Reno accountants Archives - Page 10 of 18

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.

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.”

©CPAmerica International

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.

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.

The Tax Court has concluded that a taxpayer who sold his primary residence and excluded gain, then reacquired it after the buyers defaulted, had to recognize long-term capital gain on the reacquisition, including amounts previously excluded.

In 2006, Marvin Debough sold his personal residence, which he had owned for 40 years. Under the terms of the sales contract, the buyers were to make installment payments until July 2009, at which time the remaining balance would become due and payable.

In 2006, 2007 and 2008, Debough received payments from the buyers. After excluding $500,000 of the gain from the sale of a principal residence and making an installment sale calculation, Debough reported $56,920 of taxable gain during 2006-2008. During those years, he received $505,000 of principal payments from the buyers.

Subsequently, the buyers failed to comply with the terms of the contract, and Debough ultimately reacquired the property in 2009. After some debate, both Debough and the IRS agreed on the basis of the property sold that he had gain to recognize as a result of reacquiring the property. They disagreed as to the amount.

Debough thought that most of the gain should be excluded as gain from the sale of a principal residence. The IRS determined that his gain was $448,080 – the $505,000 cash Debough had received during 2006-2008, less the $56,920 gain he reported during those years.

Internal Revenue Code Section 1038 governs reacquisitions of real property and provides the rules regarding a reacquisition of a principal residence for which gain had been excluded. If the reacquired property is resold within one year of the reacquisition, the resale is treated as part of the original sale. The IRS said that the exclusion was not available to Debough because he did not sell the property within one year after he had reacquired it.

The Tax Court agreed with the IRS. In addition to agreeing with the IRS’s technical reasoning, the court found that there was “nothing unfair” in taxing the income since Debough was actually in a better position than he was before the sale, having both ownership of the property and $505,000 in cash (Marvin E, Debough v. Commissioner, 142 TC No. 17, May 19, 2014).

The IRS in Notice 2014-37 is allowing certain 401(k) and 403(m) retirement plans, including 403(b) plans, to make midyear amendments to reflect the U.S. Supreme Court’s Windsor decision.

The Supreme Court struck down Section 3 of the Defense of Marriage Act in U.S. v. Windsor, et al. (Sup Ct 2013) as an unconstitutional deprivation of equal protection. Section 3 had defined marriage for purposes of administering federal law as the “legal union between one man and one woman as husband and wife.” As a result, same-sex spouses were not recognized for purposes of qualified retirement plans.

Following the court’s decision, the IRS issued Revenue Ruling 2013-17 stating that same-sex couples who were legally married in jurisdictions that recognize their marriage will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage.

In Notice 2014-19, the IRS provided guidance on the effect of the Windsor decision on qualified retirement plans and plan amendments. To be considered a qualified plan, a cash or deferred arrangement (CODA), such as a 401(k) plan, must meet certain nondiscrimination tests. A CODA that meets safe-harbor provisions described in regulations generally must have those provisions in place before the beginning of the plan year and be maintained throughout a full 12-month plan year.

The IRS has now said that a plan will not fail to satisfy the requirements to be a Code Section 401(k) or 401(m) safe-harbor plan merely because the plan sponsor adopts a midyear amendment pursuant to Notice 2014-19, Q&A 8. ■

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.

Appalled by what it called the IRS’s unfair argument, the Court of Appeals for the Eighth Circuit has reversed a Tax Court decision that a taxpayer did not make a timely rollover to his IRA from which he previously had made IRA withdrawals at different times.

The Tax Court had held that the rollover, which was in the same amount as one of the withdrawals, was not timely because it was not made within 60 days of that withdrawal. However, the Eighth Circuit found that the rollover occurred within 60 days of a withdrawal in a larger amount and thus

qualified as a valid partial rollover.

During 2007, Harry Haury made four withdrawals from his IRA:

➤ Feb. 15 – $120,000

➤ April 9 – $168,000

➤ May 14 – $100,000

➤ July 6 – $46,933

On April 30, 2007, Haury deposited $120,000 into his IRA. The IRS matched the $120,000 contribution with the $120,000 distribution and concluded more than 60 days had elapsed, precluding rollover treatment. The Tax Court agreed with the IRS.

On appeal, Haury argued that the $120,000 contribution occurred within 60 days of the April 9 distribution and rollover treatment should be allowed. The appellate court agreed with Haury (Haury v. Commissioner, CA-8, wMay 12, 2014).

During the appeal, the IRS acknowledged that the 60-day limit was satisfied. However, the IRS argued that the partial rollover defense was forfeited because Haury had failed to argue it to the Tax Court. The appellate court rejected this contention.

Then the IRS tried to argue that Haury failed to prove that he had not already exercised his one-rollover-per-year opportunity within the 12 months preceding this transaction.

The appellate court characterized this argument as silly and factually without merit since the IRS agreed that it had access to the transactions in Haury’s IRA account during the year leading up to April 30, 2007. There were no prior rollovers in the records.

Important Reminder: The IRS has historically applied the one-rollover-per-year rule separately to each IRA. However, starting with distributions made after 2014, it intends to apply the rule on a more restrictive aggregate basis.

A recent Tax Court decision serves to re-emphasize that, when the owner of a hobby-like activity meets the requisite profit motive in one year, the courts may not necessarily apply that profit motivation to other years. Each year will be tested on its own.

Merrill Roberts is a former nightclub owner who became a horse breeder. Despite his rudimentary recordkeeping system and history of large losses, his profit objective was shown by the following facts:

➤ He liquidated his old, unsuitable facility and moved his activity to new property on which he built a premier training facility.

➤ He hired an assistant trainer.

➤ His accounting methods allowed him to make informed business decisions.

➤ He consulted with bloodstock agents and respected trainers on various business aspects.

Further, Roberts was asked by peers to run for leadership roles in professional horse racing organizations and lobbied for horse racing interests. He spent substantial time on business and was successful in his prior business ventures.

However, the court found that Roberts did not engage in the activity with the required profit motive during the earliest two years involved in the case. The court determined that his primary motivation in those years was as an investor in real estate.

The court said that Roberts’ participation in horse-related activities during those two years was equally divided between the social aspects and the business aspects of horse racing (Merrill C. Roberts v. Commissioner, TC Memo 2014-74, April 29, 2014).

Roberts avoided accuracy-related penalties during the earlier years by demonstrating reasonable cause/good faith for his tax positions. ■

The IRS has introduced a new one-year pilot program providing administrative relief to plan administrators and plan sponsors of certain retirement plans that must file with the IRS – but not the Department of Labor.

The one-year pilot program, established by Revenue Procedure 2014-32, provides relief to plan administrators who fail to timely file Form 5500-EZ. The relief is available to the plan administrator or plan sponsor of certain one-participant plans and certain foreign plans. No penalty will be assessed for late filing.

The applicant’s submission must include a complete Form 5500 Series Annual Return/Report, including all required schedules and attachments, for each plan year for which the applicant is seeking penalty relief. All returns must be sent to the IRS and cannot be filed through the Department of Labor (DOL) EFAST2 filing system. The relief is effective on June 2, 2014, and will remain in effect until June 2, 2015.

In addition, the IRS recently issued Notice 2014-35 to provide relief for late filers that satisfy certain requirements as well as the Delinquent Filer Voluntary Compliance (DFVC) Program administered by the DOL Employee Benefits Security Administration.

The IRS will not impose penalties for late filing of Form 5500, Form 5500-SF and Form 8955-SSA if the filer:

➤ Is eligible for, and satisfies the requirements of, the DFVC Program with respect to a delinquent Form 5500 series return; and

➤ Separately files with the IRS, within the prescribed time, a Form 8955-SSA with any information required to be filed for the year to which the DFVC filing relates.

Any Form 8955-SSA required to be filed with the IRS must be filed on paper by the later of 30 calendar days after the filer completes the DFVC filing or Dec. 1, 2014.