The term “personal property tax” means an ad valorem tax imposed on an annual basis on personal property.
To qualify as a personal property tax, a tax must meet a three-part test:
Part 1: The tax must be ad valorem. A tax based on criteria other than value is not considered an ad valorem tax. For example, some states base a motor vehicle tax on the vehicle’s value, weight, model year or horsepower. If the motor vehicle tax is based on value, it is considered ad valorem and qualifies as a deductible personal property tax.
If part of the motor vehicle tax is based on value and part based on weight, the portion of the tax related to the value is deductible, and the portion of the tax related to the weight is not.
Part 2: The tax must be imposed on an annual basis, even if collected more or less frequently.
Part 3: The tax must be imposed on personal property. A tax may be considered to be imposed on personal property even if, in form, it is imposed on the exercise of a privilege.
These three rules are why taxpayers are able to deduct registration fees for cars, boats, mobile homes and trailers as a personal property tax provided that they are ad valorem or at least partially ad valorem.
To deduct any personal property tax, taxpayers must file Schedule A and itemize their deductions.
Taxpayers should look at a car, boat, mobile home or trailer registration to determine whether the registration fees are ad valorem. This document usually shows the amount of the fees as well. The registration form itself can serve as documentation or backup for the deduction.
©2015 CPAmerica International
Taxpayers should keep up with the U.S. bonds they purchase and cash in – and their tax liability on the interest.
Mr. and Mrs. Lobs purchased ten $1,000 Series EE U.S. savings bonds for their son in mid-November 1992. The bonds were registered to both Mr. and Mrs. Lobs even though they purchased the bonds to provide for their son Joseph’s college education.
In 1995, the Lobses divorced. Mrs. Lobs received the 10 bonds in the divorce settlement.
During September 2010, Mrs. Lobs’s son needed some money. Mrs. Lobs cashed in the bonds, which were registered in both her and her ex-husband’s names.
The proceeds from the bonds were deposited in her checking account. A cashier’s check for $12,640 was immediately made payable to her son Joseph. Joseph cashed the check.
Mrs. Lobs timely filed a Form 1040 return for 2010 but did not include any interest income from the bond transaction on the return.
The IRS sent Mrs. Lobs a notice of deficiency in April 2013 determining that she had failed to report $7,640 of interest income. Mrs. Lobs timely filed a petition with the IRS claiming that the bonds belonged to her son, not to her, and that the interest on the bonds was not properly taxable to her.
The Internal Revenue Code states that interest income received by the taxpayer constitutes taxable gross income. In particular, interest on U.S. obligations, such as U.S. savings bonds, is fully taxable.
Registration of Series EE U.S. savings bonds is generally conclusive of actual ownership of, and interest in, such bonds. Savings bonds are usually not transferable and are payable only to the owner named on the bonds.
Mrs. Lobs cashed in the bonds and had the proceeds transferred to her checking account. The difference between the original purchase price and the amount of proceeds received became taxable income to her.
It doesn’t matter that Mrs. Lobs had meant to have her son’s name put on the bonds when they were originally purchased. The court can rule only on what happened.
The reality of the situation is that Mrs. Lobs was a registered co-owner of the bonds who was entitled to receive, and did in fact receive, the proceeds of the bonds upon their endorsement and surrender. Therefore the $7,640 is taxable to her as interest income (Ruth A. Lobs v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-17, March 3, 2015).
©2015 CPAmerica International
James A. Ericson really missed the mark as a federal income tax preparer.
In February 2015, the U.S. District Court for the District of Hawaii permanently barred Ericson from preparing federal income tax returns.
Ericson had prepared a large number of income tax returns in which he took unrealistic and unsustainable positions on clients’ tax returns. He willfully understated taxes due and had a reckless and intentional disregard for tax rules and regulations.
The 9th U.S. Circuit Court of Appeals does not have a clear standard or test for the district court to apply in determining whether a lifetime or permanent ban against all tax return preparation is proper. However, the courts have considered a variety of factors in analyzing this issue.
The following are some of the factors considered by the courts through the years in determining whether a lifetime ban is appropriate:
1. A defendant’s willingness or refusal to acknowledge wrongdoing
2. Compliance with the law following a warning or notification by the IRS that the conduct is unlawful
3. Percentage of tax returns filed that are fraudulent
4. Severity of the harm, i.e., the amount of money fraudulently requested and the amount actually and erroneously released
5. Number of discrete fraudulent practices
6. Longevity of the fraudulent scheme
7. Defendant’s degree of “scienter,” or knowledge
The facts and circumstances of the case indicate that Ericson performed negatively under all seven factors.
Regarding the first factor, Ericson has always maintained his innocence under cross-examination. He was warned by the IRS back in 2009 that his practices were improper, and he was fined.
Ericson continued preparing improper returns for the next three years, violating the second factor.
Ericson severely violated the third through fifth factors. The IRS examined 611 federal income tax returns of his clients from 2007 through 2012 and found a total tax shortfall of more than $2.4 million. This amounts to an average of almost $4,000 per return, and when projected over all of the returns that Ericson prepared, a loss to the U.S. Treasury of over $30 million in revenue. Between 86 and 92 percent of Ericson’s clients received a refund.
The sixth factor was violated because this fraudulent activity had been carried out for over five years. The court also found Ericson guilty of the seventh factor because it felt that he knowingly and repeatedly violated the U.S. Tax Code.
Because the court found all of the seven factors against Ericson, it felt it was appropriate to impose a lifetime ban on his ability to prepare individual income tax returns (United States of America v. James A. Ericson, U.S. District Court, District of Hawaii, 2015-1 U.S.T.C. Paragraph 50,222, Feb. 20, 2014).
©2015 CPAmerica International
Donating an automobile with a fair market value of more than $500 has a few twists and turns when taxpayers claim a deduction.
Taxpayers donating to charity a qualified vehicle, car, truck, boat or aircraft valued at over $500 must obtain from the charity either a Form 1098-C or a similar contemporaneous written acknowledgment of the contribution. They should attach this documentation to their return.
The acknowledgment must provide the following information:
➜ Donor’s name
➜ Donor’s Social Security number
➜ Vehicle’s identification number
➜ Description of each donated item
➜ Good-faith estimate of any goods or services provided by the charity in exchange for the vehicle
The fair market value of any goods or services received by the donor reduces the amount of the charitable contribution deduction.
The acknowledgment also must contain the amount of sales proceeds if the vehicle was sold in an arm’s-length transaction. For a vehicle sold in an arm’s-length transaction with no material improvements, the amount of the donation is limited to the amount of the sales proceeds.
If the charity retains the vehicle for its own internal purposes, the acknowledgment must state that as well. Under those conditions, the taxpayer can deduct the fair market value of the vehicle.
If the charity sells the vehicle to a needy individual at a price below fair market value, the taxpayer is allowed to claim the fair market value as the deduction amount, provided the sale furthers the charity’s purpose. Most of these types of charities have as their purpose helping needy individuals by providing them with good-quality, low-cost automobiles.
When itemizing deductions, taxpayers should deduct charitable contributions on Schedule A and attach it to their Form 1040 tax return. In addition, they should remember to attach a copy of their 1098-C or similar acknowledgment.
©2015 CPAmerica International
If you’ve started your own business since 1993, and funded it with your own money as a C Corporation there could be some valuable tax savings if you’re planning on selling the company. This comes in the form of the section 1202 exclusion.
The Section 1202 exclusion allows a person to exclude up to 100% of the gain on the sale of qualified small business stock (QSBS) that has been held more than five years.
The amount available to be excluded varies depending on when the business was started and funded. If the corporation was started between Aug 10, 1993 and Feb 17, 2009, 50% is excludable; if between Feb. 17, 2009 and Sept 27, 2010, 75%; and if you were lucky enough to start the corporation between Sept 27, 2010 and before Jan 1, 2014 100% of the gain is excluded.
So what are the catches? The taxable portion of the gain is taxed at 28% (excluding the possible Medicare investment tax of 2.8%) as opposed to the regular long term capital gain rate of 20%. The maximum amount of gain that can be excluded is the greater of $10 million of 10 times the taxpayer’s basis in the stock. Further, QSBS is defined as a C Corporation that the taxpayer funded directly with no more than $50 million of gross assets, 80% of its assets must be in an active trade or business, the corporation cannot own real property or stock/securities exceeding 10% of its total assets, and stock/securities cannot exceed 10% of its total assets in excess of its liabilities.
As you have read the 1202 exclusion can save a lot of money, but there are many complexities not outlined above including possible alternative minimum taxes. All the more reason to contact a CPA!
Having recently visited Germany and being a CPA, I naturally was interested in their taxes. I have heard throughout my life how taxes in Europe are extremely higher than in the United States and I thought I’d do a simple comparison.
According to a KPMG report on income tax and social security rates on $100,000 USD of income, in Germany the percentage paid by individuals was 28.3% plus 9.8% in pension insurance for a total of 38.1% (this does not include the mandatory 15.5% for health insurance that we in the United States pay separately). In the Unites States the percentage paid was 18.2% plus 7.65% for social security for a total of 25.85% (if you live in California, add another 7% for 32.85% total). So, for somebody earning $100,000 the taxes in the United States are lower regardless of where you live.
The above result is what I figured since the United States has low marginal rates for low earners. For somebody well-off making over $1,000,000, I hypothesized that the United States would buck the stereotype and have higher rates. In Germany the top tax rate is 50.5% (which starts at $283,326 USD for a single person ). In the United States the top rate is 43.4% (starting at $406,750 USD for a single person) and would be as high as 56.7% if the income was earned in California. Further, in Germany dividends and sales of capital assets are taxed at 25% while in the United States there is a maximum of 23.8% (or up to 37.1% if you live in California).
So there you have it, if you are wealthy and live in California you are paying more income tax than people who live in the European Unions’ largest economy. Of course this is only one facet of the tax system. There are many others, like the value added tax of 19% in Germany, but Germany’s corporate tax rate is 15% while ours in 35%. If you live in California and are paying these high rates you can’t even take solace in the fact that you’re working less. In Germany the average work week is 35 hours with 24 paid vacation days and 10 paid holidays!
Since we moved back in September, my wife and I have dropped cable television and have gone the cord cutting route of using various streaming services. I’m happy to report that we’re very satisfied with the choice. It’s not a perfect alternative, but I do enjoy knowing I’m not shelling out $150 a month for a bundle of TV and internet services.
We still have our internet through Charter and I’ve been happy with them on that front. We then use Netflix, Amazon Prime, and Hulu as our main streaming services. While each of these services does have a cost, the ability to play shows when we want is amazing. The bonus of watching these shows commercial free is almost even more amazing. (Don’t’ get me started on Hulu Plus, however, which still makes us watch commercials even though we pay them a monthly fee!) We’ve also been watching live television the old fashioned way by hooking up an antenna. Even though you still have to play the game of moving the antenna around to find the best signal, this has been a perfectly acceptable way to watch shows and the news.
With all these options available, I see very few reasons for us to go back to paying for an all our nothing TV subscription. I think cable and satellite providers are starting to see this point of view as the newly launched Dish-owned service Sling TV has the slogan: “Take Back TV.” This service is $20 per month and provides streaming of live TV. You get the most popular channels like ESPN, Food Network, TBS and they just added AMC to the mix (hooray, we can finally be up to date on The Walking Dead). We haven’t jumped on board with this service yet, but I’m glad to see someone finally offering a more a la carte approach to TV viewing. Also, HBO finally announced their upcoming streaming service will be $15 per month. I’m enjoying all this choice in the “cable free” world.
So, if you’re still paying for cable or satellite TV in one of those fancy packages where you have to call every year or two to get the best price, consider cutting the cord and trying out the world of on demand streaming. I think you’ll like it.