Monday, June 29, 2015

Summer Wedding and taxes

Include a Few Tax Items in Your Summer Wedding Checklist
 
 
If you’re preparing for summer nuptials, make sure you do some tax planning as well. A few steps taken now can make tax time easier next year. Here are some tips from the IRS to help keep tax issues that may arise from your marriage to a minimum:
 
  • Change of name. All the names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. The easiest way for you to get the form is to download and print it on SSA.gov. You can also call SSA at 800-772-1213 to order the form, or get it from your local SSA office.
  • Change tax withholding. When you get married, you should consider a change of income tax withholding. To do that, give your employer a new Form W-4, Employee's Withholding Allowance Certificate. The withholding rate for married people is lower than for those who are single. Some married people find that they do not have enough tax withheld at the married rate. For example, this can happen if you and your spouse both work. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information. You can get IRS forms and publications on IRS.gov/forms at any time.
  • Changes in circumstances. If you receive advance payments of the premium tax credit you should report changes in circumstances, such as your marriage, to your Health Insurance Marketplace. Other changes that you should report include a change in your income or family size. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes in circumstances will allow the Marketplace to adjust your advance credit payments. This adjustment will help you avoid getting a smaller refund or owing money that you did not expect to owe on your federal tax return.
  • Change of address. Let the IRS know if you move. To do that, file Form 8822, Change of Address, with the IRS. You should also notify the U.S. Postal Service. You can change your address online at USPS.com, or report the change at your local post office.
  • Change in filing status. If you are married as of Dec. 31, that is your marital status for the entire year for tax purposes. You and your spouse can choose to file your federal tax return jointly or separately each year. It is a good idea to figure the tax both ways so you can choose the status that results in the least tax.

Monday, June 15, 2015

Child and Dependent Care Deductions

Don’t Overlook the Child and Dependent Care Tax Credit this Summer 
  1. Day camps are common during the summer months. Many parents pay for them for their children while they work or look for work. If this applies to you, your costs may qualify for a federal tax credit that can lower your taxes. Here are the top ten tips to know about the Child and Dependent Care Credit:
    1. Care for Qualifying Persons. Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 usually qualify. For more about this rule see IRS Publication 503, Child and Dependent Care Expenses.
    2. Work-related Expenses. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care.
    3. Earned Income Required. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return. Refer to IRS Publication 503 for more details.
    4. Joint Return if Married. Generally, married couples must file a joint return. You can still take the credit, however, if you are legally separated or living apart from your spouse.
    5. Type of Care. You may qualify for it whether you pay for care at home, at a daycare facility or at a day camp.
    6. Credit Amount. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income.
    7. Expense Limits. The total expense that you can use in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
    8. Certain Care Does Not Qualify. You may not include the cost of certain types of care for the tax credit, including:
    • Overnight camps or summer school tutoring costs.
    • Care provided by your spouse or your child who is under age 19 at the end of the year.
    • Care given by a person you can claim as your dependent.
    1. Keep Records and Receipts. Keep all your receipts and records for when you file your tax return next year. You will need the name, address and taxpayer identification number of the care provider. You must report this information when you claim the credit on IRS Form 2441, Child and Dependent Care Expenses.
    2. Dependent Care Benefits. Special rules apply if you get dependent care benefits from your employer. 
     
    Remember that this credit is not just a summer tax benefit. You may be able to claim it for qualifying care that you pay for at any time during the year.

Wednesday, May 13, 2015

4 ways to help stop employee fraud

In the course of performing audits, I am often asked what the problem is with having one person do many different tasks for an organization.  Here is a brief explanation of some of the problems that are borne out of a single person performing incompatible duties and some things you can do to prevent fraud
:
Q: Which internal accounting controls can help prevent fraud?
A: This is a vast topic covered by countless books and consultants, so let’s narrow it down to employee fraud and theft. Aside from the obvious—conducting regular inventory checks and book audits, reconciling cash daily, and personally reviewing financial statements each month—there are several actions you can take to protect yourself and your business.

1. Establish a code of conduct.

Did you know that Walmart employees are not allowed to accept a bottle of water or cup of coffee from a vendor at a meeting without paying for it? That’s what I mean by a code of conduct. It’s a statement that you will not tolerate unethical or illegal behavior toward anyone—customers, suppliers, employees or the company itself.
While you may not be as strict as Walmart, you should write and post a code of conduct that clearly spells out the rules for employees and the repercussions for not following them. Give the code to everyone upon hire, and periodically thereafter, and require written acknowledgement that they have read, understand and agree to comply with it.
Now look in the mirror. It’s one thing to demand honesty from your employees, but the code of conduct goes both ways. So you, as the enforcer of the code, need to follow it to the letter. If employees see you take home merchandise or use company property for personal reasons, they may follow your lead—or worse. If you treat employees with respect, compensate them appropriately and offer opportunities to advance their careers, they’ll have less motivation to steal or cheat.

2. Set up organizational checks and balances.

In a small business, one person may wear many hats. But the most dangerous multitasker is a solitary administrator/bookkeeper who opens the mail, handles deposits and payments and files transaction documents. No one person should control that many aspects of the business—it’s asking for trouble.
At one of my companies that processed a high volume of mail, we convened a dozen senior managers and their assistants to open the mail every day. With all those hands, the task took about 15 minutes. All checks were set aside, with a tape of their total run. When the day’s bank deposit was prepared, the total had to match the tape run earlier.
Also avoid assigning the same person to handle purchasing and vendor payments, or allowing the same employee to manage accounts payable and accounts receivable. If you’re a manufacturer or distributor, you should have separate people managing receiving, warehousing and shipping.
At the very least, set up an operation in which one person controls what comes in (cash, checks, merchandise, supplies) and another handles what goes out (payments, orders, finished products).

3. Institute policies and procedures.

Someone other than the bookkeeper should settle bank and credit card statements every month—and the person who reconciles the bank statements should not have the ability to enter or modify transactions in the accounting system.
Here’s why: One of my partners started working with a new client and began routinely looking at their credit card statements. For one card, there were no records of purchases that matched the charges. An investigation uncovered that the client’s former controller had taken a company card with him when he left and had run up more than $200,000.
Another way to rein in fraud is to have payroll prepared and authorized by HR but entered by accounting, then checked by management before the funds are sent to the payroll company.
Also, keep everything locked up that should be locked up, and enforce rigorous key control and computer-system access, especially for departing employees. Changing locks and passwords company-wide when someone leaves or is dismissed is not an overreaction—it’s smart.

4. Watch employees’ behavior. 

If you notice changes in an employee’s behavior—files have been misplaced; they don’t want help with a project; they’re giving a customer excessive attention—look into it. The same goes for an employee with access to critical parts of the company’s operations or finances who never takes vacation time, or who routinely works early or late when no one else is around.
Trust me, they’re not working those extra hours because they love their job. It might be because they don’t want anyone else to see what they’re doing. Insist that people use their vacation time and stick to regular business hours.
Pay attention to any blips in your operation, no matter how minor. At one manufacturing company I worked for, a customer sent back an expensive item for warranty repair. We couldn’t find any record of the sale. Upon further inquiry with the customer, we discovered that our vice president of manufacturing and a foreman were building equipment inside the company, then shipping units out the back door along with their own company’s invoices. We were able to recover hundreds of thousands of dollars in losses before turning the two over to the police.
The key in all this is to trust your gut and recognize that no one knows your company as well as you do. If something doesn’t look or feel right, it’s probably not. By all means, investigate.  Thanks to Entrepreneur website for concise reporting on this topic.

Tuesday, May 05, 2015

Non Profits need to file form 990

Many Tax-Exempt Organizations Must File with IRS by May 15; Do Not Include Social Security Numbers or Personal Data
 
The Internal Revenue Service today reminds tax-exempt organizations that many have a filing deadline for Form 990-series information returns in mid-May.

With the May 15 filing deadline facing many tax-exempt organizations, the Internal Revenue Service today cautioned these groups not to include Social Security numbers (SSNs) or other unneeded personal information on their Form 990, and consider taking advantage of the speed and convenience of electronic filing.

Form 990-series information returns and notices are due on the 15th day of the fifth month after an organization’s tax year ends. Many organizations use the calendar year as their tax year, making Thursday, May 15 the deadline for them to file for 2014.

Many Groups Risk Loss of Tax-Exempt Status

By law, organizations that fail to file annual reports for three consecutive years will see their federal tax exemptions automatically revoked as of the due date of the third required filing. The Pension Protection Act of 2006 mandates that most tax-exempt organizations file annual Form 990-series informational returns or notices with the IRS. The law, which went into effect at the beginning of 2007, also imposed a new annual filing requirement on small organizations. Churches and church-related organizations are not required to file annual reports.

No Social Security Numbers on 990s

The IRS generally does not ask organizations for SSNs and in the form instructions cautions filers not to provide them on the form. By law, both the IRS and most tax-exempt organizations are required to publicly disclose most parts of form filings, including schedules and attachments. Public release of SSNs and other personally identifiable information about donors, clients or benefactors could give rise to identity theft.

The IRS also urges tax-exempt organizations to file forms electronically in order to reduce the risk of inadvertently including SSNs or other unneeded personal information. Details are on IRS.gov.

Sunday, April 12, 2015

Home Foreclosure and Debt Cancellation

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in calendar years 2007 through 2014. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007.
1. What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

2. Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.
  • Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.

3. I lost my home through foreclosure.  Are there tax consequences?  
There are two possible consequences you must consider:
  • Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
  • A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________

The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
5.    Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                    ____________
6. Subtract line 5 from line 4.  If less than zero, enter zero.   
The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.


4. I lost money on the foreclosure of my home.  Can I claim a loss on my tax return? 

No.  Losses from the sale or foreclosure of personal property are not deductible. 

5.  Can you provide examples?

A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.
The borrower figures income from the foreclosure as follows:
Use the following steps to compute the income to be reported from a foreclosure:
Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__
The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
5.  Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                        ___$170,000__
6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__

The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.
In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.
Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions”.

6.  I don’t agree with the information on the Form 1099-C.  What should I do?
Contact the lender.  The lender should issue a corrected form if the information is determined to be incorrect.  Retain all records related to the purchase of your home and all related debt.

7.  I received a notice from the IRS on this. What should I do?
The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

Friday, April 03, 2015

When you must report on a Trust Return?

Question: Do I need to file form 1041 for a small estate to indiacte that the estate has income or has terminated?

You would only be required to file a Form 1041 for your estate if the estate had gross income for the tax year of $600 or more or had a beneficiary who is a nonresident alien.

Tuesday, March 17, 2015

800,000 incorrect 1095~A forms issued by US Health Care

On February 23, 2015, the Treasury Department stated that the individuals who had filed their tax returns when they received their incorrect 1095A forms would not be required to file amended returns.

Wednesday, February 18, 2015

Peer review

Just received my firm's letter indicating my VOLUNTARY peer review must occur before July 31, 2016.  Not fun but hopefully enlightening!

Wednesday, February 04, 2015

Obamacare Premium Tax Credit

 Taxpayers Will Use New Information Statement to claim Premium Tax Credit
The Affordable Care Act is bringing several changes to the tax filing season this year, including a new form some taxpayers will receive. If you or anyone in your household enrolled in a health plan through the Health Insurance Marketplace in 2014, you’ll get Form 1095-A, Health Insurance Marketplace Statement.
You will receive Form 1095-A from the Marketplace where you purchased your coverage, not the IRS. This form should arrive in the mail from your Marketplace by early February. You should wait to receive your Form 1095-A before filing your taxes.
Form 1095-A will tell you the dates of coverage, total amount of the monthly premiums for your insurance plan, information you may use to determine the amount of your premium tax credit, and any amounts of advance payments of the premium tax credit.
You will use the information to calculate the amount of your premium tax credit and reconcile advance payments of the premium tax credit made on your behalf to your insurance provider with the premium tax credit you are claiming on your tax return.  To do this, you will use Form 8962, Premium Tax Credit (PTC), which you file with your tax return.
If you do not receive your Form 1095-A by early February, you should contact the state or federal Marketplace from which you received coverage. If you believe any information on your Form 1095-A is incorrect, you should contact the state or federal Marketplace from which you received coverage. The Marketplace may need to send you a corrected Form 1095-A.
You may receive more than one Form 1095-A if different members of your household had different health plans, you updated your coverage information during the year, or you switched plans during the year.
For more information about the Affordable Care Act and your 2014 income tax return, visit IRS.gov/aca.

Saturday, January 10, 2015

2015 Tax Planning, it is never to early to start!

While we all still think fondly of the holidays that have just passed, it is time to begin tax planning for the new year!  
It’s often wiser to get started early. That’s especially true wheen looking at contributions to tax-advantaged savings accounts. You should look to fund these as soon as you can, rather than putting them off to the last minute. The sooner you fund your 2015 IRA, your Health Savings Account, or your Section 529 education savings account (like College Savings Iowa), the sooner your funds are earning their returns tax-free.

So if you have cash on hand, here’s a new year’s resolution to keep today — fully fund your tax-advantaged savings accounts. Your limits for 2015:
  • Health Savings Accounts for qualifying taxpayers with single coverage can be funded up to $3,350 for 2015. For taxpayers with family coverage, the limit is $6,650. Read more here.
  • Section 529 plans have more flexible limits. The IRS explains:
Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year.
Thanks to Roth & Co., P.C. for pulling these details together.

Monday, December 29, 2014

Biggest Tax Breaks Extended for 2014

Biggest Tax Breaks Extended for the Middle Class!
 
A last minute deal was recently passed by Congress to extend dozens of expired tax breaks affecting millions of Americans.  The Tax Increase Prevention Act of 2014 includes more than 50 tax breaks, most of which expired at the end of 2013. The bill is retroactive so it covers the entire tax year 2014.

Five of the biggest tax breaks for individuals included in the Tax Increase Prevention Act of 2014 are as follows:
 
1. Teachers’ Classroom Expense Deduction
This extension is relatively small in the overall economic picture, but it affects millions of teachers who pay taxes. The teachers’ classroom expense deduction allows primary and secondary education professionals (grades K-12, including school administrators and assistants) to deduct above-the-line qualified expenses. You can deduct up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) of any unreimbursed expenses you paid or incurred for books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you used in the classroom.
In order to qualify, you need to work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law. For courses in health and physical education, expenses for supplies are qualified expenses only if they are related to athletics.

2. Tuition and Fees Deduction

This tax break is still available to taxpayers for 2014, even if they don’t itemize. It allows for the deduction of qualified tuition and fees for post-secondary education, such as college and graduate school. The maximum deduction is $4,000 for taxpayers with AGI not exceeding $65,000 ($130,000 for a joint return), $2,000 for taxpayers with AGI $65,000 to $80,000 ($130,000 to $160,000 for joint filers), and $0 for other taxpayers. Under regulations, expenses paid by year-end for an academic term starting on or before March 31 of the following year qualify for the deduction in the year paid.
Qualified expenses you pay for yourself, your spouse, or your dependents are eligible for this deduction. Please note that you cannot take this deduction for room and board expenses or optional fees. Course-related books and supplies are also not eligible unless you are required to purchase them as a condition of enrollment or attendance. Furthermore, you are not allowed to deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American Opportunity or Lifetime Learning Credit for that same student in the same year.
 
3. Residential Energy Credit

Incentives for energy conservation expired at the end of 2013, but the extension of Code Sec. 25C provides a nonbusiness tax credit to people who made qualified energy efficiency improvements to residential property. Examples of qualified property are improvements such as adding insulation, energy efficient exterior windows, and energy efficient heating and air conditioning systems. A tax credit is also available for the construction of new energy-efficient homes.
Some energy tax benefits were not extended. The plug-in electric vehicle credit and energy-efficient appliance credit were left behind.
 
4. State and Local Sales Tax Deduction
If you itemize your taxes, this extension allows you to deduct state and local sales taxes you paid in lieu of state income taxes. However, this deduction is not only potentially beneficial to taxpayers in states without an income tax. As Dixon Hughes Goodman notes, taxpayers who made a big ticket purchase in 2014, such as a motor vehicle before year-end could benefit by weighing the deduction for state and local general sales taxes against their deduction for state and local income taxes.
 
5. Mortgage Debt Forgiveness

Although a lender might be willing to forgive debt you owe when you sell your home for less than what’s left on the mortgage, the IRS typically treats this cancellation of debt as income. Under the tax extension bill, cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing separately) will be excluded from income for 2014. This includes foreclosures, short sales, or loan modifications.
 
Thanks to Eric McWinnie for some of the layout of this article.

Friday, December 26, 2014

What happens when a Trust distrubutes income?

A trust is a separate legal entity for income tax purposes, and must file its own tax forms. A trust that is required to distribute all its income currently is considered a simple trust; otherwise the trust is a complex trust.
A trust figures its income and deductions much in the same way that an individual figures his or her income for tax purposes with one major difference. A trust is allowed a deduction for income distributed to beneficiaries. The income distribution deduction is figured by completing Schedule B of Form 1041. The beneficiary, not the trust, pays the income tax on the taxable amount of the distributions.
Generally, if an amount is distributed from a trust, that amount is considered to come out of current-year income first, then from accumulated capital or principal. Accumulated capital would be the original contribution, or contributions, to the trust plus all subsequent accumulations (i.e., income in excess of distributions).
Current income is figured under the state law applicable to trusts and the trust's governing document. Generally, the only distinction in accounting income under local law and regular net income would be the treatment of capital gains. If you have capital gains, you need to determine if they're taxable to the trust or the beneficiary.
When you distribute some or all of the trust to your beneficiaries, the income will be taxed to them, and accordingly you will need to complete a Schedule K-1 for them. They will include the K-1 amounts on their individual return. It is hoped they saved some money for taxes. The trust must claim the distribution deduction and pass the tax burden on to the beneficiary.
The full amount distributed is shown on Schedule B and is not required to be shown on the Schedule K-1. All amounts distributed to your beneficiaries or for their benefit are taxable to him to the extent of the trust's income distribution deduction. If you don't have capital gains or alternative minimum tax differences, the two pages of form 1041 and the schedule K-1 would be a complete tax return.



Wednesday, December 17, 2014

Obamacare and the tax implications!

Here is a listing of various tax effects having to do with the Affordable Care Act...
Taxes-
High wage earners, with a $250,000 threshold for married filing jointly, $125,000 for married filing separately, and $200,000 for all others, must pay a Medicare tax of an additional 0.9%, for a total tax of 2.35%. Those with an income of $200,000 or more have this tax withheld at the payroll level during the year, but adjustments are needed once annual income is determined – which can result in additional taxable income.
Also, Medicare tax of 3.8% is assessed on net investment income of high wage earners, which includes passive gross income from interest, dividends, royalties, rents, annuities, gross income derived from a trade or business, and gain attributable to the disposition of property.

More tax effects....Itemized deductions on Schedule A of Form 1040, which expands the medical expense deduction from 7.5 to 10% for those under age 65.  Further, Flexible Spending Accounts (FSA) have been capped at $2,500. If you sponsor one of these plans you must have all document amendments in place by the end of 2014.

For small businesses (and non profits)
The small business health care credit is available to employers with 25 or fewer full-time equivalents (FTEs) with wages averaging less than $50,000 per year. The employer must pay at least 50% of these employees’ health insurance costs. In 2014, the credit is 50% for for-profit entities and 35% for tax-exempt employersand it is only available if the insurance is purchased through the Marketplace. Tax returns can be amended for previously missed credits.

Individual mandate
The individual mandate is in effect. Those without health insurance coverage will pay a penalty, which in 2014 is the greater of either $95 or 1% of modified adjusted gross income and $47.50 per dependent under the age of 18. For families this can result in a maximum 2014 penalty of $285. For 2015 and 2016, the amounts are $325 or 2% of income and $695 or 2.5% of income respectively. The maximum penalty is equivalent to the national average premium for a bronze plan on the Marketplace.

Employer mandate updates
The U.S. Treasury Department issued an update that gives mid-sized employers an additional year before the employer mandate takes effect. Employers with 50 to 99 FTEs now have until January 2016 to offer health insurance or pay a penalty.
The employer mandate still applies to employers with 100 or more FTEs. These employers must offer insurance effective Jan. 1, 2015 or pay a penalty. The percentage of FTEs required to be covered has been reduced to 70% for 2015, but will increase to 95% in 2016.
Part-time and variable hour employees are converted to FTEs in order to determine how many employees a company has under the employer mandate. Calculated on monthly hours, the formula is the total working hours of all FTEs for a month divided by 120. Seasonal employees with less than 120 days a year can be excluded. Employers who already offer affordable coverage need to consider that variable hour part-time employees could transition to a FTE and be eligible for coverage. Measurement periods under ACA regulations should be utilized to consider both variable hour employees as well as the overall employer mandate.

Obamacare Fees
If your client sponsors a fully insured health plan, the health insurance carrier is required to pay the Patient Centered Outcomes Research Institute (PCORI) fee directly. However, if your client self-funds their health plan, they were required to pay the $2 fee by July 31, 2014 on Form 720. With annual fee increases, there is a sunset provision for plan years ending Oct. 1, 2019.
If your company has an FSA that isn’t affiliated with a medical program, this account is considered to be self-funded and could be subject to PCORI fees for employees. Health reimbursement arrangements should be integrated with health insurance, and are still considered self-funded for the PCORI fee requirement.
Reinsurance fee due in January 2015
Sponsors of self-funded health insurance plans should have reported the number of people covered by their plans to the Department of Health and Human Services for the 2014 plan year by Nov. 15, 2014. This includes employees, spouses and dependents covered under the plan.
The IRS has specified four specific counting methods for this purpose: Actual count, Snapshot dates, Snapshot factor, Form 5500 method.
Pay.gov is the reporting site for employers to report their count. After reporting, the employer will receive a notice regarding the reimbursement fees due, which will equal $63 per covered life for 2014. The first installment will be due to HHS by Jan. 15, 2015. Fully insured plans will collect these fees through the insurance premiums paid. The reimbursement fee applies to each medical plan sponsored by the employer and must be submitted on a per plan basis.

Implications for 2015 and 2016
New reasons employees can change their health care coverage
With the issuance of IRS Notice 2014-55, there are now two reasons employees covered under a Section 125 plan can change health care options: 1) an employee can cease participation in an employer-sponsored plan in order to enroll in the Marketplace without an otherwise qualified change in status, and  2) variable-hour employees (those who may work less than 30 hours a week but were determined to be full-time during a measurement period and are otherwise enrolled in the employer-sponsored plan) can also cease participation in order to enroll in the Marketplace when their employment status drops below 30 hours a week.
Employers must adopt an amendment allowing these elections on or before the last day of the plan year. For 2014, the amendment must be adopted by Dec. 31, 2015. Participants must be notified of these changes. An election to revoke coverage on a retroactive basis cannot be allowed under any circumstance.

Reporting requirements
Forms 1094-B, 1095-B, 1094-C and 1095-C, for the 2015 plan years will be due to the IRS in 2016. These forms will be used to report:
1) the different types of insurance offered
2) which employees are covered
 and
3) various other details of health plans.
The IRS will use the data to compute both the individual and employer mandates under the ACA. As these reporting forms are detailed and complex (and we might not be bright enough -according to the ACA architect), I recommend employers consult with their benefits professional and accounting specialist before completing them.

Thursday, December 11, 2014

Art Work tax break working through Congress

Original Art work valued at over $1,000 could become exempt from Florida sales taxes.  To be eligible, works can't be numbered, must cost at least $1,000, and be sold by the artist.  HB:89 is the proposed bill and will be voted on in 2015.

Monday, December 08, 2014

Required Mimimum Distributions....

Most Retirees Need to Take Required Retirement Plan Distributions by Dec. 31
 
The Internal Revenue Service today reminded taxpayers born before July 1, 1944, that they generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31.
Known as required minimum distributions (RMDs), these payments normally must be made by the end of 2014. But a special rule allows first-year recipients of these payments, those who reached age 70½ during 2014, to wait until as late as April 1, 2015 to receive their first RMDs. This means that those born after June 30, 1943 and before July 1, 1944 are eligible for this special rule. Though payments made to these taxpayers in early 2015 can be counted toward their 2014 RMD, they are still taxable in 2015.    
The required distribution rules apply to owners of traditional IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2014 RMD, this amount was on the 2013 Form 5498 normally issued to the owner during January 2014.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2013 (born after June 30, 1942 and before July 1, 1943) and received the first required payment on April 1, 2014 must still receive the second RMD by Dec. 31, 2014.
The RMD for 2014 is based on the taxpayer’s life expectancy on Dec. 31, 2014, and their account balance on Dec. 31, 2013. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Use the online worksheets on IRS.gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590.
For most taxpayers, the RMD is based on Table III (Uniform Lifetime) in the IRS publication on IRAs. So for a taxpayer who turned 72 in 2014, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.
Though the RMD rules are mandatory for all owners of traditional IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Wednesday, November 26, 2014

Expiring Tax Breaks for individual filers being considered...

According to the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act Committee Report the following provisions are under consideration:

1. Deduction for expenses of elementary and secondary school teachers
The bill extends for two years the $250 tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

2. Mortgage debt forgiveness
If you experienced mortgage debt cancellation or forgiveness on your personal residence after 2013, you may be required to pay taxes on that amount as taxable income unless the exclusion is renewed by Congress. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications, through 01/01/2010. It was extended through 01/01/2013 by the Emergency Economic Stabilization Act of 2008; and extended through 01/01/2014 by the American Taxpayer Relief Act of 2012.

3. Deduction for mortgage interest premiums
The bill extends the ability to deduct the cost of mortgage insurance, also known as PMI on a qualified personal residence. This deduction is driven by income levels. Depending upon how much you make, the deduction may be ratably reduced and is unavailable for a taxpayer with an AGI in excess of $110,000.

4. Deduction for state and local general sales taxes
The bill extends the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes for two years. The original passage of this bill leveled the playing field for those who lived in a state that did not levy a state income tax. 

5. Above-the-line deduction for higher education expenses
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. Taxpayers could enjoy the deduction rather than take the American Opportunity Credit or the Lifetime Learning Credit. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns).

6. Tax-free distributions from individual retirement plan for charitable purposes
The bill extends for two years the provision that permits an Individual Retirement Arrangement (“IRA”) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain qualified charities. This deduction is beneficial for seniors that no longer itemize deductions. It essentially allows for a charitable deduction in addition to the standard deduction. 

7. Credit for energy efficient improvements to existing homes
The bill extends for two years, through 2015, the 10% credit for purchases of energy efficient improvements to existing homes. Homeowners can claim up to $200 for energy efficient windows, up to $150 for an efficient furnace or boiler, and up to $300 for other improvements, including insulation. The total credit is capped at $500 per taxpayer. The bill also allows energy efficient roofing products to qualify.

Wednesday, November 19, 2014

Year- End indecision caused by expiring tax benefits

Year-end uncertainty highlights need for reform

Once again we find ourselves in an a all too common position! Many popular tax planning opportunities, such as the R&D credit and bonus depreciation, expired at the end of 2013. As of the publish date for this article, the Expiring Provisions Improvement Reform and Efficiency Act has been drafted but not yet voted on. As rumor has it, it won’t be voted on until after the November elections. This act addresses 62 business and individual provisions that have already expired.
As a tax practitioner for the past 20-plus years, the best advice I can offer to my clients and to other practitioners for 2014 year-end planning is to assume the Act will pass and plan accordingly. The Act seeks to extend the following most  commonly used provisions:
Business:
  • 50% bonus depreciation
  • Section 179 expense at the $500,000 level with phase-outs starting at $2 million of additions
  • 15-year life for qualified leasehold improvements
  • R&D credit
  • 1202 stock
  • Work Opportunity Tax Credit
  • Renewable Energy tax credits
  • New Markets Tax Credit
  • Reduction in S Corporation built-in gain period
Individuals:
  • Above-the-line $250 deduction for teachers
  • Deducting sales tax in lieu of income tax
  • Above-the-line deduction for higher education expenses
  • Tax-free distributions from IRAs for charitable purposes
  • PMI deductions
But the real issue is how do we plan to move forward beyond 2014? Over the last decade, the tax rules have consisted of many short-lived opportunities that, while beneficial to many taxpayers, have passed very late in the year. If you recall, the last time we went through this cycle was at the end of 2012 when we were on a crash course with the fiscal cliff, but, at the very last minute, the American Taxpayer Relief Act was passed. Even though that tax act did give us certainty as it related to the individual tax rates, AMT exemption, and gift and estate tax rates, it offered many commonly used provisions for business and individuals that were only extended for another two years.
I find it very interesting how our tax policy has evolved into two-year extensions of popular tax provisions. Then every other year we wait with baited breath to see if an extender package is passed. This cycle creates uncertainty and makes it difficult for practitioners to plan. Our current situation makes it clear that we need tax reform now, yet it begs the question: is that even possible in the current political environment?
Maybe and maybe not. The Senate does, however, set broad expectations for reform in its introduction to the provisions of the EXPIRE Act, saying that “reform efforts should eliminate temporary provisions from the tax code, boost the economy through the tax code, broaden the tax base by lowering tax rates and ensure an appropriate baseline is used.” The Act also states that “comprehensive tax reform will begin in the next Congress and conclude prior to the expiration of tax extenders.”
So, in an optimistic moment, we can start to envision what a reform package might look like. In Congress’ initial iterations, reform for C Corporations could include reducing the corporate tax rate to 25%, but eliminating benefits such as the production deduction, like-kind exchanges and LIFO inventory. Bonus depreciation could become a thing of the past, and net operating loss utilization could be altered. For individuals, tax reform could include a simplified rate structure with only 10% and 25% brackets (taking us from seven to two brackets); the elimination of AMT, as well as most deductions; and the elimination of personal exemptions in lieu of a generous standard deduction.
Regardless of the path the final reform package may take, getting there will be a long and challenging road and will take strong bi-partisan support to overhaul a tax code that hasn’t seen major reform in 30 years. However, considering the global perspective that our corporate tax rate is not competitive and the insanely complicated rules individuals must navigate to comply with their tax obligations, it is becoming clearer with each passing day that reform is not only necessary, but critical to a stable tax and business environment.

For much of this well written article, I would like to thank Tracy Monroe, CPA, MT, who is a partner with Cohen & Company.

Wednesday, October 15, 2014

Effets of Obamacare on S corps and their shareholders

S Corporations, Health Insurance and Obamacare

Churches depreciate assets just like everyone else!

Common Question, should our church record depreciation on its fixed asset purchases? We have been advised to do so in order to remain compliant with Generally Accepted Accounting Principles (GAAP). We see the benefit of having a record of our fixed assets and their values (original values or replacement cost), but don't see much value at all in recording depreciation.

Our annual budget is around $350,000. We have approximately 30 families and 150 people in regular attendance.

Answer:

In order to provide users of financial statements a GAAP presentation, building, equipment and other long-lived asset purchases must not be recorded as expenditures in the year of purchase. Rather, their costs are allocated to expenses over the years of their useful lives. Accountants call this allocation process depreciation. Some churches are required to present GAAP reports for purposes of bank financing or donor expectations. Generally, this is limited to ministries larger than the one cited in the above question.

I have found that most members of a congregation better understand reports presented on a cash or modified cash basis. For financial statements reported on a cash basis, church members should be able to clearly see that the beginning of year cash balance, plus total receipts, less total disbursements, equals end of year cash. This means that all receipts, even loan proceeds, show up as receipts on a Statement of Receipts and Disbursements (note, not an income / profit or loss statement). All disbursements, including purchase of long-lived assets and principal payments on debt, are reported on this Statement as well.

Statements that use a modified cash basis generally include assets and debts that are current in nature. For example, expenses are reported on the Statement of Receipts and Disbursements even though they are paid a few days after the reporting period is over (e.g. the December utility bill that gets paid in January, after the budget year is over, shows up in December disbursements).

One caveat. I believe that all ministries should employ the use of a balance sheet beyond simple reporting of a cash balance. The reason? Designated gifts. A cash-basis church that never receives designated gifts will present a balance sheet with cash, no liabilities, and an amount equal to the cash balance in its equity section (more appropriately called the Fund Balance section).

But most churches do receive designated gifts and do not spend 100 percent of these gifts before their budget years are over. These unspent amounts will be forgotten without one key modification to the balance sheet. Since I know a lot of churches use QuickBooks, I'll explain my common suggestion using its features.

When a designated gift is received, the Record Deposit window must include a Split entry. General offerings should be posted to an Income account type. But the designated portion of the total deposit should be posted to an Equity account type. QuickBooks will "remember" this contribution and not close it out to zero at the end of the year.

When a check is written (Write Checks window) to spend monies received from donors who put these stipulations on their gifts, then the check must be posted to the Equity account type that was established when the gift was deposited.

One additional benefit of this technique for designated gifts received and disbursed: the church's general fund budget receipts and disbursements are not inflated by this non-budget activity.