Surprises That Tax Us

 

Picture this; for the past few years you have picked up your tax return and have had a small but nice refund. Now imagine your surprise, when next year, you are required to send in a fairly big check to settle your tax bill. Believe it or not, this message is almost as hard to deliver to a taxpayer as it is to hear it. Here are some tips to help ensure tax changes do not come as a surprise to you.

A spouse passes away. The tax surprise related to this event tends to hit older taxpayers the hardest. In the year of death the tax impact in not usually felt. The year following death, the tax surprise hits hard because of the following tax changes:

• You lose standard deductions
• You lose an exemption
• You move from a joint filing status to single (or head of household)

A child is no longer eligible. Just when you think you have it figured out, a child who generated a tax break for you no longer does. Here are some age requirements for popular tax benefits:

• Dependent Care Credit: under age 13
• $1,000 Child Tax Credit: under age 17
• Earned Income Tax Credit: under age 19 (24 if a qualified student)

Earnings with social security benefits. If you are recently retired, collecting Social Security Benefits, and then start working part-time, you are also in for a tax surprise. These extra earnings could not only make your benefits taxable, it could result in a reduction of benefits received.

Other life events. Other life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth, or becoming head of household, others might surprise you and result in additional tax. Other common life events include retirement, death, and entering/leaving school.

Capital gains surprises from mutual funds. Often sales of investments are a planned event. Unfortunately, many mutual funds sell assets and then you receive a capital gain statement with a surprise taxable event.

New tax laws. 2014 tax law changes create special complications. A number of tax breaks expired at the end of 2013. This includes the educator deduction, state general sales tax deduction, tuition deduction and mortgage insurance deduction. If you took any of these tax deductions in 2013 you can expect a change to your tax return next year unless Congress acts to reinstate any of these provisions.

Want to avoid these surprises? Spend some time now reviewing your anticipated tax situation for 2014. By doing so, perhaps a planned “pleasant” surprise can be in store for you next year.

Alimony Mis-match Getting IRS Audit Attention

 

The U.S. Treasury Department recently released an audit report revealing a disturbing level of non-compliance in alimony reporting on tax returns. This non-compliance will result in vast increase in tax return reviews now and in the years to come. Here is what you need to know.

The study

The Treasury Inspector General for Tax Administration (TIGTA) recently conducted an Audit of 2010 tax returns that claimed an alimony deduction. What they found:

• Over 560,000 taxpayers reduced their income for alimony paid in 2010.
• 47% of the claimed alimony deduction tax returns did not match required income reporting from those who received the alimony.
• The discrepancy was more than $2.3 billion in unreported 2010 income.

Please note: You may reduce your income for qualified alimony payments. Those that receive alimony must include the payments as income on their tax return. As a clarification, in most cases, spousal maintenance is considered alimony by the IRS. While child support is not considered alimony.

Further, the audit determined that the IRS does not adequately track this non-compliance, nor are proper penalties being assessed when the person paying alimony does not correctly report the Social Security Number (SSN) or Tax Identification Number (TIN) of the person receiving the funds.

Things to consider

If you receive alimony. You must report this income on your tax return. If you are receiving income from an ex-spouse that you believe is child support, have documentation to support this claim.

Mis-match audits will rise this year. The IRS has corrected their audit filters to capture major alimony mis-matches for the 2013 tax year. Given this, you should expect a notice or audit if there is a major alimony discrepancy.

Penalties are coming. If you do not correctly report the SSN or TIN of the person receiving alimony you will now start to see penalty notices. The programming error in the IRS system has been corrected. So get a correct identification number for the person who receives your alimony payments and report it on your tax return.

Keep documentation close. Since you know the risk of audit in this area is high, keep your documentation handy. If paying alimony, having it automatically deducted from your paycheck will help you accurately report your payment amounts.

File a tax return. In 2010, $937.2 million of the claimed alimony deductions had no corresponding income tax returns filed reporting the income. This non-reporting area is a highly recommended audit target for the IRS.

Talk to your ex. While possibly an unpleasant task, a quick discussion regarding claimed alimony can identify whether you have a reporting problem. Hopefully, this communication can solve any potential problems prior to the involvement of the IRS.

Small Businesses: Plan for Lower Section 179 Expense

 

Top-line: In 2014, the annual expense limit for Section 179 is now $25,000, down from $500,000 in 2013. You will need to plan accordingly.

Background

Section 179 of the tax code allows businesses to immediately expense qualified capital purchases versus depreciating (recovering) their cost over time. Qualified purchases can be new or used equipment and certain software placed in service during the year. This benefit can be maximized as long as total qualified asset purchases by your business do not exceed $200,000 (formerly $2 million) during your 2014 tax year.

What’s the Problem?

For years the threshold for qualified purchases was much higher than the lower Section 179 amount in 2014. The old Section 179 provision allowed for small businesses to upgrade equipment while lowering their current year tax obligation. Many small businesses like dentist offices, veterinarians, chiropractors and others used this provision in the tax code to help manage their cash flows through reduced taxes while purchasing needed equipment.

Time to Plan

Users of Section 179. If your business currently uses Section 179 as a tax planning strategy, you need to review your anticipated capital purchases for the year. Consider prioritizing your needs to ensure the most important capital purchases are at the top of your list.

Delay your Purchases? There is a slight possibility that Congress will act during the year to increase the Section 179 limits once again. This retroactive nature in Congress has been in place for the past number of years, so this is not out of the question. Consider delaying purchases until later in the year if you think this might happen.

Is Section 179 for you? Please remember that taking advantage of this provision in the tax code only changes the timing of expensing your capital purchases and not the over all deduction of your purchase. If you think Congress will continue to raise taxes to help balance the budget, your future income could be exposed to a higher tax rate. By using standard recovery periods for your capital purchases (typically three, five, or seven years), you are saving some expense for later (higher tax) years. In this case using Section 179 expensing may not be the right decision for your business.

Feel free to call for help to review your situation, especially if you are planning major capital purchases in the near future.

Heart to Heart Talks With Members of Congress

Wow … how inspiring it is to go to Capital Hill and actually get to talk one on one with those we elected to Congress! That is what I did this last week and it was the experience of a lifetime, except that I’ll do it again next year and the year after and the … well you get my point.

As for our elected officials, it is important that we personally address them making their constituents desires known. I hope next year more of you will take the opportunity to share with me your feelings on what needs to happen with the tax code. Taxes are here to stay but we still have a voice in regards to how we would like to see it enacted.

As an Enrolled Agent (EA), a tax expert licensed by the Federal government itself, specifically in the area of tax, who better to go to Congress and express our thoughts? As the IRS is to enforce the tax laws passed by Congress, Enrolled Agents were created for the citizens, as their voice before the IRS. This is why EA’s are best suited to advocate on your behalf and that is what I was able to do last week.

Tax reform is of the utmost importance but to ask for a complete overhaul would be like trying to eat an elephant all at once rather than one bite at a time. So we had to strategically approach our representatives with the items of the most importance which we felt would garner a greater buy in from both sides of the aisle.

Let me share with you the three main goals outlined during our visit to Capital Hill:

1)   Permanently approve Extenders. There are certain deductions, which Congress has to pass each and every year, sometimes making them retroactive. This uncertainty in deductions makes it difficult each year from a tax planning perspective. We asked for stability by permanently approving these extender deductions.

2)   Tax preparer oversight. Did you know that anyone could prepare tax returns for money? I mean to say, did you know that your hairstylist is required to have a license and several hours of training to cut your hair but a tax return preparer needs none? Enrolled Agents are the only voluntary tax preparer licensing that subjects themselves to extensive tax code training along with passing a 12-hour exam focused exclusively on tax law. Most citizens are unaware that not all tax preparers are created equal. It is important that if you are looking for a tax expert, to use an Enrolled Agent. No other certification has the extensive tax training and will many times fall short in one aspect or another leaving you to pick up and pay for those pieces.

3)   The final item on our agenda was to request that the Enrolled Agent credential be protected by the tax code. The goal here is to prevent certain professions from misleading the public as to the true designation of a tax professional. Due to state licensing of CPA’s there has been a push at the state level to restrict federally licensed EA’s from advertising their tax professional designation. One can only presume to know why they would want to restrict the EA’s from advertising their federal qualifications, but realistically this only harms the general public from being able to make an informed decision on who to engage to meet the federal tax filing requirements. We want the tax code to restrict the states from discriminating against the true tax professionals merely based on the fact that the states do not license or oversee the EA. The IRS is charged with overseeing EA’s and with that oversight comes a rigorous 12-hour tax specific exam, along with continuing education directly related to the tax field that the CPA’s are not required to neither pass nor obtain. It is only in the best interest of the tax paying citizens to know that the Enrolled Agents are the Tax Experts. CPA’s are only licensed at the state level as public accountants entrusted with a different set of requirements regarding the accounting professional and not required to be either a tax professional or federally licensed specifically in the area of tax.

The goal was to meet with the Congressman and Senators that represent Arizona, and more specifically the area I am from. This allowed me to stand before them not only as an Enrolled Agent but also a constituent. We had the privilege of meeting with the following:

Congresswoman Krysten Sinema – I met with her personally and she was very receptive to the points we were making. She was very agreeable that in an effort to protect taxpayers that Tax preparers should be required to obtain licensing.

Congressman Matt Salmon – I met with him personally and although he was very reserved he seemed very interested in tax reform. He was very interested in having the ability to call our office to ask questions and receive input on specific tax law that is being reviewed. He found it important to get input from not only those that actually implemented the laws but from those that are also licensed specifically in the tax code.

Senator John McCain – As the Senator was in Arizona speaking at the opening of the new VA hospital we were able to speak with his Legislative Correspondent, Jennifer Scheaffer. The meeting went well and we hope to have Mr. McCain’s support.

Senator Jeff Flake –The Senators Legislative Assistant, Kristen Fallon, was very excited to learn that we have offered our assistance as it relates to tax laws or giving advice should a constituent call the Senators office with a tax concern. She continues to be supportive of “fixing” the extender problem and supports Senator Flake to this end.

All in all the meetings on Capital Hill were wonderful, enlightening, and constructive. We look forward to doing this each year as a voice and advocate for our clients so we respectfully insist you send us your thoughts on tax reform. If enough people are on the same page we just might be taking it to Capital Hill next year!

Tammy

Annual Tax-Exempt Filing Due May 15th

 

If you are involved in a tax-exempt organization or know someone who is, this is a reminder that the annual filing requirement is quickly approaching. The rule: Every tax-exempt organization must file an annual return (990 series) on the 15th day of the fifth month following their year end. That means calendar based charitable groups have until May 15th to file. The penalty: If the organization does not file their annual return for three consecutive years, they automatically have their tax-exempt status revoked. Who should worry: Any tax exempt organization except churches and church related organizations. So soccer booster clubs, PTAs, youth sports organizations, community organizations and more need to do this every year. The small organizations: If your average annual receipts are $50,000 or less, you can simply file Form 990-N (e-postcard). Privacy: Remember not to include your Social Security number with any filings. Often these tax Forms are in public domain. So any private information is available for identity thieves. What’s Your Status? The IRS offers an online tool to check the status of your organization. Here is the link. A quick check of organizations you are members of can lead to a quick phone call to ensure they get their filings done.

Indirect IRA Rollovers. Change is Coming

 

Topline: When rolling over funds from one IRA to another (typically Traditional IRAs, Roth IRAs, SEP IRAs and Simple IRAs), it is best to use a direct rollover versus an indirect rollover. As confirmed in a recent tax court ruling, taxpayers are limited to ONE INDIRECT rollover per 12 months. This limit applies no matter how many IRA accounts you own. Background Many taxpayers have numerous Individual Retirement Accounts (IRAs). You can move funds from one qualifying account to another without paying taxes on the rollover as long as you follow the rollover rules. If the rules are not followed, the funds are deemed a distribution and taxes plus a potential early withdrawal penalty may be owed. There are two primary methods for rolling over the funds from one account to another: Direct Rollover. Using this method, the taxpayer never takes possession of the rollover funds. Instead, one institution transfers the funds out of one account and sends them directly to the institution that has the receiving account. Since the taxpayer never takes possession of the funds, there is little chance the IRS would see the transfer as a distribution. Indirect Rollover. In this case, the funds are withdrawn from the IRA and sent to the account holder. The account holder then deposits the same amount into the new account. As long as the transfer takes place within 60 days, it is a valid transfer and no taxes are owed. The taxpayer bears the burden of proof that the transfer was completed within the required timeframe. Aggregate once per year rule In a recent court case, the IRS put their foot down on unlimited INDIRECT transfers of funds.* In their ruling they stated that a taxpayer is entitled to make one indirect transfer per 12-month period regardless of the number of IRA accounts. Any additional transfers are not valid and will be deemed a distribution from your IRA. Why the rule? Some taxpayers were using a number of rollovers of the same dollar amount from account to account to give themselves a short-term loan. In the tax case, the defendant removed funds from one IRA. He used the money for a couple of months. He then took the same amount from a second IRA and replaced the money originally removed from the first IRA. He then took the same amount from a third IRA to replace the funds in the second IRA. Finally, the last IRA had its funds replaced. Effectively giving him use of the funds for up to 120 days. The court ruling effectively eliminated the ability to make these kinds of transfers. Effective change The court ruling creates a change in the IRA indirect rollover rules beginning on January 1, 2015. Effective that date, you may only conduct one indirect IRA rollover per 12 month period. IRS publications will be revised to reflect this change. Because of this, it is best to employ a direct rollover of funds from one IRA to another using a qualified financial trustee to avoid any potential problems. This ruling does not apply to all conversions and rollovers. Please contact the financial institution receiving the rolled over funds for details on their process to ensure it is handled correctly.