Tax Calendar Q2 2015 & Gift Treatment

Tax Calendar Q2 2015 & Gift Treatment

Tax Calendar Q2 2015

April 15

Besides being the last day to file (or extend) your 2014 personal return and pay any tax that is due, 2015 first quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today. So are 2014 returns for trusts and calendar-year estates, partnerships, and LLCs, plus any final contribution you plan to make to an IRA or Education Savings Account for 2014. SEP and Keogh contributions are also due today if your return is not being extended.

June 15

Second quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today.

Avoid Gift Treatment by Paying Expenses Directly

The annual exclusion for gifts remains at $14,000 for 2015. (Married couples can gift up to $28,000 combined.) This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However, any payment made directly to the medical care provider (for example, doctor, hospital, etc.) or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.

So, when paying tuition or large medical bills for parents, grandchildren, or any other person who is not your dependent minor child, be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor, or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.

Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.

Lifetime vs. Testamentary Contributions & Passive Activity Loss Limitations

Lifetime vs. Testamentary Contributions & Passive Activity Loss Limitations

Lifetime vs. Testamentary Contributions

Many taxpayers with charitable intentions struggle with the decision of whether to donate property to charity during their lifetimes or to make a charitable bequest in their wills that will be fulfilled from property included in their estates (testamentary bequests). While taxpayers frequently base their choice between lifetime charitable gifts and testamentary bequests on nontax considerations, they need to be aware of the tax implications of their decision.

For income tax purposes, the deduction for charitable contributions is limited to a percentage of adjusted gross income (AGI), depending on the type of charity and the type of property donated. In contrast, no percentage limitation exists on the amount of charitable donations that may be deducted from the gross estate (as long as the donated property is included in the gross estate). However, in most instances a charitable gift during lifetime will provide a double tax benefit. The donation produces an income tax deduction at the time of the gift, plus the donated property and any future income and appreciation from the property are fully excluded from the donor’s gross estate. The cost of the double benefit is giving up the property and all future income while the donor is still living.

Example: Greater tax benefits by lifetime giving

Tom, who is in the top tax bracket, plans on leaving $1 million to a qualifying charity. If he makes a $1 million testamentary bequest, this could save his estate up to $400,000 ($1,000,000 x an assumed marginal federal estate tax rate of 40%). If Tom makes a current gift, this will save him up to $396,000 in federal income taxes ($1,000,000 x 39.6% for 2014). In addition, if he has a taxable estate, it could also save another $241,600 [($1,000,000 – $396,000) x 40%] based on his estate being reduced by the net amount of $604,000, the difference between the value of the donated property and income taxes he saved. Thus, the total income and estate tax savings from making a current gift is $637,600 ($396,000 + $241,600).

The donor generally must transfer his or her entire interest in the contributed property for the gift to qualify for the charitable donation income tax deduction. Transfers of less than the donor’s entire interest in the property (i.e., split-interest gifts) qualify for the deduction only if they meet certain criteria.

A charitable bequest has the obvious advantage of allowing the donor full use of the property until death. However, many lifetime gifts can be structured in a manner that allows the donor to continue to use the property or receive its income for life. In these instances, the donor gets the double tax benefit associated with lifetime contributions while retaining some benefit from the property until his or her death.

 


 

Passive Activity Loss Limitations

The passive activity loss (PAL) rules were introduced by the Tax Reform Act of 1986 and were designed to curb perceived tax shelter abuses. However, the PAL rules are far-reaching and affect activities other than tax shelters. Additionally, these rules limit the deductibility of losses for federal income tax purposes.

The PAL rules provide that passive losses can only be used to offset passive income, not active income the owners may earn from business activities in which they materially participate or portfolio income they receive from investments, such as dividend and interest income. So, while taxpayers may not benefit currently from losses sustained from passive activities, they may be able to use those losses to offset gains in future years.

A passive activity is a trade or business in which the taxpayer does not materially participate or, with certain exceptions, any rental activity. Rental activities generally are passive regardless of whether the taxpayer materially participates. However, the rental real estate activities of certain qualifying taxpayers in real estate businesses are subject to the same general rule that applies to nonrental activities. In other words, if the taxpayer satisfies certain participation requirements, the rental activity is nonpassive and any losses or credits it generates can be used to offset the taxpayer’s other nonpassive income. Additionally, federal regulations provide several exceptions to the general rule allowing a rental activity to be treated as either a trade or business or an investment activity.

A special rule allows taxpayers who actively participate in a rental activity to deduct up to $25,000 of loss from the activity each year regardless of the PAL rules. Examples of what would constitute active participation include approving new tenants, deciding on rental terms, and approving capital or repair expenditures. The $25,000 special allowance is, however, subject to a limitation. The $25,000 amount is reduced if the taxpayer has an adjusted gross income (AGI) (before passive losses) in excess of $100,000. The allowance is reduced by 50% of the amount by which AGI exceeds the $100,000 level. Consequently, the allowance is completely phased out when AGI exceeds $150,000. If taxpayers have rehabilitation or low-income housing credits, a special rule allows the credits to offset tax on nonpassive income of up to $25,000, regardless of the limitation based on AGI.

Another special rule is the exception for real estate professionals. This provision allows qualifying real estate professionals to deduct losses from rental real estate activities as nonpassive losses if they materially participate in the activity. To qualify as a real estate professional, a taxpayer must demonstrate that he or she spends more than 750 hours during the tax year in real property businesses in which they are a material participant. In addition, they must demonstrate that more than 50% of the services they perform in all of their businesses during the tax year are performed in real property businesses in which they materially participate.

Please contact us to discuss the passive activity provisions or any other tax planning or compliance issue.

Social Security Update & Retirement Plan Review

Social Security Update & Retirement Plan Review

Social Security Update

The annual inflation adjustments have been announced for the various Social Security amounts and thresholds, so we thought it would be a good time to update you for 2014.

For Social Security beneficiaries under the full retirement age, the annual exempt amount increases to $15,480 in 2014, up from $15,120 in 2013. These beneficiaries will be subject to a $1 reduction in benefits for each $2 they earn in excess of $15,480 in 2014. However, in the year beneficiaries reach their full retirement age, earnings above a different annual exempt amount apply. Earnings greater than $41,400 in 2014 (up from $40,080 in 2013) are subject to a $1 reduction in benefits for each $3 earned over this exempt amount. Social Security benefits are not reduced by earned income beginning with the month the beneficiary reaches full benefit retirement age. But remember, Social Security benefits received may be subject to federal income tax.

The Social Security Administration estimates the average retired worker will receive $1,294 monthly in 2014. The average monthly benefit for an aged couple where both are receiving monthly benefits is $2,111. These amounts reflect a 1.5% cost of living adjustment (COLA). The maximum 2014 Social Security benefit for a worker retiring at full retirement age is $2,642 per month, up from $2,533 in 2013.

 


 

Retirement Plan Review

Your retirement plan savings (e.g., qualified plans and IRAs) are important to your financial well-being for many reasons. You can accumulate income without currently paying tax, and the power of compounding pretax dollars makes a retirement plan one of the most powerful investment vehicles available. When you reach retirement age, your retirement plan assets may be a significant portion of your overall savings. Therefore, it is important to do everything you can to get the most out of one of the best investment opportunities you have. Listed below is information to consider when conducting a review of your retirement plans.

Generally, when you begin to withdraw funds from your retirement plans, you will be subject to tax on the distributions. If you made after-tax contributions to your plan, a portion of each distribution will be tax-free. Also, special rules apply to Roth IRAs that make them particularly beneficial. If distributions begin prematurely (generally before age 59 1/2), you may be hit with a 10% penalty tax, but exceptions are available.

When you reach age 70 1/2 (or in some cases, retire), you must start withdrawing a minimum amount from your traditional IRAs and qualified plans each year. Severe penalties can result if required minimum distributions are not made on a timely basis. However, distributions from Roth IRAs are not required during your lifetime.

At the time of your death, the beneficiary designation in effect will determine not only who gets the retirement plan assets, but also how quickly your account must be paid out to your beneficiary and, therefore, how quickly the benefits of tax deferral are lost. Beneficiary designation adjustments may be necessary as family and beneficiary conditions change (e.g., divorce).

Your retirement plan savings may be critical for you and your dependents’ future well-being. With proper planning, you can maximize tax-deferred earnings, avoid penalty taxes, choose a desired beneficiary, and minimize the amount your heirs are required to withdraw (and pay taxes on) after your death.

Next Public Forum on taxpayer service needs and preferences to be held in Washington DC on May 17

Next Public Forum on taxpayer service needs and preferences to be held in Washington DC on May 17

National Taxpayer Advocate Nina E. Olson will hold a public forum in Washington, DC to discuss what taxpayers want and need from the IRS to comply with their tax obligations. The Public Forums unites speakers from the tax community, IRS advisory boards, and nonprofit and government researchers to discuss the future state of the IRS.

The public forum will be held Tuesday, May 17, at 10:00 a.m. in the IRS Headquarters Building, 1111 Constitution Ave NW, Washington, DC Members of the public and the media are invited to attend.

Building on initiatives already implemented, the IRS for the past two years has been developing a “Future State” plan that envisions how it will operate in five years and beyond. It is continuing to develop a path for how it gets from its “Current State” to the “Future State,” including refinements to the vision along the way. A central component of the plan is the creation of online taxpayer accounts as a convenient but non-exclusive channel through which taxpayers will be able to obtain information from and interact with the IRS.

In the National Taxpayer Advocate’s 2015 Annual Report to Congress, Ms. Olson expressed concerns about whether the IRS’s “Future State” plan adequately addresses taxpayer needs. To further public awareness and dialogue, she announced plans to hold a series of public forums around the country. The objective of the public forums is to ensure the “Future State” plan will better reflect the needs and preferences of U.S. taxpayers as they seek to comply with the tax code.

This forum will include a three-part panel presentation and discussion on the digital behavior of Americans, including trends for future usage, and will conclude with an opportunity for public comment. Invited representatives include:

Panel 1

Panel 2

Panel 3

Members of the public will also have an opportunity to speak.

The public forum will take place in the IRS Auditorium, Internal Revenue Service Building, 1111 Constitution Avenue, N.W., Washington, DC 20224. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, the IRS will not admit visitors beyond the immediate entrance area more than 30 minutes before the public forum begins. For information about having your name placed on the building access list to attend the public forum, contact Deborah Powell at (202) 317-6100.

More about the forum:

Forum on taxpayer service in Red Oak IA

Forum on taxpayer service in Red Oak IA

National Taxpayer Advocate Nina E. Olson and Sen. Chuck Grassley, a member and former chairman of the Senate Finance Committee and current chairman of the Senate Judiciary Committee, convened a public forum to discuss what taxpayers want and need from the IRS to comply with their tax obligations.

Over 50 people attended the forum, including farmers, tax practitioners, and community based organizations. Interested Iowans engaged in a dialogue with Senator Grassley and NTA Nina Olson. Senator Grassley asked the audience for one suggestion to improve the IRS that could be implemented today and heard one common answer—more open and clear communication. This highlights the NTA’s view that some taxpayers will continue to need telephone and in-person assistance when dealing with the IRS.

Varel Bailey, a local farmer from Anita, Iowa who manages a family farm, has prepared his own tax return for over 50 years, and expressed his amazement for the increased complexity in filing every year. Mr. Bailey stated, “With the increasing complexity of filing a return, this is not the time for IRS to reduce the communication interface with the public. Modern electronics provide a broad range of ways efficient ways to educate, instruct and solve problems. IRS should provide the full spectrum of communications from one-on-one phone calls, print media and internet support.”

Several of the panelists submitted written statements:

  • Varel Bailey (President | Bailey Farms, Inc. | Anita, IA)
  • Tamara Borland (Director | Low Income Taxpayer Clinic, Iowa Legal Aid | Des Moines, IA)
  • Alvin LaMar (Enrolled Agent | Iowa Farm Business Association | Iowa Falls, IA)
  • Kristy Maitre (Tax Specialist | Agricultural Education & Studies, Iowa State University | Ames, IA)
  • Wendy Smith (VITA Program Coordinator | United Way of Wapello County | Ottumwa, IA)

More about the forum:

Read more about the forums

Alert: Beware of practitioner scams against taxpayers with limited English proficiency and certain non U.S. citizens

Alert: Beware of practitioner scams against taxpayers with limited English proficiency and certain non U.S. citizens

Reports have detailed unscrupulous preparers instructing their clients to make Individual Shared Responsibility (ISRP) payments directly to the preparer rather than the IRS. In particular, current scams focus on those who primarily speak Spanish and those with Individual Taxpayer Identification Numbers (ITIN). So choose your tax professional carefully.

The requirement to pay the ISRP (and the ability to claim the Premium Tax Credit) is based on whether the individual was “lawfully present,” and does not necessarily correspond to whether they had an ITIN or a Social Security Number (SSN).

If you are not a U.S. citizen or national, and are not lawfully present in the United States, you are exempt from the ISRP and do not need to make a payment. For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is considered not lawfully present and therefore is exempt.  If you are in that situation you may also qualify for this exemption even if you have a SSN.

Disclosure of Immigration Status by IRS

Taxpayers have the right to confidentiality, and the IRS is limited in what information it can share with other agencies such as the Department of Homeland Security. Thus, taxpayers should be wary of claims that they have to make tax related payments directly to a tax return preparer or direct their refunds to a tax return preparer because of immigration status.

Disclosure of Immigration Status by Insurance Marketplaces

Federal and state Marketplaces and state Medicaid and CHIP agencies can’t require applicants to provide information about the citizenship or immigration status of any family or household members who aren’t applying for coverage.

Information provided by applicants or beneficiaries won’t be used for immigration enforcement purposes. See the More Information for Immigrant Families page on Healthcare.gov.

Report Improper Tax Preparation Practices to the IRS

If you believe you have been targeted by an unscrupulous preparer or you have been financially affected by a tax return preparer’s misconduct or improper tax preparation practices, you can report it to the IRS on Form 14157, Complaint: Tax Return Preparer.

Alternate Language Versions Information is Available

IRS Health Care Tax Tip 2016-10 gives information about practitioner Affordable Care Act related scams, tax practitioner selection, and tips about the Individual Shared Responsibility payments. IRS.gov also has these alternative language versions of ACA pages Español , 中文 , 한국어, TiếngViệt , Pусский and related publications as well.

For more information on the Taxpayer Bill of Rights and what that means for you, visit these pages; Taxpayer Bill of Rights, Español, 中文, 한국어, TiếngViệt , Pусский.

Forum on taxpayer service in Baltimore MD

Forum on taxpayer service in Baltimore MD

National Taxpayer Advocate Nina E. Olson and Sen. Ben Cardin, a member of the Senate Committee on Finance, convened a public forum in Baltimore, Maryland, to discuss what taxpayers want and need from the IRS to comply with their tax obligations.

Approximately 30 people attended the forum, including, business owners, tax practitioners, and community based organizations. One panelist shared her personal experience in dealing with the IRS concerning an issue caused by her business’s fraudulent payroll service provider. The discussion brought to light the difficulties communicating with the IRS on complex tax issues and the need for face-to-face interaction.

Several of the panelists submitted written statements:

More about the forum:

Read more about the forums

Comments regarding the Future State of the IRS may be submitted by email. Please do not send account-related questions to this email address.

New Employer Shared Responsibility Provision estimator tool is now available

New Employer Shared Responsibility Provision estimator tool is now available

The Taxpayer Advocate Service is pleased to announce a new tool designed to help employers better understand how the Employer Shared Responsibility Provision (ESRP) works and learn how the provision may apply to them.

If you are an employer, you can use this ESRP Estimator to determine:

  • The number of your full-time employees, including full-time equivalent employees (FTEs),
  • Whether you might be an applicable large employer (ALE), and
  • If you are an ALE, an estimate of the maximum amount of the potential liability for the employer shared responsibility payment that could apply to you based on the number of FTEs that you report if you fail to offer coverage to your full-time employees.

Please note that this tool will only help provide the above information for the tax year 2016 and forward. Due to the various Transition Relief rules applicable in 2015, this tool cannot be used for tax year 2015. For information about these rules and how to determine the payment for 2015, see the ESRP Regulations.

The estimator will also not report a payment estimate to the IRS or interact with your tax return or tax account information. It is intended only as a guide to help you understand the ESRP.

It even provides you with definitions of key terms, links to the actual regulations and offers real-life examples and detailed instructions to assist you with using the tool.

So try our ESRP Estimator, anytime, to help you understand whether you are considered an ALE and if you might be liable for a payment. It could help you plan better and possibly avoid a payment later. You can also use it anytime you have employee changes to see if that change will affect your employer status under the ESRP provisions, so you won’t be surprised later.

Need help with other understanding or estimating other ACA related payments or credits? Visit our Affordable Care Act page and try our other three estimator tools; Individual Shared Responsibility Estimator, Premium Tax Credit Change Estimator and the Small Business Heath Care Tax Credit Estimator.

Forum on taxpayer service in Washington DC

Forum on taxpayer service in Washington DC

On Tuesday, May 17, National Taxpayer Advocate Nina E. Olson convened the seventh in a series of public forums on taxpayer service.

Over 100 people attended, representing a range of interests and organizations, including tax professional groups like the AICPA, and the National Society of Accountants; several law firms; a blend of nonprofit and government researchers; and tax publications including Tax Analysts. The forum also brought back former IRS Commissioner Lawrence Gibbs, who discussed the evolving state of the IRS since his time leading the agency.

Building on initiatives already implemented, the IRS for the past two years has been developing a “Future State” plan that envisions how it will operate in the next five years and beyond. It is continuing to develop a path for how it gets from its “Current State” to the “Future State,” including refinements to the vision along the way. A central component of the plan is the creation of online taxpayer accounts as a convenient but non-exclusive channel through which taxpayers will be able to obtain information from and interact with the IRS.

In the National Taxpayer Advocate’s 2015 Annual Report to Congress, Ms. Olson expressed concerns about whether the IRS’s “Future State” plan adequately addresses taxpayer needs. To further public awareness and dialogue, she announced plans to hold a series of public forums around the country. The objective of the public forums is to ensure the “Future State” plan will better reflect the needs and preferences of U.S. taxpayers as they seek to comply with the tax code.

The speakers who joined the National Taxpayer Advocate at the IRS building in Washington, DC submitted written statements and participated in panel discussions about the usefulness of online accounts and their limitations, their likely impact on taxpayer demand for telephone and face-to-face service, and IRS priorities generally. The first panel featured a discussion with former Commissioner of Internal Revenue Lawrence Gibbs, who discussed the potential for fraud associated with the IRS’s administration of social programs such as the Earned Income Tax Credit. Despite the efforts within the IRS to detect and deter refund fraud, substantial problems remain with the payment of fraudulent refund claims to fraudsters.

Continuing with the theme of the forum’s focus on what taxpayers want and need from the IRS to comply with the tax laws, John Ams from the National Society of Accountants highlighted the importance of facilitating voluntary compliance by empowering taxpayers with secure tools and support to help them meet their tax obligations. The need to strengthen cyber defense, prevent identity theft and refund fraud, and help drive agility in IRS operations were all elements John Ams dictated were incumbent upon the IRS to adopt for its Future State initiative.

Highlighting the National Taxpayer Advocate’s concern for what the IRS’s Future State will mean for average taxpayers, the third panel discussed taxpayer preferences for online delivery of government services. The panel featured a discussion around a survey published by Forrester Research that showed respondents being more satisfied with in-person interactions when dealing with a federal agency as compared with the interaction taking place through a website or mobile application. The findings echo the concern for what a broad transition to online services will mean for taxpayers hoping to get assistance in person when filing their taxes.

The theme across the panels was that the need for face-to-face, voice-to-voice communications and interactions with taxpayers will continue to be necessary, regardless of the quality of digital tools being developed by the IRS.

Several of the panelists submitted written statements:

Panel 1

Panel 2

Panel 3

More about the forum:

Read more about the forums

2016 Tax Forums: TAS focus groups to discuss IRS Future State and refund timing

2016 Tax Forums: TAS focus groups to discuss IRS Future State and refund timing

Each year the IRS sponsors the Nationwide Tax Forums, a three-day series of tax education and networking conferences for tax professionals in cities around the country.

These events feature the latest information from the IRS, news about tax law changes, the chance to meet with software vendors and the opportunity to attend nearly 50 seminars presented by IRS employees and members of professional associations.

We’ve already written about the seminars TAS will offer. Now, we’re pleased to announce this year’s focus groups.

TAS holds focus groups at the forums to hear the practitioners’ perspective and gain valuable insights on trending problems or issues where we’ve heard concerns from the public. The focus group topics for 2016 are:

Ready for IRS Future State?

TAS wants to hear about the services that you and your clients MUST have in order to handle tax obligations. Some of the areas we would like to explore include:

  • What online services do you consider necessary in serving your clients?
  • Do the proposed IRS Future State online services leave segments of the population underserved?
  • What effect will the IRS Future State have on your clients?
  • What are the implications for your practice?

We value your opinion, so please join us to share your thoughts about how the changes will affect your clients and how the IRS Future State should be implemented.

Refunds: Now or Later?

TAS values your opinion and wants to hear your thoughts and experiences concerning the receipt of refunds. This includes current practices and operations, and potential changes for refunds in the future. We would like to know what your expectations are when you file a tax return for a client with a refund, how well the process works now, and how pushing back the timing of when refunds are issued may affect your clients and your practice.

We will hold the focus groups during the lunch hour so you will not miss any continuing education credits. To sign up and attend the focus groups, please look for the TAS recruiters at the focus group booth near the registration area at the forums.

Space is limited. Visit the focus group booth at the forums to sign up.

2016 Tax Forum Dates

City Dates Hotel
Chicago 7/12 – 7/14 Hyatt Regency
New Orleans 7/26 – 7/28 Hyatt Regency
Washington DC 8/23 – 8/25 National Harbor
Orlando 8/30 – 9/1 Hyatt Regency
San Diego 9/13 – 9/15 Town & Country