income tax Archives - Page 4 of 5 - Barnard Vogler & Company

U.S. income tax is basically pay as you go. As you earn income during the year, you’re expected to pay your taxes on it – or you’ll be penalized.

You may pay taxes in basically two ways:

➤ Through withholding from your paycheck

➤ By making estimated payments if your withheld tax is insufficient

Those needing to make estimated payments are self-employed individuals who run their own businesses or professionals in business for themselves, as well as investors and retirees who receive interest or gains, among others.

For 2014, estimated tax deadlines for individuals are April 15, June 15 and Sept. 15, 2014, and Jan. 15, 2015. The January payment may be skipped without penalty if you file your 2014 tax return and pay all taxes due by Feb. 2, 2015.

If you do not pay enough tax throughout the year, penalties may apply. But with proper planning, the penalties are avoidable.

You won’t be penalized if you owe less than $1,000 in taxes after subtracting withholding and credits. You also won’t be penalized if you pay at least 90 percent of the tax you owe for the current year, or 100 percent of the tax shown on your tax return from the prior year.

If adjusted gross income for 2013 was more than $150,000 for married taxpayers, 110 percent of the 2013 tax liability must be paid for 2014, or there will be a penalty.

There are special rules for farmers and fishermen. If two-thirds of income comes from farming or fishing, only 66 2/3 percent of the current-year tax owed is payable in one installment due Jan. 15.

In general, your estimated tax payments should be made in four equal amounts to avoid a penalty. But if your income is received unevenly during the year, annualizing your payments and making unequal payments may enable you to eliminate or lower your penalty.

If it appears that you will be subject to an underpayment penalty, you may be able to reduce or eliminate the penalty by initiating or increasing your quarterly estimated tax payments or by adjusting your withholdings.

A quirk in the penalty rules treats withheld taxes – even those withheld late in the year – as if they had been taken evenly throughout the year. So, if you’re employed, instructing your employer to withhold more from your pay can even eliminate penalties that accrued earlier in the year.

While most people want to avoid unnecessary penalties, it is seldom a good idea to pay more than the law requires or to pay your taxes earlier than necessary. Why let the government hold your money only to return it to you next year as a tax refund – with no interest?

Your goal should be to pay just enough to avoid an underpayment penalty but not so much as to create a large refund. Consult with your tax adviser to optimize your tax payments to avoid penalties.

With the school year coming to a close, your son or daughter may be starting a summer job. Now may be a good opportunity to teach them a thing or two about taxes.

Several factors affect a student’s tax position, including the amount of anticipated annual earnings, status as a dependent and type of employment.

Their employers will ask your working children to fill out a Form W-4, which is used for computing income tax withholdings. The information provided on this form will affect the amount of taxes your children will owe next April or the size of their refunds. If a child will not earn enough to create an income tax liability, claiming exempt status on the Form W-4 may even eliminate the necessity of filing a tax return for 2014.

To qualify for exempt status, your student must have had no income tax liability in 2013 and also expect no income tax liability for 2014. However, exempt status does not apply to Medicare or Social Security taxes, which are still withheld and reduce your student’s take-home pay accordingly.

A student returning to the same place of employment as last summer may be required to complete a new Form W-4. Although W-4s usually remain valid until an employee wishes to change any information, if an employee claims exempt status from federal withholding, a new W-4 must be completed for the employer each calendar year.

Full-time students under the age of 24 are eligible to be claimed as dependents on their parents’ income tax return. For this purpose, children who attend school full-time during any part of five calendar months during 2014 are considered full-time students for the entire year. So, they may be full-time students even if 2014 is their graduation year.

Students may not need to file individual returns if they meet certain income thresholds. For 2014, a dependent child will not be required to file an individual income tax return if the child meets all of the following requirements:

➤ Is employed

➤ Earns less than $5,850

➤ Has less than $1,000 of unearned income, such as interest, dividends or capital gains

➤ Has gross income – earned plus unearned income – of no more than $6,200

However, if the student does not claim exempt status on Form W-4 and any amount of federal income tax is withheld from the student’s earnings, it will be necessary to file a return for 2014 just to claim the refund.

It is also important to understand the employment classification for the work the student is being hired to perform. Form W-4 filings pertain only to an individual hired as an employee.

Students hired as independent contractors are considered self-employed. This situation often occurs within service industries providing odd jobs, such as mowing lawns or babysitting. At the end of the year, instead of a W-2, self-employed individuals usually receive a Form 1099-MISC, which will not include any taxes withheld from earnings since withholding is not required of self-employed individuals.

Regardless of whether your student receives Form 1099-MISC, anyone earning a profit over $400 from a self-employed summer job is required to file an income tax return and pay the self-employment tax of 15.3 percent, in addition to any income taxes. To determine the amount of profits from self-employment, deduct any qualified expenses incurred that are directly related to the jobs performed from the gross income earned during the year.

Several unique rules frequently apply to students’ summer positions. For example, it is important to remember that all tips received, such as through a wait staff position, are taxable, and any tips received in excess of $20 per month must be reported to the employer. This reporting requirement ensures that the proper amount of tax is withheld not only from hourly earnings but also from tip income.

If a student is in a U.S. armed forces training program, such as ROTC, active duty pay while in training is fully taxable. However, certain allowances provided for food and lodging are not.

While students’ tax positions can vary based on specific circumstances, understanding the tax implications of summer jobs can help your students plan their 2014 tax situation and provide them with valuable tax knowledge that they can carry forward into their future careers.

With April 15 behind us, most taxpayers have filed their income tax returns. If for some reason, people have yet to file their 2013 return, they may owe interest and penalties when the return is ultimately filed.

It is important to note that interest and penalties are charged only if taxes are owed. If the return shows a refund, no interest or penalties apply, even if the return is filed late.

Here are eight points you should know about interest and late penalties:

The IRS checks all returns for mathematical accuracy. If the IRS finds you owe more money,it will send you a bill.
Interest is generally charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest is compounded daily. Currently, the interest rate is 3 percent because the federal short-term interest rate is 0 percent.
In addition to interest, if you file a return but do not pay the entire amount due on time, you will generally have to pay a late payment penalty of one-half of one percent for each month, or part of a month, up to a maximum of 25 percent, on the amount of tax that remains unpaid.
If you owe tax and do not file your return on time, a separate failure-to-file penalty is usually 5 percent of the tax owed for each month, or part of a month, that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100 percent of the tax owed.
The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it is 10 times more, so those who cannot pay what they owe by the due date should still file their tax return on time, or file for an extension, and pay as much as they can.
The maximum penalty for failure to file and for failure to pay is 25 percent of the amount of tax owed, so the combined maximum is 50 percent of the tax owed.
The penalties for filing and paying late may be abated if you have reasonable cause and the failure was not due to willful neglect. Generally, interest charges are not abated. They continue to accrue until all assessed tax, penalties and interest are paid in full.
If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

As you may be aware, for the last few years the Internal Revenue Service has been strongly urging taxpayers to file their income tax returns electronically. Tax return preparers have been required to IRS e-file individual income tax returns since 2012, with certain allowable exceptions. One of those exceptions is that the taxpayer can opt-out of e-filing and choose to file on paper. Although you may have a reason for not wanting to e-file, for the 122 million taxpayers who did e-file last year there are actually several good reasons for doing so.

E-file is actually the best way to file an accurate and complete return since tax software is designed to do the math and help you avoid mistakes. E-filing means the IRS does not have to re-type your tax return at their service center, which means less chance that the IRS will make a mistake when processing your return. When e-filing you will receive a confirmation that the IRS has received your tax return. This is proof that the IRS received your tax return and has started processing it. E-file also meets strict security guidelines and uses the best encryption technology. Since the start of the e-file program, the IRS has safety and securely processed more than 1.2 billion e-file individual tax returns.

If you would like to receive your refund earlier, e-filing is definitely the way to go. Because there is nothing to mail and your return is less likely to contain errors, e-filed returns have a shorter turnaround time. Most IRS refunds were issued in less than 21 days. An even faster way to get your refund is to combine e-filing with direct deposit into your bank account.

With the e-file program you have several different payment options available. If you owe taxes, you can e-file and set an automatic payment date on or before the April 15th due date. You can pay by check, money order, debit card or credit card. You can also transfer funds electronically from your bank account.

E-file is easy. You can e-file your federal return through IRS Free File at IRS.gov. You can also use commercially available software or simply ask your tax preparer to e-file your return.

Try it. You’ll like it.

The Tax Court has held that payments made by a parent corporation’s wholly owned subsidiaries to another wholly owned subsidiary were deductible as insurance expenses.

The court abandoned its previous position that there could not be risk shifting in brother-sister corporate arrangements (Rent-A-Center and Affiliated Subsidiaries v Commissioner, 142 TC No. 1, Jan. 14, 2014).

Rent-A-Center, Inc. (RAC) is the parent of a group of approximately 15 affiliated subsidiaries. RAC and its subsidiaries rented, sold and delivered home electronics, furniture and appliances. RAC’s wholly owned subsidiary, Legacy Insurance Co., Ltd., is a Bermuda corporation.

Legacy and RAC’s other wholly owned subsidiaries entered into contracts under which each subsidiary paid Legacy an amount – determined by actuarial calculations and an allocation formula – relating to workers’ compensation, automobile and general liability risks. In turn, Legacy reimbursed a portion of each subsidiary’s claims relating to these risks.

On their consolidated returns, RAC’s subsidiaries deducted the payments to Legacy as insurance expenses. On audit, the IRS determined that the payments were not deductible. In its majority opinion, the Tax Court concluded that the payments by RAC’s subsidiaries to Legacy were deductible as insurance expenses.

In making this determination, the court found that RAC presented convincing evidence that:

➤ Legacy was a bona fide insurance company.

➤ RAC faced actual and insurable risk.

➤ Comparable coverage with other insurance companies would have been more expensive.

➤ Some insurance companies would not underwrite the coverage provided by Legacy.

➤ RAC established Legacy for legitimate business reasons, including increasing the accountability and transparency of its insurance operations, accessing new insurance markets and reducing risk management costs.

The court concluded that Legacy was not a sham. It reasoned that, while federal income tax consequences were considered, the formation of Legacy was not a tax-driven transaction.

Legacy entered into bona fide arm’s-length contracts with RAC, charged actuarially determined premiums, was subject to the regulatory control of the Bermuda Monetary Authority and met Bermuda’s minimum statutory requirements. It also paid claims from its separately maintained account and was adequately capitalized.

The court noted that, to be deductible, an arrangement must involve insurance risk and meet commonly accepted notions of insurance. And, there must be risk shifting and risk distribution.

The court then determined that the arrangement in this case satisfied the following requirements:

➤ Insurance risk policies. RAC faced insurable risk relating to all three types of insured risk – workers’ compensation, automobile and general liability. RAC entered into contracts with Legacy and an independent insurance company to address these risks.

➤ Risk shifting. The court repudiated its 1987 Humana Inc. decision with regard to brother-sister arrangements and concluded that a balance sheet and net worth analysis, looking at the arrangement’s economic impact on the insured entities, were the proper analytical framework to determine risk shifting in brother-sister arrangements. It found that the policies shifted risk from RAC’s insured subsidiaries to Legacy, and that Legacy:

❋ Was formed for a valid business purpose

❋ Was a separate, independent and viable entity

❋ Was financially capable of meeting its obligations

❋ Reimbursed RAC’s subsidiaries when they suffered an insurable loss

A payment from Legacy to RAC’s subsidiaries did not reduce the net worth of RAC’s subsidiaries because, unlike RAC, the subsidiaries did not own stock in Legacy.

➤ Distributed risk. RAC’s subsidiaries owned more than 2,500 stores, had more than 14,000 employees and operated more than 7,000 insured vehicles. RAC’s subsidiaries had a sufficient number of statistically independent risks. Thus, by insuring RAC’s subsidiaries, Legacy achieved adequate risk distribution.

➤ Insurance in the commonly accepted sense. Legacy was adequately capitalized, regulated by the Bermuda Monetary Authority, and organized and operated as an insurance company. It issued valid and binding policies, charged and received actuarially determined premiums, and paid claims.

Adam Hart may have seen himself as an established pharmaceutical salesman, but the Tax Court didn’t agree.

Hart graduated from college in 2007. In 2009, he enrolled in an M.B.A. program with a concentration in finance.

Hart deducted $18,600 as an unreimbursed employee business expense for his education costs paid during 2009. The IRS denied the deduction.

Hart’s employment history during 2009 was as follows:

➜ Jan. 1 to April 30, 2009 – employed by Priority Healthcare Distribution as a cancer pharmaceutical salesman

➜ May 1 to Aug. 10, 2009 – unemployed

➜ Aug. 11 to Oct. 1, 2009 – employed by ADP Totalsource as a cancer pharmaceutical sales account manager

➜ Oct. 2 to Oct. 11, 2009 – unemployed

➜ Oct. 12 to Dec. 31, 2009 – employed as entry-level professional for Walgreen Co.

None of his 2009 employers required Hart to attend M.B.A. courses. Hart contended that he was in the business of selling pharmaceuticals and that the M.B.A. classes he took enabled him to obtain employment in 2009.

The IRS contended that Hart was not established in a trade or business during 2009 and that his employers did not require him to enroll in an M.B.A. program.

Implicit in claiming a business expense deduction for education expenses is the notion that the taxpayer must be established in a trade or business before any expenses are deductible. The IRS contended that Hart was not established in a trade or business before entering the M.B.A. program.

Hart contended that he was engaged in a trade or business because he focused on the selling of cancer pharmaceuticals, which is a specialized field.

The Tax Court sided with the IRS and denied the deduction. The court’s reasoning included the following:

➜ Hart graduated from college only two years before starting his M.B.A. program.

➜ Carrying on a trade or business has been defined as entailing continuous and regular activity.

➜ Hart’s employment in the cancer pharmaceutical sales field was not continuous.

➜ There is no evidence that Hart was carrying on a trade or business before he enrolled in the M.B.A. program.

Because the court ruled that Hart was not engaged in a trade or business, it had no reason to decide whether the M.B.A. program would qualify Hart for a new trade or business (Adam E. Hart et. ux. v. Commissioner, T.C. Memo 2013-289, Dec. 23, 2013).

Yes, it is that time of year. Now that the holidays are over, it’s time to start thinking about income tax. Were there any life event changes such as getting married, having a baby, adopting a child, death of a spouse, purchasing a home or any other events that would affect your income tax return?

Start accumulating your documents to prepare your 2013 income tax return. Set aside a box, a file or a cubby to hold tax documents as you receive them in the mail. Be on the lookout for envelopes with “tax document enclosed” on them. You should receive Form W-2 if you were an employee in 2013, Form 1098 Mortgage Interest Statement if you own property, as well as various types of Form 1099, if any. You’ll also need Forms K-1 from pass through entities that you have an interest in. You should have been accumulating documents and receipts for tax deductions and contributions received throughout the year.

How will you prepare your income tax return? The IRS offers a free filing on their website for taxpayers with adjusted gross income (AGI) of $57,000 or less. The free filing is a good option for taxpayers with uncomplicated tax situations. There are also numerous tax preparation software packages on the market for individuals ineligible to take advantage of the IRS Free File.

Hiring a professional to prepare your income tax return makes sense when your tax situation includes unusual tax circumstances, numerous investments in rentals or partnerships, or you just need to be confident that your return was prepared correctly and that all possible tax savings were considered.

Now get prepared and get your 2013 income tax return filed by April 15, 2014! (An extension to file is available, but not to pay if you can’t meet this deadline).

There have been new developments in the aftermath of the Supreme Court decision that struck down Section 3 of the Defense of Marriage Act (U.S. v. Windsor, et. al., 111 AFTR 2d 2013-2385, June 26, 2013), which required same-sex spouses to be treated as unmarried for purposes of federal law.

Now the IRS has issued a ruling (Rev. Rul. 2013-17) concluding that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether or not the couple lives in a jurisdiction where same-sex marriage is recognized.

The ruling clarifies that same-sex couples will be treated as married for all federal tax purposes, including income, gift and estate taxes and more. The ruling applies to all federal tax provisions in which marriage is a factor. More than 200 Internal Revenue Code sections and regulations relate to laws that refer to marriage, spouse, husband or wife. Some of the provisions affected include:

➤ Filing status

➤ Claims of personal and dependency exemptions

➤ Standard deductions

➤ Employee benefits

➤ IRA contributions

➤ Earned income tax credit claims

➤ Child tax credit claims

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships, even if recognized under state law.

The ruling concludes that legally married same-sex couples:

➤ Generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status. Single filing status is not appropriate.

➤ May file amended returns for prior years, if the tax year is still open under the statute of limitations.

Note that, in some cases, filing a joint return may result in a higher tax bill than the combined tax on two unmarried returns. The ruling concludes that same-sex couples who were married in prior years may, but are not required to, file amended returns.

It is advisable to make the tax calculation both ways before deciding to amend a prior return.

Generally, the statute of limitations expires three years after the later of the original due date of the return or two years after the date the tax was paid. For most people, 2010, 2011 and 2012 are still open under the statute of limitations.

Some taxpayers may have special circumstances – such as signing an agreement with the IRS to keep the statute of limitations open – that permit them to file refund claims for tax years 2009 and earlier.

According to the ruling, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pretax and excludable from income.

The ruling applies to filings (original or amended) on or after Sept. 16. This provides a limited opportunity for same-sex married couples, who extended their 2012 tax returns and have not yet filed, to file as unmarried taxpayers until Sept. 16.

As tax season begins to draw to an end, the Internal Revenue Service is issuing its annual “The Dirty Dozen” warning to consumers about fraud on and by taxpayers.
This year’s list is little changed from 2012, and is again headed up by identity theft. A growing problem every year worldwide, the IRS is stepping up its vigilance in this area, from establishing an Identity Protection Web Portal, and increased prosecution of offenders. Last year over $20 billion in fraudulent refunds were prevented, up from $14 billion in 2011.

Another scam is “phishing”, where taxpayers are sent fake e-mails asking them to provide the IRS with sensitive personal information such as social security numbers. A good rule of thumb to remember is that the IRS never will attempt to contact you by e-mail, text message or social media.

Tax fraud is not just committed by outsiders, however. Unscrupulous tax preparers are also lurking. The amount of fraud committed (or attempting to be committed) by taxpayers rises every year as well.

Beware of any tax preparer that offers to get you “free money” by claiming tax credits that you do not in reality qualify for. Some preparers have also been known to exaggerate wages or self-employment income to inflate refundable credits.

Taxpayers have also been known to try to avoid taxes with hiding income offshore. While offshore income was always reportable income, only in recent years did it come to light that many people were not in fact reporting it. In 2009 the IRS implemented an Offshore Voluntary Disclosure Program that to date has 38,000 participants. In 2012, the program was extended indefinitely. Penalties for not reporting this income can be steep.

So whether it’s a scam artist, an unscrupulous tax preparer or just you, remember that the IRS is watching out for you AND over you.

The IRS has just announced plans that the 2013 tax season will begin on January 30, 2013 (a Wednesday if you’re wondering). This misses the previously set date of January 22, 2013, but given that Congress passed the American Taxpayer Relief Act (ATRA) in 2013 when it should have passed it in 2012, a late start of only eight days is impressive. If we could just get Congress to get things done so quickly.

Starting on January 30, the IRS says more than 120 million households should be able to begin filing returns. Those households include people who are “affected by the late Alternative Minimum Tax (AMT) patch as well as the three major ‘extender’ provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.” For the rest of tax filers unable to file starting January 30, look to late February or into March to be able to submit a return. This group of tax filers includes people who claim the residential energy credits (Form 5695), depreciation and amortization (Form 4562), or general business credits (Form 3800). The IRS has posted a list of the forms that won’t be accepted until a later date at IRS.gov. It often happens that those in this tax filing group don’t file until later in the season anyway or they just go ahead and file an extension, so the delay in being able to file may not cause much of a delay at all.

The IRS does remind all of us that it will not process paper returns before the January 30th opening date, so there’s no rush to get that return finished and in the mail in the next couple of weeks. Also, paper filing is not the most efficient way to file. If you want your tax refund sooner you should e-file with the direct deposit option checked.

If you have any questions, please feel free to contact us here at Barnard Vogler & Co.