Financial accounts maintained at foreign financial institutions;

• Foreign retirement accounts;
• Direct ownership of stock in a foreign corporation (outside of a financial institution);
• Foreign life insurance products;
• Foreign partnership interests, such as foreign hedge funds and foreign private equity funds;
• Foreign deferred compensation arrangements; and,
• Beneficial interest in foreign trusts or estates.

 There are various thresholds above which the Form 8938 reporting requirements apply.  Some taxpayers will be required to report if they have foreign assets and foreign accounts with an aggregate value of $50,000.  Filing thresholds for business entities, trusts and estates have not been announced by the IRS.

 At this time, we do not have a full guidance from the IRS detailing the rules associated with this required Form 8938 filing.  However, Form 8938 will typically be attached to your annual federal income tax return, if you have a filing requirement.

 There are significant civil and criminal penalties for failure to file the Form 8938 or to complete the form as required.

 Form 8938 reporting is in addition to other filing requirements with respect to foreign assets and accounts you may have an interest in or authority over such as foreign bank and financial accounts on Form TD F 90-22.1 (commonly referred to as FBAR reporting).

 Accordingly, if you are subject to Form 8938 reporting, we will likely need to perform additional work in order to prepare your 2011 tax federal income tax filings.

Do you have the above required documentation for charitable contributions made in cash?                                   Yes         No

 2.   Contributions Made by Check, Debit Card, or Charge Card. For charitable contributions made by check, the law requires that you either have a receipt as outlined above for Contributions Made in Cash, a copy of the cancelled check, or some other bank record (e.g., a bank statement).  For charitable contributions made by a debit card or by charge card, you are required to either have a receipt as outlined above for Contributions Made in Cash, or a bank record (e.g., a bank statement, credit card statement, etc.). Please see additional requirements below if the contribution is $250 or more.

Do you have the above required documentation for charitable contributions made by check, debit card, or charge card? Yes       No

3.   Contributions of $250 or More.  For all charitable contributions of $250 or more (contributions of cash, by check, by debit or credit card, or of property), the law requires a receipt (written acknowledgment) from the charity to which you made the donation stating the date and amount of the contribution as well as a statement as to whether you received anything in return for your contribution. If you received goods or services in return for the contribution, the receipt must include a description and an estimate of the value of the goods or services received in return for the contribution. If the goods or services received consist solely of intangible religious benefits, the receipt must include a statement to that effect.

4.   Contributions of Vehicles, Boats, or Airplanes of More than $500.  If you are claiming a deduction of more than $500 for a vehicle, a boat, or an airplane you contributed to charity, the law requires that you obtain a Form1098-C (or other written acknowledgment containing the same information shown on Form 1098-C) from the charity in order to deduct your contribution.

Were your charitable contributions of clothing or household items in good used condition or better?                            Yes        No

ALL OTHER NONCASH DONATIONS

Please remember there are numerous other substation requirements for: Publicly Traded Stock; Non Publicly Traded Stock; Artwork; Payroll Deductions; Volunteer Out-of-Pocket Expenses and for amounts over $5,000.

Copyright 2013 Sladek & Witek, CPA’s LLP

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

Distributions for Emergency Personal Expenses

Code Sec. 72(t)(2)(I) provides an exception to the 10 percent additional tax for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. The term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The IRS specifically noted that emergency expenses could be related to: medical care; accident or loss of property due to casualty; imminent foreclosure or eviction from a primary residence; the need to pay for burial or funeral expenses; auto repairs; or any other necessary emergency personal expenses.

The IRS provides that a plan administrator or IRA custodian may rely on a written certification from the employee or IRA owner that they are eligible for an emergency personal expense distribution. Furthermore, the IRS provides that an emergency personal expense distribution is not treated as a rollover distribution and thus is not subject to mandatory 20% withholding. However, the distribution is subject to withholding, the IRS said. If the emergency personal expense distribution is repaid, it is treated as if the individual received the distribution and transferred it to an eligible retirement plan within 60 days of distribution.

If an otherwise eligible retirement plan does not offer emergency personal expense distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is an emergency personal expense distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Distributions to Domestic Abuse Victims

Code Sec. 72(t)(2)(K) provides an exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). The guidance defines a"domesticabusevictimdistribution" as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. "Domesticabuse" is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.

As with distributions for emergency personal expenses, a retirement plan may rely on an employee’s written certification that they qualify for a domestic abuse victim distribution. Similarly, if an otherwise eligible retirement plan does not offer domestic abuse victim distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is a domestic abuse victim distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Request for Comments

The Treasury Department and the IRS invite comments on the guidance, and specifically on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

Specifically targeted by this new tax compliance effort are partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities (related parties) enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These basis shifting transactions allow closely related parties to avoid taxes.

The use of these abusive transactions grew during a period of severe underfunding for the IRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period, according to an IRS News Release.

"Using Inflation Reduction Act funding, we are working to reverse more than a decade of declining audits among the highest income taxpayers, as well as complex partnerships and corporations," IRS Commissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.

"This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long," said IRS Commissioner Danny Werfel. "We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here".

This multi-stage regulatory effort announced by the Treasury and IRS includes the following guidance designed to stop the use of basis shifting transactions that use related-party partnerships to avoid taxes:

• proposed regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold;

• proposed regulation to require taxpayers and their material advisers to report if they and their clients are participating in abusive partnership basis shifting transactions; and

• a Revenue Rulingproviding that certain related-party partnership transactions involving basis shifting lack economic substance.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," said U.S. Secretary of the Treasury Janet L. Yellen.

In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of large partnerships with average assets over $10 billion dollars and larger organizational changes taking place to support compliance efforts, including the creation of a new associate office that will focus exclusively on partnerships, S corporations, trusts, and estates.

By Catherine S. Agdeppa, Content Management Analyst

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

The concept was promoted by multiple witnesses testifying during a recent Senate Finance Committee hearing on the subject of child savings accounts and other tax advantaged accounts that would benefit children. It also is the subject of a recently released report from The Tax Foundation.

Rather than push new limited-use savings accounts, "policymakers may want to consider enacting a more comprehensive savings program such as a universalsavingsaccount," Veronique de Rugy, a research fellow at George Mason University, testified before the committee during the May 21, 2024, hearing. "Universalsavingsaccounts will allow workers to save in one simple account from which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."

She noted that, like other more focused savings accounts, like health savings accounts, it would have "the benefit of sheltering some income from the punishing double taxation that our code imposes."

De Rugy added that universal savings accounts "have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawals would stop them from addressing an emergency in their family."

Adam Michel, director of tax policy studies at the Cato Institute, who also promoted the idea of universal savings accounts. He said these accounts "would allow families to save for their kids or any of life’s other priorities. The flexibility of these accounts make them best suited for lower and middle income Americans."

He also noted that they are promoting savings in countries that have implemented them, including Canada and United Kingdom.

"For example, almost 60 percent of Canadians own tax-free savingsaccounts," Michel said. "And more than half of those account holders earned the equivalent of about $37,000 a year. These accounts have helped increase savings and support the rest of the Canadian savings ecosystem."

De Rugy noted that in countries that have implemented it, they function like a Roth account in that money that has already been taxed can be put into it and not penalized or taxed upon withdrawal.

Michel also noted that the if the tax benefits extend to corporations as they do with deposits to employee health savings accounts, "to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment into savings by those entities."

Simulating The Universal Savings Account Impact

The Tax Foundation in its report simulated how a universal savings account could work, based on how they are implemented in Canada. The simulation assumed the accounts could go active in 2025 for adults aged 18 years or older.

On a post-tax basis, individuals would be allowed to contribute up to $9,100 on a post-tax basis annually, with that cap indexed for inflation. Any unused "contribution room" would be allowed to be carried forward. Earnings would be allowed to grow tax-free and withdrawals would be allowed for any purpose without penalty or further taxation. Any withdrawal would be added back to that year’s contribution room and that would be eligible for carryover as well.

"The fiscal cost of this USA policy would be offset by ending the tax advantage of contributions to HSAs beginning in 2025," the report states. "As such, future contributions to HSAs would be given normal tax treatment, i.e. included in taxable income and subject to payroll tax with subsequent returns on contributions also included in taxable income."

In this scenario, the Tax Foundation report estimates that "this policy change would on net raise tax revenue by about $110 billion over the 10-year budget window."

As for the impact on taxpayers, the "after-tax income would fall by about 0.1 percent in 2025 and by a smaller amount in 2034, reflecting the net tax increase in those years," the report states. "Over the long run, and accounting for economic impacts, taxpayers across every quintile would see a small increase in after-tax income on average, but the top 5 percent of earners would continue to see a small decrease in after-tax income on average."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

In a report issued June 5, 2024, the federal government watchdog noted that while the agency uses AI to improve the efficiency and selection of audit cases to help identify noncompliance, "IRS has not completed its documentation of several elements of its AI sample selection models, such as key components and technical specifications."

GAO noted that the IRS began using AI in a pilot in tax year 2019 for sampling tax returns for NRP audits. The current plan is to use AI to create a sample size of 4,000 returns to measure compliance and help inform tax gap estimates, although GAO expressed concerns about the accuracy of the estimates with that sample size.

"For example, NRP historically included more than 2,500 returns that claimed the Earned Income Tax Credit, but the redesigned sample has included less than 500 of these returns annually," the report stated.

IRS told GAO that it "is exploring ways to combine operational audit data with NRP audit data when developing its taxgapestimates. IRS officials also told us that if IRS can reliably combine these data for taxgap analysis, IRS might be better positioned to identify emerging trends in noncompliance and reduce the uncertainty of the estimates due to the small sample size."

The report also highlighted the fact that the agency "has multiple documents that collectively provide technical details and justifications for the design of the AI models. However, no set of documents contains complete information and IRS analyst could use to run or update the models, and several key documents are in draft form."

"Completing documentation would help IRS retain organizational knowledge, ensure the models are implemented consistently, and make the process more transparent to future users," the report stated.

By Gregory Twachtman, Washington News Editor

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.

As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.

As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.

Individuals

In less than three months, the individual income tax rates are scheduled without further action to automatically increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. Additionally, the current tax-favorable capital gains and dividends tax rates are scheduled to expire. Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the tax code, will be cut in half. Millions of taxpayers are predicted to be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals will either disappear or be substantially reduced after 2012.

In July, the House and Senate passed competing bills to extend many of these expiring incentives one more year (through 2013). No further action is expected on these bills until after the November elections. However, they do signal a highly probable temporary solution to the fate of the Bush-era tax cuts. Regardless of which party wins the White House and Congress, the probability of a one-year extension of the Bush-era tax cuts appears high.

Along with expiration of the Bush-era tax cuts, the two percent payroll tax holiday for 2012 is scheduled to expire. For individuals with income at or above the Social Security wage base for 2012 ($110,100), the payroll tax holiday represented a $2,202 savings. Unlike the Bush-era tax cuts, an extension of the payroll tax holiday is unlikely.

Putting aside the Bush-era tax cuts and the payroll tax holiday for a moment, two new taxes are scheduled to take effect after 2012: an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income. Both new taxes are targeted to individuals with incomes over $200,000 (families with incomes over $250,000). One important misconception about the 3.8 percent Medicare tax is that it is a direct real estate tax. Taxpayers that dispose of real estate may be exempt from the tax either because of income limitations or because of an exclusion provided for primary residence home sales. However, certain high-end homes may feel the sting of the 3.8 percent tax on some or all of the gain realized. Despite some rumblings in the GOP-controlled House, it is unlikely the new Medicare taxes will be repealed before 2013.

All these provisions can be seen as the perfect storm. Year-end tax planning takes on new urgency because of the uncertainty. Some variations on traditional year-end planning techniques may be valuable. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. The same strategy may apply to recognizing income from capital gains and dividends. Another valuable year-end strategy is to “run the numbers” for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes. Additionally, keep in mind the new Medicare taxes and how they will impact investments and possibly home sales.

Estate tax planning is also in flux. Under current law, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million (indexed for inflation) for decedents dying before January 1, 2013. Unless Congress acts, the estate tax will revert to its less generous pre-2001 rates. Gift and generation-skipping transfer (GST) taxes also will revert to their pre-2001 rates.

Businesses

Businesses are also confronted with uncertainty in tax planning as 2012 ends. Special incentives, such as bonus depreciation, enhanced Code Sec. 179 expensing and a host of business tax extenders, may be unavailable after 2012.

Under current law, 50-percent bonus depreciation applies to qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 (January 1, 2014 for certain property). For tax years beginning in 2012, the Code Sec, 179 expensing dollar limitation is $139,000 and the investment ceiling is $560,000 for tax years beginning in 2012. After 2012, 50-percent bonus depreciation is scheduled to expire (except for certain property) and the Code Sec. 179 expensing dollar limitation will drop to $25,000 with a $200,000 investment ceiling.

Enhanced Code Sec. 179 expensing is a good candidate for extension after 2012, but at less generous amounts. In July, the Senate approved a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after December 31, 2012. The House approved a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.

The list of expired business tax extenders is long. The expired incentives include the research tax credit, special expensing for film and television productions, the employer wage credit for military reservists, and many more. A host of related energy incentives have also expired and are awaiting renewal. Unlike past years, Congress is not expected to routinely extend all of the expired provisions. The more widely utilized incentives are likely to be extended; some lesser used incentives may not.

Businesses do have some good news in year-end planning. Temporary “repair” regulations issued in late 2011 include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer’s expensing policy is subject to a ceiling equal to the greater of 0.1 percent of gross receipts or two percent of total depreciation and amortization reported on the financial statement.

Businesses should also explore the Code Sec. 199 domestic production activities deduction. This deduction, unlike many other incentives, is permanent and will not expire after 2012. The deduction allows qualified taxpayers to deduct an amount equal to the lesser of a phased-in percentage of taxable income (adjusted gross income for individuals) or qualified production activities income. A taxpayer’s Code Sec. 199 deduction cannot exceed one-half (50 percent) of the W-2 wages paid by the taxpayer during the year.

Sequestration

The fate of the Bush-era tax cuts and the other incentives is linked to sequestration. The Budget Control Act of 2011 imposes across-the-board spending cuts starting in 2013. Many lawmakers want to postpone or repeal the spending cuts but savings must be recouped somehow. Several energy tax incentives, especially for oil and gas producers, have been viewed as likely candidates for elimination to offset repeal of the Budget Control Act.

Please contact our office if you have any questions about the incentives we discussed and how you can develop a year-end tax plan that responds to the current climate of uncertainty.

When Congress passed the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act (collectively known as the Affordable Care Act) in 2010, lawmakers staggered the effective dates of various provisions.  The most well-known provision, the so-called individual mandate, is scheduled to take effect in 2014.  A number of other provisions are scheduled to take effect in 2013. All of these require careful planning before their effective dates.

When Congress passed the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act (collectively known as the Affordable Care Act) in 2010, lawmakers staggered the effective dates of various provisions.  The most well-known provision, the so-called individual mandate, is scheduled to take effect in 2014.  A number of other provisions are scheduled to take effect in 2013. All of these require careful planning before their effective dates.

2013

Two important changes to the Medicare tax are scheduled for 2013.  For tax years beginning after December 31, 2012, an additional 0.9 percent Medicare tax is imposed on individuals with wages/self-employment income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately). Moreover, and also effective for tax years beginning after December 31, 2012, a 3.8 percent Medicare tax is imposed on the lesser of an individual's net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately).

The Affordable Care Act sets out the basic parameters of the new Medicare taxes but the details will be supplied by the IRS in regulations.  To date, the IRS has not issued regulations or other official guidance about the new Medicare taxes (although the IRS did post some general frequently asked questions about the Affordable Care Act's changes to Medicare on its web site).   As soon as the IRS issues regulations or other official guidance, our office will advise you. In the meantime, please contact our office if you have any questions about the new Medicare taxes.

Also in 2013, the Affordable Care Act limits annual salary reduction contributions to a health flexible spending arrangement (health FSA) under a cafeteria plan to $2,500.  If the plan would allow salary reductions in excess of $2,500, the employee will be subject to tax on distributions from the health FSA.  The $2,500 amount will be adjusted for inflation after 2013.

Additionally, the Affordable Care Act also increases the medical expense deduction threshold in 2013.  Under current law, the threshold to claim an itemized deduction for unreimbursed medical expenses is 7.5 percent of adjusted gross income.  Effective for tax years beginning after December 31, 2012, the threshold will be 10 percent.  However, the Affordable Care Act temporarily exempts individuals age 65 and older from the increase.

2014

The Affordable Care Act's individual mandate generally requires individuals to make a shared responsibility payment if they do not carry minimum essential health insurance for themselves and their dependents.  The requirement begins in 2014. 

To understand who is covered by the individual mandate, it is easier to describe who is excluded.  Generally, individuals who have employer-provided health insurance coverage are excluded, so long as that coverage is deemed minimum essential coverage and is affordable.  If the coverage is treated as not affordable, the employee could qualify for a tax credit to help offset the cost of coverage.  Individuals covered by Medicare and Medicaid also are excluded from the individual mandate.  Additionally, undocumented aliens, incarcerated persons, individuals with a religious conscience exemption, and people who have short lapses of minimum essential coverage are excluded from the individual mandate.

The individual mandate was at the heart of the legal challenges to the Affordable Care Act after its passage.  These legal challenges reached the U.S. Supreme Court, which in June 2012, held that the individual mandate is a valid exercise of Congress' taxing power.

Like the new Medicare taxes, the Affordable Care Act sets out the parameters of the individual mandate.  The IRS is expected to issue regulations and other official guidance before 2014.  Our office will keep you posted of developments.

2014 will also bring a new shared responsibility payment for employers.  Large employers (generally employers with 50 or more full-time employees but subject to certain limitations) will be liable for a penalty if they fail to offer employees the opportunity to enroll in minimum essential coverage.  Large employers may also be subject to a penalty if they offer coverage but one or more employees receive a premium assistance tax credit.

The employer shared responsibility payment provisions are among the most complex in the Affordable Care Act.  The IRS has requested comments from employers on how to implement the provisions.  In good news for employers, the IRS has indicated may develop a safe harbor to help clarify who is a full-time employee for purposes of the employer shared responsibility payment.

If you have any questions about the provisions in the Affordable Care Act we have discussed, please contact our office.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Exempt organizations

Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status.  The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.

Contributions

Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.

The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.  Similar information is available on an IRS Business Master File (BMF) extract.

In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract.  Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.

Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.

Churches

As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.

Foreign charities

Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada.  Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.

The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

• Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:
• Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.
• Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.
• Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.
• Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.
• Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.
• Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.
• Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.
• Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.
• Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.
• Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

• Proof of medical and dental expenses;
• Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;
• Statements, notes, canceled checks and, if applicable, Form 1098, Mortgage Interest Statement, showing interest paid on a mortgage;
• Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;
• Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and
• Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.

Although the IRS may compromise any tax liability, taxpayers may often find it difficult to obtain an offer-in-compromise (OIC).  However, for taxpayers experiencing especially difficult financial hardship, the IRS may be more willing to negotiate, especially if the taxpayer has been compliant in the past.

Although the IRS may compromise any tax liability, taxpayers may often find it difficult to obtain an offer-in-compromise (OIC).  However, for taxpayers experiencing especially difficult financial hardship, the IRS may be more willing to negotiate, especially if the taxpayer has been compliant in the past.

The OIC program was designed to allow the IRS to negotiate with taxpayers for a reduced settlement when the taxpayers are unable to pay their full tax bill. In the past, taxpayers seeking relief by way of OIC had to meet one of two tough conditions in order to be eligible:

1. Doubt as to collectability of tax debt
2. Doubt as to whether the debt is actually owed

The regulations create a third possible condition. If taxpayers don't meet one of the above mentioned conditions, they may now be eligible to enter into a compromise agreement if:

• Collection of the entire liability would create economic hardship
• Exceptional circumstances exist where collection of the entire tax liability would be detrimental to voluntary compliance.

The IRS stresses that these provisions are designed for taxpayers in extreme hardship situations and should not be viewed as an "out" for most taxpayers looking to get out of paying their taxes. Examples of such circumstances were given in the regulations and include the following:

• Where taxpayers (and/or their dependents) that are facing long-term illnesses or disability who have the funds to pay the tax debt but whose assets are needed to cover expenses related to the illness/disability
• Where the sale or liquidation of the taxpayers' assets would result in the taxpayers being unable to meet basic living expenses, including voluntary tax compliance
• Where taxpayers sustained a tax debt due to circumstances beyond their control, such as an extended hospital stay that left them unable to file tax returns.

If you believe that you may be eligible for relief under these regulations, please contact the office for assistance. You also should be aware that the IRS offers installment payment agreements, often given automatically upon application, for taxpayer who may not qualify for an offer in compromise but who nevertheless cannot pay what they owe. Our office can also assist you in qualifying for that payment alternative if appropriate.