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IRS Taxes Sweat Equity

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sweat equityWhen a taxpayer forms an LLC and contributes appreciated property to the LLC, the taxpayer generally does not recognize gain on the transfer.   The IRS does not force taxpayers to recognize gain on property contributions to LLCs because taxpayers didn’t sell or exchange the property; they continue to own an interest in the contributed property, albeit through a business entity.  Naturally, there are exceptions to this rule where gain can be recognized such as where debt encumbered property is transferred to the LLC or investments are transferred to an investment LLC.

On the other hand, when a taxpayer performs services (i.e., sweat equity) in exchange for an interest in an LLC, the taxpayer will usually recognize compensation income equal to the fair market value of the LLC interest received.  The IRS treats the transaction as if the taxpayer received cash compensation (which is taxable), and then used the cash to purchase the LLC interest at fair market value.

There are two forms of ownership interests in an LLC—a capital interest and a profits interest.  A capital interest gives the owner a claim to assets when the LLC is dissolved.  A profits interest is defined as an interest other than a capital interest.  Helpful.  Basically, a profits interest does not entitle the owner to assets upon the LLC’s liquidation, but instead entitles the owner to a share of the LLC’s profits (if any).

A taxpayer who performs services in exchange for a capital interest recognizes income in the amount of the fair market value of the capital interest.  However, a taxpayer who performs services in exchange for a profits interest will not recognize income on receipt of the profits interest.  This is because the profits interest holder is not entitled to liquidation proceeds of the LLC, but is instead entitled solely to LLC profits (if any).  Profits interests holders therefore have an speculative value in their interests and will not recognize income upon receipt of the interest, but will instead pay tax on any profits that are allocated to them.

Example 1:  Thelma and Louise form an LLC.  Thelma contributes land that is currently worth $50,000 and was originally purchased for $20,000 for a 50% capital interest.  Louise will perform real estate advisory services for a 50% capital interest.  Since both parties own a 50% capital interest, each would be entitled to 50% of the assets upon liquidation—Thelma and Louise would each own 50% of the land upon liquidation.  Thelma does not recognize income upon her contribution because it is a contribution of property.  Louise will recognize income of $25,000 because she contributed services in exchange for a capital interest.

Example 2:  Same as above except that Louise received a profits interest instead of a capital interest.  If the LLC liquidates, Louise will not share in the liquidation assets.  Instead, Thelma will receive 100% of the land.  Louise will not be taxed on her contribution of services because she received only a profits interest.  However, Louise will recognize income for any profits that are allocated to her in the future.

While a profits interest is generally not subject to tax because of their unascertainable value, there are circumstances where their value is ascertainable.  In these circumstances, the profits interests will be taxable upon receipt.  These circumstances include:

  • the profits interest relates to a substantially certain and predictable stream of income from the partnership assets (such as a net lease);
  • the partner disposes of the profits interest within two years of receipt; or
  • the profits interest is a limited partner interest in a publicly traded partnership.

While a capital interest received in exchange for services usually is taxable, it is not immediately taxable if the capital interest is subject to a substantial risk of forfeiture.  Property is subject to a substantial risk of forfeiture if the rights to its full enjoyment are conditioned (directly or indirectly) upon either of the following:

  • Future Performance of Substantial Services. A requirement of future performance (or refraining from performance) of substantial services by the recipient is a substantial risk of forfeiture. The regularity of the performance of services and the time spent in performing them tend to indicate whether the required services are substantial.
  • Occurrence of a Condition Related to a Purpose of the Transfer. For example, a requirement that the recipient complete an advanced educational degree, obtain a professional designation, or attain a certain job position within the company to receive unrestricted access to the property would likely be a substantial risk of forfeiture, which would exist until that condition was met.

When the capital interest is subject to a substantial risk of forfeiture, the service provider will not recognize gain until the substantial risk of forfeiture is eliminated.

Example:  Same as Example 1 above except that Louise’s capital interest will be forfeited if Louise does not provide 5 years of services to the LLC.  Since Louise’s capital interest is subject to a substantial risk of forfeiture, it is not taxable in the year of receipt.  Instead, it will be taxable after Louise completes 5 years of service and her capital interest is fully vested.

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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.

 

Michigan’s New Minimum Wage

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minimum-wageA little over two years ago, Governor Snyder signed a law that increased the minimum wage.  Under this law, the minimum wage for 2017 will be $8.90.  It will again increase in 2018 to $9.25 per hour.  Beginning in January 2019, the minimum wage will be indexed for inflation.  The minimum wage increase for each year will not take effect if the unemployment rate in Michigan is 8.5% or more in the year prior to the year of the minimum wage increase.

Training Wage is Still Available

As existed under prior law, an employer may pay a new employee who is under age 20 an hourly training wage of $4.25 for the first 90 days of that employee’s employment.  After 90 days has passed, the employee must be paid at least minimum wage.

 Minor Minimum Wage is Still Available

The minimum wage for an employee who is less than 18 years of age is 85% of the general minimum wage listed above.  This is not a new rule.

 Minimum Wage for Tipped Employees

The current minimum wage for tipped employees is $3.23 per hour.  It will increase to $3.38 per hour in 2017.  To qualify for this lower rate, the following must occur:

  • the employee receives gratuities in the course of employment
  • the tipped minimum wage plus the gratuities received must be at least equal to the general minimum wage (i.e., in 2016 the tips received per hour plus the tipped minimum wage of $3.23 must be at least equal to the general minimum wage of $8.50).  If there is a shortfall, the employer must pay the shortfall to the employee.

 Overview of Minimum Wage Rates

 The schedule of minimum wage increases under the law signed two years ago is:

Minimum Wage

Minimum Wage for Tipped Employees Minimum Wage

for Minors

Training Wage (first 90 days only)

Prior to September 1, 2014

$7.40

$2.65 $6.29 $4.25
September 1, 2014

$8.15

$3.10

$6.93

$4.25

January 1, 2016

$8.50

$3.23

$7.23

$4.25

January 1, 2017

$8.90 $3.38 $7.57

$4.25

January 1, 2018

$9.25

$3.52

$7.86

$4.25

 

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.

New Deadlines for 2016 Tax Forms–Avoid Late Penalties!

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time-371226_1920As you know, the tax system is made up of all types of deadlines.  This year, deadlines that we have long been accustomed to are changing.  These changing deadlines apply to Forms W-2 and 1099-MISC as well as to income tax forms such as the Form 1065 for entities taxed as partnerships and the Form 1120 for C corporations.  This post will describe the new deadlines for each of these items.

Forms W-2 and 1099-MISC

When a business pays a worker who is not an employee $600 or more in a year, the business must file an information return using Form 1099-MISC (miscellaneous income) to report the payments.  Likewise, an employer must report wages paid to employees on Form W-2.  In prior years, these forms had to be provided to the worker by January 31 of the following year and copies were required to be filed with the IRS (Form 1099-MISC) and the Social Security Administration (Form W-2) by the last day of February, or by March 31 if filing electronically.

Starting with 2016 forms (due in 2017), the due dates for IRS and Social Security Administration have been accelerated to January 31 of the following year (no longer the last day of February, or March 31 for electronic filers).  So, 2016 Forms W-2 and 1099-MISC will need to be filed with the government by January  31, 2017–the same date that the forms have to be provided to workers.

Failing to file these returns timely can result in significant penalties–beginning at $50 per 1099-MISC or W-2 filed late.

Form 1065 (U.S. Return of Partnership Income)

Under prior law, partnership tax returns were due three and a half months after the end of the year (i.e., April 15).  Since the partnership tax return was due on the same day as personal income tax returns, many owners of partnerships (or LLCs taxed as partnerships) did not receive their Form K-1 from the partnership in time to file their personal returns by the April 15 personal income tax deadline.

Beginning with 2016 partnership tax returns, the deadline has been moved up to two and a half months after the end of the partnership tax year (i.e., March 15).  Six month extensions to September 15 are available.

It is important to either timely file the partnership tax return or to request an extension.  If the return is filed late, the penalty is $195 per owner per month!  So if a five member LLC unaware of the new deadline files a partnership tax return on April 15, the return is one month late and the penalty is $975.

Form 1120 (U.S. Corporation Income tax Return)

The deadline for C CORPORATION tax returns has been two and a half months after the end of the corporate year (generally March 15).  Beginning with 2016 C corporation tax returns, the deadline has been moved back to three and a half months after the end of the corporate tax year (generally April 15).  Since C corporations are not flow-through tax entities, the owner’s personal tax return is not dependent on the filing of the C corporation tax return.   Delaying the C corporation deadline and accelerating the partnership tax return deadline therefore makes some sense.

Form 1120S (U.S. Return of S Corporation Income)

No changes here–the deadline is still March 15.

FinCen Form 114 (FBAR)

In prior years, foreign bank accounts had to be reported to the IRS by June 30, and no extensions were allowed.  Beginning this year, the due date for FinCen 114 will be April 15 of the following year, but a six month extension will now be allowed.  The  extension will last to October 15.

Under the Internal Revenue Code, if a due date falls on a holiday or weekend, the return is due on the next business day.  Unfortunately, the FinCen 114 form is required under the Bank Secrecy Act of 1970 and not under the Internal Revenue Code–so if the April 15 deadline for FinCen 114 falls on a holiday or weekend, the due date will not be delayed to the next business day (even though the Form 1040 will be delayed to the next working day).

So this tax season, April 15 is on a Saturday and Monday, April 17 is Emancipation Day, so the Form 1040 due date will be April 18.  Since the FinCen 114 is outside of the Internal Revenue Code, its due date remains April 15.

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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.

IRS Scrutinizing Aggressive Tax Strategy

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captive insuranceI always get a kick when I see a book or an article with “what your CPA doesn’t want you to know” in the title.  The strategy that is being pushed is either a well established strategy that most competent CPAs already know about or the strategy is a sham.  One strategy that fits more closely into the latter category is the captive insurance company.

The Basics of a Captive Insurance Company

Basically this strategy involves a profitable business that sets up a related captive insurance company.  The business enters into an insurance agreement with the related insurance company to cover risk the likelihood of which is almost certain never to occur.  The business will take a deduction for the insurance premiums.  The captive insurance company files an election under IRC  Section 831(b) to only pay tax on investment income–basically the captive insurance company does not pay tax on the premiums it receives–it only pays tax on the investment income it earns on the premiums.

Example:  Sham-How Corp is expecting profit of $200,000 this year.  To shelter some of its income, it forms a captive insurance company.  It then takes out a policy covering risk of a Godzilla attack.  It pays the captive insurance company $100,000 in premiums.  Sham-How Corp takes a $100,000 deduction.  The captive insurance company does not pay tax on the $100,000 of premiums it receives–it only pays tax on the investment income it earns on the $100,000.  Wanting to push its luck even more, Sham-How Corp then borrows $100,000 from the insurance company (loans are tax-free).

The Party is Ending

While these transactions have worked, they are very aggressive.  The IRS is classifying captive insurance arrangements as a transaction of interest.  This classification requires businesses entering into these transactions to disclose the transaction to the IRS.  This will subject the transaction to close scrutiny–someone just called the cops and the party is winding down.

Why the Scrutiny?

The IRS is scrutinizing captive insurance arrangements because these arrangements tend to have the following characteristics:

  • the coverage involves an implausible risk
  • the coverage does not match a business need or risk of the business
  • the description of the coverage in the insurance policy is vague, ambiguous, or illusory
  • the coverage duplicates coverage provided to the business by an unrelated, commercial insurance company, and the policy with the commercial insurer often has a far smaller premium.

The premiums paid to the captive insurance company have one or more of the following characteristics:

  • the insurance premiums are designed to be deductible
  • the payments are determined without an underwriting or actuarial analysis that conforms to insurance industry standards
  • the premium payments are not made consistently with the schedule in the policy
  • the premiums are set without comparing the amounts of the premiums to premiums that would be made under policies with unrelated insurance companies

The management of the captive insurance company has one or more of the following characteristics:

  • the insurance company fails to comply with some or all of the laws applicable to insurance companies in the jurisdiction where it is organized
  • the insurance company does not issue policies or binders in a timely manner consistent with industry standards
  • the insurance company does not have defined claims administration procedures that are consistent with industry standards
  • the insured does not file claims for each loss that is covered by the policy
  • the insurance company does not have adequate capital
  • the insurance company invests its capital in illiquid or speculative assets usually not held by insurance companies
  • the insurance company loans or otherwise transfers its capital to the business, related businesses, or owners of the business.

For tax strategies that work, 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.

Deducting Investment Interest

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investment interest expenseInvestors are allowed to deduct interest expense they pay on debt incurred to purchase or carry property held for investment.  Property held for investment includes any property producing interest, dividends, annuities, royalties, and gain-generating property other than that used in a business.

How the Investment Interest Expense Deduction Works

Investment interest is deductible as an itemized deduction.  It is limited to net investment income.  Net investment income is defined as investment income that exceeds investment expenses.  Investment income includes interest and includes gains that are not subject to the reduced capital gains tax rate (e.g., short term capital gain taxed at ordinary rate is qualifying investment income while long term capital gain taxed at 15% is not qualifying investment income).  Also excluded from qualifying investment income are qualified dividends subject to the lower capital gains tax rates.  An election exists whereby a taxpayer can treat qualifying dividends and capital gains as ordinary income and treat such income as qualifying investment income in order to deduct investment interest expense, but this election generally won’t be beneficial.

Watch Out for Tax Exempt Securities

Investment interest does not include interest expense incurred to purchase tax-exempt securities, so such interest expense is not deductible.  This rule also applies to mutual funds so if a fund invests in both taxable and tax-exempt securities, the interest expense must be allocated proportionally based on the income in the fund.

Because expenses allocated to tax-exempt securities are not deductible, the allocation of expenses to tax-exempt income should be minimized.  While it is common to allocate investment expenses to taxable and non-taxable income based on the amount of income in each category, allocating the interest expense in a different manner (such as the number of transactions or the amount of time spent on each class of income) may provide larger allocations to taxable income and therefore increase the amount of deductible investment interest expense.

Example:  Danny manages his own investments.  He trades very frequently, but hasn’t been successful this year.  His taxable investment income is $5,000 and his tax-exempt investment income is also $5,000.  If he allocated investment interest expense based on the relative amount of income from each class, only half of his investment interest expense would be deductible.  However, if 90% of his time in his investment activities is managing his taxable investments and 10% of his time is spent managing his tax-exempt investments, then he has a strong case that 90% of his investment interest should be deductible.

Taxpayers who receive tax exempt income must submit with their returns an itemized statement showing the amount of each class of exempt income and the expenses allocated to each class.  If an item is allocated between tax-exempt and taxable income, the basis of the allocation must be shown on the statement.

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.

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.

New Relief for Missing 60 Day Rollover Deadline

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60 day waiverDistributions from IRAs or qualified plans are not taxable and not subject to penalty if they are transferred to an eligible retirement plan no later than the 60th day following the day of receipt.  A similar rule applies to 403(a) annuity plans, 403(b) tax sheltered annuities, and 457 government plans.

If the rollover is not made within 60 days of receipt, the amount distributed will be subject to income tax and will be subject to a 10% early withdrawal penalty.  Unfortunately, mistakes happen and taxpayers sometimes miss the 60 day deadline to complete the rollover.

Relief Available for Missing the 60 Day Rollover Deadline

The IRS may waive the 60 day requirement where the failure to waive the 60 day requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the taxpayer.

New guidance from the IRS provides relief for taxpayers who have a good reason for missing the 60 day deadline.  The guidance allows the taxpayer to make a written certification to a plan administrator or IRA custodian that the taxpayer meets the requirements for the IRS to waive the 60 day rule.  The IRA custodian or plan administrator may rely on the written certification and treat the rollover as if it was made within the 60 day period.  However, the certification is subject to audit by the IRS.

The requirements of the self certification are:

  1. the IRS must not have denied a previous waiver request with respect to a rollover of all or part of the distribution to which the contribution relates
  2. the taxpayer must have missed the 60 day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons:
  • an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates
  • the distribution, having been made in the form of a check, was misplaced and never cashed
  • the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan
  • the taxpayer’s principal residence was severely damaged
  • a member of the taxpayer’s family died
  • the taxpayer or a member of the taxpayer’s family was seriously ill
  • the taxpayer was incarcerated
  • restrictions were imposed by a foreign country
  • a postal error occurred
  • the distribution was made on account of an IRS levy and the proceeds of the levy were returned to the taxpayer
  • the party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information

The contribution must be made to the plan or IRA as soon as practicable after the reason(s) listed in the preceding paragraph no longer prevent the taxpayer from making the contribution.  This requirement is automatically satisfied if the contribution is made within 30 days after the reason(s) no longer prevent the taxpayer from making the contribution.

The Self-Certification is Subject to IRS Audit

The IRS may, in audit, consider whether a taxpayer’s contribution meets the requirements for a waiver.  For example, the IRS may determine that the requirements for a waiver were not met because of a misstatement in the self-certification, the reason(s) claimed for missing the 60 day deadline did not prevent the taxpayer from completing the rollover within 60 days, or the taxpayer failed to make the contribution as soon as practicable after the reason(s) no longer prevented the taxpayer from making the contribution.  If the IRS disallows the waiver, the taxpayer will be subject to tax and penalty on the distribution.

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.

IRS Impersonators Now Targeting Students & Parents

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More and more people are receiving phone calls from IRS impersonators.  The latest scam involves telephone scammers targeting students and parents during the back-to-school season and demanding payment for non-existent taxes, such as the “Federal Student Tax.”

During these calls, if the student or parent does not cooperate with the scammer, the scammer will become aggressive and threaten to report the student to the police to be arrested.  As schools and universities are preparing for the new school season, it is important for taxpayers to be aware of this latest scam.

IRS impersonators are constantly identifying new ways to carry out their crimes in new and unsuspecting ways.  Some of the latest scams include:

  • Altering the caller ID on incoming phone calls in a spoofing attempt to make it seem like the IRS, the local police, or another government agency is calling
  • Imitating tax software providers to trick tax professionals
  • Demanding fake tax payments using iTunes gift cards
  • Contacting human resource professionals to solicit W-2 information of employees
  • “Verifying” tax return information over the phone
  • Pretending to be from the tax preparation industry

These scammers often threaten to do things that the IRS would never do.  It is the telltale sign of a scam if the impersonator attempts extraordinary IRS measures.  The IRS will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card, or wire transfer. The IRS will first mail you a bill before doing anything else.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe
  • Ask for credit or debit card numbers over the phone

If you get a call from an IRS impersonator, here’s what you should do:

  • Do not give out any information. Hang up immediately
  • Search the web for telephone numbers scammers leave in your voicemail asking you to call back. Some of the phone numbers may be published online and linked to criminal activity
  • Contact the U.S. Treasury Inspector General for Tax Administration (TIGTA) at 800-366-4484 or at their website to report the call.
  • Report the call to the Federal Trade Commission at the FTC Complaint Assistant site website.
  • If you may owe additional taxes, contact a tax professional

 

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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.

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