shut-ins. Taxpayers can deduct as a charitable contribution qualified unreimbursed out-of-pocket expenses, such as the cost of gas and oil, directly related to the use of their vehicle in giving services to a charitable organization. However, certain expenses, such as registration fees, or the costs of tires or insurance, are not deductible. Alternatively, taxpayers can use a standard mileage rate of 14 cents per mile to calculate the amount of their contribution. Do not confuse the charitable mileage rate, which is set by statute, with business mileage rate (56.5 cents per mile for 2013), which generally changes from year to year. Parking fees and tolls are deductible whether the taxpayer uses the actual expense method or the standard mileage rate.
Uniforms
Some volunteers are required to wear a uniform, such as a jacket that identifies the wearer as a volunteer for the charitable organization, while engaged in activity for the charity. In this case, the tax rules generally allow taxpayers to deduct the cost and upkeep of uniforms that are not suitable for everyday use and that the taxpayer must wear while performing donated services for a charitable organization.
Hosting a foreign student
Qualifying expenses for a foreign student who lives in the taxpayer's home as part of a program of the organization to provide educational opportunities for the student may be deductible. The student must not be a relative, such as a child or stepchild, or dependent of the taxpayer and also must be a full-time student in secondary school or any lower grade at a school in the U.S. Among the expenses that may be deductible are the costs of food and certain transportation spent on behalf of the student. The cost of lodging is not deductible. If you are planning to host a foreign-exchange student, please contact our office and we can explore the possible tax benefits.
Travel
Volunteers may be asked to travel on behalf of the charitable organization, for example, to attend a convention or meeting. Generally, qualified unreimbursed expenses may be deductible subject to complicated rules. Very broadly speaking, there must not be a significant element of personal pleasure, recreation, or vacation in the travel. Special rules apply if the charitable organization pays a daily travel allowance to the volunteer. There are also special rules for attendance at a church meeting or convention and the capacity in which the volunteer attends the church meeting or convention. If you plan to travel as part of your volunteer activity for a charitable organization, please contact our office and we can review your plans in greater detail.
If you have any questions, please contact our office.
The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.
The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.
The health law provisions interact. Individuals are supposed to carry health insurance or pay a tax. Employers are supposed to offer coverage or pay a tax. The exchanges will provide information about the availability of different health care plans and will certify individuals eligible for the premium assistance tax credit. Individuals who cannot obtain affordable coverage may purchase insurance through an exchange and may be entitled to a premium assistance tax credit.
Exchanges
The DOL, in a technical release, provided temporary guidance to employers about their obligation to notify their employees of the availability of health insurance through an exchange and of the potential to qualify for the premium assistance tax credit if they purchase insurance through an exchange. Exchanges will begin operating January 1, 2014 and will provide open enrollment for their coverage beginning October 1, 2013. DOL provided model notices for employers to send out beginning October 1, 2013. Notices must be issued to all employees, whether or not the employer offers insurance and whether or not the employee enrolls in the employer's insurance.
Employer mandate
As part of the regulatory process, the IRS recently held a hearing on proposed regulations regarding the employer mandate, which imposes a penalty on employers who fail to provide adequate health insurance coverage in certain circumstances. The employer mandate takes effect January 1, 2014. Twenty different groups testified on relevant issues, including: the definition of a large employer subject to the penalty, the definition of a full-time employee who must be offered coverage, and the determination whether the coverage is affordable.
Minimum value
The IRS issued proposed regulations to clarify the minimum value requirement for employer-provided health insurance. The regulations provide additional guidance on how to determine whether an individual is eligible for the premium assistance tax credit. Taxpayers will not be eligible for the credit if they are eligible for other "minimum essential (health insurance) coverage" (MEC). MEC includes employer-sponsored coverage that is affordable and that provides minimum value. Employer coverage fails to provide minimum value if the employer pays less than 60 percent of the cost of plan benefits. Taxpayers may rely on the proposed regulations for years ending before January 1, 2015.
Medical loss ratio (MLR)
The IRS issued proposed regulations on MLRs. Insurance companies must provide premium rebates to their customers if they fail to spend at least 80 percent (85 percent for large companies) of their premiums directly on health care, as opposed to executive salaries and other expenses. The provision took effect in 2012; and the first round of MLR rebates was distributed in 2012. The IRS issued several notices to implement the program; the proposed regulation would apply to tax years beginning after December 31, 2013.
Annual limits on benefits
PPACA generally prohibits group health plans and health insurance issuers that offer group or individual health insurance from imposing annual or lifetime limits on the value of essential health benefits. Although some limits are allowed for plan years beginning before January 1, 2014, HHS regulations provide that HHS may waive the limits if they would cause a significant decrease in benefits or significant increase in premiums. IRS, DOL, and HHS issued frequently asked questions (FAQs) to clarify that plan or issuer receiving a waiver may not extend the waiver to a different plan or policy year.
Summary of benefits and coverage
PPACA generally requires insurers, employers and other health care plan providers to give a Summary of Benefits and Coverage (SBC) to participants and other affected individuals. In recent FAQs, the three government agencies advised that an updated SBC template and a sample SBC are available on the DOL's website. These documents can be used for coverage beginning in 2014. The agencies also extended certain enforcement relief. The agencies issued final regulations in 2012, and indicated that providers can continue to use coverage examples in current guidance, without adding new examples to their SBC.
Employer reporting
The Treasury Inspector General for Tax Administration (TIGTA) issued a recent report on some of the new information reporting requirements that PPACA has imposed on employers. For example, health insurance providers must report information for each individual who receives coverage. Large employers must report details about the coverage offered to employees and their dependents, including the premiums and the employer's share of costs. Employers must also report the cost of coverage to employees on their Forms W-2. The IRS will use these reports to administer PPACA's requirements.
PPACA is a complicated law. Many of its most important provisions take effect in 2014. The IRS and other responsible federal agencies continue to issue guidance and to take comments on the administration of the law.
If you have any questions about PPACA and what strategies you or your business might adopt, please contact our office.
On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (a.k.a, the "Internet Sales Tax Bill" by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales. The bill, if passed in the House and signed by the President, would enable states to collect from certain online sellers sales and use tax on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a seller to collect the state's tax unless the seller has a physical presence within that state.
On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (a.k.a, the "Internet Sales Tax Bill" by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales. The bill, if passed in the House and signed by the President, would enable states to collect from certain online sellers sales and use tax on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a seller to collect the state's tax unless the seller has a physical presence within that state.
Small seller exemption
The Marketplace Fairness Act includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act.
Proponents of the bill say that the main issue is fairness. Brick-and-mortar retailers have long argued that the physical presence restriction provides Internet sellers with an unfair advantage. By not collecting sales tax, an online retailer seller can, in effect, sell an item at a lower price than a store. Retailers who operate stores have increasingly complained of "showrooming" by customers who come to a store to browse and then order the same merchandise online where they will not be charged for sales tax.
On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 jurisdictions. Conservative groups also contend that the Marketplace Fairness Act allows overreaching by state governments.
Authority to require tax collection
The Marketplace Fairness Act would allow a state to require all online sellers that do not qualify for the small seller exemption to collect tax on all taxable sales sources to that state. Streamlined sales tax member states would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.
Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to exercise the authority and implements the Marketplace Fairness Act's mandatory simplification requirements.
The Marketplace Fairness Act is currently sitting in the House of Representatives. For information on any recent developments, please contact our offices.
Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.
Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.
Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.
Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.
Capital gain on vacation properties. Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There's no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.
Vacation home rentals. Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.
- Income from rentals totaling not more than 14 days per year is nontaxable.
- Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
- Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitled them to a greater number of deductions.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.
Small employers
Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.
The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.
To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.
Other requirements
Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.
In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.
Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.
If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.
2009 is quickly coming to a close but there is still time to possibly maximize your federal tax savings for the year. Many year-end tax planning techniques can help you save money. Because of the recession, some of the year-end strategies take on added urgency for individuals affected by a job loss or a reduction in income.
2009 is quickly coming to a close but there is still time to possibly maximize your federal tax savings for the year. Many year-end tax planning techniques can help you save money. Because of the recession, some of the year-end strategies take on added urgency for individuals affected by a job loss or a reduction in income.
Bunching itemized deductions.If quitting smoking is one of your New Year's resolutions, you might want to stop in December and possibly deduct the cost of participating in a smoking cessation program. Many medical expenses are deductible. However, medical expenses may only be deducted if they exceed 7.5 percent of your adjusted gross income. Our office can review your 2009 medical expenses and if you are close to the threshold for 2009, you may want to accelerate some elective medical expenses into 2009 to jump over the 7.5 percent floor.
Other expenses may only be deducted if they exceed two percent of your adjusted gross income and you itemize your deductions. These are known as miscellaneous itemized deductions and may also be bunched. They include certain unreimbursed employee expenses, tax preparation fees, certain job search expenses, and more.
Individuals who lost a job in 2009 and whose incomes have fallen need to carefully time their deductions. In some cases, it may be more valuable to defer bunching itemized deductions into 2010 rather than accelerating them into 2009. Our office can help you time your deductions for the maximum benefit.
Above-the-line deductions. Above-the-line deductions help minimize your tax bill because they reduce your adjusted gross income. Generally, above-the-line deductions are only available to taxpayers who itemize their deductions.There are also important income limitations.
One of the most valuable deductions for many individuals is the deduction for state and local real property taxes. You may be able to pre-pay state and local taxes for 2010 before the end of 2009 and take a deduction for 2009. Additionally, for 2009, individuals who do not itemize their deductions get a partial state and local property tax deduction. A non-itemizer single individual can deduct up to $500 in state and local property taxes paid in 2009. Married couples filing joint returns who do not itemize their deductions can deduct up to $1,000.
Another valuable deduction will expire at the end of 2009: the deduction for state and local sales tax when you purchase a new vehicle. The special deduction is available whether you take the standard deduction or itemize deductions on your return. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 return. At year-end, new car and truck prices are generally high across the county, especially after dealers emptied their inventories under the cash-for-clunkers program. If you qualify, the state and local sales tax deduction could help bring down the cost of a new vehicle. Generally, the new vehicle must be valued at $49,500 or less. There are important income limitations so contact our office before you make your purchase.
Charitable contributions. Year-end charitable giving generally has always been a smart way to reduce current year taxes but tough substantiation requirements cannot be overlooked. Traditionally, charitable contributions (and other itemized deductions) phased out for higher-income individuals. However, that limitation is reduced by two-thirds for 2009 and does not apply at all in 2010, which makes charitable contributions more valuable not only to charities but also donors. Depending on your income, you may want to delay a charitable deduction into 2010 to take full advantage of the phase out of the limitation.
Retirement savings. The economic slowdown has caused many individuals to tap their retirement savings to help pay for everyday expenses. To discourage the use of pension funds and IRAs for purposes other than normal retirement, the Tax Code imposes an additional 10 percent tax on certain early distributions of these funds. Early distributions from a qualified retirement plan are also subject to federal income tax. However, if you are over age 59 ½ and your taxable income has fallen because of a job loss, the income tax you pay on the distribution could be offset by other deductions.
Distributions that you roll over to another qualified retirement plan or IRA are not subject to the 10 percent additional tax. Generally, you must complete the rollover by the 60th day following the day on which you receive the distribution.
Please contact our office if you have taken an early distribution from a qualified retirement plan or IRA. Besides the 60-day rollover window, there are special rules for military reservists, disaster victims and others.
FSAs. The current generous rules for using funds in a health flexible spending arrangement (FSA) may soon be a thing of the past. Congress is considering, as part of health care reform, placing tougher rules on health FSAs. For example, you could only use health FSA dollars for prescription medications with some exceptions and your maximum annual contribution to a health FSA would be limited to $2,500. These changes could be enacted before year-end but would not affect your FSA spending for 2009.
Depending on the terms of your health FSA, you may have to use your remaining health FSA dollars on or before December 31, 2009. This is known as the "use it or lose it" rule. Some plans allow for an extended period into 2010; for example, until March 15, 2010. If you have unused health FSA dollars, you should consider accelerating qualified purchases before year-end.
Congress. Finally, there is the added uncertainty of what Congress will do about many popular but soon-to-expire tax breaks. In addition to the ones we have mentioned, other incentives that will expire at year-end include the state and local sales tax deduction, the teachers' classroom expense deduction, the higher education tuition deduction, tax-free distributions from IRAs for charitable purposes for individuals age 70 ½ and older, and national disaster relief. Many of these incentives are expected to be renewed for 2010 before year-end or in early 2010 with Congress making them retroactive to January 1, 2010. Our office will keep you posted of developments.
