As promised, I am updating my earlier blog outlining many tax law questions left unanswered as a result of the recent Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act (DOMA). The IRS has recently announced their ruling addressing the tax law implications arising from the Court’s decision on DOMA.
The IRS took a surprisingly bold stand in their recognition of a same-sex marriage in the eyes of federal tax law. While it was clear early on that a same-sex couple married and residing in a state or jurisdiction recognizing same-sex marriages would be considered an married couple, there were questions as to whether other same-sex marriages with different situations would be recognized similarly. The IRS was courageous and decided to recognize all same-sex marriages regardless of circumstance as valid marriages in the eyes of the tax code.
What does this mean? As I pointed out in my earlier blog, questions remained for same-sex couples who were married in a state that obviously recognizes same-sex marriage but now reside in a state that does not recognize those marriages. Further, many same-sex couples have made the decision to marry and traveled from their state of residence to a state or jurisdiction that recognizes same-sex marriage to celebrate a legal same-sex marriage. These couples were also unsure of where they would stand in the eyes of the tax law.
On August 29, 2013, the IRS answered their questions…all of the same-sex marriages discussed above are recognized as a legal marriage for federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax or child tax credit. According IR-2013-72:
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships (RDP’s), civil unions or similar formal relationships recognized under state law. Couples who have an RDP or similar must continue to file as they have in the past which can be complicated by those residing in states that have community property laws such as the State of Nevada.
Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.
Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.
Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.
Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.
As our country moves forward in terms of equality in marriage, so too does the tax law. However, tax law has always been equal in one regard…it is, and continues to be, complicated. Please remember that we at Barnard Vogler & Co., CPA’s are always ready to help you trudge through the process of compliance and keep you on the right track.
Healthcare notices must be sent by Oct.1
By Oct. 1, 2013, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s healthcare exchanges, which will open Jan. 1, 2014.
The requirement applies to any business regulated under the Fair Labor Standards Act. Going forward, letters must be distributed to any new hires within 14 days of their starting date.
The notice requirement applies to all employers, whether or not they offer health coverage. In addition, employers must send the notice to all full-time and part-time employees, whether or not they are eligible for benefits.
Earlier this summer, the employer mandate, which states that every business with at least 50 or more full-time employees must offer workers acceptable coverage or face a $2,000 penalty per worker, per year, was pushed back until 2015.
But the Oct. 1, 2013, employee-notification deadline remains in effect.
Sample notices are available on the Department of Labor website at: www.dol.gov/ebsa/pdf/FLSAwithplans.pdf (for employers that offer a health plan to some or all employees) www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf (for employers that do not offer a health plan)
©2013 CPAmerica International
In a recent private letter ruling, the IRS has given an unnamed S corporation a second chance at computing its depreciation deduction.
According to the facts in the ruling (LTR201337013), sometime in the past, the S corporation acquired and placed in service depreciable assets, some qualifying for 100 percent bonus depreciation and some qualifying for 50 percent bonus depreciation.
Thinking that the bonusdepreciation would only produce losses that the corporation’s shareholders would be unable to use on their personal returns, the S corporation made a valid, timely election to forgo the bonus depreciation.
After filing the relevant tax returns, the S corporation became aware that a major shareholder had sufficient income to have benefited from the bonus depreciation deductions.
However, once the election is made to forgo bonus depreciation, a business can revoke the election only with the consent of the IRS. That consent may be obtained only by filing a request for a private ruling.
The recent private ruling contains the IRS response to the S corporation’s request. The IRS ruled that the S corporation could revoke its election to forgo bonus depreciation by filing the appropriate amended returns within 60 days after the date of the ruling.
©2013 CPAmerica International
One common piece of year-end tax planning advice is to check your withholding to be sure you will have paid enough tax to avoid a penalty for underpayment of estimated taxes.
If it looks like you will be short, the solution is to increase the withholdings being taken out of your paycheck between now and the end of 2013.
Many higher-income people are aware that the new 3.8 percent net investment income tax may cause them to owe more taxes in 2013. Far less attention has been paid to the new 0.9 percent Medicare hospital insurance tax that applies to earned income above $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
In theory, if you are subject to this tax, it is being withheld by your employer. However, if not enough is being withheld or you are self-employed, you must pay the difference with your income taxes. If you are not careful, an underpayment penalty could result.
For example, suppose your total earned income for 2013 will be enough to subject you to the 0.9 percent hospital insurance tax. However, if you worked for more than one employer during the year, perhaps no single employer paid you more than $200,000, the threshold for withholding.
In that case, you would be subject to the tax, but none would have been withheld. The same issue results if you have self-employment earnings in excess of the taxable threshold.
If you are trying to pay in more tax to avoid an underpayment penalty, the general recommendation is to ask your employer to increase your withholding.
A less conventional alternative is to take an eligible rollover distribution from a qualified retirement plan before the end of 2013. Income tax withheld from the distribution will be applied toward the taxes owed for 2013.
You then have 60 days to roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. If you complete the full rollover, no part of the distribution will be includible in your 2013 income, but the withheld tax will be applied pro rata over the full 2013 tax year to reduce previous underpayments of estimated tax.
© 2013 CPAmerica International
More people are heading to their retirement plans at work for a bail out in today’s economic times. An individual will have financial options if he or she should be so lucky as to a have a retirement plan at work.
An employee may request a hardship distribution or a loan from their retirement plan at work, if available. There are strict rules that must be followed or unwanted tax consequences may occur due to non-compliance.
A retirement plan may, but is not required to, provide hardship distributions. The plan, if it provides for hardship distributions, must specify the criteria used to determine hardship. Hardship withdrawals are subject to income tax and the 10% early withdrawal penalty if the employee is under 59 ½ years of age.
Borrowing from your retirement plan is another option available if offered. The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less. A plan could include an exception to the 50% of the vested account balance limit if the balance is less than $10,000. A participant may borrow up to $10,000 if the exception is included in the plan.
Federal law mandates that participant loans must be repaid within five years and payments must be made at least quarterly. An exception to the 5-year rule is if the loan is used to purchase a primary residence. The rules for repayment for a primary home loan can vary by the individual plan.
Any outstanding participant loan balance in the event of termination of employment is treated as a fully taxable distribution at the time of separation from employment. The “distribution” may also be subject to the 10% early withdrawal penalty if the employee is under the age of 59 ½.
Depending on the personal situation, one option may be better than the other from a tax standpoint.
No repayment is required on a hardship distribution. Taxes must be paid on the distribution and may incur the 10% early withdrawal penalty as well.
Participant loans must be repaid but are not taxed as income unless employment terminates.
The October 15th tax extension deadline is quickly approaching, which means it’s time to finish up that tax return you have been avoiding all summer. There are many benefits to filing an extension if your tax return is not quite ready in April, but there are no additional extensions available for the upcoming October 15th deadline. When you filed your extension in April, it did not extend the amount of time to pay, it just gave you an extra 6 months to finalize and file your tax return. You still had to pay the amount of tax you owed or the best estimate of it by April 15th. This might have people questioning why they need to get their returns in by October 15th if they already paid in April. The reason is to avoid possible penalties.
Depending on whether you owe money or are due a refund from the IRS will determine the consequences of not filing on time.
For individuals that will receive a refund, you will not be assessed any penalties. This is because the penalties are based on a percentage of the amount owed to the government. If you owe $0, any percentage of zero is still zero. However, the sooner you file, the sooner you’ll get your tax refund so it’s not a bad idea to get your tax return filed as soon as possible.
If you are one of the unlucky individuals that do owe, you could be subject to penalties. The IRS imposes two types of penalties; the failure-to-file penalty and the failure-to-pay penalty. The failure-to-file penalty is 5% per month on any unpaid taxes and the failure-to-pay penalty is .05% per month on any unpaid taxes. If you filed an extension in April the failure-to-file penalty is deferred until October 15th. However, if you do not file by October 15th the failure-to-file penalty begins that day and will be assessed until you file your return. If you did not file an extension in April, the failure-to-file penalty started April 15th and will continue until your return is filed and the amount you owe is paid. In general, the maximum penalty is 25% of the amount you owe. You will also have to pay interest on the amount of tax unpaid by April 15th.
In order to avoid these penalties be sure to file your tax return by April 15th or if you filed an extension, by October 15th, and pay the total amount you owe when you file your extension in April.
The IRS concluded that amounts paid by a U.S. corporation to its foreign parent were not deductible as interest since the U.S. corporation, in effect, borrowed from its parent to make those payments.
As explained in a Chief Counsel Advice (CCA 201334037), the U.S. corporation maintained a general account into which it deposited amounts derived from all sources, including advances from third-party banks under lines of credit, active business income and advances from its foreign parent. Funds were withdrawn from this account to pay day-to-day operating costs.
Periodically, funds were withdrawn from this account to make payments to the foreign parent. These payments were characterized as payments of interest on advances from the parent. Funds sufficient to cover these payments were obtained shortly before or shortly after the disbursement, either through additional loans from the parent or pursuant to draw-downs on one or more lines of credit with the parent.
The related-party rules of Internal Revenue Code Section 267 authorize the IRS to provide regulations that limit the deductibility of payments to foreign persons. Those regulations provide that payments to a foreign related party are not deductible until that amount is treated as paid to the foreign person.
The IRS found that the U.S. corporation’s payments were not deductible as interest because it borrowed for the purpose of paying the interest. The IRS noted that, when funds are (in form) loaned by the foreign parent to the U.S. corporation and “paid back” via return wire transfers, the resulting “U-turn” transaction is one that changes neither the economic position of the lender nor the borrower.
©2013 CPAmerica International
The Tax Court ruled in a recent case that a doctor with a minority ownership interest in a medical practice organized as an S corporation was not deprived of the economic benefit of his share of ownership – although he was excluded by the majority owner from participating in the corporation’s activities.
Accordingly, he was obligated to report his share of the corporation’s undistributed profits and interest income (Ramesh T. Kumar v. Commissioner, T.C. Memo 2013-184, Aug. 13, 2013).
Dr. Kumar owned 40 percent of the S corporation. Another doctor, who also served as president and chairman, owned the remaining 60 percent.
When a dispute arose among the two doctors, Dr. Kumar’s role in the practice was replaced by another doctor, who was an employee of the corporation. Dr. Kumar received no compensation and no distributions, and he did not take part in the operations or management of the corporation.
The corporation issued a Schedule K-1 to Dr. Kumar showing his share of the income as exceeding $200,000. The court concluded that, since Dr. Kumar had never agreed to relinquish his ownership in the corporation, he was responsible for reporting his share of the income.
©2013 CPAmerica International
There have been new developments in the aftermath of the Supreme Court decision that struck down Section 3 of the Defense of Marriage Act (U.S. v. Windsor, et. al., 111 AFTR 2d 2013-2385, June 26, 2013), which required same-sex spouses to be treated as unmarried for purposes of federal law.
Now the IRS has issued a ruling (Rev. Rul. 2013-17) concluding that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether or not the couple lives in a jurisdiction where same-sex marriage is recognized.
The ruling clarifies that same-sex couples will be treated as married for all federal tax purposes, including income, gift and estate taxes and more. The ruling applies to all federal tax provisions in which marriage is a factor. More than 200 Internal Revenue Code sections and regulations relate to laws that refer to marriage, spouse, husband or wife. Some of the provisions affected include:
➤ Filing status
➤ Claims of personal and dependency exemptions
➤ Standard deductions
➤ Employee benefits
➤ IRA contributions
➤ Earned income tax credit claims
➤ Child tax credit claims
Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships, even if recognized under state law.
The ruling concludes that legally married same-sex couples:
➤ Generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status. Single filing status is not appropriate.
➤ May file amended returns for prior years, if the tax year is still open under the statute of limitations.
Note that, in some cases, filing a joint return may result in a higher tax bill than the combined tax on two unmarried returns. The ruling concludes that same-sex couples who were married in prior years may, but are not required to, file amended returns.
It is advisable to make the tax calculation both ways before deciding to amend a prior return.
Generally, the statute of limitations expires three years after the later of the original due date of the return or two years after the date the tax was paid. For most people, 2010, 2011 and 2012 are still open under the statute of limitations.
Some taxpayers may have special circumstances – such as signing an agreement with the IRS to keep the statute of limitations open – that permit them to file refund claims for tax years 2009 and earlier.
According to the ruling, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pretax and excludable from income.
The ruling applies to filings (original or amended) on or after Sept. 16. This provides a limited opportunity for same-sex married couples, who extended their 2012 tax returns and have not yet filed, to file as unmarried taxpayers until Sept. 16.
©2013 CPAmerica International
With the housing market beginning to show signs of coming off life support, you may begin to think about moving. The good news is that, even if you make a profit from the sale of your home, you may not have to report it as income.
Here are 10 tax tips to consider when planning a sale of your principal residence:
©2013 CPAmerica International