The middle of the month has just passed and with it my bi-monthly cursing of getting taxed, specifically for social security. This is a tax that I’m supposed to be paid back sometime starting thirty years from now in my sixties, but I highly doubt that. According to a study by the Urban Institute, a person who turned 65 in 1980 received $2.12 for every dollar paid in social security taxes, while somebody who turns 65 in 2030 (born in 1965) will receive $.84. I’m sure for somebody like myself, who will turn 65 in 2046, that figure will be closer to 50 cents if anything at all!
One reason I’m pessimistic about receiving any benefits is that the social security system is currently way too broad, as almost 20% of the population is receiving some form of the benefits. In addition, according to ssa.gov, the social security trust funds started to take in less money through payroll tax revenues than it paid out in benefits starting in 2010. And in 2033 the trust fund is anticipated to be down to 0. This social security trust fund is the accumulation of all the social security taxes ever collected less benefits that have been paid. This money is invested in the form of government bonds and the government has used this money to fund other programs. So there really isn’t a trust fund, as we all know that the government has been running deficits for years and will have to come up with this trust fund money to pay benefits somehow. Or to save money social security benefits will be cut (penalizing some hard workers who put money into the system and saved for retirement responsibly), the qualifying age will be increased, or social security taxes will have to be raised by either increasing the tax rate or the ceiling on wages that are subject to social security taxes.
At least I can take solace that I don’t live in Germany where social security payments are 20%, in Italy where they are in excess of 25%, and definitely not in France where they are closer to 40%!
The Fast Track Settlement program is now available nationwide.
Fast Track Settlement (FTS) is designed to help small businesses and self-employed individuals who are under examination by the IRS’s Small Business/Self Employed (SB/SE) Division to more quickly settle their differences with the IRS. The IRS announced the program’s nationwide availability in Information Release 2013-88.
Originally launched as a pilot program for small businesses and self-employed individuals in September 2006, FTS was expanded in January 2011 to specified cities and areas: Chicago, Ill.; Houston, Texas; St. Paul, Minn.; Philadelphia, Pa.; central New Jersey; and San Diego, Laguna Niguel and Riverside, Calif.
While not all disputes with the IRS are eligible for consideration, the FTS program is designed to expedite case resolution.
It uses alternative dispute resolution techniques to save time and avoid a formal administrative appeal or lengthy litigation. As a result, audit issues can usually be resolved within 60 days rather than months or years.
The IRS emphasizes that taxpayers choosing this option lose none of their rights because they still have the right to appeal if the FTS process is unsuccessful.
Either the taxpayer or the IRS examination representative may initiate Fast Track for eligible cases. The goal is to complete cases within 60 days of acceptance of the application.
©2013 CPAmerica International
The Tax Court determined in a recent case that, because an individual’s IRA owned the shares of his limited liability company, the payment of compensation to the individual for his services to the company was a prohibited transaction.
The prohibited transaction resulted in disqualification of the IRA and a deemed distribution of its assets.
In 2005, Terry Ellis organized a limited liability company (LLC), signing the operating agreement on behalf of the Terry Ellis IRA, an entity that did not yet exist. The IRA owned 98 percent of the membership units.
The LLC was formed to engage in the business of used car sales, with Ellis as the general manager. A month later, Ellis created the Terry Ellis IRA. He then transferred cash from his 401(k) account with a former employer to the IRA. The IRA transferred the funds to the LLC and received its membership units. The LLC elected to be treated as an association taxable as a corporation.
During 2005, the LLC paid Ellis $9,754 as compensation for his role as general manager and deducted that amount on its corporation tax return. Ellis’s 2005 return reported the $9,754 as taxable compensation. It also reported the distribution from the 401(k) account but did not report any portion of the distribution as taxable.
The IRS concluded that Ellis engaged in a prohibited transaction with his IRA either:
The Tax Court concluded that the formation of the LLC did not involve any prohibited transaction. However, the compensation that the LLC paid to Ellis was a prohibited transaction.
The court agreed with Ellis that, at the time of its formation, the LLC was not a disqualified person with respect to the IRA because, at that point in time, the LLC had no owners or ownership interests. However, the court said that, by paying the compensation, Ellis engaged in a prohibited transaction.
Ellis argued that the payment of compensation was not a prohibited transaction because the amounts paid to him by the LLC did not consist of plan income or assets of his IRA. He saw the compensation as merely the income or assets of a company in which his IRA had invested.
Given the facts in this case, the court concluded that the LLC and the IRA were substantially the same entity.
As a result of the prohibited transaction, the full amount that Ellis transferred to the IRA from his old 401(k) account was deemed distributed to him on Jan. 1, 2005. That amount was therefore includible in his gross income.
The court also found that Ellis was subject to the 10 percent additional tax that applies to early distributions from qualified retirement accounts. Finally, the court found that Ellis was liable for the 20 percent accuracy-related penalty (Terry L. Ellis v. Commissioner, TC Memo 2013-245, Oct. 29, 2013).
©2013 CPAmerica International
The IRS has modified the “use-it-or-lose-it” rule for health flexible spending arrangements.
At the plan sponsor’s option, employees participating in a health flexible spending arrangement (health FSA) may be allowed to carry over to the next plan year up to $500 of unused amounts remaining at year-end, according to Notice 2013-71 and an accompanying fact sheet. Prior to this announcement, any amounts that were not used by year-end were forfeited.
Health FSAs are benefit plans established by employers to reimburse employees for healthcare expenses, such as deductibles and co-payments. These plans are usually funded by employees through salary reduction agreements, although employers may contribute as well. Qualifying contributions to, and withdrawals from, health FSAs are not subject to tax.
Unused health FSA contributions left over at the end of a plan year have historically been forfeited to the employer. A plan can, but is not required to, provide an optional grace period immediately following the end of each plan year. The grace period would extend the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year (March 15 for a calendar-year plan).
For a health FSA to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents and any other eligible beneficiaries with respect to the employee cannot exceed $2,500 per year. This maximum is effective for tax years beginning after Dec. 31, 2012.
The new notice provides that an employer, at its option, can amend its cafeteria plan document to provide for the carryover to the immediately following plan year of up to $500 of any amount in a health FSA remaining unused as of the end of the plan year. The notice also clarifies that the carryover does not count against or otherwise affect the next year’s salary reduction limit. Any unused amount in excess of $500 will be forfeited.
The notice provides that the plan sponsor can specify a lower amount as the permissible maximum carryover amount or can decide not to allow any carryover at all.
For a cafeteria plan offering a health FSA to adopt this new carryover provision, the plan must be amended on or before the last day of the plan year from which amounts may be carried over. The new provision may be effective retroactively to the first day of that plan year.
However, a plan may be amended to adopt the carryover provision for a plan year that begins in 2013 at any time on or before the last day of the plan year that begins in 2014. As a result, some plans may be able to put the carryover option into effect for 2013.
©2013 CPAmerica International
As you are cleaning house before the relatives come to visit, you may come across a number of items that you no longer need or want but could brighten someone else’s holiday season.
Many charities are looking for toys your children have outgrown or usable clothing that has gone out of style. Here are some tips for making someone else’s holidays a little brighter, while saving some tax dollars for you at the same time:
1. Only donations to qualified charitable organizations are tax deductible. Providing help directly to a family in need may fill you with the holiday spirit, but it will not secure a tax deduction for you. Maybe you can find a local church, temple, synagogue or mosque to act as a go-between.
➤ You must itemize your deductions to claim charitable contributions on your return.
2. If you receive a benefit because of your contribution, such as event tickets or a discount at a local restaurant, then you can deduct only the value of your contribution that exceeds the value of the benefit received.
3. Cash contributions, regardless of amount, must be substantiated by a bank record, like a canceled check or credit card receipt, showing the name of the charity and the amount of the gift. A written acknowledgment from the charity showing the date and amount of the gift will also suffice. Dropping a check in the kettle or asking the bell-ringer for a receipt takes some of the luster off the gift, but it’s a requirement if you want the tax deduction.
➤ The rules for a deduction of monetary donations do not change the requirement that you obtain an acknowledgment from a charity for each deductible donation – either money or property – of $250 or more. However, one statement containing all of the required information may meet both requirements.
4. If you have money taken out of your paycheck for charity, keep a pay stub, a Form W-2 or other document furnished by your employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
5. For 2013 only (unless Congress extends it again), an IRA owner who has reached the age of 70½ or older can make a direct transfer of up to $100,000 per year to an eligible charity, tax free. This means that amounts directly transferred to the charity from your IRA are counted in determining whether you have met the IRA’s required minimum distribution, but they will not be considered a taxable withdrawal. Some restrictions apply: Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
6. If you donate a noncash item, you can generally deduct the item’s fair market value – what the item would sell for in its current condition. Keep notes on how you determined the value. A picture of the item may also help if your tax return is audited.
➤ If the items you donate include used clothing and household items, there is an additional requirement that the deduction be allowed only if the item is in good used condition or better.
➤ On the other hand, if the item is worth more than $500, even if it is in less than “good” condition, you may still be able to claim the deduction if you go through the effort of obtaining an appraisal.
7. The rules for the donation of a car, truck, other motor vehicle, boat or airplane are a little different. Rather than using the fair market value of the donation, you generally are limited to deducting the gross proceeds the charity receives from its sale if the value of the item is more than $500. You must obtain a Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes, or a similar statement, from the charity and attach it to your tax return. Other rules apply if the charity doesn’t sell your donation within a specified time period.
8. If the total of all your noncash contributions is over $500, your tax return must also include a Form 8283, Noncash Charitable Contributions.
9. Special rules apply to donations of appreciated goods, like stock or jewelry, or difficult-to-value items, such as artwork. If you plan to make these kinds of donations, check with your tax adviser.
Contributions are deductible in the year made, so be sure to get those gifts in by Dec. 31. Credit card charges made before the end of the year are deductible even if you pay the credit card bill next year. Similarly, checks written and mailed by the end of the year are deductible this year even if they are cashed in 2014.
You can also take some time out of your busy schedule to volunteer at a shelter, deliver a meal to a shut-in or shovel snow for an elderly neighbor. You won’t get a tax deduction for the value of your time, but you will brighten someone’s day – maybe even your own. ■
©2013 CPAmerica International
In trust law, a Protector is a person appointed under the trust agreement to direct or restrain the trustees in relation to their administration of the trust. Historically, the concept of a Protector developed in offshore jurisdictions where settlors were concerned about appointing a trust company in a small, distant country as sole trustee of an offshore trust which is to hold a great deal of the settlor’s wealth. However, Protectors have now moved into the mainstream of more trust agreements.
Do they have fiduciary responsibilities? And what is a fiduciary? A fiduciary is an individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit. The duties of a fiduciary include loyalty and reasonable care of the assets within custody.
In Jay Adkisson‘s 2012 article “Trust Protectors — What They Are And Why Probably Every Trust Should Have One”, he states the original idea behind the Protector is to have somebody who can watch the Trustee and terminate the Trustee for any misconduct. Originally that was the only power the protector had: fire the Trustee. Then additional powers were bestowed on the Protector in trust agreements.
Adkisson cautions that if one starts giving the Protector too many powers, they become seriously at risk of being deemed a de facto “Co-Trustee”, with all the fiduciary duty baggage that carries. With Protector provisions, simpler is better. A Protector provision should ideally just have three sections:
In Adkisson’s recent article in Forbes.com, he raises the question as to whether the trust protector as a fiduciary is a bad idea.
Adkisson’s position is the Trust Protector should not have fiduciary duties, which means that the Trust Protector should be able to exercise wholly independent discretion to fire Trustees without worrying about whether the Trust Protector will be sued by somebody.
If a drafter of a trust agreement is going to make the Trust Protector a fiduciary, then those fiduciary duties need to be clearly and specifically set out — otherwise, the Trust Protector has the potential to be sued if anything goes wrong with the Trust even if the Trust Protector did not know about it, which is another way of saying that here the Trust Protector was implicitly charged with reviewing every slight thing that went on in the Trust.
The inclusion of a Protector in a trust can often avoid expensive and time-consuming court proceedings if their powers are properly and clearly stated. There is some confusion as to whether they in fact have any fiduciary responsibilities.
The word is caution. If you are agreeing to be a Trust Protector, know where you stand. Are you a fiduciary without any fiduciary protections under the trust?
The fastest growing segment of the labor force is workers over the age of 65, according to the U.S. Bureau of Labor Statistics.
If you plan on working past 65, there are some issues to be aware of that author Mark Miller points out in his Wealth Management.com article:
Social Security timing: It doesn’t make sense to take Social Security in your first year of eligibility (age 62) if you continue to plan on working for two main reasons: 1) you will only receive 75% of your primary insurance amount and 2) there are penalties incurred on Social Security benefits if you earn income. For example, if you have earned income of more than $15,480 in 2014, you will be hit with a penalty of $1 for every $2 over that amount. These withheld benefits are given back after you reach full retirement age, but it does not make much sense to take the reduced benefits early. Instead, if you continue to work and can wait until the age of 70, you will receive 132% of the primary insurance amount for the rest of your life, and that is nearly double the amount you would receive at age 62. After age 70 benefits stop accruing.
Medicare filing: The article notes that Medicare benefits are by the far the most important and the most complicated. If you already receive Social Security benefits, the sign-up for Medicare is automatic. If not, your window to sign up is the three months before turning 65 up through the three months following. Failing to do so can result in expensive premiums down the road. For example, monthly Part B premiums jump 10% for each full 12 month period that a senior could have had coverage but didn’t sign up. If you plan on working past age 70, you can delay starting Medicare without penalty if you are insured based on your active work status by an employer with more than 20 employees. However, if you are self employed, or your employer has fewer than 20 employees, you should sign up at age 65.
Required Minimum Distributions (RMDs): RMD’s are mandatory from IRA accounts and 401(k)s (unless you are working for an employer who sponsors the plan) starting the year you turn 70.5. If you are working, you do not have to take RMDs from the 401(k) of your current employer; it is only required from former workplaces if they were never rolled over. These distributions can affect what tax bracket you will fall into, so it’s important to plan accordingly.
Here is a common question, “when do I have to capitalize an expenditure and when can I deduct it as a repair or maintenance item?”
The difference between expensing and capitalizing can mean the difference between an immediate deduction at full value versus a deduction spread out over the useful life of the asset.
In September 2013, the IRS released final regulations governing when taxpayers must capitalize and when they can deduct their expenses for acquiring, maintaining, repairing, and replacing tangible property. The new “repair regs” are lengthy and complex. Every business with fixed assets must comply with these new rules for its first tax year beginning on or after January 1, 2014.
The IRS’s stated goal is to reduce controversies with taxpayers by moving away from a facts and circumstances determination whenever possible, as well as from the subjective nature of the existing standards in general. All well intentioned; however, with the low threshold safe harbor amounts not particularly favorable for the taxpayer.
Code Sec 263 requires the capitalization of amounts paid to acquire, produce, or improve intangible property. Code Sec 162 allows the deduction of all ordinary and necessary business expenses, including the costs of certain supplies, repairs, and maintenance.
In the regs, five main areas were addressed:
Materials and supplies are defined as a unit of property that has an economic useful life of 12 months or less with an acquisition or production costs of less than $200. Materials and supplies are generally deducted in the tax year first used or consumed.
The regs provide guidelines as to when amounts relating to acquisitions or improvements should be capitalized or deducted. These are tied to whether a taxpayer has an applicable financial statement generally defined as an audited financial statement.
A taxpayer with an applicable financial statement may deduct up to $5,000 of the cost of an item of property per invoice. The required written accounting procedures in effect as of the beginning of the tax year may specify a per item amount of less than $5,000. Taxpayers without an applicable financial statement may elect the de minimis safe harbor and expense up to $500 per invoice/item. Big difference. With an audited financial statement, the amount is $5,000. Without, $500.
These limits are safe harbor amounts. When accounting procedures expense items that exceed the $5,000 limit, it may still make the case with the IRS that a greater amount is reasonable under its facts and circumstances.
To take advantage of the $5,000 de minimis rule, taxpayers must have written book policies in place at the start of the tax year that specify a dollar amount (up to $5,000) that will be expensed for financial accounting purposes.
The de minimis rule is a safe harbor that is elected annually by including a statement with the taxpayer’s tax return for the year elected.
Consult with your CPA. Make sure you have a written capitalization policy in place before the end of 2013. For 2014 and beyond, make sure you are making the proper annual elections.
The Tax Court has once again ruled that regular commuting expenses are nondeductible personal expenses, no matter what the mitigating circumstances might be.
William Cor was an engineer living in Las Vegas. He worked at a remote test site in the desert. There was no direct public transportation to the job site.
Cor commuted by car and calculated that he drove approximately 160 miles round-trip, four days a week. Although he kept no records of his commuting expenses, he claimed $50 an hour, or $150 per day, for a daily commute of three hours. The amount works out to almost $1 per mile, which is about double the standard mileage allowance the IRS generally allows for travel deduction purposes – but not for commuting expenses.
Although the court agreed that Cor endured a more costly and much longer commute than average in both mileage and time, the drive to the job was still a personal commute between home and work. The expenses of the commute were not deductible, regardless of the distance traveled or the lack of housing near the job site (William Cor v. Commissioner, TC Memo 2013-240, Oct. 22, 2013).
Since the commuting expenses were personal, any reimbursement by an employer to defray those expenses would be subject to income and employment taxes, as would any increase in salary to induce employment. Cor was also liable for a 20 percent negligence penalty.
©2013 CPAmerica International
The estate tax law generally provides that an executor may elect to value farmland considering its actual use, rather than its highest and best use, if certain conditions are met.
The tax basis of inherited property is usually its fair market value at the date of death. However, when a special-use valuation is elected for estate tax purposes, the tax basis of the property is its special-use value instead of its fair market value.
The Tax Court determined in a recent case (Brett Van Alen v. Commissioner, TC Memo 2013-235, Oct. 21, 2013) that two beneficiaries of a trust that sold an easement in farmland specially valued in their father’s estate were bound by a duty of consistency to use the special-use value as their tax basis for calculating their gain on the sale.
In 1994, Joseph Van Alen died. His will created a testamentary trust for the benefit of two of his children. Property going into the trust included Van Alen’s interest in a ranch, which had a fair market value of $1.963 million at the date of his death.
The estate elected special-use valuation. It ultimately reported the special-use value at $98,735, which the IRS accepted.
In 2007, the California Rangeland Trust bought a conservation easement on the ranch, paying the testamentary trust $910,000 as its share of the proceeds. A series of returns and amended returns eventually led to a beneficiary claiming a gain of less than $25,000 from his 50 percent share of the trust’s gain.
Both the IRS and the Van Alen children agreed that the trust received $910,000 in proceeds from the sale of the easement. However, they disagreed on the amount of capital gain the siblings should report from those proceeds.
The children argued that the special-use valuation did not bind the trust. They said that the $1.963 million appraised value of the ranch interest provided clear and convincing evidence that someone – but not the children – made a mistake when reporting the special-use value at less than $100,000.
They asked the court to redetermine the special-use valuation, not to increase their father’s taxable estate, but only to recalculate the trust’s tax basis in the ranch interest.
The court noted that both the IRS and the children agreed that Van Alen’s estate met all the requirements to elect the special-use valuation. It also noted that, when special use is elected, the tax basis of the property is its special-use value. After accounting for trust-level deductions and the distributions made by the trust to its beneficiaries, that basis would result in a long-term capital gain of nearly $360,000 to each of the children.
The court said that, if it allowed the children to revise the special-use election, it would be allowing them to whipsaw, or defeat in two ways, the IRS. The estate could escape the burden of an additional estate tax because the statute of limitations had expired. Meanwhile, the trust – and the children as its sole beneficiaries – would be given additional tax basis to offset amounts realized from the conservation easement sale, as well as future sales of the ranch interest.
The court found that the duty of consistency required the children to use the reported special-use value as their tax basis. In addition, the children were liable for the negligence and substantial understatement penalties.
©2013 CPAmerica International