By Leslie C. Daane, CPA firstname.lastname@example.org
Under the recently passed Tax Cuts and Jobs Act (TCJA), all miscellaneous itemized deductions that were subject to the two-percent floor were eliminated. Some of the deductions eliminated that fall under this category include unreimbursed employee expenses, investment fees, and tax preparation fees to name just a few that may impact you individually.
One such deduction that you may not be as familiar with is the excess deductions allowed a beneficiary on termination of an estate or trust. This deduction typically arises when an estate or trust is terminated and in the year of termination expenses are in excess of income. This “excess deduction” is then passed out to the beneficiary to report on their individual income tax return. Under the TCJA this deduction appears to have been eliminated.
The AICPA has provided a letter of comment to the IRS in response to Notice 2018-61 concerning this specific issue. These excess deductions can include expenses that are not limited to the two-percent floor on the estate or trust return but are “above the line” deductions. These include fiduciary fees, attorney fees, and accountant fees. Many times these are not paid until the final year thus resulting in the deductions exceeding the income in the final year. The AICPA’s position is that the beneficiaries should be allowed to deduct these expenses in the same manner as the trust or estate would have, “above the line.”
Treasury and the IRS intend to issue regulations to clarify if trusts and estates may continue to deduct these “above the line” deductions. However, it is unclear as to the outcome on the deductibility of “excess deductions” at the individual level.
As we launch into tax season, there are still many areas of the TCJA that have not been adequately addressed to date. I expect this will result in more extensions and possibly more amended returns once they get around to addressing the questions still unresolved.
On Tuesday, tax season officially began, and the IRS started accepting electronic returns, and processing paper returns. However, many of you may be waiting for your tax documents. The IRS urges taxpayers to wait until they have received all tax documents before filing. Here is a list of some common IRS forms you may be waiting for to file your return. I have included the due dates that are listed on the back of the tax documents. The form is considered on time if they have been mailed to the recipient on or before that date. Generally, many of these forms are required to be mailed by January 31st, but since this date falls on a weekend the due date is the next business day.
Check the IRS website under Current Forms & Publications Search to look at any additional tax forms that you have questions about.
Be sure to look out for any mention of possible amendments on any of these forms. It is common for brokerages to provide 1099 forms by the deadline, but then have a note on them that there may be changes that could cause an amended 1099.
If you are waiting on a K-1 from a separate entity, you may be waiting awhile longer. The date you receive this will depend on when the entity files their return. Be sure to check the due date of the entity’s return, and be aware of possible extensions.
The one-year IRS pilot program to provide relief to plan administrators who didn’t file required retirement plan returns on Form 5500-EZ expires June 2, 2015. So, anyone wanting to take advantage of the penalty relief program should act fast.
This penalty relief is available to:
➜ Certain small business (owner-spouse) plans and plans of business partnerships
➜ Certain foreign plans
Small business plans provide retirement benefits only for the owner and the owner’s spouse.
The late filing penalty for 5500-EZs is $25 per day, up to a maximum of $15,000 per return. A business being assessed the maximum penalty for four years’ worth of unfiled returns could pay as much as $60,000 in penalties if it were not for this pilot program.
Under the program, no penalty or other payment is required to be paid for late filing. The applicant must include a complete Form 5500 Series Annual Return/Report, including all required schedules and attachments, for each year that the applicant is seeking penalty relief.
All of the delinquent 5500s must be sent directly to the IRS. The businesses cannot file through the Department of Labor’s EFAST2 filing system. Filing through the EFAST2 filing system results in returns being processed as they normally would be, with applicable late-filing penalties being assessed.
Plans subject to ERISA are not eligible for this program.
A foreign plan is a retirement plan maintained outside the United States, primarily for nonresident aliens. A foreign plan is eligible for relief if the employer that maintains the plan is a domestic employer or a foreign employer with income derived from sources within the United States.
At the end of this pilot program, the IRS will consider whether it should be replaced with a permanent one. If a permanent program is established, the IRS will charge businesses a fee to take part in the program. ■
©2015 CPAmerica International
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.
©2014 CPAmerica International
As promised, I am updating my earlier blog outlining many tax law questions left unanswered as a result of the recent Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act (DOMA). The IRS has recently announced their ruling addressing the tax law implications arising from the Court’s decision on DOMA.
The IRS took a surprisingly bold stand in their recognition of a same-sex marriage in the eyes of federal tax law. While it was clear early on that a same-sex couple married and residing in a state or jurisdiction recognizing same-sex marriages would be considered an married couple, there were questions as to whether other same-sex marriages with different situations would be recognized similarly. The IRS was courageous and decided to recognize all same-sex marriages regardless of circumstance as valid marriages in the eyes of the tax code.
What does this mean? As I pointed out in my earlier blog, questions remained for same-sex couples who were married in a state that obviously recognizes same-sex marriage but now reside in a state that does not recognize those marriages. Further, many same-sex couples have made the decision to marry and traveled from their state of residence to a state or jurisdiction that recognizes same-sex marriage to celebrate a legal same-sex marriage. These couples were also unsure of where they would stand in the eyes of the tax law.
On August 29, 2013, the IRS answered their questions…all of the same-sex marriages discussed above are recognized as a legal marriage for federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax or child tax credit. According IR-2013-72:
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 (RDP’s), civil unions or similar formal relationships recognized under state law. Couples who have an RDP or similar must continue to file as they have in the past which can be complicated by those residing in states that have community property laws such as the State of Nevada.
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.
Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.
Additionally, 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 pre-tax and excludable from income.
Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. 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.
As our country moves forward in terms of equality in marriage, so too does the tax law. However, tax law has always been equal in one regard…it is, and continues to be, complicated. Please remember that we at Barnard Vogler & Co., CPA’s are always ready to help you trudge through the process of compliance and keep you on the right track.
Last week approximately 400 CPA’s (including yours truly) descended on Capitol Hill to discuss issues of interest to the profession and our clients. The Capitol Hill visits were in conjunction with the Spring Meeting of the AICPA Council which is held every other year in Washington DC in order for Council members to make these important visits to each state’s legislators. Our delegation from Nevada met with each of our elected members of Congress or their staff liaisons in order to discuss the following important issues:
• “What’s at Stake?” – The CPA Profession on Federal Fiscal Responsibility: This updated video resource available for CPA’s, Policymakers and the Public reviews the federal government’s latest financial report and discusses the profession’s role in promoting the importance of the nation’s fiscal responsibility.
• H.R. 1129: The Mobile Workforce State Income Tax Simplification Act of 2013: This bill creates a uniform national standard that will limit state or local taxation of the compensation of an employee who performs duties in more than one state or locality to: (1) the state or locality of the employee’s residence and (2) the state or locality in which the employee is physically present performing duties for more than 30 days.
• S. 420 and H.R. 901: Tax Return Due Date Simplification and Modernization Act of 2013: These bills propose a shuffling of the original and extended due dates of corporate, partnership and other returns to improve the flow of information needed by taxpayers to timely file their personal returns. The bills propose new original due dates as follows:
There are proposed revisions to various extended due dates as well which for the most part remain in the familiar September/October time frame. For more information on these dates see the full text of the bills at www.govtrack.us.
• H.R 797: Municipal Advisor Oversight Improvement Act of 2013: This bill would clarify the definition of a municipal advisor and make it clear that providing customary and usual accounting services by CPA’s is not the same as providing municipal advisory services which now requires SEC registration under the Dodd-Frank Act.
• Our Nevada CPA delegation also discussed various other issues related to the general topic of tax reform which is of great interest to Congress in light of recent and not so recent events. For more information read the AICPA’s Principals of Good Tax Policy.
Our visits always prove to be enlightening for all of those involved be they the elected member of Congress, the staff liaison or the CPA’s participating in the meetings. We must never lose sight of the fact that we all have a voice in our democracy whether it be a visit to Capitol Hill, a phone call or email or the simple casting of a vote.
The IRS reported that National Taxpayer Advocate Nina E. Olson recently issued her annual report to Congress. In it she stated that tax reform was the overriding priority in tax administration. “The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns”, Olson stated.
Since 2001, Congress has made nearly 5,000 changes to the tax code, an average of more than one a day, and the number of words in the code has approached nearly five million. To reduce the burden on taxpayers and improve the public’s confidence in the integrity of the system, the report urges Congress to simplify the tax code. If Congress were to eliminate all tax expenditures, i.e. income exclusions, exemptions, deductions and credits, the indications are that individual income tax rates could be cut by 44 percent.
The report suggests that a tax break should be retained only if a compelling argument can be made that the benefits of that break outweigh the complexity burden it creates. Does the incentive provided make sense? If so, can it be administered without imposing unreasonable burdens on either taxpayers or the IRS?
The report recommends that Congress take several steps, including:
To accomplish such a dramatic change in congressional thinking seems insurmountable, but the report does offer serious food for thought.
So you think you have financial issues? Just listen to what Nina Olson, National Taxpayer Advocate, has to say about the IRS. In her annual report to Congress she suggested that the IRS’s increasing workload and declining resources are the most serious problems facing taxpayers. So how does she connect the dots to conclude that this is a “taxpayer” problem?
She reasons that the resulting inadequate taxpayer service, erosion of taxpayer rights and reduced taxpayer compliance are causing harm to the taxpayers. That’s how! I don’t know. Seems to me like an IRS problem rather than a taxpayer problem. But, then again, doesn’t the taxpayer always get stuck with the tab?
But wait. Maybe there is a solution that doesn’t stick the taxpayer with the bill. It turns out that increasing funding for the IRS might actually be a good investment. Current inadequate funding contributes to many of the problems facing today’s IRS. When the federal individual income tax was first enacted in 1913, it applied only to high-income taxpayers, which totaled about 358,000 people. That total today stands at 141.2 million with one tax return for about every two people in the United States. And believe me, the returns are a lot more complicated now than they were almost 100 years ago.
It seems that as the collection agency for the U.S. government, the IRS does a pretty good job. On a budget of $12.1 billion, the IRS collected $2.42 trillion in fiscal year 2011. That is to say that for every $1 that Congress appropriated for the IRS, it collected about $200. Now with the current “tax gap” at about 15%, every household is paying an annual “noncompliance surtax” of about $2,700 to enable the federal government to raise the same amount of money it would have collected if all taxpayers had reported their income and paid their taxes in full.
While I doubt that appropriating an extra $1 would produce the same collection rate when applied to the last 15% of noncompliance, I’ll bet it would provide an attractive return on the investment.
Did you ever wonder how many people do not actually pay their taxes under our “voluntary compliance” system here in the United States? Well, it turns out that the latest IRS estimates show about 15% of the total tax liability owed for 2006 was actually collected.
This rate is virtually unchanged from the 2001 compliance rate and amounts to $450 billion for 2006. This represents a $105 billion increase over the2001 estimated tax gap of $345 billion. Enforcement efforts and late payments reduce the net tax gap to $385 billion for 2006 which is still $95 billion greater than the $290 billion net tax gap in 2001. While these numbers are staggering, the growth in the tax gap somewhat mirrors the growth in total tax liabilities. Furthermore, the increased estimate may well result from better data and improved estimation methods.
This “tax gap” results from three different types of non-compliance: failure to file, underreporting taxable income, and underpayment of amount of tax due. Underreporting of income continues to be the largest contributing factor to the 2006 gross tax gap accounting for $376 billion of the $450 billion total. Tax non-filing and underpayment of tax accounts for $28 billion and $46 billion, respectively.
As you might imagine, non-compliance is lowest where there is third-party information reporting and/or withholding, such as wages and salaries. Conversely, amounts not subject to information reporting had a 56% net misreporting rate in 2006.
Just think how much progress we could make towards reducing our horrendous deficit if this gap were closed!