It was announced on Friday, February 20, 2015 that approximately 800,000 people received incorrect 1095-A forms. The 1095-A forms are used to report the premiums and tax credits for taxpayers who signed up for discounted health insurance coverage through the HealthCare.Gov Marketplace. This error affects up to 20% of the statements sent by the federal insurance website. The error was due to a coding issue in a calculation that included the local premium data for 2015, instead of the information for 2014.
The government is notifying those who received an incorrect statement. If your form is incorrect, you should get a call and an email from the Marketplace. There will also be a message in your Marketplace account on HealthCare.gov. When your corrected form is ready, you will be notified. The corrected forms are supposed to be issued in early March. If you received an incorrect 1095-A, you should wait to file your tax return until you receive the corrected form. If you already filed your taxes with the incorrect information you will need to amend you return.
Along with the announcement of the error, came an extension period to sign up for health insurance through the Marketplace. The original enrollment period began November 15th and ended February 15th. The extension will allow enrollment starting March 15th to buy coverage if they attest that they learned of the penalty of not having insurance when they filed their 2014 tax return. The additional enrollment period will go until the end of April. These individuals will still have to pay a penalty for being uninsured in 2014, and a partial penalty for the time they were uninsured in 2015, but they would avoid the penalty of being uncovered for all of 2015.
You have a choice between deducting state and local sales taxes or state and local income taxes. A prudent tax planner would obviously choose the larger of the two deductions.
The option to deduct state and local sales taxes benefits the residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. These states don’t impose a state income tax.
You may claim this deduction by electing to deduct state and local sales taxes instead of state and local income taxes on Schedule A of your 1040 return.
You can calculate this deduction in two different ways. You can choose to:
➤ Keep a copy of all of your sales receipts in which sales or use tax was charged, and total the amount of sales and use taxes paid during the year, or
➤ Use the optional sales tax tables provided by the IRS in the instruction booklet to Schedule A.
Using the optional sales tax tables reduces your record-keeping burden and is generally the easier way to go. The tables provide an amount of sales taxes paid based on a number of factors, including state of residence, adjusted gross income and number of exemptions.
A nice benefit of using the optional sales tax tables is getting to deduct the amount of sales taxes determined by the tables, plus any state sales and local taxes paid on the following:
➤ Motor vehicles
➤ Homes, including mobile and prefabricated homes
➤ Materials to build a home
The IRS provides taxpayers with an Internet tool to determine whether they might benefit by electing to deduct state and local sales taxes at www.irs.gov/Individuals/Sales-Tax-Deduction-Calculator. ■
The modern-day secession movement that has sprung up around the country in recent years is evidence that a number of states – as many as 20, stretching from New Jersey to Oregon to Texas – have citizens who would like to assert their independence from the federal government.
John Trowbridge Jr. found out the hard way that living in Texas means he is a U.S. citizen and is subject to U.S. tax laws.
In addition, district courts have the jurisdiction, and the Internal Revenue Code gives them the power, to hear tax cases and settle those disputes.
Trowbridge has been a longtime tax protester. He has on two prior occasions lost Tax Court cases regarding similar issues.
This particular case involved the district court, which had reduced Trowbridge’s tax liabilities for the years 1993 through 1997 to the amount of the associated tax liens on his property. The court foreclosed on the liens and then sold Trowbridge’s property for back taxes.
Trowbridge’s argument against the court is that he lives in Harris County, Texas, which he doesn’t consider a part of the United States, meaning that he is not, therefore, a U.S. citizen. He feels that he isn’t subject to the federal income tax laws and that the district court doesn’t have jurisdiction in his case.
The courts have already held in prior cases that citizens of Texas are also citizens of the United States, so Trowbridge lost that argument. There is also an Internal Revenue Code section authorizing the district courts to hear Tax Court cases and disputes, so he lost on that issue as well (United States of America v. John Parks Trowbridge, Jr., No. 14-20333, U.S. Court of Appeals, Fifth Circuit, Feb. 3, 2015).
©2015 CPAmerica International
don’t impose a state income tax.
Just in time for small business owners’ 2014 tax returns, a procedure for easier compliance with final tangible property repair regulations was announced by the IRS last week.
The simplified procedure is now available starting with the 2014 income tax return, which taxpayers or their tax professionals are currently preparing. In general, for the first taxable year beginning on or after Jan. 1, 2014, small businesses may change the method of accounting on a prospective basis.
The simplified procedure is available:
➤ To small businesses, including sole proprietors;
➤ With assets totaling less than $10 million; or
➤ With average annual gross receipts totaling $10 million or less.
Small businesses that intend to use this new procedure for 2014 taxes will not have to file a Form 3115, Application for Change in Accounting Method. Previously a requirement, the IRS decided to waive the filing of this form after receiving many requests from small business owners and tax professionals.
However, check with your accountant about certain circumstances that may still require a Form 3115.
The IRS is “pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” IRS Commissioner John Koskinen said in making the announcement.
To read more details in Revenue Procedure 2015-20, click here. ■
©2015 CPAmerica International
You have a choice between using the business standard mileage rate or actual expenses when calculating the fixed and operating costs of an automobile. Once you select a method, you must use that method for the entire tax year.
There are some limitations on the eligibility to use the business standard mileage rate. A taxpayer cannot choose the standard mileage rate and:
Items 2 through 5 above relate to a situation in which the vehicle owner was claiming actual business auto expenses but then wanted to change to the business standard deduction method. Although you are allowed to change back and forth each year between the standard deduction method and the actual expense method, you cannot do so if items 2 through 5 pertain to you.
If that is the case, you must stay with the actual expense method.
The business standard mileage rate generally changes each year as the cost of operating a vehicle changes. The business standard mileage rate for 2014 was 56 cents per mile. That rate has been increased to 57.5 cents per mile for 2015.
The fluctuating cost of gasoline is one of the reasons for the rate change, as well as the increase in the cost of vehicles. The IRS sends out a notice toward the end of each year informing the general public of the new rate for the upcoming year. ■
Have you ever wondered when and how the IRS got its start? I did and so I did a little research.
The IRS traces its origins back to the Civil War. In 1862, President Lincoln signed the Revenue Act of 1862 into effect. This law was intended to help pay for war expenses by establishing a Commissioner of Internal Revenue and the country’s first income tax. It imposed a 3% tax on income between $600 and $10,000 and a 5% tax on income over $10,000. In 1872, after much public disapproval and resistance, Congress allowed the law to expire and so the income tax was temporarily eliminated. According to the IRS website, from 1868 until 1913, 90% of all revenue came from liquor, beer, wine, and tobacco taxes.
In 1894, Congress attempted to reintroduce the income tax by enacting the Wilson Tariff Act and creating an income tax department within the Bureau of Internal Revenue. Congress’s success was short-lived as the Supreme Court ruled the new income tax law unconstitutional one year later in 1895. It reasoned that the income tax constituted a direct tax and, therefore, needed to be imposed in proportion to each state’s population, which it was not (i.e. apportioned). Following the Supreme Court’s decision, the income tax division of the Bureau of Internal Revenue ceased to exist.
In 1909, President Taft encouraged Congress to propose a constitutional amendment that would effectively override the Supreme Court’s decision. The amendment would permit the government to impose an income tax without apportionment. In 1913, the 16th Amendment was adopted, which reads, “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any consensus or enumeration.” Shortly thereafter, Congress enacted a 1% tax on net personal income over $3,000 with a surtax of 6% on income over $500,000. The first Form 1040 was created.
During World War I, the top income tax rate increased to 77% in 1918. After the war, it fell to 24% in 1929, but increased again during the Depression. During World War II, payroll withholding, quarterly tax payments, and the standard deductions were implemented. During the 1950s, the Bureau of Internal Revenue was restructured to employ professional employees and its name was changed to the Internal Revenue Service. In 1998, Congress passed the IRS Restructuring and Reform Act of 1998, which caused the most wide-ranging restructuring since the mid-century. The IRS was split into four divisions, each focused on different taxpayer needs.
In case you have not heard, Jon Stewart will be stepping down as the host of The Daily Show with Jon Stewart. Currently his contract is set to run out sometime in September, but he has said that he is unsure of when he will actually leave the show. Jon’s satirical reporting is what has gotten me, as well as many other younger people, to watch the news and know what is going on in the world. The show has been on since 1999, 15 years, all of which have occurred since I was old enough to care about the news. Now with him leaving, I am unsure of who could possibly replace him and keep the show as light and funny as it has been for the last 15 years. Let’s look at the possible candidates.
As of right now, there are no for sure leads as to who may replace Mr. Stewart, however there are favorites for the position. Currently three of the shows current or previous analysts are expected to take the place of Mr. Stewart; however,of the three candidates, Jessica Williams, John Oliver, and Jason Jones, I am not particularly drawn towards any of them. I like the work that they do on the show, but I do not feel that they have the personality that Mr. Stewart has shown over the years on the show. Some of the other candidates that have been mentioned are: Chris Rock, John Hodgman, Aasif Mandvi, Ricky Gervais, and Amy Poehler. These are all great candidates except for the fact that they seem to have much more going on in their lives that won’t allow them the time to undertake The Daily Show. As host, Jon Stewart was mostly involved in just the TV show taking a brief period of time off to produce a movie. Thus, if any of these people would like to take his position, it would likely only be if they are choosing this as their career.
The candidate that I am the most stoked on is Amy Schumer. She is by far my favorite choice for the position, as she is a young and aspiring comedian just as Jon Stewart was when he began. Mr. Stewart did not become the figure that he is until he landed the Daily Show, however Ms. Schumer already has a lot going for her. She currently hosts her own show on Comedy Central and will host the MTV Awards show later in 2015. If Comedy Central is looking for someone that can bring in the young crowd, just as Mr. Stewart has done, they need to go with a younger, upcoming comedian and thus I believe that Amy Schumer is the best choice for the job.
Taxpayers who claim one or more qualifying children as dependents may be entitled to a child tax credit of $1,000 per child.
The definition of qualifying child for purposes of the child tax credit is the same as that for a dependency exemption – except that the child must not have attained age 17 by the end of the tax year. The relationship, support, joint return and principal place of abode tests are the same as those for the dependency exemption.
The qualifying child must be either a U.S. citizen, national or resident of the United States.
This credit is allowed only for tax years consisting of 12 months. It is calculated by using a worksheet in the instruction booklet for the Form 1040 return.
There are income limitations on qualifying for the child tax credit. The child tax credit begins to phase out when taxpayers’ modified adjusted gross income (MAGI) reaches $110,000 for joint filers, $55,000 for married taxpayers filing separately and $75,000 for single taxpayers.
The credit is reduced by $50 for each $1,000, or fraction thereof, of MAGI above the threshold amount. For example, at $95,000 of MAGI, the credit is no longer available for a single person with one child. However, a single person with more than one child would still be able to claim a portion of the credit.
Generally, the child tax credit is considered to be a nonrefundable personal tax credit in 2014. All nonrefundable personal tax credits are allowed to the full extent of the taxpayer’s regular tax liability – reduced by the foreign tax credit – and alternative minimum tax liability.
An individual taxpayer with qualifying children may be eligible for a refundable additional credit in 2014 if:
➤ The taxpayer’s tax liability doesn’t fully absorb the otherwise allowable credit, and
➤ The taxpayer has earned income in excess of $3,000.
Taxpayers should discuss the details of the child tax credit with their tax preparer. ■
©2015 CPAmerica International
The U.S. Tax Court recently found that Nichelle Perez, a 29-year-old single woman, performed a service for infertile couples when she donated her eggs. Therefore, the compensation she received was taxable income to her.
The facts of the case reveal that Perez, after discovering The Donor Source
International, LLC, website, became a prospective egg donor. The Donor Source is a for-profit California company that has been in business since 2003, supervising egg donation cycles for its customers.
Perez went through an initial screening process and passed. She became a potential donor with an online profile, which included a picture, a description of her family history and other personal data.
After a couple selects a donor from the profiles, the donor signs two contracts. One contract is signed with The Donor Source, the agent. The other contract is signed with the intended parents.
These contracts give the parents the right to terminate the relationship with the donor up until the time the donor begins receiving egg-stimulation medication. If the contract is terminated at this point, the donor is owed no compensation.
The contract Perez signed with The Donor Source in February 2009 read as follows: “Donor and intended parents will agree upon a Donor Fee for Donor’s time, effort, inconvenience, pain, and suffering in donating her eggs. This fee is for Donor’s good faith and full compliance with the donor egg procedure, not in exchange for or purchase of eggs, and the quantity or quality of eggs retrieved will not affect the Donor fee.”
This contract meant that, if Perez kept her side of the deal, but produced unusable eggs or no eggs at all, she would still be paid the contract price. The parties agreed that the funds would not in any way constitute payment to the donor for her eggs.
The agreement did not instruct any of the parties on the issue of taxation of any payment made or received under this agreement or any agreement with The Donor Source.
Perez went through a number of painful procedures in March 2009. The process included stomach injections of hormones.
On the retrieval date in March 2009, 15 to 20 of Perez’s eggs were removed. She was paid her promised fee of $10,000. In August 2009, she signed a second $10,000 contract to go through the process again.
At the end of the year, Perez received a Form 1099 from The Donor Source for $20,000. Despite receiving the 1099, Perez did not claim the $20,000 as income on her 2009 income tax return.
She received a notice of deficiency from the IRS and ended up in Tax Court.
Perez argued that the $20,000 she had received from The Donor Source was in exchange for the pain, suffering and physical injuries she endured as part of the process. The IRS argued that Perez received taxable compensation.
According to Perez, she had relied on Section 104 of the Internal Revenue Code, which excludes from gross income the amount of money paid that is considered damages received because of physical injuries.
The court disagreed with Perez’s interpretation of the code and found that the physical pain and injuries were a byproduct of performing a service contract. It found that the payments were made, not to compensate her for an unwanted invasion against her bodily integrity, but to compensate her for services rendered (Nichelle G. Perez v. Commissioner, U.S. Tax Court, Jan. 22, 2015).
The $20,000 is taxable compensation. ■
©2015 CPAmerica International
In a divorce situation, make sure you have an appropriate agreement in place. Otherwise, you will not be able to claim a deduction for any payments made to your former spouse.
The U.S. Tax Court recently made this clear in a case in which it denied Franklin Rex Milbourn a tax deduction for alimony payments he had made to his ex-wife (Franklin Rex Milbourn v. Commissioner, U.S. Tax Court, T.C. Memo 2015-13, Jan. 21, 2015).
Milbourn made payments to Brenda Ann Marshall, his ex-wife, totaling $37,000 in 2006. In June 2006, the family and probate court granted Marshall a decree of divorce. The court deferred on working out the other important details of the divorce, including the amount of alimony, until a later date.
In June 2007, the family and probate court issued an amended final decree of divorce. The amended decree spelled out in writing that the amount of alimony payments would be $4,500 per month. Both Milbourn and Marshall signed the amended decree.
Milbourn had filed his 2006 individual income tax return late, not sending it to the IRS until Sept. 19, 2011. On the return, Milbourn claimed an alimony deduction of $36,000. He listed Marshall as the person to whom the alimony was paid and included her Social Security number in the appropriate spot on his tax return.
Despite the fact that Milbourn had documented payments of $37,000 to his ex-wife, one of these payments was in dispute, so he claimed only $36,000 of payments as a deduction for alimony on his tax return.
The IRS subsequently sent him a notice of deficiency disallowing the $36,000 alimony deduction.
Milbourn responded in a timely fashion to the IRS’s letter, disputing the agency’s position. He claimed that the alimony payments were valid and paid under the terms of a marital dissolution agreement drafted by Marshall’s attorney. This draft was not signed by either party because they could not agree on a monthly amount of alimony.
An IRS code section spells out a four-part test that must be met for a payment to be considered alimony. One of the parts of the test states that “such payment is received by a spouse under a divorce or separation instrument.”
The problem in this case was that Milbourn was paying alimony based on an unsigned draft of a marital dissolution agreement and not a signed copy that specified the amount of alimony to be paid each month. The draft was not considered to be an official divorce decree.
In addition, Milbourn stated during testimony that no separate maintenance agreement existed between Marshall and him in 2007.
Because one of the four tests was not met, the payments were deemed by the Tax Court not to be alimony payments, and Milbourn’s deduction was denied.
©2015 CPAmerica International