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The IRS has provided the annual inflation-adjusted contribution, deductible and out-of-pocket expense limits for 2015 for health savings accounts.
The following limitations on contributions for calendar year 2015 were announced in Revenue Procedure 2014-30:
➤ $3,350 for an individual with self-only coverage
➤ $6,650 for an individual with family coverage under a high-deductible health plan
Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older.
Also for calendar year 2015, a high-deductible health plan is a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage. The annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) under the high-deductible plan should not exceed $6,450 for self-only coverage or $12,900 for family coverage.
Eligible individuals may make deductible contributions to a health savings account, subject to statutory limits.
Employers as well as other persons, including family members, also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income.
In general, a person is an eligible individual if he is covered under a high-deductible health plan and is not covered under any other health plan that is not a high-deductible plan – unless the other coverage is permitted insurance, such as for worker’s compensation, a specified disease or illness, or insurance providing a fixed payment for hospitalization.
©2014 CPAmerica International
S corporations facing increased Medicare taxes may want to take advantage of a planning opportunity.
Business owners might be able to reduce or eliminate the increased Medicare taxes that went into effect last year. This opportunity may be available to them if they own a business operating as an S corporation and their total income exceeds certain threshold amounts.
Since 2013, the Medicare tax on compensation and self-employment income has been increased from 2.9 percent to 3.8 percent. The 0.9 percent increase applies to the extent compensation or self-employment income specified is more than $250,000 for married individuals filing jointly and $200,000 for single individuals.
Since these threshold amounts are not indexed for inflation, an increasing number of taxpayers will be subject to the tax in 2014 and future years.
Accompanying the Medicare tax on earned income, a 3.8 percent Medicare tax that applies to net investment income (NII) also became effective in 2013. With few exceptions, most income is covered by one, but not both, of these taxes.
The net investment income tax applies to the lesser of NII or modified adjusted gross income over the specified threshold amounts.
NII is the sum of passive income – generally, interest, dividends, annuities, rents, royalties, capital gains and certain income from a passive trade or business – less applicable deductions. Trade or business income is included in NII only if the business activity is a passive activity or involves trading in financial instruments or commodities.
The net investment income tax applies to the entire distributive share of S corporation income allocable to a shareholder to the extent the income is derived from activity that is passive (or from trading in financial instruments or commodities) or represents the corporation’s investment income.
However, shareholders who materially participate in the business of the S corporation avoid the NII tax on their entire distributive share of the S corporation’s business income.
If the shareholder is also an employee of the S corporation, the employee-shareholder is subject to employment taxes – including the Medicare tax on earned income at the new higher rate – on compensation for services that the shareholder provides to the S corporation. However, the self-employment tax does not apply to an S corporation shareholder’s distributive share of the corporation’s income.
If you are a shareholder-employee actively involved in a business operated by an S corporation, you can minimize earnings subject to the higher Medicare taxes by keeping your salary low and taking most of your profits through yourdistributive share of the corporation’s profits. The trick is to make sure your salary is a reasonable amount for the services you provide.
With the increase in taxes on earned income, the IRS has an added incentive to challenge the allocation of S corporation payments between salary and distributions. If the IRS determines that your salary is too low, a portion of the distribution might be recharacterized as wages.
©2014 CPAmerica International
The IRS is increasing the penalties on U.S. taxpayers who attempt to hide assets overseas, while lowering or eliminating penalties for those who unintentionally failed to disclose offshore accounts.
The IRS has announced in Information Release 2014-73 major changes to its Offshore Voluntary Compliance Program (OVDP). The changes include:
1. Modifications to the 2012 OVDP
2. An expansion of the “streamlined” filing compliance procedures announced in 2012
There are a number of reporting requirements for taxpayers with foreign accounts. Affected individuals must fill out and attach Schedule B with their tax returns. Schedule B asks about the existence of foreign accounts.
Some taxpayers have to fill out Form 8938, Statement of Foreign Financial Assets. Other filing requirements apply to foreign trusts.
In addition, taxpayers with foreign accounts whose aggregate value exceeds $10,000 must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR), electronically through the Financial Crimes Enforcement Network’s BSA E-Filing System. Failure to comply with applicable reporting requirements can result in civil and criminal penalties.
On July 1, 2014, a new information reporting regime instituted by the Foreign Accounts Tax Compliance Act went into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons.
Under the 2014 OVDP, taxpayers who do not meet certain deadlines will be subject to a 50 percent penalty under one of the following circumstances:
Taxpayers already in the 2012 OVDP may be able to take advantage of certain of the new procedures.
The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was not willful. Key expansions in the streamlined procedures will accommodate a wider group of individuals living outside the United States and, for the first time, certain U.S. residents who have unreported foreign financial accounts.
If you are already in the 2012 OVDP, you should consult your tax adviser to determine whether you qualify for the new streamlined program. If you live outside of the United States and qualify, there are no penalties.
If you live in the United States and qualify, there is a maximum penalty of 5 percent – down from the previous 27.5 percent.
The fact that the IRS even raised a recent tax issue and took it to the Tax Court demonstrates the care that must be taken by family-owned business owners not to inadvertently run afoul of complex tax laws.
The court ruled that, when three brothers formed a corporation to conduct a trucking operation after their father’s wholly owned corporation ceased operations, there was no taxable transfer of goodwill from the father’s corporation to his sons (Bross Trucking, Inc. v. Commissioner, TC Memo 2014-107, June 5, 2014).
Here is what happened.
Chester Bross owned 100 percent of Bross Trucking, Inc. The corporation provided trucking services, and 90-95 percent of its customers were companies owned by members of the Bross family. Bross did not have an employment contract with Bross Trucking, and he never signed a noncompete agreement. The company leased its trucks from CB Equipment, another Bross family-owned entity.
After Bross Trucking came under investigation by federal and state regulatory agencies for safety issues, Bross decided to cease trucking operations. Bross Trucking remained in existence as a viable entity, complete with insurance and its original trucking authority. The corporation had cash assets and over $250,000 of other assets, including accounts receivable, which it continued to collect.
Bross’s three sons, who were not previously involved with Bross Trucking, started their own trucking business – LWK Trucking. About 50 percent of LWK’s employees were former employees of Bross Trucking. LWK executed a lease with CB Equipment allowing LWK to use equipment that had previously been leased to Bross Trucking.
LWK provided a broader range of services than Bross Trucking, including doing truck repairs and providing GPS devices.
LWK obtained its own licenses, regulatory authorizations, suppliers and customers. In other words, nothing was transferred from Bross Trucking to LWK Trucking.
The IRS assessed tax and penalties based on the following:
1. Bross Trucking distributed appreciated intangible assets to its sole shareholder, Chester Bross, and
2. Bross made gifts of those assets to his sons.
The IRS said that the intangible assets included:
➤ An established revenue stream
➤ A developed customer base
➤ Transparency of the continuing operations between the entities
➤ An established work force, including independent contractors
➤ Continuing supplier relationships
Although the IRS did not call the intangible assets “goodwill,” the Tax Court did.
The court ruled that Bross Trucking’s goodwill was primarily owned by Bross
personally, and the company did not transfer any corporate goodwill to Bross. Thus, there was no taxable distribution to Bross and no gift from Bross to his sons.
The court reasoned as follows:
➜ The court concluded that the sole attribute of goodwill displayed by Bross Trucking was an in-place work force, and it was therefore the only attribute that the corporation could have distributed to Bross.
➜ Nearly all the goodwill used by Bross Trucking was Bross’s personal asset. A company does not have any corporate goodwill when all of the goodwill is attributable solely to the personal ability of an employee.
➜ Bross never transferred his personal goodwill to Bross Trucking.
➜ No intangible assets were transferred from Bross Trucking to LDW.
➜ Bross Trucking did not distribute any cash assets and retained all the necessary licenses and insurance to continue business.
Further, Bross remained associated with Bross Trucking and was not involved in operating or owning LWK Trucking. He was free to compete against LWK Trucking and use every cultivated relationship to do so.
The IRS’s willingness to litigate the Bross Trucking case opens the door to the possibility that the agency may find a future case with a better set of facts. These facts might allow it to convince a court that the corporation should recognize gain on the distribution of goodwill, the shareholder should recognize dividend income on the receipt of the goodwill, and the transfer of the goodwill to the next generation is a taxable gift.
©2014 CPAmerica International
Does your state have refundable credits against its state income tax? What are the federal income tax consequences?
Chief Counsel Advice (CCA) 201423020 specifically addresses the Massachusetts Senior Circuit Breaker Credit. However, the reasoning should apply to similar refundable credits authorized by other states.
In this CCA, the IRS explains the federal income tax consequences of the Massachusetts credit. This credit, which is partially refundable, is payable to qualifying senior citizens who own or rent a principal residence.
The Massachusetts Senior Circuit Breaker Credit is a refundable credit against state income taxes. The credit is available to eligible low-income state residents who paid real estate taxes or rent during the year.
The credit first reduces state income tax liability. If the credit exceeds the person’s state income tax liability for the year, the excess is refunded.
To be eligible for the credit, an individual must:
➤ Be an owner or tenant of residential property located in Massachusetts
➤ Be age 65 or older
➤ Not be a dependent of another taxpayer
➤ Occupy the property as his principal residence
➤ Meet certain income limits
The CCA concludes that the amount of the credit that reduces a potential state income tax liability as part of computing how much state tax is due is not includable in federal gross income. Instead, it will generally be reflected in a reduced federal deduction for state taxes.
The proper federal income tax treatment of the refundable portion of the credit depends on the tax situation of the taxpayer:
➜ A renter who receives the refundable portion of the credit does not include that amount in gross income.
➜ A homeowner who claims the standard deduction for federal tax purposes does not include the refundable portion of the credit in gross income.
➜ A homeowner who itemized deductions for federal tax purposes in a prior year must include the refundable portion of the credit in income, except to the extent that the prior-year real estate tax deduction did not reduce the federal income tax imposed.
©2014 CPAmerica International
If you’re planning a business trip this summer, consider adding a few days of “R&R” to create a partially tax-deductible vacation.
The rules for travel-related tax deductions can be complicated, so you may want to speak with your tax adviser as well as your travel agent.
If the trip is primarily for business and within the United States, the cost of your transportation is fully deductible both ways. International travel rules and the rules for attending seminars held aboard cruise ships are different. Consult your tax adviser if you are traveling aboard ship or out of the country.
Cruises are also subject to special rules. To be deductible, a business-related cruise has to be aboard a ship registered in the United States and must avoid foreign ports. You can deduct up to only $2,000 per year regardless of the length or frequency of travel, and you have to file a detailed written statement with your tax return.
Assuming your travel is within the United States, adding a few extra days on either end of the business trip will not disqualify your business deductions. As long as the primary purpose of the trip is business and you have the necessary documentation, your business deductions are allowed. You cannot deduct any expenses related to the recreational part of the trip.
You also cannot deduct expenses for anyone traveling with you who is not involved in the business of the trip. However, if you pack everyone into one car (yours or a rental), your deductible transportation includes the cost of getting the entire family to the destination.
And if everyone shares a single hotel room, it is deductible, too. However, any fees for added occupants or an upgrade to a larger room to accommodate the family are not covered.
During the business portion of the trip, your meals and those of your business associates are deductible at 50 cents on the dollar.
Any kind of travel tends to involve several incidental costs, such as taxi fares, Internet access fees, phone calls, tips and laundry charges. These costs are deductible if they are business-related.
Any time you travel for business, keep good records, not just receipts but anything that helps prove your business purpose – itineraries, agendas, programs and the like. The IRS will balk at expenses considered lavish or extravagant. Your expenses should be reasonable based on the facts and circumstances.
You will have a difficult time claiming a vacation is a “business trip” just because you keep up with work emails or pop into a branch office in Orlando on the way to Disney World. To be safe, the business portion of the trip should clearly be well in excess of 50 percent of the total time. The IRS is clear: “The scheduling of incidental business activities … will not change what is really a vacation into a business trip.”
A Florida district court jury has found that a U.S. citizen willfully failed to file required Reports of Foreign Bank and Financial Accounts for tax years 2004 through 2006 with respect to a Swiss bank account that he controlled, the U.S. Department of Justice has announced.
The judge in the case will determine later the amount of the penalty – which could be as high as 150 percent of the bank account balance.
U.S. citizens who have an interest in, or signature authority over, a foreign financial account are required to disclose the existence of the account on Schedule B, Part III, of their individual income tax return. Additionally, U.S. citizens must file a Foreign Bank and Financial Accounts Report (FBAR) with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 – at any point during the year – in which they have a financial interest or over which they have signatory or other authority.
Those who willfully fail to file their FBARs on a timely basis – that is, on or before June 30 of the following year – can be assessed a penalty of up to the greater of $100,000 or 50 percent of the balance in the unreported bank account for each year they fail to file a required FBAR.
In this case, Carl Zwerner opened a bank account in Switzerland in the 1960s. Zwerner maintained the account in the name of two different foundations he had created. He was able to use the proceeds of the account whenever he wanted and used it for personal expenses, including European vacations.
For the years at issue, 2004-2007, even though Zwerner filled out a tax organizer provided by his accountant, he answered “no” to questions asking whether “you have an interest in or signature authority over a financial account in a foreign country, such as a bank account, securities account or other financial account” and whether “you have any foreign income or pay any foreign taxes.” He failed to file the FBARs for those years.
The balance of the bank account during each of the years at issue exceeded $1.4 million.
The district court jury found Zwerner should be liable for penalties for 2004 through 2006. Zwerner faces a maximum penalty in excess of $700 thousand for each of the three years. The jury found that Zwerner’s failure to report the account was not willful for 2007. The district court judge will determine the final amount of the judgment after further proceedings.
The Eighth Amendment to the U.S. Constitution prohibits the imposition of “excessive fines.” Attorneys for Zwerner have been reported to be planning to argue that imposing the maximum penalty of $2.2 million (3 years x 50 percent of the account balance per year) – which is what the IRS proposed – would violate the Eighth Amendment.
©2014 CPAmerica International
The IRS has released a “Taxpayer Bill of Rights” intended to better communicate to taxpayers their existing statutory and administrative protections.
The IRS incorporated the rights into a new version of Publication 1, Your Rights as a Taxpayer, which accompanies IRS correspondence with taxpayers.
➤ The rights are:
➤ The right to be informed
➤ The right to receive quality service
➤ The right to pay no more than the correct amount of tax
➤ The right to challenge the IRS’s position and to be heard
➤ The right to appeal an IRS decision in an independent forum
➤ The right to finality – for example, to know the time allowed for challenging an IRS position, to know the maximum amount of time the IRS has to audit a specific tax year or collect a tax debt, or to know when an audit is finished
➤ The right to privacy – for example, IRS compliance with laws and respect for due process in inquiries, examinations and enforcements
➤ The right to confidentiality of information provided to the IRS
➤ The right to retain representation
➤ The right to a fair and just tax system
A survey by the Taxpayer Advocate Service in 2012 found that only 46 percent of U.S. taxpayers believed they had rights before the IRS, and only 11 percent knew what those rights were.
Some natural disasters are more common during the summer. But because major events like hurricanes, tornadoes and fires can strike at any time, it’s a good idea to plan for what to do in case of a disaster.
You can help make your recovery easier by keeping your tax and financial records safe. Here is some basic guidance provided by the IRS:
➤ Back up records electronically. Documents received by email, like bank statements, are easily secured. You can also scan tax records and insurance policies onto an electronic format. To store important records, use an external hard drive, CD or DVD. Be sure you back up your files and keep them in a safe place. If a disaster strikes your home, it may also affect a wide area. If that happens, you may not be able to retrieve your records easily.
➤ Document valuables. Take photos or videos of the contents of your home or business. These visual records can help you prove the value of your lost items. They may help with insurance claims or casualty loss deductions on your tax return. You should store them with a friend or relative who lives out of the area.
➤ Update emergency plans. Review your emergency plans every year, and update them when your situation changes. Make sure you have a way to get severe weather information. If threatening weather approaches, have a plan for what to do.
➤ Keep copies of tax returns or transcripts. To replace lost or destroyed tax returns, visit www.IRS.gov to get Form 4506, Request for Copy of Tax Return. If you just need information from your return, you can order a free transcript online or by calling (800) 908-9946. You can also file Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return.
The IRS offers more information about disaster assistance on its website. Click here or click on the Disaster Relief link in the lower left of the IRS homepage.
©2014 CPAmerica International
Seizing the occasion of “National Small Business Week” in mid-May, the U.S. Department of the Treasury encouraged small business owners to learn more about making starter savings accounts, called myRAs, available to their employees.
The Treasury has provided more details on its website about the working of the myRA program that it will roll out later in 2014.
President Obama promised in his 2014 State of the Union address that he would take executive action to create myRAs that would be available through employers and backed by the U.S. government. MyRAs were described as being simple, safe and affordable starter savings accounts to help low- and moderate-income wage earners save for retirement.
On its website, the Treasury stated that in late 2014 it will begin offering the myRA program. Treasury highlighted these key features of myRAs:
➤ Employees may open an account with as little as $25.
➤ Account holders may add to savings through regular payroll direct deposit – $5 or more every payday.
➤ Account holders will pay no fees.
➤ MyRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.
➤ MyRAs will not be limited to one employer – the account will be portable.
➤ MyRA contributions can be withdrawn tax-free.
➤ Earnings can be withdrawn tax-free after five years if the saver is at least age 59½.
➤ Account holders can build savings for 30 years or until their myRA reaches $15,000 – whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs.
As further explained in Treasury’s “myRA: Top Questions & Answers,” the myRA account will hold a new add-on Treasury security. As a result, savers will add to the value of a single security with each contribution they make, rather than buying additional securities. The security in the myRA account – like other U.S. savings bonds and Treasury securities – will be backed by the U.S. Treasury.
The retirement savings account will be a Roth IRA account and have the same tax treatment and follow the rules of Roth IRAs. The same tax advantages that apply to Roth IRAs will also apply to myRAs.
An individual who changes jobs can continue to add savings to an existing myRA account by setting up deposits through any employer that offers payroll direct deposit. An individual with multiple jobs will be able to use direct deposit from each paycheck to contribute to a single myRA. The deposits will be automatic every payday.
Employers will not be required to make myRA available to their employees.
Treasury said it will finalize procedures for rollovers to private-sector accounts (after the account is 30 years old or has reached its $15,000 maximum) when it launches myRAs later in 2014.
©2014 CPAmerica International
