There are 55 tax provisions, also know as “extenders” that expired at the end of 2013. In a letter from the Internal Revenue Commissioner sent to the United States Congress, members of the tax writing committees stated that if Congress waits until 2015 to enact tax law changes affecting the tax year 2014, there may be a delay in the opening of tax filing season.
The 2014 filing season opened on January 31, 2014, instead of January 21, due to the 16-day federal government closure in October of 2013. A delay is very possible in 2015 if the decision whether to extend the expired tax provisions is not made before the end of this year.
Several tax extenders that may affect individuals in particular are:
This deduction benefited individuals who lived in states without state income tax, such as Nevada. Sales taxes are deducted in lieu of state and local income taxes on Schedule A, Itemized Deductions.
Taxpayers who are 70 ½ or older are able to exclude from income up to $100,000 per year when distributions are made directly to certain qualified charities. Seniors who can no longer itemize deductions benefit from this extender.
Qualifying individuals could deduct qualifying higher education tuition or expenses above-the-line.
The Mortgage Debt Relief Act provided the exclusion from income of up to $2 million of qualified cancellation of mortgage debt on a principal residence.
This extender provides for the 50 percent bonus depreciation on qualified property purchased and placed in service in a business.
A taxpayer may immediately expense up to $25,000 of Section 179 property, with a dollar for dollar phase-out of the maximum deductible amount for purchases in excess of $200,000 for tax years 2014 and thereafter. The proposal would increase the maximum amount and phase-out threshold to $500,000 and $2 million, respectively.
If Congress does not act on these and other tax extender issues before the end of 2014, and instead reinstates them retroactively sometime in 2015, millions of Americans would be forced to file amended returns to claim these deductions.
Whether you were for or against health care reform, there is no denying that the recently implemented Affordable Care Act (ACA or “Obamacare”) is something that will affect you during the coming tax season.
Even if you have been insured during the entire year, the IRS will require that you provide proof of insurance during your tax preparation in the coming year. This will increase the burden on tax preparers to retrieve documentation from the taxpayer in order to file your 2014 tax return. Be prepared upon filing that in order to complete any personal tax return, your accountant will require proof of health insurance coverage.
If you did not have insurance for the year, or had insurance for only a portion of the year, you may be subject to a tax penalty based upon your household income. The penalty for 2014 is the greater of $95.00 per adult ($47.50 per child), or 1% of your household income that is above the tax return filing status threshold for your filing status. This amount is prorated for the months that you were covered by the minimum health insurance coverage.
The vast majority of taxpayers will fall into the 1% penalty, which will be significantly larger than the $95.00 penalty that most individuals assume they will be hit with. The penalty continues to increase in 2015 and 2016 to “encourage” the un-insured to pursue health insurance from the marketplace or other provider. The penalty is capped at $3,600 per adult and $1,900 per child for 2014, and continually increases over the next two years. A family of four could be hit with a penalty as much as $11,000.00 for 2014!(Equivalent to the bronze plan premium for insurance coverage).
In order to avoid exorbitant tax penalties in the future, it is important to know when the enrollment periods are open to obtain health insurance. A recent poll indicated that 89% of registered voters were unaware of the open enrollment periods for the Marketplace. Here are the dates that you need to be aware of:
2015 Open Enrollment start November 15, 2014
2015 Open Enrollment Ends February 15, 2015
In future years the enrollment period will shift from October 31 to December 7. So make sure you are aware of the open enrollment periods and obtain health insurance to avoid this costly tax penalty.
Companies having their data hacked seems to be a common occurrence these days. This is causing credit card companies to issue new cards every few months, or at least it feels like it happens this often. This has me thinking that maybe using cash more frequently may be a good idea. There are times when using a credit card can be beneficial; however, if not used properly, a credit card can cause a lot more harm than good.
Paying with a credit card lets you postpone the actual obligation of payment to the future, while cash payments make you physically have the cash to make the purchase. Purchasing items on credit without being able to afford it will just lead to debt sitting on your card accumulating finance charges. Using cash would be beneficial if you have a tough time holding off on large purchases until you have the money.
Avoid using a credit card when the company requires large processing fees. These processing fees can sometimes be more expensive than waiting until you have the cash and paying the late fee. These fees will usually offset the rewards one would receive by using a credit card. To avoid paying more than you need to, compare the processing fees to the late fees to make sure you are making the right choice.
Most credit cards offer many types of rewards and exclusive benefits. You can avoid interest and late fees by making payments on time and paying off your balance. The rewards will add up, making credit cards more beneficial than paying cash. Just make sure you pay off your balance so the fees are not also adding up. Other credit card benefits include additional warranties and purchase protection.
As much of a pain as it is when your credit card company issues a new card after a potential data hack, it is actually one of the credit cards’ greatest advantage. If cash is stolen from you it is hard, if not impossible, to retrieve this cash. However, if your credit card is stolen or fraudulent charges are made on your card, it takes one call to cancel the credit card, refute the charges, and have another card sent to you. This is a much less painful process than trying to retrieve stolen cash.
These are only a few examples of situations where you should decide what is better, paying with cash or credit. By making conscious choices when it comes to your payment method, it can end up saving you money.
Penalized for withdrawing funds early? All is not lost.
You are entitled to a deduction for a penalty imposed on an early withdrawal of funds from a timed savings account or a certificate of deposit. And you are entitled to this deduction even if you do not itemize deductions on your 1040 return.
However, you must file Form 1040 to claim this deduction. You cannot claim it on either Form 1040A or Form 1040 EZ.
The Internal Revenue Code has a section that benefits taxpayers who are penalized because they withdrew funds from a certificate of deposit or a timed savings account. When an account owner makes a withdrawal of these types of funds early, the bank or savings institution imposes a penalty.
The amount of this penalty is required to be reported to the taxpayer on Form 1099-INT at the end of the tax year. Line 2 of this form contains the amount of the early withdrawal penalty. The amount of interest income earned during the year on the investment is reported on line 1 of the same form.
In certain instances, the amount of the penalty can exceed the amount of interest income earned on the account.
This type of deduction is referred to as an above-the-line deduction because the deduction is used in completing the taxpayer’s adjusted gross income (AGI). AGI is all of a taxpayer’s sources of income added together, reduced by a group of deductions known as below-the-line deductions.
The deduction of an early withdrawal penalty is an example of one type of above-the-line deduction.
©2014 CPAmerica International
Chet Lee West found out the hard way that you cannot suppress evidence, claiming it was barred under the six-year statute of limitations, when charged with income tax evasion.
West was trying to invoke Internal Revenue Code Section 6531, which outlines the periods of limitations on criminal prosecutions. But that section doesn’t apply because it is a procedural limitation designed to bar stale claims and charges. It doesn’t affect the introduction of relevant evidence.
The facts of United States vs. Chet Lee West (U.S. District Court, Nebraska, 2014-2 U.S.T.C., ¶50,486, Oct. 2, 2014) reveal that, on July 17, 2013, the grand jury for the district of Nebraska returned an indictment against West charging him with three counts of income tax evasion.
The deadline to file pretrial motions was Jan. 31, 2014. On Aug. 18, 2014, West filed a pretrial motion to suppress. He was trying to suppress any evidence that occurred before Dec. 31, 2006. Any evidence that occurred before this time period would lie outside of the statute of limitations.
The United States responded to this by stating that West’s motion was untimely and lacked merit.
The deadline to file pretrial motions was July 17, 2013. West filed his pretrial motion well after this deadline – on Aug. 18, 2014. It has been established by prior court cases that “if a party fails to file a pretrial motion before the pretrial motion deadline, the party waives that issue.”
The court should have denied West’s motion because it was not filed by the deadline. But it decided to proceed with the case and decide it on its merits.
Code Section 6531 does not disallow the admission of evidence. “The statute of limitations is a defense to being prosecuted, not for admitting evidence. As long as the prosecution is timely filed, the statute of limitations has no bearing on the admissibility of evidence.” In this case, the prosecution was filed in a timely manner.
What determines whether the evidence is admissible is its relevance, not the date of the evidence. Evidence that is relevant is admissible unless it is prohibited by the Supreme Court, United States Constitution, federal statute or the federal rules of evidence. None of these prohibitions applied in this case.
Therefore, the judge determined that Code Section 6531 did not apply and denied West’s motion to suppress the evidence. ■
Joseph Sanchez mailed a petition challenging a deficiency assessed against him by the Internal Revenue Service. Unfortunately for Sanchez, the IRS dismissed his petition because the agency did not receive it in a timely manner.
This situation involved a dispute over Sanchez’s tax year 2010 individual income tax return. The IRS sent Sanchez a notice of deficiency claiming that he owed approximately $13,000 of additional tax, penalties and interest.
The letter from the IRS clearly stated that Sanchez had 90 days from the date of the letter to file a petition with the U.S. Tax Court. The letter even stated the “last date to petition the tax court: March 3, 2014.”
On March 3, 2014, Sanchez had a third party deliver to the U.S. Postal Service a letter containing his petition to the IRS. This petition was Sanchez’s response to the deficiency assessed against him.
The third party even gave a written statement to the court, claiming she had delivered the letter containing the petition documents to the post office on March 3, 2014. She further stated that, instead of waiting in a long line, she had dropped the petition paperwork off at the post office without having a certified mail receipt stamped by a post office employee.
Therefore, the third party had no documentation showing that the post office had received the package on March 3, 2014.
The court actually received the petition documents on March 10, 2014. The envelope containing the petition documents had a U.S. Postal Service postmark date of March 4, 2014.
On the envelope was also a stamp printed on a computer by a third party using software from Stamps.com, as well as a certified mail sticker. The stamp showed the date of March 3, 2014.
The IRS has a section in its regulations that deals with this issue. The regulation section provides that “if the envelope has a postmark made by the U.S. Postal Service in addition to a postmark from another entity, the postmark made by the other entity is disregarded. In determining whether the envelope was mailed in a timely fashion, the date provided by the U.S. Postal Service is the date used.”
In this case, that date was March 4, 2014. For Sanchez to have made a timely response, he would have needed to have his envelope postmarked no later than March 3, 2014.
Therefore, the court had no choice but to dismiss the case on the grounds that the petition was not timely filed. A judgment in the amount of roughly $13,000 was entered on behalf of the IRS (Joseph Sanchez v. Commissioner, U.S. Tax Court, T.C. Memo 2014-223, Oct. 22, 2014).
This situation could have been avoided had the third party delivered the letter to the U.S. Postal Service in time to have it stamped as of March 3, 2014.
Mortgage interest is usually the largest itemized deduction on most people’s tax returns unless they give a lot to charity. But there are limitations on the amount of home mortgage interest you can deduct.
Home mortgage interest is deductible on Schedule A of your tax return if it is secured by your qualified residence.
A “qualified residence” is either the principal or second residence of the taxpayers. The second residence is designated by the taxpayers on an annual basis should they own more than two homes.
For example, taxpayers could have a mortgage on their main home and a mortgage on their cottage, and they could write off the interest portion of both of the loans – provided they meet the criteria of two types of deductible residence interest: acquisition indebtedness and home equity indebtedness.
“Acquisition indebtedness” is basically the original mortgage on your home and a second residence. The mortgage must be secured directly by your home or second residence as collateral.
You can use the mortgage to buy, construct or substantially improve your home. You are limited to deducting interest paid on the first $1 million of debt on your home and second residence, or $500,000 for a married taxpayer filing a separate return.
The deduction for home equity indebtedness has two limitations. First, you are limited to deducting the interest on the first $100,000 of the loan, or $50,000 for a married taxpayer filing a separate return.
The second limitation requires the aggregate amount of the home equity loan not to exceed the qualified residence’s fair market value minus the amount of acquisition indebtedness on the residence. In other words, the total amount of debt on the property cannot exceed the fair market value of the property.
With the way the tax law is presently structured, the maximum amount of acquisition and home equity indebtedness that you can incur and still write off the interest is $1.1 million. The interest paid on the loan amount in excess of $1.1 million would be treated as nondeductible personal interest.
So there is nothing wrong with buying that $2 or $3 million mini-mansion you’ve been dreaming about. You just won’t be able to write off all the home mortgage interest pertaining to that purchase. ■