A CPA’s Frequently Asked Questions… At Your Reach
Things you should know about Tax, Tax Debt, Tax Credit, Mortgages, Healthcare, Hybrid Car Tax Savings, Charity Donations, and so much more!
How do you pay your IRS tax bill How do I pay now? Use a safe and convenient electronic payment option or send your payment. Pay by: • Debit or credit card • Electronic funds transfer • Check or money order •
What if I can't pay now?
Learn about IRS programs designed to help you meet your tax obligations without causing additional hardship: • Installment Agreement Allows you to pay your taxes over time, if you qualify. • Offer in Compromise Allows you to settle for less than you actually owe, if you meet strict requirements. What if I don't pay? The IRS is legally required to take certain steps to collect your balance due account. • Your refund can be used to offset your bill. • A federal tax lien can be filed against your property. • Your salary/accounts can be seized through a tax levy. • You can be served a summons to provide information. Review the IRS Collection Process to learn about these actions and your rights. •
Health Insurance Premium Tax Credit (Posted on Merchant Circle) 6/05/2013 Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. Exchanges will operate in every state and the District of Columbia. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On May 18, 2012, the Treasury Department and the IRS issued final regulations which provide guidance for individuals who enroll in qualified health plans through Exchanges and claim the premium tax credit, and for Exchanges that make qualified health plans available to individuals and employers.
Health Flexible Spending Arrangements Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The
change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. Like Share Print
Affordable Care Act: Questions and Answers on Over-theCounter Medicines and Drugs 1. How are the rules changing for reimbursing the cost of overthe-counter medicines and drugs from health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs)? A. Section 9003 of the Affordable Care Act established a new uniform standard for medical expenses. Effective Jan. 1, 2011, distributions from health FSAs and HRAs will be allowed to reimburse the cost of over-thecounter medicines or drugs only if they are purchased with a prescription. This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted, even if purchased without a prescription.
2. How are the rules changing for distributions from health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs) that are used to reimburse the cost of over-thecounter medicines and drugs? A. In accordance with Section 9003 of the Affordable Care Act, only prescribed medicines or drugs (including over-the-counter medicines and drugs that are prescribed) and insulin (even if purchased without a prescription) will be considered qualifying medical expenses and subject to preferred tax treatment.
3. When will the changes become effective? A. The changes are effective for purchases of over-the-counter medicines and drugs without a prescription after Dec. 31, 2010. The changes do not affect purchases of over-the-counter medicines and drugs in 2010, even if they are reimbursed after Dec. 31, 2010.
4. How do I prove that I have purchased an over-the-counter medicine or drug with a prescription so that I can get reimbursed from my employer's health FSA or an HRA? A. If your employerâ€™s health FSA or HRA reimburses these expenses, you would provide the prescription (or a copy of the prescription or another item showing that a prescription for the item has been issued) and the customer receipt (or similar third-party documentation showing the date of the sale and the amount of the charge). For example, documentation could consist of a customer receipt issued by a pharmacy that reflects the date of sale and the amount of the charge, along with a copy of the prescription; or it could consist of a customer receipt that identifies the name of the purchaser (or the name of the person for whom the prescription applies), the date and amount of the purchase and an Rx number.
5. How does this change affect over-the-counter medical devices and supplies? A. The new rule does not apply to items for medical care that are not medicines or drugs. Thus, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA if purchased after Dec. 31, 2010, and a distribution from an HSA or Archer MSA for the cost of such items will still be tax-free, regardless of whether the items are purchased using a prescription.
6. Will I need a prescription to use my health FSA, HRA, HSA or Archer MSA funds for insulin purchases after Dec. 31, 2010? A. No. You can continue to use your health FSA, HRA, HSA or Archer MSA funds to purchase insulin without a prescription after Dec. 31, 2010.
7. I use health FSA funds for my co-pays and deductibles. Will I still be able to reimburse those expenses with health FSA funds after Dec. 31, 2010? A. Yes. Co-pays and deductibles continue to be reimbursable from a health FSA after Dec. 31, 2010. Similarly, funds from an HRA can continue to be used for these expenses and a distribution from an HSA or Archer MSA for these purposes will be tax-free.
8. My company gives me two extra months beyond the end of the year to submit claims for health FSA expenses incurred during the
year. What happens if I purchase over-the-counter medicines or drugs without a prescription in 2010 but do not submit the claim for those expenses until January 2011? Will they qualify for reimbursement? A. Yes. The new restriction on plan reimbursements for the cost of overthe-counter medicines or drugs without a prescription applies only to purchases that are made after 2010.
9. My company’s health FSA includes a provision for a grace period, so that if I don’t spend all of the money in my health FSA by Dec. 31 in a given year, I can still use the amount left in my health FSA at the end of the year to reimburse expenses I incur during the first 2 ½ months of the following year. If I buy overthe-counter medicines or drugs without a prescription during the 2 ½ month grace period of 2011, can I still use the amount left in my health FSA at the end of 2010 to reimburse those expenses? A. No. The change applies to purchases made on or after Jan. 1, 2011. Thus, even if your employer’s plan includes the 2 ½ month grace period provision, the cost of over-the-counter medicines and drugs purchased without a prescription during the first 2 ½ months of 2011 will not be eligible to be reimbursed by a health FSA.
10. If my health FSA or HRA issues a debit card that I use to pay for over-the-counter medicines or drugs, will I still be able to use the card to purchase over-the-counter medicines or drugs after Dec. 31, 2010? A. Generally, yes, if you have a prescription for the medicine or drug. For expenses incurred in 2010, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs (whether or not you have a prescription) at pharmacies and from mail order and web-based vendors that sell prescription drugs. Starting after Jan. 15, 2011, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs at these vendors, so long as you obtain a prescription for the medicine or drug, the prescription is presented to the pharmacist, and the medication is dispensed by the pharmacist and given an Rx number.
For further information, including guidance on purchases of over-thecounter medicines and drugs from health care providers other than pharmacies and mail order and web-based vendors (such as physicians or hospitals), see IRS Notice 2011-5. For guidance on debit card purchases at “90 percent pharmacies,” see IRS Notice 2010-59.
11. The ACA removed over-the-counter medicines and drugs from the list of reimbursable qualified medical items if purchased without a prescription. If you have an HSA, Archer MSA, health FSA, or HRA, how will the change in the law affect reporting on Form W-2? Do the reimbursements for items that are not qualified medical expenses need to be included as taxable wages on employees’ Forms W-2? A. If you have an HSA or an Archer MSA, distributions for expenses that are not qualifying medical expenses (including over-the-counter medicines and drugs purchased without a prescription) will be included in your gross income and subject to an additional tax of 20%. The income tax and additional tax are reported on Form 8889 for an HSA distribution and on Form 8853 for an Archer MSA distribution. You complete these forms and attach them to your Form 1040 when you file your income tax return. Distributions from an HSA or an Archer MSA are not included as taxable wages and do not affect your Form W-2. New Topic:
Small Business Health Care Tax Credit This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. 1. How will the credit make a difference for you?
For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective
beginning Jan. 1, 2014. Additional information about the enhanced version will be added to IRS.gov as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively. Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save … $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year. Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments. There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. And finally, if you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return. 2. Can you claim the credit?
Now that you know how the credit can make a difference for your business, let’s determine if you can claim it. To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year. Let us break it down for you even more. You are probably wondering: what IS a full-time equivalent employee. Basically, two half-time workers count as one full-timer. Here is an example, 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20. Now let’s talk about average wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10 –
the number of FTEs – and the result is your average wage. The average wage would be $20,000. Also, the amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit you receive will be less. 3.
How do you claim the credit?
You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941. If you are a small business, include the amount as part of the general business credit on your income tax return. If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don't ordinarily do so. Don’t forget … if you are a small business employer you may be able to carry the credit back or forward. And if you are a tax-exempt employer, you may be eligible for a refundable credit. New Topic:
Additional Medicare Tax A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. New Topic:
Net Investment Income Tax A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and
trusts that have certain investment income above certain threshold amounts.
Net Investment Income Tax FAQs Basics of the Net Investment Income Tax 1. What is the Net Investment Income Tax (NIIT)? The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code (IRC). The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
2. When does the Net Investment Income Tax take effect? The Net Investment Income Tax goes into effect on Jan. 1, 2013. The NIIT will affect income tax returns of individuals, estates and trusts for their first tax year beginning on (or after) Jan. 1, 2013. It will not affect income tax returns for the 2012 taxable year that will be filed in 2013. Who Owes the Net Investment Income Tax 3. What individuals are subject to the Net Investment Income Tax? Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds: Filing Status
Married filing jointly
Married filing separately
Head of household (with qualifying person) Qualifying widow(er) with dependent child
Taxpayers should be aware that these threshold amounts are not indexed for inflation.
If you are an individual that is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.
4. What individuals are not subject to the Net Investment Income Tax? Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under IRC section 6013(g) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the proposed regulations provide these couples special rules and a corresponding IRC section 6013(g) election for the NIIT.
5. What Estates and Trusts are subject to the Net Investment Income Tax? Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650). There are special computational rules for certain unique types of trusts, such a Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the proposed regulations (see # 19 below).
6. What Trusts are not subject to the Net Investment Income Tax? The following trusts are not subject to the Net Investment Income Tax: a. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under IRC section 501, and Charitable Remainder Trusts exempt from tax under IRC section 664). b. A trust in which all of the unexpired interests are devoted to one or more of the purposes described in IRC section 170(c)(2)(B). c. Trusts that are classified as “grantor trusts” under IRC sections 671679. d. Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
What is Included in Net Investment Income 7. What is included in Net Investment Income? In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of IRC section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #12 below).
8. What are some common types of income that are not Net Investment Income? Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, selfemployment income, Alaska Permanent Fund Dividends (see Rev. Rul. 9056, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A, or 457(b)).
9. What kinds of gains are included in Net Investment Income? To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income: a. Gains from the sale of stocks, bonds, and mutual funds. b. Capital gain distributions from mutual funds. c. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence). Gains from the sale of interests in partnerships and S corporations (to the extent you were a passive owner).
10. Does this tax apply to gain on the sale of a personal residence? The Net Investment Income Tax will not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The preexisting statutory exclusion in IRC section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.
Example 1: A, a single filer, earns $210,000 in wages and sells his principal residence that he has owned and resided in for the last 10 years for $420,000. A’s cost basis in the home is $200,000. A’s realized gain on the sale is $220,000. Under IRC section 121, A may exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home. Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 IRC section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%). Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 IRC section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.
11. Does Net Investment Income include interest, dividends and capital gains of my children that I report on my Form 1040 using Form 8814? The amounts of Net Investment Income that are included on your Form 1040 by reason of Form 8814 are included in calculating your Net Investment Income. However, the calculation of your Net Investment Income does not include (a) amounts excluded from your Form 1040 due
to the threshold amounts on Form 8814 and (b) amounts attributable to Alaska Permanent Fund Dividends.
12. What investment expenses are deductible in computing NII? In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in Net Investment Income.
13. Will I have to pay both the 3.8% Net Investment Income Tax and the additional .9% Medicare tax? You may be subject to both taxes, but not on the same type of income. The 0.9% Additional Medicare Tax applies to individualsâ€™ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income. See more information on the Additional Medicare Tax. How the Net Investment Income Tax is Reported and Paid
14. If I am subject to the Net Investment Income Tax, how will I report and pay the tax? For individuals, the tax will be reported on, and paid with, the Form 1040. For Estates and Trusts, the tax will be reported on, and paid with, the Form 1041.
15. Is the Net Investment Income Tax subject to the estimated tax provisions? The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates, and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.
16. Does the tax have to be withheld from wages? No, but you may request that additional income tax be withheld from your wages.
Examples of the Calculation of the Net Investment Income Tax 17. How does a Single taxpayer with income less than the statutory threshold calculate the Net Investment Income Tax? Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.
18. How does a Single taxpayer with income greater than the statutory threshold calculate the Net Investment Income Tax? Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000. Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000. The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).
Additional Information 19. Other than these FAQs, where can I find additional information about the Net Investment Income Tax? Find it in the full text of the proposed regulations, request for comments, and information on the public hearing.
20. The proposed regulations are proposed to be effective for tax years beginning after Dec. 31, 2013, but Net Investment Income Tax goes into effect on Jan. 1, 2013.
May I rely on the regulations for guidance on the Net Investment Income Tax during 2013? Taxpayers may rely on the proposed regulations for purposes of compliance with section 1411 until the effective date of the final regulations. To the extent the proposed regulations provide taxpayers with the ability to make an election, taxpayers may make the election provided that the election is made in the manner described in the proposed regulation. Any election made in reliance on the proposed regulations will be in effect for the year of the election, and will remain in effect for subsequent taxable years. However, if final regulations provide for the same or a similar election, taxpayers who opt not to make an election in reliance on the proposed regulations will not be precluded from making that election pursuant to the final regulations. New Topic: Reporting Employer Provided Health Coverage in Form W-2 The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employeeâ€™s Form W2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement. The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits.
Form W-2 Reporting of Employer-Sponsored Health Coverage The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable. The value of the employerâ€™s excludable contribution to health coverage continues to be excludable from an employee's income, and it is not taxable. This reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.
Employers that provide "applicable employer-sponsored coverage" under a group health plan are subject to the reporting requirement. This includes businesses, tax-exempt organizations, and federal, state and local government entities (except with respect to plans maintained primarily for members of the military and their families). However, federally recognized Indian tribal governments are not subject to this requirement.
Transition Relief For certain employers, types of coverage, and situations, there is transition relief from the requirement to report the value of coverage on the 2012 Forms W-2 (the forms for calendar year 2012 that employers generally are required to provide employees in January 2013). This relief will apply to future calendar years until the IRS publishes additional guidance. However, any guidance that expands the reporting requirements will apply only to calendar years that start at least six months after the guidance is issued. See the â€œOptional Reportingâ€? column in the below chart for the employers, types of coverage, and situations eligible for the transition relief. Reporting on the Form W-2 The value of the health care coverage will be reported in Box 12 of the Form W-2, with Code DD to identify the amount. There is no reporting on the Form W-3 of the total of these amounts for all the employerâ€™s employees. In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee. See the chart, below, and the questions and answers for more information. An employer is not required to issue a Form W-2 solely to report the value of the health care coverage for retirees or other employees or former employees to whom the employer would not otherwise provide a Form W2. NEW Topic:
What You Need to Know about the Small Business Health Care Tax Credit How will the credit make a difference for you? For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers
such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014. Additional information about the enhanced version will be added to IRS.gov as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively. Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save … $7,500. If you save $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year. Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments. There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. And finally, if you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended. http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-for-SmallEmployers New Topic:
A Brief Overview of Depreciation Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property. Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable. In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the following requirements: • The taxpayer must own the property. Taxpayers may also depreciate any capital improvements for property the taxpayer leases.
A taxpayer must use the property in business or in an incomeproducing activity. If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based only on the business use of that property. • The property must have a determinable useful life of more than one year. Even if a taxpayer meets the preceding requirements for a property, a taxpayer cannot depreciate the following property: • Property placed in service and disposed of in same year. • Equipment used to build capital improvements. A taxpayer must add otherwise allowable depreciation on the equipment during the period of construction to the basis of the improvements. • Certain term interests. Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property ceases to be depreciable when the taxpayer has fully recovered the property’s cost or other basis or when the taxpayer retires it from service, whichever happens first. A taxpayer must identify several items to ensure the proper depreciation of a property, including: • The depreciation method for the property • The class life of the asset • Whether the property is “Listed Property” • Whether the taxpayer elects to expense any portion of the asset • Whether the taxpayer qualifies for any “bonus” first year depreciation • The depreciable basis of the property The Modified Accelerated Cost Recovery System (MACRS) is the proper depreciation method for most property. Additional information about MACRS, and the other components of depreciation are in Publication 946, How to Depreciate Property. A taxpayer must use Form 4562, Depreciation and Amortization, to report depreciation on a tax return. Form 4562 is divided into six sections and the Instructions for Form 4562 contain information on how, and when to fill out each section. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/A-BriefOverview-of-Depreciation •
Plug-In Electric Drive Vehicle Credit Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks. For vehicles acquired after December 31, 2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The total amount of the credit allowed for a vehicle is limited to $7,500. The credit begins to phase out for a manufacturerâ€™s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009). Section 30D originally was enacted in the Energy Improvement and Extension Act of 2008. The American Recovery and Reinvestment Act of 2009 amended section 30D effective for vehicles acquired after December 31, 2009. Section 30D was also modified by the American Taxpayer Relief Act (ATRA) 2013 for certain 2 or 3 wheeled vehicles acquired after December 31, 2011 and before January 1, 2014. The vehicles must be acquired for use or lease and not for resale. Additionally, the original use of the vehicle must commence with the taxpayer and https://www.google.com/the vehicle must be used predominantly in the United States. For purposes of the 30D credit, a vehicle is not considered acquired prior to the time when title to the vehicle passes to the taxpayer under state law. Notice 2009-89 applies to vehicles acquired subsequent to December 31, 2009 and provides procedures that a vehicle manufacturer may use if it chooses to certify that a vehicle meets certain requirements that must be satisfied to claim the Qualified Plug-in Electric Drive Motor Vehicle Credit and the amount of the credit allowable with respect to that vehicle Credit Amounts for Qualified Vehicles Acquired After December 31, 2009 Qualified Plug-In Electric Drive Motor Vehicle Credit (IRC 30D) Phase Out New Topic: Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas)
Generally, you may deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement, and you reduce the loss by the amount of any reimbursement or expected reimbursement. A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration. A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent. If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of: â€˘ The adjusted basis of your property, or â€˘ The decrease in fair market value of your property as a result of the casualty The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero. If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis. The loss, regardless of whether it is a casualty or theft loss, must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to Publication 547. Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A (PDF) (or Form 1040NR, Schedule A (PDF), if you are a nonresident alien). For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty or theft event that occurred during the year. Then add up all those
amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. Casualty and theft losses are reported on Form 4684 (PDF), Casualties and Thefts. Section A is used for personal-use property, and Section B is used for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) . For losses involving business-use property, refer to Publication 584B (PDF), Business Casualty, Disaster, and Theft Loss Workbook . Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. Review Disaster Assistance and Emergency Relief for Individuals and Businesses on IRS.gov, for information regarding timeframes and additional information to your specific qualifying event. Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received. If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536, Net Operating Losses for Individuals, Estates, and Trusts . http://www.irs.gov/taxtopics/tc515.html New Topic: Advanced Energy Credit for Manufacturers Overview The Qualifying Advanced Energy Project Credit was enacted by the American Recovery and Reinvestment Act of 2009 on February 17, 2009, as section 48C of the Internal Revenue Code. This credit provides an investment tax credit of up to 30 percent of qualified investment in a qualifying advanced energy project, which is defined to be a project which
establishes, expands or re-equips a manufacturing facility for the production of any of the following types of property: • Property designed to be used to produce energy from the sun, wind, geothermal deposits, or other renewable resources; • Fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles; • Electric grids to support the transmission of intermittent sources of renewable energy, including storage of such energy; • Property designed to capture and sequester carbon dioxide emissions; • Property designed to refine or blend renewable fuels or to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies); • New qualified plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components which are designed specifically for use with such vehicles, including electric motors, generators, and power control units; or • Other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Secretary. To qualify for this credit, a project must be certified in advance by the Internal Revenue Service. To obtain certification for projects, taxpayers must do the following: • Apply in advance; • Receive an allocation of a specific amount of credit from the Service; • Sign an agreement with the Service agreeing to meet certain requirements; • Request certification within 1 year after the credit was allocated and show that they have taken certain steps toward implementing their projects; • Receive a certification letter from the Service; and • Place the facility in service within 3 years after the date of certification. http://www.irs.gov/Businesses/Advanced-Energy-Credit-forManufacturers-%28IRC-48C%29 New Topic: Recently Married? Here’s some Tax Tips for Newlyweds…
Late spring and early summer are popular times for weddings. Whatever the season, a change in your marital status can affect your taxes. Here are several tips from the IRS for newlyweds. • It’s important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you’ve changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at SSA.gov, by calling 800-7721213 or by visiting your local SSA office. • If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at USPS.com or report the change at your local post office. • If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year. • If you and your spouse both work, you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4, Employee's Withholding Allowance Certificate. See Publication 505, Tax Withholding and Estimated Tax, for more information. • If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. You’ll need to use Form 1040 with Schedule A, Itemized Deductions. You can’t use Form 1040A or 1040EZ when you itemize. • If you are married as of Dec. 31, that’s your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it’s beneficial to file jointly. New Topic: Failure to File or Pay Penalties: Eight Facts The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and
accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both. Here are eight important points about the two different penalties you may face if you file or pay late. 1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failureto-pay penalty. 2. The failure-to-file penalty is generally more than the failure-to-pay
penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you. 3. The penalty for filing late is usually 5 percent of the unpaid taxes for
each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. 4. If you file your return more than 60 days after the due date or
extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. 5. If you do not pay your taxes by the due date, you will generally have
to pay a failure-to-pay penalty of Â˝ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. 6. If you request an extension of time to file by the tax deadline and
you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date. 7. If both the failure-to-file penalty and the failure-to-pay penalty apply
in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a failure-to-file or failure-to-pay penalty if
you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect. New Topic:
Tax Tips if You’re Starting a Business If you plan to start a new business, or you’ve just opened your doors, it is important for you to know your federal tax responsibilities. Here are five basic tips from the IRS that can help you get started. 1. Type of Business. Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form. 2. Types of Taxes. The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax. 3. Employer Identification Number. A business often needs to get a federal EIN for tax purposes. Check IRS.gov to find out whether you need this number. If you do, you can apply for an EIN online. 4. Recordkeeping. Keeping good records will help you when it’s time to file your business tax forms at the end of the year. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’ progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses. 5. Accounting Method. Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year.
Tips for Taxpayers Who Travel for Charity Work Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity. 1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified. 2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services. 3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip. 4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
5. Deductible travel expenses may include: • Air, rail and bus transportation • Car expenses • Lodging costs • The cost of meals • Taxi fares or other transportation costs between the airport or station and your hotel
Keep Tax and Financial Records Safe in Case of a Natural Disaster Hurricanes, tornadoes, floods and other natural disasters are more common in the summer. The IRS encourages you to take a few simple steps to protect your tax and financial records in case a disaster strikes. Here are five tips from the IRS to help you protect your important records: 1. Backup Records Electronically. Keep an extra set of electronic records in a safe place away from where you store the originals. You can use an external hard drive, CD or DVD to store the most important records. You can take these with you to keep your copies safe. You may want to store items such as bank statements, tax returns and insurance policies. 2. Document Valuables. Take pictures or videotape the contents of your home or place of business. These may help you prove the value of your lost items for insurance claims and casualty loss deductions. Publication 584, Casualty, Disaster and Theft Loss Workbook, can help you determine your loss if a disaster strikes. 3. Update Emergency Plans. Review your emergency plans every year. You may need to update them if your personal or business situation changes. 4. Get Copies of Tax Returns or Transcripts. Visit IRS.gov to get Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns. If you just need information from your return, you can order a transcript online. 5. Count on the IRS. The IRS has a Disaster Hotline to help people with tax issues after a disaster. Call the IRS at 1-866-562-5227 to speak with a specialist trained to handle disasterrelated tax issues. NEW Topic:
Renting Your Vacation Home A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short. In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence. Here are some tips from the IRS about this type of rental property. • You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss. You may also be subject to paying Net Investment Income Tax on your rental income.
• If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs. Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses. • If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). • If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income. NEW Topic:
Six Tips on Gambling Income and Losses Whether you roll the dice, play cards or bet on the ponies, all your winnings are taxable. The IRS offers these six tax tips for the casual gambler. 1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips. 2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You’ll also receive a Form W-2G if the payer withholds federal income tax from your winnings. 3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G. 4. If you’re a casual gambler, report your winnings on the “Other Income” line of your Form 1040, U. S. Individual Income Tax Return. 5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference. 6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses. NEW Topic:
How to Get a Transcript or Copy of a Prior Year Tax Return There are many reasons why you should keep a copy of your federal tax return. For example, you may need it to answer an IRS inquiry. You may also need it to apply for a student loan or a home mortgage. If you can’t find your tax return, the IRS can provide a copy or give you a transcript of the tax information you need. Here’s how to get your federal tax return information from the IRS: 1. Transcripts are free and you can get them for the current year and the past three years. In most cases, a transcript includes all the information you need. 2. A tax return transcript shows most line items from the tax return you originally filed. It also includes items from any accompanying forms and schedules you filed. It does not reflect any changes made after you filed your original return.
3. A tax account transcript shows any changes either you or the IRS made to your tax return after you filed it. This transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income. 4. You can get transcripts on the web, by phone or by mail. To request transcripts online, go to IRS.gov and use the Order a Transcript tool. To order by phone, call 800-908-9946 and follow the prompts. 5. To request a 1040, 1040A or 1040EZ tax return transcript by mail or fax, complete Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses and individuals who need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return. 6. If you order online or by phone, you should receive your tax return transcript within five to 10 calendar days. You should allow 30 calendar days for delivery of a tax account transcript if you order by mail. 7. If you need an actual copy of a filed and processed tax return, it will cost $57 for each tax year. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year and past six years. Please allow 60 days for delivery. 8. If you live in a Presidentially declared disaster area, the IRS may waive the fee to obtain copies of your tax returns. Visit IRS.gov and select the ‘Disaster Relief’ link in the lower left corner of the page for more about IRS disaster assistance. 9. Forms 4506, 4506-T and 4506T-EZ are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). NEW Topic:
How can I spot a charity scam? These are some common-sense suggestions for avoiding rip-offs: • Do not contribute cash. All contributions should be in the form of a check or money order made out to the charity-never to the individual soliciting the donation. • Ask for written descriptions of the charity's programs and/or finances. • Don't allow yourself to be pressured to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation. Tip: Don't forget to keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time. • Don't be misled by a charity that resembles or mimics the name of a well-known organization-all charities should be checked out. Before giving, check on all charities with the local charity registration office (usually a division of the state attorney's general office) and with the Better Business Bureau (BBB).
How can I maximize my tax benefit from charitable contributions? Many donors are not aware that their contributions may not be deductible, or that deductions may be limited. Here are the general rules: When an organization claims to be tax-exempt, it does not necessarily mean contributions are deductible. "Tax-exempt" means that the organization does not have to pay federal income taxes, while "tax-deductible" means the donor can deduct contributions to the organization. The
Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these are eligible to receive contributions deductible as charitable donations. Tip: When in doubt, call us or the IRS (800-829-1040) about the deductibility of a contribution. If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. Example: You pay $50 for a charity luncheon worth $30. Only $20 can be deducted. Donations made directly to needy individuals are not deductible. Contributions must be made to qualified organizations to be tax-deductible. Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible they are paid. No donation of $250 or more is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
What are the most tax-effective ways of donating? There are many ways to give money to charity. In fact, much of many charities' revenue comes from the "planned or deferred giving" techniques. A planned or deferred gift is a present commitment to make a gift in the future, either during your life or via your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it tax benefits. Charitable gifts by will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but might also offer a current income tax deduction. If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale -- all the while helping a charity. Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, real estate, retirement plan) and its appreciated value. Not all charities have the resources to be able to offer the more sophisticated arrangements. Tip: These gifts are complex, so be sure to consult with both the charity and your financial advisor to determine how to best structure your deferred gift. Here are some examples of planned and deferred charitable gifts: Life insurance You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible. Charitable Remainder Annuity or Unitrust You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or to your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination -- even though you keep a life-income interest.
In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity. Charitable Remainder Unitrust This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period and the remainder goes to the charity. Charitable Lead Trust You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children). You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period and your heirs get the remainder. Charitable Income Or Lead Unitrust This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the charities. Here, too, the charity gets the current income for a specified period and your heirs get the remainder. Charitable Gift Annuity You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Pooled Income Fund You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.
How can I find out if contributions to a particular charity are tax-deductible? To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes. Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition. When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a "Determination Letter" formally notifying it of its charitable status. Older charities
may have a "101(6) ruling," which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual income do not have to apply to the IRS for exemption. Tip: IRS publication 78, the "Cumulative List of Organizations," is an annual list of tax-exempt organization eligible to receive deductible contributions. Contact the IRS (800-829-1040) for information on where to obtain this list.
What types of deductible contributions can be made to charity? Generally, you can donate money or property to charity. A deduction is usually available for the fair market value of the money or property. However, for certain property the deduction is limited to your cost basis; inventory (some exceptions), certain creative works, stocks held short term, and certain business use property. You can also donate your services to charity, however you may not deduct the value of your services. You can deduct your travel expenses and some out of pocket expenses. NEW Topic:
What is a living trust? A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A flesh-and-blood person, however, must actually be in charge of the property; that person is called the trustee. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust. There are many kinds of trusts. A "living trust" (also called an "inter vivo" trust by lawyers who can't give up Latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will. All living trusts are designed to avoid probate. Some also help you save on death taxes, and others let you set up long-term property management.
Is it expensive to create a living trust? The expense of a living trust comes up front. Many lawyers would charge relatively little for drafting your will, in hopes of getting your estate later as a client. They may charge more for a living trust. Some people have chosen to use a self-help book or software program, to create a Declaration of Trust (the document that creates a trust) yourself. They may consult a lawyer if they have questions that the self-help publication doesn't answer. But there's always the danger of problems they don't see, that a lawyer could help avoid if consulted.
Can a living trust save taxes? A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death. Professional guidance is needed to set up such trusts. NEW Topic:
Can I just give all my property away before I die and avoid estate taxes? You can give up to $12,000 (2008 number) per person per year with no gift tax liability. Gifts exceeding that amount are counted against a gift tax exemption of $1,000,000. Gifts exceeding that exemption are subject to gift tax. At your death, these gifts could become your taxable estate (with a credit for gift tax paid). There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed; the 2008 amount is $128,000) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.
Will my estate have to pay taxes after I die? It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death-$2,000,000 in 2006-8, $3,500,000 in 2009 and repealed thereafter. But there are a couple of important exceptions to the general rule. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. And estate taxes won't be assessed on any property you leave to a tax-exempt charity. NEW Topic: Should My Company be an LLC, an S-Corp or Both? Of the many business entities that owners consider, Limited Liability Companies (LLCs) and Subchapter S Corporations (S-Corps) are two of the most popular. Although they share the distinction of being 'pass-through' entities in addition to providing liability protection, they do have several differences. An owner must also consider operational ease, administrative requirements, profit-sharing and employment tax implications. Before choosing one or both of these options, determine which features are most important to you and your company. The needs of every business are different so it's worth an hour or two with a knowledgeable attorney to investigate all of the issues that will affect it. What Is an LLC? An LLC is a business structure similar to a sole-proprietorship or a general partnership. According to the IRS, 'It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.' As a pass-through entity, all profits and losses pass through the business to the LLC owners (aka 'members'). Similar to partnerships, the members themselves report the profits/losses on their federal tax returns but not the LLC. Nevertheless, some states do charge the LLC an income tax. What differentiates the LLC is the limit of the liability for which a member is responsible. Typically, the member's investment in the company is that limit. Conversely, a sole proprietor or the partners in a general partnership are each liable for all of the debts of the company. Keep in mind that neither LLCs nor S-Corps necessarily shield owners from their or their employees' tort actions such as accidents. Did I mention you should talk to an attorney? Pros and Cons of the LLC
One of the features that distinguishes the LLC from an S-Corp is its operational ease. There are far fewer forms required for registering and there are fewer start-up costs. Filing taxes is a oncea-year affair on April 15: a single-member LLC files a 1040 and Schedule C like a sole proprietor; partners in an LLC file a 1065 partnership tax return like owners in a traditional partnership. Moreover, LLCs are not required to have formal meetings and keep minutes. There are also fewer restrictions on profit-sharing within an LLC as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it's up to them to decide who has earned what percentage of the profits or losses. But LLCs are not the perfect entity for all businesses. First, an LLC has a limited life: when a member dies or undergoes bankruptcy the LLC is dissolved. Typically, you would determine in advance the length of the LLC's duration when you file it with your state. If your plans include taking your company public or issuing shares to your employees, essentially prolonging its life, then you would need to convert to a corporate business structure. Second, the owner of an LLC is considered to be self-employed and must pay the 15.3% selfemployment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. It costs money to have some operational ease! The IRS also limits the 'characteristics' of your company. An LLC may only have two of the four characteristics that define corporations: 'Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.' Therefore, if you wish to have more than two of these characteristics, you'll need to convert to a corporate business structure. What is an S-Corp? An S-Corp is a corporation that has received the Subchapter S designation from the IRS. A business must first be chartered as a corporation in the state where it's headquartered then file to be considered an S-Corp. According to the IRS, S-Corporations are 'considered by law to be a unique entity, separate and apart from those who own it.' This allows for a limit on the financial liability for which an owner (aka 'shareholder') is responsible. Nevertheless, liability protection isn't perfect. The plaintiff may be able to 'pierce the corporate veil' and go after your personal assets in a lawsuit. What differentiates the S-Corp from a traditional corporation (C-Corp) is the ability to have profits and losses pass through to the shareholder's personal tax return. Consequently, the business is not taxed itself, only the shareholders. There is an important caveat: any shareholder who works for the company must pay him or herself 'reasonable compensation.' Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' We'll see the tax implications of this below. Pros and Cons of the S-Corp One of the best features of the S-Corp is the tax savings for you and your business. Recall that members of an LLC are subject to employment tax on the entire net income of the business. Conversely, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is taxed at a lower rate if at all! As I mentioned before, the shareholder must receive reasonable compensation. If you try to cheat the system by paying yourself a lower salary and higher distributions you might get a tax advantage for the year, but the IRS takes notice of such red flags. If they reclassify your
distributions as wages you'll be back to paying the higher employment tax and you will have the IRS's attention. Need I say more? Keep in mind that some benefits that shareholder/employees receive can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, the benefits like health and life insurance are deemed taxable income. An S-Corp also allows the business to have an independent life separate from the shareholders. If a shareholder dies, leaves the company, or sells his or her shares the S-Corp can continue doing business relatively undisturbed. By maintaining the business as a distinct corporate entity, clearer lines are defined between the shareholders and the business that improve the protection of the shareholders The tax savings and solidity of the S-Corp also come with a price. As a separate structure, SCorps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance. In addition to all of this paperwork are the tax forms required by the IRS. Such forms include: • Form 1120S: Income Tax Return for S Corporation • 1120S K-1: Shareholder's Share of Income, Credit, Deductions • Form 4625 Depreciation • Employment Tax Forms • Form 1040: Individual Income Tax Return • Schedule E: Supplemental Income and Loss • Schedule SE: Self-Employment Tax • Form 1040-ES: Estimated Tax for Individuals • Forms 2553, 941 and 940 These forms are due at various times during the year, so the burden to file them increases. Also, states do not treat S-Corps equally. Most recognize them similarly to the federal government and tax the shareholders accordingly. However, some states like Massachusetts tax S-Corps on profits that rise above a specified limit. Other states don't recognize the S-Corp election and treat the business as a C-Corp with all of the tax ramifications. And if that isn't enough, some states like New York and New Jersey tax both the S-Corps profits and the shareholder's proportional shares of the profits! It pays to do your homework. Combining the Benefits of an LLC with an S-Corp There is always the possibility of requesting S-Corp status for your LLC. Your attorney will advise you on the pros and cons. You'll have to make a special election with the IRS to have the LLC taxed as an S-Corp using Form 2553. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. The LLC remains a limited liability company from a legal standpoint but for tax purposes it's treated as an S-Corp. Be sure to contact the state's income tax agency where the election form will be filed. Ask them whether or not they recognize the S-Corp election and what the tax requirements are. NEW Topic:
Give Withholding and Payments a Check-up to Avoid a Tax Surprise
Some people are surprised to learn they’re due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. When this happens, it’s a good idea to check your federal tax withholding or payments. Doing so now can help avoid a tax surprise when you file your 2013 tax return next year. Here are some tips to help you bring the tax you pay during the year closer to what you’ll actually owe. Wages and Income Tax Withholding • New Job. Your employer will ask you to complete a Form W-4, Employee's Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks. • Life Event. Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W–4 anytime. • IRS Withholding Calculator. This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4. Self-Employment and Other Income • Estimated tax. This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments. • Form 1040-ES. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis. • Change in Estimated Tax. After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax. • Additional Medicare Tax. A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. For additional information on the Additional Medicare Tax, see our questions and answers. • • Net Investment Income Tax. A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. For additional information on the Net Investment Income Tax, see our questions and answers.