Filing Status MUST be agreed on!

May 1, 2017

Mrs. Moss filed a 2008 return as married filing separately on which she claimed a loss due to the Bernard Madoff fraud scheme, although she had no investments affected by the fraud. Peter Moss believed his wife was delusional, and although she had been hospitalized for mental illness in 2005 and 2006 and had been released from the hospital in 2006 under the condition that she live with him, he was not her conservator or guardian. In 2013, a Connecticut probate court appointed her daughters as conservators.

The IRS changed the filing status of Peter Moss's return to married filing separately and issued him a notice of deficiency. He petitioned the Tax Court to challenge the IRS's determination, asking the court to invalidate his wife's return and accept his joint return.

Issues: Generally, a joint return must be signed by both spouses. However, a joint return may be signed by only one spouse where the signing taxpayer acts as an authorized agent for the spouse or where there is sufficient evidence that the nonsigning spouse consented to filing jointly.

Sec. 6012(b)(2) provides that if a person is unable to make a return, a duly authorized agent, among others, may make a return on his or her behalf. Regs. Sec. 1.6012-1(a)(5) provides that a person may be unable to file due to disease or illness and sets forth filing provisions, which must be complied with by the agent even when representing a disabled spouse. Under these provisions, the return must be accompanied by either (1) Form 2848, Power of Attorney and Declaration of Representative, or other power of attorney authorizing the agent to represent the person in making, executing, or filing the return; (2) a signed statement containing specified information and confirming that the incapacitated spouse consents to the signing of the return; or (3) a request by the taxpayer for a determination by the IRS that good cause exists for permitting the agent to submit the return.

Peter Moss contended that his wife was unable to file a return due to her mental illness and that the Tax Court should accept the original return he filed showing married-filing-jointly status.

Holding: The Tax Court held that Peter Moss was not entitled to married-filing-jointly status, as he failed to show that his wife was unable to file a return. It found that her hospital commitments for mental illness, his assertion of her mental illness, and the conservatorship order issued in 2013 did not establish that Mrs. Moss was incapable of filing her own 2008 return.

The court further found that even if it concluded that Mrs. Moss was unable to file a return, Peter Moss was not her agent, as he had no power of attorney or Form 2848 to attach to the return and did not file a statement confirming that Mrs. Moss consented to the signing of the return. The court ruled that although the couple had a long history of filing jointly, the evidence showed that she intended not to file a 2008 joint return.

Since Peter Moss had to file married filing separately, he could not claim an exemption for his wife. The court did allow him to apply the full overpayment of tax from the couple's 2007 joint return to his return.

Thanks to Mark Aquillo, CPA for pulling this info together.

Trump's tax plan would eliminate the home mortgage interest deduction for many!

U.S. Treasury Secretary Steven Mnuchin has taken pains to stress that the Trump administration isn’t out to kill Americans’ beloved mortgage-interest tax deduction—but a side effect of the plan could turn it into a perk for only the wealthy.

President Donald Trump has proposed rewriting the tax code to raise the standard federal deduction to a level where about 25 million homeowners would no longer take advantage of the century-old break. A married couple would need a home-loan balance of about $608,000—almost triple the mortgage on a median-priced U.S. home—before using it would make sense, according to a new analysis by property-data provider Trulia. That would be up from about $322,000 today.

Without the incentives, along with a proposed end to local property-tax deductions, home sales may be hurt in cities where prices are rising quickly and buyers are stretching to afford their purchases, from Denver and Portland, Oregon, to Boston and Washington. Reduced demand would weigh on values, causing price declines nationwide, according to the National Association of Realtors, which opposes the change.

Homes in an aerial photograph taken above New JerseyCraig Warga/Bloomberg

The proposal “is a backdoor way of rendering the mortgage interest deduction close to worthless,” said Mark Zandi, chief economist for Moody’s Analytics Inc.

Americans filing their taxes can either subtract a fixed amount from their incomes, called the standard deduction, or itemize write-offs, including mortgage interest as well as state and local taxes. The administration wants to raise the standard allowance—to $24,000 from $12,700 for a married couple filing jointly—and allow deductions for only home loans and charitable donations, greatly reducing the chances that itemizing would pay off for average taxpayers.

‘Apple Pie’

A White House spokeswoman, Natalie Strom, said average families would be better off under the proposal. Low- and middle-income households would effectively get a tax cut, “putting more disposable income in their pockets for them to invest in a home, purchase a car, save for their children’s college—any other expense,” she said in an email.

Trump’s plan, outlined last month in a one-page proposal with few details and no provisions for how it might be paid for, amounts to a wish list. House Republicans came up with their own plan last June, which includes several controversial measures that have gotten a cool reception from the Senate as well as the White House.

Mnuchin called the mortgage break, which will cost the government an estimated $63.6 billion this year, “kind of like apple pie” and reiterated that Trump’s tax reforms wouldn’t touch it.

“Owning a home is something that’s been part of the American dream, and we want to keep it that way,” he said on May 1 at the Milken Institute Global Conference in Beverly Hills, California.

Fewer Itemizers

While Trump may not technically change the deduction, he would probably eliminate its usefulness for all but the most wealthy homeowners, said Joseph Rosenberg, a senior research associate for the nonpartisan Tax Policy Center.

The share of households that itemize would plunge to about 5 percent from about 30 percent now, according to a National Association of Realtors estimate. About 8 million families would itemize under Trump’s plan, a reduction of about 25 million.

The administration is “selling it as a sort of simplification,” said Rosenberg, noting that Americans who switch to the standard write-off wouldn’t pay more in taxes. “In some respects, they are embracing the fact that there would be fewer people who itemize and take these deductions.”

Taxpayers, however, would lose an incentive to take on mortgage debt, and buyers in expensive markets who are stretching to afford fast-rising home prices may start to re-evaluate how much they’re willing to spend. In Denver and Portland, Oregon, for example, potential buyers for about half the listings would no longer be able to justify itemizing because of mortgage interest alone, according to a Trulia analysis. The share is about double the national average of 22 percent in areas including Dallas, Seattle, Boston, Washington and Sacramento, California.

The impact of the switch would be greatest for middle-income renters who are thinking about making the jump to homeownership, according to Ralph McLaughlin, Trulia’s chief economist.

Price Declines

Prices may fall 10 percent on average nationwide, taking into account the lack of deduction for state and local property taxes, according to a preliminary estimate prepared by a consultant for the National Association of Realtors. Zandi of Moody’s said the proposed deduction changes would reduce prices by about 4 percent nationally, including the property-tax impact, with bigger decreases in pricier parts of the country.

If the government’s tax policy no longer favors homeownership, some renters may decide buying isn’t worth the hassle or expense. While buying a house for $517,000 is now cheaper than renting in all 100 markets measured by Trulia, that calculation would change under the Trump plan in 12 areas, including New York City; Portland, Oregon; and Madison, Wisconsin.

Reducing incentives to buy could benefit large publicly traded landlords, including Equity Residential and Avalon Bay Communities Inc., and single-family rental companies such as Blackstone Group LP’s Invitation Homes Inc. and Colony Starwood Homes, whose co-chairman, Tom Barrack, was a key Trump supporter.

Economists’ View

Economists have long been critical of the mortgage-interest deduction because it disproportionately benefits people with more-expensive properties, including many who would have purchased even without the break. It also inflates home prices because buyers often overestimate their tax savings when they’re budgeting for a purchase, said Dennis Ventry, a professor at University of California, Davis, School of Law who has studied the program’s history.

Trump’s plan might end up boosting homeownership rates over time because a drop in prices would improve affordability and the standard deduction would give buyers more money to spend on a house, Ventry said.

The real estate industry is lining up against the proposal, including the powerful National Association of Realtors, which spent $10.2 million lobbying Congress in the first quarter, more than any other organization except the U.S. Chamber of Commerce, according to the Center for Responsive Politics. William E. Brown, the association’s president, said his group isn’t just fighting for its members.

“If values fall, it’s not just going to impact people who just bought houses, but all current homeowners,” Brown said.

Fighting Back

Trump’s plan also targets tax deductions for state and local taxes paid—a provision that would especially hurt homeowners in states where property taxes are high. Coldwell Banker Realtor Kevin Cascone, who’s based in Westfield, New Jersey, took to Facebook on May 3 to persuade his followers to fight back by contacting their legislators: “NEW JERSEY HOMEOWNERS! This should concern you deeply,” Cascone wrote. “Regardless of your politics, the terms of this policy could SIGNIFICANTLY affect your wallets come tax season next year.”

“One of the big reasons for homeownership is the ability to deduct property taxes,” Cascone said. “If that’s eliminated, what’s the difference between renting and buying?”

Thanks to Joe Light and Phasant Gophal for pulling much of this information together!

Debt extinguished before it's maturity

Governmental Accounting Standards Board has issued guidance for state and local governments to use when they extinguish debt before it matures.

GASB’s Statement No. 86, Certain Debt Extinguishment Issues, provides guidance on accounting for transactions in which cash and other monetary assets that have been acquired with only a government body’s existing resources are put in an irrevocable trust only for the purpose of extinguishing debt.

The current GASB standards already offer guidance on how to account for and report when cash and other monetary assets that have been acquired with the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt. However, GASB decided that more guidance was needed when only the existing resources (in other words, other than bond proceeds) are used to acquire cash and other monetary assets placed in a trust for the future repayment of outstanding debt.

The new GASB statement also includes guidance on prepaid insurance on debt that is extinguished and notes to the financial statements for defeased debt.When debt is defeased in substance, GASB noted, the debt and the cash and other monetary assets put in trust are not reported in the financial statements anymore. State and local governments are required, though, to disclose information in the notes to the financial statements about debt that has been defeased in substance.

The new requirements take effect for reporting periods beginning after June 15, 2017, although GASB is encouraging them to be applied earlier.

Opportunity Tax Credit can help!

Small Business Week Reminder: Work Opportunity Tax Credit can Help Employers Hiring New Workers; Key Certification Requirement Applies

WASHINGTON –The Internal Revenue Service today reminded employers planning to hire new workers that there’s a valuable tax credit available to those who hire long-term unemployment recipients and others certified by their state workforce agency. During National Small Business Week—April 30 to May 6—the IRS is highlighting tax benefits and resources designed to help new and existing small businesses.

The Work Opportunity Tax Credit (WOTC) is a long-standing income tax benefit that encourages employers to hire designated categories of workers who face significant barriers to employment. The credit, usually claimed on Form 5884, is generally based on wages paid to eligible workers during the first two years of employment.

To qualify for the credit, an employer must first request certification by filing IRS Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. Other requirements and further details can be found in the instructions to Form 8850.

There are now 10 categories of WOTC-eligible workers. The newest category, added effective Jan. 1, 2016, is for long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and received state or federal unemployment benefits during part or all of that time. The other categories include certain veterans and recipients of various kinds of public assistance, among others.

The 10 categories are:

• Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
• Unemployed veterans, including disabled veterans
• Ex-felons
• Designated community residents living in Empowerment Zones or Rural Renewal Counties
• Vocational rehabilitation referrals
• Summer youth employees living in Empowerment Zones
• Food stamp (SNAP) recipients
• Supplemental Security Income (SSI) recipients
• Long-term family assistance recipients
• Qualified long-term unemployment recipients.

Eligible businesses claim the WOTC on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on Form 3800.

Though the credit is not available to tax-exempt organizations for most categories of new hires, a special rule allows them to get the WOTC for hiring qualified veterans. These organizations claim the credit on Form 5884-C. Visit the WOTC page on IRS.gov for more information.