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When it comes to income taxes, it pays to be organized.
Begin gathering your tax information as early as it is available. You should receive most of your 2014 tax documents by early to mid-February 2015.
Probably the most important document you need to locate is a copy of last year’s tax return. The tax situation of most individuals does not change dramatically from year to year. The information shown on last year’s return is a good guide to what you need to look for this year.
On the other hand, if you experienced a life event during 2014, your tax situation could be in for a big adjustment. Life events include marriage, divorce, birth of a child, retirement, a business startup or a change in employment.
Everyone’s situation is different, but most people receive some common tax documents in the mail:
You may receive other income tax-related forms as well:
All of these forms will be needed to determine whether you qualify to itemize your deductions.
If you are self-employed, you will also need to gather receipts for all deductible business expenses. Check out IRS Publication 535 for more information about business expenses.
While you’re digging up all these records, look ahead to next year at this time. Sort everything and create files to hold:
Then keep items sorted as they come in during 2015. Using this method, next year’s income tax return should be easier.
©2015 CPAmerica International
The U.S. Tax Court recently determined that a cash method taxpayer is entitled to claim an American Opportunity Credit only in the tax year when the payment was actually made – not for the academic year when the tuition payment was paid.
John and Brenda Ferm paid their daughter’s tuition at the local community college for the 2011 winter semester, which ran January through April 2011. They made the tuition payments in three installments with the majority of the tuition paid on Dec. 28, 2010.
The taxpayers timely filed their 2011 income tax return, but they did not claim the American Opportunity Credit, a tuition credit available to parents of dependent children who are undergraduate students.
On April 1, 2013, the taxpayers filed an amended return. On the amended return, the taxpayers claimed an American Opportunity Credit of $2,107.
On June 13, 2013, the IRS sent the taxpayers a notice of deficiency disallowing the American Opportunity Credit for lack of payment verification.
The taxpayers filed a petition in court contesting the IRS in its disallowance of the credit.The taxpayers provided the court with the appropriate evidence that the tuition had been paid. The court disallowed all but $157 of the credit because $2,151 of the qualified educational expenses was paid in 2010, not in 2011.
The portion of the tuition paid in 2010 cannot be used to claim a credit in 2011. Only $157 of qualified tuition and related expense was actually paid in 2011.
The American Opportunity Credit is allowed only when payment is made in the same year that the academic period begins.
When a taxpayer prepays qualified tuition and related expense during one taxable year for an academic period that begins during the first three months of the following taxable year, the academic period is treated as beginning during the taxable year in which payment was made.
In this case (John Mark Ferm and Brenda Kay Ferm vs. Commissioner, T.C. Summary Opinion 2014-115, Dec. 30, 2014), the academic year and the majority of the tuition payments were considered 2010 transactions, not 2011, explaining the court’s disallowance of most of the credit.
The Tax Court’s opinion in this case may not be used as precedent for any other case.
©2015 CPAmerica International
Certain expiring tax provisions were extended on Dec. 19, 2014, when President Obama signed into law the Tax Increase Prevention Act of 2014.
Some interesting examples of tax law extended on the individual income tax side are:
These provisions of the Internal Revenue Code were set to expire in 2014. With passage of this new law, you are still able to take advantage of these provisions in 2014.
These are just a few examples of the various individual tax law provisions that were extended. A number of business income tax provisions were extended as well.
The law (P.L. 113-295) also included technical corrections to the Internal Revenue Code of 1986.
©2015 CPAmerica International
Now is the time to begin logging your business travel miles if you want to take a tax deduction for 2015.
The IRS requires strong substantiation – even if it is obvious that you use your vehicle for business purposes.
If you are audited, estimates are not acceptable. Each business trip should be documented with location, destination, purpose of trip, date and number of miles driven. Business driving must be separated from personal driving.
If you haven’t been taking a deduction for your business driving, 2015 is a good time to start because recently released standard mileage rates are attractive considering the decrease in gas prices.
Effective Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup truck or panel truck will be:
✦ 57.5 cents per mile, an increase from 56 cents per mile in 2014
✦ 23 cents per mile for medical or moving purposes, down from 23.5 cents per mile in 2014
✦ 14 cents per mile driven in service of charitable organizations (the same rate as last year – the longtime rate fixed by Congress)
Taxpayers also have the option of deducting vehicle expenses based on actual costs of using a vehicle rather than standard mileage rates.
For those filling out their 2014 tax returns, remember to use mileage rates that applied for 2014. Your mileage expenses must be documented in detail or they won’t be allowed.
If you don’t have strong enough substantiation and are audited, the IRS will in all likelihood deny your entire deduction. And to make matters worse, you’ll probably also be charged penalties and interest for overdue taxes.
If substantiation of auto expense records is lost or stolen, the IRS will generally also deny the deduction.
The standard mileage rate is based on an annual study of the costs of operating a vehicle, including gas, oil, maintenance, tires, repairs, insurance and depreciation.
©2015 CPAmerica International
Landlords who want to deduct 100 percent of their rental property expenses must be sure to watch the personal use of their rental property.
In the case of Mark A. Van Malssen and Patricia D. Kiley v. Commissioner, T.C. Memo 2014-236, T.C.M., the taxpayers were limited in the amount of rental expenses that they could claim because their personal use of the rental property exceeded 14 days.There is a section in the Internal Revenue Code that limits the amount of rental expenses that can be deducted when personal use of the rental property exceeds 14 days. When that is the case, instead of being able to deduct 100 percent of rental expenses, the owner must allocate those expenses.
The allocation percentage is derived by dividing the number of days the property was rented by the total number of days that the rental property was used. The number of days the rental property was used is determined by adding the rental days and the personal use days together.
Mark A. Van Malssen and Patricia D. Kiley had deducted 100 percent of their rental property expenses on their 2008 and 2010 jointly filed 1040 returns. In both of these years, it was determined by the facts and circumstances of the case that the personal use of the rental property had exceeded 14 days.
Therefore, instead of deducting 100 percent of their expenses, they should have allocated the expenses based on the above allocation percentage.
The issue in this case was how many personal days the taxpayers had used their rental property. The taxpayers said they used the rental property in both 2008 and 2010 for 14 days. Had this beenthe only personal use of the rental property, they would have been entitled to claim 100 percent of the rental expenses as a deduction.
An IRS regulation states that when the principal purpose of use of the dwelling unit is to make repairs and maintenance, those days do not count as personal days.
Whether the principal purpose is for repairs and maintenance or for personal use is determined under a facts-and-circumstances test.
A number of times over the course of 2008 and 2010 Mr. Van Malssen made the 350-mile trip from his home to the rental property in South Carolina. If the purpose of the trip is deemed to be primarily business, then the travel days are not considered to be personal days. If the primary purpose of the trip is personal, then those travel days are considered to be personal days.
The travel days were caused because it took the whole day for Mr. Van Malssen to drive from his personal residence to the rental property.
Mr. Van Malssen kept very detailed logbooks regarding his personal and business use of the rental property. The court used thoselogbooks when determining whether the different travel days counted as personal use days.
When traveling to the rental property, if more than 50 percent of the days spent at the rental property are related to making repairs and maintenance, then all of the days spent at the rental property and the one day of travel time are all deemed to be nonpersonal use.
But if less than 50 percent of the days spent at the rental property were related to repairs and maintenance, then the one day of travel time is deemed to be personal use time.
Because the court ruled that some of the travel time from the main residence to the rental property was properly counted as personal time, the taxpayers exceeded 14 personal use days in both tax years 2008 and 2010.
Because of this fact, the taxpayers were required to allocate the rental property expenses instead of deducting 100 percent of them. The court denied some of the rental expenses and a deficiency judgment was asserted against the taxpayers.
©2014 CPAmerica International
Discharge of debt is generally considered income for tax purposes – and it will be again in 2014 for principal residence indebtedness.
Many taxpayers took advantage of not being taxed on discharge of debt for principal residences from Jan. 1, 2007, through Dec. 31, 2013. Unfortunately, this exclusion has ended effective for the 2014 tax year. It applied to homeowner’s mortgages or equity loans secured by their residence.
For those who had their home reposed by the bank or had a short sale in which the fairmarket value of the home was less than the balance owed on the mortgage, the bank allowed them to walk away from the mortgage without paying the remaining balance still owed.
And because the IRS had a provision in one of their code sections in which this deficient balance was not considered to be taxable income, the taxpayer did not have a taxable event as a result of this transaction.
Starting in 2014 this loophole is no longer available. If the bank forgives debt related to a mortgage or home improvement loan secured by your primary residence, that debt forgiveness will now be considered taxable income.
The company that discharged the debt will send a 1099 form at tax time, and the taxpayer will be required to include the amount of debt discharged as income the tax return.
The IRS provides for five situations in which this discharge of debt is not taxable income. Those five situations are:
The general rule regarding gifts to employees is that they are taxable income to the employee.
There are some exceptions to this general rule. Two of the more common exceptions are:
1. Employee achievement awards
2. De minimis (small) fringe benefits
Employee achievement awards are nontaxable. These awards are tangible property that is given to the employees as a reward for length of service or for achieving some sort of a safety standard.
The IRS worries that employee achievement awards are actually a form of disguised compensation. That is why when the company is giving out these awards, they should be presented in some type of ceremonial format.
The amount of the gift that the employee is allowed to exclude from income is tied to the amount the company claims as a deduction. If the awards are given by a company that does not have a qualified plan, the maximum amount of the deduction for the company is $400. Therefore, the maximum amount the employee is able to exclude from income and treat as a nontaxable gift would be $400.
So, for example, if the employee received an award with a fair market value of $650, $400 of that would be considered a gift and $250 would be considered taxable compensation.
If the gift is given to an employee by a company that does have a qualified plan – an established written plan that does not discriminate in terms of eligibility or benefits to highly compensated employees – the maximum amount of the deduction for the company would be $1,600. The employee would then be able to exclude this same amount from income and treat it as a gift.
Other categories of gifts that are nontaxable are de minimis fringe benefits. De minimis fringe benefits are property or services that are so small as to make accounting for it unreasonable or administratively impracticable.
Not all de minimis fringe benefits are gifts. In fact, most are not. The IRS provides some guidance on what a de minimis fringe benefit is. The following three items are considered to be de minimis fringe benefits that impact the discussion of nontaxable gifts:
1. Birthday or holiday gifts of property with a low fair market value.
2. Occasional theater or sporting event tickets.
3. Flowers, fruit, books or similar property provided to employees under special circumstances.
These three items would be considered gifts and not added to the employees W-2 wages.
Employers that give gifts to employees for the holidays would be well advised to know what the rules are. Otherwise that gift might end up being taxable income to that employee.
Penalized for withdrawing funds early? All is not lost.
You are entitled to a deduction for a penalty imposed on an early withdrawal of funds from a timed savings account or a certificate of deposit. And you are entitled to this deduction even if you do not itemize deductions on your 1040 return.
However, you must file Form 1040 to claim this deduction. You cannot claim it on either Form 1040A or Form 1040 EZ.
The Internal Revenue Code has a section that benefits taxpayers who are penalized because they withdrew funds from a certificate of deposit or a timed savings account. When an account owner makes a withdrawal of these types of funds early, the bank or savings institution imposes a penalty.
The amount of this penalty is required to be reported to the taxpayer on Form 1099-INT at the end of the tax year. Line 2 of this form contains the amount of the early withdrawal penalty. The amount of interest income earned during the year on the investment is reported on line 1 of the same form.
In certain instances, the amount of the penalty can exceed the amount of interest income earned on the account.
This type of deduction is referred to as an above-the-line deduction because the deduction is used in completing the taxpayer’s adjusted gross income (AGI). AGI is all of a taxpayer’s sources of income added together, reduced by a group of deductions known as below-the-line deductions.
The deduction of an early withdrawal penalty is an example of one type of above-the-line deduction.
©2014 CPAmerica International
Chet Lee West found out the hard way that you cannot suppress evidence, claiming it was barred under the six-year statute of limitations, when charged with income tax evasion.
West was trying to invoke Internal Revenue Code Section 6531, which outlines the periods of limitations on criminal prosecutions. But that section doesn’t apply because it is a procedural limitation designed to bar stale claims and charges. It doesn’t affect the introduction of relevant evidence.
The facts of United States vs. Chet Lee West (U.S. District Court, Nebraska, 2014-2 U.S.T.C., ¶50,486, Oct. 2, 2014) reveal that, on July 17, 2013, the grand jury for the district of Nebraska returned an indictment against West charging him with three counts of income tax evasion.
The deadline to file pretrial motions was Jan. 31, 2014. On Aug. 18, 2014, West filed a pretrial motion to suppress. He was trying to suppress any evidence that occurred before Dec. 31, 2006. Any evidence that occurred before this time period would lie outside of the statute of limitations.
The United States responded to this by stating that West’s motion was untimely and lacked merit.
The deadline to file pretrial motions was July 17, 2013. West filed his pretrial motion well after this deadline – on Aug. 18, 2014. It has been established by prior court cases that “if a party fails to file a pretrial motion before the pretrial motion deadline, the party waives that issue.”
The court should have denied West’s motion because it was not filed by the deadline. But it decided to proceed with the case and decide it on its merits.
Code Section 6531 does not disallow the admission of evidence. “The statute of limitations is a defense to being prosecuted, not for admitting evidence. As long as the prosecution is timely filed, the statute of limitations has no bearing on the admissibility of evidence.” In this case, the prosecution was filed in a timely manner.
What determines whether the evidence is admissible is its relevance, not the date of the evidence. Evidence that is relevant is admissible unless it is prohibited by the Supreme Court, United States Constitution, federal statute or the federal rules of evidence. None of these prohibitions applied in this case.
Therefore, the judge determined that Code Section 6531 did not apply and denied West’s motion to suppress the evidence. ■
Joseph Sanchez mailed a petition challenging a deficiency assessed against him by the Internal Revenue Service. Unfortunately for Sanchez, the IRS dismissed his petition because the agency did not receive it in a timely manner.
This situation involved a dispute over Sanchez’s tax year 2010 individual income tax return. The IRS sent Sanchez a notice of deficiency claiming that he owed approximately $13,000 of additional tax, penalties and interest.
The letter from the IRS clearly stated that Sanchez had 90 days from the date of the letter to file a petition with the U.S. Tax Court. The letter even stated the “last date to petition the tax court: March 3, 2014.”
On March 3, 2014, Sanchez had a third party deliver to the U.S. Postal Service a letter containing his petition to the IRS. This petition was Sanchez’s response to the deficiency assessed against him.
The third party even gave a written statement to the court, claiming she had delivered the letter containing the petition documents to the post office on March 3, 2014. She further stated that, instead of waiting in a long line, she had dropped the petition paperwork off at the post office without having a certified mail receipt stamped by a post office employee.
Therefore, the third party had no documentation showing that the post office had received the package on March 3, 2014.
The court actually received the petition documents on March 10, 2014. The envelope containing the petition documents had a U.S. Postal Service postmark date of March 4, 2014.
On the envelope was also a stamp printed on a computer by a third party using software from Stamps.com, as well as a certified mail sticker. The stamp showed the date of March 3, 2014.
The IRS has a section in its regulations that deals with this issue. The regulation section provides that “if the envelope has a postmark made by the U.S. Postal Service in addition to a postmark from another entity, the postmark made by the other entity is disregarded. In determining whether the envelope was mailed in a timely fashion, the date provided by the U.S. Postal Service is the date used.”
In this case, that date was March 4, 2014. For Sanchez to have made a timely response, he would have needed to have his envelope postmarked no later than March 3, 2014.
Therefore, the court had no choice but to dismiss the case on the grounds that the petition was not timely filed. A judgment in the amount of roughly $13,000 was entered on behalf of the IRS (Joseph Sanchez v. Commissioner, U.S. Tax Court, T.C. Memo 2014-223, Oct. 22, 2014).
This situation could have been avoided had the third party delivered the letter to the U.S. Postal Service in time to have it stamped as of March 3, 2014.
