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Michigan Tax

Michigan’s New Offer in Compromise Program

July 17, 2014 by curcurucpa

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A new law in Michigan will grant relief to qualifying taxpayers who have outstanding Michigan tax liabilities.  Beginning January 1, 2015, Michigan will have an offer in Michigan Offer in Compromisecompromise program that will allow taxpayers to lower their taxes due if one or more of the following three grounds exist:

 1.)  The Taxpayer Disputes that She Owes the Taxes Due

If doubt exists as to liability (whether the taxpayer actually owes the amount due), the taxpayer will qualify for a compromise if the state determines, based on evidence provided by the taxpayer, that the taxpayer would have won a contested case if the taxpayer’s appeal rights have not expired

2.)  The Taxpayer Owes the Taxes Due, but Can’t Afford to Pay in Full

If doubt exists as to collectability (the taxpayer owes the taxes, but can’t afford to pay in full) the taxpayer will qualify for relief if the taxpayer establishes both of the following:

  • the amount offered in payment is the most that can be expected to be paid or collected from the taxpayer’s present assets or income, AND
  • the taxpayer does not have reasonable prospects of acquiring increased income or assets that would enable the taxpayer to satisfy a greater amount of the liability than the amount offered, within a reasonable period of time

 3.)  A Federal Offer in Compromise Has Been Granted for the Same Tax Years

If an offer in compromise for federal taxes has been accepted by the IRS for the same tax years, the state treasurer may compromise the outstanding balance of the state liability for each year by applying the same percentage as the federal liability compromised to the total federal liability.

Example:  John owes the IRS $100,000 and the State of Michigan $50,000.  His federal offer in compromise has been accepted and he now owes the IRS $20,000.  Since John’s federal offer in compromise was accepted for 20% of the tax owned, his Michigan offer will likely also be accepted for 20% of the $50,000 tax amount owed.

 Accepted Offers will be Subject to Ongoing Review

If the state accepts an offer in compromise, the offer will be subject to continuing review by the state.  The state may revoke any accepted compromise, may reestablish the original amount of taxes due, and will not refund payments made during the compromise period if either of the following occurs:

  • the taxpayer concealed assets from the state, or falsified/withheld/etc. any documents or oral statements
  • the taxpayer fails to comply with any of the terms and conditions relative to the compromise or the taxpayer becomes delinquent on current tax filings and/or payments.

 Public Inspection

The state will disclose return information to members of the general public to the extent necessary to permit inspection of any accepted offer in compromise.

 Fees

To apply for a compromise, taxpayer must submit the GREATER of $100 or 20% of the offer to the department.  If the offer is accepted, the application fee will be applied to the reduced balance.  If the offer is rejected, the application fee is non-refundable but will still be applied to the original balance due.

If you have any questions on how this applies to you, please feel free to give us a call.

 

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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.

Filed Under: Michigan Tax Tagged With: Michigan offer in compromise, tax disputes

Renting Out Your Old Home? Avoid This Tax Trap!

April 3, 2013 by curcurucpa

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Homeowners pay real property taxes on their homes.  Principal residences are exempt from the 18-mill tax for school operating purposes.  This reduction in property taxes is known as the homestead exemption—not to be confused with the Homestead Property Tax Credit which is a refundable tax credit claimed on Michigan income tax returns.

The 18-mill exemption reduces a homeowner’s property tax bill by 1.8% of the home’s taxable value.

Example:  Joan buys a home for $200,000.  The home’s initial taxable value is $100,000.  The total property taxes on her home equal 56 mills.  Her total property taxes for the year are $5,600.  However, since Joan uses the home as her principal residence, she qualifies for the homestead exemption which reduces her millage by 18 points down to 38 mills.  Her total property taxes with the homestead exemption are now $3,800 (saving her $1,800 dollars)

The homestead exemption applies only as long as the home is being used as a principal residence.  When the home is no longer used as a principal residence, the homeowner has to notify the assessor that it is no longer her principal residence.  The assessor will then remove the homestead exemption and increase the millage by the 18 mill school operating assessment.

When homeowners move out of their principal residences and rent it out, they must be sure to notify the assessor that the home is no longer being used as their principal residences since the homes are now rented out. 

Example 1: Same facts as above, except that Joan buys a new home and rents out the old one.  Joan will claim a homestead exemption on the new home and must relinquish the homestead exemption on the old home.  Her property taxes on the old home will increase.  She should increase the rent she is charging the tenant to cover this increase in property taxes.  

Failing to notify the assessor will result in the assessment of back taxes (the 18 mill school operating assessment) against the homeowner plus penalties and interest.

Example 2: If Joan decides not to notify the assessor, she risks the assessor finding out that the old home is rented.  The assessor will assess back taxes for the years the home was rented with the homestead exemption in place.  Joan will also be subject to penalties and interest.  

There is an exemption for people who are no longer using their homes as a principal residence because they are on active duty in the military.

There is also an exemption for people who are selling the home if the home remains unoccupied and for sale for up to three years.

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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.

Filed Under: Michigan Tax Tagged With: homestead exemption, rent income

Tax Rules for Gambling Income & Losses

February 26, 2013 by curcurucpa

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Gambling income, unsurprisingly,  is subject to income tax.  This post is an overview of federal and Michigan treatment of gambling income and losses.

FEDERAL TAX TREATMENT OF GAMBLING INCOME & LOSSES

gambling

On your federal income tax return, you can take an itemized deduction for gambling losses, but only to the extent of gambling income (in other words you can’t claim an overall loss on gambling activity).

Example: John likes to play blackjack and had winnings of $40,000 in 2009. He also lost $90,000 in the same year. John has to report his $40,000 winnings as income, but he can only deduct $40,000 of his gambling losses because gambling losses are limited to gambling winnings.  Excess gambling losses cannot be carried forward.

It should be noted that taxpayers must itemize to claim gambling losses.

Example: Joan won $4,000 in the lotto in 2009. She also lost $5,500 in other gambling activity during the year. If she does not itemize, she has to claim the $4,000 in income and cannot deduct the $5,500 in gambling losses—not a good result.

Even though the itemized deduction for gambling losses can offset gambling income, it is a below-the-line deduction (i.e., it is taken after computing AGI). AGI is used to calculate various phaseouts for credits and deductions. Therefore, gambling income may affect your phaseouts even though they are offset by gambling losses.

MICHIGAN TAX TREATMENT OF GAMBLING INCOME & LOSSES

In Michigan, gambling income is based on the amount of gambling winnings included in federal AGI (the bottom line of the first page of your Form 1040) without taking into account the itemized deduction for gambling losses. So, in the above examples, John has $40,000 in gambling income on his MI-1040 and pays $1,700 in tax and Joan has $4,000 in gambling income on her MI-1040 and pays $170 in tax even though both John and Joan had overall gambling losses.

To get around this unlucky result, the strategy is to use gambling losses to directly offset gambling income, rather than take gambling losses as an itemized deduction. There are two ways to do this:

* Special Rule for Slots and other Casual Gambling

* Becoming a professional gambler (harder than you think and will not be discussed here)

SPECIAL RULE FOR SLOTS AND OTHER CASUAL GAMBLING

Generally, gambling winnings and losses have to be determined on a wager-by-wager basis. For causal gambling (slots, poker, blackjack, horse racing, etc.) you can determine gambling winnings and losses on a net daily basis. By figuring gambling income on a daily basis (rather than wager-by-wager) gambling winnings are directly offset by gambling losses (and thus become excludable from Michigan income tax).

Example (wager-by-wager basis): Jimmy goes to the casino on Friday and buys $1,000 in tokens to play slots. He has $9,000 in winning spins and $6,000 in losing spins. He cashes out on Friday with $3,000. Jimmy wants to continue his winning streak on Saturday. He buys $4,000 in tokens. This time Jimmy has $1,000 in winning spins and $5,000 in losing spins. He leaves the casino with nothing.

On a wager-by-wager basis, Jimmy has $10,000 in winning spins over the two days and reports this amount as income. Jimmy has $11,000 in losing spins over the two days and deducts his losses as an itemized deduction (limited to the $10,000 in gambling winning). However, on Jimmy’s Michigan tax return, he must report the $10,000 as income, but cannot take a deduction for gambling losses.

Same Example (daily basis): Jimmy’s daily gambling winnings and losses are netted. Jimmy has overall income of $2,000 on Friday (Cash Out: $3,000 & Cash In: $1,000) and an overall loss of $4,000 on Saturday (Cash Out: $0 & Cash In: $4,000). On a daily basis, Jimmy had $2,000 of gambling winnings on Friday and $4,000 of gambling losses on Saturday. On his federal return, he must report $2,000 of gambling winnings and gambling losses of $2,000 (again, the itemized deduction for gambling losses is limited to gambling winnings). On his Michigan return, he only reports the Friday daily winnings of $2,000.

It is CRITICAL that gambling winnings and losses be properly documented. The following information should be maintained in a log:

1. the date and type of specific wager or wagering activity

2. the name and address of the gambling establishment

3. the names of other persons present with the taxpayer at the gambling establishment

4. the amount won or lost

 

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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.

Filed Under: Michigan Tax Tagged With: gambling

New Law Allows Michigan Unemployment Tax to Be Paid In Installments

October 18, 2012 by curcurucpa

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The Michigan Unemployment Tax applies to the first $9,500 of each employee’s wages during each year.  Once an employee reaches $9,500 of wages in a year, the employer does not have to pay unemployment tax on that employee’s excess wages for the rest of the year.  Businesses with low employee turnover tend to have larger unemployment tax liabilities in the first two quarters.  This is because employees (especially full-time employees) will hit the $9,500 wage limit fairly early in the year.  Employers with higher turnover have employees starting later in the year and will thus have taxable wages in later quarters.

Example:  ABC Corp has ten full time employees who earn $10,000 per quarter.  ABC Corp has a 5% unemployment tax rate.  ABC Corp’s total wages for the first quarter are $100,000.  Taxable wages for the first quarter are $95,000 (the first $9,500 of each employee’s wages).  ABC Corp’s unemployment tax due is $4,750.  As long as ABC Corp does not hire additional employees during the remainder of the year, ABC Corp will not have an unemployment tax due for the remaining three quarters of the year because each employee reached the $9,500 limit in the first quarter.

Beginning in 2013, certain employers will be able to spread their first quarter Michigan Unemployment tax liability over four equal quarterly payments.  For example, in the above fact scenario, ABC Corp has to pay $4,750 by April 25.  If ABC Corp qualifies under this provision, it can pay the $4,750 in four equal payments of $1,187.50 with its four Michigan unemployment tax returns for the year.

To qualify:

  • A business have 25 or fewer employees on January 12th of the prior year AND
  • 50% or more of the business’ total previous year’s tax were payable with the first quarter report.

If the business qualifies, it can make an election on its first quarter report and pay the first quarter tax over four quarters.   Beginning in the second quarter, the total amount due for each quarter will be the unemployment tax for payroll in that quarter plus the carryover of the first quarter’s tax.

Example:  It is 2013.  XYZ Corp had 20 employees as of January 12, 2012.  Its unemployment tax liability in the first quarter of 2012 was $5,000 and its total tax liability for the year was $8,000.  Since XYZ Corp had 25 or fewer employees as of January 12 of the prior year and 50% or more of its prior year unemployment tax was payable in the first quarter, it meets the requirements to spread its 2013 first quarter liability over four quarters.

Continuing on with the example—If XYZ Corp has $6,000 of tax due in the first quarter, $2,000 in the second quarter, $1,000 in the third quarter, and no tax liability in the fourth quarter, its 2013 Michigan unemployment taxes due will be:

1st quarter:          $1,500 (one quarter of $6,000)

2nd quarter:         $3,500 (one quarter of $6,000 plus 2nd quarter liability of $2,000)

3rd quarter:         $2,500 (one quarter of $6,000 plus 3rd quarter liability of $1,000)

4th quarter           $1,500 (one quarter of $6,000 plus 4th quarter liability of $0)

 

If you need help with small business taxes,

sign up for a FREE tax consultation.

 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.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Filed Under: Michigan Tax, Small Business Tax Tagged With: excess wages, Michigan unemployment tax, taxable wages

Changes (some scary) to Michigan’s Personal Income Tax

June 2, 2011 by curcurucpa

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Our previous posts have described changes in Michigan tax law regarding pension income and business taxation.  This post will highlight changes to Michigan’s personal income tax.  These changes are generally effective January 1, 2012.

A list of the most relevant changes:

  • Political contributions will no longer be deductible.  Previously, Michigan allowed up to a $50 deduction for political contributions ($100 on a joint return)
  • Senior citizens will no longer be able to exclude a portion of interest, dividends, and capital gains received.
  • Taxpayers will no longer receive an additional $600 exemption per dependent child under age 19
  • Charitable contributions from retirement accounts will no longer be deductible for Michigan tax purposes
  • The additional exemption allowed for each taxpayer age 65 and older will be eliminated

There will also be substantial changes to the Homestead Property Tax Credit.  This credit is based on the property taxes assessed against your principal residence and its maximum amount is $1,200.  It is calculated as:

(Property Taxes Assessed – 3.5% of Household Income) * 60%

For senior citizens, the 60% at the end of the formula is increased to 100%.

The credit begins to phase out when Household Income exceeds about $73,000.

Changes to the Homestead Property Tax Credit:

  • a taxpayer will no longer be eligible for the credit if the taxable value of her homestead exceeds $135,000 (for a new home, this limit equates to a sale value of $270,000)
  • the credit will be phased out starting at $41,000 of household resources and will be completely phased out at household resources of $50,000
  • the 60% and 100% applicable percentages for non-seniors and seniors will be eliminated.  In its place will be an applicable percentage phase out based on household resources:
    • Those with $21,000 of household resources and lower will have an applicable percentage of 100%
    • The applicable percentage will phase out four percentage points for every $1,000 of household resources above $21,000.
    • The minimum applicable percentage will be 60%.

Under prior law, the Homestead Property Tax Credit was based on household income.  Under the new law, the credit will be based on household resources.  The primary difference between the two concepts is that household resources would exclude any subtractions due to net business, rental, or royalty losses.

Example:  John has W-2 income of $70,000 and a business loss of $30,000.  His household income is $40,000.  John pays property taxes of $2,000.  Under old law, his property tax credit would be based on the amount of his property taxes exceeding 3.5% of household income.  Subject to the applicable percentage, John property taxes eligible for the credit are $600 ($2,000 property taxes less $1,400 (which is 3.5% of household income of $40,000).

Under the new law, John’s household resources are $70,000 (household resources do not take into account business losses).  3.5% of his household resources is $2,450.  Since John’s property taxes of $2,000 don’t exceed 3.5% of household resources, John cannot take the property tax credit.

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.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Filed Under: Michigan Tax Tagged With: Curcuru & Associates, farmington hills cpa, metro detroit cpa, Michigan Homestead Property Tax credit, Michigan pension tax, michigan taxes, Sal Curcuru, small business tax, Vito Curcuru

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