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Archives for September 2016

Tax Scammers Sending Affordable Care Act Penalty Notices

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aca-scamTax scammers are at it again.  The IRS has just issued an alert to taxpayers to be on guard against fake emails containing a fraudulent IRS tax bill related to the Affordable Care Act.  The fraudulent tax bill uses the same formatting and very similar language to the actual IRS Form CP2000.

The Real Form 2000CP

The IRS sends Form 2000CP when income reported from third-party sources (such as an employer) does not match the income reported by the taxpayer on his return.  The form provides instructions to taxpayers about what to do if they agree or disagree with the proposed additional tax.  If the taxpayer will send payment, the form instructs that payment be made out to “United States Treasury.”  The Form 2000CP is mailed to taxpayers—it is never emailed.

The Fake Form 2000CP

The IRS has received numerous reports of a fake Form 2000CP being emailed to taxpayers around the country.  The fake forms have the following characteristics:

  • An email that contains the fake CP2000 as an attachment
  • The notice appears to be issued from Austin, Texas
  • The underreported issue is related to the Affordable Care Act requesting information regarding 2014 coverage
  • The payment voucher lists the letter number as 105C
  • The notice includes a payment request that taxpayers mail a check made out to “I.R.S.” to the “Austin Processing Center” at a PO Box. This is in addition to a payment link within the email itself.

The American Institute of Tax Problem Solvers (of which we are members) obtained a copy of the fake tax notice.  It can be viewed here.

What to Do if You Receive a Fake Notice

Taxpayers who receive this scam email should not open the attachment, but forward it to phishing@irs.gov and then delete it from their email account.  Taxpayers should be wary of any unsolicited email purported to be from the IRS.  They should never open an attachment or click on a link within an email sent by an unknown source.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Tax Credits for Energy-Efficient Homes

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energy-tax-creditOver the past several years, Congress has provided taxpayers with a nonrefundable tax credit for energy efficient home improvements.  These tax credits were scheduled to expire in the past, but Congress continues to extend them.  Once again, these credits have been extended through 2016.  This post is a summary of the current rules regarding these credits.

The Credit for Nonbusiness Energy Property

Individuals can claim a nonrefundable tax credit for certain expenditures during 2016 to increase the energy efficiency of their primary residences (not for vacation or second homes) in the United States.

The credit equals the sum of:

  • 10% of certain costs for property installed during the year to improve the energy efficiency of existing homes (these costs are referred to as building envelope components)
  • amounts paid for residential qualified energy property expenditures

Building envelope components are:

  • insulation systems that reduce heat gain/loss
  • exterior windows (including skylights)
  • exterior doors
  • certain metal and asphalt roofs designed to reduce heat gain

For building envelope components, the credit is allowed only for amounts paid to purchase the components.  The credit is not available for amounts paid for onsite preparation, assembly, or original installation of the component.  The component must meet or exceed certain energy efficiency criteria (the manufacturer will certify whether a component meets the criteria).

Qualified energy property is property that meets certain energy efficiency criteria (once again, the manufacturer will certify whether a product meets the criteria).  The credit equals 100% of the cost of the property (up to the limits below).  Qualified energy property includes:

  • electric heat pump water heaters (up to $300)
  • electric heat pumps (up to $300)
  • biomass fuel stoves (up to $300)
  • high-efficiency central air conditioners (up to $300)
  • natural gas, propane, or oil water heaters (up to $300)
  • natural gas, propane, or oil furnaces or hot water boilers (up to $150)
  • advanced circulating air fans (credit limited to $50)

For qualified energy property, the credit is available for amounts paid to purchase the property as well as for costs for onsite preparation, assembly, or original installation.

For building envelope components and qualified energy property, there is a taxpayer lifetime tax credit limit of $500 ($200 for exterior windows and skylights), taking into account all such credits allowed to the taxpayer after 2005.

The Credit for Residential Energy Efficiency Property

This is an entirely separate tax credit and is generally available for installation of alternative energy equipment through at least 2016.  Taxpayers can claim a tax credit for 30% of the cost of eligible solar water heaters, solar electricity property, fuel cell property, small wind energy property, and geothermal heat pump property.  The 2016 Consolidated Appropriations Act extends the Residential Energy Efficient Property credit for five years so it applies to property placed in service through 2021, but ONLY for qualified solar electric property expenditures and qualified solar water heating property expenditures.  The credit will decrease to 26% for 2020 and 22% for 2021 (down from the current 30%).

Expenditures for labor costs for onsite preparation, preparation, assembly, or original installation of qualified property and for piping or wiring to interconnect such property to the dwelling unit also qualify for the credit.

The principal residence requirement does not exist for qualified solar water heating, solar electric, small wind energy, or geothermal heat pump expenditures.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

The High Tax Cost of Renouncing U.S. Citizenship

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tax-exitWith the upcoming election there is increased talk about leaving the country if that person wins.  While these statements are generally made in jest, there has been an increase in the number of Americans contemplating expatriation because of high U.S. taxation or administrative burdens.

Expatriation comes at a high tax cost for certain people who are covered expatriates.  Covered expatriates are basically treated as if they sold all of their assets at current market value and recognize any gain in excess of an exclusion amount.  If someone renouncing their U.S. citizen is a covered expatriate, he may face a very steep tax cost for expatriation.

Who is a Covered Expatriate?

A covered expatriate is a person who meets any ONE of the following tests:

  • for 2016, the individual’s average annual net income tax liability for the give preceding five years exceeds $161,000
  • the individual has a net worth of $2 million or more
  • the individual fails to certify under penalties of perjury that he has complied with all U.S. federal tax obligations for the preceding five years (this question is often posed to those seeking expatriation)

The following individuals are NOT covered expatriates (as long as compliant with all tax obligations for the past 5 years):

  • an individual born a citizen of the U.S. and another country if she continues to be a citizen and resident of the other country and has not resided in the U.S. for more than 10 out of the last 15 years
  • An individual who gives up U.S. citizenship before reaching age 18 and a half if not a resident in the U.S. for more than 10 years before relinquishment

The Income Tax Cost of Expatriation

The exit tax treats the expatriate as having sold all of her assets for fair market value on the day before expatriation.  Keep in mind that the expatriate is not required to actually sell his assets, he just has to pay tax as if he did.  Gain realized from the deemed sale must be taken into account without regard to other provisions of the Code.  This means that gains that would otherwise be tax-free are subject to tax (e.g., gain on the sale of a principal residence would be taxable when it would otherwise be tax free).  For 2016, net gain on the deemed sale is included in taxable income to the extent it exceeds $693,000.

Example:  Johnny renounces his U.S. citizens.  His net worth is $3 million so he is a covered expatriate.  The tax basis of his assets equals $1 million, so he has a net gain of $2 million.  He has taxable income to the extent his $2 million net gain exceeds the exclusion amount of $693,000.  His taxable income is therefore $1,307,000.  Depending on the type of assets he owns, some of the gain will be capital gain and some will be ordinary income.  Basically, Johnny will owe a tax of several hundred thousands of dollars for renouncing his U.S. citizenship.

The Estate & Gift Tax Cost of Expatriation

Normally, the gift and estate tax is paid by the person giving away the property.  In the case of a covered expatriate gifting or bequeathing property, the tax is paid by the recipient if the recipient is a U.S. citizen or resident.  The tax is the highest gift or estate tax rate in effect on the date of transfer (currently a 40% tax rate).  The value of the gift or bequest is reduced by the $14,000 annual gift tax exclusion and by any gift/estate tax paid to a foreign country.  The gift/bequest is NOT reduced by the lifetime exclusion amount (currently $5.45 million).

The following items are exempt from this tax:

  • a gift by a covered expatriate shown on a timely-filed gift tax return
  • a bequest by a covered expatriate shown on a timely-filed estate tax return
  • a gift or bequest that would be eligible for an estate or gift tax charitable or marital deduction if the transferor were a U.S. citizen

As you can see, the tax cost of someone renouncing her U.S. citizenship is very high.  This is not a decision to be taken lightly.

 To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.