1040/540 Tuneup
Update 2014
REVISED 01-15-2015
IRS PROGRAM #UD2VU-T-00024-14-I
CTEC COURSE #1008-CE-0007
By
Michael P. Karll, EA
Lisa Ihm, EA
http://www.brasstax.com
858-487-2553
To Our Brass Tax Attendees:
The entire outline of our Update seminar is included in pdf format for your
convenience.
All relevant changes/modifications as of January 15, 2015 have been
incorporated into this manual.
All changes/modifications to the original manual are highlighted in RED.
A page that has been totally revised is denoted by “(entire).”
The following pages contain changes:
Table of Contents page vii.
Pgs 1, 4, 9, 10 (entire), 11 (entire), 12, 13 (entire), 14 (entire), 15 (entire),
16 (entire), 17(entire) 39, 62, 63, 64, 65, 83, 85, 87, 89, 106, 108, 115, 126,
154, 162, 166, 170, 171, 192, 204, 208, 210, 214, 219, 225, 236, 242, 243,
244, 245, 250, 251, 262, 263, 265, 312, 358, 362, 364, 370, 371 and 372
(entire was added).
Meet Your Update Speakers
Michael Paul Karll, EA, CFP, MBA
Mike is a well known speaker throughout the country. He
has taught for National University, the California Society of
Enrolled Agents Super Seminar, National Association of Tax
Practitioners, California Society of Tax Consultations, and
other tax seminars nationwide for over 40 years. He coauthored the Masters in Taxation program for National
University in San Diego, CA. Mike is the current owner of
Brass Tax Presentations. He has written and presented all
Brass Tax Presentations seminars since 1996. Mike owns
his own tax and financial practice in North San Diego county.
Lisa Ihm, EA
Lisa has been teaching seminars nationwide since 1986 for
National Association of Tax Professionals (NATP), California
Society of Enrolled Agents (CSEA), California Society of Tax
Consultants (CSTC), the Missouri Society of CPAs and many
other state and regional groups of tax professionals. Every
year, she fields questions from tax professionals on tax issues
ranging from basic individual tax problems to partnership,
corporation, estate and trust law. Rather than simply reciting
the rules, she digs below the surface making us think about
how tax laws affect our clients and how we can use those laws
to our clients’ benefit. She works and lives in Coronado. CA.
BRASS TAX Presentations
1040/540 TUNEUP 2014
TABLE OF CONTENTS
ITEM
PAGE
OVERVIEW ............................................................................................................ 1
INDIVIDUAL MANDATE ROADMAP – 2014 .......................................................... 2
FORMS & FILING
Who Must File? ................................................................................................ 4
When To File .................................................................................................... 5
Where To Get Help .......................................................................................... 6
Military Personnel In Combat Zones ................................................................. 7
The Forms Themselves .................................................................................... 9
Federal Form 1040 ................................................................................... 10
California Form 540 .................................................................................. 13
CALIFORNIA FILING STATUS
California Same-Sex Couples (SSMC) ........................................................... 18
California Registered Domestic Partners (RDP) ............................................. 22
DEPENDENCY & EXEMPTIONS
Dependency—Two Types Of Dependency ..................................................... 24
Tier 2 Qualifying Relative—Notes/Exceptions To 5 Tests............................... 25
Interaction Of Dependency Rules ................................................................... 28
Separated Parents.......................................................................................... 30
Waving An Exemption—What Got Waived?................................................... 32
Joint Custody Issues....................................................................................... 33
Filing Status—Head Of Household ................................................................. 35
LINE 7 – WAGES AND FRINGE BENEFITS........................................................ 37
Military Spouse Taxation—New Law—Affects Calif Returns........................... 38
Qualified Transportation Fringe Benefits And Other Issues ............................ 39
W-2 Employee Retirement Plan Charts .......................................................... 41
LINE 15 – IRA DISTRIBUTIONS
One Rollover Allowed Per Year (Bobrow) ....................................................... 45
Retirement Plans—Mandatory Distributions ................................................... 47
Age 70 ½ Distribution................................................................................ 48
Uniform Table ........................................................................................... 49
Inherited Account Distributions ................................................................. 50
Chart For Distribution To Beneficiaries—Final Regulations....................... 52
Single Life Expectancy Table.................................................................... 54
LINE 16 – PENSIONS AND ANNUITIES
Qualified Domestic Relations Order (QDRO).................................................. 55
Other Pension Issues ..................................................................................... 56
LINE 20 – SOCIAL SECURITY
Social Security Earnings Limits....................................................................... 58
Normal Retirement Age For Social Security & Social Security COLAs ........... 59
Table of Contents
Page i
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
ITEM
PAGE
LINE 21 – OTHER INCOME
Long-Term Care & Accelerated Death Benefits.............................................. 60
Settlements .................................................................................................... 61
Cancellation Of Debt Issues
1) COD Income Exclusion......................................................................... 63
2) Section 108(i) Deferred COD Income Reported In 2014-2018.............. 65
3) Mortgage Assistance Payments ........................................................... 66
4) Independent Foreclosure Review ......................................................... 68
5) Attorney General Settlement................................................................. 70
6) Horn Settlement.................................................................................... 71
7) Taxation Of Settlements From Private Lawsuits ................................... 72
8) Loan Modifications................................................................................ 73
9) Deferred Principal Reductions .............................................................. 74
10) Shared Appreciation Agreements ....................................................... 76
11) Payments From Completing A Short Sale........................................... 79
12) Qualified Real Property Business Debt Exclusion ............................... 80
California Refinanced Mortgages.............................................................. 81
California Short Sale Law Changed .......................................................... 82
Federal Net Operating Losses ........................................................................ 83
California Net Operating Losses & California Losses Charts .......................... 83
Distributions From Educational Accounts ....................................................... 86
Contributions To Educational Accounts .......................................................... 87
Education Savings Account vs. QTP Chart..................................................... 88
LINE 23 – EDUCATOR EXPENSE DEDUCTION................................................. 89
LINE 24 – BUS EXPS OF RESERVISTS & PERFORM ARTISTS ....................... 90
LINE 25 – HEALTH SAVINGS ACCOUNTS (HSA) .............................................. 91
LINE 28 – SELF-EMPLOYED RETIREMENT PLANS .......................................... 99
Retirement Plan Amount Charts For S/E Persons ........................................ 100
One-Person 401(k) Plans ............................................................................. 103
LINE 29 – S/E HEALTH INSURANCE DEDUCTION.......................................... 105
LINE 31 – ALIMONY PAID ................................................................................. 107
LINE 32 – IRA DEDUCTIONS
IRA Contributions ......................................................................................... 111
IRA Deductions............................................................................................. 112
IRA Charts.................................................................................................... 113
ROTH IRA ACCOUNTS
Basic Concepts............................................................................................. 116
Roth Contributions & Conversions ................................................................ 117
Roth Distributions ......................................................................................... 119
The Roth Cookie Jar..................................................................................... 121
Roth Recharacterizations & Reconversions.................................................. 122
Roth 401(k) & 403(b) & 457.......................................................................... 123
Roth Payout Rules........................................................................................ 124
Table of Contents
Page ii
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
ITEM
PAGE
LINE 33 – STUDENT LOAN INTEREST DEDUCTION ...................................... 125
LINE 34 – TUITION & FEES DEDUCTION ........................................................ 126
LINE 35 – DOMESTIC PRODUCTION ACTIVITIES DEDUCTION .................... 127
LINE 36 – TOTAL ADJUSTMENTS TO INCOME............................................... 129
Archer MSA Deduction ................................................................................. 130
TAX COMPUTATION......................................................................................... 131
Federal Key Numbers................................................................................... 132
California Key Numbers................................................................................ 133
Federal & California Tax Rate Schedules ..................................................... 134
LINES 45 & 46 – EXTRA TAX
Alternative Minimum Tax—Form 6251 (Line 45)........................................... 139
Excess Advance Premium Tax Credit Repayment—Form 8962 (Line 46) .... 139
LINES 47 THROUGH 53 – TAX CREDITS
Child & Dependent Care Credit—Form 2441 (Line 49)................................. 140
Education Credits—Form 8863 (Line 50)...................................................... 140
Retirement Savings Contribution Credit—Form 8880 (Line 51) .................... 140
Child Tax Credit (Line 52) ............................................................................. 141
Residential Energy Tax Credit (Line 53) ....................................................... 142
Other Credits (Line 54) ................................................................................. 142
California Credits .......................................................................................... 143
Non-Refundable Child & Dependent Care Credit (Form 3506) ............... 143
New Jobs Credit (Form 3527) ................................................................. 144
Other State Tax Credit (Schedule S) ...................................................... 144
Senior Head Of Household Credit........................................................... 145
Joint Custody Head Of Household Credit ............................................... 145
Dependent Parent Credit ........................................................................ 146
California Competes Credit ..................................................................... 147
New Employment Credit ......................................................................... 147
Form 3554 – New Employment Credit ............................................... 148
College Access Credit............................................................................. 149
Non-Refundable Renters Credit.............................................................. 149
California Tax Credit Checklist................................................................ 150
Expired California Tax Credit Checklist ................................................... 151
LINES 57 THROUGH 62 – OTHER TAXES
Self-Employment Tax—Schedule SE (Line 57) ............................................ 152
Additional Tax On IRAs & Retirement Plans—Form 5329 (Line 59) ............. 152
Household Employment Taxes—Schedule H (Line 60a) .............................. 152
First-Time Homebuyer Credit Repayment—Form 5405 (Line 60b) ............... 152
Health Care Individual Responsibility Payment (Line 61) .............................. 153
Additional Medicare Tax—Form 8959 (Line 62)............................................ 153
Net Investment Income Tax—Form 8960 (Line 62) ...................................... 153
Table of Contents
Page iii
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
ITEM
PAGE
TAX PAYMENTS
California Tax Withheld (Line 73) ................................................................. 154
Earned Income Credit—Schedule EIC (Line 66)........................................... 155
Additional Child Tax Credit—Form 8812 (Line 67)........................................ 155
American Opportunity Tax Credit—Form 8863 (Line 68) .............................. 155
Net Premium Tax Credit—Form 8962 (Line 69)............................................ 155
TAX REFUND .................................................................................................... 156
TAX DUE............................................................................................................ 157
SCHEDULE A
Spouses Filing Separate Returns ................................................................. 161
Deduction Phase-out Reduced ..................................................................... 162
Medical Deductions
Mileage ................................................................................................... 162
Increased Medical Deduction Floor Limit ................................................ 162
Qualified Long-Term Care Services........................................................ 163
Long-Term Care Premiums .................................................................... 164
Medicare B Premiums............................................................................. 165
Tax Deductions............................................................................................. 166
Interest Deductions....................................................................................... 168
Charitable Deductions .................................................................................. 171
California College Access Credit............................................................. 172
Casualty & Theft Losses............................................................................... 174
Miscellaneous Deductions ............................................................................ 174
SCHEDULE B – INTEREST & DIVIDEND INCOME
New Procedures For Validating SSN ............................................................ 175
Interest Income............................................................................................. 176
Qualifying Dividends ..................................................................................... 177
Foreign Investment Accounts ....................................................................... 178
Offshore Voluntary Disclosure Program ....................................................... 179
SCHEDULE C – BUSINESS INCOME/LOSS
Change Of Address ...................................................................................... 181
Payroll Provider Scams ................................................................................ 181
Qualifying Joint Venture Status Election ....................................................... 182
Investor Or Stock Trader? ............................................................................ 182
Capital Gain Vs. Sch C ................................................................................. 183
Passive Activities .......................................................................................... 184
Hobby Loss................................................................................................... 185
Business Bad Debt ....................................................................................... 187
California LLC Fees ...................................................................................... 188
California New Sick Pay Law In 2015 ........................................................... 189
SCHEDULE CA – CALIFORNIA ADJUSTMENTS
California Residents And Non-Resident Rules.............................................. 190
Table of Contents
Page iv
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
ITEM
PAGE
SCHEDULE D
Summary Chart ............................................................................................ 191
Capital Gain Rates ....................................................................................... 192
Sale Of Residence-$250K Exclusion ............................................................ 194
Sale Of Residence “Non-Qualified Use” ....................................................... 199
SCHEDULE E – RENTAL REAL ESTATE.......................................................... 203
SCHEDULE EIC – EARNED INCOME CREDIT ................................................. 204
SCHEDULE F – FARM INCOME/LOSS ............................................................. 205
SCHEDULE H – HOUSEHOLD EMPLOYMENT TAXES.................................... 206
SCHEDULE J – INCOME AVERAGING FOR FARMERS & FISHERMEN ......... 208
SCHEDULE SE – SOCIAL SECURITY & SELF-EMPLOYMENT TAX ............... 209
FORMS W-2, 1098 & 1099 – INFORMATION RETURNS
Reference Guide For Form W-2 (Box 12) & Form 1099-Q ........................... 211
Reference Guide For Form 1099-R (Box 7) & Form 1099-SA (Box 3) .......... 212
Form 1099-K & More Form 1099 Reporting Required .................................. 213
California—Independent Contractor Reporting (Form DE 542)..................... 213
FORM 2106 – EMPLOYEE EXPENSES
Meals............................................................................................................ 214
Lodging......................................................................................................... 217
Mileage......................................................................................................... 219
Commuting Rules ........................................................................................ 220
Travel Away From Home .............................................................................. 223
Substantiation Rules..................................................................................... 224
Education Expenses ..................................................................................... 226
FORM 2210 – UNDERPAYMENT PENALTY (Calif Form 5805)......................... 228
FORM 2441 – CHILD & DEPENDENT CARE CREDIT ...................................... 230
FORM 2848 – POWER OF ATTORNEY & DECLARATION OF REP ................ 231
FORM 3115 – APPLICATION FOR CHANGE IN ACCTG METHOD.................. 236
FORM 3468 – INVESTMENT TAX CREDIT ....................................................... 241
FORM 4562 – DEPRECIATION AND §179
Section 179 .................................................................................................. 242
Qualified Real Property................................................................................. 243
Bonus Depreciation ...................................................................................... 245
Chart – Section 179 Vs Bonus Depreciation ................................................. 247
Leasehold Improvements & Repair Vs Improvement (Final Regs)................ 248
Chart – Repair Or Improvement.............................................................. 249
Special Rules For Vehicles ........................................................................... 250
“Luxury” Caps For Passenger Autos............................................................. 251
Lease Income Inclusion For Leased Vehicles............................................... 251
Claiming Vehicle Deductions ........................................................................ 252
Table of Contents
Page v
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
ITEM
PAGE
FORM 4684 – CASUALTY & LOSS
Disaster Losses ............................................................................................ 253
California Disaster Losses & Insur Proceeds in Disaster Area...................... 255
Ponzi Style Investment Fraud (Rev Rul 2009-9 & Rev Proc 2009-20) .......... 257
FORM 5329 – RETIREMENT PLAN PENALTIES .............................................. 259
Reference Guide For Form 5329 Penalty Exceptions ................................... 260
FORM 5405 – FIRST-TIME HOMEBUYER CREDIT ......................................... 261
FORM 5695 –RESIDENTIAL ENERGY CREDITS ............................................. 262
Chart - Comparing Two Federal Credits ....................................................... 263
FORM 6251 –ALTERNATIVE MINIMUM TAX .................................................... 264
FORM 6765 – RESEARCH TAX CREDIT .......................................................... 265
FORM 8582 – PASSIVE ACTIVITY LOSS LIMITATIONS .................................. 266
Real Estate Professionals............................................................................. 268
FORM 8606 – NONDEDUCTIBLE IRAs ............................................................. 271
Chart – Max Deductible Contributions – IRA/Keogh/SEP/SIMPLE ............... 272
Chart – Additional Amount For Age Add-on (Age 50 & Over) ....................... 273
FORM 8615 – KIDDIE TAX CALCULATION ...................................................... 274
FORM 8812 – ADDITIONAL CHILD TAX CREDIT ............................................. 275
FORM 8815 – EDUCATION SAVINGS BONDS................................................. 276
FORM 8824 – LIKE KIND EXCHANGES............................................................ 277
California Form 3840 .................................................................................... 278
FORM 8829 – HOME OFFICES ......................................................................... 280
New Safe Harbor Rule.................................................................................. 282
FORM 8839 – ADOPTION CREDIT ................................................................... 284
FORM 8857 – REQUEST FOR INNOCENT SPOUSE RELIEF.......................... 286
FORM 8863 – EDUCATION CREDITS .............................................................. 287
Chart Comparing LL & American Opportunity Credits................................... 288
Chart Comparing Education Incentives......................................................... 289
Coordination Of Credits and Scholarships .................................................... 290
FORM 8867 – PAID PREPARERS EIC CHECKLIST ......................................... 295
FORM 8880 – RETIREMENT SAVINGS CONTRIBUTION CREDIT .................. 296
FORM 8881 – PENSION PLAN STARTUP COSTS CREDIT............................. 297
FORM 8910 & 8936 – VEHICLE CREDITS ........................................................ 298
FORM 8938 – STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS . 300
FORM 8941 – SMALL EMPLOYER HEALTH INSURANCE CREDIT ................. 302
FORM 8949 – SALES & OTHER DISPOSITIONS OF CAPITAL ASSETS ......... 307
Table of Contents
Page vi
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
ITEM
PAGE
FORM 8959 – ADDITIONAL MEDICARE TAX ................................................... 308
FORM 8960 – NET INVESTMENT INCOME TAX .............................................. 309
FORM 8962 – PREMIUM TAX CREDIT ............................................................. 312
Form 8962 .................................................................................................... 315
FORM 8965 – HEALTH COVERAGE EXEMPTIONS......................................... 317
Exemptions For Individuals........................................................................... 318
Form 8965 .................................................................................................... 319
Form 1095-A ................................................................................................ 320
Forms 1095-B & 1095-C............................................................................... 321
The Dreaded Penalty.................................................................................... 322
Shared Responsibility Payment Worksheet .................................................. 323
FORM 14039 – IDENTITY THEFT AFFIDAVIT .................................................. 325
Form 14039 .................................................................................................. 326
MISCELLANEOUS TAX ISSUES
Estate, Gift & Trust Tax Issues ..................................................................... 328
Trust & Estate Income Tax Rates For 2014 & 2015...................................... 329
Foreign Earned Income Exclusion ................................................................ 329
Calif—Use Tax For Personal Purchases ...................................................... 330
Calif—Mandatory Use Tax Returns For Business Entities ............................ 331
Mandatory E-Filing........................................................................................ 332
Tax Preparer Registration............................................................................. 333
Annual Filing Season Program ..................................................................... 335
2014 CE & License Registration Requirements ............................................ 336
Circular 230 Disclaimers............................................................................... 337
Contingent Fees ........................................................................................... 338
Taxpayer Representation Issues .................................................................. 340
Understanding Authority ......................................................................... 340
HEALTH CARE REFORM (“OBAMA-CARE”)..................................................... 344
Timeline For Implementing Health Care Reform........................................... 345
Everyone Must Have Health Care Insurance In 2014 ................................... 347
Health Exchange Overview........................................................................... 348
Employers Must Offer Health Insurance In 2015 .......................................... 350
Healthcare References & Internet Sites........................................................ 355
CHARTS & TABLES........................................................................................... 356
Summary—Education Benefits For 2014...................................................... 357
Comparison Of Education Incentives For 2014............................................. 359
Client Interview Guide—Education Incentives For 2014 ............................... 361
Retirement Plan Cost Of Living Factors........................................................ 363
Interest Charged/Paid By IRS and FTB ........................................................ 364
California Short Sale – Original Letter From IRS Chief Counsel ................... 365
California Short Sale – Clarification Letter From IRS Chief Counsel............. 367
Form 1040—Page References ..................................................................... 370
OVERVIEW – ABLE ACT OF 2014 .................................................................... 372
Table of Contents
Page vii
Table of Contents
BRASS TAX Presentations
1040/540 TUNEUP 2014
OVERVIEW
FOCUS OF OUTLINE
This outline focuses on Federal and California tax law for Individuals.
We will presume you prepared tax returns for Year 2013 and are familiar with
basic tax laws and forms as of 2013. This is not a review of all tax law, but an
update on the new and the difficult. The intent is to help you get off to a running
start on the 2014 tax filing season. NEW LAW is covered with enough detail to
get you through the coming filing season. Difficult new areas and changes for
2015 and on may not be covered thoroughly. We want to get ready for the coming
season, not necessarily for the tough planning cases we encounter.
The Health Care Act’s Individual Mandate begins this year. Many new forms and
worksheets will complicate our season. In addition, the Tax Increase Prevention
Act (TIPA), which included the ABLE Act of 2014, was signed on 12-19-2014.
TIPA extended over 50 expiring provisions for one year only. ABLE contains a
new type of tax-advantaged savings plan (similar to a Section 529 QTP) to help
meet financial needs of disabled individuals (see page 372 for an overview).
California has not yet specifically conformed to many of the recent acts, although
partial conformity to certain provisions is mandatory. The most recent California
conformity law was passed in 2010, but did not address all areas of nonconformity.
HANDBOOK FOR TAX SEASON
The authors offer this as a practical handbook to help guide you through the filing
season. Any changes or additions to this outline after the revision date shown
below will be posted at our website—www.brasstax.com in mid-January 2015.
ORDER OF OUTLINE
The outline is ordered similarly to Form 1040 and its lettered schedules and
numbered forms. Thus mortgage interest is dealt with under “Schedule A”,
depreciation rules under “Form 4562”, and so on. California law is presented
directly after the applicable Federal topic.
Revision Date 01/21/15
Brass Tax Presentations
Tel (800) 388-8404 PIN 1040
www.brasstax.com
Overview
Page 1
Overview
BRASS TAX Presentations
1040/540 TUNEUP 2014
INDIVIDUAL MANDATE
ROADMAP - 2014
WHAT MUST I DO FOR EVERY CLIENT? In 2014, we must ask each client
whether they have adequate health insurance. This is referred to as “minimum
essential coverage” (MEC). If they do have MEC, then we have one set of
questions to ask and items to do. If they do not, then we have another set of
questions and items to pursue. This must be done on a month-by-month basis.
Form 1095-A, B or C tells us about the client’s insurance coverage on a monthby-month basis during the calendar year 2014. (We discuss these forms in our
outline when we discuss Form 8965.) Form 1095-A will be issued in 2014 by
the Health Insurance Marketplace. BIG PROBLEM! Forms 1095-B or C are
not required to be issued in 2014!
CLIENT HAS ADEQUATE
INSURANCE
1) INSURANCE OBTAINED THROUGH EXCHANGE. Client has Form 1095-A
and may have qualified for an advanced premium assistance via a tax credit
through the exchange. If taxpayer actually received this tax credit in advance,
it lowered the amount paid initially for health insurance premiums in 2014.
You will need to fill out Form 8962 (discussed later).
A) DID NOT RECEIVE ANY PREMIUM ASSISTANCE THROUGH
EXCHANGE. Form 1095-A will show the insurance coverage and amount
of the advanced premium credit received which should be ZERO. This
information is used on Form 8962 to determine the correct amount of any
premium tax credit that should be received as determined by client’s 2014
MAGI. Any amount due taxpayer is shown on Form 1040, Line 69 as an
additional advance payment of tax.
B) RECEIVED SOME PREMIUM ASSISTANCE THROUGH EXCHANGE.
Form 1095-A will show the insurance coverage and amount of the
advanced premium credit received. This information is used on Form 8962
to reconcile the advanced amount received by the client to the correct
amount that should have been received as determined by his 2014 MAGI.
Any excess received is shown on Form 1040, Line 46 as an additional tax
due. Any additional amount due taxpayer is shown on Form 1040, Line 69
as an additional advance payment of tax.
Individual Mandate Road Map
Page 2
Individual Mandate Road Map
BRASS TAX Presentations
1040/540 TUNEUP 2014
2) INSURANCE NOT OBTAINED THROUGH EXCHANGE. Client did NOT
receive any advanced premium tax credit assistance since insurance was not
obtained through an insurance exchange. Form 1095-B or C will show the
coverage for each month so client can prove he has adequate insurance. No
Form 8962 is necessary.
CLIENT HAS INADEQUATE
OR NO INSURANCE
1) QUALIFIES FOR HEALTH COVERAGE EXEMPTION. Form 8965 enables
taxpayers to obtain an exemption on the tax return or to prove their marketplace
granted exemption. There are 19 exemptions and 14 sub-categories of the
exemptions for a total of 33 ways to qualify for an exemption. Available
exemptions are discussed under Form 8965.
2) DOES NOT QUALIFY FOR HEALTH COVERAGE EXEMPTION. If the
taxpayer does not qualify for a health coverage exemption, then he is subject to
a “Shared Responsibility Payment. This payment is calculated on a “Shared
Responsibility Payment Worksheet” (from the Form 8965 instructions) and the
result will appear on Form 1040, Line 61 as another “Other Tax” due. We
show you this worksheet when we discuss Form 8965.
PRACTICE NOTE
In a 11-13-2014 webcast, an IRS spokesperson said that practitioners will not
have to get specific documentation to show that their clients have the minimum
essential health coverage for 2014. “There’s no formal due diligence required or
documents that you are required to obtain. However, I think you have to apply a
reasonable level of common sense in terms of determining whether the taxpayer
does have MEC”. (MEC = Minimum Essential Coverage)
“Practitioners still need to do the best they can to make sure taxpayers are
representing in good faith that they have a level of health coverage that will
ensure they don’t have to make individual shared responsibility payments under
the ACA. Taxpayers could provide a variety of information showing they have
coverage through an employer or private insurance company, for example.”
Individual Mandate Road Map
Page 3
Individual Mandate Road Map
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORMS & FILING
WHO MUST FILE?
FOR MOST PEOPLE - When gross income exceeds the standard deduction plus
the personal exemptions allowed.
The 2014 Federal PERSONAL EXEMPTION AMOUNT IS $3,950.
The 2014 FEDERAL STANDARD DEDUCTIONS ARE:
Single, MFS = $ 6,200
MFJ
= $12,400
H of H
= $ 9,100
AGE 65 OR OLDER AND/OR BLIND. Add $1,200 for each of the joint filers or
$1,550 for single or head of household filers to standard deduction. Add these
numbers again if the person is blind.
MINIMUM STANDARD DEDUCTION – Those who can be claimed as a dependent
on another’s return make use of the minimum standard deduction:
GREATER OF
$1,000, or
$350 plus earned income,
but never more than $6,200 (the 2014 max standard deduction)
Generally a return is required when income exceeds the minimum and there is
at least $1 of investment income. For a blind dependent, add $1,550 to each
filing threshold. If the dependent is also over 65, add another $1,550.
WHO ELSE MUST FILE? - If SE income exceeds $400; to get a refund of tax
withheld; to claim any refundable tax credit (EIC, refundable portion of
education credits); if the return involves any tax such as AMT, IRA penalty,
FICA on tip income, etc.; if T/P is a nonresident alien with a U.S. business or
has a tax liability not covered by withholding.
Forms & Filing
Page 4
Forms & Filing
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA DIFFERENCES -- WHO MUST FILE
CALIFORNIA FILING REQUIREMENTS are based on gross income as well as
AGI per Federal return. A return is required if either income exceeds the floor.
NOTE: $250,000 EXCLUSION – SALE OF RESIDENCE. Excludable gain is
NOT included in the gross income for purposes of filing requirements.
Status
Age
S, H/H , MFS, Surv Sp
Calif. Gross
Calif. AGI
S, H/H , MFS, Surv Sp
Calif. Gross
Calif. AGI
No depend
1 depend
2 depend
$27,147
23,938
$35,472
32,263
29,772
26,563
36,432
33,223
32,097
25,678
43,197
36,778
51,522
45,103
37,497
31,078
45,822
39,403
52,482
46,063
42,897
36,478
51,222
44,803
57,882
51,463
Under 65
$16,047
12,838
65 & up
21,447
18,238
MFJ, RDP Both under 65
Calif. Gross
Calif. AGI
One 65 & up
Calif. Gross
Calif. AGI
Both 65 & up
Calif. Gross
Calif. AGI
Dependent of another
All ages – File if Gross Income or AGI exceeds standard deduction.
WHEN TO FILE?
GENERALLY BY APRIL 15, 2015. April 15, 2015 is a Wednesday.
(Note Regarding Emancipation Day, April 16: When April 16 falls on a Saturday, the Emancipation
holiday is observed on Friday, April 15 – filing deadline becomes Monday, April 18. If April 16 falls on
Sunday, the holiday is observed on Monday, April 17 – filing deadline is Tuesday, April 18.)
LIVING AND WORKING ABROAD or on military duty abroad the date is 15 June.
This is NOT available to one who is merely out of the country traveling.
NONRESIDENT ALIEN and no taxes were withheld, the date is June 15.
RESIDENT ALIEN about to leave the U.S. the date is 10 days before departure.
FISCAL YEAR FILER, date is 15th day of the fourth month following year-end.
AUTOMATIC EXTENSION until October 15 is obtained using Form 4868.
October 15, 2015 is a Thursday.
Forms & Filing
Page 5
Forms & Filing
BRASS TAX Presentations
1040/540 TUNEUP 2014
WHERE TO GET HELP
IMPORTANT TELEPHONE NUMBERS
INTERNAL REVENUE SERVICE
General Information
Taxpayer’s Advocate Help Line
IRS Forms
National Tax Practitioner Hotline
Automated Refund Information
800-829-1040
877-777-4778
800-829-3676
866-860-4259
800-829-4477
FRANCHISE TAX BOARD
General Information
Tax Practitioner Hotline/PRO
Hotline FAX
POA FAX
Taxpayer’s Advocate Help Line
E-file Help Desk
800-852-5711
916-845-7057
916-845-9300
916-843-5440
800-883-5910
916-845-0353
EMPLOYMENT DEVELOPMENT DEPARTMENT
General Information
888-745-3886
Tax Practitioner Hotline
916-654-8316
Taxpayer’s Advocate Help Line
916-654-8957
STATE BOARD OF EQUALIZATION
General Information
Tax Practitioner Hotline
Taxpayer’s Advocate Help Line
800-400-7115
800-401-3661
888-324-2798
SITES: Here are some useful sites for tax help and general tax
INTERNET
information that you may find useful.
BRASS TAX SITE. Our site has links to many more tax-related sites:
BRASS TAX – http://www.brasstax.com
DOWNLOADING FORMS. Both IRS and FTB have tax forms you can download
from the Internet. Other useful sites are also listed below.
IRS – www.irs.gov
FTB – www.ftb.ca.gov
EDD – www.edd.ca.gov
BOE – www.boe.ca.gov
CAL – www.ca.gov
Forms & Filing
Page 6
Forms & Filing
BRASS TAX Presentations
1040/540 TUNEUP 2014
MILITARY PERSONNEL IN
COMBAT ZONES
OVERVIEW. Military members, reservists, and support personnel serving in
combat zones are provided tax relief. The relief includes:
• Exclusion of combat pay from taxable income,
• Tax-free combat pay qualifies as earned income for IRAs and for EITC,
• Extended due dates, and
• Suspension of collection, audit or filing enforcement activities.
Personnel who die in a combat zone are also given additional relief.
COMBAT ZONES. Currently the list of combat zones consists of:
•
•
•
•
Arabian Peninsula Area (Iraq, Kuwait, Saudi Arabia & adjoining areas),
Kosovo area (Yugoslavia, Albania & adjoining areas), and
Afghanistan
Bosnia and Herzegovina/Croatia/Macedonia.
EXCLUSION OF COMBAT PAY FROM TAXABLE INCOME. This benefit is for
members of the military only. Reservists must be called to active duty to
qualify. It is not for spouses, non-active duty reservists or support personnel.
Excludable combat pay will be shown on Form W-2, Box 12, with the Code Q.
For enlisted members and any warrant officers, 100% of compensation for
active service earned in a combat zone is tax-free, including regular basic pay.
Special pay, such as reenlistment bonuses, is also tax-free if the service
member reenlists in a combat zone.
Officers pay tax on the portion of their monthly pay that exceeds the highest
enlisted pay plus the $225.00 monthly imminent danger pay. (2014 calendar
year = $8,041.20; 2013 = $7,963.80; 2012 = $7,834.50; 2011 = $7,714.80;
2010 = $7,611.30).
Military members can also exclude military pay earned while hospitalized as a
result of wounds, disease or injury incurred in a combat zone.
Any applicable exclusion is computed into the Form W-2 as provided by the
military. If you believe an error was made, request the W-2 be corrected. Do
not take the exclusion on the return.
QUALIFICATION OF TAX-FREE COMBAT PAY AS EARNED INCOME FOR
IRA AND EITC. Tax-free combat pay is deemed earned income which will
allow contributions to a traditional or Roth IRA. In addition, taxpayers may
elect to treat this pay as earned income for the Earned Income Tax Credit.
Military Personnel
Page 7
Military Personnel
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXTENDED DUE DATES. Military personnel and those serving in support of
military personnel (including Red Cross personnel, accredited correspondents
and civilian support personnel acting under the direction of the Armed Forces)
serving in a combat zone are entitled to an extension of time for:
• Filing any income, estate or gift tax return without penalty and interest,
• Payment of any tax (including estimated tax) other than withholding tax,
• Protesting an audit assessment, collection or suit on tax liability, and
• Allowance of and filing for a claim or refund.
This postponement extends the time for all of the above activities for the period
that the person is in a combat zone (or hospitalized from a combat zone injury)
plus at least 180 days. The postponement includes any unused time within the
normal statute of limitations prior to entry in a combat zone plus the 180 days.
SUSPENSION OF COLLECTION, AUDIT AND FILING ENFORCEMENT
ACTIVITIES. All collection, audit and filing enforcement are suspended while
the taxpayer serves in a combat zone. This applies to military personnel and
their spouses, reservists and support personnel.
DEATH IN A COMBAT ZONE. If a member of the Armed Forces dies while in
active service or from injuries or disease sustained in a combat zone, the
decedent’s taxes are forgiven for the year of death and any open tax years. This
relief also applies to certain civilian employees of the U.S. government. On
joint returns, only the decedent’s part of the joint liability is forgiven.
HOW TO GET THESE BENEFITS. Taxpayers qualifying for combat zone relief
may notify IRS directly of their status through a special e-mail address—
combatzone@irs.gov. They should provide name, stateside address, date of
birth and date of deployment to the combat zone, but not SSN.
Affected taxpayers should print the name of the conflict in red ink at the top of
the return or payment document when filing with the IRS or FTB. Also
indicate the combat zone’s entry and exit date at the top of the document. For
example: “Operation Iraqi Freedom; February 14, 2003 through Present.”
WHERE CAN I OBTAIN ADDITIONAL INFORMATION? Visit the IRS website,
www.irs.gov for the latest information. Additionally, IRS Pub 3 and FTB Pubs
1021 & 1032 are written specifically for military persons.
CALIFORNIA CONFORMITY
TOTAL CONFORMITY. California conforms to all of the above issues.
Military Personnel
Page 8
Military Personnel
BRASS TAX Presentations
1040/540 TUNEUP 2014
THE FORMS THEMSELVES
FEDERAL FORM 1040 has been released in final format. Changes to the Form
itself are minimal. Lines of note on the draft Form are:
LINE 23 – EDUCATOR EXPENSES
This provision was reinstated by the
2014 TIPA for the year 2014 only.
This provision was also
reinstated by the 2014 TIPA for the year 2014 only.
LINE 34 – TUITION & FEES DEDUCTION
LINE 46 – EXCESS ADVANCE PREMIUM TAX CREDIT REPAYMENT
This is a repayment of excess government subsidies received in advance for
health insurance premiums and is discussed under Form 8962 in the outline.
LINE 61 – HEALTH CARE INDIVIDUAL RESPONSIBILITY PAYMENT
This a new tax imposed on taxpayers who do not have health insurance.
The topic is discussed under Form 8965 in the outline. IRS has indicated
that the “Full-Year Coverage” checkbox should only be checked for
households where everyone has minimum essential insurance coverage for
the entire year. In addition, IRS said that the box does not have to be
checked on a dependent’s return if the dependent is covered by the parent’s
insurance and the box is checked on the parent’s return.
This is a new tax credit to help certain
taxpayers pay less for their health insurance premiums and the topic is
discussed under Form 8962 in the outline.
LINE 69 – NET PREMIUM TAX
IDENTITY PROTECTION PIN. The number is still used for 2014. IRS
concern with identity theft issues began with 2011 returns. Affected
Taxpayers receive a letter CP01F in November informing them they will
receive a special IP PIN number in December. This number must be used
on e-filed returns. Affected persons may call the special unit at 1-800-9084490. IRS uses a Form 14039 to report details on such cases. If IRS agrees
there may be a problem (or if IRS identifies such a problem independently,
they send Letter LTR4868CS to Taxpayers, informing them of IRS’
concern. The letter also reminds Taxpayers that IRS will issue this special
PIN, and that it must be used on the next tax return. For additional identity
theft/protection issues, see the additional discussion under Form 14039.
The Actual Forms
Page 9
The Actual Forms
BRASS TAX Presentations
1040/540 TUNEUP 2014
Draft Form 1040 Had Shown
Line 23 – “Reserved” - Was Educator Expenses
Line 34 – “Reserved” - Was Tuition & Fees Deduction
The Actual Forms
Page 10
The Actual Forms
BRASS TAX Presentations
1040/540 TUNEUP 2014
Final Form 1040
Line 46 – Excess Advance Premium Tax Credit Repayment – New Form 8962.
Line 61 – Health Care Individual Responsibility “Penalty” – Worksheet, But No Form
Line 69 – Net Premium Tax Credit – New Form 8962.
To The Right Of Signature Box – Identity Protection PIN Goes Here
The Actual Forms
Page 11
The Actual Forms
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA FORM 540 FOR 2014
EARLY JANUARY 2015. The final format for the Form 540 is released. On the
next 5 pages is the 2014 Form 540.
LOOKS SAME – CONTENT SIMILAR. The layout of the Form looks the same
with most of the content and line numbers similar to the 2013 form.
CHANGES. On Page 2, Lines 41 & 42 have disappeared. This is where the
New Jobs Credit has been for the last few years. This seems to indicate that the
credit is not available in 2014.
On Page 4, the list of voluntary contributions has changed from 2013.
TAX RATES CHANGED with the passage of Proposition 30 a few years back.
The familiar brackets of 1%, 2%, 4%, 6%, 8% and 9.3% are still with us.
NEW BRACKETS OF 10.3%, 11.3%, AND 12.3% were passed for the period
2012 through 2018. They apply to taxable incomes exceeding $250,000.
Full details of the rates are covered in our “Tax Calculations” section.
MENTAL HEALTH SERVICES TAX, often called the “Millionaire tax” is still
applicable. Think of it as a “surtax”, as it imposes an extra tax of 1% on
any taxable income in excess of $1M. Effectively, it makes California’s
highest “tax bracket” become 13.3%.
The Actual Forms
Page 12
The Actual Forms
BRASS TAX Presentations
The Actual Forms
1040/540 TUNEUP 2014
Page 13
The Actual Forms
BRASS TAX Presentations
1040/540 TUNEUP 2014
Form 540
Lines 41 & 42 – Were Used For New Jobs
Credit in 2013
The Actual Forms
Page 14
The Actual Forms
BRASS TAX Presentations
The Actual Forms
1040/540 TUNEUP 2014
Page 15
The Actual Forms
BRASS TAX Presentations
1040/540 TUNEUP 2014
Form 540
The List Of Voluntary Contributions Shown Here
Has Changed From Those Available In 2013
The Actual Forms
Page 16
The Actual Forms
BRASS TAX Presentations
The Actual Forms
1040/540 TUNEUP 2014
Page 17
The Actual Forms
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA FILING STATUS
CALIFORNIA SAME-SEX COUPLES
SAME-SEX MARRIED COUPLES (SSMCs) FILE FORM 1040 AS IF A
MARRIED COUPLE. Federal law was changed in 2013 to allow SSMCs to file
joint returns. See discussion of the Windsor case starting on the next page.
SAME-SEX MARRIED COUPLES (SSMCs) FILE FORM 540 AS IF A MARRIED
COUPLE. California requires Same-Sex Married Couples to file as a married
couple for 2008 and on.
LEGAL HISTORY IN CALIFORNIA. On 05-15-2008, the California Supreme
Court invalidated two provisions of the Family Code that had prevented samesex couples from getting married (In re Marriage Cases (2008) 43 Cal. 4th 757).
Under the court’s decision, same-sex couples were allowed to marry beginning
at 5:00pm on Monday, June 16, 2008. On June 20, 2008, FTB issued Notice
2008-5 that advised SSMC of their obligations resulting from this court case.
Proposition 8, addressing same-sex marriages, was on the November 4, 2008
California ballot. The initiative passed and was effective the day after the
general election. The passage overturned the then current law established by
the California Supreme Court in the above decision. The California constitution
stated that only marriage between a man and a woman is valid or recognized in
California. However, the California Attorney General has declared that same-sex
marriages that occurred from June 16, 2008 through November 4, 2008 will be
deemed to be valid until or unless the courts deem otherwise.
A Federal District Court overturned Proposition 8, and its proponents filed a
petition with the U.S. Supreme Court requesting the Court to review the case.
2013 COURT RULING. In the “Hollingsworth V Perry court case (Sup Ct
6/26/2013) 570 U.S., the U.S. Supreme Court (because of their ruling in the
Windsor case) found that proponents of Prop 8 did not have standing to appeal
the case in federal court and remanded the case to the Ninth Circuit Court
instructing them to dismiss the appeal. On June 28, 2013, the Ninth Circuit
Court lifted its stay of the district court’s ruling and thus enabled same sex
marriages to resume in California. Implementation of this decision has begun.
California Filing Status
Page 18
California Filing Status
BRASS TAX Presentations
1040/540 TUNEUP 2014
Supreme Court Ruling
COURT CASE. Windsor (Sup Ct 6/26/2013) 111AFTR 2d 2013-839.
FACTS. In 1996, Congress enacted the Defense of Marriage Act which defined
marriage as a “legal union between one man and one woman as husband and
wife.” The definition was to be used in administering federal law. DOMA was
a reaction of the Federal government to protect and preserve government
resources because same sex marriages could have made those individuals
eligible for many rights and benefits denied under Federal law. DOMA also
prevented same-sex married individuals from filing jointly.
In 1963, Edie Windsor met Thea Spyer in New York City. They entered into a
committed relationship and lived together in New York for many years. In
1993, they registered as domestic partners in NYC and later married in Canada.
Spyer died in February 2009 and left her estate to Windsor. IRS denied a
marital deduction to the estate of the deceased spouse for the amount left to the
surviving spouse since the Spyer estate did not qualify for the marital deduction
as a result of the provisions of DOMA. The Spyer estate had to pay over
$360,000 in estate tax. As the executor of the estate, Windsor paid the tax and
sued for a refund.
As part of the suit, she claimed that Section 3 of DOMA was unconstitutional.
The case was upheld by a District Court in New York (Windsor v. U.S. (June 6,
2012) U.S. District Court, Southern District of New York, Case No. 1:10cv08435-BSJ-JCF)) and also in the Second Circuit Court of Appeals.
RULING. The Supreme Court struck down Section 3 of the Defense of Marriage
Act (DOMA). The Court voted 5 to 4 to uphold the lower court decisions. The
majority opinion was written by Justice Kennedy cited that Section 3 of DOMA
was “unconstitutional as a deprivation of the liberty of the person protected by
the Fifth Amendment of the Constitution. The liberty protected by the Fifth
Amendment’s Due Process Clause contains within it the prohibition against
denying to any person the equal protection of the law.”
Justices Roberts, Scalia, Thomas and Alito dissented, some in part. The dissent
stated that the Court did not have jurisdiction to review the lower court’s
decision. It further stated that Congress acted constitutionally in passing
DOMA, “finding that defining marriage on a federal level was justified by
interest in uniformity and stability.”
IRS GUIDANCE. IRS has issued Revenue Ruling 2013-17 (see next page) to
provide guidance for persons affected by this new ruling.
California Filing Status
Page 19
California Filing Status
BRASS TAX Presentations
1040/540 TUNEUP 2014
Revenue Ruling 2013-17
(Mandatory On 09-16-2013 & After, But Elective For All Open Tax Years)
•
Ruling says same-sex couples will be treated as married for all Federal tax
purposes, including Income, Gift and Estate taxes.
•
Ruling applies to any same-sex marriage entered into in one of the 50 states, the
District of Columbia, a U.S. territory or a foreign country.
•
Ruling applies regardless of whether couple lives in a jurisdiction that recognizes
same-sex marriage or a jurisdiction that does not recognize same-sex marriage.
•
Ruling applies to all Federal provisions where marriage is a factor, including, but
not limited to, filing status, claiming personal & dependency exemptions, taking a
standard deduction, employee benefits, contributing to an IRA, and claiming
earned income tax credit or child tax credit.
•
Ruling does not apply to registered domestic partnerships (RDPs), civil unions or
similar formal relationships recognized under state law.
•
For 2013: Legally married same-sex couples must file their 2013 Federal income
tax return using either MFJ or MFS filing status.
•
For 2010, 2011 & 2012: Legally married same-sex couples may, but are not
required to, file original or amended returns choosing to be treated as married for
one or more prior tax periods that are open under the statute of limitations.
•
Taxpayers who wish to file a refund claim for income taxes should use Form
1040X. Taxpayers who wish to file a refund claim for gift or estate taxes should
use Form 843.
•
Treasury and IRS intend to issue streamlined procedures for employers who wish
to file refund claims for payroll taxes paid on previously-taxed health insurance
and fringe benefits provided to same-sex couples. They intend to issue further
guidance on cafeteria plans and on how qualified retirement plans and other taxfavored arrangements should treat same-sex spouses for periods prior to the
effective date of this ruling.
•
IRS guidance can be found in the following websites:
1) http://www.irs.gov/pub/irs-drop/rr-13-17.pdf
2) http://www.irs.gov/uac/Newsroom/Treasury-and-IRS-Announce-That-AllLegal-Same-Sex-Marriages-Will-Be-Recognized-For-Federal-Tax-Purposes;Ruling-Provides-Certainty,-Benefits-and-Protections-Under-Federal-Tax-Law-forSame-Sex-Married-Couples
3) http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-SameSex-Married-Couples
4) http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-forRegistered-Domestic-Partners-and-Individuals-in-Civil-Unions.
California Filing Status
Page 20
California Filing Status
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX IMPLICATIONS. The tax implications of this decision are many and
varied. Same-sex married couples should be aware of the items listed below.
1) Couples will no longer be able to file as single persons. They will have
the choice of married filing jointly or separately. Filing a joint return may
or may not produce a lower combined tax. As we are well aware, this new
filing status may not be a benefit at all. The question of filing amended tax
returns may provide benefits in certain situations. The Federal statute of
limitations is three years from the date the return was originally filed or the
April 15th due date.
2) Couples can claim the $500,000 exclusion on the sale of their principal
residence even if title is held by only one spouse. However, the other spouse
must meet the residency requirement to qualify.
3) Same sex couples will now be able to deduct alimony payments made to
a former same-sex spouse.
4) No tax is due on property settlements or transfers of property between
same-sex couples.
5) Same-sex couples are now eligible for a QDRO. In the case of divorce,
pension plan accounts may be divided and transferred without taxing the
transfer as a distribution to the owner of the account.
6) Innocent spouse protection is now available to same-sex couples.
7) Same-sex couples now will qualify for the other spouse’s social security
benefits in death or divorce. Social Security has issued a new ruling here.
8) Married couples are afforded many benefits with retirement plans and
IRA’s. If there is a non-working spouse, the couple may wish to contribute
to a spousal IRA. If the spouse is deceased, the plan assets can be
distributed over the surviving spouse’s life expectancy.
9) Same-sex employees who covered their spouse’s health care benefits
were taxed on the spouse’s portion of the benefit as wages in the past. This
will no longer be true and may provide an additional reason to file an
amended tax return for prior years.
10) Couples need to review their benefit and retirement plans beneficiary
designations to include same sex marriage partners.
11) There will no longer be any gift tax between same sex spouses. If gift
tax returns were previously filed, possible amended returns may be required
to recapture any prior tax or exclusion that was paid or applied. Split gifts
between spouses will also be available. Split gifts allow spouses to divide
the gift between spouses and reduce the amount, if any, of the gift tax
exclusion utilized.
12) For estate tax purposes, unlimited marital deduction and portability
elections are now available to same sex couples. Estate plans need to be
reviewed and revised as necessary.
California Filing Status
Page 21
California Filing Status
BRASS TAX Presentations
2007
1040/540 TUNEUP 2014
2007 & ON – CALIFORNIA DOMESTIC PARTNERS
REGISTERED DOMESTIC PARTNERS (RDPs) WILL EACH FILE FORM 1040
AS A NON-MARRIED INDIVIDUAL. Federal law was changed in 2013 to allow
SSMCs to file joint returns, but is not changed for RDPs. RDPs will continue to
use a filing status of Single or Head of Household for Federal purposes.
REGISTERED DOMESTIC PARTNERS (RDPs) WILL FILE FORM 540 AS IF A
MARRIED COUPLE. California requires Registered Domestic Partners to file as
a married couple for 2007 and on. RDPs achieve their status by registering with
the California Secretary of State.
WHO MAY REGISTER AS DOMESTIC PARTNERS IN CALIFORNIA?
1) Taxpayers in a committed same-sex relationship, or 2) opposite-sex
relationship where at least one partner is age 62 or older, may register with the
Secretary of State. Registering provides the partnership with legal standing and
certain legal rights. Registering with a city or county does not give the
partnership the status of RDP—registration with the SOS is required.
DETAILS. FTB Publication 737, “Tax Information For Registered Domestic
Partners” is a necessary aid for us. A “California Filing Status Adjustments
Worksheet—Registered Domestic Partners’ Recalculated Federal Adjusted
Gross Income” helps us compute the differences in income, adjustments and
expenses for California return versus Federal return.
COMMUNITY PROPERTY RULES apply. For instance, if one of the two
RDPs has wages of $100,000, and the other has wages of $50,000, on their
separate Federal returns, each would claim $75,000 of wages for Federal
purposes. Their joint California return would show their total respective wages.
COMBINED FEDERAL AGI applies for California purposes. Remember
that the Federal returns will be returns for Single Filers (or possibly one or both
as a Head of Household). Limitations based on AGI would depend upon the
sum total of the AGI figures for the Federal returns of the RDPs. California law
calculates Federal AGI as the amount that would have been computed on a
Federal return if the RDPs would have been allowed to file a joint or separate
Federal tax return and used the same filing status on the Federal return as was
used on the California return. Thus, in most cases, the combined Federal AGI
figures will be adjusted for so called “marriage penalty” issues.
PREPARING THE RETURNS can be a challenge. The two Federal
returns need to be completed first. Preparing both partners’ Federal returns
simplifies the process. The California return will not simply contain the combined
Federal figures. The RDP Worksheet will adjust the actual combined Federal
numbers to reflect a revised adjusted combined Federal amount. We saw many
tax software programs that automatically prepared the California return by
combining the two Federal returns.
SB 1827 (2006) and SB 105(2007)
California Filing Status
Page 22
California Filing Status
BRASS TAX Presentations
1040/540 TUNEUP 2014
VERY IMPORTANT FEDERAL RULING – CALIF RDPs & SSMCs
A MAY 28, 2010 CHIEF COUNSEL ADVICE MEMORANDUM (CCA
201021050) changes rules for California registered domestic partners (RDPs)
and California same-sex married couples (SSMCs). The CCA insists RDPs and
SSMCs must:
USE COMMUNITY PROPERTY RULES. Thus each partner must report onehalf of the community's income and deductions on the Federal tax return unless
they executed an agreement opting out of community property treatment.
MANDATORY IN 2010 & ON. Community rules must be used by both California
RDPs and SSMCs for tax years 2010 and on.
PRIOR TO 2010. Use of these rules is not mandatory prior to 2010. However,
California RDPs and SSMCs could have filed amended returns to report 50% of
the community income and deductions, but they were not required to do so. If
one RDP/SSMC taxpayer filed an amended return to report in this manner, the
other RDP/SSMC taxpayer must have done so also.
FILING STATUS. This new ruling only addresses the treatment of community
income and deductions of RDPs and SSMCs. It does not change their Federal
filing status. For Federal purposes, they will use a single or H of H status. For
California filing purposes, they will use a MFJ or MFS status.
REVISED FEDERAL PUBLICATION 555. To clarify these rules, IRS issued a
revised Publication 555, “Community Property,” in December 2010. This
publication is a necessary and invaluable tool to be used when filing returns for
California RDPs and SSMCs. In addition, this topic was covered in full detail in
the 2011 BrassTax Stocking Your Tax Tool Box program.
OTHER IRS GUIDANCE. In September 2011, IRS issued a series of questions
and answers (Q&A) addressing various filing issues faced by RDPs and SSMCs
in community property states. They explain the application of community
property law to such couples and also clarify the effect of state law-recognized
same-sex marriages for Federal tax purposes. These Q&As are found at the
following internet address:
http://www.irs.gov/newsroom/article/0,,id=245869,00.html.
APPLICABILITY FOR 2013 & ON RETURNS. As discussed under the area for
SSMCs, joint returns for Federal and California are required for those married
couples in 2013 & on and therefore these rules apply. For RDPs, these rule still
apply, even though for Federal tax purposes RDPs cannot file joint returns.
California Filing Status
Page 23
California Filing Status
BRASS TAX Presentations
1040/540 TUNEUP 2014
DEPENDENCY & EXEMPTIONS
DEPENDENCY
2 TIERS OF DEPENDENCY (Began In 2005)
A. Tier 1 Dependent: Also called “Qualifying Child” (Must Pass 3 Tests)
Test 1 Residency
Test 2 Relationship
Test 3 - Age
General
Notes
Dependent must have same principal residence as taxpayer for more than ½ the year.
“Temporary absence” for illness, education, incarceration, business, vacation, or
military service is ignored. A dependent who is born or dies during tax year qualifies,
except a stillborn child. Dependent Child must be US citizen, US national or resident
alien of Canada, Mexico, or the US. Dependent needs a valid SSN, ITIN, or ATIN.
Dependent must be
•
T/P’s child, stepchild, sibling, stepsibling, or a descendent of one of these.
•
Legally adopted.
•
A foster child (placed by authorized agency or order of a competent court)
who was a member of the household for the entire year.
Must be under 19 (24 if a full-time student). No age limitation if the individual is totally
and permanently disabled. NOTE: Different age requirements apply for the Child Tax
Credit (age 17) and the Dependent Care Credit (age 13).
Began In 2009 – Dependent must be either (a) younger than claimant, or (b)
permanently & totally disabled. (Increasing Adoption Act of 2008)
SELF-SUPPORTING CHILD. A child who provides more than half his/her own
support is not a qualifying child for dependency purposes, but might be a qualifying
child for purposes of the EIC.
NOT A DEPENDENT. One who can be claimed as another’s Tier 1 Dependent may
not claim any dependents on his/her own return.
TIE-BREAKER RULES. If a child is Tier 1 for multiple T/Ps we have 2 tiers of rules:
1) 2009 & On – If both a parent and a non-parent qualify to claim a Tier 1
dependent, the non-parent may NOT claim the dependency unless non-parent has
higher AGI than parent. (Increasing Adoption Act of 2008)
2) If a Tier 1 dependent is claimed by both T/Ps, apply the following rules in order.
•
PARENT FIRST. If one of the individuals is parent of the child, parent wins.
•
BOTH PARENTS – NO JOINT RETURN. If both parents claim, but do not file a
joint return, parent with whom the child lived for the greater part of the year wins.
•
NONE IS PARENT – HIGHEST AGI. If no claiming individual is the parent, the
child is the qualifying child of the claimant with highest AGI.
DIVORCE/SEPARATION. Dependency goes first to parent with whom a child lives for
greater portion of the year. Dependency may be waived, and must be waived where
certain decrees of divorce/separation award dependency to non-custodial parent.
JOINT RETURN. Began In For 2009 – a person filing a joint return (except for refund
only) cannot be a Tier 1 dependent of another. (Increasing Adoption Act of 2008)
KIDNAPPED CHILD. If an otherwise “qualifying child” is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the
family, the child is deemed to be a “qualifying child” for all purposes of the Tax Code.
This ends the year after the child is determined to be dead, or would have turned 18.
THAT'S IT! The chart is complete. There is a diagrammatic version of the
relationship test 4 pages from here.
Dependency & Exemptions
Page 24
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
B. Tier 2 Dependent—“QUALIFIED RELATIVE”
1. A Potential Dependent Must Pass All Five Of These Tests
1) Citizen or
Residency Test
Must be U.S. citizen, national or a resident of the U.S., Canada or Mexico.
2) Joint Return Test
Must be unmarried, or, if married, must not file a joint return, except for refund.
3) Support Test
Taxpayer must provide over 50% of potential dependent’s support.
4) Member Of
Household Or
Relationship Test
TIER 2A: Must be the taxpayer’s:
•
Child, stepchild, foster child or a descendent of any of them;
•
Brother, sister, niece or nephew;
•
Father, mother, grandmother, grandfather, aunt or uncle;
•
Step-brother, step-sister, step-father, step-mother or any of the
following in-laws—son, daughter, father, mother, brother or sister.
OR
TIER 2B: A person (related or not) who lived with T/P all year as member of
T/P’s household, as long as the relationship does not violate local law.
5) Gross Inc. Test
Gross taxable income must be < pers exemption amount ($3,950 in 2014).
2. And Watch Out For This!
Caveat
NOT A TIER 1 DEPENDENT OF ANOTHER TAXPAYER. We may not claim as a
Tier 2 Dependent anyone who qualifies as a Tier 1 Dependent of another person.
EXCEPTION: You may claim a Tier 2 dependent if the person who could claim the
dependent under Tier 1 (a) is not required to file a return, and does not file a return, or
(b) files a return simply to claim refund of withheld taxes. (IRS Notice 2008-5)
TIER 2 – QUALIFYING RELATIVE
NOTES/EXCEPTIONS TO 5 TESTS
1. MEMBER OF HOUSEHOLD/RELATIONSHIP. A chart of special cases:
Person
Relationship
Test Passed
CHILDREN
Child, grandchild, great-grandchild, etc
Step-child
Adopted Child
Adoption not final – placed by qualified agency
not placed by qualified agency
Foster Child (no requirement for placement by an agency)
PARENTS
Parent, grand-parent, great-grandparent, etc
“Step” or “”In-Law” – single generation only
SIBLINGS – All including “step” & “in-law”
UNCLES / AUNTS
NIECE / NEPHEW
COUSIN
Dependency & Exemptions
Must live in
Household
entire year
Page 25
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
COMMON TRAPS. And here are the special rules.
Trap
Rule
BIRTH/DEATH
In cases of birth or death, the member of household test is generally
met. With births, it is required the child be born alive, but not
required the child be taken home from the hospital during the year.
JOINT RETURNS
Each test may be passed by EITHER spouse
SEPARATE RETURNS
Each test must be passed by the filer
IN-LAWS ARE FOREVER
Relationships established by marriage do not end with death or
divorce
2. CITIZEN OR RESIDENT TEST
Trap
Rule
Parent is citizen when child
is born
Generally the child passes the test, regardless of where the child
lives.
Citizen adopts non-citizen
child.
Child must be resident in your home all year.
Residency
Includes Canada and/or Mexico.
3. JOINT RETURN TEST
Trap
Child files joint return.
Rule
Child fails the test with one exception – if return (a) is filed only to
claim a refund, and (b) neither spouse would have a tax if filing
SEPARATELY, the test is passed.
4. GROSS INCOME TEST
Trap
Basic Test.
Gross income includes –
Gross income does NOT
include -
Rule
Gross Income cannot exceed personal exemption amount.
•
Schedule C for manufacturing, sales, or mining – Gross
sales less cost of goods.
•
Rentals – Gross rents
•
Partnerships – Partner’s share of gross income.
•
Unemployment compensation, most grants and
scholarships.
•
Tax exempt income such as social security payments.
•
Income received by a totally and permanently disabled
person at a sheltered workshop.
Dependency & Exemptions
Page 26
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
5. SUPPORT TEST
A. GENERAL RULES FOR CALCULATING SUPPORT
Issue
Use of Funds:
Dependent’s own funds
Rule
Ignored unless actually used for support items.
Military Allotments
Considered used by the recipient of the allotments.
Tax Exempt Incomes
Considered if actually used for support.
Support provided by
State
Generally considered used for support unless shown specifically
otherwise.
Foster care payments
Considered as support provided by the agency – can lead to nobody
being able to claim an exemption.
Capital Items
Cost included if actually used by the dependent in a support
function.
Medical insurance
Cost is included in support.
B. MULTIPLE SUPPORT AGREEMENT
When two or more persons provide together more than half the support of an
individual and each of them could claim the dependency exemption but for the
support test, any one of them who provides more than 10% of the dependent’s
support may be chosen by the group to claim the exemption. Use Form 2120.
2014
INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITINs)
ITINs EXPIRE AFTER 5 YEARS. ITINs are issued to aliens who are not eligible
for social security numbers. They can be used by the taxpayer, spouse, or
dependents. The IRS announced that ITINs will expire if not used on a Federal
tax return for five consecutive years. To give interested parties time to adjust
and to allow the IRS to reprogram its systems, the IRS will not begin deactivating
ITINs until 2016. This new policy applies to any ITIN, regardless of when it was
issued. Only about ¼ of the 21 million ITINs issued since the program began in
1996 are being used on tax returns.
IR 2014-76.
Dependency & Exemptions
Page 27
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
INTERACTION OF
DEPENDENCY RULES
RELATIONSHIP – DIFFERENCES BETWEEN TIER 1 AND TIER 2.
TIER 1 DEMANDS A FAMILIAL RELATIONSHIP. If looked at on a “family
tree” the relationships allowed in Tier 1 Dependency are:
Taxpayer
Any Sibling or
Step-sibling
Any Descendent,
including adopted,
step, or foster
Any Descendent
Legally adopted children are included (as are foster-children if placed by a
qualifying agency if they are present in the household for the entire year).
TIER 2 HAS DIFFERENT RELATIONSHIPS, AND ALLOWS A NONRELATIVE! Note that Tier 2 allows for a “relationship” OR “Member of
Household” test. The “Member of Household” test requires the dependent
be a member of the household for the entire year. Moreover, the
relationships are different:
Tier 2A
Parent or
Grand-parent
Tier 2B
Aunt or Uncle
OR
Siblings, including
Step- and In-Law
Taxpayer
Any Descendent,
including adopted,
step, or foster
Single descendent step
(niece or nephew)
Dependency & Exemptions
Page 28
An unrelated
party as long
as party
resides with
taxpayer for the
entire year.
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
OTHER TAX ATTRIBUTES
There are other tax issues we often associate with “dependent”. Some of these are
not allowed for a Tier 2 Dependent – hence, we learn that a Tier 1 Dependent is
more valuable than a Tier 2 Dependent.
If Taxpayer Has A
Dependency Exemption
Head of Household Status
Tier 1 Dependent
Tier 2 Dependent
Yes
Yes
If pass other tests
If pass other tests
and be Tier 2A
Child/Dependent Care Exp
and excludable employerprovided dependent care
assistance
If pass other tests
NEVER
Unless physically or
mentally disabled
(ILM 200812024)
Earned Income Credit
If pass other tests
NEVER
Tuition & Fees Deduction
If pass other tests
If pass other tests
Education Credits
If pass other tests
If pass other tests
Child Tax Credit
If pass other tests
NEVER
Additional Child Tax Credit
If pass other tests
NEVER
Yes
Yes
Medical Expense of Dependent
Dependency & Exemptions
Page 29
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
SEPARATED PARENTS
CUSTODIAL PARENT WINS! Here’s a chart of key tax issues:
Item
Dependency Exemption
Head of Household Status
Child/Dependent Care Exp
and excludable employer-paid
dependent care assistance
Earned Income Credit
Tuition Deduction
Education Credits
Child Tax Credit
Additional Child Tax Credit
Custodial
Parent may
benefit from
Non-custodial
Parent may benefit
from
1
(1)
2
3
2&3
2
4
Medical Expenses of Child
(1) Custodial parent may claim his/her own expenses and can’t use noncustodial parent’s expenses. Non-custodial parent may not claim at all.
(2) Denotes a refundable credit – has value even if tax is low.
(3) Expense is claimed on return where personal exemption is claimed,
regardless of who paid the money.
(4) Each parent may claim his/her own expense.
Dependency & Exemptions
Page 30
Dependency & Exemptions
BRASS TAX Presentations
2009
1040/540 TUNEUP 2014
NEW FOR 2009 & ON – FORM 8332 MANDATORY
USE OF FORM: Custodial spouse may sign the waiver form, passing the
personal exemption to non-custodial spouse as long as:
a. one or both parents have custody of the child more than half the year,
b. child receives more than half support from one or both parents, and
c. parents are legally divorced/separated, or live apart in last 6 mos of yr.
DECREE NOT RELEVANT. Since 2009, IRS insists on the Form – use it for
safety! Recent cases involving a decree where IRS won its demand for Form
8332: Leslie Hymes, (2010) TC Memo 2010-97, in John D. Thomas, (2010) TC
Memo 2010-11, in Scott McClure, (2009) TC Summ. Op. 2009-181, Stephen S.
Gessic, (2010) TC Memo 2010-88. USE THE FORM 8332!!!
RECENT COURT CASE
FACTS
Child lived with Mom in 2009.
Mom signed an agreement that Dad could claim child if he remained current with
his child support.
Mom did not sign Form 8332.
Can Dad claim child as a dependent if he attaches a court order?
RULING
No. Dad failed to meet the signature requirement of IRC §152c(2)(A) because
he did not obtain a signaturethfrom the custodial parent, and the consent was not
unconditional. (Armstrong (8 Cir.)
How does the Form 8332 waiver affect tax benefits? Turn the page.
Dependency & Exemptions
Page 31
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
WAIVING AN EXEMPTION –
WHAT GOT WAIVED?
Form 8332 – Waiver of Dependency
Who Gets What If You Sign The Form?
Item
Custodial Waived By
Parent Still Custodial
Parent
Applicable
Dependency Exemption
Head of Household Status
AGI Sensitive?
Sing/Jt (2014)
Can be
Lost to
AMT
Phase Out In 2014
N/A
Child/Dependent Care Exp
and excludable employerprovided dependent care
assistance
Earned Income Credit
1
(1)
2
$38,511/$43,941
Tuition Deduction & Amer.
Opportunity Credit.
3
Lifetime Learning Credit
Child Tax Credit
3
Additional Child Tax Credit
2
Medical Expenses of Child
Employer-Provided Benefits
(Rev. Proc. 2008-48)
4
N/A
4
$80,000/$160,000
$54,000/$108,000
$75,000/$110,000
Earned income
exceeds $3,000
7.5 or 10% of AGI floor
With a signed waiver, some benefits apply to BOTH parents
• Exclusion of employer-provided medical reimbursement
• Exclusion of employer-provided health benefits
• Exclusion of certain fringe benefits
• Health Savings Plans (both HSA and MSA)
FOR 2009 & ON: FORM 8332 MUST BE USED!!
If it is NOT used, we send conflicting information to IRS.
They believe T/P is the CUSTODIAL parent.
(1)
(2)
(3)
(4)
Custodial parent uses his/her own expense. Non-custodial parent may not claim.
Denotes a refundable credit – has value even if tax is low.
Claimed on return where exemption is claimed, regardless of who paid.
Each parent may claim his/her own expense.
PLANNING ISSUES. The tax benefit of these provisions depends upon parent’s
AGI. Some unusual choices can be prompted by this fact. More than ever,
separated parents should look at their children as tax planning opportunities!
Dependency & Exemptions
Page 32
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
JOINT CUSTODY ISSUES
IRS ARBITRATES IF BOTH PARENTS CLAIM. After 2008, Form 8332 (or a
written document conforming to the substance of Form 8332) must be used to
release claim to a child’s exemption. A court order or decree or a separation
agreement may NOT serve as a written declaration. If IRS is forced to enter
the argument, they apply rules under TD 9408 – the “final” IRS Regulations:
“COUNTING NIGHTS” RULE. IRS awards a “day” of custody depending upon
where the child sleeps. The child is deemed to reside for the night with the
parent if the child sleeps:
1. at the parent’s residence (whether parent is present or not), or
2. in the company of the parent when not at the residence (e.g., vacations).
NIGHT OF DECEMBER 31 is allocated to the earlier tax year.
STATE LAW DETERMINES ALLOWABLE CUSTODY. For instance, when
the child reaches majority under state law, the child is not in the custody of
either parent.
SLEEP WITH NEITHER PARENT. In this case, the child is treated as residing
with the parent with whom child would have resided, but for the absence.
NIGHTS EQUAL, USE AGI. If the child resides for an equal number of nights
with each parent, custody is deemed to be with the parent with higher AGI.
EXCEPTION FOR ONE PARENT WORKING NIGHTS. If the child resides
with the working parent for a greater number of days, but not nights
because that parent works nights, that working parent is treated as the
custodial parent. However, on school days, the child is deemed as residing
at the primary residence registered with the school.
BEST IF PARENTS “SING THE SAME SONG”! The rules above are taken from
the Regulations. However, in dealing with clients, it pays to acquaint them
with these rules and then ask if they are willing to each file returns consistent
with their agreed-upon stance.
Dependency & Exemptions
Page 33
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Daughter is 19-year old, full-time college student.
Mom was awarded custody in divorce 10 years ago.
Dad and daughter live with Paternal Grandma entire year.
More than 50% of support by Dad, Mom, Paternal Grandma and Maternal
Grandpa.
Dad does not have a Form 8332.
Can Dad claim Daughter as a dependent?
RULING
Yes. Form 8332 is not required because Daughter actually lived with Dad for the
greater portion of the year. (Patrick A. Davis, TC Memo 2014-147)
Dependency & Exemptions
Page 34
Dependency & Exemptions
BRASS TAX Presentations
1040/540 TUNEUP 2014
FILING STATUS –
HEAD OF HOUSEHOLD
REQUIREMENTS SUMMARIZED in the chart below.
You May File As Head of Household If:
You are Unmarried or
“Considered Unmarried”,
and you
Have a DEPENDENT
(either Tier 1 or Tier 2A,
but NOT Tier 2B) who:
“CONSIDERED UNMARRIED” – You may be legally married but still
considered to be unmarried solely for purposes of using this filing status if
you meet ALL OF THE FOLLOWING:
•
File a separate return, AND
•
Pay more than half the cost of maintaining your household, AND
•
Lived apart from spouse during last 6 months of the year, where
spouse’s “temporary absence” (below) counts as time living with you.
•
Is related to you more closely than cousin (this removes the unrelated
Tier 2B Dependent from consideration), and
•
Claims your household as his/her main home for more than half the
year, and you pay more than half the cost of maintaining the home.
NOTES/EXCEPTIONS:
1) A dependent parent need not live with you if you pay more than
half the cost of maintaining their household, which can include a rest
home or nursing facility.
2) “Temporary Absence.” You and your qualifying person are
considered to be living together if one (or both) of you are temporarily
absent from your home due to special circumstances, including
illness, education, business, vacation, military service, or
incarceration. It must be reasonable to assume the absent party will
return to your home after the absence, and you must continue to
provide more than half its cost during the absence.
3) Waiving of the dependency to the other parent via Form 8332
does not waive the ability to claim Head of Household status.
THAT’S IT – NO OTHER RULES OR EXCEPTIONS! We know this may look
too short or too simple when compared to the rambling rules and tables in IRS
publications. Nonetheless, the chart above is accurate and complete.
CALIFORNIA DIFFERENCES – EFFECTIVELY NONE!
CALIFORNIA FOLLOWS Federal rules for dependents and filing status, except
as noted for RDPs and same-sex couples.
HEAD OF HOUSEHOLD SCHEDULE (FORM 4803e). Several years ago
California began using the Head of Household Schedule. We recommend using
this for any H of H filer. Without the Form the client is likely to receive a Head of
Household letter in the Fall.
Head Of Household
Page 35
Head Of Household
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Son lives with Taxpayer most of the year.
Taxpayer paid more than 50% of keeping up the home.
Taxpayer signed Form 8332 allowing Ex-wife to claim Son as dependent.
Can Taxpayer use Head Of Household filing status?
RULING
Yes. Taxpayer is not required to claim the child as a dependent in order to
qualify for H of H filing status.
The taxpayer who had to take the case to Tax Court was awarded
reimbursement of his attorney’s fees (under IRC §7430(a)). The IRS had issued
a math error notice disallowing the H of H filing status and during a collection due
process hearing refused to abate the assessed tax, despite the taxpayer’s
support for filing as H of H. In Tax Court, the IRS conceded to abate the
assessment. The Court said the taxpayer exhausted all administrative remedies
available to him within the IRS and did not unreasonably delay the proceedings.
(Michael Swiggart, TC Memo 2014-172)
RECENT CHIEF COUNSEL ADVICE
FACTS
Husband and Wife originally filed joint return.
After filing deadline, but before 3-year statute expired, Husband amended.
Husband claimed Head of Household status with additional tax due.
Is this change allowed?
RULING
No. The Office of Chief Counsel advised that the election to file a joint return
becomes irrevocable once the time for filing the return has expired (Reg 1.60131(a)(1); Ladden (1962)). Therefore, Husband could not change his filing status
on the amended return.
However, even though Husband’s amended return claimed an invalid status and
was signed by only one spouse, the assessment of additional tax was valid. IRC
§6201(a)(1) requires the Service to assess “all taxes determined by the
taxpayer6as to which returns6are made under this title.” Since the Husband
filed the amended return within the 3-year assessment period, the assessment of
the tax is valid. (CCA 201411017)
Head Of Household
Page 36
Head Of Household
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 7
WAGES & FRINGE BENEFITS
NORMAL REPORTING. The amount to be entered here is the amount from Form
W-2, box 1. Sometimes, other income must also be included here.
1. HOUSEHOLD EMPLOYEE. Wages received by a household employee
2.
3.
4.
5.
6.
7.
8.
who did not receive a Form W-2 because wages were less than $1,900. The
amount and “HSH” should be entered in the space to the left of line 7.
TIP INCOME. Includes tip income not reported to the employer plus the
"allocated tips" shown on Form W-2, box 8. Form 4137 may be needed.
DEPENDENT CARE BENEFITS. From Form W-2, box 10. Form 2441
may allow total exclusion of these benefits.
EMPLOYER-PROVIDED ADOPTION BENEFITS. From Form W-2, box
12, with the code "T". Form 8839 may allow total exclusion of benefits.
SCHOLARSHIP/FELLOWSHIP GRANTS. If not on Form W-2, enter
"SCH" next to Form 1040, line 7. Degree candidates: Includes amounts not
used for tuition/course-related expenses such as room, board and travel.
EXCESS SALARY DEFERRALS. The total amounts deferred under
retirement plans should appear on Form W-2, box 12. Generally, if the
amount shown there exceeds $17,500/$23,000, the excess is taxable.
DISABILITY PENSIONS SHOWN ON FORM 1099-R. If taxpayer has not
reached the minimum age set by employer, the amount is shown here.
Amounts received after retirement age are on Form 1040, line 16a and 16b.
CORRECTIVE DISTRIBUTIONS FROM FORM 1099-R. This includes
excess salary deferrals plus earnings and excess contributions plus earnings
to a retirement plan. IRA distributions belong on lines 15a and 15b.
9. WAGES FROM FORM 8919 (UNCOLLECTED SOCIAL SECURITY AND
MEDICARE TAXES ON WAGES), LINE 6. This entry is self-explanatory.
2 0 11
6
HEALTH INSURANCE PREMIUMS TO APPEAR ON W-2s.
EMPLOYERS will show premiums paid for employees' health insurance on Form
W-2, Box 12, using Code DD. It is NOT an addition to income – it is intended for
INFORMATIONAL purposes only. It was optional for 2011 W-2s, but is required
in 2012 & on (except for small employers (those filing fewer than 250 W-2s)).
Health Care Act of 2010, Notices 2010-69 & 2011-28 and W-2/W-3 Instructions.
Line 7 – Wages/Fringes
Page 37
Line 7 – Wages/Fringes
BRASS TAX Presentations
1040/540 TUNEUP 2014
FOR 2009 & ON – MILITARY SPOUSE TAXATION CHANGES
NEW FEDERAL LAW CHANGES CALIFORNIA STANCE. California has
always treated personal service income of non-military spouses present with
military spouse inside California as California source income. This is no longer
allowed under a new Federal law. The Military Spouses Residency Relief Act
(MSRRA) (Public Law 111-97) effectively extends taxation laws applicable to
service members under the Service Members Civil Relief Act to their spouse”
non-military service income, under certain cases.
2014 CALIFORNIA PUBLICATION 1032, pages 10 through 12, outlines the
FTB’s standing on this Federal law.
SEE BELOW for details as presented in 2014 version of FTB Publication 1032.
Military Spouses Residency Relief Act of 2009
KEY POINTS of the new law:
• Year 2009 and later are affected.
• Both spouses must have the same domicile or residence.
• Non-military spouse is absent from home state to join military spouse at
his/her military duty station.
• Residency State laws will determine rules of taxation for these spouses.
This will apply to both personal service income and unearned income.
• Military taxpayer continues to be taxed on non-military job in California.
DIFFERENT RESIDENCY STATES for the spouses make the law inoperable.
Service members who marry a California resident will not see this law applied
to spouse’s income.
NON-CALIFORNIA MILITARY personnel stationed in California:
• Non-military spouse cannot be taxed on wages in California, or on other
income which is not California source income, because spouse is not a
California resident.
CALIFORNIA MILITARY PERSONNEL stationed in some other state have rules
which depend on the type of military orders.
• Those under TDY assignment (temporary orders) are considered
California residents. Both spouses continue to be treated as residents.
• Those under PCS assignments (“permanent” orders) cease to be treated as
California residents. The same rules now apply to the spouse if he/she
accompanies the military person. The non-military spouse is not taxed by
California, and may not be taxed by the other state under this new law.
Line 7 – Wages/Fringes
Page 38
Line 7 – Wages/Fringes
BRASS TAX Presentations
1040/540 TUNEUP 2014
WAGES DONATED TO AID EBOLA VICTIMS. If an employee forgoes income
(vacation, sick, or personal leave) in exchange for their employer making a
cash contribution to a qualified organization aiding Ebola victims in Guinea,
Liberia, and Sierra Leone, the forgone income will not be included in gross
income or wages, and the employee may not claim a charitable contribution for
the donated amount. The employer may deduct the payments as business
expenses rather than charitable contributions (so they are not subject to
charitable limits). The payments must be made to the organizations before
1/1/16. (IRS Notice 2014-68)
RECENT TAX COURT CASE
FACTS
Taxpayer was downsized by employer and received severance pay.
Is severance pay subject to FICA tax?
RULING
The Supreme Court reversed the Sixth Circuit and held that severance payments
made to involuntarily terminated employees are subject to FICA tax. This means
that social security and Medicare taxes are due on severance packages paid to
these individuals. (US v. Quality Stores Inc. et al).
QUALIFIED TRANSPORTATION FRINGE BENEFITS. Current law allows an
employee to exclude a certain amounts from taxable income for qualified
transportation fringe benefits. Monthly amounts are shown in the table below.
BENEFIT
2013
2014
2015
Qualified Parking
$245
$250
$250
Transit Passes &
Commuter Vehicle
$245
$250
$130
Bicycle Commuting
$20
$20
$20
CALIFORNIA NON-CONFORMITY
California does not conform to these transportation fringe benefits.
Line 7 – Wages/Fringes
Page 39
Line 7 – Wages/Fringes
BRASS TAX Presentations
2014
1040/540 TUNEUP 2014
HEALTH FSA CONTRIBUTIONS LIMITED
LIMIT ON HEALTH FSA CONTRIBUTIONS. Starting for 2013 plan years, the
Health Care Act imposes an annual limit of $2,500 for a health FSA that is part of
any cafeteria plan. The inflation adjusted limit is $2,550 for 2014.
Health Care Act of 2010.
2013
HEALTH FSA “USE IT OR LOSE IT” RULE MODIFIED.
EMPLOYERS who do not use the current 2 ½ month grace period rule can now
provide that up to $500 of a participant’s unused FSA medical account balance
can be carried over from one plan year to the next. The carryover amount can
be used to reimburse qualifying medical expenses incurred at any time during
the next plan year.
The alternative is available immediately. Employer must choose to offer the
carryover option, and cannot offer both that option and the grace period option in
the same plan year. To allow the $500 amount to be carried over to 2014,
employers need to adopt a written amendment to health FSAs by 12-31-2013.
IRS Notice 2013-71.
MEDICAID WAIVER PAYMENT TAXATION – IRS NOTICE 2014-7
FACTS. Section 131 excludes most qualified foster care payments from gross
income - in particular, Section 131(c) excludes difficulty of care payments from
taxation. Payments to related individual care providers under state Home &
Community-Based Waiver (Medicaid waiver) Programs were taxable income.
RULING. Medicaid waiver payments will now be treated as difficulty of care
payments. Therefore they will not be taxable for income tax purposes whether
the care provider is related or unrelated to the eligible individual receiving care.
EFFECTIVE DATE. Payments received on or after 1/3/2014. Taxpayers may
also apply this notice to all open tax years.
WHAT WE CAN DO. Amend open-year returns. Affected CA individuals have
received a Form W-2 that looks as though it were issued by the individual
receiving care from your client and an address of Rancho Cordova, CA. W-2
shows Federal & CA taxable wages with no Social Security or Medicare wages.
Line 7 – Wages/Fringes
Page 40
Line 7 – Wages/Fringes
BRASS TAX Presentations
1040/540 TUNEUP 2014
W-2 EMPLOYEE
RETIREMENT PLANS
2014
NEW RETIREMENT PLAN COMING – MYRA
OVERVIEW. A new retirement account is headed our way late in 2014 for
employees. It is called “myRA”. MyRAs are described as a simple, safe, and
affordable way to save for retirement that initially will be available through
employers who choose to offer the program. MyRAs will be similar to Roth IRAs
with Roth IRA annual income eligibility limits.
KEY FEATURES include (1) the ability to open an account and contribute small
amounts through payroll direct deposits; (2) no fees; (3) balances backed by the
U.S. Treasury; (4) account portability; (5) not limited to one employer; (6) tax-free
withdrawals of contributions; and (7) continuance of the plan until the earlier of
30 years or an account balance of $15,000 (after that, myRA balances will
transfer to private sector Roth IRAs).
ADDITIONAL INFORMATION can be found at:
www.treasurydirect.gov/readysavegrow/start_saving/myra/myra_top_questions
2014
CHANGE TO 2014 RETIREMENT AMOUNTS
Contributions/deductions for retirement plans have increased for 2014.
YOUR TAX TOOL - EMPLOYEE CHARTS FOR RETIREMENT PLANS.
CHARTS. Summary charts for employees and their maximum retirement
plan amounts allowable in 2014 and in the future start on page 42. Charts for
self-employed taxpayers start on page 100.
CALIFORNIA CONFORMITY
For 2002 and on, California has conformed!!
Employee Retirement Plans
Page 41
Employee Retirement Plans
BRASS TAX Presentations
1040/540 TUNEUP 2014
Employee
Year 2014
Maximum Contributions
IRA-Type Plans
Other Plans
TRADITIONAL IRA
$5,500
$6,500 (50+)
401(K)
$17,500
$23,000 (50+)
ROTH-IRA
$5,500
$6,500 (50+)
403(B)
$17,500
$23,000 (50+)
457
$17,500
$23,000 (50+)
SIMPLE IRA
$12,000
$14,500 (50+)
Profit Sharing
$52,000
Same (50+)
SEP IRA
$52,000
Same (50+)
Money Purchase
$52,000
Same (50+)
PRACTICE NOTE – USING THESE CHARTS
3-PAGE UNIT. This page and the next 2 show the maximum amount an
employee can contribute to a pension. This page is for 2014 only. The
next shows how the amounts are scheduled to change through 2015.
THIRD PAGE – ACTUAL CONTRIBUTION MAXIMUM. This page shows how a
particular client’s personal maximum may be limited by compensation.
NOTE: Self-employed use the charts beginning on Page 100.
Employee Retirement Plans
Page 42
Employee Retirement Plans
BRASS TAX Presentations
1040/540 TUNEUP 2014
I AM AN EMPLOYEE
WHAT IS THE ANNUAL MAXIMUM AMOUNT
I CAN PUT IN MY RETIREMENT PLAN?
Plan
2013
2014
2015
$12,000
$12,000
$12,500
> Age 50 + $2,500
$14,500
> Age 50 + $2,500
$14,500
> Age 50 + $3,000
$15,500
SEP IRA
$51,000
$52,000
$53,000
401(k) or SAR-SEP
Under Age 50
$17,500
$17,500
$18,000
> Age 50 + $5,500
$23,000
> Age 50 + $5,500
$23,000
> Age 50 + $6,000
$24,000
$17,500
($20.5K = 15 Yr)
$17,500
($20.5K = 15 Yr)
$18,000
($21.0K = 15 Yr)
> Age 50 + $5,500
$23,000
> Age 50 + $5,500
$23,000
> Age 50 + $6,000
$24,000
$17,500
Special Rules =
Catch-up
$17,500
Special Rules =
Catch-up
$18,000
Special Rules =
Catch-up
> Age 50 + $5,500
$23,000
Special Rules =
Catch-up
> Age 50 + $5,500
$23,000
Special Rules =
Catch-up
> Age 50 + $6,000
$24,000
Special Rules =
Catch-up
Profit Sharing
$51,000
$52,000
$53,000
Money Purchase
$51,000
$52,000
$53,000
Defined Benefit
No Maximum
No Maximum
No Maximum
SIMPLE IRA
Under Age 50
Age 50 & Over
Age 50 & Over
403(b)—TSA
Under Age 50
Age 50 & Over
457—Def Comp
Under Age 50
Age 50 & Over
NOTE: Self-employed use the charts beginning on Page 100.
SPECIAL NOTE: MAXIMUM APPLIES TO ALL PLANS COMBINED. Some
clients will have retirement plans at two or more jobs, or may be wage earners
and self-employed at the same time. For example, a worker, under age 50,
covered under both a SIMPLE and a profit sharing plan may not contribute
more than $12,000 to the SIMPLE, but has a maximum of $52,000 for the
profit sharing plan – if this client already funded $12,000 to the SIMPLE, the
maximum allowable for the profit sharing plan in 2014 is reduced to $40,000.
Employee Retirement Plans
Page 43
Employee Retirement Plans
BRASS TAX Presentations
1040/540 TUNEUP 2014
I AM AN EMPLOYEE
HOW DO I DETERMINE THE AMOUNT
I CAN PUT IN MY RETIREMENT PLAN IN 2014?
Plan
A
B
C
Method
SIMPLE IRA
Lesser of annual maximum amount or 100% compensation.
401(k) or SAR-SEP
Lesser of annual maximum amount or 100% compensation.
403(b)—TSA
Lesser of annual maximum amount or 100% compensation.
457—Def Comp
Lesser of annual maximum amount or 100% compensation.
SEP IRA
Lesser of annual maximum amount or 25% compensation.
Max compensation = $260K.
Profit Sharing
Lesser of annual maximum amount or 25% compensation.
Max compensation = $260K.
Money Purchase
Lesser of annual maximum amount or 25% compensation.
Max compensation = $260K.
Defined Benefit
Limit on benefit amount. Cannot exceed 100% average
compensation for highest 3 years with max of $210K benefit
per year. Max compensation = $260K.
“A” = Employee AND employer both contribute
“B” = Employee contributes only
“C” = Employer contributes only
NOTE: Self-employed use the charts beginning on Page 100.
Employee Retirement Plans
Page 44
Employee Retirement Plans
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 15 – IRA DISTRIBUTIONS
ONE ROLLOVER
ALLOWED PER YEAR
NEW COURT CASE CHANGES INTERPRETATION. An individual is permitted
to make only one nontaxable rollover in an IRA in any one-year period. (IRC
§408(d)(3)(B)) In a 2014 Tax Court case, the court ruled that the one-rolloverper-year limit was applied on an aggregate basis; not separately to each IRA
owned. (Bobrow, TC Memo 2014-21)
PRIOR IRS GUIDANCE. Proposed regs published in 1981 provided that the
rollover limitation is applied on an IRA-by-IRA basis, which was also reflected
in IRS Pub 590, Individual Retirement Arrangements (IRAs), including some
specific examples. The IRS has now partially withdrawn that proposed regs to
reflect the more restrictive aggregate application of the rule, and says they will
revise Pub 590 to reflect the change.
IRS ONLY APPLYING AFTER 1/1/2015. The IRS says this change will not apply
to any rollover that involves a distribution occurring before 1/1/15.
PENALTIES!!! It is interesting to note that the taxpayer in the Bobrow case was
subject to penalties for understatement of tax, even though they followed the
guidance provided in proposed regulations and the IRS’s publication. This
should be taken into consideration when determining how to report a
transaction in 2014, regardless of the IRS’s announcement that it would not
apply the rule until 2015.
DIRECT ROLLOVERS NOT AFFECTED. Direct transfers from one IRA trustee
to another are not subject to the one-rollover-per-year limitation, and will not
be affected by this change. (Reg 209459-78)
Line 15 – IRA Distributions
Page 45
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
QUESTION
• Connie Cashstrapped
• January 15, 2014 withdrew $10,000 from IRA 1.
• March 10, 2014 withdrew $10,000 from IRA 2 and replenished IRA 1
• May 5, 2014 replenished IRA 2 from available cash.
• How much of the $20,000 of withdrawals is taxable in 2014?
ANSWER
If the distributions were in 2015, only the first rollover would be qualified. The
second rollover would be limited by the one-rollover-per-year rule.
However, the IRS says they will not apply that rule to rollovers that occur
before 1/1/2015, so for 2014 both of the rollovers qualify and neither of the
distributions will be taxable.
Line 15 – IRA Distributions
Page 46
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
IRA & RETIREMENT PLAN
MANDATORY DISTRIBUTION ISSUES
TWO CASES require retirement plan distributions to become mandatory:
A. AGE 70½. When a person reaches the required beginning date (RBD), or
B. INHERITED. After an owner of a retirement plan dies.
TWO SETS OF RULES. We will cover each of these rules.
NOTE: MEANING OF “RBD” is a distribution is required each year beginning
with the year you reach 70½. An exception applies to the very first distribution
– it may be taken as late as April 1 of the year following the year one reaches
age 70½. This date is named "required beginning date” (RBD).
HOW TO SPOT THE DIFFERENCE
WHO OWNS THIS IRA? Look at the titling of the IRA. You need to see an
account statement. Are two names or three names in the titling?
• ALIVE – 2 NAMES. I am still alive. My IRA title reads: “Capital Bank &
Trust, Trustee of the Traditional IRA of Michael P. Karll.”
First name – custodian – Capital Bank & Trust.
Second name – Account “owner” – your client – the client is alive.
• DEAD – 3 NAMES. If I die and leave the IRA to Lisa, title now reads:
“Capital Bank & Trust, Trustee of the Traditional IRA of Michael P. Karll,
Deceased; For the benefit of Lisa M. Ihm, Beneficiary.”
First name – custodian – Capital Bank & Trust.
Second name – decedent – Michael Paul Karll.
Third name – your client – inheritor – beneficiary – Lisa M. Ihm.
If your client’s name is third in line, the account is an inherited account!
ONE OF THREE TABLES is used in any minimum distribution calculation.
LIVING ACCOUNT OWNER. If the taxpayer owns the IRA use the table on
page 49. (A distribution is required even in the year of death!) A few folks
use another table - we discuss this special case on page 48.
INHERITOR OF ANOTHER’S ACCOUNT. The third table on page 54 is used
by taxpayers for minimum distributions from a decedent’s IRA.
Line 15 – IRA Distributions
Page 47
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
DISTRIBUTIONS AT AGE 70 ½
ALIVE – TWO NAMES
SIMPLIFIED RULES are the hallmark of this area. Minimum required
distributions are determined by dividing the owner’s account balance (revalued
annually) by a life expectancy factor (the “divisor”). The final regulations use
just two possible ways of determining the “divisor.”
1. ALL CLIENTS CAN USE THE “UNIFORM TABLE”. The participant’s age
is the age attained during the current calendar year. Each subsequent year’s
divisor is recalculated annually. This “Uniform Table” shown on page 49,
is used without regard to the actual age of the beneficiary. It is used even if
there is no beneficiary named for the retirement account.
2. LOOPHOLE: SPOUSE 10 YEARS YOUNGER. If the participant’s
spouse is the sole beneficiary of the account at all times during the
distribution year and is greater than 10 years younger than the participant,
the divisor may be determined from the actual joint and survivor life
expectancies of the participant and the spouse. See the final regulations or
Publication 590 for this table.
OTHER METHODS. There are no other methods. Use one of the two methods
shown above for all of your clients.
LIFETIME DISTRIBUTION SIMPLIFICATION. Two major simplifications are
made in the final regulations.
1) Marital status of the participant is determined on January 1 of each year.
Death or divorce after that date is disregarded until the next year. Further, a
change in beneficiary due to a spouse’s death is not recognized until the
next year.
2) Contributions and distributions made after December 31 of a calendar year
are disregarded for purposes of determining the minimum distribution
amount for the following year.
Line 15 – IRA Distributions
Page 48
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
UNIFORM TABLE-2002 FINAL REGS
(Distribution Divisors for Taxpayers Drawing From Own Account)
AGE
DIVISOR
AGE
DIVISOR
70
27.4
93
9.6
71
26.5
94
9.1
72
25.6
95
8.6
73
24.7
96
8.1
74
23.8
97
7.6
75
22.9
98
7.1
76
22.0
99
6.7
77
21.2
100
6.3
78
20.3
101
5.9
79
19.5
102
5.5
80
18.7
103
5.2
81
17.9
104
4.9
82
17.1
105
4.5
83
16.3
106
4.2
84
15.5
107
3.9
85
14.8
108
3.7
86
14.1
109
3.4
87
13.4
110
3.1
88
12.7
111
2.9
89
12.0
112
2.6
90
11.4
113
2.4
91
10.8
114
2.1
92
10.2
115+
1.9
USE AGE AT END OF YEAR
THE NEW FINAL REGULATIONS FOR MINIMUM DISTRIBUTIONS use this
table to determine required lifetime distributions for EVERYONE (almost).
Do NOT use this table for beneficiaries of a deceased owner.
Line 15 – IRA Distributions
Page 49
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
INHERITED PLAN DISTRIBUTIONS
THREE NAMES
SIMPLIFIED RULES AGAIN!! Normally two ways to determine the “divisor”.
1. PLAN BALANCE PAID OUT OVER BENEFICIARY’S LIFE. Used if a
beneficiary has been named and that beneficiary is a living person.
2. PLAN BALANCE PAID OUT OVER PARTICIPANT’S LIFE. Used if no
designated beneficiary is named or if designated beneficiary is not a living
person. Utilize participant’s remaining life expectancy as if no death.
OTHER METHODS. Many more possible scenarios may seem to exist when the
participant dies. In truth, most results will be determined by one of the two
methods shown above. However, there are still some differences when the
participant dies before RBD as compared to dying after RBD.
DESIGNATED BENEFICIARY DETERMINED AT DEATH. Required
distributions to beneficiaries who actually receive the benefits are now based
on their own life expectancies and not tied to another person’s life expectancy.
FINAL DETERMINATION – 9/30 OF YEAR AFTER DEATH. The designated
beneficiaries will be determined as of September 30 following the calendar
year of the owner’s death. This means any beneficiaries, who have received
their entire benefit or disclaimed their portion before this “final determination”
date, will not be considered when minimum distributions are determined.
SPOUSES. Spouses have additional options as they did under the old rules.
TRUSTS. If a trust is named as a beneficiary of a retirement plan, the underlying
beneficiary of the trust can be deemed to be the actual beneficiary of the
retirement plan for minimum distribution purposes if certain rules are followed.
MULTIPLE BENEFICIARIES—SEPARATE ACCOUNTS. When there are
multiple beneficiaries, all must be individuals, or none can use their own life
expectancy method for payouts. This is true unless the various beneficiaries
have “separate accounts” with separate proportionate accounting for
profits/losses as of the final determination date.
LIFE EXPECTANCY. Use the 2-page chart starting on page 52, “Distributions to
Beneficiaries” to determine the correct method of determining the minimum
distribution. In most cases, the “Single Life Expectancy Table” provided by
the IRS is used to determine the “divisor”. This table is shown on page 54.
Line 15 – IRA Distributions
Page 50
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT IRS LETTER RULING
FACTS
Husband Harry died.
His IRA had a trust listed as beneficiary.
Surviving Spouse was the sole beneficiary of the trust.
Trust gave Surviving Spouse sole authority and discretion to distribute.
Can Surviving Spouse roll the IRA into her own IRA?
RULING
Yes. Under the spousal exception, if the surviving spouse is the IRA’s sole
beneficiary with unlimited rights of withdrawal, they can rollover an inherited IRA
to the own IRA. The spousal exception does not apply if the IRA’s beneficiary is
a trust, even if the spouse is the trust’s sole beneficiary, unless the surviving
spouse has the sole authority and discretion under trust language to pay the IRA
proceeds to himself/herself. The surviving spouse met those requirements in
this case. (Letter Ruling 201423043)
RECENT SUPREME COURT RULING
RULING
The Bankruptcy Code allows a debtor to exempt “retirement funds” from a
bankruptcy, but the US Supreme Court unanimously held that funds in an
inherited IRA are not considered “retirement funds” as defined by the Bankruptcy
Code and, thus, are not exempt from the bankruptcy estate. They concluded
that inherited IRAs do not have the same characteristics as other types of IRAs,
such as traditional and Roth IRAs.
According to the Court, individuals who hold inherited IRAs: (1) can’t contribute
additional money to those accounts, (2) are required to make withdrawals
regardless of their age, and (3) can withdraw the entire balance at any time for
any purpose without triggering the 10% early withdrawal penalty.
The Court considered these characteristics more like a “pot of money that can be
freely used for current consumption”, rather than retirement funds set aside for
the time the individual stops working. Thus, the Court denied bankruptcy
exemption. (Clark v. Rameker, US Supreme Court, Case No 13-299)
Line 15 – IRA Distributions
Page 51
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
DISTRIBUTIONS TO BENEFICIARIES—2002 FINAL REGS
Use This For Beneficiaries Drawing From A Decedent’s Account
Other
Beneficiaries?
Separate
Accounts By
Determination
Date?
Options
(Also See
Note 1)
No
N/A
Option A1 or B
Or
Option C
All Individuals
Yes
Option D
No
Option A3 or A4
Not All
Yes
Option D
Individuals
No
Option A3
No
N/A
Longer of Option A1
or Option A5
Or
Option C
All Individuals
Yes
Option D
No
Option A4
Not All
Yes
Option D
Individuals
No
Option A5
No
N/A
Option A2
All Individuals
Yes
Option D
No
Option A3 or A4
Not All
Yes
Option D
Individuals
No
Option A3
No
N/A
Longer of Option A2
or Option A5
All Individuals
Yes
Option D
No
Option A4
Not All
Yes
Option D
Individuals
No
Option A5
No
N/A
Option A3
Yes
Yes
Option D
Non Spouse
Any Type
No
Option A3
(Not Person)
No
N/A
Option A5
Yes
Yes
Option D
Any Type
No
Option A5
Designated
Beneficiary
Participant
Reached
RBD?
No
Spouse
Yes
No
Non-Spouse
(Living Person)
Yes
No
Yes
No Benefic
No
N/A
N/A
Option A3
Designated
Yes
N/A
N/A
Option A5
Page 52
Line 15 – IRA Distributions
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
OPTIONS & NOTES
2002 FINAL REGS
Option
Description
A1
Begin distribution by 12-31- of yr following participant’s death
over spouse’s life expectancy in year after death (Recalculate)
A2
Begin distribution by 12-31- of yr following participant’s death
over beneficiary’s life expectancy in year after death (Fixed)
A3
Begin distribution by 12-31- of yr following participant’s death
entire interest within next 5 yrs
A4
Begin distribution by 12-31- of yr following participant’s death
over oldest beneficiary’s life expectancy in year after death (Fixed)
A5
Begin distribution by 12-31- of yr following participant’s death
over deceased owner’s life expectancy in year of death (Fixed)
B
Begin distribution by participants age 70½
over spouse’s life expectancy in that year (Recalculate)
C
Special rule for Spouse beneficiary. Rollover into spouse’s account and
begin distributions over spouse’s life expectancy by spouse’s age 70½
(Recalculate). In addition, the 10% premature penalty may apply since this
is now spouse’s own IRA.
D
Go back and look up rule for each separate beneficiary as if there were not
other beneficiaries.
Note
Description
1
Upon death of designated beneficiary, subsequent beneficiaries must take
remaining amounts in account over designated beneficiary’s fixed
remaining life expectancy calculated in the year of designated beneficiary’s
death and beginning in the year following designated beneficiary’s death.
“Fixed” means that the initial life expectancy divisor is reduced by 1.0 in each
subsequent year. Non-spouses use the fixed method.
“Recalculate” means that the life expectancy is recalculated in each subsequent
year. Only spouses are allowed to recalculate.
2002 Final Regulations changed the final determination date from “12-31- of the yr
following participant’s death” to “9-30- of the yr following participant’s death.”
Line 15 – IRA Distributions
Page 53
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
SINGLE LIFE EXPECTANCY TABLE—2002 FINAL REGS
(Distribution Divisors for Taxpayers Drawing From Decedent’s Account)
AGE
FACTOR
AGE
FACTOR
AGE
FACTOR
AGE
FACTOR
0
82.4
30
53.3
60
25.2
90
5.5
1
81.6
31
52.4
61
24.4
91
5.2
2
80.6
32
51.4
62
23.5
92
4.9
3
79.7
33
50.4
63
22.7
93
4.6
4
78.7
34
49.4
64
21.8
94
4.3
5
77.7
35
48.5
65
21.0
95
4.1
6
76.7
36
47.5
66
20.2
96
3.8
7
75.8
37
46.5
67
19.4
97
3.6
8
74.8
38
45.6
68
18.6
98
3.4
9
73.8
39
44.6
69
17.8
99
3.1
10
72.8
40
43.6
70
17.0
100
2.9
11
71.8
41
42.7
71
16.3
101
2.7
12
70.8
42
41.7
72
15.5
102
2.5
13
69.9
43
40.7
73
14.8
103
2.3
14
68.9
44
39.8
74
14.1
104
2.1
15
67.9
45
38.8
75
13.4
105
1.9
16
66.9
46
37.9
76
12.7
106
1.7
17
66.0
47
37.0
77
12.1
107
1.5
18
65.0
48
36.0
78
11.4
108
1.4
19
64.0
49
35.1
79
10.8
109
1.2
20
63.0
50
34.2
80
10.2
110
1.1
21
62.1
51
33.3
81
9.7
111+
1.0
22
61.1
52
32.3
82
9.1
23
60.1
53
31.4
83
8.6
24
59.1
54
30.5
84
8.1
25
58.2
55
29.6
85
7.6
26
57.2
56
28.7
86
7.1
27
56.2
57
27.9
87
6.7
28
55.3
58
27.0
88
6.3
29
54.3
59
26.1
89
5.9
USE AGE AT END OF YEAR
Line 15 – IRA Distributions
Page 54
Line 15 – IRA Distributions
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 16 – PENSIONS & ANNUITIES
QUALIFIED DOMESTIC
RELATIONS ORDER
(QDRO)
DISTRIBUTIONS TAXABLE TO RECIPIENT SPOUSE. A spouse or former
spouse of a plan participant who receives any distribution or payment made
pursuant to a QDRO (IRC §414(p)) is an alternate payee and is subject to tax
on the distributions. (IRC §402(e)(1)(A); IRC §414(p)(8))
RECENT TAX COURT CASE
FACTS
Ex-Wife awarded part of Ex-Husband’s 401(k) in divorce decree.
Divorce decree also created a “payment to complete division of community
estate” as a property settlement.
Ex-Wife received distribution from Ex-Husband’s 401(k).
Ex-Wife claimed distribution was not taxable to her because Ex-Husband was
indebted to her and paid her from his 401(k) to satisfy the debt.
Is the distribution taxable to Ex-Wife?
RULING
Yes. As the alternate payee, she is subject to tax on the distributions. If property
is transferred incident to divorce, the transferee’s basis is the adjusted basis of
the transferor. (IRC §1041(b)) The court noted that a distribution made pursuant
to a QDRO may be taxable to the participant spouse, rather than the alternate
payee (recipient spouse), where the distribution discharges a legal obligation, but
that was not the case here. (Weaver-Adams, TC Memo 2014-73)
Line 16 – Pensions & Annuities
Page 55
Line 16 – Pensions & Annuities
BRASS TAX Presentations
1040/540 TUNEUP 2014
OTHER PENSION ISSUES
20 08
FOR 2008 & ON - EXXON VALDEZ LITIGATION
SPECIAL RULES FOR AMOUNTS RECEIVED FROM EXXON VALDEZ
LITIGATION. Special rollover rules are provided to “qualified taxpayers.” Any
“qualified taxpayer” who receives any “qualified settlement income” in a tax year
may, at any time before the end of the tax year in which the income is received,
make one or more contributions to an eligible retirement plan where the taxpayer
is a beneficiary, in amounts not to exceed the lesser of: (1) $100,000 (reduced
by the amount of qualified settlement income contributed to an eligible retirement
plan in earlier years under this rule) or (2) the amount of qualified settlement
income received by taxpayer during the current tax year. Eligible retirement plan
include IRAs, qualified plans, annuity plans, 403(b) plans and 457(b) plans.
No portion of qualified settlement income received by a qualified taxpayer is
treated as self-employment income nor treated as wage income.
“QUALIFIED TAXPAYER” IS DEFINED as (1) any individual who is a plaintiff in
the civil action In re Exxon Valdez, No. 89-095-CV (HRH) 25 (Consolidated) (D
Alaska) or (2) any individual who is a beneficiary of the estate of a plaintiff in item
(1) above, who acquired the right to receive qualified settlement income from that
plaintiff and was the spouse or an immediate relative of that plaintiff.
“QUALIFIED SETTLEMENT INCOME” IS DEFINED as any interest and punitive
damage awards which are (1) includible in taxable income and (2) received in
connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) 25
(Consolidated) (D Alaska). Amounts may be received pre- or post- judgment, as
lump sums or periodic payments, and be related to a settlement or judgment.
EFFECTIVE DATE. October 3, 2008.
Emergency Economic Stabilization Act of 2008.
20 08
FOR 2008 & ON - ROLLOVER OF MILITARY DEATH BENEFITS
ROLLOVERS. Eligible survivors of a military member may receive a military
death gratuity and/or proceeds from Service members’ Group Life Insurance
(SGLI) benefits. Normally, both of these amounts are excludable from income.
Survivors who receive these benefits can contribute all or part of the amounts
received to a Roth IRA or a Coverdell ESA. Amounts contributed are treated as
“qualified rollover contributions.” and as nontaxable investments which add to
basis. Rollover must occur within 1 year of receipt of payment, or 1 year after
06-17-2008 for payments received after 10-6-2001 and before 06-17-2008.
Line 16 – Pensions & Annuities
Page 56
Line 16 – Pensions & Annuities
BRASS TAX Presentations
1040/540 TUNEUP 2014
ROTH IRA. These rollovers are in addition to the normal annual Roth IRA
contribution limits. In addition, the annual income phase-out limit is ignored.
The rollover contribution cannot exceed the total amounts received from both the
military death gratuity and SGLI benefits less the amount contributed to an ESA.
The rule allowing only one rollover to a Roth IRA during any 12-month period
does not apply here.
COVERDELL ESA. These rollovers are in addition to the normal annual ESA
contribution limits. In addition, the annual income phase-out limit is ignored.
The rollover contribution cannot exceed the total amounts received from both the
military death gratuity and SGLI benefits less the amount contributed to a Roth
IRA. The rule allowing only one rollover to an ESA during any 12-month period
does not apply here.
EFFECTIVE DATE. For payments made on account of deaths occurring on or
after October 7, 2001.
2008 Heroes Act.
2007
FOR 2007 & ON – EXCLUSION FOR PUBLIC SAFETY OFFICERS
PUBLIC SAFETY OFFICERS CAN EXCLUDE DISTRIBUTIONS USED TO PAY
FOR HEALTH AND LONG TERM CARE INSURANCE. An annual election can
be made by an “eligible retired public safety officer” (PSO) to exclude from gross
income any distribution from a Code Section 414(d) governmental plan (that is a
qualified trust, Section 457 plan, Section 403(a) plan or Section 403(b) plan) that
is used for health and long-term care premiums. The premiums must be for
insurance for the employee, spouse or dependents. The insurance plan does
not have to be a plan sponsored by the employer. The annual amount
excludible is the lesser of the actual insurance premiums paid or $3,000. Check
the Form 1099-R for gross and taxable amounts of the pension. They may be
different.
“ELIGIBLE RETIRED PUBLIC SAFETY OFFICER” is an individual who, by
reason of disability or attainment of normal retirement age, is separated from
service with the employer that maintains the eligible retirement plan from which
the distributions are made. Public safety officers include law enforcement
officers, firefighters, rescue squad workers and ambulance crew members.
DIRECT PAYMENT TO INSURER REQUIRED. This exclusion applies only if
payment of premiums is made directly to the provider of the insurance. Thus a
deduction must be taken directly from the eligible retirement plan. The exclusion
does not apply to premiums paid by the employee and reimbursed with pension
distributions.
Pension Protection Act Of 2006.
Line 16 – Pensions & Annuities
Page 57
Line 16 – Pensions & Annuities
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 20 – SOCIAL SECURITY
SOCIAL SECURITY
2014
SOCIAL SECURITY EARNINGS LIMITS
I am still working and want to receive Social Security. What is my earnings limit
before I lose some of my Social Security?
1) EARNINGS LIMIT AT RETIREMENT AGE—NONE.
2) EARNINGS LIMIT PRIOR TO RETIREMENT AGE. The maximum annual
earnings level for Social Security recipients aged below full retirement age is:
Year 2009-2011
Year 2012
Year 2013
Year 2014
Year 2015
$14,160 ($1,180/Mo)
$14,640 ($1,220/Mo)
$15,120 ($1,260/Mo)
$15,480 ($1,290/Mo)
$15,720 ($1,310/Mo)
Taxpayer forfeits $1 of Social Security for each $2 of earnings above the cap.
3) PERSONS REACHING RETIREMENT AGE DURING THE YEAR: The
maximum monthly earnings level for Social Security recipients prior to the month
in which they reach full retirement age during the year is:
Year 2009-2011
Year 2012
Year 2013
Year 2014
Year 2015
$3,140/Mo ($37,680 Annual)
$3,240/Mo ($38,880 Annual)
$3,340/Mo ($40,080 Annual)
$3,450/Mo ($41,400 Annual)
$3,490/Mo ($41,880 Annual)
Taxpayer forfeits $1 of Social Security for each $3 of earnings above the cap in
those months prior to reaching retirement age. This applies only to earnings for
months prior to retirement age. Upon reaching retirement age, there is no limit.
4) DELAYED RETIREMENT CREDIT: A retired worker, beginning with the
month in which he/she reaches full retirement age and ending with the month
prior to attainment of age 70, may earn a delayed retirement credit for any month
for which the retired worker requests that benefits not be paid even though
he/she is already on the benefit rolls.
SOCIAL SECURITY & MEDICARE TAX & EARNINGS LIMITS. These limits are
provided with the discussion for Schedule SE on page 209.
Line 20 – Social Security
Page 58
Line 20 – Social Security
BRASS TAX Presentations
1040/540 TUNEUP 2014
“NORMAL RETIREMENT AGE” FOR
SOCIAL SECURITY
Currently age 66 is the “normal retirement age” for social security. Beginning in
2020, the normal retirement age will begin to increase again.
YEAR OF BIRTH
RETIREMENT AGE
AGE 62 BENEFIT
1943-1954
66 years
75.0%
1955
66 years, 2 months
74.2%
1956
66 years, 4 months
73.3%
1957
66 years, 6 months
72.5%
1958
66 years, 8 months
71.7%
1959
66 years, 10 months
70.8%
1960 and later
67 years
70.0%
2014 Retirees Are Here
Begins in 2021
2014
SOCIAL SECURITY EARNINGS ANNUAL COLA
COST OF LIVING ADJUSTMENT: The annual COLA adjustment for social
security payments takes place with the January payment. The annual COLA for
each year is given below. In addition, the maximum social security benefit and
the estimated average social security benefit are also given below.
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
COLA
3.30%
2.30%
5.80%
0%
0%
3.60%
1.70%
1.50%
1.70%
Max Benefit
$2,116/Mo
$2,185/Mo
$2,366/Mo
$2,366/Mo
$2,366/Mo
$2,513/Mo
$2,533/Mo
$2,642/Mo
$2,663/Mo
Avg Benefit
$1,055/Mo
$1,090/Mo
$1,186/Mo
$1,186/Mo
$1,186/Mo
$1,240/Mo
$1,275/Mo
$1,306/Mo
$1,328/Mo
MEDICARE COST OF LIVING ADJUSTMENT: The annual COLA adjustment
for Medicare premiums is discussed on page 165.
Line 20 – Social Security
Page 59
Line 20 – Social Security
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 21 – OTHER INCOME
LONG-TERM CARE INSURANCE BENEFITS
IN GENERAL. There is an income exclusion for long term care benefits paid to
plan beneficiaries from Federally “tax qualified” LTC policies.
PER DIEM LIMITATION. For each year there is an excludable per diem limit. It is
the LARGEST of the dollar amount as shown below or ACTUAL COSTS
INCURRED for qualified long-term care.
Per Diem Limit
Yearly Total
2013
2014
2015
$320.00
$330.00
$330.00
$116,800.00
$120,450.00
$120,450.00
FORMS. Payments are reported on Form 1099-LTC. Form 8853 calculates the
taxability. Any taxable amount goes on Form 1040, line 21.
ACCELERATED DEATH BENEFITS
IN GENERAL. There is an exclusion for accelerated death benefits paid to
terminally ill or chronically ill persons from life insurance. Certain sales of life
insurance policies by the same persons are also excluded. (IRC §101(G))
EXCLUDABLE AMOUNTS. The dollar amounts are for:
CHRONICALLY ILL – Same per diem limits as for long-term care, above.
TERMINALLY ILL – ALL payments are fully tax-free.
FORMS. Payments are reported on Form 1099-LTC. Form 8853 calculates the
taxability. Any taxable distribution is shown on Form 1040, line 21.
CALIFORNIA CONFORMITY
California conforms to the Federal treatment of long term care benefits and
accelerated death benefits. Prior to 7-1-2001, California allowed “non-qualified”
LTC policies to be issued that offered more generous benefits than the Federal
“qualified” plans. These policy benefits are fully taxable.
Line 21 - Other Income
Page 60
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
SETTLEMENTS
DAMAGES FOR PERSONAL INJURY ARE EXCLUDABLE. Damages received
in a settlement are generally taxable unless received for personal injury. (IRC
§104(a)(2)) The term damages means an amount received through prosecution
of a legal suit or action, or through a settlement agreement entered into in lieu
of prosecution.
DISCRIMINATION OR INJURY TO REPUTATION. Damages received on
account of personal nonphysical injuries or nonphysical sickness are not
excluded from gross income. (Rev Rul 2007-14, TC Memo 2007-286) Thus,
damages received based on a claim of employment discrimination, or injury to
reputation, are not excluded from gross income. (H Rept No 104-586 (PL 104188) p144)
RECENT TAX COURT CASE
FACTS
Diane Discriminatedagainst sued former employer under civil rights statutes and
the Americans with Disabilities Act.
Lawsuit was settled.
Diane received damages labeled as “for wages and emotional distress”.
Is the settlement taxable?
RULING
Yes. The Tax Court held that the settlement proceeds were clearly allocated to
damages that did not include physical injury or physical sickness. (Mazie Green,
TC Memo 2014-23)
PUNITIVE DAMAGES. Damages for personal injury do not include punitive
damages and therefore are not excludable from income. (IRC §104(a)(2))
EMOTIONAL DISTRESS. Emotional distress is not considered a physical injury
or physical sickness for purposes of the exclusion from income of damages
received on account of physical injury or physical sickness. (IRC §104(a)); H
Rept No. 104-586 (PL 104-188) p144) Emotional distress includes physical
symptoms (e.g. insomnia, headaches, stomach disorders, depression, sleep
disorders, high blood sugar) that can result from the emotional distress.
WORKER’S COMPENSATION CLAIMS. Gross income does not include
amounts received under workmen’s compensation acts as compensation for
personal injuries or sickness. (IRC §104(a)(1))
Line 21 - Other Income
Page 61
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Patty Professor filed workers comp claim and another claim seeking damages for
colleague’s gross negligence.
Patty received $210,000 settlement for emotional distress.
Is the settlement taxable?
RULING
The Tax Court ruled that the proceeds were not excludable because the
settlement agreement specifically stated that the proceeds were for “emotional
distress damages only” and did not indicate intention for proceeds to be in
exchange for a workers comp claim.
AMOUNTS REC’D THROUGH ACCIDENT OR HEALTH INSURANCE. Gross
income does not include amounts received through accident or health insurance
for personal injuries or sickness. However, this exclusion does not apply if the
insurance was paid for by the employer or were pre-tax contributions of the
employee. (IRC §104(a)(3))
RECENT TAX COURT CASE
FACTS
Employee was covered by Employer’s group long-term disability policy.
Employee stopped working when diagnosed with Bell’s Palsy.
Insurer denied claim for disability benefits.
Employee sued and won settlement for $65,000.
Is the settlement taxable?
RULING
Yes. The Tax Court concluded that the payment was made to satisfy the
Employee’s claim for disability benefits, not for any physical injuries or illness.
Furthermore, the IRC §104(a)(3) income exclusion didn’t apply because the
policy premiums were made by Employer and not included in Employee’s
income. (James D. Ktsanes, TC Summ Op 2014-85) The payment should be
reported on a W-2 as third-party sick pay.
Line 21 - Other Income
Page 62
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
CANCELLATION OF DEBT
ISSUES
(1) COD INCOME EXCLUSION
ELIMINATING COD INCOME BY USING QUALIFIED PRINCIPAL RESIDENCE
INDEBTEDNESS (QPRI) EXCLUSION. Federal law for 2007-2014 allows a
limited exclusion of COD income for homeowners.
THIS IS AN ELECTION. Taxpayers with debt relief on a loan secured by
principal residence may elect to exclude COD income on up to $2
Million ($1 Million for MFS) of QPRI.
QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS (QPRI). This
affects ONLY what we call “Acquisition Debt”. This is debt incurred to
buy, build, or substantially improve a qualifying residence – this is from
IRC §163(h)(3)(B)(i)(I). If improvements were made without incurring
additional debt to finance them, the improvements do not increase the
qualified debt!
REFINANCING ALLOWED, but QPRI may not exceed balance of prior
loan immediately before refinance (unless some proceeds of refinance
are used directly to finance substantial improvement).
EXCESS EQUITY DEBT is not excludable under this provision. The
excess might be excludable using the insolvency exception.
PRINCIPAL RESIDENCE ONLY. Vacation homes, rentals and consumer
debt do not qualify for this exclusion.
REDUCE BASIS BY EXCLUSION. Any exclusion claimed reduces basis
of the property (not below zero). If the property is disposed of (via short
sale or foreclosure), taxpayer no longer has the home after cancellation
of the debt. Thus no reduction is required.
RENEGOTIATED LOANS/LOAN MODIFICATIONS. If the loan was
reduced without a sale of the property, we have COD income. The
exclusion can apply (but ONLY to the Acquisition Debt), but the basis
must be reduced. This may lead to a future tax liability when the home
is sold.
Line 21 - Other Income
Page 63
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
PARTIAL CALIFORNIA CONFORMITY
CALIFORNIA QPRI EXCLUSION FINALLY EXTENDED FOR 2013. California
extended the qualified principal residence indebtedness exclusion, but only
through 12/31/2013. The federal exclusion has been extended through 2014,
but CA has not yet passed legislation to extend it for 2014.
PRIOR YEARS CA PARTIALLY CONFORMED TO QPRI EXCLUSION
2007 – 2013 California conformed to the federal QPRI exclusion with the
following 2 differences:
1) CA limits the amount of qualified residence debt to $400,000 for
married/RDP filing separate returns and $800,000 on all other returns. The
federal limit is $2 million for all taxpayers (except MFS is a $1 million limit).
2) CA limits the actual debt relief that can be excluded to $125,000 for
married/RDP filing separate and $250,000 for all other returns. Federal law does
not limit the actual debt relief amount.
CA CONFORMS TO ALL OTHER COD EXCLUSION RULES
RECENT TAX COURT CASE
FACTS
Married Couple took out home equity loan on Arizona house.
Used proceeds to build new principal residence in Florida.
After moving to Florida, Arizona home sold in foreclosure.
Received Form 1099-C for COD income.
Does the COD qualify for the QPRI exclusion?
RULING
Married Couple argued that they were entitled to an exclusion of up to $2M for
discharge indebtedness on a principal residence, according to IRC
§108(a)(1)(E). The Tax Court disagreed, stating that the QPRI exclusion applies
only to debt used to acquire or improve the same residence secured by the loan.
Because the Florida residence was acquired with the proceeds of the AZ home
equity loan, the couple was not eligible for the exclusion. (The debt was equity
debt, not acquisition debt.) (Said H. Koriakos, TC Summ Op 2014-70).
Line 21 - Other Income
Page 64
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(2) §108(i) DEFERRED COD INCOME MUST BE REPORTED IN 2014-2018
2009 – 2010 COD DEFERRAL REPORTED IN 2014-2018. At the
taxpayer's election, business COD income in 2009 and 2010 could be deferred
and included in gross income ratably over a period of five tax years beginning
with 2014 through 2018. (Code Sec. 108(i)(1))
HOW THE ELECTION WAS MADE. The election was made by attaching a
statement to the return in the year the COD occurred. The statement had to be
attached to a timely filed (including extensions) original tax return for the year
in which the reacquisition occurred. (Code Sec. 108(i)(5)(B)(i), Rev Proc 200937) Form 982 did not indicate that the election had been made.
NO OTHER EXCLUSION CAN APPLY NOW. If the deferral election was
made, the other exclusions will not apply to that income. (Code Sec.
108(i)(5)(C))
TAXPAYER HAD TO STAY IN BUSINESS. In the case of the taxpayer’s death,
the liquidation or sale of substantially all the taxpayer’s assets (including in a
bankruptcy case), the cessation of business by the taxpayer, or similar
circumstances, any item of COD that was deferred under this rule and had not
previously been taken into account must be taken into account in the tax year in
which that event occurs. (Code Sec. 108(i)(5)(D)(i))
WHERE TO REPORT THE INCOME.
o
o
o
o
o
o
Nonbusiness debt – Form 1040 Line 21 Other Income
Business debt – Schedule C (subject to SE)
Rental debt – Schedule E (passive)
Farm debt – Schedule F (subject to SE)
Farm rental – Form 4835
Investment debt – Investment income
CALIFORNIA NON-CONFORMITY TO §108(i)
CALIFORNIA DID NOT CONFORM TO THIS PROVISION. Therefore, the COD
would have been reported in the year it occurred (2009 or 2010) on the CA
return. When 1/5 of the income is reported on the federal return in each year
2014-2018, a state adjustment to remove the income will be required, since the
income was already reported on the state return in the year of discharge.
Line 21 - Other Income
Page 65
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(3) MORTGAGE ASSISTANCE PAYMENTS
Taxpayers who are experiencing a financial hardship may qualify for state
assistance to pay their house payments.
SAFE HARBOR – NOT REQUIRED TO USE! The IRS provides a safe-harbor
that has given many people the impression that they are not entitled to the tax
deduction for the interest paid by the assistance. It is imperative to remember
that a safe-harbor may be used, it is not required! A safe-harbor often provides
a less beneficial tax treatment, but with the surety that the position will not be
challenged. In this instance, using the safe-harbor would result in the loss of
significant tax deductions. Do NOT use the safe-harbor in these situations!
Interest paid by mortgage assistance payments is deductible.
MORTGAGE ASSISTANCE PROGRAM PAYMENTS ARE TAX-FREE. The IRS
issued a notice stating that payments made under state programs promote the
general welfare. The IRS has consistently held that payments made under
governmental programs for the promotion of the general welfare are not
includible in the individual recipient’s gross income. Therefore, the IRS says
that these payments to or on behalf of a homeowner are excluded from gross
income under the general welfare exclusion. (Notice 2011-14) The same
treatment applies to pay-for-performance payments, where borrowers receive
five annual principal reductions of $1,000 if they remain compliant with their
new payment schedules.
INTEREST AND TAXES PAID BY GOV’T ARE DEDUCTIBLE. Payments made
under these programs are considered to be made to the homeowner, who then
uses them to pay their house payment (even though the payment goes direct
from the government to the bank). The homeowner is not required to include
the assistance in income, but is entitled to a tax deduction for the interest they
paid, or that was paid on their behalf. While this seems like “double-dipping”,
it is the same tax treatment that a military member or clergy receives when he
receives a tax-free housing allowance but still gets a tax deduction for his
interest expense. The receipt of the aid is not taxable but the payment of the
interest is tax deductible.
Line 21 - Other Income
Page 66
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
REPORTING DOCUMENTS. The IRS instructed lenders that when preparing
Form 1098 they should not include the amount of interest paid by the assistance
programs in Box 1. In our example, if the Form 1098 is completed properly
Box 1 should be $0. (Most forms we have seen are completed improperly and
show $23,000 in Box 1.) In any case, we believe the taxpayer is entitled to
deduct the mortgage interest that was paid on his behalf. To avoid a matching
notice from the IRS’s computer, enter the mortgage interest on Schedule A on
the line for “Home mortgage interest not reported to you on Form 1098”.
Line 21 - Other Income
Page 67
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(4) INDEPENDENT FORECLOSURE REVIEW
OVERVIEW. As part of consent orders with federal banking regulators, the Office
of the Comptroller of the Currency (OCC), the Office of Thrift Supervision
(OTS), and the Board of Governors of the Federal Reserve System (FRB), the
Independent Foreclosure Review was established to determine whether eligible
homeowners suffered financial injury because of errors or other problems
during their home foreclosure process between 1-1-2009 and 12-31-2010.
CASH PAYMENTS RECEIVED IN 2013. Agreements were reached that ended
the Independent Foreclosure Review for participating servicers and resulted in
all eligible borrowers whose homes were in any stage of the foreclosure
process in 2009 or 2010 (whether or not they requested a review) and whose
mortgages were serviced by one of 13 servicers or their affiliates receiving a
payment under the Agreement. Almost 4 million households received
payments ranging from $300 to $125,000 during the spring of 2013.
DEBTORS MAY STILL GET PAYMENTS. A debtor may not have received their
payment because the bank did not have their forwarding address. Their checks
would have been returned as undeliverable. They would also not have received
their 1099s reporting the payments. However, the IRS would have received a
copy of the 1099, so the debtor is likely to receive a CP-2000 notice from the
IRS proposing an assessment of additional tax (or a preparer may discover a
1099 for an attempted payment when reviewing a taxpayer’s Wage and Income
Transcript). Those debtors can still claim their payments by contacting the
consulting firm that handled the payments. To find contact information for the
firm that handled payments, go to www.IndependentForeclosureReview.com .
WHEN SHOULD INCOME BE REPORTED? Debtors had a legal right to receive
the payments in 2013, and would have received them if they had simply
provided the bank with their forwarding address. As a result, the debtor had
constructive receipt of the payment in 2013, regardless of when the payment
was actually received, and the income must be reported on the 2013 return.
TAX EFFECTS OF PAYMENTS. Payments received in connection with the
Independent Foreclosure Review Payment Agreement may be subject to
taxation depending on the borrower’s individual circumstances.
SECTION A: “BASE PAYMENT, WHICH MAY BE REPORTABLE AS
INCOME.” This is a lump sum payment that does not represent
reimbursement of any particular amounts. The entire “Base payment” is
generally subject to taxation. Payments of $600 or more will be reported on
a Form 1099 MISC. (The 1099-Misc indicates that these payments are not
COD which can be excluded. It appears these payments are punitive
damages and taxable.)
Line 21 - Other Income
Page 68
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
SECTION B: “RETURN OF MORTGAGE INTEREST YOU PAID.” This
payment may be taxable to the extent the borrower received a tax benefit
from the deduction of the interest in a prior year. Payments of $600 or
greater will be reported to the IRS on Form 1098 (in the box for “Interest
Refunded).
SECTION C: “RETURN OF EQUITY ON YOUR HOME.” The borrower will
not receive a tax document related to this portion of the payment, but the
amount may still be subject to taxation depending on the borrower’s
individual circumstances. (This would be additional selling price, if the
foreclosure price was used when originally reporting the transaction. If the
property was a principal residence or personal use property sold at a loss,
this will probably not change the tax, so since no reporting documents are
issued, no reporting is probably required. However, if the property was a
business or rental property, the additional sale price will have to be
reported. Note that if the loan was nonrecourse and the entire loan balance
was used as the disposition price, then this additional payment will not
create additional income.)
SECTION D: “INTEREST ON OTHER PAYMENT COMPONENTS.” This
payment represents a payment of interest due to the borrower on the
amounts specified in Sections A, B, and C above and/or Section E below.
Payment of interest will be reported on a Form 1099 INT.
SECTION E: “RETURN OF FEES YOU PAID.” These payments are not
being reported to the IRS or state agencies, so the borrower will not receive
a tax document related to this portion of the payment, but the amount may
still be subject to taxation depending on the borrower’s individual
circumstances. (If the property was a principal residence or personal use
property sold at a loss, this payment is probably immaterial, but if the
property was business or rental property, the reimbursement of fees used as
selling expenses when originally reported will result in additional income.)
TAX WITHHOLDING (SUBTRACTED FROM PAYMENT). If a borrower does
not return tax information on the Form W-9 as requested by the Paying
Agent, then the Paying Agent is required by law to automatically withhold
certain amounts. These amounts will be subtracted from the borrower’s
payment and noted in the letter enclosed with the check. The Paying Agent
will report such amounts to the IRS and to borrowers on a Form 1099 MISC
and/or a Form 1099 INT.
Line 21 - Other Income
Page 69
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
INTERNET RESOURCES.
https://independentforeclosurereview.com/TaxInfo.aspx (Tax information)
www.federalreserve.gov/newsevents/press/bcreg20130409a1.pdf (Chart)
http://www.federalreserve.gov/consumerinfo/independent-foreclosure-reviewpayment-agreement.htm (Frequently asked questions)
(5) ATTORNEY GENERAL SETTLEMENT
OVERVIEW. In February 2012, 49 state attorneys general and the federal
government announced a historic joint state-federal settlement with the
country’s five largest mortgage servicers: Ally/GMAC, Bank of America, Citi,
JPMorgan Chase and Wells Fargo.
The settlement provides about $25 billion in relief to distressed borrowers and
direct payments to states/federal government. It is the largest multistate
settlement since the Tobacco Settlement in 1998. The settlement provides
benefits to borrowers whose loans are owned by the settling banks as well as to
borrowers whose loans they service. State attorneys general anticipate the
settlement’s requirement for principal reduction will show other lenders that
principal reduction is one effective tool in combating foreclosure and that it
will not lead to widespread defaults by borrowers who really can afford to pay.
ST
HOMEOWNERS NEEDING LOAN MODIFICATIONS NOW, INCLUDING 1
AND 2ND LIEN PRINCIPAL REDUCTION. The servicers are required to work
off up to $17 billion in principal reduction loan modifications and other forms
of loss mitigation nationwide. Eligible borrowers will be contacted by the
servicers and will receive letters offering principal reductions or other
modifications starting in June 2012. This modification process will continue
for approximately 3 years. Borrowers who were denied modifications in the
past or received modifications without principal write-down should re-apply.
BORROWERS WHO ARE CURRENT, BUT UNDERWATER. Eligible borrowers
will be able to take advantage of today’s historically low interest rates by
refinancing their mortgage despite their negative equity. Servicers agreed to
provide up to $3 billion in refinancing relief nationwide.
CASH PAYMENTS FOR FORECLOSURES IN 2008 - 2011. Payments were
distributed to borrowers who returned a claim form by January 18, 2013. There
was no requirement to prove financial harm. Actual payments were $1,484.21
per home foreclosed! Rev Ruling 2014-2 says these payments are additional
selling price. Since eligible loans were generally made on principal residences,
this added sales price may not be taxable income if §121 exclusion applies.
Line 21 - Other Income
Page 70
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
PAYMENTS NO LONGER AVAILABLE. If a debtor did not receive and return
the claim form they are not eligible for a payment, so those who did not give
the bank a forwarding address will not be able to claim payments.
INTERNET RESOURCES.
www.nationalmortgagesettlement.com
(6) HORN SETTLEMENT
CIVIL LITIGATION AGAINST BANK OF AMERICA. Borrowers who had ARMs
with B of A often received Forms 1098 in 2009-2012 that underreported the
amount of deferred interest they paid in those years. As the result of a class
action settlement, Bank of America issued thousands of corrected Forms 1098
for years 2010 - 2012, many reporting thousands of dollars of additional
deductible interest.
AMENDED RETURNS. Amended returns can be filed for years that are not closed
by the statute of limitations to claim appropriate refunds. (2010 returns are
closed to statute for refund, but the corrected 1099s were issued in time that
refunds could have been claimed, so taxpayers who did not file amended
returns on time will not be able to get those refunds.)
CASH PAYMENTS IN LIEU OF 2009 AMENDMENTS. 2009 returns are already
closed to statute, so affected borrowers can receive a cash payment from B of
A in lieu of the tax refund for that year. They had to return a claim form no
later than July 13, 2014 to be eligible for the cash payment. This payment
should not be taxable on the federal return, as it is in lieu of a refund of taxes
paid. However, it may be taxable on the CA return if the debtor benefitted from
an itemized deduction for the state income taxes paid.
CASH PAYMENT TO DEFRAY RETURN PREP COSTS. $40 cash payment for
each 1098 will be issued after the settlement is approved by the courts
(expected to be received in 2014). That payment is meant to help defray tax
preparation costs related to the corrected forms. (The tax deduction for
preparing amended returns may have to be reduced by the $40 received.)
Line 21 - Other Income
Page 71
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(7) TAXATION OF SETTLEMENTS FROM PRIVATE LAWSUITS
REPORTING DOCUMENTS NOT ALWAYS CORRECT. Reporting documents
are often incorrect. Remember that it is a tax preparer’s responsibility to
correctly report the tax on the return, regardless of whether reporting
documents are received or correct, and that incorrect reporting documents are
not a defense against penalties. The nature of the settlement should be
explored and the settlement amount included when appropriate.
RECENT TAX COURT CASE
FACTS
Homeowner sued mortgage company for fraud.
In settlement, principal balance reduced by $35,000 (Form 1099-C issued).
In settlement, interest rate reduced.
In settlement, received $10,000 that he had to pay to 2 mortgage service
companies (Form 1099-MISC issued).
How is settlement reported on tax return?
RULING
The IRS argued that the $10,000 payment had to be included in income because
settlement proceeds are included in income unless they are damages received
due to personal injuries or sickness. The Tax Court disagreed, based on the
homeowner’s binding commitment to turn the amount over to the mortgage
companies. Even though he received a Form 1099-MISC showing $10,000 of
non-employment compensation, the taxpayer was not required to include the
$10,000 in income. (Mohamed Kadir, TC Summ Op 2014-43) The IRS didn’t
raise the cancellation of debt issue related to the $35,000 in this case, but it
would likely be taxable unless Homeowner qualified for an exclusion.
AVOIDING A CP-2000 NOTICE. The IRS’s computer routinely matches Form
1099-C to the taxpayer’s return. The only place it looks for the amount shown
on Form 1099-C is Line 21 of the Form 1040, so always be sure it appears
there! If the amount is not taxable, make another entry on Line 21 showing the
amount as a negative number and explaining why it is not taxable (i.e. “COD
excluded – See Form 982”, or in the example above “Form 1099-MISC issued
in error”).
Line 21 - Other Income
Page 72
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(8) LOAN MODIFICATONS
COSTS. The Tax Court recently held that debt resolution fees were deductible
under IRC Sec. 212 as miscellaneous itemized deductions, subject to the 2%
floor. (Thomas Tran, TC Summ. Op 2012-110 (Tax Ct))
INTEREST ROLLED INTO NEW LOAN. IMPORTANT! Many times when a
loan is modified, past due interest is rolled into the new principal balance.
When this occurs, future payments of principal are really payments of that
accrued interest, and the payment of the accrued interest will NOT appear on
Form 1098. It is extremely important that records be maintained to account for
the accrued interest that has been converted to principal so that interest
deductions can be taken as principal is paid down.
EXAMPLE: MOLLY MODIFIED.
In 2010, Molly modified a loan on her rental property. See the excerpt
from her modification documents below.
In 2011, Molly’s Form 1098 indicated that she paid $20,000 in interest and
$765 in principal payments on her loan.
In 2012, Molly sold her rental in a short sale on January 1, 2012. Her Form
1098 says she paid $14,000 in interest for the year.
QUESTION - 2010. What are her 2010 deductions?
ANSWER - 2010. The “Delinquent Interest” is not currently deductible.
The “Fees and Costs” are financing costs and should be amortized over the
remaining loan term.
The “Delinquent Escrow” amount should have been deducted when the
bank paid the real estate taxes to the county, when the homeowner
borrowed the money from the bank to pay the taxes.
Line 21 - Other Income
Page 73
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
QUESTION - 2011. What are her 2011 deductions?
ANSWER - 2011. The $20,000 in interest is deductible.
In addition, the $765 of principal payments is actually old loan accrued
interest. Remember that virtually all loan documents say that payments
made are credited to interest first and then to principal. Thus deduct the
$765 on the line labeled “Mortgage Interest Not On Form 1098.”
Deduct the appropriate amount of the “Fees and Costs” that you started
amortizing in 2011.
QUESTION - 2012. What are her 2012 deductions?
ANSWER - 2012. The $14,000 in interest is deductible. (The Form 1098
indicates that the bank chose to credit the sales proceeds from the short sale
to first pay the current interest.
Remaining short sale proceeds would then be applied to old loan accrued
interest. Thus deduct the remaining $31,910 ($32,675 - $765 deducted in
2011) on the line labeled “Mortgage Interest Not On Form 1098.”
Deduct the entire remaining amount of the “Fees and Costs” that you started
amortizing in 2011 now that Molly has disposed of the loan.
(9) DEFERRED PRINCIPAL REDUCTIONS
OVERVIEW. Banks are currently modifying loans and discharging part of the
principal balance (forbearance amount) under the Home Affordable
Modification Program (HAMP-PRA). (Revenue Procedure 2013-16)
CANCELLATION OVER A 3-YEAR PERIOD. If the loan is in good standing on
the 1st, 2nd and 3rd annual anniversaries of the effective date of the trial
period, the loan servicer reduces the unpaid principal by 1/3 of the initial PRA
Forbearance Amount on each anniversary date. If the loan is paid before the
end of the 3 years (because the property is sold) the remaining forbearance
amount is discharged. This program began in the last quarter of 2010 and has
currently been extended through the end of 2015 (which gives us some hope
that the QPRI exclusion will also be extended).
WHEN TO REPORT THE COD INCOME. Borrowers receiving aid under this
program may report COD income either:
(1) In the year of the permanent modification of the mortgage loan (Rev Proc
2013-16, Sec 4.04); or
(2) Ratably over the 3 years in which the mortgage loan principal is reduced
(Rev Proc 2013-16, Sec 6).
Line 21 - Other Income
Page 74
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
This is a major advantage for taxpayers! If a HAMP-PRA is entered into in
2013, the principal reduction will be applied in 2014, 2015, and 2016. If the
Qualified Principal Residence Indebtedness exclusion is not extended past
December 31, 2013, reporting the COD income when the reductions are
actually applied would mean that the exclusion would not be available;
reporting the COD income in the year of the modification, 2013, would mean
that the exclusion could be applied to the entire amount of COD. Additionally,
the taxpayer may be insolvent in 2013, but not insolvent later.
WHEN WILL THE BANK ISSUE FORM 1099-C. Banks must file Form 1099-C
for the year in which they sign the agreement, regardless of when the borrower
chooses to report the income.
AMOUNT OF COD REDUCED BY INCENTIVE PAYMENTS. To encourage
mortgage loan holders to participate in HAMP–PRA, HAMP will make an
incentive payment to the bank (called a PRA investor incentive payment) for
each of the 3 years in which the loan principal balance is reduced. The
treatment of incentive payments made to banks depends on the use of the
property securing the loan.
1. RESIDENCE. Payments are treated as made by the US Government on
behalf of the borrowers. These payments are generally not taxable to the
borrowers under the general welfare doctrine. (Rev Proc 2013-16, Sec 4.07)
2. RENTAL PROPERTY OR VACANT AVAILABLE FOR RENT. Payments
are treated as income in the year in which the payment is applied against the
borrower’s mortgage loan. (Rev Proc 2013-16, Sec 4.08) The HAMP
administrator must issue a Form 1099-MISC. The payment is not COD
income and thus cannot be excluded from income.
In both cases 1 & 2 above, only the principal reduced in excess of the
investor incentive payments is COD income!
AMOUNT TO BE INCLUDED ON FORM 1099-C. The discharged amount to be
reported on the Form 1099-C should be the PRA Adjusted Forbearance
Amount (which does not include the amounts expected to be satisfied by the
PRA Investor Incentive Payments). Caution – Banks have historically
prepared many 1099s incorrectly, so the numbers on the form should always be
questioned! The problem is that the amount of the Investor Incentive Payment
does not appear on any paperwork received by the debtor!
AMOUNT OF INCENTIVE PAYMENT IS UNOBTAINABLE.
The authors have
been unable to find any reliable source that clearly states the amount of
payment the bank is entitled to receive. The HAMP handbook states that the
incentive payment may range from 6% to 21%, but the IRS Revenue Procedure
2013-16 states that an incentive payment may range from 18% to 63%.
Line 21 - Other Income
Page 75
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(10) SHARED APPRECIATION AGREEMENTS
OVERVIEW. Some banks are offering loan modifications, but with shared
appreciation clauses that may allow the bank to recoup some of the debt they
have agreed to discharge. The shared appreciation agreement may mean that
the debt is not actually discharged when the agreement is signed. If the debtor
may later pay the debt, it has not been discharged!
AMOUNT OF DISCHARGE CANNOT BE FIXED WITH CERTAINTY. It is
not “clear” that the debt will actually be canceled and the agreement did not
“fix a loss with certainty” until the time limits under the shared appreciation
agreement have passed. COD should be reported after the repayment events in
the shared appreciation agreement have passed and it can be determined with
certainty the amount of the debt the bank will actually discharge.
EXAMPLE
We will use these excerpts from a “Loan Modification Agreement (Shared
Appreciation)” to illustrate the tax implications of this type of modification.
A. New Principal Balance: The new principal balance of my Note shall be $457,567.53
(the “New Principal Balance”). This includes, to the extent permitted by law, all amounts
and arrearages that are past due (including any unpaid late charges) less any amounts
paid to the Servicer but not previously credited to my Loan. A portion of the New
Principal Balance shall be deferred and may be forgiven as provided in Sections 2.B and
2.C of this Agreement.
B. Deferred Principal Balance: $206,767.53 of the New Principal Balance shall be
deferred (the “Deferred Principal Balance”). The Deferred Principal Balance shall be
treated as a non-interest bearing principal forbearance and I am not obligated to pay
interest or make monthly payments on any portion of it.
C. Forgiveness of Deferred Principal Balance: 100% of the Deferred Principal Balance is
eligible for forgiveness in equal installments over three (3) years. Unless I default on my
new payments to the extent that three (3) or more monthly payments become overdue
and unpaid on the last day of any month, then the Servicer shall forgive one-third of the
outstanding portion of my Deferred Principal Balance on each of the first, second and
third anniversaries of the Modification Effective Date, respectively. Forgiveness of any
such amounts will not result in a new payment schedule.
F. Pre-Payment of Note: Provided I am not in default under the terms of this Agreement,
in any pre-payment of the Note more than thirty (30) calendar days after the Modification
Effective Date, the portion of the Deferred Principal Balance not yet forgiven pursuant to
Section 2.C shall be deducted from the payoff amount.
3. Shared Appreciation
IF THE PROPERTY SECURING THE NOTE INCREASES IN VALUE AFTER THE
MODIFICATION EFFECTIVE DATE, THERE MAY BE AN ADDITIONAL PAYMENT
DUE, DEFINED IN THIS AGREEMENT AS THE “SHARED APPRECIATION AMOUNT”.
Line 21 - Other Income
Page 76
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
THE SHARED APPRECIATION AMOUNT RECOGNIZES CERTAIN IMPROVEMENTS
I MAY MAKE TO THE PROPERTY IN THE FUTURE. IN NO EVENT SHALL THE
SHARED APPRECIATION AMOUNT COLLECTED BE MORE THAN MY DEFERRED
PRINCIPAL BALANCE ($206,767.53).
A. In addition to the amounts I am obligated to pay pursuant to Section 2 of this
Agreement, upon the earliest of (i) the Maturity Date, (ii) a Refinance Transaction, or (iii)
a Sale Transaction, I shall also pay principal in an amount equal to 25% of the future
increase in value, if any, of the Property as more fully described below. This additional
payment of principal is referred to in this Agreement as the “Shared Appreciation
Amount”. The Shared Appreciation Amount shall be determined by Servicer as follows.
(Note that the lack of commas in the following paragraphs make it possible to interpret
the ordering in several different ways with very different repayment outcomes.)
I.Maturity Date: The Shared Appreciation Amount, if any, at the Maturity Date shall be
25% of the difference between the Valuation of the Property as of such date and
$250,800.00 (the Interest Bearing Principal Balance as of the Modification Effective
Date) less (i) any credit determined by Servicer for Subsequent Capital Improvements
and (ii) any amount of appreciation in excess of the Deferred Principal Balance.
II. Refinance Transaction: The Shared Appreciation Amount, if any, in connection with a
Refinance Transaction shall be 25% of the difference between the Valuation of the
Property as of the closing date of the Refinance Transaction and $250,800.00 (the
Interest Bearing Principal Balance as of the Modification Effective Date) less (i) any
credit determined by Servicer for Subsequent Capital Improvements and (ii) any amount
of appreciation in excess of the Deferred Principal Balance.
III. Sale Transaction: If the Property is sold, the manner in which the Shared
Appreciation Amount, if any, is determined by the Servicer depends on whether or not
the sale is at “Arm’s Length”.
a) If the Sale Transaction is Arm’s Length, then the Shared Appreciation Amount, if any,
will be equal to 25% of the difference between the gross sales price of the Property and
$250,800.00 (the Interest Bearing Principal Balance as of the Modification Effective
Date) less (i) any credit determined by Servicer for Subsequent Capital Improvements
and (ii) any amount of appreciation in excess of the Deferred Principal Balance.
b) If the Sale Transaction is not Arm’s Length, then the Shared Appreciation Amount, if
any, will be equal to 25% of the difference between the Valuation of the Property as of
the date of the sale or transfer and $250,800.00 (the Interest Bearing Principal Balance
as of the Modification Effective Date) less (i) any credit determined by Servicer for
Subsequent Capital Improvements and (ii) any amount of appreciation in excess of the
Deferred Principal Balance.
DISCUSSION
Even though the bank will “forgive” 1/3 of the forbearance amount on each
of the first three anniversaries of the agreement, it is possible the debtor
will have to repay those “forgiven” amounts later because of the shared
equity agreement. Therefore, the COD should not be reported until
possible repayment milestones have passed (the property is either
refinanced or sold or the note matures).
Line 21 - Other Income
Page 77
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
BRIGHT IDEA –
The homeowner will have to weigh the benefits of the low interest rate on the
modified loan against the future cost of sharing appreciation in the property to
determine whether to keep this loan long-term or refinance it as soon as
possible.
If high appreciation is expected, the homeowner should be advised to refinance
the mortgage as soon as possible, which will probably be right after the third
anniversary of the modification. At that time all of the principal in excess of the
FMV of the property (the forbearance amount) will have been written-off, making
the loan balance less than the FMV, so another bank will consider a refinance.
1099S NOT ALWAYS CORRECT. It is possible, and maybe even likely that the
creditor will send a 1099-C either on the date the modification agreement is
signed or on each of the first three anniversary dates, when they write off a
portion of the forbearance amount. In most cases, a taxpayer whose debt is
required to report the discharge on Form 1099-C, but that isn't always true,
because the events that trigger the reporting requirement don't necessarily mean
that a debt discharge has occurred. For example, if a taxpayer who received a
Form 1099-C pays the entire liability in a later year, that would support the
conclusion that the amount reported on the form shouldn't have been included
in income. If a partial payment is made, then the amount that should have been
included in income is a question of fact. A taxpayer who reports debt
discharge income after receiving a Form 1099-C but later repays the debt may
file a refund claim for the year the income was reported. The repayment
indicates that the taxpayer hadn't realized debt discharge income in the year the
1099-C was issued. (Service Center Advice 200235030)
CP-2000 WARNING
The IRS’s computer tries to match Form 1099-C to Line 21 on Form 1040.
Whenever a client receives a Form 1099-C, enter it on Line 21 and then make a
second negative entry on that line to explain why the COD is not taxable in the
current year. In the case of a shared appreciation mortgage modification my
second entry would say “Amount of COD not determinable with certainty
because of Shared Appreciation Agreement”. Other common negative entries
would be “COD excluded – See Form 982” or “COD properly reported in 2011”.
Line 21 - Other Income
Page 78
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(11) PAYMENTS FROM COMPLETING A SHORT SALE
Let’s look at the settlement statement from a short sale and the Form 1099-MISC
received from Chase. Is the $10,000 income to your client?
The $10,000 payment should not be included in income. It is
The $10,000 payment should not be included in income. It is already increasing the
amount of COD (because the payoff to the bank is $10,000 less) and including it in
income would mean it was taxed twice. Amended returns may be filed.
Line 21 - Other Income
Page 79
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
(12) QUALIFIED REAL PROPERTY BUSINESS DEBT EXCLUSION (QPRBD)
Taxpayers can exclude income on discharged debt that was incurred to acquire
business property, including rental property. (IRC §108(c)(3)(C))
BENEFITS OF ELECTION. Using this election
1) eliminates SE tax on business COD and,
2) if other business property is owned, delays paying tax on the COD.
MUST HAVE BASIS TO GIVE UP INSTEAD. The exclusion can only be used if
the taxpayer has basis that can be reduced in depreciable real property. Do not
confuse this basis reduction with attribute reduction required if the insolvency
exclusion is used. They are completely different things. This exclusion cannot
be used by C corporations. (Code Sec. 108(a)(1)(D))
ELECTION. This exclusion is an election. It is not mandatory (the bankruptcy
and insolvency exclusions are mandatory).
ORDERING. This exclusion does not apply to a cancellation of debt in a
bankruptcy case, or to the extent the taxpayer was insolvent immediately before
the cancellation. Those exclusions are mandatory and MUST be applied before
applying this exclusion.
QUALIFIED REAL PROPERTY BUSINESS DEBT is debt incurred to buy real
property used in a trade or business, including rental property. (IRS Letter
Ruling 9840026) The debt must be secured by the property and have been
incurred either before 1993 or, if after 1992, be either Qualified Acquisition
Debt or debt incurred to refinance Qualified Acquisition Debt with no increase
in amount (very similar to the rules for acquisition debt on a residence).
AMOUNT EXCLUDABLE - The amount excludable is limited to the amount the
debtor is “upside down” in the property and thus it is the excess of:
1. The principal amount of the qualified real property business
indebtedness immediately before the discharge, over
2. The FMV of the property less any other qualified real property business
debt secured by the same property (this would include not only real
estate loans such as second mortgages, but debts that have attached to
the property such as contractor’s liens). (Code Sec. 108(c)(2)(A); Reg
1.108-6(a))
Line 21 - Other Income
Page 80
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
HOW TO MAKE THE ELECTION. Enter the excluded amount on Form 982 Line
2 and check the box on line 1d, “Amount excluded is due to…Discharge of
qualified real property business indebtedness”. The election must be made on
a timely filed (including extensions) return and can be revoked only with the
consent of the IRS. The election can be made by filing an amended return
within 6 months of the due date of the return (excluding extensions). Enter
“Filed pursuant to section 301.9100-2” on the amended return and file it at the
same place the original return was filed.
CALIFORNIA CONFORMITY
CALIFORNIA generally agrees with Federal law relating to COD with differences
only in COD amounts that may be excluded. Thus, we expect FTB to agree with
our COD discussion of the topics presented on the previous pages.
NEW FOR 2013 & ON – CALIFORNIA REFINANCED MORTGAGES
OVERVIEW. CA law makes purchase money debt on a principal residence
nonrecourse. In the past, if the loan was refinanced, the debtor lost their
protection and the new loan was a recourse loan. A new law passed in 2012
changes that! (SB 1069)
ONLY NEW ADVANCES ARE RECOURSE. Under the amended law, the
refinanced loan will also be a nonrecourse loan, except to the extent that the
lender or creditor advances new principal that is not applied to any obligation
owed under the purchase money loan, or to fees, costs, or related expenses of
the refinance. Any new credit transaction shall be deemed to be a purchase
money loan except as to the principal amount of any new advance.
CALCULATION COMPLICATIONS. Note that even the refinance costs that are
added to the principal balance are treated as nonrecourse debt. However, this
does not turn the refinance costs into qualified acquisition debt for purposes of
the Qualified Principal Residence Indebtedness exclusion! This will definitely
complicate the calculations needed to report the COD.
APPLICATION OF PRINCIPAL PAYMENTS. Any payment of principal on a
refinanced purchase money loan will be applied first to the principal balance of
the purchase money loan, and then to the remaining principal balance. In other
words, if there is debt discharge on the new loan it will apply to the recourse
portion of the debt and will create COD income to the extent of the “cash-out” at
the time of the refinance(s).
EFFECTIVE DATE. The new law applies to a loan, refinance, or other credit
transaction used to refinance a purchase money loan which is executed on or
after January 1, 2013. (Since loans refinanced after 1-1-2013 will probably not
have yet been foreclosed or the property not yet sold already in 2013, we believe
this new law will have limited impact on 2014 returns).
Line 21 - Other Income
Page 81
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
NEW FOR 2011 & ON – CA SHORT SALE LAW CHANGED
TWO RECENT CALIFORNIA LAWS limit a lender’s ability to collect a deficiency
after a short sale of a dwelling unit of up to 4 units, but ONLY for California
properties. However, the rules apply to BOTH the Federal and California
returns. SB 931, effective January 1, 2011, limits the first mortgage holder’s
ability to collect a deficiency. SB 458, effective July 15, 2011, extended this
treatment to any and all loans secured by the property.
DO THE NEW LAWS CHANGE LOANS TO NONRECOURSE?
CHIEF COUNSEL NOW SAYS NO! On April 29, 2014 IRS Office of Associate
Chief Counsel issued a letter changing and clarifying their earlier opinion about
the effect of a short sale on a loan’s recourse or nonrecourse status. In the new
letter they state that they were “overly broad in our prior response”, and indicate
that the recourse or nonrecourse status of a note is determined at inception
(when the debt was incurred). (See the back of this outline for a copy of the
letter.)
The new letter changes the opinion they gave in a letter dated September 19,
2013. That letter stated that Chief Counsel believed a short sale changed the
status of the loan to nonrecourse. (See the back of this outline for a copy of that
letter.)
Relief for people who relied on the first letter? Senator Boxes asked for further
clarification and relief for property owners who sold their properties relying on the
original letter and the belief that their sales would not create COD income, but no
response has been released.
VERY IMPORTANT! A letter from Chief Counsel’s office is not considered to be
authority and the IRS and the courts are not required to follow its contents.
Note that the tax consequences are not always better when the loan is
nonrecourse. If the property is a rental property and the taxpayer is insolvent, the
tax consequences could be better if the loan were a recourse loan.
SAME TREATMENT FOR NON-JUDICIAL FORECLOSURES? California’s law
prohibits the lender who completes a non-judicial foreclosure from obtaining a
deficiency judgment, much the same way a short sale limits the lender’s ability to
obtain a deficiency judgment. Does that mean that the loan would be treated as
a nonrecourse loan if the lender completes a non-judicial foreclosure? In an
earlier private letter ruling the IRS said that it does NOT. (TAM 199935002)
Line 21 - Other Income
Page 82
Line 21 - Other Income
BRASS TAX Presentations
1040/540 TUNEUP 2014
NET OPERATING LOSSES - 2014
FEDERAL NOL. The chart below contains the Federal NOL rules.
TYPE OF NOL
CARRY BACK
(Default)
CARRY FORWARD
(Elect)
Business
2 Years
20 Years
Casualties & Theft (Including
Pres Declared Disasters)
3 Years
20 Years
Farming
5 Years
20 Years
CARRY BACK VERSUS CARRY FORWARD—ELECTION.
Taxpayers can elect Code Section 172(b)(3)(c) which allows taxpayer to
irrevocably waive any carry back period and carry the NOL forward only. This is
only done on a timely filed return.
CALIFORNIA NOL. NOLs incurred in taxable years beginning on or after
January 1, 2013, shall be carried back to each of the preceding two taxable years.
Form FTB 3805V calculates the 2013 NOL and all carrybacks and carryforwards
allowable.
ALLOWABLE CARRYBACK PERCENTAGE. The allowable NOL
carryback percentage varies. For an NOL incurred in a taxable year
beginning on or after:
• January 1, 2013, and before January 1, 2014, the carryback amount
shall not exceed 50% of the NOL.
• January 1, 2014, and before January 1, 2015, the carryback amount
shall not exceed 75% of the NOL.
• January 1, 2015, the carryback amount shall be 100% of the NOL.
Taxpayers compute the NOL carryback in Part IV of Form FTB 3805V, Net
Operating Loss (NOL) Computation and NOL and Disaster Loss
Limitations. For more information, see form FTB 3805V.
ELECTION TO WAIVE CARRYBACK. Any taxpayer entitled to a
carryback period pursuant to Internal Revenue Code IRC Section 172(b)(3)
may elect to relinquish/waive the entire carryback period with respect to an
NOL incurred in the 2013 taxable year. By making the irrevocable election,
the taxpayer is electing to carry an NOL forward instead of carrying it back
in the previous two years. To make the election, check the box in Part I
under Section C - Election to Waive Carryback, of Form FTB 3805V.
Line 21 - NOLs
Page 83
Line 21 - NOLs
BRASS TAX Presentations
1040/540 TUNEUP 2014
CARRYOVER OF LOSSES. Losses attributable to taxable years
beginning in 2008 and after are allowed a carryover of 20 years. Prior to
2008, the carryover was generally 10 years and prior to 2000 it was
generally 5 years.
LOSSES FROM PRIOR YEARS. NOLs must be calculated using the
rules applicable in the year the loss was generated. The percentage and
time of carryover is not increased by any new law extensions.
LOSSES FROM MULTIPLE YEARS. Multiple years’ NOLs are
applied against current year income on a FIFO basis. Thus the oldest
NOLs are used first. This gives the taxpayer the maximum advantage of
an NOL carryover.
California Losses
Incurred In Years Beginning After December 31, 1999
Type of Loss
Carryover
Percent
Max
Carryover
Time
Special Notes
Regular NOL
100%
20 Years
(10 Years Prior
To 2008)
Was 60% (2002-2003)
Was 55% (2000-2001)
Disaster Loss
100%
AND
50%
20 Years
(5 & 10 Years
Prior To 2008)
Only Federal declared disaster
losses.
New Business Loss
100%
20 Years
(10 Years Prior
To 2008)
Only losses during 1 three years
of business.
Business formed and commenced
operation on or after 1-1-1994.
Eligible Small Business Loss
100%
20 Years
(10 Years Prior
To 2008)
Gross receipts must be less than
$1 million.
st
California Losses
Incurred In Years Beginning Before January 1, 2000
Type of Loss
Carryover
Percent
Max
Carryover
Time
Regular NOL
50%
5 Years
None.
Disaster Loss
100%
AND
50%
5 Years
AND
10 Years
Only Federal declared disaster
losses.
Line 21 - NOLs
Page 84
Special Notes
Line 21 - NOLs
BRASS TAX Presentations
1040/540 TUNEUP 2014
NOL SUSPENSIONS. NOLs were suspended in 2002, 2003, 2008, 2009,
2010 and 2011. Losses sustained in these years are still calculated but are
carried over to the next year. The carryover period for suspended losses
that were not usable in these years is extended one year for each year that
the loss was not usable. FTB addressed questions regarding NOL
suspensions in Legal Ruling 2011-04.
Extension Of Carryover For Suspended NOLs +
Year Of NOL
Year NOL Was Denied
Years Added To Carryover
2010
2011
1 Year
2009
2010 Or 2011
2 Years
2008
2009, 2010 Or 2011
3 Years
Prior To 2008
2008, 2009, 2010 Or 2011
4 Years
2002
2003
1 Year
Prior To 2002
2002 Or 2003
2 Years
+ Note: NOLs were suspended for 2002 & 2003 and for 2008 through 2011. Also see FTB Legal Ruling
2011-04 for more detailed information.
Line 21 - NOLs
Page 85
Line 21 - NOLs
BRASS TAX Presentations
1040/540 TUNEUP 2014
DISTRIBUTIONS FROM
EDUCATIONAL ACCOUNTS
DISTRIBUTIONS. Distributions from a Coverdell Educational Savings Account
(ESA) (formerly called Educational IRA) and the Qualified Tuition Plan (QTP)
(commonly called a “529 plan”) may be tax free if used for qualified
educational expenses. If the distribution is not used for these expenses, the
earnings portion of the distribution is taxable and is shown on Line 21, Other
Income. In addition, there may be a 10% penalty on this income which is
calculated on Form 5329. See IRS Publication 970 for additional information.
TAX PLANNING. See the discussion on Forms 5329 and 8863 later in this text for
important planning ideas related to withdrawals from educational accounts.
REPORTING FORM. Form 1099-Q is used to report ESA and QTP distributions.
The current form is shown below. Special codes may be shown below boxes 5
and 6 to help us determine the type of distribution. See page 211 for an
explanation of these Form 1099-Q codes.
ESAs & QTPs
Page 86
ESAs & QTPs
BRASS TAX Presentations
1040/540 TUNEUP 2014
CONTRIBUTIONS TO
EDUCATIONAL ACCOUNTS
CONTRIBUTIONS. Saving for education utilizes the ESA and the QTP.
Contributions to either of these accounts are not deductible. The current
maximum contribution is $2,000 for an ESA. QTPs have a much higher limit
(see chart on the next page).
YOUR TAX TOOL - SUMMARY CHART – ESA & QTP.
CHART. The chart shown on the next page compares the Coverdell
Education Savings Account (ESA) and the Qualified Tuition Plan (QTP). For the
QTP, there may be small variations from state to state in their individual plans.
COMPUTER INTERNET WEBSITE—QUALIFIED TUITION PLANS
WHAT KIND OF PLAN DO OTHER STATES OFFER? For more information on
qualified tuition plans for any state visit the website: www.collegesavings.org.
STATE CONFORMITY—ESA AND QTP
California conforms to all Federal provisions for an ESA and a QTP.
Each individual state may have its own version of the Federal QTP. As long as
the state’s plan conforms with the Federal rules, the rules just listed will apply.
For more information on the California state plans, called the Golden State
Scholarshare Trust, telephone a Scholarshare consultant at 1-877-728-4338
from 5am to 6pm or visit their website at: www.scholarshare.com.
YOUR TAX TOOL - DETAIL CHARTS – EDUCATIONAL INCENTIVES.
Three different quick reference charts on all educational tax incentives
appear at the end of this book, starting on page 357. Very helpful!
ESAs & QTPs
Page 87
ESAs & QTPs
BRASS TAX Presentations
1040/540 TUNEUP 2014
Education Savings Account VS Qualified Tuition Plans—2014
Item
Eligibility and
Maximum
contributions
allowed
Deduction?
Date to make
contributions
Contribution
Allowance
phased out
Gift tax
problems
Education Svgs Acct (§530)
QTP (§529) Plan
Any contributor (including a minor)
can set up an account for any
beneficiary (under age 18), but the
maximum contribution is $2,000
per beneficiary per year (from all
contributors). For elementary,
secondary, undergraduate or
graduate level education.
Any contributor (other than a
minor) can set up an account for
any beneficiary. Maximum
contribution per beneficiary is
determined by cost of tuition for a
4-year school in state (>$100K).
Only for undergraduate or
graduate level education.
No
No
By tax filing date.
With no extensions.
By end of calendar year.
Yes,
Joint = $190,000-220,000
All Others = $95,000-110,000
No.
Contributions allowed without
regard to income.
None
Contribution is completed gift
eligible for $14,000/year
exclusion. Special 5-yr averaging
available for gifts over $14,000.
Rollovers and change of
beneficiaries subject to gift tax.
Penalties for 10% of taxable distribution for the
early
excise tax
withdrawal Plus
Regular income tax on taxable
distribution
Age to
withdraw
Within 30 days after beneficiary
turns 30. Different rules for
“special needs” individual.
Is withdrawal No tax on principal or income if
taxable?
used for qualified education
10% of taxable distribution
Plus
Regular income tax on taxable
distribution
No penalty if used for qualified
education expenses, if death or
disability of beneficiary or to
extent of scholarship received.
No age limitation (Calif =Must be
withdrawn by age 45)
expenses, or death or disability.
Taxable if not used for qualified
education expenses after basis is
recovered pro-rata.
No tax on principal or income if
used for qualified education
expenses. Taxable if not used for
qualified education expense by
whoever receives money. Basis is
recovered pro-rata.
Rollover or
transfer
allowed?
Yes—to another ESA for benefit
of old beneficiary or for benefit of
another member of the same
family.
Yes—to another QTP for benefit
of old beneficiary or for benefit of
another member of the same
family as old beneficiary.
Coordination
with other
benefits or
plans
Contrib allowed if contrib in same
year to QTP. No education credit
for expenses paid with tax-free
monies taken from ESA.
Contrib allowed if contrib. in same
year to ESA. No education credit
for expenses paid with tax-free
monies taken from QTP.
ESAs & QTPs
Page 88
ESAs & QTPs
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 23
EDUCATOR EXPENSE
DEDUCTION
EXPIRING PROVISION AS OF 12-31-2014
This provision is due to expire after 2014 unless Congress acts to extend it.
ATRA 2012 & TIPA 2014
WHICH EXPENSES? Under IRC 62(a)(2)(D), eligible educators may claim an
above-the-line deduction for up to $250 of unreimbursed qualified expenses for
items such as books, supplies, computer equipment (including related software and
services) and other equipment and supplementary material used in their classroom.
To be eligible for this deduction, the expenses must be otherwise deductible under
IRC 162 as a trade or business expense.
WHO IS AN “ELIGIBLE EDUCATOR”? Teachers, instructors, counselors,
principals or aides who work at least 900 hours during a school year in a school
providing elementary or secondary education, as determined by state law, are
“eligible educators”. The school may be a public, private or religious institution.
OFFSETS FOR OTHER BENEFITS. This deduction is allowed to the extent the
eligible expenses exceed, for the calendar, the amount excludable by the educator
under: 1) the exclusion of savings bond income by a person who pays qualified
higher education expenses (IRC 135); 2) qualified tuition program exclusion (IRC
529(c)(1)); and 3) payout from a Coverdell education savings account for qualified
education expenses (IRC 530(d)(2).
CALIFORNIA DIFFERENCES
California does not conform to this Federal provision.
Line 23 – Educator Expenses
Page 89
Line 23 – Educator Expenses
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 24
CERTAIN BUSINESS EXPENSES
OVERVIEW. Certain business expenses of the three groups listed below are now
reported on this line. Form 2106 or 2106-EZ must be attached to verify these
expenses.
1. ARMED FORCES RESERVISTS, who are government employees, travel
more than 100 miles from home and stay overnight to perform services,
may claim deductions for transportation, meals and lodging expenses if
these expenses do not exceed the allowance for U.S. Government
employees.
2. QUALIFIED PERFORMING ARTIST with performing-arts-related
expenses, even though an employer treats the artist as an employee.
“QUALIFIED” has a very special meaning here. The filer must pass all 4
tests below:
• at least two different employers during the year,
• at least $200 in W-2 wages from each of 2 employers,
• artist expenses must be more than 10% of income from performing,
• AGI may not exceed $16,000 before the expenses.
3. FEE-BASIS STATE OR LOCAL GOVERNMENT OFFICIALS who are
employees with unreimbursed business expenses.
Line 24 – Certain Business Exps Page 90 Line 24 – Certain Business Exps
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 25
HEALTH SAVINGS ACCOUNT
DEDUCTION
HEALTH SAVINGS ACCOUNTS
THE CONCEPT
You put money in a
custodial account
THE DETAILS
•
•
To be “eligible” to contribute you must have a HDHP
(High Deductible Health Plan) and no other plan, and
meet age requirements.
The contribution is limited by the type of HDHP and
an annual maximum amount.
You get a tax deduction
•
•
•
It grows tax-free
•
•
Only certain medical expenses qualify.
Expenses may be in future, whether or not you are
“eligible” to make contributions in that year.
If not spent properly, tax and penalty will apply (with
exceptions, of course!).
Distributions appear on Form 1099-SA. Form 8889
is used to report whether any is taxable.
Special rules apply at account holder’s death.
When you take it out its
tax-free if spent for
qualifying medical
expenses
THE TAX ADVANTAGE
THE GOOD NEWS:
• Instead of paying medical expenses as they arise,
then hoping for a deduction on Schedule A - - • You put the money aside in advance, and get a
guaranteed deduction!
THE BAD NEWS:
• You must have a High Deductible Health Plan and no
other!
Line 25 – Health Savings Accts
Page 91
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
LIVING WITH AN HSA
OVER THE YEARS taxpayers might go through periods of “eligibility” for HSA
accounts, while other periods they either have no health insurance, or are
covered by a health plan which is not HSA-qualified.
CONTRIBUTING VS. DISTRIBUTING is the issue here. During periods of
“eligibility” a person can do either or both. But during periods of noneligibility T/P might still retain the HSA, but contributions might not be
allowable. Distributions, however, are still allowed.
CONSIDER A TIME-LINE OF SEVERAL TAX YEARS. The diagram below
illustrates the concept.
Deductible Contributions to the HSA may be
made only during periods of “eligibility”.
Tax-Free Distributions may be taken for the
appropriate medical expenses.
During “Eligible” periods
Contributions – OK
Distributions – OK
“Eligible”
Time
Jan 1
“Eligible”
Jan 1
Jan 1
Jan 1
“In-eligible”
Jan 1
Jan 1
Jan 1
“In-eligible”
During “In-eligible” periods
Contributions – NO
Distributions – OK
NO CONTRIBUTIONS may be made unless T/P is “Eligible.”
However, the ACCOUNT is portable, and may still exist, with
funds remaining.
DISTRIBUTIONS may be taken for the appropriate medical
expenses, and retain their Tax-Free character.
Line 25 – Health Savings Accts
Page 92
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
GENERAL REQUIREMENTS
Health coverage under a “High Deductible Health Plan” in the form of a
trust/custodial account. Form 8889 reports contributions/distributions.
HIGH DEDUCTIBLE HEALTH PLAN” (HDHP)
Minimum annual deductibles and maximum out-of-pocket expenses:
Item
Self-Only Annual
Deductible (Min.)
Self-Only Annual
Expenses (Max.)
Family Annual
Deductible (Min)
Family Annual
Expenses (Max)
2013
2014
2015
$1,250
$1,250
$1,300
$6,250
$6,350
$6,450
$2,500
$2,500
$2,600
$12,500
$12,700
$12,900
TAX ADVANTAGES
Contributions are tax deductible (with an annual limit). Growth is not taxed,
and distributions for “qualified medical expenses” are tax-free.
WHO CAN CONTRIBUTE
Must be “eligible individual” (status determined month-by-month).
EXCEPTION: T/Ps eligible in the last month of a year are treated as eligible
all year. But, if taxpayer becomes an ineligible individual during the next year,
contributions above monthly limit are subject to tax and 6% penalty.
- - - If the “eligibility” period ends PRIOR
TO THE END OF THE NEXT TAX YEAR,
any amount contributed in the prior year in
excess of the monthly limit is now deemed
distributed, and is subject to BOTH tax
and penalty!
As long as T/P is “eligible”
by December 31 of a year,
the annual maximum is
allowed, rather than the
smaller monthly limitation,
HOWEVER - - - -
Time
Jan 1
Jan 1
“Eligible”
Jan 1
Jan 1
Jan 1
Jan 1
Jan 1
“ELIGIBLE INDIVIDUAL” (ON 1ST DAY OF EACH MONTH)
Is covered by a “high deductible health plan (HDHP), and not covered by
another health plan, and not enrolled in Medicare (thus, generally, under
age 65), and not claimed as a dependent on someone else’s tax return.
Line 25 – Health Savings Accts
Page 93
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
ANNUAL MAXIMUM CONTRIBUTION LIMIT
Annual limits are below. Monthly limit is 1/12 of this amount.
Item
Self-Only Annual
Max. Deductible
Family Annual
Max Deductible
2013
2014
2015
$3,250
$3,300
$3,350
$6,450
$6,550
$6,650
If both spouses have family coverage, they both are treated as covered
under the plan with the lowest deductible. The limit is divided equally.
Account owners age 55 and over may also make “catch-up” contributions.
The amount of this additional contribution is shown in the chart below.
Year
Amount
Year
Amount
2004
2005
2006
$500
$600
$700
2007
2008
2009 & On
$800
$900
$1,000
CONTRIBUTIONS
Contributions must be made in cash. Account owner and/or employer may
contribute. Family members of owner can contribute – same as by owner.
Employer contributions are deducted by employer, excluded from employee
income, and not subject to withholding. Not deductible by account owner.
Employers report HSA contributions on Form W-2, Box 12. “Nondiscrimination” rules apply, and a 35% excise tax is assessed if standards
are not met. Contributions can be made through a Sec. 125 cafeteria plan.
Contributions must be made by April 15 – no extensions.
Rollover contributions from another HSA or a MSA are permitted and need
not be in cash. Rollover must be completed within 60 days.
Excess contributions aren’t deductible. Plus 6% excise tax unless original
contribution and earnings are withdrawn by due date plus extension.
DISTRIBUTIONS
Form 1099-SA used to report distributions. Taxable distributions are
reported on Form 1040, line 21 & labeled “HSA.”
Distributions for “qualified medical expenses” are tax-free even if T/P is no
longer “eligible” for contributing but may not be deducted on Schedule A.
Distributions for any other purpose are taxable and incur a 20% (formerly
10%) excise tax, unless distribution is made because of account owner’s
death, disability or upon reaching age 65. Excise tax penalties are
calculated on Form 8889 and included on Form 1040, line 62 and labeled
“HSA.”
Transfer of owner’s interest in a HSA incident to a divorce to a spouse or
former spouse is normally not considered a taxable distribution.
Line 25 – Health Savings Accts
Page 94
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
“QUALIFIED MEDICAL EXPENSES”
Expenses for “medical care” that could be deducted on Schedule A (with a
few exceptions shown below). These include the annual deductible required
by the HDHP, but not premiums to pay for the HDHP itself.
Includes premiums for long-term care insurance, COBRA plans, Medicare
A, B, and HMO coverage (but not Medicare supplemental coverage), retiree
employer sponsored coverage and health insurance premiums paid while
receiving unemployment compensation.
Items specifically not qualified medical expenses include (1) athletic club
membership; (2) cosmetic surgery/procedures; (3) weight-loss programs;
and (4) non-prescription medications (unless covered under Rev Ruling
2003-102 that allows items to alleviate or treat personal injuries or sickness,
but not including dietary vitamin supplements, but only until 12-31-2010).
SPECIAL RULES
OTHER PERMITTED INSURANCE COVERAGE
Liability coverage such as worker’s compensation, tort liability, or liability
arising from the use or ownership of property (e.g. auto insurance).
Coverage for a specific illness or disease or that pays a fixed amount (per
day or other period) for hospitalization.
Coverage for accidents, disability, dental care, vision care, and LTC.
Rev Ruling 2004-45 outlines how an eligible individual may have a flexible
spending account (FSA) or health reimbursement arrangement (HRA) and
still remain eligible for a HSA.
DEATH OF ACCOUNT OWNER
SPOUSE BENEFICIARY.
Account becomes the HSA of the surviving spouse as of date of death
and is subject to normal rules for all HSAs.
NON-SPOUSE BENEFICIARY.
Account ceases to be a HSA as of date of death.
Non-spouse beneficiary includes in taxable income the FMV, at date of
death, of account. (This amount may be reduced by qualified medical
expenses of the deceased account owner, paid within one year of death.)
Taxable income is considered IRD and therefore a deduction under IRC
Section 691(c) is allowed on the return where the income appears.
If beneficiary is decedent’s estate, the FMV of the account is included in
taxable income on account owner’s final Form 1040.
ADDITIONAL INFORMATION
See website www.hsa.gov and IRS Notices 2008-51, 52 and 59.
Line 25 – Health Savings Accts
Page 95
Line 25 – Health Savings Accts
BRASS TAX Presentations
2007
1040/540 TUNEUP 2014
ROLLOVER RULES
IRA TO HSA ROLLOVERS. For tax years after 12-31-2006, a taxpayer can
make a one-time-only tax-free rollover, via direct trustee-to-trustee-transfer from
an IRA (but not a SEP-IRA or Simple IRA), to a HSA.
The amount that can be distributed from the IRA and contributed to the HSA is
limited to the otherwise maximum deductible HSA contribution amount,
computed on the basis of the type of coverage under the high deductible health
plan at the time of the contribution.
The amount that can otherwise be contributed to the HSA for the contribution
year is reduced by the amount contributed from the IRA. No deduction is
allowed for the amount contributed from the IRA to the HSA.
Only one distribution and contribution may be made during a taxpayer’s lifetime,
except that if a distribution and contribution are made during a month in which
taxpayer has self-only coverage as of the first day of the month, an additional
distribution and contribution may be made during a subsequent month in the
same tax year in which taxpayer has family coverage.
If taxpayer does not remain an eligible individual (except for death or disability)
for 12 full months from the month of the contribution, the amount of the IRA
distribution that would otherwise have been includible in income is taxed to him
and is subject to a 10% penalty tax. The income is includible for the tax year
when the taxpayer first becomes an ineligible individual.
Tax Relief & Health Care Act of 2006.
Line 25 – Health Savings Accts
Page 96
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
STATE NON-CONFORMITY
California does not conform to any provision of Health Savings Accounts.
Therefore, no deduction is allowed for any contribution to a HSA and any interest
earned on a HSA is considered taxable income for California.
ISSUES OF NON-CONFORMITY. Since California does not recognize the HSA,
many issues can arise in preparing returns for clients who have HSA accounts.
Item
Federal
California
Contributions by:
Taxpayer
Deductible within applicable limits.
Not a tax event.
Employer
Excludable from W-2 wages.
Taxable wages.
Account Earnings
Non-taxable growth.
Taxable interest/dividends.
Probably no 1099 is issued
– must see statement.
Distributions
Tax & penalty except to extent spent
for qualified medical. Other
exceptions apply.
Not a tax event.
To Schedule A Medical
OK to pay from HSA – excess to
Schedule A Medical
Schedule A Medical
Schedule A Medical
“Normal” medical exp
OK to pay from HSA – excess to
Schedule A Medical
Schedule A Medical
OTC drugs per MD, or
for treatment of
medical condition.
Not OK to pay from HSA – and never
to Schedule A Medical
Never deductible anywhere
Medical Expenses
Insurance Premiums
for the HDHP policy
for other permitted
insurance
Non-prescription drugs are not allowed to be paid from HSA starting
in 2011, but were allowed prior to that. See Notice 2010-128.
COMPUTER NOTE
FIND THE INPUT BOXES within your own software.
TEST WITH SIMPLE EXAMPLE. We recommend you double-check using a
simple example to see whether the programmers think the same way you think.
The boxes may sound correct, but the results may not be what you expect.
Line 25 – Health Savings Accts
Page 97
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXAMPLE – HSA & CALIFORNIA NON-CONFORMITY ISSUES:
Jenny has an HSA account and the proper self-only High Deductible insurance
with $1,800 deductible. During the year Jenny paid her $2,100 premium for the
insurance, and contributed $1,000 to her own HSA. Her employer contributed an
additional $600 to the account. The account earned $90.
In November, Jenny paid the following bills for a non-covered out-patient
procedure directly through the HSA account:
Surgical procedure
$1,300
Dressings for home follow-up care
$ 45
Prescription antibiotics
$ 125
Non-prescription OTC pain medication $ 30
Total withdrawn
$1,500
In addition to the $1,500 above (which was not covered by her insurance plan),
Jenny spent a total of $1,945 on qualified medical that would have been covered
by the plan. $1,800 went against her insurance deductible and $145 was
actually paid for by the insurance.
Note the differing treatment under Federal and California laws:
ITEM:
HSA ACCOUNT:
Jenny’s $1,000 contribution to HSA
Employer’s $600 contribution
Growth - $90
Deduct – Line 25 Ignored.
Non-taxable wage Wages on W-2
Excludable
Taxable
OTHER MEDICAL:
Jenny’s $2,100 premium
Jenny’s $1,800 deductible
Insurance-paid $145 of bills
Sched A, medical
Sched A, medical
Ignored
JENNY’S $1,500 WITHDRAWAL
Procedure
$1,300
Dressings
$ 45
Prescriptions
$ 125
Non-Prescription $ 30
Federal
California
Sched A, medical
Sched A, medical
Ignored
QME* - Ignored
Sched A, medical
QME* - Ignored
Sched A, medical
QME* - Ignored
Sched A, medical
Ignored
Ignored
* QME = “Qualified Medical Expense”
NOTE – NON-PRESCRIPTION MEDICATION OF $30. NOT a QME anymore!
However, reduce $1,800 of deductible shown above (which is QME) taken on
Federal Schedule A, Medical by this non-deductible $30 (thus deducting $1,770
on Federal Schedule A) and no tax or penalty will apply.
WHEW! LOTS OF STEPS! Yes and most software programs require multiple
inputs to handle this correctly!
Non-prescription drugs are not allowed as QME
starting in 2011. But see Notice 2010-128.
Line 25 – Health Savings Accts
Page 98
Line 25 – Health Savings Accts
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 28
S/E RETIREMENT PLANS
2014
CHANGE TO 2014 RETIREMENT AMOUNTS
Contributions/deductions for retirement plans have increased for 2014
.
YOUR TAX TOOL – S/E CHARTS FOR RETIREMENT PLANS.
CHARTS. A set of summary charts for self-employed individuals and their
maximum retirement plan amounts start on page 100. Charts for employees
start on page 42. These charts look at the 2014 maximum deductions and show
what lies ahead in future years for a variety of retirement plans.
CALIFORNIA CONFORMITY
For 2002 and on, California has conformed!!
UPDATE SEP AND SIMPLE PLAN DOCUMENTS. SEP and SIMPLE plans are
typically governed by plan documents that consist of the IRS’s Form
5304/5305. It is important to conduct a periodic review of the plan and update
plan documents to be certain the plan is operating within the rules. The easiest
way to accomplish this is to complete and sign a new Form 5304/5305 each
year. These forms are kept in the taxpayer’s records and do not have to be filed
with the IRS.
Line 28 – S/E Retirement Plans
Page 99 Line 28 – S/E Retirement Plans.
BRASS TAX Presentations
1040/540 TUNEUP 2014
Self-Employed
Year 2014 Maximum
Contributions
IRA-Type Plans
TRADITIONAL IRA
$5,500
$6,500 (50+)
ROTH IRA
$5,500
$6,500 (50+)
SIMPLE IRA
$24,000
$29,000 (50+)
SEP IRA
$52,000
Same (50+)
Other Plans
401(K)
$52,000
$57,500 (50+)
403(B)
Not
Applicable
457
Not
Applicable
Profit Sharing
$52,000
Same (50+)
Money Purchase
$52,000
Same (50+)
PRACTICE NOTE – USING THESE CHARTS
3-PAGE UNIT. This page and the next 2 show the maximum amount a
self-employed person can contribute to a pension. This page is for 2014
only. The next shows how the amounts are scheduled to change through 2015.
THIRD PAGE – ACTUAL CONTRIBUTION MAXIMUM. This page shows how a
particular client’s personal maximum may be limited by compensation.
NOTE: EMPLOYEES use the charts beginning on Page 42.
Line 28 – S/E Retirement Plans
Page 100 Line 28 – S/E Retirement Plans.
BRASS TAX Presentations
1040/540 TUNEUP 2014
I AM SELF-EMPLOYED
WHAT IS THE ANNUAL MAXIMUM AMOUNT
I CAN PUT IN MY RETIREMENT PLAN?
Plan
2013
2014
2015
Double Employee
$24,000
Double Employee
$24,000
Double Employee
$25,000
Double Employee
$29,000
Double Employee
$29,000
Double Employee
$31,000
SEP IRA
$51,000
$52,000
$53,000
1-Person 401(k)
Under Age 50
$51,000
$52,000
$53,000
> Age 50 + $5,500
$56,500 Max
> Age 50 + $5,500
$57,500 Max
> Age 50 + $6,000
$59,000 Max
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Profit Sharing
Keogh
$51,000
$52,000
$53,000
Money Purchase
Keogh
$51,000
$52,000
$53,000
No Maximum
No Maximum
No Maximum
SIMPLE IRA
Under Age 50
Age 50 & Over
Age 50 & Over
403(b)—TSA
Under Age 50
Age 50 & Over
457—Def Comp
Under Age 50
Age 50 & Over
Def Benefit Keogh
NOTE: EMPLOYEES use the charts beginning on Page 42.
SPECIAL NOTE: MAXIMUM APPLIES TO ALL PLANS COMBINED. Some
clients will have retirement plans at two or more jobs, or may be wage earners
and self-employed at the same time. For example, a worker covered under both
a SIMPLE and a profit sharing plan may not contribute more than $12,000 to
the SIMPLE, but has a maximum of $52,000 for the profit sharing plan – if this
client already funded $12,000 to the SIMPLE, the maximum allowable for the
profit sharing plan in 2014 is reduced to $40,000.
Line 28 – S/E Retirement Plans
Page 101 Line 28 – S/E Retirement Plans.
BRASS TAX Presentations
1040/540 TUNEUP 2014
I AM SELF-EMPLOYED
HOW DO I DETERMINE THE AMOUNT
I CAN PUT IN MY RETIREMENT PLAN IN 2014?
Plan
A
B
C
Method
SIMPLE IRA
Lesser of employee annual maximum amount or 100% of
compensation
PLUS
Employer contribution of 3% of compensation (up to employee
amount contributed).
401(k) or SAR-SEP
Lesser of employee annual maximum amount or 100% of
compensation
PLUS
Employer contribution of 20% of compensation (up to yearly
annual maximum amount).
403(b)—TSA
This plan is not available to a S/E person.
457—Def Comp
This plan is not available to a S/E person.
SEP IRA
Lesser of annual maximum amount or 20% compensation.
Max compensation = $260K.
Profit Sharing
Lesser of annual maximum amount or 20% compensation.
Max compensation = $260K.
Money Purchase
Lesser of annual maximum amount or 20% compensation.
Max compensation = $260K.
Defined Benefit
Limit on benefit amount. Cannot exceed 100% average
compensation for highest 3 years with max of $210K benefit
per year. Max compensation = $260K.
“A” = Employee AND employer both contribute
“B” = Employee contributes only
“C” = Employer contributes only
Compensation = 92.35% of net S/E income for SIMPLE plans and net S/E
income less 50% of S/E tax deduction for all other plans.
NOTE: EMPLOYEES use the charts beginning on Page 42.
Line 28 – S/E Retirement Plans
Page 102 Line 28 – S/E Retirement Plans.
BRASS TAX Presentations
1040/540 TUNEUP 2014
ONE PERSON 401(K) PLAN
OVERVIEW. There is an innovative retirement plan being called the “one-person
401(k) plan.” The plan is very attractive to a sole owner of a business who has
no employees (except for a spouse). It is a combination of a 401(k) plan AND
a defined contribution profit sharing plan.
HOW DOES IT WORK? The owner can maximize retirement contributions by
combining the employee contribution (through 401(k) elective contributions)
and the 25% maximum employer contribution (through defined contribution
profit sharing contributions). The maximum deductible amounts are increased
significantly over other plans. Together, the employee elective contributions
and the employer profit sharing contributions can be $52,000 or 100% of
compensation, whichever is less, for 2014.
WHO CAN USE IT? Both sole proprietors and corporate owners can use it. This
type of plan is normally being offered offering only to businesses that have the
owner (and spouse) as the only employees.
HOW MUCH CAN BE CONTRIBUTED AND DEDUCTED? See below.
2014 Max Deductible Contributions (Filing Schedule C—S/E Under Age 50)
Type of Plan
Compensation
$10,000
$50,000
$100,000
$150,000
1-Person 401 (k)
$10,000
$27,500
$37,500
$47,500
SIMPLE
$10,000
$13,500
$15,000
$16,500
SEP-IRA
$2,000
$10,000
$20,000
$30,000
Profit Sharing
$2,000
$10,000
$20,000
$30,000
Money Purch
$2,000
$10,000
$20,000
$30,000
2014 Max Deductible Contributions (Filing Corp—Employee Under Age 50)
Type of Plan
Compensation
$10,000
$50,000
$100,000
1-Person 401 (k)
$10,000
$30,000
$42,500
$52,000
SIMPLE
$10,000
$13,500
$15,000
$16,500
SEP-IRA
$2,500
$12,500
$25,000
$37,500
Profit Sharing
$2,500
$12,500
$25,000
$37,500
Money Purch
$2,500
$12,500
$25,000
$37,500
Line 28 – S/E Retirement Plans
$150,000
Page 103 Line 28 – S/E Retirement Plans.
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Consultant Chris signed Letter of Appointment to serve 3-year term as trade
officer.
Letter referred to him as “self-employed for tax purposes”.
Chris filed Schedule C.
Chris contributed to and deducted a SEP based on Schedule C net income.
Chris was later determined to be an employee.
What are the tax consequences of this re-determination?
RULING
The Tax Court disallowed his SEP contribution and applied the 6% excise tax on
the excess contribution, finding that he was unable to contribute to a SEP in his
capacity as a common law employee. And he was not an employer
since he did
not own any interest in the company. (Michael Rosenfeld 2013 (9th Cir))
Line 28 – S/E Retirement Plans
Page 104 Line 28 – S/E Retirement Plans.
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 29
SELF-EMPLOYED HEALTH
INSURANCE DEDUCTIONS
WHICH PREMIUMS CAN BE DEDUCTED HERE? A quick reminder of the
generalities of this above-the-line deduction.
AVAILABLE TO: Self-employed persons with net profit from Schedule C or F,
Partners with SE earnings on Form K-1, those using one of the optional
methods on Schedule SE, S-Corp members who own more than 2% of the
S-corporation and who receive a W-2.
“COMPANY PLAN” Rules are vague here. Instructions say the plan must be
“considered” to be established by the employer. Schedule C folks can use
virtually anything. Partners must have the premiums paid by the partnership
and reported as guaranteed payments. S-Corporation shareholders should
have the amount shown on Form W-2.
VIRTUALLY ALL HEALTH CARE. Beyond the ordinary “health” plans, look
for dental, vision care, the “cancer” policies – in short, anything you’d call
“insurance” under Schedule A Medical deductions.
LONG-TERM CARE, TOO! Include these premiums. Remember, these have
an annual maximum amount based upon age of the covered party.
JOINT RETURNS generally may claim premiums for either spouse, as long as
the premiums are paid by the couple.
IRS GUIDANCE. See Form 1040 instructions, IRS Publication 535 and Code
Section 162(l) for more information; especially if taxpayer or spouse is
eligible to participate in any subsidized health plan maintained by any
employer for any month during the current taxable year.
RECENT IRS CHANGE OF HEART. Can Medicare Part B premiums be
considered as self-employed health insurance? For many years IRS has taken a
negative stance.
FORMER STANCE. IRS maintained Medicare premiums weren’t paid under a
health insurance plan established by the business saying it is a federal
program available only to those who qualify under the operative law (Field
Service Advice 3042).
Line 29 – S/E Health Insurance
Page 105
Line 29 - S/E Health Insurance
BRASS TAX Presentations
1040/540 TUNEUP 2014
CURRENT STANCE - NOW OK! IRS revised the 2010 instructions to Form
1040 back in January 2011, and suddenly they allow the deduction! Both
Form 1040 instructions and Publication 535 state “Medicare premiums you
voluntarily pay to obtain insurance in your own name that is similar to
qualifying private health insurance can be used to figure the deduction.”
SPOUSE, DEPENDENTS AND CHILDREN ALSO! Chief Counsel Advice
201228037 states that Medicare premiums may be deducted for the selfemployed individual’s spouse, dependents or children under age 27.
SOCIAL SECURITY TAX DISCUSSION. See page 209 for a discussion on
Schedule SE and social security taxes.
PRACTICE NOTE – AMEND PRIOR YEARS!
Amend all open tax years that will benefit the taxpayer.
RECENT REVENUE PROCEDURE 2014-41
S/E taxpayers who receive premium assistance (IRC Section 36B) must reduce
this deduction by the amount of the credit they receive. Taxpayers can receive
an advanced tax credit as they pay their premiums through the marketplace or
they can receive any credit due when the tax return is filed. Calculation of the
credit is complicated because S/E health insurance premiums reduce AGI, but
the premium assistance credit is based on AGI which causes a circular
calculation. This revenue procedure presents two calculation methods and
multiple examples on how to solve this dilemma. (Rev Proc 2014-41)
Since California conforms to this S/E health insurance deduction as of 1-1-2009,
and does not have any corresponding premium assistance credit, the reduction
referred to in this Rev Proc does not seem to apply to California returns.
CALIFORNIA CONFORMITY
CONFORMITY! California is in conformity with Federal law except as noted in
the Revenue Procedure 2014-41 above.
Line 29 – S/E Health Insurance
Page 106
Line 29 - S/E Health Insurance
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 31
ALIMONY PAID
OVERVIEW. Alimony or separate maintenance payments are deductible by the
spouse or former spouse making the payments and the payment must be
included in the recipient’s gross income. (IRC §215(a))
ALIMONY GAP. Nearly half the tax returns on which individuals claimed tax
deductions for alimony payments did not match up with their former spouse’s
tax returns, showing a total “alimony gap” of over $2.3 billion a year,
according to a new government report. (TIGTA report dated March 31, 2014,
Reference Number 2014-40-022)
Apart from examining a small number of tax returns, the IRS generally has no
processes or procedures to address the majority of discrepancies between
alimony deductions claimed and income reported.
TIN OFTEN MISSING OR INVALID. IRS processes also do not ensure that
individuals provide a valid recipient Taxpayer Identification Number (TIN)
when claiming an alimony deduction as required. TIGTA’s analysis of the
567,887 returns that claimed an alimony deduction identified an estimated
6,500 tax returns for which the IRS did not identify that the recipient TIN was
missing or invalid. In addition, because of errors in IRS processing
instructions, the IRS did not assess penalties totaling $324,900 on individuals
who did not provide a valid recipient TIN as required.
TIGTA RECOMMENDATIONS. TIGTA recommended that the Commissioner,
Small Business/Self-Employed Division, work with the Commissioner, Wage
and Investment Division, to evaluate current examination filters to ensure that
potentially high-risk tax returns are not inappropriately excluded from
examination and develop a strategy to address the significant alimony
compliance gap. TIGTA also recommended that the Commissioner, Wage and
Investment Division, revise processes and procedures to verify that all tax
returns include a valid recipient TIN when claiming an alimony deduction. In
addition, errors in IRS processing instructions must be corrected to ensure that
a penalty is accurately assessed on all tax returns on which a valid recipient
TIN is not provided.
Line 31 – Alimony Paid
Page 107
Line 31 – Alimony Paid
BRASS TAX Presentations
1040/540 TUNEUP 2014
IRS’S PLAN. The IRS stated that it enhanced its examination filters and will
continue to review and improve its strategy to reduce the compliance gap. In
addition, the IRS says they revised procedures to ensure that penalties are
assessed when appropriate. However, because the IRS does not have the
authority to deny alimony deductions outside of deficiency processing, it
believes verification of the deduction is more efficiently performed in its
Compliance function.
7 REQUIREMENTS TO BE CONSIDERED ALIMONY. Alimony or separate
maintenance means any payment that meets the following requirements:
1. Payments must be in cash
2. Payments must be under a divorce or separation instrument (oral
agreements do not qualify)
RECENT TAX COURT CASE
FACTS
Taxpayers divorced in 2001.
Alimony set at $2,000/month in divorce decree.
In 2011 Ex-Wife requested increase in alimony because she was unemployed.
Ex-Husband agreed to voluntarily increase alimony to $2,500/month.
What are the tax consequences of this alimony increase?
RULING
The Tax Court noted that the taxpayer’s willingness to increase the alimony was
admirable, but denied his deduction for the portion of the alimony that exceeded
the amount set in the divorce agreement because only an oral arrangement had
been made. IRC §71 requires that alimony must be made subject to a written
divorce or separation instrument. (Daniel R. Martin, TC Summary Opinion 201331)
3. Instrument cannot designate the payment as not includable in the recipient
spouse’s gross income and not deductible by the payor spouse
4. Separated spouses cannot be members of the same household when the
payments are made
Line 31 – Alimony Paid
Page 108
Line 31 – Alimony Paid
BRASS TAX Presentations
1040/540 TUNEUP 2014
5. Payor’s obligation to make the payment must end at the death of the payee
spouse
RECENT TAX COURT CASE
FACTS
Divorce divided Taxpayer and Ex-Wife’s retirement accounts equally.
Taxpayer’s account balance was higher than Ex-Wife’s balance.
Taxpayer’s excess balance to be transferred to Ex-spouse pursuant to a QDRO.
Three years later transfer still had not been accomplished.
Taxpayers then paid excess directly to Ex-Spouse.
Is this payment deductible as alimony?
RULING
The Tax Court disallowed the deduction, concluding that it did not qualify as
alimony because, according to the settlement agreement, Taxpayer would have
remained liable for the obligation in the event of her death. (Kenneth R.
Laremore, TC Summ Op 2014-94)
6. Payments “fixed” as child support do not qualify as alimony
RECENT TAX COURT CASE
FACTS
Divorced Dad made payments to Ex-Wife.
Divorce decree called payments “Spousal Maintenance”.
Payments terminate upon their youngest child’s high school graduation, ExWife’s remarriage, or death of Dad or Ex-Wife.
Are payments deductible as alimony?
RULING
The Tax Court held that regardless of what the parties intended, the payments
terminated based on a child-related contingency and, thus, did not qualify as
deductible alimony. Instead, the payments were considered child support. (Allen
H. Johnson, TC Memo 2014-67)
7. Spouses cannot file a joint return
Line 31 – Alimony Paid
Page 109
Line 31 – Alimony Paid
BRASS TAX Presentations
1040/540 TUNEUP 2014
PROPERTY SETTLEMENTS AS ALIMONY. A taxpayer is entitled to an alimony
deduction if all the Code requirements have been satisfied, even if it is possible
that the taxpayer’s payments might represent a division of marital property.
(Nelson, Thomas H., TC Memo 1998-268)
RECENT TAX COURT CASE
FACTS
FrankyFortyyearsmarried got divorced.
Both spouses waived alimony.
Equitable distribution of assets and debts included a $40,000 equalization
payment to Ex-Wife.
Can Franky deduct the $40,000 payment as alimony?
RULING
The Tax Court ruled that the payment was intended to ensure the equitable
division of the property, and property settlements or transfers between spouses
incident to a divorce are neither taxable events nor give rise to deductions or
recognizable income as alimony. Additionally, under state (Florida) law, the
taxpayer’s obligation would not terminate upon the death of his ex-wife. (Roscoe
McNealy, TC Summary Opinion 2014-14)
LUMP SUM PAYMENTS. A lump-sum payment made at the payor’s option in
lieu of future alimony payments qualifies as deductible alimony where it meets
all the requirements listed above. Where a divorce decree required monthly
alimony payments, but gives the payor spouse the option to make a single
payment of a fixed sum in lieu of future alimony, the lump-sum payment
qualifies as alimony. (IRS Letter Rulings 200329003 and 200246029)
(Making a lump-sum payment in the 1st or 2nd year could cause the alimony to
be recaptured under the front-end-loading rules.)
Line 31 – Alimony Paid
Page 110
Line 31 – Alimony Paid
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 32
IRA DEDUCTIONS
IRA CONTRIBUTIONS
FORM 5498 OFTEN INCORRECT. The IRS issued a warning to taxpayers that
incorrect information on Form 5498 (IRA Contribution Information) could
cause errors when filing individual income tax returns. Examples of incorrect
information include: 1) Reporting the IRA contribution for the wrong year, 2)
Failing to report the contributions as a conversion from a traditional IRA to a
Roth IRA or 3) Issuing duplicate Forms 5498.
IRA CONTRIBUTION LIMITS. Maximum allowable contributions to a traditional
and/or a Roth IRA are shown below. Contributions can be made 100% to
either type of IRA or some to both of them, but the total cannot exceed this
amount. You can contribute to a Traditional IRA only if you have
compensation and prior to the year you turn age 70 ½. Also tax-free combat
pay counts as compensation beginning after 12-31-2003. Additional IRA
contributions for a non-working spouse (spousal IRA) are allowed in the same
amount as for the working spouse.
For Tax Years
Under Age 50
Age 50 & Above
2013-2015
$5,500
$6,500
2008-2012
$5,000
$6,000
2006-2007
$4,000
$5,000
2005
$4,000
$4,500
2002-2004
$3,000
$3,500
1982-2001
$2,000
$2,000
1975-1981
$1,500
$1,500
CALIFORNIA CONFORMITY AND NON-CONFORMITY
California generally conforms to the Federal treatment of traditional and Roth
IRAs. See FTB Publication 1005 for any differences.
Line 32 - IRA Deductions
Page 111
Line 32 - IRA Deductions
BRASS TAX Presentations
1040/540 TUNEUP 2014
IRA DEDUCTIONS
TRADITIONAL IRA—NOT ACTIVE PARTICIPANT. You can contribute to a
traditional IRA if you have earned income and are under age 70 ½. If you, and
your spouse if married, are not an “active participant” in any qualified plan, the
amount either of you contribute to a traditional IRA is the amount you deduct.
TRADITIONAL IRA—ACTIVE PARTICIPANT. If you, or your spouse, are an
active participant, the deduction could be eliminated or limited if MAGI is too
high. Deduction of a traditional IRA phases out at amounts shown below for
the active participant. The phase out range for MFS filing status is $0-$10K.
TRADITIONAL IRA—SPOUSE IS AN ACTIVE PARTICIPANT, BUT I’M NOT.
An individual is not treated as an active participant in an employer-sponsored
plan merely because the individual’s spouse is an active participant.
Spouse Is
Non-Active Participant
Active Participant
Tax Years
Single Returns
Joint Returns
Joint Returns
1987-1997
$25,000 to $35,000
$40,000 to $50,000
$150,000 to $160,000
1998
$30,000 to $40,000
$50,000 to $60,000
$150,000 to $160,000
1999
$31,000 to $41,000
$51,000 to $61,000
$150,000 to $160,000
2000
$32,000 to $42,000
$52,000 to $62,000
$150,000 to $160,000
2001
$33,000 to $43,000
$53,000 to $63,000
$150,000 to $160,000
2002
$34,000 to $44,000
$54,000 to $64,000
$150,000 to $160,000
2003
$40,000 to $50,000
$60,000 to $70,000
$150,000 to $160,000
2004
$45,000 to $55,000
$65,000 to $75,000
$150,000 to $160,000
2005
$50,000 to $60,000
$70,000 to $80,000
$150,000 to $160,000
2006
$50,000 to $60,000
$75,000 to $85,000
$150,000 to $160,000
2007
$52,000 to $62,000
$83,000 to $103,000
$156,000 to $166,000
2008
$53,000 to $63,000
$85,000 to $105,000
$159,000 to $169,000
2009
$55,000 to $65,000
$89,000 to $109,000
$166,000 to $176,000
2010
$56,000 to $66,000
$89,000 to $109,000
$167,000 to $177,000
2011
$56,000 to $66,000
$90,000 to $110,000
$169,000 to $179,000
2012
$58,000 to $68,000
$92,000 to $112,000
$173,000 to $183,000
2013
$59,000 to $69,000
$95,000 to $115,000
$178,000 to $188,000
2014
$60,000 to $70,000
$96,000 to $116,000
$181,000 to $191,000
2015
$61,000 to $71,000
$98,000 to $118,000
$183,000 to $193,000
Line 32 - IRA Deductions
Page 112
Line 32 - IRA Deductions
BRASS TAX Presentations
1040/540 TUNEUP 2014
Sometimes Deductible – Traditional IRA—2014
ITEM
Contributory IRA (§408)
Rollover IRA (§408)
Maximum
contributions
allowed
$5,500 each—limited to earned
income. Age 50 and over is
$1,000 additional.
$11,000 total for spousal (nonworking) IRA with maximum of
$5,500 for either spouse.
No limit
Basis can also be rolled over.
Deduction?
Yes, but may be phased out if
covered by employer maintained
qualified retirement plan. Thus,
basis may occur.
No deduction.
Prevents taxation on amount
rolled over.
Tax filing date with no
extensions
No date limit. Must be done
within 60 days of receipt.
Deduction
phased out
Yes, if filer OR spouse covered
by employer qualified plan
Joint = $96,000-116,000 active
participant
Single/H of H = $60,000-70,000
active participant
MS = $0 active participant
All filing stati = $181,000191,000 non-active spouse
N/A
Penalties for
early
withdrawal
before age
59½
10% of taxable distribution for
the excise tax
PLUS
Regular income tax on taxable
distribution
10% of taxable distribution for
the excise tax
PLUS
Regular income tax on taxable
distribution
70½
No more contributions for person
who has attained age 70½
70½
For person who has attained age
70½, a rollover is still allowed.
Yes. Basis is recovered prorata.
Yes. If rollover is from a
qualified plan there is no basis to
recover. If rollover is from a
contributory IRA, basis is
recovered pro-rata.
Rollover
allowed?
Yes. Generally, into any other
permitted plan.
Yes. Generally, into any other
permitted plan, but rollover may
be allowed into similar qualified
plan as where original rollover
came from to retain “qualified”
status.
Coordination
with other
benefits or
plans
Must be coordinated with Roth
IRA since a total of $5,500 may
be contributed to the combo of
this IRA and the Roth IRA.
N/A
Date to make
contributions
Age to
withdraw
Is withdrawal
taxable?
Line 32 - IRA Deductions
Page 113
Line 32 - IRA Deductions
BRASS TAX Presentations
1040/540 TUNEUP 2014
Always Deductible – “Pension-Like” IRA—2014
ITEM
SEP IRA (§408(k))
S.I.M.P.L.E. IRA (§408(p))
Maximum
contributions
allowed
Employees: 25% of gross wages
with $52,000 maximum.
S/E persons: 20% of net selfemployment income with max.
contribution of $52,000.
Age 50 and over is the same as
above.
Compensation = Sched "C" net
inc. reduced by 50% of S/E tax.
By employee--$12,000 (limited to
100% of compensation). Age 50
and over is $2,500 additional.
Employer—mandatory contrib.
Either
(a) match up to 3% for
participating employees; or
(b) 2% for eligible employees.
Yes
Yes
Tax filing date with extensions
EMPLOYER – Tax filing date with
extensions.
EMPLOYEE – During the
calendar year.
No
No
Penalties for
early
withdrawal
before age
59½
10% of taxable distribution for the
excise tax
PLUS
Regular income tax on taxable
distribution
25% of taxable distribution if
withdrawn within 2 years
participation and 10% of taxable
distribution thereafter, for the
excise tax; Plus
Regular income tax on taxable
distribution
Age to
withdraw
70½ normally, but exception if still
working at 70½ (less than 5%
ownership).
Contributions can still be made
after age 70½ if employee has
earned income
70½
Can make contributions for
person who has attained age
70½
Yes--tax on all distributions
Yes—tax on all distributions
Yes to any other permitted plan
Yes, only to another SIMPLE
within the first two years of
participation and to any other
permitted plan after first two
years.
No—except considered
"qualified" to disallow traditional
IRA deduction
$12,000/$14,500 maximum
elective contributions must be
coordinated with other elective
deferral programs (401(k),
403(b), 457 deferred government
compensation.)—Annual max is
$17,500/$23,000.
Deduction?
Date to make
contributions
Deduction
phased out
Is withdrawal
taxable?
Rollover
allowed?
Coordination
with other
benefits or
plans
Line 32 - IRA Deductions
Page 114
Line 32 - IRA Deductions
BRASS TAX Presentations
1040/540 TUNEUP 2014
Never Deductible – Back loaded Roth IRA—2014
ITEM
Maximum
contributions
allowed
Deduction?
ROTH Contributions (§408A)
ROTH Conversion (§408A)
$5,500 per taxpayer-limited to
earned income. Age 50 and over
No limit.
is $1,000 additional. $11,000
Basis can also be rolled over.
total for spousal (non-working)
IRA with max $5,500/spouse.
No
No
Date to make
contributions
Tax filing date
With no extensions
Contributions after 70 ½ allowed
During calendar year
Contribution
phased out
Yes,
Joint = $181,000-191,000
MS = $0-10,000
All Others = $114,000-129,000
N/A
Penalties for
early
withdrawal
before age
59½
On converted amount:
No penalty if wait 5 years from
On earnings amount only:
conversion date.
10% of taxable distribution for the
On earnings amount only:
excise tax
10% of taxable distribution for the
PLUS
excise tax
Regular income tax on taxable
PLUS
distribution
Regular income tax on taxable
distribution
Age to
withdraw
No age limit for owner
Special rules when owner dies
No age limit for owner
Special rules when owner dies
Is withdrawal
taxable?
No tax on principal or income if
held 5 years and taken out after
age 59½, or for death, disability,
or for first-time homebuyers.
Otherwise, distribution is taxable
after contributions are recovered.
Taxable amount of conversion
amount is taxed in year of
conversion (but special rule for
2010 conversions).
No future tax on conversion
amount.
Rollover
allowed?
Yes. Conversions from almost
any retirement plan to Roth IRA
are allowed. No penalty applies
in this instance. Income is
claimed in year of conversion, but
special rule for 2010 conversions.
Yes. Conversions from almost
any retirement plan to Roth IRA
are allowed. No penalty applies
in this instance. Income is
claimed in year of conversion, but
special rule for 2010 conversions.
Coordination
with other
benefits or
plans
Must be coordinated with
traditional IRA since a total of
$5,500 may be contributed to the
combination of Roth & traditional
IRA.
N/A
Line 32 - IRA Deductions
Page 115
Line 32 - IRA Deductions
BRASS TAX Presentations
1040/540 TUNEUP 2014
ROTH “IRA” ACCOUNTS
BASIC ROTH
CONCEPTS
1) THE BASIC ROTH PLEDGE FOR EARNINGS. Behind Roth is a very basic
promise. Place money in a tax-favored savings account. The account grows
tax-deferred. Upon withdrawal (IF you keep the “basic pledge”) the promise
comes true—all earnings are tax-free.
THE BASIC 5-YR PLEDGE. The basic pledge normally concerns leaving the
money in the Roth account for the LATER of
• 5 tax years or
• until taxpayer attains age 59½.
st
BASIC 5-YR PERIOD. Begins on the 1 day of the taxpayer’s taxable year for
which the 1st contribution is made OR, if earlier, the 1st day of the taxable
year in which the 1st conversion occurs. Each taxpayer has his/her own
unique basic 5-year period which never starts over.
SANCTION. Break the pledge – the earnings are taxed. Maybe a penalty also.
2) ONE ADDITIONAL PLEDGE FOR CONVERSIONS ONLY. You pay tax on
Roth IRA conversions, but there is no 10% penalty IF you keep the additional
5-year conversion pledge.
5-YR COOLING OFF PERIOD. You must not touch the conversion money
during a 5-year cooling off period beginning January 1st of the year of the
conversion. Each conversion has its own 5-year cooling off period.
SANCTION. There will be a penalty at this withdrawal if there would have
been a penalty at date of conversion AND no Section 72(t) exception
applies at date of withdrawal.
Roth Accounts
Page 116
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
ROTH CONTRIBUTIONS
ROTH CONTRIBUTIONS PHASE-OUT. Roth contributions are limited and then
eliminated if MAGI reaches certain limits. These indexed limits are shown in
the table below. Roth contributions can be made up to the non-extended due
date of the tax return (normally April 15) for each taxable year. Contributions
can also be made after reaching age 70 ½.
Filing Status
2013
2014
2015
Single/H of H
$112K-$127K
$114K-$129K
$116K-$131K
MFJ
$178K-$188K
$181K-$191K
$183K-$193K
MFS
$0K-$10K
$0K-$10K
$0K-$10K
ROTH CONVERSIONS
2008
FOR 2008 & ON – DIRECT ROTH ROLLOVERS EXPANDED
DIRECT ROLLOVERS EXPANDED. In addition to Traditional IRAs, distributions
from qualified retirement plans under Section 401(a), 457, 403(a) and 403(b)
may be rolled over directly (“converted”) into a Roth IRA.
Pension Protection Act Of 2006.
CONVERSIONS – 2010 AND ON – NEW RULES. The Tax Increase
Prevention and Reconciliation Act of 2005 gave us new rules beginning in
2010 for Roth conversions.
MAGI LIMIT AND MFS PROHIBITION ELIMINATED! The $100,000
MAGI limit and the prohibition of MFS status conversions to Roth IRAs
are eliminated. Anyone can convert to Roth IRA!
PROBLEM – THE TAX AND THE PENALTY. Taxpayers must pay the tax
on the conversion in the year that the conversion was made! However,
the 10% penalty is waived for all taxpayers, unless a subsequent
distribution occurs within the 5-year "cooling off" period. Penalty then
will apply if it would have applied at the time of the conversion AND no
Section 72(t) exception applies at date of withdrawal.
Roth Accounts
Page 117
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
WE'VE HAD CONVERSIONS FOR YEARS! We are familiar with
conversions, but most often with clients in lower tax brackets who see
an advantage to converting to Roth. Starting in 2010, wealthier clients
became interested, but current income tax problems may make them lose
interest quickly.
TAXATION OF THE CONVERSION. Distributions in excess of taxpayer’s
basis will be included in income. Code Section 72 annuity rules govern
which part of the converted amount is treated as a tax-free return of
nondeductible contributions (basis) and which part is taxable. The value
of all similar retirement accounts at the end of the year must be included
in this calculation. For IRA distributions, this means the values of all
traditional plus SEP plus SIMPLE IRA accounts must be included.
Form 8606 uses these rules for determining tax on an IRA distribution.
Calculating the basis of the retirement plan being converted is essential,
but information is not always easy to obtain from the client.
RECHARACTERIZING A ROTH CONVERSION. A client who has made a
Roth conversion can recharacterize that conversion. The client has until
the due date plus extensions of the tax return (October 15, 2015 for 2014
tax returns) to completely cancel (“recharacterize”) any conversion. For
a client who has changed their mind about the conversion, this can be
very useful. See the discussion on recharacterizations and reconversions
later in this Roth Account section.
Roth Accounts
Page 118
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
ROTH DISTRIBUTIONS
“QUALIFIED DISTRIBUTIONS”. The Roth IRA allows “qualified distributions”
to be free from tax and penalty.
A “QUALIFIED DISTRIBUTION” meets both of the following two
requirements:
1) The distribution occurs at least 5 years after the Roth IRA holder
established and funded his/her first Roth account; and
2) It is distributed under one of the following circumstances:
• Roth IRA holder is at least age 59 ½; or
• Roth IRA holder becomes disabled before the distribution; or
• Beneficiary of the Roth IRA holder receives assets after holder’s
death; or
• Distributed assets (limited to a lifetime limit of $10,000) will be used
toward the purchase or rebuilding of a first home for the Roth IRA
holder or a qualified family member (Roth IRA holder, spouse,
children, grandchildren or parent).
NOT A “QUALIFIED DISTRIBUTIONS”. Withdrawals from a Roth IRA that are
not “qualified distributions may be subject to income tax and an additional 10%
early distribution penalty.
TAKING FROM THE ROTH “COOKIE JAR”. Distributions from a Roth account
remind me of taking cookies from my mom’s cookie jar when I was young.
The Roth “Cookie Jar” on page 121 will help you in determining the taxation
of any Roth distribution.
KEYS TO UNDERSTANDING. To tackle this problem, look at the following three
concepts. They make distributions from the Roth Account easier to understand.
1. ROTH ACCOUNTS—CONTRIBUTORY VERSUS CONVERSION. The
rules are different! Contributory accounts are simpler to understand since
only growth can be taxed or penalized. Conversion accounts can be more
complicated since both growth and principal can cause problems.
2. ROTH MONEY—GROWTH VERSUS PRINCIPAL. Generally growth
money (earnings) will cause taxation and penalty problems. Principal
money is normally not taxed or penalized. An exception occurs with some
Roth conversion accounts. Learn to separate growth from principal.
Roth Accounts
Page 119
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
3. ROTH DISTRIBUTION—TAXATION VERSUS PENALTIES. These are
two very distinct problems about Roth distributions. Always tackle the tax
problem first and then solve the penalty problem.
USING “THE COOKIE JAR” to analyze a distribution, you can take 3 simple steps
using the diagram on the next page:
1. WHICH DOLLARS? Tax law insists distributions come from Roth
Accounts in the order of the diagram, starting at the top. Original
contributions first, then conversions and finally the earnings.
2. IS THERE A TAX? The brief remarks to the left of the “Cookie Jar” are
your answers.
3. IS THERE A PENALTY? The comments at the right are your answer.
PRACTICE NOTE - RECORDS ARE ESSENTIAL!!
DISTRIBUTION RULES ARE SPECIAL. We need to understand the taxation of
Roth IRA distributions. These rules are very different than for distributions from
traditional IRAs. The Roth “Cookie Jar” can help here.
RECORDS ARE A ‘MUST’! We need records on all money put into Roth
Accounts. Is it from annual contributions? Rollover/Conversions? Both? When
did this happen? If you can’t answer these questions, you will not correctly
calculate the taxation and penalty on the Roth distribution.
AN IN-DEPTH REVIEW OF ROTH DISTRIBUTIONS (complete with numerous
real-life examples) was presented in our 2014 Tax Toolbox seminar.
Roth Accounts
Page 120
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
THE ROTH “COOKIE JAR”
Money Comes Out In The
Order of These "Layers"
TAX
PENALTY
Never
Contributions
Conversions
None—Already Paid
When Converted
(in FIFO order)
Taxable Part
Never
None-If
Wait For
5 Years To
Cool Off
Conversions
Never
Yes—If Break
5-Yr Basic Pledge
(in FIFO order)
Basis Part - Free
Earnings/Growth
Never
Possible—If
Break 5-Yr
Basic Pledge
DISTRIBUTIONS OF CONVERSIONS. FIFO ordering – Oldest conversion has taxable
and basis element distributed before next conversion is considered.
ROTH IS TAXPAYER-FRIENDLY! With a Traditional IRA, any distribution treats the
dollars as if they were "homogenized" – each contains some of the basis and some
of the growth. Dollars in a Roth Account are in "layers" like cookies in a cookie jar –
the dollars at the top are withdrawn first.
Roth Accounts
Page 121
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
UNDO
RECHARACTERIZATONS
DEFINITION OF A RECHARACTERIZATION.
An undo button for traditional or Roth IRA contributions, rollovers or
conversions is known as a “recharacterization”.
Trustee-to-trustee transfer required.
Must be done by due date of tax return plus extension.
Amount transferred is equal to original value contributed, rolled over or
converted plus any net allocable income. 2002 proposed regulations to
section 408 and 408A revise the computation of this net allocable income.
If account has declined in value, current value of account is transferred.
If account commingled with other accounts, prorata share is transferred.
ROTH RECONVERSIONS
REDO
DEFINITION OF A RECONVERSION.
After a recharacterization from a Roth IRA, the current (usually smaller)
amount in a traditional IRA is again converted to a Roth IRA. This process
is known as a “reconversion”.
Only one reconversion may be done each calendar year (since 11-1-98).
More than one reconversion is termed an “excess reconversion” and is not
taken into account for determining taxability of the conversion.
TIMING OF RECONVERSIONS (AFTER 1999)
Reconversions can only be done in the tax year following the tax year in
which the original conversion to a Roth IRA took place.
Additionally, reconversions may not be done until a 30-day period has
elapsed since the recharacterization.
This timing rule applies regardless of whether the recharacterization occurs
during the tax year of the original conversion or in the following year.
A reconversion made before the end of this time period is called a “failed
conversion”. It is subject to correction by recharacterizing it back to the
traditional IRA. A “failed conversion” that is not corrected, would result in
a distribution that is subject to tax (and a possible penalty) followed by a
regular contribution to the Roth IRA.
REPORTING FORMS. Form 1099-R will be issued when a Roth IRA
recharacterization or reconversion occurs. Check Box 7 for applicable codes.
Roth Accounts
Page 122
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
ROTH 401(K), 403(B) & 457
ACCOUNTS
Employers were allowed these beginning 01-01-2006. How do they work?
IT LOOKS LIKE A ROTH ACCOUNT.
EMPLOYEE CONTRIBUTIONS are non-deductible and are made post-tax.
EARNINGS may be non-taxable. To ensure that all earnings are non-
taxable, the distribution must be a “qualified” distribution as defined for
the Roth IRA. Thus the basic Roth promise (the 5-yr/age 59 ½ test
shown on page 116) must be met by the participant.
IT LOOKS LIKE A 401(K) ACCOUNT.
EMPLOYEE POST-TAX ELECTIVE DEFERRAL CONTRIBUTIONS are
as large as regular 401(k) pre-tax contributions.
EMPLOYERS can match employee contributions on a pre-tax basis.
ROLLOVER CONTRIBUTIONS to the Roth 401(k) are allowed if from
other tax-qualified plans as well as from other Roth 401(k) plans.
DISTRIBUTIONS can only begin on a participant’s termination of
employment, death, disability, attainment of age 59 ½ (if permitted
under the terms of the plan), or hardship.
MINIMUM DISTRIBUTION RULES will apply (generally at age 70 ½).
NOT “QUALIFIED DISTRIBUTIONS. Distributions used for a first home
purchase or to the extent of higher education expenses or made to
unemployed individuals for health insurance premiums are not treated as
“qualified” distributions.
EXCESS DEFERRALS may occur if participant contributes both pre-tax
and post-tax Roth 401(k) contributions to one or more defined
contribution plans that are in excess of the yearly limits.
OTHER RULES: Certain nondiscrimination rules will apply and separate
accounting is required.
DOES CURRENT LAW ALSO ALLOW OTHER ROTH ACCOUNT? The current
law allows employers to allow Roth 403(b) accounts, and starting in 2011 the
law also allows Roth 457 accounts for governmental plans.
Roth Accounts
Page 123
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
ROTH PAYOUT RULES
PAYOUT RULES BEFORE DEATH. Distributions from Roth IRAs are not
subject to the required distribution rules at age 70½ or the incidental death
benefit rules.
PAYOUT RULES UPON DEATH.
SPOUSE BENEFICIARY. If the account owner dies before the balance in a
Roth IRA has been distributed, one of two rules applies:
1) If the surviving spouse is the sole beneficiary of the account and elects
that the decedent’s account be treated as the beneficiary’s own account, no
minimum distributions are required;
2) If the surviving spouse is the sole beneficiary of the account and does not
elect to treat decedent’s account as his/her own, spouse can delay
distributions until decedent would have attained age 70½.
NON-SPOUSE BENEFICIARY. If the account owner dies before the balance
in a Roth IRA has been distributed, and any non-spouse is a beneficiary of
the account, the distribution rules that apply are similar to the rules for a
regular IRA whose owner dies before the required beginning date (RBD)
and where the account's beneficiary is a non-spouse.
Those rules require:
(1) a total distribution of the account by the end of the 5th year following
the year of the account owner's death, or
(2) annual distributions over the life expectancy of the beneficiary,
starting no later than December 31 of the year following the year in
which the account owner died.
CALIFORNIA CONFORMITY AND NON-CONFORMITY
California generally conforms to the Federal treatment of traditional and Roth
IRAs. See FTB Publication 1005 for any differences.
Roth Accounts
Page 124
Roth Accounts
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 33
STUDENT LOAN INTR DEDUCTION
OVERVIEW
§221 allows up to $2,500 of interest paid on a qualified education loan to be
deducted per year. Form 1098-E reports interest paid each year.
Person who is liable to make payments under the loan and who actually
makes those payments claims this deduction.
Qualified higher education expenses are reduced for expenses paid with tax
free assistance or from ESA proceeds or proceeds from an educational
savings bond. Also cannot be deducted if same expense qualified for an
educational tax credit (HOPE or Lifetime Learning).
Not available for dependents or persons filing MFS.
Deduction phased out as indicated in table below.
Filing Status
MFJ
All Other Filing Stati
2013
2014
2015
$125K-$155K
$130K-$160K
$130K-$160K
$60K-$75K
$65K-$80K
$65K-$80K
“QUALIFIED HIGHER EDUCATION EXPENSES”
Tuition, fees, books, supplies, equipment, room & board (if at least a halftime student) and transport.
Performed at an eligible education institution.
Undergraduate or graduate level courses.
“QUALIFIED EDUCATION LOAN”
Used to pay qualified educational expenses incurred by taxpayer, spouse, or
dependent when the loan was taken out.
Expenses paid or incurred within a reasonable time of when loan began.
Expenses were attributable to education when the recipient was a student
enrolled at least half time in program leading to degree or other credential.
A loan from a related taxpayer or a “mixed-use” loan is not a qualified
education loan. Notice 98-54 outlined these requirements.
CALIFORNIA CONFORMITY WITH SMALL DIFFERENCES
California conforms to Federal law except for a spouse of a non-California
domiciled military taxpayer residing in a community property state. A special
worksheet (included with Schedule CA instructions) computes this deduction.
See FTB Publication 1032 for more information.
Line 33 - Student Loan Intr
Page 125
Line 33 - Student Loan Intr
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 34
TUITION & FEES
DEDUCTION
EXPIRING PROVISION AS OF 12-31-2014
This provision is due to expire after 2014 unless Congress acts to extend it.
ATRA 2012 & TIPA 2014
OVERVIEW. “Qualified higher educational expenses” are deductible as an
adjustment to income. These are tuition and fees only for undergraduate and
graduate level courses. §222 governs this education incentive. Form 8917 is
used to report this deduction.
DEDUCTION AMOUNT—TWO TIERS. The deduction amount is:
$4,000 if AGI doesn’t exceed $65K ($130K for MFJ)
OR
$2,000 if AGI doesn’t exceed $80K ($160K for MFJ)
Note: This deduction has a cut-off, not a phase-out. American Opportunity
and LLC credits have phase-out amounts. See discussion for Form 8863
starting at page 287.
EXCEPTIONS. Taxpayers filing MFS and those being claimed as a dependent on
another return may not use this deduction. No deduction is allowed for an
individual in the same year a HOPE or Lifetime Learning Credit is taken for
the same individual. Expenses paid for by an ESA distribution, or to the extent
an interest exemption is claimed for educational savings bonds, are not eligible
for deduction. Expenses to the extent of earnings attributable to a QTP
distribution are not eligible for deduction. However, principal from a QTP
distribution is eligible.
CALIFORNIA DIFFERENCES
NON-CONFORMITY. California has not conformed to this provision.
Line 34 – Tuition Deduction
Page 126
Line 34 – Tuition Deduction
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 35
DOMESTIC PRODUCTION
ACTIVITIES DEDUCTION
OVERVIEW. Form 8903 is used to compute this deduction and Code §199
governs this extremely complicated deduction. The deduction is available to
any type of taxpayer who is conducting an active trade or business and who has
the “benefits and burdens” of ownership of qualified production property.
The deduction is equal to a “specified percentage” times the lesser of
a) the “qualified production activities income” for the taxable year, or
b) the “taxable income” (modified adjusted gross income for a sole proprietor)
determined without regard for this deduction for the taxable year.
In addition, the allowable deduction for any taxable year as determined above
shall not exceed 50% of the “W-2 wages” of the employer for that taxable year.
SPECIFIED PERCENTAGE. For 2010 and on, the specified percentage is 9%.
This percentage was 6% from 2007 through 2009 and 3% in 2005 and 2006.
W-2 WAGES. These wages are the sum of the wages subject to withholding plus
the elective deferrals. Payments to independent contractors and guaranteed
payments to partners are normally not included.
QUALIFIED PRODUCTION ACTIVITY. The following activities (and the gross
receipts obtained) are qualified production activities:
a) The manufacture, production, growth, or extraction in whole or in significant
part in the United States of tangible personal property (e.g. clothing, goods and
food), software development, or music recordings;
b) Film production (with some statutory exclusions), provided at least 50% of the
total compensation relating to the production of the film is compensation for
specified production services performed in the United States;
c) Production of electricity, natural gas, or water in the United States;
d) Construction or substantial renovation of real property in the United States
including residential and commercial buildings and infrastructure such as
roads, power lines, water systems, and communications facilities; or
e) Engineering and architectural services performed in the United States and
relating to construction of real property in the United States.
Line 35 –Domestic Prod Deduct Page 127 Line 35 – Domestic Prod Deduct
BRASS TAX Presentations
1040/540 TUNEUP 2014
NON-QUALIFIED PRODUCTION ACTIVITIES. Qualified activities do not
include (a) the sale of food and beverages prepared by the taxpayer at a retail
establishment, (b) the transmission or distribution of electricity, natural gas, or
potable water, and (c) any activity used by or for a related party.
“IN SIGNIFICANT PART”. Property will be treated as manufactured by the
taxpayer “in significant part” if (a) based on all of the taxpayer’s facts and
circumstances, the manufacturing, production, growth, or extraction activity
performed by the taxpayer in the United States is substantial in nature; or (b)
the labor and overhead costs incurred by the taxpayer in the United States for
the manufacture, production, growth and extraction of the property are at least
20% of the taxpayer’s total cost for the property.
QUALIFIED PRODUCTION ACTIVITY INCOME. Gross receipts derived from a
lease, rental, license, sale, exchange, or other disposition of tangible personal
property manufactured, produced, grown, or extracted by the taxpayer in whole
or “in significant part” within the United States are reduced by the sum of (a)
the cost of goods sold that are allocable to such receipts, plus (b) other
deductions, expenses and losses directly allocable to such receipts, plus (c) a
ratable portion of other deductions, expenses and losses that are not directly
allocable to such receipts or another class of income.
This deduction must be applied on an “item by item” basis. IRS (in both the
notice and regulations named later) goes into great detail, with many examples,
on how this concept will affect qualified production activities income.
In the simplest case for 2014, a taxpayer whose entire taxable income is from
qualified production activities multiplies that amount by 9% to determine its
tentative §199 deduction for the year. In the more complex, (and usual)
situation, where only a portion of a business’s activities qualify for the
deduction, a taxpayer must segregate qualifying gross receipts from nonqualifying gross receipts and must apportion the cost of goods sold and
deductions accordingly. In some cases simplified methods may be used in
making this apportionment; however, in other cases, a taxpayer may have to
specifically identify the cost of goods sold and the expenses related to
qualifying activities.
CALIFORNIA DIFFERENCES
NON-CONFORMITY. California does not conform to this deduction.
Line 35 –Domestic Prod Deduct Page 128 Line 35 – Domestic Prod Deduct
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINE 36
TOTAL OF ADJUSTMENTS TO INCOME
aka “OTHER ADJUSTMENTS”
OVERVIEW. This line should be the total of all adjustments to income from line
23 through line 35. However, it has become a line that includes “other
adjustments” not included in lines 23 through 35. These include the following:
1) Archer MSA deduction (see Form 8853). Identify as “MSA.”
2) Jury duty pay if given to employer because employer paid taxpayer’s salary
while taxpayer was on jury duty. Identify as “Jury Duty.”
3) Deductible expenses related to income reported on Line 21 from the rental
of personal property engaged in for profit. Identify as “PPR.”
4) Contributions to §501(c)(18)(D) pension plans (Pub 525). Identify as such.
5) Repayment of supplemental unemployment benefits under Trade Act of
1974 (Pub 525). Identify as “Sub-Pay TRA.”
6) Chaplain contributions to §403(b) plans (Pub 517). Identify as “403(b)”.
7) Reforestation amortization and expenses (Pub 535). Identify as “RFST”.
8) Attorney fees and court costs paid after 10-22-2004, for actions settled or
decided after that date involving certain unlawful discrimination claims (see
§62(e)), claims against the U.S. Government or a claim made under section
1862(b)(3)(A) of the Social Security Act, but only to the extent of gross
income from such actions (Pub 525). Identify as “UDC”.
9) Attorney fees and court costs paid by taxpayer in connection with an award
from the IRS for information provided by taxpayer after 12-19-2006, that
substantially contributed to the detection of tax law violations, up to the
amount of the award includible in gross income. Identify as “WBF”.
Line 36 –Other Adjustments
Page 129
Line 36 –Other Adjustments
BRASS TAX Presentations
1040/540 TUNEUP 2014
ARCHER MSA DEDUCTION
ARCHER MEDICAL SAVINGS ACCOUNT. An MSA is a trust or custodial
account with a financial institution where money is saved for future medical
expenses. In 2004, they were joined by another medical savings account called
Health Savings Accounts (HSA). (See Form 1040, line 25). Unlike the HSA,
California conforms to this provision of the law.
BENEFITS. A person owning an MSA has the following benefits:
•
•
•
•
The earnings in the MSA account are tax-free.
Contributions to the MSA account are tax deductible.
Contributions remain in the account from year to year until used up.
Distributions are nontaxable if used for qualified medical expenses.
WHO IS ELIGIBLE? Persons must meet the following two conditions:
• They must work for a small employer or be self-employed.
• They must have a high deductible health plan.
HIGH DEDUCTIBLE HEALTH PLAN DEFINED. For any year, it is a health
plan with an annual deductible amount shown below and under which the
annual maximum out-of-pocket expenses required to be paid (other than for
premiums) for covered benefits doesn’t exceed the amount shown below.
Item
Self-Only Annual
Deductible
Self-Only Annual
Max Exps (Not
Includ Premiums)
Family Annual
Deductible
Family Annual
Max Exps (Not
Includ Premiums)
2013
2014
2015
At least $2,150
Not > $3,200
At least $2,200
Not > $3,250
At least $2,200
Not > $3,300
$4,300
$4,350
$4,450
At least $4,300
Not > $6,450
At least $4,350
Not > $6,550
At least $4,450
Not > $6,650
$7,850
$8,000
$8,150
REPORTING FORMS. Form 1099-SA reports distributions from an MSA.
Form 5498-MSA verifies the amount contributed to the MSA. Form 8853
reports the contributions made and the deductions allowed.
Line 36 –Other Adjustments
Page 130
Line 36 –Other Adjustments
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX COMPUTATION
2013
2013 & ON – “BUSH” TAX RATES EXTENDED PERMANENTLY
ATRA 2012, signed January 2, 2013 extended the “Bush Tax Cuts”.
1) FAMILIAR BRACKETS of 10%, 15%, 25%, 28%, 33% and 35% remain.
2) NEW 39.6% BRACKET FOR HIGH INCOMES. The actual levels for the new
brackets can be seen in the Rapid-Scan-Tax Tables in this section.
3) BRACKET CUT-OFF POINTS FOR COUPLES. Cut-off points for the 10%
and 15% brackets for couples stay at exactly double the figure for single filers.
4) STANDARD DEDUCTIONS FOR COUPLES will continue to be twice those
for single filers.
5) PERSONAL EXEMPTION PHASEOUTS will once again apply for higher
incomes.
ATRA 2012
YOUR TAX TOOL – THE FOLLOWING PAGES CONTAIN:
FEDERAL KEY NUMBERS are lists of the standard deduction, personal
exemption, etc., for the current year plus the prior and succeeding year.
CALIFORNIA KEY NUMBERS are similar to the Federal Key Numbers.
INCOME TAX RATE SCHEDULES are given for 2014 & 2015 for Federal and
2014 for California.
AMOUNTS FOR 2014 & 2015. The Federal amounts are correct for both 2014
and 2015. California amounts are correct for 2014 only. Both IRS and FTB
make their calculations after the August figures for the Consumer Price Index
(CPI) are published. However, IRS normally calculates the FOLLOWING (2015)
year’s rates, while California calculates for the CURRENT (2014) year! For
California purposes official 2015 rates won’t be known until August of 2015.
Tax Computation
Page 131
Tax Computation
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL KEY NUMBERS
PERSONAL EXEMPTIONS
2013
2014
2015
$3,900
$3,950
$4,000
Single
$250,000
$254,200
$258,250
MFJ/Surv Spouse
$300,000
$305,050
$309,900
MFS
$150,000
$152,525
$154,950
H of H
$275,000
$279,650
$284,050
2013
2014
2015
Single
$250,000
$254,200
$258,250
MFJ/Surv Spouse
$300,000
$305,050
$309,900
MFS
$150,000
$152,525
$154,950
H of H
$275,000
$279,650
$284,050
2013
2014
2015
Single
$6,100
$6,200
$6,300
MFJ/Surv Spouse
$12,200
$12,400
$12,600
MFS
$6,100
$6,200
$6,300
H of H
$8,950
$9,100
$9,250
Singe/H of H
$1,500
$1,550
$1,550
Married
$1,200
$1,200
$1,250
$1,000
$1,000
$1,050
$350
$350
$350
“KIDDIE TAX” EARNINGS LIMIT
2013
2014
2015
Tax Free On Up To This Amount
$2,000
$2,000
$2,100
$1,000
$1,000
$1,050
$10,000
$10,000
$10,500
2013
2014
2015
$51,900
$52,800
$53,600
$7,150
$7,250
$7,400
Amount
Phase-Out Starts At AGI Of:
ITEMIZED DEDUCTIONS
3% Phase-Out Starts At AGI
STANDARD DEDUCTIONS
Additions For Age 65 Or Over Or Blind
Dependents—Greater of:
(A) This Basic Std Deduction; OR
(B) This Amount Plus Dependent’s Earned Inc
(But Never > Regular Std Deduction)
Parents May Elect To Claim Child’s Income
If Over This Amount
But Less Than This Amount
AMT EXEMPTION AMOUNT FOR PERSONS SUBJECT
TO “KIDDIE TAX” IS LESSER OF:
(A) This Basic Amount; OR
(B) This Amount Plus Child’s Earned Inc
Tax Computation
Page 132
Tax Computation
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA KEY NUMBERS
CALIFORNIA – PROP 30 ADDED 3 BRACKETS THROUGH 2018
THREE NEW BRACKETS were created for taxable incomes above $250K –
10.3%, 11.3%, & 12.3%. – for taxable years 2012 through 2018.
HEALTH SERVICES TAX REMAINS. Also called the “Millionaire Tax”. An extra
1% on taxable income over $1 Million – regardless of “normal” bracket.
PERSONAL EXEMPTIONS CREDITS
2013
2014
2015
Amount For Each Filer/Spouse
$106
$108
TBA
Amount For Dependents
$326
$333
TBA
Phase-Out Starts At AGI Of:
(For each $2,500 ($1,250 for MS) or fraction of Federal AGI over this threshold, credit drops
by $6 for Single, MFS & H of H and $12 for MFJ & Surv Spouse)
Single/MFS
$172,615
$176,413
TBA
MFJ/Surv Spouse
$345,235
$352,830
TBA
H of H
$258,927
$264,623
TBA
2013
2014
2015
Single/MFS
$172,615
$176,413
TBA
MFJ/Surv Spouse
$345,235
$352,830
TBA
H of H
$258,927
$264,623
TBA
2013
2014
2015
Single/MFS
$3,906
$3,992
TBA
MFJ/Surv Spouse/H of H
$7,812
$7,984
TBA
$1,000
$1,000
$1,050
$350
$350
$350
“KIDDIE TAX” EARNINGS LIMIT
2013
2014
2015
Tax Free On Up To This Amount
$1,000
$1,000
$1,050
$1,000
$1,000
$1,050
$10,000
$10,000
$10,500
ITEMIZED DEDUCTIONS
6% Phase-Out Starts At Federal AGI
STANDARD DEDUCTIONS
Dependents—Greater of:
(A) This Basic Std Deduction; OR
(B) This Amount Plus Dependent’s Earned Inc
(But Never > Regular Std Deduction)
Parents May Elect To Claim Child’s Income
If Over This Amount
But Less Than This Amount
Tax Computation
Page 133
Tax Computation
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL & CALIFORNIA
TAX RATE SCHEDULES
FEDERAL
Married Individuals Filing Separate Returns
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $9,075
10%
Over $9,075
Up To $36,900
15% Over $9,075
Plus $907.50
Over $36,900
Up To $74,425
25% Over $36,900
Plus $5,081.25
Over $74,425
Up To $113,425
28% Over $74,425
Plus $14,462.50
Over $113,425
Up To $202,550
33% Over $113,425
Plus $25,382.50
Over $202,550
Up To $228,800
35% Over $202,550
Plus $54,793.75
39.6% Over $228,800
Plus $63,981.25
Over $228,800
Plus $0
FEDERAL
Married Individuals Filing Separate Returns
2015 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $9,225
10%
Over $9,225
Up To $37,450
15% Over $9,225
Plus $922.50
Over $37,450
Up To $75,600
25% Over $37,450
Plus $5,156.25
Over $75,600
Up To $115,225
28% Over $75,600
Plus $14,693.75
Over $115,225
Up To $205,750
33% Over $115,225
Plus $25,788.75
Over $205,750
Up To $232,425
35% Over $205,750
Plus $55,662.00
39.6% Over $232,425
Plus $64,998.25
Over $232,425
Plus $0
CALIFORNIA
Married Individuals Filing Separate Returns
2014 Income Tax Rates
For California MFS status, see the Tax Rate Schedule for Single Individuals.
Tax Rate Schedules
Page 134
Tax Rate Schedules
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL
Married Individuals Filing Joint Returns & Surviving Spouses
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $18,150
10%
Over $18,150
Up To $73,800
15% Over $18,150
Plus $1,815.00
Over $73,800
Up To $148,850
25% Over $73,800
Plus $10,162.50
Over $148,850
Up To $226,850
28% Over $148,850
Plus $28,925.00
Over $226,850
Up To $405,100
33% Over $226,850
Plus $50,765.00
Over $405,100
Up To $457,600
35% Over $405,100
Plus $109,587.50
39.6% Over $457,600
Plus $127,962.50
Over $457,600
Plus $0
FEDERAL
Married Individuals Filing Joint Returns & Surviving Spouses
2015 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $18,450
10%
Over $18,450
Up To $74,900
15% Over $18,450
Plus $1,845.00
Over $74,900
Up To $151,200
25% Over $74,900
Plus $10,312.50
Over $151,200
Up To $230,450
28% Over $151,200
Plus $29,387.50
Over $230,450
Up To $411,500
33% Over $230,450
Plus $51,577.50
Over $411,500
Up To $464,850
35% Over $411,500
Plus $111,324.00
39.6% Over $464,850
Plus $129,996.50
Over $464,850
Plus $0
CALIFORNIA
Married (RDP) Individuals Filing Joint Returns & Qualifying Widow(er)
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $15,498
1%
Over $15,498
Up To $36,742
2% Over $15,498
Plus $154.98
Over $36,742
Up To $57,990
4% Over $36,742
Plus $579.86
Over $57,990
Up To $80,500
6% Over $57,990
Plus $1,429.78
Over $80,500
Up To $101,738
8% Over $80,500
Plus $2,780.38
Over $101,738
Up To $519,688
9.3% Over $101,738
Plus $4,479.42
Over $519,688
Up To $623,624
10.3% Over $519,688
Plus $43,348.77
Over $623,624
Up To $1,039,374
11.3% Over $623,624
Plus $54,054.18
12.3% Over $1,039,374
Plus $101,033.93
Over $1,039,374
Tax Rate Schedules
Page 135
Plus $0
Tax Rate Schedules
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL
Single Individuals (Other Than H of H & Surviving Spouse)
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $9,075
10%
Over $9,075
Up To $36,900
15% Over $9,075
Plus $907.50
Over $36,900
Up To $89,350
25% Over $36,900
Plus $5,081.25
Over $89,350
Up To $186,350
28% Over $89,350
Plus $18,193.75
Over $186,350
Up To $405,100
33% Over $186,350
Plus $45,353.75
Over $405,100
Up To $406,750
35% Over $405,100
Plus $117,541.25
39.6% Over $406,750
Plus $118,118.75
Over $406,750
Plus $0
FEDERAL
Single Individuals (Other Than H of H & Surviving Spouse)
2015 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $9,225
10%
Over $9,225
Up To $37,450
15% Over $9,225
Plus $922.50
Over $37,450
Up To $90,750
25% Over $37,450
Plus $5,156.25
Over $90,750
Up To $189,300
28% Over $90,750
Plus $18,481.25
Over $189,300
Up To $411,500
33% Over $189,300
Plus $46,075.25
Over $411,500
Up To $413,200
35% Over $411,500
Plus $119,401.25
39.6% Over $413,200
Plus $119,996.25
Over $413,200
Plus $0
CALIFORNIA
Single Individuals & Married (RDP) Filing Separate & Fiduciary
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $7,749
1%
Over $7,749
Up To $18,371
2% Over $7,749
Plus $77.49
Over $18,371
Up To $28,995
4% Over $18,371
Plus $289.93
Over $28,995
Up To $40,250
6% Over $28,995
Plus $714.89
Over $40,250
Up To $50,869
8% Over $40,250
Plus $1,390.19
Over $50,869
Up To $259,844
9.3% Over $50,869
Plus $2,239.71
Over $259,844
Up To $311,812
10.3% Over $259,844
Plus $21,674.39
Over $311,812
Up To $519,687
11.3% Over $311,812
Plus $27,027.09
12.3% Over $519,687
Plus $50,516.97
Over $519,687
Tax Rate Schedules
Page 136
Plus $0
Tax Rate Schedules
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL
Individuals Filing Head Of Household
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $13,150
10%
Over $13,150
Up To $50,200
15% Over $13,150
Plus $1,315.00
Over $50,200
Up To $129,600
25% Over $50,200
Plus $6,872.50
Over $129,600
Up To $209,850
28% Over $129,600
Plus $26,722.50
Over $209,850
Up To $411,500
33% Over $209,850
Plus $49,192.50
Over $411,500
Up To $439,000
35% Over $411,500
Plus $115,737.00
39.6% Over $439,000
Plus $125,362.00
Over $439,000
Plus $0
FEDERAL
Individuals Filing Head Of Household
2015 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $12,950
10%
Over $12,950
Up To $49,400
15% Over $12,950
Plus $1,295.00
Over $49,400
Up To $127,550
25% Over $49,400
Plus $6,762.50
Over $127,550
Up To $206,600
28% Over $127,550
Plus $26,300.00
Over $206,600
Up To $405,100
33% Over $206,600
Plus $48,434.00
Over $405,100
Up To $432,200
35% Over $405,100
Plus $113,939.00
39.6% Over $432,200
Plus $123,424.00
Over $432,200
Plus $0
CALIFORNIA
Individuals Filing Head Of Household
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $15,508
1%
Over $15,508
Up To $36,743
2% Over $15,508
Plus $155.08
Over $36,743
Up To $47,366
4% Over $36,743
Plus $579.78
Over $47,366
Up To $58,621
6% Over $47,366
Plus $1,004.70
Over $58,621
Up To $69,242
8% Over $58,621
Plus $1,680.00
Over $69,242
Up To $353,387
9.3% Over $69,242
Plus $2,529.68
Over $353,387
Up To $424,065
10.3% Over $353,387
Plus $28,955.17
Over $424,065
Up To $706,774
11.3% Over $424,065
Plus $36,235.00
12.3% Over $706,774
Plus $68,181.12
Over $706,774
Tax Rate Schedules
Page 137
Plus $0
Tax Rate Schedules
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL
Married Individuals Filing Separate Returns
2014 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $9,075
10%
Over $9,075
Up To $36,900
15% Over $9,075
Plus $907.50
Over $36,900
Up To $74,425
25% Over $36,900
Plus $5,081.25
Over $74,425
Up To $113,425
28% Over $74,425
Plus $14,462.50
Over $113,425
Up To $202,550
33% Over $113,425
Plus $25,382.50
Over $202,550
Up To $228,800
35% Over $202,550
Plus $54,793.75
39.6% Over $228,800
Plus $63,981.25
Over $228,800
Plus $0
FEDERAL
Married Individuals Filing Separate Returns
2015 Income Tax Rates
If Taxable Income Is:
The Tax Is:
$0
Up To $9,225
10%
Over $9,225
Up To $37,450
15% Over $9,225
Plus $922.50
Over $37,450
Up To $75,600
25% Over $37,450
Plus $5,156.25
Over $75,600
Up To $115,225
28% Over $75,600
Plus $14,693.75
Over $115,225
Up To $205,750
33% Over $115,225
Plus $25,788.75
Over $205,750
Up To $232,425
35% Over $205,750
Plus $55,662.00
39.6% Over $232,425
Plus $64,998.25
Over $232,425
Tax Rate Schedules
Page 138
Plus $0
Tax Rate Schedules
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINES 45 & 46
EXTRA TAXES
ALTERNATIVE MINIMUM TAX –
FORM 6251
FORM 1040, LINE 45
OVERVIEW. This additional tax is discussed under Form 6251.
EXCESS ADVANCE PREMIUM TAX
CREDIT REPAYMENT– FORM 8962
FORM 1040, LINE 46
OVERVIEW. The advance premium tax credit allowed to certain taxpayers when
they purchase health insurance through a marketplace can lead to the taxpayer
receiving too much credit during the calendar year and having to pay back
some or all of the excess credit received. Form 8962 is used to determine this
excess and the appropriate pay-back. This additional tax is discussed under
Form 8962.
Extra Taxes
Page 139
Extra Taxes
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINES 48 - 54
TAX CREDITS
CHILD & DEPENDENT CARE – FORM 2441
FORM 1040, LINE 49
OVERVIEW. This non-refundable credit can be 35% of child care expenses with a
max of $3,000 for one child and $6,000 for two or more. Thus credit cannot
exceed $1,050 or $2,100. Deemed income for disabled or full-time student
spouses is $250 or $500 per month. Credit normally used for a child under age
13. The ATRA 2012 made this credit permanent. California also has a nonrefundable child care credit (see FTB Form 3506).
EDUCATION CREDITS – FORM 8863
FORM 1040, LINE 50
OVERVIEW. Two special credits are available to help families reduce the costs of
education - the American Opportunity Tax Credit and Lifetime Learning
Credit. These Federal-only credits will be discussed under Form 8863.
RETIREMENT SAVINGS CONTRIB
CREDIT – FORM 8880
FORM 1040, LINE 51
OVERVIEW. This credit began in 2002 to encourage lower income individuals to
place monies in certain types of retirement accounts. This Federal-only credit
will be discussed under Form 8880.
Federal Tax Credits
Page 140
Federal Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
CHILD TAX CREDIT
FORM 1040, LINE 52
OVERVIEW. This credit is a maximum of $1,000 and was made permanent by the
ATRA 2012.
QUALIFYING CHILD. A “qualifying child” is a U.S. citizen or resident alien,
under the age of 17, whom taxpayer can claim as a Tier 1 Dependent.
APPLICATION OF THE CREDIT. The credit is non-refundable and is allowed
against AMT. For certain low-income families and families with three or more
qualifying children, any “lost” portion of this credit may be convertible to a
refundable child credit. See discussion for Form 8812, Additional Child
Credit.
PHASE-OUT. The amount of the credit is reduced by $50 for each $1,000 (or part
of $1,000) of modified AGI above $110,000 for MFJ, $75,000 for single filers
and heads of household, and $55,000 for MFS.
NEW PREPARER CHECKLIST – FORM 8967. Last year we showed you the
Paid Preparer’s Child Tax Credit Checklist (Form 8967). The checklist was
optional for 2013, but was to become mandatory in 2014. However, IRS has
removed Form 8967 from its current list of forms and has announced it will not
be using it for 2014.
CALIFORNIA DIFFERENCES – CHILD TAX CREDIT
NONCONFORMITY. California does not have a child tax credit. However, it
does have a dependent exemption credit which is worth $333 in 2014.
Federal Tax Credits
Page 141
Federal Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
RESIDENTIAL ENERGY CREDITS –
FORM 5695
FORM 1040, LINE 53
OVERVIEW. There is currently one credit in 2014—Residential Energy Efficient
Property Credit. The Non-Business Energy Property credit ended 12-31-2013.
This credit is discussed in the section for Form 5695. This is a Federal-only
credit.
OTHER CREDITS
FORM 1040, LINE 54
ALTERNATIVE MINIMUM TAX
CREDIT – FORM 8801
OVERVIEW. This credit is for the non-refundable portion of the alternative
minimum tax credit. This Federal-only credit will be discussed in the section
for Form 8801. The refundable portion of this credit which previously
appeared on Form 1040, Line 71 expired on 12-31-2012.
VEHICLE TAX CREDITS –
FORMS 8910 & 8936
OVERVIEW. This credit is for the non-refundable portion of various vehicle tax
credits. This Federal-only credit will be discussed in the section for Forms
8910 and 8936.
ADOPTION CREDIT
FORM 8839
OVERVIEW. For 2012 and on, this credit again becomes non-refundable.
Adoption credits were refundable in 2010 and 2011. This Federal-only credit
is discussed at Form 8839.
Federal Tax Credits
Page 142
Federal Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA HAS LOTS AND LOTS OF CREDITS!!
CALIFORNIA TAX CREDITS. A list of all current California credits for 2014
starts on page 150 and is followed by a list of expired credits which can be
carried forward to 2014 from previous years.
NONREFUNDABLE CHILD CARE
FORM 3506
FORM 540, LINE 40
OVERVIEW. Taxpayers are allowed a nonrefundable tax credit for the cost of
employment-related child and dependent care. Prior to 2011, this credit was
refundable. The credit is based on a percentage of the nonrefundable Federal
credit (Federal Form 2441). Form 3506 is required to compute the credit.
California treats parents who were never married to each other the same as
divorced taxpayers for purpose of this credit thus creating another
Federal/California difference. In addition, military taxpayers must make
special adjustments to their California income. See Form 3506 for details. The
amount of the credit is as shown below:
California
AGI
% Federal
Credit
2002
% Federal
Credit
2003-2014
$40,000 or less (Includes Non-filers)
63%
50%
Over $40,000 but not over $70,000
53%
43%
Over $70,000 but not over $100,000
42%
34%
Over $100,000
0%
0%
California Tax Credits
Page 143
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
NEW JOBS CREDIT – FORM 3527
FORM 540, LINE 41 & 42 (2013)
OVERVIEW. For taxable years beginning on or after 01-01-2009, “Qualified
employers” can claim a $3,000 credit for each net increase in “qualified fulltime employees” hired in the current tax year as compared with the previous tax
year. If the employer first commenced doing business in California in the
current taxable year, the number of qualified full-time employees for the
immediately preceding taxable year is zero. The credit does not reduce any
other deduction for qualified wages. Only returns filed by the “cut-off date”
qualify for the credit. The credit must be claimed on a timely filed original
return. The credit is not refundable. The credit cannot reduce tax below the
tentative minimum tax. Any credit not used in the current year can be carried
forward for up to 8 years. The credit is not subject to the 50% limitation for
business credits discussed above.
MAXIMUM CREDIT AMOUNT. The FTB allocated the credit on a first-come,
first-served basis. The maximum amount allocated for this credit could not
exceed $400 million for all taxpayers for all taxable years.
“CUT-OFF DATE”. FTB granted the credit through the end of the quarter in
which the $400 million runs out. FTB announced as of 08/20/2014 that
approximately $323.0 million of the allocation had been claimed. However,
even though there seems to be another $77 million available for the credit, the
2014 Form 540 has eliminated both lines 41 and 42 which seems to say that the
credit is not available for 2014. Information regarding the credit and the
amount allocated to date (and the possible cut-off date) can be found at the
FTB website (“ftb.ca. gov” and search the term “new jobs credit”).
OTHER STATE TAX CREDIT- SCHED S
FORM 540, LINE 43 & 44
OVERVIEW. If income is taxed by two states, use the chart below to determine
where to take this credit.
Income Is From
California Resident
California Non-Resident
Normal Rule:
Almost All States
Credit on California Resident
Return
Credit on Other State
Resident Return
The Exceptions:
AZ, IN, OR, VA or Guam
Credit on Other State
Nonresident Return
Credit on California
Nonresident Return
California Tax Credits
Page 144
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
SENIOR HEAD OF HOUSEHOLD
CREDIT #163
FORM 540, LINE 43 & 44
OVERVIEW. Qualified senior head of household taxpayers are allowed a non-
refundable tax credit. A “qualified senior head of household taxpayer” is an
individual who satisfies all of the following.
(1) Reached age 65 before close of the taxable year;
(2) Qualified as a head of household (R&TC 17042) for either of the 2 years
immediately prior to the current taxable year by providing a household for a
qualifying individual who died during either of those two taxable years;
(3) Is not otherwise qualified to file as a head of household during the current
tax year; and
(4) Has a California AGI that does not exceed an annual amount to be indexed
annually for inflation. (For 2014, the maximum AGI amount is $69,005.)
For 2014, the credit is the lesser of 2% of the taxpayer’s taxable income or
$1,300. The maximum credit amount is indexed annually for inflation. The
credit can reduce regular tax below tentative minimum tax. In addition, any
excess credit can be carried over to future years until exhausted.
JOINT CUSTODY HEAD OF HOUSEHOLD
CREDIT #170
FORM 540, LINE 43 & 44
OVERVIEW. Taxpayers who provide a home for part of a taxable year for their
children or grandchildren (but don’t qualify for head of household status) are
allowed a non-refundable tax credit. A “qualified joint custody head of
household taxpayer” is an individual who satisfies all of the following.
(1) Is not married at the end of the year, or is married but files MFS;
(2) Taxpayer’s spouse was not a member of taxpayer’s household during the
entire taxable year;
(3) Maintains a household which is the home of the taxpayer’s “qualifying
child” for at least 146 days but not more than 219 days of the taxable year
(pursuant to an agreement reached during divorce proceedings or pursuant to a
divorce decree);
California Tax Credits
Page 145
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
(4) Furnishes more than 50% of the cost of maintaining that household during
the taxable year; and
(5) Does not qualify as head of household under R&TC 17042 or as a surviving
spouse under R&TC 17046.
“Qualifying child” means a son, stepson, daughter, stepdaughter or grandchild
of the taxpayer. Normally a dependent exemption is not needed. However, if
the child is married, the taxpayer must be entitled to claim a dependent
exemption credit for the child. To qualify for the credit, the taxpayer does not
have to have legal physical custody of the child(ren). (Appeal of Jerald Wesley
Bucklin, Jr (March 19, 1998) 97A-0601.)
For 2014, the credit is the lesser of 30% of the taxpayer’s net tax or $425. The
maximum credit amount is indexed annually for inflation. The credit can
reduce regular tax below tentative minimum tax. However, there is no
carryover if the credit exceeds tax.
DEPENDENT PARENT
CREDIT #173
FORM 540, LINE 43 & 44
OVERVIEW. Qualified married taxpayers are allowed a non-refundable tax credit.
A “qualified taxpayer” is an individual who satisfies all of the following.
(1) Is married and files MFS;
(2) Taxpayer’s spouse was not a member of taxpayer’s household during last 6
months of taxable year;
(3) Maintains a household, whether or not the taxpayer’s home, which is the
principal place of abode for a dependent mother or father of the taxpayer for
the taxable year;
(4) Furnishes more than 50% of the cost of maintaining that household during
the taxable year; and
(5) Does not qualify as head of household under R&TC 17042 or as a surviving
spouse under R&TC 17046.
For 2014, the credit is the lesser of 30% of the taxpayer’s net tax or $425. The
maximum credit amount is indexed annually for inflation. The credit can
reduce regular tax below tentative minimum tax. However, there is no
carryover if the credit exceeds tax.
California Tax Credits
Page 146
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA COMPETES
CREDIT #233
FORM 540, LINE 43 & 44
OVERVIEW. This is a new income tax credit for tax year 2014. It is available to
businesses that want to locate in California or stay and grow in California. A
business must apply for the credit and the tax credit agreements will be
negotiated by GO-Biz and approved by a statutorily created “California
Competes Tax Credit Committee.” See website below for more information.
www.business.ca.gov/Portals/0/CA%20Competes/Docs/CCTC_FAQ.pdf
NEW EMPLOYMENT
CREDIT #234
FORM 540, LINE 43 & 44
OVERVIEW. It is available for each taxable year beginning on or after January 1,
2014, and before January 1, 2021. This credit is for a qualified taxpayer that hires
a qualified full-time employee on or after January 1, 2014, and pays or incurs
qualified wages attributable to work performed by that employee in a designated
census tract, pilot area or former economic development area, known as the
Designated Geographic Area (DGA), and receives a Tentative Credit Reservation
(TCR) for that employee. I n addition, an annual certification of employment (by
EDD within 30 days of hire) is required with respect to each qualified full-time
employee hired in a previous taxable year. In order to be allowed a credit, the
qualified taxpayer must have a net increase in the total number of full-time
employees in California. Like Enterprise Zone credits before them, the New
Employment Credit will likely be administered by companies who specialize in
this tax incentive for CA businesses. We will most likely be affected when credits
pass through on K-1s. Form 3554 is shown on the next page.
California Tax Credits
Page 147
California Tax Credits
BRASS TAX Presentations
California Tax Credits
1040/540 TUNEUP 2014
Page 148
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
COLLEGE ACCESS
CREDIT #235
FORM 540, LINE 43 & 44
OVERVIEW. This is a new credit for tax year 2014 and is discussed under
Schedule A, Charitable Deductions on page 172. See website below for more
information.
http://www.treasurer.ca.gov/cefa/catc/index.asp
NONREFUNDABLE RENTERS CREDIT
FORM 540, LINE 46
OVERVIEW. It is for "qualified California renters," is not refundable and is
limited by California AGI. The credit is $60 for single and MS returns with a
2014 California AGI of less than $37,768 and $120 for all other returns with a
2014 California AGI of $75,536 or less. Amounts are indexed annually.
“QUALIFIED RENTER”. A "qualified California renter" is a person who is a
California resident who rented or occupied premises in California that was a
principal place of residence during at least 50% of the taxable year.
NOT A “QUALIFIED RENTER”. A "qualified California renter" does not include:
(1) An individual who rents and occupies premises that are exempt from
property taxes for more than 50% of the year; or (2) An individual whose
principal place of residence for more than 50% of the taxable year is with any
other person who claims that individual as a dependent for income tax
purposes; or (3) An individual (and spouse if applicable) was granted the
homeowner's property tax exemption during the taxable year. (Does not apply
if an individual’s spouse is granted the homeowner's property tax exemption if
each spouse maintains a separate residence for the entire taxable year.)
MARRIED FILING SEPARATE. A husband and wife are entitled to only one
renter's credit. If the husband and wife file separate returns, the credit may be
taken by either or equally divided between them.
PART-YEAR RESIDENT. The credit is available to a qualifying renter who is a
nonresident for any portion of the taxable year at the rate of 1/12 of the credit
for each full month that the person resided in California.
California Tax Credits
Page 149
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
California Tax Credit Checklist—2014
Credit
Title
Code
Number
Form
Final
Year
For
AMT?
Carry
Over
California Competes
233
None
N/A
No
6 Yrs
CA Motion Pict & TV Production
223
3541
N/A
No
Yes
Child Adoption
197
Wrksheet
N/A
No
Yes
Child/Dependent Care Exps
232
3506
N/A
Yes
No
College Access
235
None
2016
No
6 Yrs
Comm Devel Finl Instit Deposit
209
None
N/A
No
No
Dependent Parent
173
Wrksheet
N/A
No
No
Disabled Access
205
3548
N/A
No
Yes
Donated Agri Prod Transport
204
3547
N/A
No
Yes
Donated Fresh Fruits Or Vegetables
224
3811
N/A
No
7 Yrs
Enhanced Oil Recovery
203
3546
N/A
No
Yes
Enterprise Hire/Sales/Use Tax
176
3805Z
N/A
Yes
Yes
Environmental Tax
218
3511
2017
No
Yes
None
None
N/A
Yes
No
Joint Custody H of H
170
Wrksheet
N/A
No
No
LAMBRA Hire
198
3807
N/A
No
Yes
Low Income Housing
172
3521
Federal
Yes
Yes
Manuf Enhanced Area Hiring
211
3808
N/A
No
Yes
Natural Heritage Preservation *
213
3503
2015
Yes
Yes
New Employment Credit
234
3554
2020
No
Yes
Other State Tax
187
Sch “S”
N/A
Yes
No
Prior Year AMT
188
3510
N/A
No
Yes
Prison Labor Inmate
162
3507
N/A
Yes
No
None
Wrksheet
N/A
Yes
No
Research
183
3523
N/A
Yes
Yes
Senior H of H
163
Wrksheet
N/A
No
No
Targeted Tax Area (TTA) Tax
210
3809
N/A
Yes
Yes
Exemption
Renter’s (Non-refundable)
* Funding for this credit is not available from 07-01-2008 through 12-31-2009. Funding
begins again on 01-01-2010 through 06-30-2015.
California Tax Credits
Page 150
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
Expired California Tax Credit Checklist—2014
(Only Available If Carryover From Previous Year)
Credit Title
Code
Carryover
Agricultural Products Donation
175
Unlimited
Commercial Solar Electric System
196
Unlimited
Commercial Solar Energy
181
Unlimited
Contribution Of Computer Software
202
Unlimited
Employer Child Care Program
189
Unlimited
Employer Child Care Contribution
190
Unlimited
Energy Conservation
182
Unlimited
Farm Worker Housing
207
Unlimited
Joint Strike Fighter—Wages (Ended 2005)
215
8 Yrs
Joint Strike Fighter—Property Costs (Ended 2005)
216
8 Yrs
Local Agency Military Base Recovery Area Sales/Use Tax
198
Unlimited
LARZ Hiring and Sales or Use Tax (Ended 1997)
159
15 Yrs
Low Emission Vehicle
160
Unlimited
Manufacturer’s Investment (Ended 2003)
199
8 or 10 Yrs
New Jobs
220
8 Yrs
Orphan Drug
185
Unlimited
Political Contribution
184
Unlimited
Recycling Equipment
174
Unlimited
Residential Rental and Farm Sales
186
Unlimited
Rice Straw (Ended 2007)
206
10 Yrs
Ridesharing—Large Employer
191
Unlimited
Ridesharing—Small Employer
192
Unlimited
Ridesharing—Employer Transit Passes
193
Unlimited
Ridesharing (Pre-1989 Carryovers Only)
171
Unlimited
Salmon & Steelhead Trout Habitat Restoration
200
Unlimited
Solar Energy
180
Unlimited
Solar Pump
179
Unlimited
Solar Or Wind Energy System (Ended 2005)
217
8 Yrs
Targeted Tax Area Sales/Use Tax
210
Unlimited
Technological Property Contribution
201
Unlimited
Water Conservation
178
Unlimited
Young Infant
161
Unlimited
California Tax Credits
Page 151
California Tax Credits
BRASS TAX Presentations
1040/540 TUNEUP 2014
LINES 57 - 62
OTHER TAXES
SELF-EMPLOYMENT TAX – SCHEDULE SE
FORM 1040, LINE 57
OVERVIEW. This additional tax is discussed under Schedule SE.
ADDITIONAL TAX
ON IRAS & RETIREMENT PLANS –
FORM 5329
FORM 1040, LINE 59
OVERVIEW. Additional tax penalties levied on retirement plans are discussed
under Form 5329.
HOUSEHOLD EMPLOYMENT TAXES
– SCHEDULE H
FORM 1040, LINE 60A
OVERVIEW. This additional tax due to employment of a household employee is
discussed under Schedule H.
FIRST-TIME HOMEBUYER CREDIT
REPAYMENT – FORM 5405
FORM 1040, LINE 60B
OVERVIEW. The 2008 First-Time Homebuyer credit is being paid back over 15
years. This additional amount due is discussed under Form 5405.
Other Taxes
Page 152
Other Taxes
BRASS TAX Presentations
1040/540 TUNEUP 2014
HEALTH CARE INDIVIDUAL
RESPONSIBILITY PAYMENT
FORM 1040, LINE 61
OVERVIEW. Taxpayers who do not have adequate health insurance in 2014 and
who do not qualify for an exemption from having such insurance will be
subject to a “penalty” tax. There is a 2-page worksheet to calculate this penalty
tax. This individual responsibility payment along with applicable exemptions
will be discussed under Form 8965
ADDITIONAL MEDICARE TAX –
FORM 8959
FORM 1040, LINE 62
OVERVIEW. This additional 0.9% Medicare tax on earned income is discussed
under Form 8959.
NET INVESTMENT INCOME TAX –
FORM 8960
FORM 1040, LINE 62
OVERVIEW. This additional 3.8% Medicare tax on certain net investment income
is discussed under Form 8960.
Other Taxes
Page 153
Other Taxes
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX PAYMENTS
FORM 1040, LINE 64 - 73
FORM 540, LINE 73
TAX WITHHELD – R/E & OTHER W/H
CALIFORNIA FORM 540, LINE 73
CALIFORNIA WITHHOLDING TAXES
WITHHOLDING OTHER THAN ON W-2 OR FORMS 1099 is recorded here.
There are types of withholding mandated by California. Only one applies to
California residents – the withholding from certain real property sales. Nonresidents may see withholding by management companies on rental properties,
or by certain business entities or estates & trusts, on California source income.
REAL ESTATE SALES. Escrow companies must withhold 3.33% of the total
sales price of California real estate sold for more than $100,000. Form 593
reports this withholding. Forms 593-C, 593-E or 593-I compute any exceptions
to the withholding. Sellers can elect an alternative to the 3.33% withholding
based on the maximum tax rate for the seller (12.3% for individual taxpayers)
multiplied by the gain on the sale. The seller is required to certify under penalty
of perjury the elected alternative withholding amount. Form 593-E computes
the estimated gain and contains the certification. In addition, for sales of
California real property, buyers must withhold on the principal portion of each
installment sale payment if the sale of California real property is structured as an
installment sale.
PUBLICATIONS. FTB Publication 1016 has the complete rules.
OTHER WITHHOLDING – INCLUDING WITHHOLDING ON RENTAL
PAYMENTS. This will usually be on non-residents of California. Property
managers use a Form 592-B. You’ll need a copy. Business entities or
estate/trust entities will provide Schedule K-1 – we recommend it be attached to
the return.
ERRORS IN WITHHOLDING. California has a Withholding-At-Source Hotline at
916-845-4900 and a FAX-line for this case as well – 916-845-9512. Fax
taxpayer ID and correct year to apply the withholding.
Tax Payments
Page 154
Tax Payments
BRASS TAX Presentations
1040/540 TUNEUP 2014
EARNED INCOME CREDIT
FORM 1040, LINE 66
OVERVIEW. Schedule EIC is used to claim this credit. The credit is discussed in
the section for Schedule EIC. This is a Federal-only credit.
ADDITIONAL CHILD TAX CREDIT
FORM 1040, LINE 67
OVERVIEW. Any “lost” portion of the child tax credit may be convertible to a
refundable child credit. This Federal-only credit is discussed at Form 8812.
AMERICAN OPPORTUNITY CREDIT
FORM 1040, LINE 68
OVERVIEW. A portion (40%) of the American Opportunity Credit is refundable.
This Federal-only credit is discussed at Form 8863.
NET PREMIUM TAX CREDIT
FORM 1040, LINE 69
OVERVIEW. The advance premium tax credit allowed to certain taxpayers when
they purchase health insurance through a marketplace can lead to the taxpayer
receiving too little credit during the calendar year and thus having an additional
credit due to them. Form 8962 is used to determine this additional credit due.
This additional credit is discussed under Form 8962.
Tax Payments
Page 155
Tax Payments
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX REFUND
FORM 1040, LINE 75
FORM 540, LINE 115
IRS TO IMPOSE DIRECT DEPOSIT LIMITS TO PREVENT IDENTITY THEFT.
The IRS plans to put in place new procedures starting January 2015 to limit the
number of refunds electronically deposited into a single financial account or
pre-paid debit card to three, as part of an effort to combat fraud and identity
theft, including fraud committed by unscrupulous tax preparers. Fourth and
subsequent refunds automatically will convert to a paper refund check and be
mailed to the taxpayer, and the taxpayer will be informed that their account has
exceeded the direct deposit limits. They will receive a paper refund check in
approximately four weeks if there are no other issues with the return. Families
who have parents’ and children’s refunds deposited into a family-held bank
account should make other deposit arrangements.
TAXES INCLUDE PENALTIES AND INTEREST FOR REFUND LOOKBACK. A
recent IRS Chief Counsel Advice notes that tax is deemed to include additions
to tax for penalty and interest charges. (IRC §6665 and 6601(e)(1)) Thus, any
payment made with respect to the tax for the period at issue will be an amount
paid for purposes of the limitation on refunds, even if the payment was
specifically allocated to a noncontested item of the liability (i.e. tax, penalty, or
interest not specifically at issue) (CCA 201429023)
CALIFORNIA REFUND
WHERE’S MY STATE TAX REFUND? The fastest way for taxpayers to check
on a state tax refund is to visit FTB website at ftb.ca.gov and click on “Where’s
My Refund”. To check a refund status, taxpayers need their (1) Social Security
Number, (2) Mailing Address as shown on tax return, and (3) Refund Amount as
shown on tax return.
E-FILE & DIRECT DEPOSITS. FTB says that taxpayers who e-file their returns
and request a direct deposit can expect their refund within 7 to 10 days.
FILING PAPER RETURNS. FTB also says that taxpayers who file a paper
return near the April 15 filing deadline can expect to wait up to 8 to 12 weeks for
their refund. This is because FTB processes paper-filed returns manually along
with nearly 3 million other returns filed near the deadline.
SCHOLARSHARE 529 COLLEGE SAVINGS PLANS DIRECT DEPOSITS.
California refunds can be directly deposited to Scholarshare accounts.
Tax Refund
Page 156
Tax Refund
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX DUE
FORM 1040, LINE 78
FORM 540, LINE 111 & 114
WEB-BASED DIRECT PAY. IRS Direct Pay allows taxpayers to pay their tax
bills or make estimate tax payments directly from their checking or savings
accounts without any fees or pre-registration. (IRS News Release IR-2014-67)
Direct Pay provides:
1. Instant confirmation that the taxpayer’s payment has been submitted.
2. 24 hours a day/seven days a week access
3. Nonretention of bank account information
4. Five simple steps to verify identity, enter payment, review, sign, and
record the transaction
IRS’S FIRST-TIME ABATEMENT POLICY. The IRS has updated its First-Time
Abate (FTA) policy after an April 2013 report from the Treasury Inspector
General for Tax Administration (TIGTA) found the policy had not been
consistently administered and that few taxpayers qualifying for relief actually
requested it. Based on a taxpayer’s compliance history, FTA relief is
potentially available for failure to file penalties, failure to pay penalties, and
failure to deposit penalties. In order to be granted relief a taxpayer must have
filed all currently required returns (or valid extensions) and paid or arranged to
pay any tax due.
“First-time” can actually happen many times during a taxpayer’s life.
Taxpayers can qualify for abatement under the FTA policy so long as they have
not had any penalties within the last 3 years. Relief is not available for
information reporting penalties, including delinquent foreign information
returns. Use of the FTA can be requested by calling the IRS Practitioner
Priority Service (PPS) line at (866) 860-4259.
CALIFORNIA PENALTY ABATEMENT
California has released two new forms to request penalty abatement for
reasonable cause: Form 2917, Reasonable Cause - Individual and Fiduciary
Claim for Refund, and Form 2924, Reasonable Cause – Business Entity Claim
for Refund. The forms are shown on the next two pages.
Tax Due
Page 157
Tax Due
BRASS TAX Presentations
Tax Due
1040/540 TUNEUP 2014
Page 158
Tax Due
BRASS TAX Presentations
Tax Due
1040/540 TUNEUP 2014
Page 159
Tax Due
BRASS TAX Presentations
1040/540 TUNEUP 2014
INSTALLMENT PLAN AND OIC FEES. Effective January 1, 2014, the new fee
for entering into an installment agreement is $120 (full cost is $282) and $50
(full cost is $85) for reinstating or restructuring an agreement. The fees for a
direct debit agreement and for low-income taxpayers remain unchanged at $52
(full cost $122) and $43 respectively. The new fee for an offer in compromise
will increase to $186 (full cost of an OIC is $2,718). Low-income taxpayers
and taxpayers making an offer based solely on doubt as to liability will
continue to pay no fee.
STATUTE OF LIMITATIONS ON COLLECTION. Although the IRS normally has
10 years to collected assessed tax (IRC §6502(a)) a District Court held that
installment agreements can stall the statute of limitations. According to the
court, the time elapsed while a debtor was repaying a tax debt in installments
should not be counted against the 10 years. Furthermore, if the IRS terminates
a payment plan, the limitations period for tax collection is extended for another
30 days. (Chelsea Brewing Co, LLC, (2014) DC NY)
Tax Due
Page 160
Tax Due
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE A
SPOUSES FILING
SEPARATE RETURNS
ZERO STANDARD DEDUCTION LIMITATION. The standard deduction of a
married taxpayer who files a separate return is zero if the taxpayer’s spouse
itemizes deductions. (IRC §63(c)(6)(A)) The married taxpayer’s standard
deduction is zero even if the taxpayer’s spouse who itemizes is “considered
unmarried” (defined as: the spouse lives apart from the taxpayer at all times
during the last 6 months of the year, has a qualifying child living with him/her,
and furnishes > 50% of the cost of maintaining the household).
However, the zero limitation does not apply to the spouse who is “considered
unmarried”. That spouse may use the full standard deduction, and is not
limited by the other spouse’s election to itemize deductions. (Chief Counsel
Advice 200030023)
QUESTION
• Husband and Wife file separate returns
• Wife files as Head of Household
• Husband’s status is Married Filing Separately
• If Wife itemizes, must Husband?
• If Husband itemizes, must Wife?
ANSWER
If Wife itemizes, Husband’s standard deduction is zero even though Wife is
considered unmarried (she must be since she qualifies for H of H status).
If Husband itemizes, Wife may still use the full standard deduction, because
the zero limitation does not apply to the spouse who is considered unmarried.
That spouse may use the full standard deduction, and is not limited by the
other spouse’s election to itemize deductions.
PARTNERS IN NONMARRIAGE RELATIONSHIPS. Partners in registered
domestic partnerships, civil unions, or other similar formal relationships that
are not “marriages" under state law are not married for federal tax purposes
either. Therefore, a taxpayer may itemize or claim the standard deduction
regardless of whether his or her partner itemizes or claims the standard
deduction. (Misc IRS Docs rdpfaqs, Q&A4)
Schedule A
Page 161
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE A REDUCTION
2013
SCHEDULE A REDUCTION RETURNS FOR 2013 & ON
PRIOR LAW: IN 2006 & 2007, reduction was 2/3 of Step 2 amount. In 2008 &
2009, reduction was 1/3 of the Step 2 amount. In 2010-2012 the reduction
under IRC section 68(g) was totally eliminated. For 2013 & on, the reduction is
re-instated.
STEP 1: Find the amount by which AGI exceeds the phase out number.
STEP 2: Reduce itemized deductions by 3% of the excess found in step 1,
HOWEVER, the following itemized deductions are NOT reduced:
Medical, Investment Interest, Casualty Losses, Gambling Losses,
AND, itemized deductions cannot be reduced by more than 80%, or
below the standard deduction.
ATRA 2012.
MEDICAL DEDUCTIONS
2014
NEW MEDICAL MILEAGE AMOUNTS FOR 2014
For 2014 returns, 23.5¢ per mile is the standard medical mileage allowance.
The 2013 amount was 24.0¢ per mile. For 2015, the amount is 23.0¢ per mile.
IR 2012-85, IR 2013-80, IR 2014-79.
Schedule A
Page 162
Schedule A
BRASS TAX Presentations
2 0 13
22
1040/540 TUNEUP 2014
INCREASED SCH A MEDICAL DEDUCTION FLOOR LIMIT
AGI THRESHOLD. The Schedule A limit for deducting medical expenses
increases from 7.5% to 10.0% for tax years beginning after 12-31-2012.
EXCEPTION FOR TAXPAYERS AGE 65 OR OVER. For taxpayers who have
reached age 65 by the end of the calendar year, the effective date of this
provision is delayed until January 1, 2017. For married taxpayers, this rule
applies if either spouse is age 65 or over and applies whether taxpayers file MFJ
or MFS. (IRC §213(f))
Health Care Act of 2010.
CALIFORNIA DIFFERENCES
California currently retains the 7.5% limit on medical deductions in 2013 & on.
MEDICAL CARE includes amount paid for the diagnosis, cure, mitigation,
treatment, or prevention of disease, and amounts paid for qualified long-term
care services.
QUALIFIED LONG-TERM CARE SERVICES means necessary diagnostic,
preventative, therapeutic, curing, treating, mitigating, and rehabilitative
services and maintenance or personal care services required by a chronically ill
individual and provided pursuant to a plan of care prescribed by a licensed
health care practitioner. (IRC §7702B(c)(1)).
CHRONICALLY ILL INDIVIDUAL means any individual who has been certified by
a licensed health care practitioner as:
a) Being unable to perform at least two of six specified activities of daily
living for a period of at least 90 days due to a loss of functional capacity.
There is no requirement that the loss of function be due to disease, etc. It can
be due to old age! (The six activities are: Eating, Toileting, Transferring,
Bathing, Dressing and Continence) or
b) Requiring substantial supervision to protect the individual from threats to
health and safety due to severe cognitive impairment.
MAINTENANCE OR PERSONAL CARE SERVICES means any care that has the
primary purpose of providing needed assistance with any of the disabilities that
result in the individuals qualifying as a chronically ill individual, including
protection from threats to health and safety due to severe cognitive impairment.
There is no requirement that the care be provided by a licensed medical
professional. See the next page for a recent Tax Court ruling on this subject.
Schedule A
Page 163
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Elderly Emma suffered from dementia.
Physician determined that she needed assistance and supervision 24 hours per
day for medical reasons as well as for her own safety.
Caregivers were not licensed health care providers.
Can Caregivers’ costs be deducted as medical expenses?
RULING
The IRS asserted that the caregivers were housekeepers hired on the advice of
a doctor, and the cost of their salary and room and board were not deductible.
However, the Tax Court held that Emma was a chronically ill individual and the
services provided by Caregivers were necessary maintenance and personal care
services required because of her diminished capacity. They were provided
pursuant to a plan of care prescribed by a licensed health care practitioner, and
therefore were qualified long-term care services. (Estate of Lillian Baral, U.S. Tax
Ct, No 3618-10 (July 5, 2011))
LONG-TERM CARE PREMIUMS are deductible as a medical expense for
premiums paid on Federal “tax qualified” LTC policies. (IRC §213(D)).
Age Limit On Deductible Premium For Each Individual
Age
2013
2014
2015
40 or less
$360
$370
$380
Over 40 but not over 50
$680
$700
$710
Over 50 but not over 60
$1,360
$1,400
$1,430
Over 60 but not over 70
$3,640
$3,720
$3,800
Over 70
$4,550
$4,660
$4,750
Schedule A
Page 164
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
MEDICARE B PREMIUMS are deductible as a medical expense. Folks begin
paying the premium at age 65. Those receiving Social Security benefits have it
withheld from their monthly benefit checks. Form 1099-SSA shows the
amount of Medicare B premiums withheld.
MEDICARE B PREMIUMS PAID
(If Affected By Medicare Surcharge- See Below)
2013
2014
2015
Monthly Premium Paid
$104.90
$104.90
$104.90
Annual Premium Paid
$1,258.80
$1,258.80
$1,258.80
MEDICARE SURCHARGE. Beginning in 2007 premiums increase based on
MAGI from tax returns 2 years previous. Premiums are calculated each year,
but MAGI figures for the surcharge are not due to be indexed until 2020.
(Medicare Modernization Act of 2003 & Deficit Reduction Act of 2005).
2013
Use
2011
MAGI
2014
Use
2012
MAGI
2015
Use
2013
MAGI
Medicare B
Monthly
Premium Is
Medicare D
Monthly
Surcharge Is
MFJ
MFS
Live with
Spouse
$146.90
$12.10
$85K-$107K
$170K-$214K
N/A
$209.80
$31.10
$107K-$160K
$214K-$320K
N/A
$272.70
$50.20
$160K-$214K
$320K-$428K
$85K-$129K
$335.70
$69.30
>$214K
>$428K
>$129K
Medicare B
Monthly
Premium Is
Medicare D
Monthly
Surcharge Is
$146.90
$12.10
$209.80
SINGLE
MFJ
MFS
Live with
Spouse
$85K-$107K
$170K-$214K
N/A
$31.10
$107K-$160K
$214K-$320K
N/A
$272.70
$50.20
$160K-$214K
$320K-$428K
$85K-$129K
$335.70
$69.30
>$214K
>$428K
>$129K
Medicare B
Monthly
Premium Is
Medicare D
Monthly
Surcharge Is
$146.90
$12.30
$209.80
SINGLE
MFJ
MFS
Live with
Spouse
$85K-$107K
$170K-$214K
N/A
$31.80
$107K-$160K
$214K-$320K
N/A
$272.70
$51.30
$160K-$214K
$320K-$428K
$85K-$129K
$335.70
$70.80
>$214K
>$428K
>$129K
Schedule A
SINGLE
Page 165
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX DEDUCTIONS
SALES TAX DEDUCTION EXPIRES AS OF 12-31-2014
SALES TAX vs. STATE INCOME TAX. We can elect to deduct the larger of
General Sales Tax or State Income Tax. This provision is due to expire after
2014 unless Congress acts to extend it. If it is not extended, only the State
Income Tax Deduction will be available.
NO STATE TAX is paid in Alaska, Florida, Nevada, New Hampshire, South
Dakota, Tennessee, Texas, Washington and Wyoming.
GENERAL SALES TAX TABLES are published in Publication 600. ADDITION
may be made for purchases of vehicles, boats, and other items specified in
Publication 600 by IRS. RECORDS of actual sales tax might be used if higher
amount than the tables.
CHOOSE 1 of 3 POSSIBILITIES: California residents will deduct EITHER:
(a) State income taxes plus SDI as paid or withheld, or
(b) Sales tax from table, plus tax paid on boats, vehicles, motor homes, or
(c) Sales tax figures based on taxpayer records.
ATRA 2012 & TIPA 2014
INPUT ALERT. The sales tax issue demands additional inputs. Look
for inputs about additional income even if non-taxable, additional
members of household, additional for motor vehicles, boats and other
items specified in Publication 600, or even an override box.
2 0 13
22
CALIF FIRE PREVENTION FEE IS NOT DEDUCTIBLE
FIRE FEE IS NOT A TAX. IRS Chief Counsel has concluded that the new
California fire fee does not qualify as a deductible real property tax under Section
164 because (1) it is not a tax under California or Federal law, (2) it is not levied
at a like rate as Reg Sect 1.164-4(a) requires, (3) it is not imposed against all
real property throughout the taxing authority’s jurisdiction as Reg Sect 1.164-4(a)
requires and (4) it is assessed only against specific property to provide a local
benefit (as was made clear by the California legislature).
The California constitution requires a two-thirds vote of both houses of the
California legislature to raise taxes. Since the bill enacting the fire fee did not
pass with a two-thirds vote, the fire fee only has force of law as a regulatory fee
and therefore it not deductible as a real property tax.
Chief Counsel Advice 201310029.
Schedule A
Page 166
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA REAL ESTATE PROPERTY TAX UPDATE
FTB WILL NOT REQUIRE ADDITIONAL INFO. There was fear FTB would
require us to enter parcel numbers and nondeductible amounts for property tax
claimed on Schedule A. However after IRS issued Information Letter 2012-0018
stating that there is no statutory requirement that a real property tax be an ad
valorem tax to be deductible, FTB has “backed away” from their original position.
Special assessments are still not deductible as real estate property taxes; though
interest, maintenance and/or interest on special assessments are deductible.
Fixed charges are deductible as real estate property taxes as long as they are
assessed at a like rate to all properties in the taxing authority’s jurisdiction. Thus
in most cases, this would then apply to Mello Roos taxes.
HERO – HOME ENERGY RENOVATION OPPORTUNITY
OVERVIEW. HERO finances 100% of the cost to purchase and install eligible
energy efficient products, offers low fixed interest rates, and 5/10/15/20 year
repayment options through property taxes. If the property is sold before the
HERO financing is paid in full, the remaining payments can be passed on to a
new property owner.
INTEREST IS DEDUCTIBLE. Financing through property taxes means the debt
is secured by the residence, making the interest tax deductible as home
mortgage interest. The interest rate is dependent upon the term. In order to
determine the amount of the annual payment that is interest, run an amortization
schedule using the terms spelled out in the financing agreement.
HERO PRINCIPAL PORTION IS NOT A TAX. Even though the repayment of
the loan appears on the homeowner’s real estate tax bill, it does not meet the
definition of a tax. It is a fixed charge that is not assessed at a like rate to all
properties within the taxing authority’s jurisdiction.
CALIFORNIA NON-CONFORMITY
STATE TAX DEDUCTION? – NO! Not for income tax or sales tax.
Schedule A
Page 167
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
INTEREST DEDUCTIONS
DEBT MUST BE SECURED BY RESIDENCE. Taxpayers are allowed a
deduction for “qualified residence interest” (QRI) where the debt is secured by
the taxpayer’s qualified residence. Secured debt means a debt such as a
mortgage, deed of trust, or land contract, which meets all of the following
criteria:
1) The instrument makes the debtor’s interest in the qualified residence specific
security for the payment of the debt;
2) Under the instrument, in the event of default, the residence could be
subjected to the satisfaction of the debt with the same priority as a mortgage or
deed of trust in the jurisdiction in which the property is situated; and
3) The instrument is recorded, where permitted, or otherwise perfected in
accordance with applicable state law. (Reg 1.163-10T(o)(1)) (Recording of
mortgages and deeds of trust is permitted in CA.)
RECENT TAX COURT CASE
FACTS
Husband and Wife purchased personal residence.
Borrowed money from Wife’s Mother and signed a written mortgage note.
Note was not recorded.
Can Husband and Wife deduct interest paid?
RULING
The Tax Court held that the interest was not deductible because the loan was
not recorded and did not meet the requirements to be secured debt.
(Christopher DeFrancis, TC Summ Op 2013-88)
Schedule A
Page 168
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
FROM IRS – GOOD & BAD NEWS ON MORTGAGE INTEREST
1) GOOD NEWS – $1.1 MILLION CAP. IRS issued Revenue Ruling 2010-25 to
formalize the stance taken in Chief Counsel Advice 2009-40030. The Ruling
essentially makes the “cap” be $1.1 Million of borrowing with no demand the
“Equity Debt” be in the form of separate borrowing. Thus a homeowner with an
original purchase mortgage of $1.1 million may deduct interest on the entire
debt. This runs counter to two different Court cases – Pau, TC Memo 1997-43,
and Catalano, TC Memo 2000-82. IRS says both cases improperly interpret IRC
Sec 163(h)(3)(C).
Taxpayers may deduct limited amounts of “Qualified Residence Interest” on their
principal residence and any one additional personal-use residence. The limits:
TOTAL DEBT Up to $1,100,000 of borrowing.
AS LONG AS
No more than $100,000 of borrowing was incurred
other than to buy, build, or substantially improve the
residence (Equity Debt).
2) BAD NEWS – CO-OWNERS. In Internal Legal Memorandum 2009-11007,
IRS says the $1.1 Million cap on acquisition debt applies to the property, not to
each owner. Thus 50% owners are each limited to interest on $550,000 (not
$1.1 million each) of Acquisition Debt.
AUDIT UPDATE – MORTGAGE INTEREST
FRANCHISE TAX BOARD began auditing mortgage interest in 2007. They
asked for loan histories where the original loan had been refinanced. A few
audits were quickly settled, but over half the cases dragged on for a long time.
Today we only hear of FTB audits on large mortgage interest, approximately
$75,000 or more. Little activity seems to target the $100K equity debt ceiling.
IRS has been involved in TWO DIFFERENT types of audits.
1) LARGE MORTGAGE INTEREST – approximately $75,000 or more is
definitely being audited by IRS throughout the nation.
2) LARGE MORTGAGE INTEREST is being ADDED to other audits. For
example, a return targeted over Schedule C issues is reviewed. If mortgage
interest is large, it is added to the audit.
IRS 1098 MATCHING PROGRAM CONTINUES. Remember:
LINE 10 of Schedule A is for amounts reported on Form 1098.
LINE 11 is used for other loans not supported by Form 1098.
Schedule A
Page 169
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXPIRING PROVISION AS OF 12-31-2014
This provision is due to expire after 2014 unless Congress acts to extend it.
QUALIFIED MORTGAGE INSURANCE premiums paid or accrued for qualified
mortgage insurance, in conjunction with acquisition debt on a qualified personal
residence of the taxpayer, are treated as qualified residence interest and thus
are deductible on Schedule A.
PHASE OUT OF DEDUCTION. The amount allowed as a deduction is phased
out by 10% for each $1,000 by which taxpayer’s AGI exceeds $100,000. Under
$100K AGI = Fully deductible. Reduce 10% for each additional $1,000 of AGI.
(For taxpayers filing MFS, the reduction is 10% for each $500 by which
taxpayer’s AGI exceeds $50,000.)
QUALIFYING INSURANCE. The mortgage insurance contract must be issued
on or after 01-01-2007. The insurance must be provided by the VA, the FHA,
the RHA or be approved private mortgage insurance. Virtually all California loans
will qualify.
PREPAID PREMIUMS AMORTIZED. IRS first issued Notice 2008-4, and then
enacted Temporary Regulations 1.6050H-3T explaining this rule. In essence,
prepaid premiums must be allocated ratably over the SHORTER OF
1) MORTGAGE TERM, or
2) 84 MONTHS.
FORM 1098. Mortgage insurance premiums of $600 or more in any calendar
year are reported to the taxpayer and IRS. Form 1098, Box 4, reports the
amount of these mortgage insurance premiums. If these amounts include any
pre-paid amounts, we have the responsibility of allocating the prepaid amount.
(Often, in the year of purchase, a lump-sum is paid at the time of purchase and
then monthly payments of premiums are also made.)
EXCEPTIONS TO AMORTIZATION REQUIREMENT: Amortization of premiums
does NOT apply to amounts paid for qualified insurance provided by the VA or
RHA, which are fully deductible in the year paid. Amortization DOES apply to
qualified insurance provided by the FHA and by private mortgage insurance.
Tax Relief & Health Care Act of 2006, Tax Extenders & AMT Relief Act of 2008,
Tax Relief Act of 2010, ATRA 2012 & TIPA 2014
CALIFORNIA DIFFERENCES
INTEREST. CALIFORNIA follows Federal rules on mortgage interest.
MORTGAGE INSURANCE PREMIUMS. California did NOT conform to the
Federal change.
Schedule A
Page 170
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
CHARITABLE
DEDUCTIONS
CHARITABLE MILEAGE. The rate for mileage driven for charity is 14¢. It is set
by statute and is not subject to indexing.
CONTRIBUTION FROM IRA - EXPIRING PROVISION AS
OF 12-31-2014
This provision is due to expire after 2014 unless Congress acts to extend it.
Certain contributions may be made directly from an IRA or Roth IRA (but not a
SEP-IRA or SIMPLE IRA) to a charity.
QUALIFIED CONTRIBUTOR
Age 70½ or older at time of contribution AND has a RMD from an IRA.
QUALIFIED CONTRIBUTION
Made directly to charity by IRA custodian.
Up to $100,000.
TAX TREATMENT
Contribution is EXCLUDABLE from AGI.
T/P may not claim contribution on Schedule A.
Does not count toward AGI % limit allowed on Schedule A.
May be counted asstpart of taxpayer’s Required Minimum Distribution.
Deemed to come 1 from taxable income, then from basis.
WHO WINS? Anyone in the age group who normally makes contributions will
likely see a tax savings.
AGI REDUCTIONS reduce the possibility of taxable Social Security, and a host
of other AGI-related limitations. Lower AGI means lower floors for medical and
miscellaneous itemized deductions. Lower AGI can even reduce AMT. Those
with high AGI will see less of the reduction of itemized deductions and personal
exemptions.
NON-ITEMIZERS will see the direct result of their charitable contributions
Pension Protection Act Of 2006, Tax Extenders, AMT Relief Act of 2008, Tax
Relief Act of 2010, ATRA 2012 & TIPA 2014
Schedule A
Page 171
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
TYPHOON HAIYAN IN THE PHILIPPINES. Taxpayers were allowed to deduct
contributions to this relief effort on their 2013 return instead of when the
contribution was actually made in 2014. Be careful that these contributions are
not deducted again in 2014.
CALIFORNIA NON-CONFORMITY
California did not conform to the special tax treatment for contributions related to
Typhoon Haiyan relief efforts. Deduction is only allowed on the 2014 CA return.
CALIFORNIA COLLEGE ACCESS CREDIT
NEW CREDIT IN 2014. This new CA credit is available to individuals and
corporations that make contributions to the College Access Tax Credit Fund
during 2014-2016. The Fund will be used to bolster the dwindling resources
used to provide Cal Grants, which pay for books and living expenses for lowincome college students.
AMOUNT OF CREDIT will be 60% of the amount contributed in 2014, 55% in
2015, and 50% in 2016. Unused credits can be carried over for six years.
HOWEVER A FEDERAL TAX DEDUCTION IS ALSO ALLOWED. Taxpayer can
claim the CA credit and also claim a federal charitable deduction for the amount
donated. However, no charitable deduction is allowed on the CA return. Unused
credits can be carried over for six years.
TOO GOOD TO BE TRUE? It may be, but for now CA is relying on a 2010 Chief
Counsel Advice that will make the contributions deductible on the federal return.
The IRS may change that position in the future.
NO CALIFORNIA CHARITABLE DEDUCTION IS ALLOWED. A negative
adjustment equal to the amount of the Federal deduction must be made on
California Schedule CA, line 41.
ADVANCE CERTIFICATION REQUIRED. Taxpayers must receive a credit
certification from the CA Educational Facilities Authority before they make the
donation. The certification will be available beginning November 3, 2014.
HOW TO APPLY. Go to https://cefa.treasurer.ca.gov/Home/Application to
complete the application form online. Enter the proposed amount of contribution
and how the donor wishes to make the contribution (money order, cashier’s
check, or electronic fund transfer). The CA Educational Facilities Authority will
review the application and send a written response within 10 days from their
receipt of the application.
Schedule A
Page 172
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECEIPTS FOR ALL CHARITABLE CONTRIBUTIONS. Taxpayers must
document any and all charitable contributions whether CASH or NON-CASH.
CASH DONATIONS UNDER $250 GIVEN AT ONE TIME – Taxpayer may
substantiate the gift with EITHER a written receipt from the charity, a
cancelled check, a credit card statement or a bank record proving payment.
CASH DONATIONS OF $250 OR MORE GIVEN AT ONE TIME – Taxpayer
needs BOTH a written receipt from the charity AND proof of payment.
NON-CASH DONATIONS UNDER $250 GIVEN AT ONE TIME – T/P needs
written acknowledgement from the charity unless impractical to obtain one.
NON-CASH DONATIONS OF $250 TO $500 GIVEN AT ONE TIME – T/P
needs written acknowledgement from the charity.
NON-CASH DONATIONS FROM $500 TO $5,000 GIVEN AT ONE TIME –
T/P needs written acknowledgement from the charity AND must file Form
8283 with tax return. Motor vehicles need Form 1098-C.
NON-CASH DONATIONS OF OVER $5,000 AT ONE TIME – T/P needs
written acknowledgement from the charity AND a written appraisal AND
must file Form 8283 with tax return. Motor vehicles need Form 1098-C.
CALIFORNIA CONFORMITY
California conforms to all of these rules.
Schedule A
Page 173
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
CASUALTY & THEFT
LOSSES
SEE “FORM 4684” FOR A DISCUSSION OF PONZI SCHEME REPORTING
MISCELLANEOUS
DEDUCTIONS
SEE “FORM 2106” FOR A DISCUSSION OF EMPLOYEE BUSINESS
EXPENSES AND JOB-RELATED EDUCATION EXPENSES.
DEDUCTING LOSSES FROM TRADITIONAL IRA, ROTH IRA, 529 PLAN AND
COVERDELL ESA ACCOUNTS. Allowable losses are deductible as a
miscellaneous itemized deduction. The losses are deductible only for regular
income tax purposes and only to the extent they exceed 2% of AGI. They are
not deductible for AMT purposes.
WHAT AMOUNT TO DEDUCT. A loss can be recognized only if 100% of the
amount in all accounts in the same category (traditional IRA or Roth IRA or
529 Plan or Coverdell ESA) has been distributed. The loss is then equal to
the unrecovered basis less the total distributions in all of the accounts.
Schedule A
Page 174
Schedule A
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE B
INTEREST & DIVIDEND
NEW PROCEDURES FOR VALIDATING SOCIAL SECURITY NUMBERS. The
IRS has revised the procedures taxpayers must use to validate their SSNs in
response to receiving a second B notice from a payor.
WHAT IS A B NOTICE? Payors must send B Notices to payees after being
notified by the IRS that the name/SSN furnished by a payee is mismatched.
The “second B notice” is sent out when the payor receives a second IRS
notification of a name/SSN mismatch within 3 years from the date they
previously received a mismatch notice from the IRS for the same payee. If the
SSN is not properly verified, the payor must take backup withholding at a rate
of 28%.
NEW VERIFICATION PROCEDURE. To stop back-up withholding after receiving
a second B notice, the new procedures require a payee to validate his or her
SSN by providing the payor a copy of a Social Security card that (1) has a
different name and SSN combination than that appearing on the second B
notice, or (2) is dated no earlier than six months prior to the date of the second
B notice. If a payee does not have a Social Security card, the payee must obtain
a new or replacement card from the SSA. If the payee’s name and SSN
combination listed on the second B notice is not current or correct, the payee
should update his or her records with the SSA and provide a copy of the
updated Social Security card to the payor. The new procedures are effective
for name and SSN validations after 7/31/14. (Rev Proc 2014-43) The prior
procedure required the payee to obtain validation by contacting the local SSA
office and requesting a Social Security number printout to send to the payor.
Effective 8/1/2014 SSA will discontinue providing SSN printouts.
HOW TO OBTAIN A REPLACEMENT SS CARD. File Form SS-5, Application
for a Social Security Card, with the SSA. See www.socialsecurity.gov for more
info.
CALIFORNIA BACKUP WITHHOLDING
FTB should be contacted with a correct taxpayer identification number before
filing your return to get credit for CA backup withholding.
Schedule B
Page 175
Schedule B
BRASS TAX Presentations
1040/540 TUNEUP 2014
INTEREST INCOME
AIRLINE TICKET POINTS TREATED AS INTEREST INCOME. A tax court has
ruled that award points used to purchase an airline ticket is taxable income.
RECENT TAX COURT CASE
FACTS
Depositor Danny received award points for setting up a bank account.
Redeemed points for a restricted coach class ticket on an airline.
Bank issued Form 1099-MISC for $668.
What are the tax consequences?
RULING
The Tax Court held that because the award was given in exchange for
depositing money in a bank account it should be treated like interest income.
Since the taxpayer did not show any evidence that the flight was worth less than
$668, that value was the amount to be includible as income. (Parimal H. Shankar
vs Commisioner, 143TC No 5 (8-26-2014))
Schedule B
Page 176
Schedule B
BRASS TAX Presentations
1040/540 TUNEUP 2014
QUALIFIED DIVIDENDS
QUALIFIED DIVIDENDS RECEIVE A SPECIAL TAX RATE. Qualified dividends
are taxed at long-term capital gain rates. This treatment was made permanent
by the ATRA 2012.
EXCEPTIONS TO QUALIFIED DIVIDEND RULES. Some dividends are reported
in Box 1b of Form 1099-DIV as qualified dividends but are not to be treated as
qualified dividends. They are:
• NOMINEES – if you are a nominee, another will report the income.
• 61-DAY RULE – dividends received on any stock held less than 61 days
in the 120-day period that began 60 days before the ex-dividend date.
• PREFERRED STOCK – dividends attributable to periods totaling more
than 366 days received on preferred stock held less than 91 days during
the 180-day period that began 90 days before the ex-dividend date.
Preferred dividends attributable to periods totaling less than 367 days
are subject to the 61-day holding period rule above.
• PAYMENTS IN LIEU OF DIVIDENDS, but only if you have reason to
know the payments are not qualified dividends. This can happen if
broker holds stock, but some was used to cover short sales – the gross
dividend is paid, but part is not really a dividend. Details and examples
in Notice 2003-87.
CALIFORNIA DIFFERENCES
QUALIFIED DIVIDENDS are ORDINARY INCOME for California purposes.
California has no advantageous capital gain rates.
Schedule B
Page 177
Schedule B
BRASS TAX Presentations
1040/540 TUNEUP 2014
FOREIGN INVESTMENT
ACCOUNTS
FOREIGN ACCOUNT REPORTING. As more clients receive income from
foreign and off-shore accounts, Foreign Bank and Financial Account Reporting
(FBAR) will be required for more individuals.
SCHEDULE B ASKS if you have “an interest in or a signature or other
authority over a financial account in a foreign country”. If the account(s)
balance(s) exceeded $10,000 at any time during the year you must file - - FIN CEN FORM 114 describing the accounts, income, etc. This form was
formerly TDF 90.22-1. The form is an electronic form which is NOT
filed with Form 1040. Form deadline is June 30 not April 15.
Practitioners can e-file the form for their clients provided they get
written authorization from the clients on Fin CEN Form 114a.
BITCOIN. IRS spokesperson declared in a 6/4/14 webinar that US taxpayers are
not required to report Bitcoin on Form 114, “at least for this filing season”
(referring to 2013 returns). He warned that as the IRS continues to scrutinize
the currency the policy could shift. On 5/10/14, another IRS spokesperson said
that IRS is putting virtual currency under the microscope.
ADDITIONAL REPORTING OF SPECIFIED FINANCIAL ASSETS IS
REQUIRED ON FORM 8938 for years beginning after 3/18/2010. These
assets include foreign stocks, notes, and financial instruments if not held in an
account at a U.S. financial institution. This is in addition to Fin CEN Form 114
described above. For more information, see Form 8938 on page 300.
RECENT TAX COURT CASE
FACTS
Hon was online gambler who held accounts at two online poker companies.
Used Firepay.com for transferring monies to facilitate his gambling.
Were the 3 accounts with the entities “bank, securities or other financial
accounts” that must be reported on a FBAR?
Was each of the 3 accounts in a foreign country?
RULING
The Court answered “Yes” to both questions and assessed Hon with civil
penalties of $30,000 in 2006 ($10,000 for each of 3 accounts) and $10,000 in
2007 for his one remaining account. (US v Hon U.S. Distr Lexis 77489( N.D. CA
6/9/2014))
Schedule B
Page 178
Schedule B
BRASS TAX Presentations
1040/540 TUNEUP 2014
OFFSHORE VOLUNTARY
DISCLOSURE PROGRAM
PRIOR PROGRAMS EASED. An expansion of the streamlined filing compliance
procedures and modifications to the 2012 Offshore Voluntary Disclosure
Program (OVDP) are expected to provide thousands of people whose failure to
disclose their offshore assets a new way to come into compliance with US tax
obligations.
EXPANSION OF STREAMLINED FILING COMPLIANCE. This program is
available to taxpayers whose failure to report their foreign assets was nonwillful. The IRS expanded the eligibility criteria (the original program was
available only to nonresident nonfilers), eliminated the $1500/year cap on the
amount of tax owed to qualify for the program, and did away with a ”risk”
questionnaire that applicants were required to complete. The taxpayer must
certify that previous failures to comply were due to non-willful conduct. For
eligible US taxpayers residing outside the US, all penalties will be waived. For
eligible US taxpayers residing in the US, the only penalty will be a
miscellaneous offshore penalty equal to 5% of the foreign financial assets that
gave rise to the tax compliance issue.
OVDP MODIFIED. The modifications are designed to cover those whose failure to
comply with reporting requirements is considered willful in nature, and who
therefore don’t qualify for the streamlined procedures. These changes will help
focus this program on people seeking certainty and relief from criminal
prosecution. People will have to provide more information than in the past (but
can now submit it electronically), submit all account statements at the time they
apply for the program, pay the offshore penalty at the time of the OVDP
application, and in some cases pay more in penalties than they would have done
had they entered this program earlier. The offshore penalty percentage
increased from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance
request is submitted, it becomes public that a financial institution where the
taxpayer holds an account is under investigation by the IRS or Department of
Justice. In addition, the prior reduced penalty percentage for certain nonwillful taxpayers has been eliminated in light of the expansion of the
streamlined procedures.
LEGAL ADVICE RECOMMENDED. Because of the possibility of criminal
prosecution and the substantial costs of voluntary disclosure and penalties, it
may be advisable to consult a tax attorney to determine the best way for a
taxpayer to come into compliance.
Schedule B
Page 179
Schedule B
BRASS TAX Presentations
1040/540 TUNEUP 2014
TIGTA SAYS MORE STILL NEEDS TO BE DONE. In their 2014 report, the
Treasury Inspector General for Tax Administration (TIGTA) said the IRS’s
collection efforts need to be improved to make sure that delinquent taxpayers
residing in foreign countries comply with their IRS tax obligations. TIGTA
recommended the IRS develop specific policies, procedures, and training plans
for international revenue officers
IS THE PROGRAM WORKING? As of mid-2014, over 45,000 persons have
participated in the voluntary compliance program. They have paid over $6.5
billion in taxes. 70 people have been prosecuted. However, some people still
don’t get it! Look at these two examples.
•
•
Ty Warner, creator of Beanie Babies.
Swiss account contained over $93 million.
Failed to pay $1.2M in income tax on unreported income.
Charged by the US Attorney’s Office with federal tax evasion “for allegedly
failing to report income he earned in a secret offshore financial account he
held with UBS, a global financial services firm headquartered in
Switzerland.”
Warner agreed to plead guilty to a single count of tax evasion.
$53 million FBAR penalty.
•
•
•
•
•
•
•
•
•
87 year old Florida man.
Swiss bank account contained about $1.5M.
He said he did not know until 2008 that he had a filing requirement.
Filed amended returns for 2004 – 2007.
Did not use the Offshore Voluntary Disclosure Program.
Jury ruled he willfully failed to file FBARs
Penalty was 150% of value of his Swiss bank account!!! (largest ever).
50% of the annual value of 2004, 2005, 2006 (usually just highest year).
(Zwerner (2014) US FL)
•
•
•
•
CALIFORNIA ISSUES
NO REQUIRED REPORT, BUT - - - SHARING INFO WITH THE IRS. IRS and
California do share information with each other.
Schedule B
Page 180
Schedule B
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE C – BUSINESS INCOME/LOSS
SEE “FORM 2106” FOR A DISCUSSION OF TRAVEL, MEALS, & LODGING
CHANGE OF ADDRESS
NEW FORM 8822-B. Beginning January 1, 2014, any entity with an EIN must
file Form 8822-B, Change of Address or Responsible Party – Business, to
notify the IRS of a change in business mailing address, location, or the identity
of a responsible party. The form must be filed within 60 days of the change.
PAYROLL PROVIDER
SCAMS
EMPLOYER STILL LIABLE TO IRS. In 2014, several payroll tax service
providers allegedly embezzled millions of dollars of federal payroll tax
payments from their clients. In these fraud cases, the victim employer can still
be held liable to the IRS for the unpaid payroll taxes, even though they paid the
funds to the service provider. This can pose a substantial risk to employers
who use outside payroll tax service providers.
To avoid a costly payroll tax nightmare, employers should verify that third party
payroll tax service providers are indeed making tax payments to the IRS.
Employers can log into the Electronic Federal Tax Payment System (EFTPS)
and verify that payments were made. Failure of a provider to use EFTPS
should raise a huge red flag!
NEW EDD E-SERVICES FOR BUSINESS
EDD now offers e-Services for Business, an online service providing employers
with an easy and secure way to manage payroll tax accounts. Services include:
• Viewing and making changes to employer accounts;
• Filing returns and reports (including file attachments);
• Filing Report of New Employees (DE34);
• Filing Report of Independent Contractors (DE 542); and
• Making Payroll Tax Deposits (DE 88) and other payments
There is a one-time registration process where you establish a username and
password to access the service. Payroll agents can establish one account to
service all their clients.
Schedule C
Page 181
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
QUALIFIED JOINT
VENTURE STATUS
ELECTION
WHO CAN MAKE THE ELECTION. In a recent Chief Counsel Advice, an IRS
attorney determined whether a Schedule C can be jointly operated. While an
unincorporated business jointly owned by a married couple is generally
classified as a partnership for federal tax purposes, a Qualified Joint Venture
(QJV), whose only members are a husband and wife filing a joint return, can
elect not to be treated as a partnership.
HOW TO MAKE THE ELECTION. Spouses make the QJV election on a jointly
filed Form 1040 by dividing all items of income, gain, loss, deduction, and
credit between themselves according to each one’s interest in the joint venture,
and each spouse filing a separate Schedule C. (CCA 201402004)
INVESTOR OR STOCK
TRADER?
SECURITIES TRADING AS A TRADE OR BUSINESS. Trading constitutes a
trade or business when it is substantial, and the person seeks to profit from
swings in daily market movements rather than long-term appreciation.
RECENT TAX COURT CASE
FACTS
Executive Edward worked full-time for his employer.
He executed 535 security trades for himself during year #1, including 214 sameday trades.
He executed 180 trades in year #2, including 34 same-day trades.
Where do you report his trading activity?
RULING
The Tax Court stated: “In the cases in which taxpayers have been held to be
traders in securities, the number and frequency of transactions indicated that
they were engaged in market transactions almost daily for a substantial and
continuous period, generally exceeding a single taxable year; and those activities
constituted the taxpayers’ sole or primary income-producing activity.” The Court
ruled the taxpayer was an investor and limited his loss deduction to $3,000 for
each year on Schedule D. (Fariborz Assaderaghi, TC Memo 2014-33)
Schedule C
Page 182
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
CAPITAL GAIN VS. SCH C
5-FACTOR TEST. Courts have identified several relevant factors for evaluating
whether a taxpayer held property primarily for sale to customers in the ordinary
course of business. Such factors include:
1. The nature of the acquisition of the property;
2. The frequency and continuity of sales over an extended period
3. The nature and the extent of the taxpayer’s business;
4. The activity of the seller about the property; and
5. The extent and substantiality of the transactions. (Pritchett (1974))
RECENT TAX COURT CASE
FACTS
LLC purchased 300 undeveloped acres of land.
LLC agreed with county to pay costs of improving land (water, sewer, road).
Became a planned unity development.
Sold 3 of 4 phases in a bulk sale to one party.
How is the sale taxed?
RULING
The tax court applied the 5-factor test for determining whether a taxpayer held
property primarily for sale to customers in the ordinary course of business. In
determining the nature of the property acquisition, the court noted that the tax
return identified their principal business activity as “development”. (If it had stated
“investment” it would have indicated that the land was held for investment.
Apparently the IRS does use that information for something!!!) The Court ruled
that the income was ordinary income (Schedule C), not capital gain. (Cordell
Pool, TC Memo 2014-3)
WHAT CONSTITUTES A TRADE OF BUSINESS? Certain expenses are
deductible only if they are incurred in carrying on a trade or business. To
qualify as a trade or business (1) taxpayer must be involved in the activity with
continuity and regularity and (2) the primary purpose must be income or profit.
Schedule C
Page 183
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Taxpayer owned 4 single family residence properties.
Lived in one of the properties and later rented it out.
Extremely involved in the renovation of all the properties.
Where is the sale of the properties reported?
RULING
The taxpayer likely wanted to deduct the losses on Schedule C to avoid the
passive loss limitations. However, the Tax Court found that the taxpayer failed
both of the “trade or business” tests. While he was extremely involved in the
remodeling and renovation of the homes, he was not continuously or regularly
involved in the business of buying and selling real estate. In addition, the Court
noted that the primary purpose test was greatly affected by the fact that the real
estate activities revolved around properties that either were, or later became, his
personal residences. (Issachar Ohana, TC Memo 2014-83)
PASSIVE ACTIVITIES
RECENT TAX COURT CASE
FACTS
Tommy Twobusinesses.
Business #1 was law practice which focused on aviation law.
Business #2 was telephone sales training business.
Purchased airplane through Business #2 – telephone sales training.
Rented airplane to pilot trainees.
Where are the airplane rentals reported on the tax return?
RULING
The taxpayer deducted the losses on the airplane rentals on Schedule C for the
sales training business, but the Tax Court verified that the activity was a passive
activity in which the taxpayer did not materially participate. (Scott W. Williams,
TC Memo 2014-158)
Schedule C
Page 184
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Harry Halfwaytoretirement and his homemaker wife file a joint return.
Each own 50% of Company.
Turned management of Company over to their son.
Harry continued to play major role in company by making visits to facilities,
speaking with personnel, researching & developing new technology to improve
products and securing financing for Company.
Tax losses are passed-through on Form K-1s.
Are losses passive for Harry? Wife?
RULING
The Tax Court concluded that although the taxpayer had stepped back
somewhat when his son became involved in Company’s management, he still
played a major role in the activities, so his losses were not passive. They also
ruled that Wife’s losses were not passive because married taxpayers who file
jointly are treated, for the passive loss limitation, as a single taxpayer. The
husband’s activities were enough to establish material participation for both him
and his wife. (Charles E. Wade, TC Memo 2014-169)
HOBBY LOSS
BONA FIDE PROFIT OBJECTIVE. In order to deduct expenses related to a
business activity, taxpayers must prove they engage in the activity with a bona
fide profit objective. (Evans; Golanty (1979)) The courts look at nine factors:
1. Manner in which the taxpayer carried on the activity;
2. Expertise of the taxpayer or his or her advisers;
3. Time and effort taxpayer expended in carrying on the activity;
4. Expectation that the assets used in the activity may appreciate in value;
5. Taxpayer’s success in carrying on other similar or dissimilar activities;
6. Taxpayer’s history of income or loss with respect to the activity;
7. Amount of occasional profits, if any, which are earned;
8. Taxpayer’s financial status; and
9. Whether elements of personal pleasure or recreation are involved.
Schedule C
Page 185
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Parents are a microbiology professor and a homemaker.
Parents had no prior experience in music industry or record labels.
Daughter majored in Music Industry and worked for Atlantic Records as an
acquisitions and repertoire specialist.
Daughter began managing Band (as side business).
Daughter wanted to produce record for the Band.
Parents made oral agreement to fund Band’s expenses.
Band agreed to keep Daughter as their manager.
Parents to be repaid from future record label advances or record sales.
Business named Schievert’s Ultimate Record Facility (SURF) because Father
enjoyed surfing.
Parents read a book to inform them on how the music business operates and
discussed their record label activity with Univ of Calif professors.
No investments in any other bands.
Ceased investments several years later.
How should Parent’s losses be reported on their tax returns?
RULING
Parents claimed their losses as business losses on Schedule C, but the Tax
Court held that they did not engage in the record label activity with a bona fide
profit objective and so could not deduct losses from the activity. Rather, they
sought to provide Daughter with valuable experience as well as income,
concluding that “Supporting [Daughter], though laudable, is not deductible.”
(Patrick Schlievert, TC Memo 2013-239)
Schedule C
Page 186
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
BUSINESS BAD DEBTS
BUSINESS BAD DEBT DEFINITION. In order to be a business bad debt, the debt
must be created or acquired in connection with the trade or business of the
taxpayer or a debt the worthlessness of which is incurred in the taxpayer’s trade
or business. (IRC §166(d)(2); Reg 1.166-5(b)) Business (not investment) must
be the dominant motivation for the debt.
TAXPAYERS WHO LEND MONEY TO BUSINESSES. A shareholder who lends
money to their corporation usually cannot deduct a loss as a business bad debt
because the business in connection with which the loan was made is not the
shareholder’s business but the corporation’s. This includes when the
shareholder loans the corporation money to protect their investment in the
company. The deduction is a nonbusiness bad debt deduction (reported on
Schedule D and limited to a $3,000 loss per year.) (James P. Shea, TC Memo
2000-179; Stanley J. Ludwig, TC Memo 1994-518; Harry Robert Haury, TC
Memo 2012-215)
RECENT TAX COURT CASE
FACTS
Larry Realestatedealer made 6 loans during 30 years as R/E dealer.
Loaned money to Unrelated Investor to purchase real estate.
Unrelated Investor defaulted on the loan.
How does Larry deduct this loss?
RULING
The Tax Court found that the taxpayer was not in the business of making loans
and denied the deduction as a business bad debt. (Scott M. Langert, TC Memo
2014-210)
Schedule C
Page 187
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
LLC FEES (YEARS PRIOR TO 2007) REFUNDED TO SOME LLCS
BACKGROUND. Prior to January 1, 2007, LLCs paid their annual fee based on
the LLC’s total income from all sources. Therefore, they paid the annual fee even
if they did no business in CA. The LLC fee was in addition to the annual tax. The
rule changed effective January 1, 2007 and the LLC fee is now determined by
reference only to the income derived from or attributable to CA. (FTB Notice
2008-2)
NORTHWEST ENERGETIC SERVICES, LLC CASE. Northwest Energetic
Services, LLC was a foreign LLC that registered with the Secretary of State but
did no business in California. In 2006 they sued for a refund of the annual fees
they paid prior to 2007. The Court of Appeal held that assessing an LLC fee to
an entity that had no income attributable to business conducted in California was
unconstitutional as it applied to NES, and the fee should be refunded.
$800 ANNUAL TAX STILL APPLIES! This case applies only to annual fees
paid for years prior to 2007.
(https://www.ftb.ca.gov/aboutFTB/Public_Service_Bulletins/2008/bulletin_0819.s
html)
CA REFUNDING FEES TO SINGLE MEMBER LLCS
The Franchise Tax Board has determined that the Collection Cost Recovery Fee
and Filing Enforcement Fee (R&TC §19254) were misapplied to certain single
member limited liability companies (SMLLCs) treated as disregarded entities for
tax purposes.
The FTB will mail affected SMLLCs a letter indicating their eligibility for a refund,
with a refund check to follow. They expect to issue refunds at the end of 2014 or
beginning of 2015. They will also abate any unpaid fees.
NEW TOOL TO AID IN CA WITHHOLDING
HELPFUL NEW TOOL. To determine what withholding may be required and
how to do it, the FTB has developed a new Small Business Withholding Tool.
WHEN IS CA WITHHOLDING REQUIRED? Businesses are required to
withhold on CA source income in three situations:
1.If the total payment of CA source income paid to a nonresident exceeds
$1,500 in a calendar year,
2.If backup withholding is required for the IRS, it is also required for CA, and
3.If a CA resident or a nonresident does not provide a taxpayer ID number or
does not certify exemption, backup withholding is required.
Schedule C
Page 188
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA NEW SICK PAY LAW IN 2015
Beginning July 1, 2015, CA employers will be required to offer paid sick leave.
ACCRUAL RULES. An employee who, on or after July 1, 2015, works in CA for
30 or more days within a year is entitled to 1 hour of sick pay for each 30 hours
worked Accrued sick days shall carry over to the following year of employment.
An employer has no obligation to allow an employee’s total accrual of paid sick
leave to exceed 48 hours or 6 days.
HOW SICK DAYS ARE USED. An employee is entitled to use accrued sick
days beginning on the 90th day of employment. An employer can limit an
employee’s use of paid sick days to 24 hours or 3 days in each year of
employment. An employee may determine how much paid sick leave he or she
needs to use and that an employer may set a reasonable minimum increment,
not to exceed two hours, for the use of paid sick leave. The rate of pay shall be
the employee’s hourly wage. If the employee, in the 90 days of employment
before taking accrued sick leave, had different hourly pay rates, was paid by
commission or piece rate, or was a nonexempt salaried employee, then the rate
of pay shall be calculated by dividing the employee’s total wages, not including
overtime premium pay, by the employee’s total hours worked in the full pay
periods of the prior 90 days of employment. An employer cannot require that the
employee search for or find a replacement worker to cover the sick days.
WHAT CAN SICK PAY BE USED FOR? 1) Diagnosis, care, or treatment of an
existing health condition of, or preventive care for, an employee or an
employee’s family member. 2) For an employee who is a victim of domestic
violence, sexual assault, or stalking.
WRITTEN NOTICE WITH EACH PAYCHECK. Employer shall provide an
employee with written notice of the amount of paid sick leave available, or paid
time off leave an employer provides in lieu of sick leave, for use on either the
employee’s itemized wage statement or in a separate writing provided on the
designated pay date with the employee’s payment of wages. A poster including
required information shall be displayed in a conspicuous place (the Labor
Commission shall create a poster and make it available to employers).
EXEMPT EMPLOYEES include those subject to a collective bargaining
agreement and providers of in-home support services. Employers are not
required to provide compensation to an employee for accrued, unused paid sick
days upon termination, resignation, retirement, or other employment separation.
(AB 1522)
CALIFORNIA DIFFERENCES – FINES PAID BY PRO TEAMS
For taxable years beginning on or after January 1, 2014, CA does not allow a
deduction for the amount of any fine or penalty paid or incurred that was
assessed or imposed by a professional sports league on a franchise owner. An
adjustment must be made on Schedule CA, Line 12.
Schedule C
Page 189
Schedule C
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE CA
CALIFORNIA
ADJUSTMENTS
CALIFORNIA RESIDENT
AND NON-RESIDENT RULES
RULES IN CALIFORNIA FOR 2002 & ON
ENTERING OR LEAVING CALIFORNIA. Beginning in 2002, AB 1115 changed
the calculation of California taxable income for taxpayers who change from
resident to nonresident status or vice versa. California income and carryover
items must be recalculated for any taxpayer who changed residency status.
ITEMS AFFECTED include:
1) Wages & compensation, installment sales and other income accrued prior to
change in residency,
2) Carryovers of capital loss, passive loss and net operating loss carryovers,
3) Basis; and
4) Depreciation.
The goal behind the change was to standardize treatment of carryover items and
to eliminate the controversy over accrual of income for cash basis taxpayers.
KEY ISSUE—SOURCE OF INCOME. Under the new provisions, if an item is
sourced to California, it is taxable to California for a resident or nonresident. If it
is not sourced to California, it is not taxable to a nonresident. The concept
seems easy. It is not! FTB Publication 1100 is a must if you have any client
moving into or out of California. In addition, FTB Publication 1031 discusses
California residency status.
LINE 41 – OTHER
ADJUSTMENTS
COLLEGE ACCESS CREDIT. If a contribution to the College Access Fund was
deducted on the federal return, and the credit is being claimed on the CA return,
the contribution amount must be entered on Schedule CA as a negative amount.
Schedule CA—California
Page 190
Schedule CA—California
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE D – CAPITAL GAIN/LOSS
SUMMARY CHART – CAPITAL GAINS – 1998 AND LATER
Item
Comments
Ordinary Gain/Loss
Recapture Gains
Depreciation recaptured as ordinary income on Form 4797 goes
directly to Form 1040. (This is not a Schedule D issue.)
Short-Term
Gain/loss on assets held 12 months or less.
Long-Term (Max. rates) Gain/Loss on assets held more than one year had composite rate
A. Long-Term Gain/Loss of 5%/15% for 5/4/2003 through 2007, and then are 0%/15% for
2008 through 2012. In 2013 add a third “tier” of 20% for taxable
0%/15%/20%
incomes over $400K ($450K for couples).
B. Collectibles not over 28%
Maximum rate of 28% for collectibles held more than one year.
Section 1202- Gain on Qualified Small Business Stock (QSBS)
held more than 5 years – the non-excludable portion goes here.
Note: 42% of excludable portion is an AMT adjustment.
NOTE: Long-term capital loss carryovers start in this group.
C. §1250 Unrecapt. Gain
not over 25%
Gains attributable to depreciation on business or rental real
estate. For dispositions after 5/7/97.
D. Special Cases
Section 1202 allows partial exclusion of gains from “qualified
small business stock.” Section 1244 allows ordinary loss on some
sales of “small business” stock. Section 1400F allows excludable
gains from a sale of “qualifying community renewal assets”.
1400B has a similar provision for Washington DC assets.
2012 American Taxpayer Relief Act allows full exclusion of gain
on small business stock purchased after 9/27/2010 and before
01/01/2014, if the stock is held more than 5 years.
Split-Rate Rule (E.G. - 0%/15%). Picture taxable
income as a stack of dollars with ordinary income
dollars on the bottom, and long-term gains at the
very top of the stack. Any long-term gain lying in
the normal 15% tax bracket is taxed at 0%. Any
long-term gain lying in normal brackets of 25% or
more is taxed at 15%. Beginning in 2013, a third
“tier” of 20% applies to taxable incomes over
$400K, ($450K for couples).
For AMT purposes, the same rule is used - no tax
preference!!
Schedule D
Page 191
Tax Rate
Txbl Inc Schedule
Cap
Gain
Ord
Inc
Tax at
15/20% rate
25%
15%
Tax at
0% rate
Schedule D
BRASS TAX Presentations
1040/540 TUNEUP 2014
CAPITAL GAINS RATES. Here’s a chart for taxation of capital gains. Also
remember that “qualified dividends” receive these same rates. The newest
rates (2013 & on) were made permanent by ATRA 2012.
Scheduled Rates For Long-Term Capital Gains
Year
Long-Term Capital Gain Rates (LTCG)
Qual Divids Taxed at
LTCG Rates?
2013 & on
0%/15%/20%
Yes
2008 - 2012
0%/15%
Yes
2004-2007
5%/15%
Yes
For 2013 and on, the 0% capital gain rate applies as long as the long-term
capital gain lies in the normal bracket of 15% or lower. The 15% capital
gain rate applies in the normal bracket of 25% or higher. However a higher
20% rate applies to taxable incomes over $400K ($450K for MFJ).
CALIFORNIA DIFFERENCES
NO CAPITAL GAIN RATES. California taxes capital gain income as ordinary
income. No tax advantage comes from the rate of taxation.
CAPITAL LOSS is limited to $3,000 per year (same as Federal).
2011
6
MORE REPORTING OF SECURITIES TRANSACTIONS
RULES FOR BROKERS. Stocks, bonds and other financial instruments
purchased after 2010 (later dates apply to specialized securities), brokers will
continue to report the items listed above, but will also need to report the
customer’s adjusted basis (essentially cost for tax purposes) and whether the
gain/loss is short or long term. This takes effect in stages:
2011 for stocks and bonds in a corporation,
2012 for stock in a RIC (Regulated Investment Co, or mutual fund) or
stock acquired in a DRP (Dividend Reinvestment Program),
2014** for any other security specified by IRS.
** This had been scheduled for 2013, but in response to brokers, IRS in
Notice 2012-34 agreed to delay this until 2014.
CHANGING BROKERS The new broker is required to gather information from
former broker, but ONLY for stocks acquired in 2011 or later.
BASIS TRACKING will continue to be a problem for many years.
Emergency Economic Stabilization Act of 2008.
Schedule D
Page 192
Schedule D
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8949 AND SCHEDULE D. IRS wants to track different capital
transactions, depending upon whether they are reported by broker on Form
1099-B, or whether they are “self-reported” by the taxpayer. Form 8949 is a
backup detail schedule of the transactions that appear on Schedule D.
BROKERS have adopted the language “Covered” for transactions “covered”
by the new reporting rules discussed on the prior page, and “Non-Covered”
for transactions not required to be reported.
ADDITIONAL INFORMATION FOR FORM 8949 is found later in this outline
under Form 8949 on page 307.
WASH SALE RULE
MODIFIED
MONEY MARKET FUNDS. If a taxpayer sells stock at a loss, then repurchases
the same or substantially identical stock within 30 days, the loss is not
deductible. Since many shareholders engage in frequent purchases and sales in
money market funds, a shareholder that realizes a loss will often acquire shares
in that same money market fund within 30 days before or after the redemption,
thus subjecting the loss to possible wash sale treatment. The IRS said that it
would not treat the redemption as part of a wash sale if the loss realized was
not more than 0.5% of the taxpayer’s basis in that share. (Notice 2013-48)
Schedule D
Page 193
Schedule D
BRASS TAX Presentations
1040/540 TUNEUP 2014
SALE OF PERSONAL RESIDENCE
$250K EXCLUSION
PERSONAL RESIDENCE SALES CAN PRODUCE A SPECIAL TYPE OF
CAPITAL GAIN. If the seller of a personal residence passes certain tests, they
may exclude some or all of their capital gain realized upon sale up to $250,000.
PRIOR TO MAY 6, 1997 – “ROLLOVERS” UNDER SEC 1034. Prior law
allowed for no exclusion at all. Instead, the law allowed deferral of gain if
the cost of replacement residence was greater than sale price of prior home.
At age 55, a “once-in-a-lifetime” exclusion of $125,000 was allowed.
MAY 6, 1997 - $250,000 EXCLUSION INVENTED. The exclusion was meant
to “remove” tax considerations for all but the wealthiest of homeowners.
THE EXCLUSION IS A FAMILIAR CONCEPT TO MOST OF US. However, a
review of this exclusion is warranted since most of us have not had as many
home sales lately as we used to have. In addition, some new IRS concepts may
have crept up on us while we were snoozing.
YOUR TAX TOOL
THIS PAGE and the NEXT 4 PAGES summarize key rules in applying the
$250,000 exclusion. The SUBSEQUENT 3 PAGES outline the 2009 law which
discusses the effect on the $250,000 exclusion because of “non-qualified use” of
a personal residence.
Sale of Residence
Page 194
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
BEST TO MAKE 3 SEPARATE TESTS: In order to apply the Code, we suggest
using 3 separate tests, each containing a look-back period:
To Earn a $250,000 Exclusion Upon Sale of a Residence
Look Back Period
Test
Test 1: Ownership
5 Years prior to sale.
Must own the property for at least two years.
Test 2: Usage
5 Years prior to sale.
Must use property as principal residence at least two years.
Test 3: Prior Exclusion
2 Years prior to sale.
May not have claimed exclusion on another sale.
EXCLUSION IS FOR TAXPAYERS – NOT HOMES! In a Tax Court case,
unmarried taxpayers sold a home and each claimed separate $250,000
exclusions. The auditor said they could each claim only $125,000 for a
total of $250,000. The Court disagreed. Hsu, TC Summ. Op. 2010-68.
$500,000 EXCLUSION IS IMPOSSIBLE. Couples can file joint returns, and
thus might claim two exclusions on the same return (total of $500,000) –
but there is no such thing as a single $500,000 exclusion. However there is
a limited exception for a surviving spouse (see immediately below).
2008
SPECIAL - DOUBLE EXCLUSION FOR SURVIVING SPOUSE
$500,000 EXCLUSION AVAILABLE. Beginning in 2008, a surviving spouse may
claim a full $500,000 upon sale, as long as:
(1) The sale is within 2 years of death of spouse, and
(2) Surviving spouse has not remarried by date of sale, and
(3) The couple would have qualified for a total of $500,000 of exclusion.
Mortgage Forgiveness Debt Relief Act of 2007
YOUR TAX TOOL – SOME HANDY CHARTS
CAN’T PASS ALL 3 TESTS?? Here come handy charts for:
1. PARTIAL EXCLUSION. You might qualify for part of the $250,000 exclusion
for certain job changes, unforeseen circumstances, or medical reasons.
2. EXCEPTIONS TO THE TESTS & THE EXCLUSION ITSELF. A group of
charts covers the only exceptions allowed under Code or Regulation.
Sale of Residence
Page 195
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
EARNING A PARTIAL EXCLUSION
Effective 12/24/02 Temporary Regulations 1.121-3T allow for a partial exclusion if you fail to
accumulate two full years under one or more of the 3 tests.
Partial Exclusion Can Be Claimed:
If the primary reason for the sale of the residence is:
Job Change
SIMILAR TO MOVING EXPENSE. The Regs tell us to use the same 50mile distance test as used to qualify for a moving expense deduction.
Thus a change in commuting distance exceeding 50 miles (or a residence
more than 50 miles away in the case of an unemployed taxpayer) will
qualify. The partial exclusion applies if the change is for taxpayer, spouse,
a co-owner of the property, or anyone whose principal home is the
property.
SIMILAR TO MEDICAL DEDUCTIONS. The Regs allow a partial
exclusion to a “qualified individual” if the primary reason for the sale is
either to:
a. Obtain, provide, or facilitate the diagnosis, cure, mitigation, or
treatment of disease, illness, or injury, or
b. Obtain or provide medical or personal care.
Medical
Reason
Unforeseen
circumstance
The Regs require there be a recommendation by a physician of a change
of residence. A “qualified individual” is taxpayer, spouse, co-owner, or
one who uses the property as principal residence, as well as certain family
members of these individuals – this is broader than the definition used in
job changes, in order to allow taxpayers to care for family members.
AN UNFORESEEN CIRCUMSTANCE is an event “the taxpayer does not
reasonably anticipate before buying and occupying the residence.”
Besides an “all facts and circumstances” proviso, IRS lists 8 possible
events (or “safe harbors”) allowing a partial exclusion:
The home suffers:
• Involuntary Conversion
• Casualty caused by natural or man-made disaster
• Casualty caused by an act of war or terrorism
Or a “qualified individual” suffers:
• Death
• Loss of employment leading to eligibility for unemployment benefits
• Unemployment leading to inability to pay housing costs and
reasonable basic living expenses
• Divorce or legal separation
• Multiple births from a single pregnancy.
CALCULATING THE PARTIAL EXCLUSION
1. Find the amount of time you satisfy each of the 2-year tests:
Test 1
You meet
X% satisfied
Test 2
You meet
Y% satisfied
Test 3
You meet
Z% satisfied
2. Select the smallest percentage among X, Y, and Z.
3. You qualify for the same percentage of a $250,000 exclusion as your result in Step 2.
Sale of Residence
Page 196
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXCEPTIONS TO SECTION 121 TESTS
Exceptions to Test 1 – Ownership – 2 Years in Prior 5 Years
Partial Exclusion If meet one of the 3 allowable exceptions see prior page.
YEAR END. Tests are applied on a joint return as of the end of the tax year –
that is, the exclusion might apply to both spouses even though they married
within the tax year, but were not married at the time of the sale.
ONLY ONE SPOUSE NEED PASS. Applies only if filing a joint return.
Spouses
DECEASED – Surviving spouse (if unmarried at the time of sale) may claim
the longer ownership period of either their own, or that of decedent spouse.
After 2007 surviving spouse may claim $500,000 exclusion for sale within 2
years of spouse’s death, if couple could have claimed $500,000, and survivor
has not remarried prior to sale.
Military and
Foreign Service
Persons under “qualified official extended duty” (call or order to such duty for a
period in excess of 90 days or for an indefinite period) as a member of the
uniformed services or of the Foreign Service of the United States may
electively exclude up to 10 years of such duty time, which could make the
look-back period as long as 15 years.
Acquired Via
Exchange
5-YEAR OWNERSHIP. For sales after 10/22/04, if the property was originally
acquired via exchange, the ownership period of Test 1 is extended to 5 years.
Living Trust of
Decedent
For 2010 only. If decedent held property in a revocable trust, the trust may
take into account the ownership of the decedent in determining the exclusion.
Involuntary
Conversions
The ownership period of the transferred property is added onto that of the
newly acquired property if there is a subsequent sale of the acquired property.
Exceptions to Test 2 – Usage – 2 Years in Prior 5 Years as Prin. Res.
Partial Exclusion If meet one of the 3 allowable exceptions see prior page.
Separated
Couples
ABSENT, BUT USING HOME. If spouses own property jointly, and an actual
decree or order allows one spouse to occupy the property, the other spouse
(the “out spouse”) is deemed to be using the property, even though absent.
Spouses
DECEASED – The surviving spouse (if unmarried at the time of sale) may
claim the longer usage period of either their own, or that of decedent spouse.
Out-OfResidence Care
If a taxpayer becomes physically or mentally incapable of self-care, and owns
property and uses it as principal residence for at least 1 year during the 5-year
look-back period, then taxpayer is treated as using it as principal residence
during any time of residence in any facility (including a nursing home) licensed
by a State or political subdivision to care for individuals in taxpayer's condition.
Military and
Foreign Service
Persons under “qualified official extended duty” (call or order to such duty for a
period in excess of 90 days or for an indefinite period) as a member of the
uniformed services or of the Foreign Service of the United States may
electively exclude up to 10 years of such duty time, which could make the
look-back period as long as 15 years.
Living Trust of
Decedent
For 2010 only. If decedent held property in a revocable trust, the trust may
take into account the usage of the decedent in determining the exclusion.
Involuntary
Conversions
The usage period of the transferred property is added onto that of the newly
acquired property should there be a subsequent sale of the acquired property.
Exceptions to Test 3 – Exclusion – 2 Years Since Claim under Sec. 121
Partial Exclusion If meet one of the 3 allowable exceptions see prior page.
THAT’S IT – THERE ARE NO MORE EXCEPTIONS TO SECTION 121 TESTS!
Sale of Residence
Page 197
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
Exceptions to The Exclusion Itself
Depreciation
Any depreciation allowed or allowable after May 6, 1997 may never be
excluded.
“Non-Qualified
Use”
Beginning in 2009, any gain attributable to a time period where usage of a
property was not as a principal residence is not excludable. (See discussion
starting on the next page).
Related Parties
The exclusion does not apply to sales or exchanges of a remainder interest
with any person related to the taxpayer as described in section 267(b) or
707(b).
Expatriates
Exclusion may not be claimed by an individual if the treatment provided by
section 877(a)(1) applies to such individual.
Election
The exclusion is an election, and such election may be revoked at any time
within the statute of limitations.
NOTES AND SPECIAL RULES
ACTUAL USAGE AS PRINCIPAL RESIDENCE IS A MUST! In a 2010 case,
Taxpayers demolished their principal residence of many years, and built a
new home on the site. They sold immediately, never having lived in the
new property. The exclusion was denied. David A. Gates, 135 TC No. 1.
VACANT LAND. Land adjacent to a home may be included with the home and
the exclusion applied to the entire sale. This applies to a sale of land within
2 years of sale of the home by treating both sales as a single tax event.
OWNED BY A TRUST. Regs clarify that property owned by a revocable living
trust is treated as the property of the taxpayer if taxpayer was treated as the
owner of the trust (or that portion of the trust which owned the property)
during the qualifying period for the ownership and usage tests of §121.
SALE OF PARTIAL INTEREST. Regulations insist that to provide that no
more than a single exclusion shall apply, the separate sales are treated as
one for purposes of the exclusion.
MIXED-USE PROPERTY (caused by periods of rental, home office, or day
care center use) qualifies for exclusion as long as the property is properly
described as “a single dwelling unit” at the time of sale. Of course, any
depreciation allowed since 5/7/97 is never excludible.
TAX-DEFERRED EXCHANGE. A sale qualifying under both Section 121 and
Section 1031 (which means there is rental or mixed-use at time of sale)
qualifies for treatment under both Code Sections! The steps:
1. EXCLUSION under Section 121 is applied first.
2. DEPRECIATION since 5/7/97 is not excludable under Section 121,
but may be deferred under Section 1031.
3. BOOT recognizable under 1031 is taken into account only to the
extent it exceeds the exclusion under Section 121.
Sale of Residence
Page 198
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
SALE OF PERSONAL RESIDENCE
“NON-QUALIFIED USE”
20 09
2009 & ON – “NONQUALIFIED USE” LIMITS EXCLUSION
TIME NOT USED AS PRINCIPAL RESIDENCE will lead to a new calculation
when selling a residence. We must “track” periods of time when property was
not used as taxpayer’s principal residence.
Housing Assistance Tax Act of 2008
UNINTENDED LOOPHOLE. Under the original law, a taxpayer simply needed to
move into a residential property for 2 years to gain the exclusion, even if the
taxpayer had owned the property for many years and had never used it
previously as a principal residence.
WOW!! RENTAL OR VACATION PROPERTY could be converted to
principal residence for 2 years, and then sold with $250,000 of gain
excluded. What a great deal that was.
THE CODE SECTION 121 EXCLUSION WAS MEANT TO REWARD
OWNERSHIP OF PRINCIPAL RESIDENCE. The law was intended (and
Committee Reports bear this out) to be a boon for homeowners. The
“loophole” was never intended. Ownership of non-personal residence
property was never intended to benefit from this exclusion.
THE 2009 LAW identifies certain periods of time as not qualifying for exclusion.
These are called periods of “non-qualified use.”
“NON-QUALIFIED USE” is any use of the property OTHER THAN as a
principal residence. This would include periods of use as a second home, a
vacation property, a rental property, or while a family member lived there.
IMPORTANT! We must inquire about any “non-qualified” use on every personal
residence sale!
BASIS BECOMES MORE IMPORTANT THAN EVER! We’ve become used to
the large exclusion, and don’t often worry about precise basis. Imagine
meeting a client with a sale where a part of the total gain is not allowed to be
excluded because of “non-qualified” usage. If, for example, 35% of the gain
cannot be excluded, we cannot afford to take a cavalier view of the basis. 35%
of any calculated gain could turn into a taxable gain!
Sale of Residence
Page 199
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
VALUABLE EXCEPTIONS: Certain periods of time are ignored completely
and are not considered periods of “non-qualified use”. See table below.
Exceptions To Non-Qualified Use
Use Before 2009
Any non-qualified use prior to 2009 is completely ignored and not
counted as days of non-qualified use. However those days are
counted as days of ownership.
Periods After Last Use
As Personal Residence
Non-qualified use is not counted as non-qualified use if during the
5-year look back period.
Military/Foreign
Service
Taxpayers in uniformed military and foreign service, as well as
employees of the intelligence community, may ignore up to 10
years of time while on “Qualified Official Extended Duty”.
Temporary Absences
Similar to the rule to qualify for partial exclusions, up to 2 years of
non-qualified use is not counted as non-qualified use if incurred
for job changes, medical issues and unforeseen circumstances.
2009 & ON – TRACKING PROBLEMS. We now must help clients track use of
residential properties beginning in 2009. Consider this when meeting new
clients and/or when preparing client questionnaires.
EXAMPLE: Consider a home owned 10 years. Taxpayer buys on June 30, and
spends a year remodeling. The property is rented (or a “second” residence) for
5½ years. Then, T/P moves in Jan 1, lives there for 24 months, moves out, and
it takes 18 months more to finally sell. Sale is July 1 – 10 years after purchase.
The 10 years of ownership look something like this:
LOOK AT THE EXAMPLE. We didn’t specify the calendar years on our time
line. Currently it is crucial to know how a property was used since 2009!
Bought
June 30
Sold
July 1
Total Ownership – 10 Yrs
Time – in years
Remodel
1 Yr
Rented
5½ Yrs
Home
2 Yrs +
Sale
1½ Yrs -
When did 2009 begin?
ONLY usage beginning in 2009 must be tracked. All prior
use is completely ignored in determining any periods of
“non-qualified” usage.
Sale of Residence
Page 200
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
BEGINNING IN 2019, WE COULD HAVE something like the following scenario
(if we use the facts in our previous example and assume all usage is for years
2009 and later):
Bought
June 30
Sold
July 1
Total Ownership – 10 Yrs
Time – in years
Remodel
1 Yr
Rented
5½ Yrs
Home
2 Yrs +
Sale
1½ Yrs -
1. You owned this property for 10 years.
2. For 6½ of those years (65%), it was NOT your home.
3. For 3½ of those years (35%), it WAS your home.
4. Therefore:
35% of the appreciation is from a home – claim your exclusion.
65% of the appreciation is a taxable gain.
NOTE: SALE PERIOD IGNORED! The law gives the taxpayer the benefit
of the doubt after the last period of personal usage if during the 5-year
look-back period. Thus the taxpayer is allowed to say the property was
“home” for the actual 2 years of usage and the additional 1½ years that it
took to sell the home. The entire 3½ years qualify for the exclusion.
The 1 year of remodel time and the 5½ years of rental time are times that
are considered “non-qualified” use and do not qualify for the exclusion.
TO CALCULATE THE PERCENTAGE OF NON-QUALIFIED USE, COUNT
THE DAYS says IRS. Their worksheet in Publication 523 on Home Sales
asks us to calculate the DAYS of non-qualified use, and compare them to
the DAYS of taxpayer’s holding period.
IRS WORKSHEET FOR TAXABLE GAIN ON SALE OF PERSONAL
RESIDENCE. This worksheet (on the next page) is shown in Publication
523, Home Sale.
LINE 6 is where the depreciation taken after 05-06-1997 (which produces
the taxable “unrecaptured Section 1250 capital gain”) is shown.
LINES 8 THROUGH 11 are used to determine the amount of any gain due
to “nonqualified usage” (which produces additional taxable capital gain).
Sale of Residence
Page 201
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
DETAILED EXAMPLES OF THIS NON-QUALIFIED USE CONCEPT was
presented in the 2014 Brass Tax Tool Box program.
CALIFORNIA DIFFERENCES
SURVIVING SPOUSES – CONFORMITY IN 2010 & ON. Sales in 2010 and
later will follow Federal rules. Before 2010, California allowed the doubled
exclusion to the surviving spouse only when the spouse sold the property by end
of year for the year of spouse’s death.
NON-QUALIFIED USE – CONFORMITY IN 2010 & ON. Sales in 2010 and later
will follow Federal rules. Sales in 2009 did not follow these rules.
Sale of Residence
Page 202
Sale of Residence
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE E
RENTAL REAL ESTATE
SEE “FORM 8582” FOR DISCUSSION OF PASSIVE ACTIVITIES
IMPROVEMENTS MADE BY TENANT (LESSEE). A lessor (owner) does not
have to include the cost of improvements made by the lessee (tenant) to leased
property in his gross income, except where the improvements are, in effect, a
substitute for rent payments. Whether improvements result in rental income
depends on the intention of the parties, but improvements will not be
considered rent unless the intent to treat them as such is plainly described. (Reg
1.61-8(a)) Where a lessee erects buildings or makes other improvements to the
lessor’s property, the lessor derives no gross income because of the increased
value of the property either when the improvements are made or at the
expiration or termination of the lease, unless the intent of the parties to treat
improvements as a substitute for rent is plainly disclosed. (Blatt Co, M.E. v.
U.S. (1938); IRC §109)
Since the lessor has not included the value of the improvements in gross
income, he has no basis in the improvements and therefore cannot depreciate
the improvements. If the property is a capital asset, any gain attributable to the
improvements on the sale of the property will be capital gain.
RECENT CHIEF COUNSEL ADVICE
FACTS
Landlord Leslie owns an office building.
Rents to Tenant USA.
Landlord paid for renovation and a building expansion.
Tenant USA reimbursed Landlord for all costs
Are the reimbursement payments considered rent income to Landlord?
RULING
Chief Counsel concluded that under the facts and circumstances of the case,
Landlord incurred the cost of the improvements under an agreement for a lump
sum reimbursable amount from Tenant USA, so the circumstances do not
indicate that the parties intended the lump sum reimbursements to be rent. (CCA
201436048)
Schedule E
Page 203
Schedule E
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE EIC
SEE FORM 8867 FOR ADDITIONAL PREPARER EITC REQUIREMENTS.
AVAILABLE WITH OR WITHOUT TIER 1 DEPENDENTS. There is a smaller
EIC available to those with no Tier 1 Dependents.
“INSIDE THE US” ADDITIONAL REQUIREMENT. The dependent in question
must reside with you inside the US for more than half the year.
COMBAT PAY IS EARNED INCOME FOR EITC. Combat pay is nontaxable, but
appears on Form W-2 in Box 12, with Code Q. An election to treat combat pay
as “earned income” for purposes of the EITC only is available and appears on
Form 1040, Line 66b. It’s an “all or nothing” election. If including the income
produces an increased EITC, use the election – otherwise do not use it.
DISQUALIFIED INCOME RULES. “Disqualified income” causes the earned
income credit to be unavailable. Disqualified income is taxable and nontaxable interest income, dividend income and net income from Schedule D.
Maximum Disqualifying Income Allowed
2013
2014
2015
$3,250
$3,350
$3,400
YEAR 2014 ADJUSTED FLOOR AND PHASE-OUT AMOUNTS.
Eligible Individual
with
Max Credit
of:
At Earned
Income of:
Phase-Out Begins :
Single
Filer
Complete Phase-Out:
MFJ
Single
Filer
MFJ
1 Tier 1 dependent
$3,305
$ 9,720
$17,850
$23,300
$38,511
$43,941
2 Tier 1 dependents
$5,460
$13,650
$17,850
$23,300
$43,756
$49,186
3 or more Tier 1
dependents
$6,143
$13,650
$17,850
$23,300
$46,997
$52,427
No Tier 1 dependents
$ 496
$ 6,480
$8,150
$13,550
$14,590
$20,020
LEGITIMATE DEDUCTIONS CANNOT BE IGNORED, BUT… The IRS has
repeated issued notices reminding taxpayers that they cannot ignore legitimate
business deductions in order to increase income, resulting in qualification for
additional earned income credit. However, in Pub 17 the IRS recommends
using the optional SE tax calculation method to boost the EIC. Even after
paying the additional SE tax, the taxpayer may receive extra thousands of
dollars of refunds by using this strategy!
Schedule EIC
Page 204
Schedule EIC
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE F
FARM INCOME OR LOSS
RELIEF FOR DROUGHTSTRICKEN FARMERS
NORMAL 4 YEAR REPLACEMENT PERIOD. Certain farmers and ranchers
forced to sell livestock held for draft, dairy, or breeding purposes, due to
drought conditions have four years to replaced the livestock and defer tax on
any gains from the forced sales.
ADDITIONAL 1 YEAR. The IRS announced an additional one-year extension of
the replacement period for farmers and ranchers currently experiencing drought
conditions. This relief applies to any farm located in an area listed as suffering
exceptional, extreme, or severe drought conditions by the National Drought
Mitigation Center during any weekly period between 9/1/13 and 8/31/14 and
includes all or part of 30 states. (IRS Notice 2014-60)
CONSERVATION
RESERVE PROGRAM
(CRP) PAYMENTS
RECENT COURT CASE
FACTS
Chris and Connie Countrydweller never farmed or intended to farm.
Tilled and fertilized the land to establish grass covering to prevent erosion.
Received payments under US Dept of Agriculture CRP.
Are the CRP payments subject to SE tax?
RULING
The Eighth Circuit Court reversed the Tax Court and found that CRP income
received by a non-active landlord who is not treated as an active farmer is not
subject to SE tax. The Tax Court had earlier ruled in this case that essentially all
CRP payments received, whether by a farmer or simply a landlord, would be
subject to SE tax. (Rollin Morehouse (2104))
Schedule F
Page 205
Schedule F
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE H
HOUSEHOLD EMPLOYMENT TAXES
2014
FOR 2014 – EXEMPT PAYMENT CEILING INCREASED
HOUSEHOLD EMPLOYMENT TAXES. In 2014 & 2015, domestic employees
are exempt on payments under $1,900. The amount was $1,800 for 2012 &
2013 and $1,700 in 2009, 2010 & 2011. However, payments of $1,000 or more
in any quarter are subject to FUTA. See IRS Publication 926 for further
information.
CREDIT REDUCTION STATES. A state that has not repaid money it borrowed
from the federal government to pay unemployment benefits is a “credit
reduction state.” The FUTA tax rate is 6.0% of the first $7,000 in eligible
wages an employer paid to an employee. Employers receive a maximum credit
of up to 5.4% against the FUTA tax (making the net rate 0.6%), unless their
state is a FUTA credit reduction state. California is a FUTA credit reduction
state. Due to California carrying an outstanding loan balance for four
consecutive years, the federal FUTA credit will decrease from 5.4% to 4.2% on
Jan. 1, 2014, which means CA employers will incur a 1.2% FUTA credit
reduction (5.4% - 1.2% = 4.2%) , and will pay an increased net FUTA rate of
1.8% (6.0% - 4.2%).
FACTS
• Elderly Emma lives in CA
• Paid Householdhelper $10,000
• How much FUTA tax must Emma pay?
ANSWER
FUTA must be paid on the first $7,000 of wages for each employee. The
FUTA rate is 6%, which is $420. The normal credit is 5.4% ($378), but CA is
a credit reduction state and the federal credit is reduced 1.2% for 2014 ($84).
Therefore, the credit is $294 and the FUTA due is $126 ($420 - $294).
For illustration of this example, see Schedule H on the next page. All
relevant calculations appear on page 2 of Schedule H.
Schedule H & J
Page 206
Schedule H & J
BRASS TAX Presentations
Schedule H & J
1040/540 TUNEUP 2014
Page 207
Schedule H & J
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA DIFFERENCES HOUSEHOLD EMPLOYMENT TAXES
NONCONFORMITY. In 2014, an employer who pays an aggregate of $750 or
more to household employees during a calendar quarter must file Form DE
1HW, Registration Form For Employers Of Household Workers, and withhold
SDI. In 2014, an employer who pays $1,000 or more during a calendar quarter
is subject to SUI and ETT (as well as SDI). Household employers must also file
Form DE 34, Report Of New Employee, for each new employee within 20 days
of hire. Obtain Household Employer’s Guide (DE 8829) for more information.
ANNUAL PAYMENT ELECTION. Employers who expect to pay household
wages of $20,000 or less may file Form DE 89, Employer of Household Worker
Election Notice, with the EDD. This allows employers to pay annually even
though they must still file quarterly. Election remains in effect until household
wages exceed $20,000.
FORM DE 89 ELECTION FILED. Employers who have filed Form DE 89 and
have total wages of $20,000 or less, must file Form DE 3BHW, Report of Wages
for Employer of Household Worker, at the end of each quarter. These
employers then file an annual report on Form DE 3HW, Annual Payroll Tax
Return for Employer of Household Worker, on or before 1-31-2015 and pay all
payroll and withholding tax at that time.
FORM DE 89 ELECTION NOT FILED. Employers who have NOT filed Form DE
89 must file Form DE9 & DE9C, Quarterly Wage Report, and make quarterly
payments with DE 88, Report of Contributions.
SCHEDULE J
INCOME AVERAGING FOR
FARMERS & FISHERMAN
INCOME AVERAGING CAN BE USED BY FARMERS AND FISHERMAN. This
income averaging technique is elective. It averages all or some of the taxable
income from farming or fishing over the three previous (base) years. A lower
tax may occur if the current year’s taxable income is high and the three prior
year’s taxable income is low. For further information, see the instructions for
Schedule J.
Schedule H & J
Page 208
Schedule H & J
BRASS TAX Presentations
1040/540 TUNEUP 2014
SCHEDULE SE
SOC SECURITY & SE TAX
SOCIAL SECURITY / MEDICARE TAX & EARNINGS LIMITS
Item
2013
2014
2015
$113,700
$117,000
$118,500
6.20%
6.20%
6.20%
Employees
Max Earnings Soc Sec Limit
Employee Rate Social Security
Employer Rate Social Security
6.20%
6.20%
6.20%
Max Employee Soc Sec Tax
$7,049.40
$7,254.00
$7,347.00
Max Employer Soc Sec Tax
$7,049.40
$7,254.00
$7,347.00
Max Earnings Medicare Limit
Unlimited
Unlimited
Unlimited
Employee Rate Medicare
1.45%
1.45%
1.45%
Employee Rate Total
7.65%
7.65%
7.65%
Employee Earns To Receive 1 Qtr
of Soc Sec Coverage
$1,160
$1,200
$1,220
Employee Earns 4 Qtr
$4,640
$4,800
$4,880
$123,119
$126,692
$128,316
12.40%
12.40%
12.40%
$14,098.80
$14,508.00
$14,694.00
Unlimited
Unlimited
Unlimited
SE Rate Medicare
2.90%
2.90%
2.90%
SE Rate Total
15.30%
15.30%
15.30%
SE Earns To Receive 1 Qtr of
Soc Sec Coverage
$1,256
$1,299
$1,321
SE Earns 4 Qtr
$5,024
$5,196
$5,284
$432
$432
$432
Self-Employed Persons
SE Reaches Max At Sch C Income
(Max Employee Earnings / 0.9235)
SE Rate Social Security
Max SE Soc Sec Tax
Max Earnings Medicare Limit
Max SE Earnings To Avoid SE Tax
ADDITIONAL 0.9% MEDICARE TAX ON EARNED INCOME is imposed on
wages and net self-employment income in excess of a threshold amount
($200K/$250K). For more information, see Form 8959 on page 308.
“COMPENSATION” IS THE PROBLEM! Employees seem to reach the maximum
earnings for social security at a lower amount than self-employed persons. The
problem is that the S/E person’s Schedule C income must be converted to
“compensation” before we compare the two amounts. Schedule C income must
be multiplied by 92.35% to become “compensation.” When you multiply the
2014 S/E Schedule C income limit of $126,692 by 92.35%, the resultant
“compensation” amount of $117,000 is identical to the employee limit.
Schedule SE
Page 209
Schedule SE
BRASS TAX Presentations
1040/540 TUNEUP 2014
CLERGY PUBLICATION
UPDATED
Pub 517, Social Security and Other Information for members of the Clergy and
Religious Workers has been updated.
MINISTERS’ HOUSING
ALLOWANCE UPDATE
WAGES AND HOUSING ALLOWANCES SUBJECT TO SE TAX. For purposes
of the social security tax, clergy are considered self-employed and pay the
entire social security tax on their Form 1040 (including SE tax on the housing
allowance).
HOUSING ALLOWANCES SUBJECT TO SE TAX BUT NOT INCOME TAX.
Ministers are allowed to exempt housing allowances from taxable income. (IRC
§107(2)) Ministers may still deduct interest paid on a mortgage and real estate
taxes, even though the money used to pay those items was received tax-free
(“double dipping”). There is no limit on the amount of the tax-free housing
allowance, except that it must be spent on qualified housing expenses (if a
home is owned, the exclusion is limited to the fair rental value of the home),
which particularly benefits high-income ministers.
COURT RULED TAX-FREE HOUSING ALLOWANCE UNCONSTITUTIONAL.
The 1954 law excluding taxes on ministers’ housing allowances was held
unconstitutional on Nov 21, 2013 as being contrary to the First Amendment by
a US District Court (Western District of Wisconsin), holding that providing a
tax exclusion conditioned on religious affiliation could be construed as
discrimination.
COURT DECISION RENDERED. The 7th US Circuit Court of Appeals heard
oral arguments September 9, 2014 and vacated the district court decision
above. Thus there is no change for any year regarding the taxation of
housing allowances for ministers.
CHURCH PROVIDED HOUSING NOT AFFECTED. The court ruling never did
affect ministers who live in church-provided housing. They are allowed to
exclude from their gross income the rental value of housing they receive as part
of their compensation. (IRC §107(1))
Schedule SE
Page 210
Schedule SE
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM W-2, 1098 AND 1099
INFORMATION RETURNS
2014 REFERENCE GUIDE FOR FORM W-2—BOX 12 CODES
Code
Item
A
Uncollected social security or RRTA tax on tips
B
Uncollected Medicare tax on tips
C
Cost of group term life over $50K (Include in boxes 1, 3, & 5 up to applicable limits)
D
§401(k) and SIMPLE §401(k) elective deferrals
E
§403(b) tax sheltered annuity elective deferrals
F
SAR-SEP (§408(k)(6)) elective deferrals
G
§457(b) deferred compensation elective/non-elective deferrals
H
§501(c)(18)(D) tax exempt organization elective deferrals
J
Nontaxable sick pay (Not included in boxes 1, 3 or 5)
K
20% excise tax on excess golden parachute payments
L
Substantiated employee business expense (Federal rate) (Non-taxable)
M
Uncollected social security tax or RRTA on group term life over $50K (For former employees only)
N
Uncollected Medicare tax on group term life over $50K (For former employees only)
P
Excludable reimbursed moving expenses (Not included in boxes 1,3 or 5)
Q
Nontaxable combat pay
R
Archer MSA employer contributions (See Form 8853)
S
SIMPLE plan (§408(p)) salary reduction contributions
T
Adoption Benefits (Not included in box 1) (Must complete Form 8839 to determine taxability)
V
Income from exercise of nonstatutory stock option (Include in box 1, 3 & 5 up to applicable limits)
W
Health Savings Account (HSA) employer contributions (Include Sect 125 plan HSA amts) (Form 8889)
Y
§409A nonqualified deferred compensation plan deferrals
Z
§409A nonqualified deferred compensation plan income
AA
Designated Roth contributions to a §401(k) plan
BB
Designated Roth contributions to a §403(b) plan
DD
Cost of employer-sponsored health coverage. This amount is not taxable.
EE
Designated Roth contributions to a §457(b) plan
2014 REFERENCE GUIDE FOR FORM 1099-Q CODES—NO BOX
Code
Item
1
Normal distributions (including transfers)
2
Excess contributions plus earnings taxable in 2014
3
Excess contributions plus earnings taxable in 2013
4
Disability
5
Death
6
Prohibited transaction
Form W-2, 1098, 1099
Page 211
Form W-2, 1098, 1099
BRASS TAX Presentations
1040/540 TUNEUP 2014
2014 REFERENCE GUIDE FOR FORM 1099-R—BOX 7 CODES
Code
Item
1
Early distribution. No known exception (usually under age 59 ½).
2
Early distribution. Exception applies (usually under age 59 ½).
3
Disability
4
Death
5
Prohibited transaction
6
Section 1035 exchange. Tax free exchange of life insurance, annuity or endowment contract.
7
Normal distribution
8
Excess contributions plus earnings/excess deferrals taxable in 2014
9
Life insurance costs (under PS58) currently taxable
A
May be eligible for 10 year averaging (see Form 4972).
B
Designated Roth account distribution.
D
Annuity payments from non-qualified annuities that may be subject to tax under Section 1411.
E
Distributions under Employee Plans Compliance Resolution System (EPCRS)
F
Charitable gift annuity
G
Direct rollover and rollover contribution to an eligible retirement plan
H
Direct rollover of a designated Roth account distribution to a Roth IRA
J
Early distribution—Roth IRA. No known exception (usually under age 59 ½)
K
Distribution of IRA assets not having a readily available FMV.
L
Loans treated as deemed distributions under §72(p)
N
IRA Recharacterizations for Year 2014 made in Year 2014 (Report in 2014)
P
Excess contributions plus earnings/excess deferrals taxable in 2013
Q
Qualified distribution from Roth IRA
R
IRA Recharacterizations for Year 2013 made in Year 2014 (Report in 2013)
S
Early distribution from a SIMPLE IRA in first 2 years. No known exception.
T
Distribution from a Roth IRA. Exception applies.
U
Dividend distribution from ESOP under §404(k) (Not eligible for rollover)
W
Charges/paym for purch LTC insurance contracts under combined arrangements
2014 REFERENCE GUIDE FOR FORM 1099-SA CODES—BOX 3
Code
Item
1
Normal distributions (including transfers)
2
Excess contributions plus earnings taxable in 2013
3
Disability
4
Death distribution other than Code 6 below
5
Prohibited transaction
6
Death distribution after year of death to non-spouse beneficiary
Form W-2, 1098, 1099
Page 212
Form W-2, 1098, 1099
BRASS TAX Presentations
2 0 11
6
1040/540 TUNEUP 2014
FORM 1099-K - REQUIRED FOR 2011 & ON
PAYMENT SETTLEMENT ENTITIES MUST FILE FORM 1099-K. Payment
settlement entities (PSE) must file this form for payments made in settlement of
reportable payment transactions for each calendar year. A PSE makes a
payment in settlement of a reportable payment transaction (i.e., any merchant
payment card (like Master Card, Visa, American Express, etc) or third-party
network transaction) if the PSE submits the instruction to transfer funds to the
account of the participating payee to settle the reportable payment transaction.
For example, your client posts items for sale on eBay. She actually makes a
sale of an item that she posted for sale. The buyer makes payment to eBay and
eBay remits this payment (through PayPal) to your client. eBay/PayPal is a PSE.
EXCEPTION FOR DE-MINIMIS PAYMENTS. A third-party settlement
organization is required to report any information concerning third-party network
transactions of any participating payee only if for the calendar year:
1) Gross amount of reportable payment transactions exceeds $20,000 AND
2) The total number of such transactions exceeds 200.
Regulations Section 1.605W-1 and Notices 2011-88 & 2011-89.
CALIFORNIA DIFFERENCES -- INDEPENDENT CONTRACTOR
FORM TO USE. Form DE 542, Report of Independent Contractors, which is
made to EDD within 20 days of EITHER making payments of $600 or more OR
entering into a contract for $600 or more with an independent contractor in any
calendar year, whichever is earlier.
WHO MUST REPORT? Any business or government entity (a “servicerecipient”) that is required to file a Federal Form 1099-MISC for services received
from an independent contractor (a “service-provider”) must report. An
independent contractor (“service-provider”) is further defined as an individual
who is not an employee of the service-recipient but who receives compensation
or executes a contract for services performed for the service-recipient either
inside or outside of California. Normally this individual is sole proprietor.
Request DE 231ES for further clarification.
WHAT INFORMATION TO REPORT.
Service-Recipient Information: Name, Address, Telephone Number; Federal
and California Employer ID Number; Social Security Number.
Independent Contractor (Service-Provider) Information: Name, Address, SSN;
Start Date, Expiration Date, Amount of Contract.; if Contract is to be ongoing.
WHERE TO SEND REPORTS. Send the form to: EDD; PO Box 997350 MIC
99; Sacramento, CA 95899-7350 OR fax the report to: (916) 255-3211.
PENALTIES. EDD may assess a penalty of $24 for each failure to comply within
the required time frames. Also, a penalty of $490 may be assessed for the
failure to report this information if the failure is the result of conspiracy.
Form W-2, 1098, 1099
Page 213
Form W-2, 1098, 1099
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 2106 – EMPLOYEE
BUSINESS EXPENSES
MEALS ALLOWANCES
PUBLICATION 1542 has tables for within the U.S.
(A) EMPLOYERS USE - PER DIEM ALLOWANCES cover both lodging and
meals. Only employers who wish to reimburse employees without requiring
receipts may use them. Pub 1542 lists per diem allowances for all U.S. cities.
HIGH-LOW. Some employers prefer the simpler “high-low” method:
High-Low Method for Employees’ Per Diem Allowances
10/01/14 – 9/30/15
High – Per diem $259 ($194 lodging, $65 M&IE)
Low – Per diem $172 ($120 lodging, $52 M&IE)
10/01/13 – 9/30/14
High – Per diem $251 ($186 lodging, $65 M&IE)
Low – Per diem $170 ($118 lodging, $52 M&IE)
10/01/12 – 9/30/13
High – Per diem $242 ($177 lodging, $65 M&IE)
Low – Per diem $163 ($111 lodging, $52 M&IE)
10/01/11 – 9/30/12
High – Per diem $242 ($177 lodging, $65 M&IE)
Low – Per diem $163 ($111 lodging, $52 M&IE)
NOTE ON DATES. Rates were formerly published by General Services
Administration (GSA), NOT by IRS. In 2012, in Notice 2012-63, IRS says
they will revise rates as needed, but they are still using GSA rates.
(B) EMPLOYEES/SELF-EMPLOYED - MEALS ALLOWANCES (M&IE).
Different U.S. Counties have different allowable rates – you need the tables!
M&IE Allowance – U.S. Counties
10/01/14 – 9/30/15
$46, $51, $56, $61, $66, $71 – depending upon county
10/01/13 – 9/30/14
$46, $51, $56, $61, $66, $71 – depending upon county
10/01/12 – 9/30/13
$46, $51, $56, $61, $66, $71 – depending upon county
10/01/11 – 9/30/12
$46, $51, $56, $61, $66, $71 – depending upon county
10/01/10 – 9/30/11
$46, $51, $56, $61, $66, $71 – depending upon county
GENERAL NOTE – 50%. In most cases, whatever figure is used for meals
expense, the resultant deduction is 50% of this, but the transportation
industry receives an increased deduction percentage (see next page).
Form 2106
Page 214
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
TRANSPORTATION INDUSTRY INCREASED DEDUCTION. Deduction for
meals while away from home overnight or longer for those subject to the
hours of service limitations of the Department of Transportation is 80% not
50%.
Also note – these people may use a “flat” allowance, rather than the figures
allowed on a city-by-city basis. The allowance figures are:
10/01/14 – 9/30/15
$59 CONUS, $65 OCONUS
10/01/13 – 9/30/14
$59 CONUS, $65 OCONUS
10/01/12 – 9/30/13
$59 CONUS, $65 OCONUS
10/01/11 – 9/30/12
$59 CONUS, $65 OCONUS
10/01/10 – 9/30/11
$59 CONUS, $65 OCONUS
10/01/09 – 9/30/10
$59 CONUS, $65 OCONUS
10/01/08 – 9/30/09
$52 CONUS, $58 OCONUS
Their net deduction is then 80% of this figure.
INCIDENTAL EXPENSES ALLOWANCE. Incidental expenses include:
Fees & tips to porters, baggage carriers, bellhops, hotel maids, stewards or
others on ships, transport between place of lodging & place of meals if
not same place, mailing costs associated with filing travel vouchers.
SO WHAT? When traveling, if clients use the M&IE allowance, they may
claim additional expense for laundry and cleaning, but may NOT
include costs mentioned above.
SELF-EMPLOYED CLIENTS are also covered by these rules – if using the
allowance for M&IE (rather than keeping separate receipts for meals).
INCIDENTALS ALLOWANCE. There is an allowance for incidental
expenses, allowed ONLY if there is no claim for meals. The allowance:
2010 – 2014 – $5 per day.
2003 – 2009 - $3 per day
WEBSITE LOCATIONS: Per-diem tables can be found at the following sites:
CONUS rates:
www.gsa.gov - follow the link near the top for “Per Diem Rates”
OCONUS rates:
same site – same link – look for “Foreign Per Diem Rates” box, next to
the map of the U.S.
NOTE: These are the GSA rates. It appears IRS is moving away from
following these. Keep your eyes & ears open!
Form 2106
Page 215
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
BREAK FOR FAMILY DAY-CARE – MEALS ALLOWANCES
STANDARD MEAL AND SNACK RATES are published by Department of
Agriculture and are used by schools and several public facilities. The same
allowances are now available to anyone in the trade or business of providing day
care services, even if not licensed, registered, or regulated. Although the
allowances generally are changed at July 1 each year, providers may use the
allowance figures in force at the beginning of the calendar year.
USE ALLOWANCE OR ACTUAL COST. As long as the provider can
document the number of children cared for, the hours, and the number and
quantity of meals provided, the allowance is available. Generally the allowances
apply for minors that are provided day care services for less than 24-hour
periods. Provider’s own children or children who live with the provider do not
qualify. As with any allowance figure (e.g. – optional mileage method for driving),
provider may claim as a deduction the allowance or the actual costs involved.
Each year provider must choose whether to use the allowance or actual
expenses.
Website for the allowances:
http://origin.www.fns.usda.gov/cnd/Care/ProgramBasics/Payments/Rates.htm
CHART BELOW summarizes the allowance figures for recent years.
Meal Allowances – Day Care – Contiguous States (Alaska, Hawaii)
Year
Breakfast
7/01/2014 – 6/30/2015
$1.31 ($2.09, $1.53)
$2.47 ($4.00, $2.88)
$0.73 ($1.19, $0.86)
7/01/2013 – 6/30/2014
$1.28 ($2.04, $1.49)
$2.40 ($3.89, $2.81)
$0.71 ($1.16, $0.83)
7/01/2012 – 6/30/2013
$1.27 ($2.03, $1.48)
$2.38 ($3.86, $2.79)
$0.71 ($1.15, $0.83)
7/01/2011 – 6/30/2012
$1.24 ($1.97, $1.44)
$2.32 ($3.76, $2.71)
$0.69 ($1.12, $0.81)
7/01/2010 – 6/30/2011
$1.19 ($1.89, $1.38)
$2.22 ($3.60, $2.60)
$0.66 ($1.07, $0.77)
7/01/2009 – 6/30/2010
$1.19 ($1.89, $1.38)
$2.21 ($3.59, $2.59)
$0.66 ($1.07, $0.77)
7/01/2008 – 6/30/2009
$1.17 ($1.86, $1.36)
$2.18 ($3.53, $2.55)
$0.65 ($1.05, $0.76)
7/01/2007 – 6/30/2008
$1.11 ($1.76, $1.29)
$2.06 ($3.34, $2.41)
$0.61 ($0.99, $0.72)
7/01/2006 – 6/30/2007
$1.06 ($1.69, $1.24)
$1.97 ($3.20. $2.31)
$0.58 ($0.95, $0.69)
7/01/2005 – 6/30/2006
$1.06 ($1.68, $1.23)
$1.96 ($3.17, $2.29)
$0.58 ($0.94, $0.68)
7/01/2004 – 6/30/2005
$1.04 ($1.64, $1.20)
$1.92 ($3.11, $2.25)
$0.57 ($0.92, $0.67)
7/01/2003 – 6/30/2004
$0.99 ($1.57, $1.15)
$1.83 ($2.97, $2.14)
$0.54 ($0.88, $0.63)
Form 2106
Lunch/Dinner
Page 216
Snack
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
LODGING
LODGING AWAY FROM HOME DEDUCTIBLE. Expenses for lodging of an
individual who is not traveling away from home are generally personal, living,
or family expenses that are non-deductible.
LOCAL LODGING MAY BE DEDUCTIBLE. Under certain circumstances, local
lodging expenses may be deductible as ordinary and necessary expenses paid in
connection with carrying on a taxpayer’s trade or business. In 2012, the IRS
issued proposed regulations providing a safe harbor for lodging expenses when
not traveling away from home. Under this safe harbor, local lodging expenses
are treated as ordinary and necessary business expenses if:
• The lodging is necessary for the individual to participate fully in or be
available for a bona fide business meeting, conference, training activity, or
other business function;
• The lodging is for a period that does not exceed five calendar days and does
not recur more frequently than once per calendar quarter;
• If the individual is an employee, the employee’s employer requires the
employee to remain at the activity or function overnight; and
• The lodging is not lavish or extravagant under the circumstances and does
not provide any significant element of personal pleasure, recreation, or
benefit.
REGULATIONS FINALIZED WITH CLARIFICATION. The final regs clarify that
a taxpayer who does not satisfy the safe harbor rules may still be able to deduct
local lodging expenses under other facts and circumstances that satisfy the
ordinary and necessary expense rules of IRC §162.
FACTORS THAT MAY SATISFY THE FACTS AND CIRCUMSTANCES TEST
include:
• Training is a bona-fide condition or requirement of employment;
• The employer has a non-compensatory business purpose for paying the
lodging;
• The employer is not paying the expenses primarily to provide a social or
personal benefit to the employee;
• The lodging provided is not lavish or extravagant.
Form 2106
Page 217
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
HOTELS WHILE MOVING DOES NOT QUALIFY. A factor that does not satisfy
the facts and circumstances test is when the local lodging is a form of
additional compensation, such as an employer paying temporary lodging while
an employee looks for a new personal residence, and the expense does not
qualify under the deductible moving expense rules.
FACTS
• ABC Corp has 7-day training session at a local hotel.
• Some employees who attend are traveling away from home.
• Some employees live locally.
• ABC requires all employees to stay at hotel overnight.
• ABC pays for the lodging.
• What are the tax consequences?
ANSWER
Because the training is longer than five calendar days, the safe harbor is not
met. However, the facts and circumstances satisfy the ordinary and
necessary expense rules, so the value of the lodging may still be excluded
from income for both employees who are traveling away from home as well
as those employees who live locally. (Reg 1.162-32(a))
Form 2106
Page 218
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
MILEAGE ALLOWANCES
Year
Business
miles
Deemed
Deprec.
Charitable Medical or
Moving
Source
2015
57.5¢
24¢
14¢
23.0¢
Notice
2014-79
2014
56.0¢
22¢
14¢
23.5¢
Notice
2013-80
2013
56.5¢
23¢
14¢
24.0¢
Notice
2012-72
2012
55.5¢
23¢
14¢
23.0¢
Notice
2012-01
2011
thru 6/30
7/01 – 12/31
51.0¢
55.5¢
22¢
22¢
14¢
14¢
19.0¢
23.5¢
2010
50¢
23¢
14¢
16.5¢
Rev. Proc
2009-54
2009
55¢
21¢
14¢
24¢
Rev. Proc
2008-72
2008
thru 6/30
7/01 – 12/31
50.5¢
58.5¢
21¢
21¢
14¢
14¢
19¢
27¢
2007
48.5¢
19¢
14¢
20¢
Rev. Proc
2006-49
2006
44.5¢
17¢
14¢*
18¢
Rev. Proc.
2005-78
Rev. Proc
2010-51
Ann 2011-40
Rev. Proc
2007-70
Ann 2008-63
2005
thru 8/31
9/01 – 12/31
Rev. Proc.
2004-64 &
2005-6
40.5¢
48.5¢
17¢
17¢
14¢*
14¢*
15¢
22¢
2004
37.5¢
16¢
14¢
14¢
Rev. Proc.
2003-76
2003
36¢
16¢
14¢
12¢
Rev. Proc.
2002-61
2002
36.5¢
15¢
14¢
13¢
Rev.Proc
2001-54
2001
34.5¢
15¢
14¢
12¢
Rev.Proc
2000-48
2000
32.5¢
14¢
14¢
10¢
Rev.Proc
99-38
* Katrina contribution mileage is increased to 70% of the business rate for 2005 & 2006.
Form 2106
Page 219
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
COMMUTING RULES
GENERAL COMMENTS. Let’s review the auto commuting rules. First let’s
look at the definition of a commute.
DEFINITIONS. “Commute” always includes “home” at one end of the trip.
“Work Location” is a place where you have a bona fide and non-trivial
business reason to be.
REVENUE RULING 99-7 leaves us with a simple set of rules for
determining deductible driving. Here is a summary:
“GOING TO WORK” – GENERALLY NONDEDUCTIBLE. IRS has
long held that any trip between home and a "regular" work location
is non-deductible. The courts uphold this even if T/P is forced to use
an expensive method of commute, or faces additional expense
because of a need to carry tools or equipment, or in the case of an
unusually long commute.
RECENT TAX COURT CASE
FACTS
William Wayfarfromwork is employed at a remote test site in Nevada desert.
No direct public transportation is available.
Commutes 160 mile per day for 4 days per week.
Can he deduct his commuting costs?
RULING
The Tax Court held, as it has consistently done, that “travel expenses which
arise from going to and from work on a daily basis are not ordinary business
expensesaregardless of the distance traveled or the availability of housing at or
near the work site. (William Cor, TC Memo 2013-240)
TAX HOME ISSUES. The discussion here presumes taxpayer’s tax
home (where the money is earned) is in the same metropolitan area
as taxpayer’s residence (the ‘home’ which is at one end of the
‘commute’). Where tax home and residence are far apart we must
use completely different rules. See next page for another recent tax
court case ruling.
Form 2106
Page 220
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Doctor Dan lives a long distance (100 miles) from his dental office.
No other employment.
Occasionally stays overnight at a hotel near his office.
Are his commuting expenses deductible?
Are his meals and lodging deductible when he stayed overnight?
RULING
The Tax Court ruled that travel from a taxpayer’s home to a permanent place of
business is not deductible (even if that place of business is outside the
metropolitan area where the taxpayer chooses to live). Meals and lodging were
also not deductible. (Javad and Ashraf Bigdeli, TC Memo 2013-148)
NOT AFFECTED BY REVENUE RULING 99-7.
BUSINESS TO BUSINESS – DEDUCTIBLE. Trips between two
different work locations are always deductible.
“2 JOBS – SAME DAY” EXCEPTION STILL VALID. The only
commuting issue not overturned by this ruling is the old allowance
for the one-way distance between 2 different regular job locations
worked on the same day.
THE EXCEPTIONS. The chart on the next page summarizes the only exceptions
to the general rule as given by Revenue Ruling 99-7.
Form 2106
Page 221
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
COMMUTING – IS IT DEDUCTIBLE?
Type of “work location”
Temporary & outside Temporary & within
Regular
“metropolitan area” “metropolitan area” “work location”
Tier 1
If your home is “principal
place of business” as
defined in Home Office
rules – NOT required to
actually claim a home
office
Yes
Yes
Yes
Tier 2
If you have 1 or more
regular “work locations”
Yes
Yes
No
Tier 3
If you have no regular
“work location”
Yes
No
N/A
NOTES ON TERMS USED ABOVE
Revenue Ruling 99-7 and Technical Advice Memorandums – Chief Counsel
Advice 200026025, 200025052, and 200027047 can be used to clarify the
terms here:
WORK LOCATION is any location where T/P has a bona fide and nontrivial
business purpose for the presence.
TEMPORARY VS. REGULAR. The CCA points out that because of the
highly individual nature of this issue, the IRS has not issued general guidance
in this area. However, they conclude than any site visited 35 times or more
during the tax year is a “Regular” work site. When there are breaks in service,
and the same site is revisited, Chief Counsel again says that IRS has not
issued any general guidance in this area, but that a 7-month break makes the
return a new assignment, while a 3-week break does not.
METROPOLITAN AREA varies for different communities. However, each
IRS Office where audits are performed has a “working rule” in place. You
need only call and ask what rule is used in your general area. Most common
choice is either 30, 35, or 40 miles. Just ask.
Form 2106
Page 222
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Jassy Joseph is a music professor at City College.
Expenses incurred for playing the upright bass with various ensembles.
Participated in jazz conferences.
Traveled to local rehearsals and performances.
Are his expenses deductible as employee business expenses?
RULING
The Tax Court agreed that “his performance activities went beyond merely being
helpful for his profession; he showed a direct correlation between the costs
expended to learn more about music and teaching music to student. “The
experiences not only helped [taxpayer] as a music professor in general, but
helped him create unique and specific teaching content.” The professor was
allowed to deduct all the expenses. (Joseph Sully, TC Memo 2013-229)
TRAVEL AWAY FROM HOME
IN GENERAL. Traveling expenses incurred while away from home in the pursuit
of a trade or business are deductible to the extent they are reasonable and
necessary to the conduct of the taxpayer’s business and are directly attributable
to it. (IRC §162(a)(2)) A taxpayer may deduct daily transportation expenses
incurred in going between the taxpayer’s residence and a temporary work
location outside the metropolitan area where the taxpayer lives and normally
works. (Rev Rul 99-7) A taxpayer who does not normally work in the
metropolitan area in which he lives cannot claim a deduction under this rule.
(Daniela Aldea, TC Memo 2000-136)
TEMPORARY JOB LOCATIONS. If employment at a work location is
realistically expected to last (and does in fact last) for one year or less, the
employment is temporary. (Rev Rul 99-7)
NO REGULAR WORK LOCATION. For a taxpayer who has no regular work
location (and works only at temporary worksites), transportation expenses with
respect to temporary work locations are nondeductible commuting expenses
except for those temporary work locations that are located outside the
metropolitan area where the individual lives and normally works.
Form 2106
Page 223
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Galleryowner Gary.
On some days he was too far from home to return for meals.
Can he deduct his meals on those days?
RULING
The Tax Court ruled that he was not entitled to the deduction since many
taxpayers often commute to work and are unable to return to their homes during
the day. It is only when their business-related travel requires them to “sleep or
rest” that they can deduct those expenses. (Timothy Thunstedt, TC Memo 2013280)
RECENT TAX COURT CASE
FACTS
Franky Floridaresident took work assignment in Missouri.
Employer said work would be completed within one year and employment would
then end.
Job actually ended within 6 months.
Frankly deducted $4,060 for mileage and $170/day for 160 days for food/lodging
per diem rate.
What expenses are allowable?
RULING
The IRS disallowed the deductions because it didn’t consider them ordinary
and necessary business expenses. The Tax Court disagreed, concluding
that the taxpayer’s six-month work assignment was temporary and that his
“tax home” did not shift to Missouri. Thus, he was entitled to deduct travel,
lodging, and meal expenses related to the job. (Roj Snellman, TC Summ
Op 2014-10)
SUBSTANTIATION RULES
TRAVEL, ENTERTAINMENT, GIFT, & LISTED PROPERTY. These items must
be substantiated by adequate records or by sufficient evidence corroborating
the taxpayer’s own statement. To substantiate business use of an automobile,
an account book, diary, log, expense statement, or trip sheet must be prepared
and maintained. (Reg 1.274-5T(c)(2)(i))
Form 2106
Page 224
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Oscar Outsidesalesrep used truck to call on customers.
Recorded in a calendar planner book the truck’s odometer at beginning and end
of each month.
Can he deduct his mileage expenses?
RULING
The Tax Court ruled that he failed to follow the strict substantiation
requirements of IRC §274(d). His calendar, while contemporaneous, did not
sufficiently document the business purpose of each business use of his truck.
(Garzo, TC Memo 2014-121)
COHAN RULE DOES NOT APPLY. These substantiation requirements override
the Cohan rule (which permits using estimates of the amount of deductible
expenses). That is, estimates made under the Cohan rule for those expenditures
listed above are not deductible. (Gilbert J. Arevalo, TC Memo 1999-350; Reg
1.274-5T(a))
RECENT TAX COURT CASE
FACTS
Jazzy Joseph had mileage logs destroyed when basement flooded.
Can he deduct his mileage expenses using the Cohan rule?
RULING
Even though the Cohan rule cannot normally be used to substantiate mileage
expenses, the Tax Court ruled that it still applies when a taxpayer’s records have
been destroyed or lost because of circumstances beyond the taxpayer’s control,
such as destruction by fire, flood, or earthquake. Since the taxpayer’s records
were destroyed in a flood, he was allowed to substantiate the claimed deductions
by making reasonable reconstructions of the expenditures. Fortunately, the
mileage log for one tax year was not destroyed in the flood, and since he had
several recurring musical commitments, he could use that log to reconstruct the
mileage logs for the other tax years at issue. (Joseph Scully, TC Memo 2013229)
Form 2106
Page 225
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
EDUCATION EXPENSES
DEDUCTIBLE EDUCATION. An individual’s education expenses are deductible
as ordinary and necessary trade or business expenses if the education meets
either of these two tests:
1. The education is necessary for the individual to keep his job, status,
or rate of pay, or
2. The education maintains or improves skills required by the
individual in his trade or business.
TAXPAYER MUST BE ESTABLISHED IN BUSINESS. According to the Tax
Court, these rules require the taxpayer to be established in a trade or business
before any expenses are deductible. (Ross Lawrence Link (1988); Adam
Edward Hart, TC Memo 2013-289; Pieter Weyts, TC Memo 2003-68; Joseph
Franklin Martel, TC Memo 1990-369; John Cannon, TC Memo 1980-224)
RECENT TAX COURT CASE
FACTS
Salesman Sammy was a pharmaceutical salesman.
Sammy also worked as an account manager for a different company.
He also worked as entry-level professional for a drugstore company.
Also unemployed for some of same year - 2009.
Began MBA program in 2009 with tuition of $18,600.
Is his tuition deductible as an employee business expense?
RULING
The Tax Court disallowed the deduction for his MBA tuition expense
because Salesman was not in a trade or business in 2009 and his
employers did not require him to enroll in an MBA program. The judge
stated that being qualified to engage in a trade or business is different than
“carrying on” a trade or business, and the Section 162 regulations specify
that to be a deductible business expense, the taxpayer must already be
established in a trade or business. (Adam Hart, TC Memo 2013-289)
Form 2106
Page 226
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
NONDEDUCTIBLE EDUCATION. Education costs are not deductible if the
education:
1. Is needed to meet the minimum requirements for qualification in the
taxpayer’s trade or business, or
2. Will qualify the taxpayer in a new trade or business.
RECENT COURT CASE
FACTS
Marty Medicalstudent.
Hospital paid cost of medical education.
Marty committed to work for Hospital for 4 years or repay amount paid.
Decided to work elsewhere at end of education.
Repaid Hospital for cost of his education.
Is the cost of his education deductible?
RULING
Citing the rule that education expenses incurred to allow someone to meet the
minimum requirements for a job are personal expenses, the appellate court
found the repayment to be nondeductible. (Dargie (2013)
Form 2106
Page 227
Form 2106
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 2210
UNDERPAYMENT PENALTY
PENALTY RULES
Federal
Item
Threshold
California
2014
2015
2014
2015
No Penalty Unless
2014 Tax Due
Equals $1,000
No Penalty Unless
2015 Tax Due
Equals $1,000
No Penalty Unless
2013 or 2014 Tax
Due Equals $500
($250 MFS)
No Penalty Unless
2014 or 2015 Tax
Due Equals $500
($250 MFS)
No Penalty If Any
Tax Increase Due
To Retroactive Law
Change
No Penalty If Any
Tax Increase Due
To Retroactive Law
Change
Normal Taxpayer
100% of 2013 Tax
OR
90% of 2014 Tax
100% of 2014 Tax
OR
90% of 2015 Tax
100% of 2013 Tax
OR
90% of 2014 Tax
100% of 2014 Tax
OR
90% of 2015 Tax
Higher Income
Taxpayer
AGI > $150K
($75K MFS)
110% of 2013 Tax
OR
90% of 2014 Tax
110% of 2014 Tax
OR
90% of 2015 Tax
110% of 2013 Tax
OR
90% of 2014 Tax
110% of 2014 Tax
OR
90% of 2015 Tax
Very High Income
Taxpayer
AGI $1 Million &
Over
($500K & Over
MFS)
Same As Above
Same As Above
90% of 2014 Tax
90% of 2015 Tax
110% of 2013 Tax
OR
90% of 2014 Tax
110% of 2014 Tax
OR
90% of 2015 Tax
Cannot Use 110%
of 2013 Tax
Cannot Use 110%
of 2014 Tax
Special Taxpayer
Not Applicable
Not Applicable
See Electronic
Payment Of Taxes
Requirement On
Next Page
See Electronic
Payment Of Taxes
Requirement On
Next Page
Form 2210
Page 228
Form 2210
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA DIFFERENCES - ESTIMATED TAXES—FORM 5805
2010 - 2015 ESTIMATE SCHEDULE. For 2010 through 2015, estimated tax
payments are paid as follows: 30% / 40% / 0% / 30%.
PRIOR TO 2010 ESTIMATE SCHEDULE. For 2009, estimated tax payments
were paid as follows: 30% / 30% / 20% / 20%. For all years prior to 2009, the
payments were paid as follows: 25% / 25% / 25% / 25%.
ELECTRONIC PAYMENT OF TAXES. Beginning in 2009, taxpayers with an
estimated or extension tax payment in excess of $20,000 or with a total tax
liability in excess of $80,000, must remit these payments electronically to FTB.
Three payment options are acceptable to meeting this requirement:
1) Web Pay—Go To FTB Website (ftb.ca.gov) and select “Payment Options”;
2) Credit Card—Go To FTB Website (ftb.ca.gov) and select “Payment Options”;
3) Electronic Funds Withdrawal (EFW)—Include banking information as
instructed on the E-File return.
A 1% penalty of the amount due is assessed if not paid electronically. FTB
waived the 1% penalty in 2009 & 2010, but it has been assessing it since.
ELECTRONIC PAYMENT IS FOREVER. Once a taxpayer reaches these
thresholds, the requirement to pay electronically exists forever (even if taxpayer
drops below the threshold). However, FTB has issued FTB 4107 PC (revised
Sept 2012), Mandatory E-Pay Election To Discontinue Or Waiver Request, to
allow taxpayers to petition FTB for a waiver of this requirement. A new wavier
because of a permanent physical or mental impairment has been added and
must be accompanied by a physician affidavit of this disability. This form may be
faxed to 916-843-0468.
HELP FOR TAXPAYERS WITH AGI OF $1 MILLION OR MORE
PRIOR YEAR EXCEPTION. Normally the prior-year safe harbor provisions do
not apply to California taxpayers with AGI of $1 million or more. However, there
is still help available for these taxpayers under R&TC 19136(c)(2).
Under this code section, a taxpayer is not subject to the underpayment penalty if,
in the prior year, the taxpayer:
(1) Had a liability of $500 or less ($250 if MFS); and
(2) Made all tax payments in the prior year through withholding.
FTB NOTICES. FTB has announced that their computer will still assess an
underpayment penalty in situations where the taxpayer met this exception under
R&TC 19136(c)(2).
If you have any clients who were assessed a penalty but could have used this
exception, contact the Tax Practitioner Hotline at (916)-845-7057.
Form 2210
Page 229
Form 2210
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 2441
CHILD AND DEPENDENT CARE
CREDIT
FORM W-10
MANY UNAWARE OF FORM. Many tax preparers, as well as their taxpaying clients,
are unaware of Form W-10, which is used specifically to request provider information
from dependent care providers.
Form 2441
Page 230
Form 2441
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 2848
POWER OF ATTORNEY AND
DECLARATION OF
REPRESENTATIVE
UPDATED FORM
RELEASED JULY 2014
CANNOT BE FILED ELECTRONICALLY. The updated form can no longer be filed
electronically.
UP TO FOUR REPRESENTATIVES can be authorized as representatives on the new
form.
AFFORDABLE CARE ACT issues are covered by the addition in Section 3 of “Sec.
5000A Shared Responsibility Payment” and “Sec 4980H Shared Responsibility
Payment, etc.”
AUTHORIZED ACTS are separated to draw more attention to specific items.
Section 3 now lists the typical acts that are authorized, Section 5a lists only the
additional acts authorized, and Section 5b deals specifically with “Specific acts
not authorized” and spells out that representatives are prohibited from
negotiating refund checks in any way.
SUBJECT TO CIRCULAR 230. Part II wording has changed so the representative
declares “I am subject to … Circular 230”. The old form said “I am aware
of…”.
PTIN REQUIRED FOR SOME REPRESENTATIVES. Unenrolled Return Preparers
and Registered Tax Return Preparers must provide their PTIN.
Form 2848
Page 231
Form 2848
BRASS TAX Presentations
Form 2848
1040/540 TUNEUP 2014
Page 232
Form 2848
BRASS TAX Presentations
Form 2848
1040/540 TUNEUP 2014
Page 233
Form 2848
BRASS TAX Presentations
1040/540 TUNEUP 2014
TRANSCRIPT DELIVERY
SYSTEM
FORM 2848 OR FORM 8821 MUST BE IN CAF FILE. A qualified tax
professional who has a Form 8821, Tax Information Authorization, or Form
2848, Power of Attorney, on file may now request a client’s account transcript
using the Transcript Delivery System (TDS). The Form 8821 or 2848 must be
on file with the Centralized Authorization File (CAF) naming the individual,
not the individual’s business, as the appointee for the client. As a reminder,
users must meet the requirements of Circular 230 or be an Electronic Return
Originator (ERO) with 5 or more accepted returns in order to register and use
TDS.
MILITARY
HOLDER OF MILITARY POA SHOULD COMPLETE FORM 2848. A military
POA is sufficient authorization to permit an individual to represent a deployed
member of the military before the IRS. Because a military POA is broad in
scope and covers more than just tax authorizations, it cannot be input to the
Centralized Authorization File (CAF) by itself. The military POA holder
(often the spouse of the deployed military member) should complete Form
2848. The military POA holder is authorized to sign the Form 2848 as the
deployed military member’s authorized representative. Attach a copy of the
military POA including an attested statement, if required, to the completed
Form 2848 prior to submitting to the CAF unit for input.
CORPORATE
EMPLOYEES
CORPORATE EMPLOYEES NEED A POA TO REPRESENT CORPORATION
according to the IRS Office of Professional Responsibility. A corporation must
provide a POA to any employee that it authorizes to dispute tax issues before
the IRS on the corporation’s behalf. (OPR Bulletin 2014-12)
Form 2848
Page 234
Form 2848
BRASS TAX Presentations
1040/540 TUNEUP 2014
BYPASSING THE
TAXPAYER’S
REPRESENTATIVE
REPRESENTATION PROTECTED. IRC §7521 protects taxpayers in the
following ways:
1) Prohibits IRS personnel from bypassing the representative;
2) Requires IRS personnel to obtain their supervisor’s approval to bypass a
representative who is (from the IRS’s perspective) unreasonably delaying
the completion of the case; and
3) Requires IRS personnel to stop an interview when a taxpayer asks to meet
with a representative.
TIGTA REPORT SHOWED ABUSES. The Treasury Inspector General for Tax
Administration (TIGTA) looked at how well the Appeals Office is “ensur[ing]
that its personnel are appropriately including taxpayers’ representatives in its
activities.” In 11 of 96 sampled cases, Appeals personnel attempted to contact
the taxpayer directly or did not ensure that copies of correspondence were sent
to the representative.
BE SURE CLIENTS UNDERSTAND THEIR RIGHTS. The takeaway is the
representative should make sure that their clients understand their §7521 rights,
inform the representative if the IRS contacts them, and provide copies of all
IRS correspondence to the representative. (TIGTA report # 2013-30-080)
Form 2848
Page 235
Form 2848
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 3115
APPLICATION FOR CHANGE IN
ACCOUNTING METHOD
WHY IS FORM 3115 REQUIRED BY THE NEW REPAIR REGS? A “method of
accounting” is established after treating an item consistently on two tax returns.
Consent to switch to a new “method of accounting” must be obtained from the
Commissioner by filing Form 3115 (according to the tax code, so the IRS does
not have the authority to eliminate this requirement). This is even true to
switch from an incorrect method of depreciation to a required permissible
method of depreciation (such as those outlined in the new regs).
WHY ALMOST ALL TAXPAYERS ARE AFFECTED. The new regs specifically
state that affected businesses (including any who deduct supplies or repairs or
depreciation) must file a Form 3115 to change their “method of accounting”
from whatever method they had been using to the new method outlined by the
regs. In theory, it is possible a taxpayer’s previous accounting method may
have been compliant with the new regs by happenstance, but the new regs are
so extensive that such a possibility is nearly impossible. Therefore, nearly all
businesses must file a Form 3115 with their 2014 tax returns.
CLEAN UP DEPRECIATION SCHEDULES IN 2014. If items were capitalized in
the past but are deductible under the new regulations, then 2014 is the year to
“clean-up” the depreciation schedule. File a Form 3115 to make the necessary
adjustments and deduct those items. This will assure that items will be
deductible in the future. However, even if no “clean-up” is required, a Form
3115 must be filed to conform to the changes made by the regs.
AUDIT RISK. The IRS stated in a directive to the Large Business and
International Division that they will wait until 2014 returns have been filed
before auditing repair issues, and then scrutinize returns that did not include a
Form 3115. (LB&I-04-0313-001) It appears likely that chances of an audit
increase significantly if a Form 3115 is not filed. Failure to do so would give
the IRS broad discretion on what method of accounting best reflects income,
which would likely not be in favor of the taxpayer. (Example: Writing off
routine maintenance under the new rules without ever filing a Form 3115 to
adopt the new rules could allow an auditor to require capitalization of those
repairs. Or an auditor could claim that capitalized repairs should have been
written off and deny the depreciation deduction taken. If the expenditure was
more than 3 years ago that deduction could be permanently lost.)
Form 3115
Page 236
Form 3115
BRASS TAX Presentations
1040/540 TUNEUP 2014
AUTOMATIC CHANGE REQUEST PROCEDURES. Depreciation changes are
granted through an automatic change request procedure. There is no fee to the
IRS for an automatic change request.
RETURNS UNDER AUDIT DO NOT QUALIFY FOR AUTOMATIC CHANGE.
If the taxpayers’ return is under audit, they do not qualify to use the
automatic procedures, and must use the advance consent request procedures
generally covered in Revenue Procedure 97-27. The fee to the IRS is $625
minimum, so most taxpayers will choose to wait until the audit is completed
and then request a change under the automatic request procedures. Discuss
with the auditor the change you believe should be made and they may make
the adjustment or provide guidance about how they want you to go about
making the corrections for other years.
HOW CORRECTION APPEARS ON TAX RETURN. The amount of the
adjustment resulting from correcting the depreciation deduction from prior
returns is referred to as a “Code Section 481(a) Adjustment”. §481(a)
adjustments represent the aggregate amount of net income or expense that
would have been reported in the tax years before the year of change if the
taxpayer had used the correct or new method in those earlier years.
A reduction in income is reported in the year the error is discovered on the
Schedule C or E, etc., in the “Other Expenses” and is listed as “Section 481(a)
Adjustment”. An increase in income is spread over four years (unless the
amount is less than $25,000 and the taxpayer elects to report the entire
adjustment in the year the error is discovered). If the business ceases, any
remaining adjustment must be reported in that year.
CORRECTING MULTIPLE ITEMS. If corrections are being made to 2 or more
depreciable items, two adjustments are made:
1) All increases to income are added together and spread over 4 years.
2) All decreases to income are added together and included in the year the
error is discovered.
IRS guidance says that multiple changes relating to the new regs can be
submitted on one Form 3115. If no “clean-up” is required, and the Form 3115
is just being filed to comply with the new regs, simply listing all the change
numbers related to the new regs may be sufficient (though we cannot be sure
until new instructions are issued).
TWO COPIES MUST BE FILED. Returns including a Form 3115 can be filed
electronically. However a second copy must be sent to Ogden, UT and that
copy cannot be filed electronically.
Form 3115
Page 237
Form 3115
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 3115 IS COMPLICATED AND LENGTHY. This 8 page form contains
question after question that does not apply to typical taxpayers requesting an
automatic change in accounting period to correct depreciation. The technical
language used makes it impossible to quickly read the questions to determine
which ones apply and the instructions are even worse. To speed input, prepare
a schedule containing all the required information. Attach the schedule to the
return as a .pdf and then on all lines requesting typed-in information simply
type “See Schedule Attached”. A copy of this attachment is shown at the end
of this Form 3115 section.
HANDY NEW FORM 3115 BOOKLET. A “marked-up” Form 3115 providing a
quick and easy-to-follow guide for completion of the form is available in a
handy booklet available on the Brass Tax website:
EXAMPLE
• Connie Conservative
• Paid $12,000 for new carpet in 2011 and capitalized the cost.
• Expects the carpet to last 4 years.
• Depreciated the carpet in 2011, 2012 and 2013.
• In 2014 does nothing with the carpet, but expects to replace it in the next
year or two.
• What should Connie do special on her 2014 tax return?
ANSWER
Connie should file a Form 3115 with her 2014 income tax return. Two small
portions of Form 3115 are shown below and a copy of an appropriate
attachment is shown on the next page.
Form 3115
Page 238
Form 3115
BRASS TAX Presentations
Form 3115
1040/540 TUNEUP 2014
Page 239
Form 3115
BRASS TAX Presentations
Form 3115
1040/540 TUNEUP 2014
Page 240
Form 3115
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 3468
INVESTMENT TAX CREDIT
20 08
ENERGY CREDIT EXTENDED THROUGH 2016
BUSINESS INVESTMENT TAX CREDIT EXTENDED AND EXPANDED. This is
a Federal only non-refundable credit that can be carried over to another tax year.
It is covered by §48. It applies to energy improvements made to taxpayer’s
business located in the U.S. Originally set to expire after 2008, it is now
extended through 2016.
THE RULES. The credit is calculated by multiplying the basis of property placed
in service during the tax year by an applicable percentage. The credit is equal to
(1) 30% for qualified fuel cell property (up to a $500 maximum credit per year per
0.5 kilowatt of capacity), (2) 30% for solar energy property (equipment that uses
solar energy to generate electricity, to heat or cool or provide hot water for a
structure or to provide solar process heat, but not for heating a swimming pool),
(3) 30% for solar energy to illuminate the inside of a structure using fiber optic
distributed sunlight; (4) 10% for equipment used to produce, distribute or use
energy derived from a geothermal deposit, and (5) 10% for qualified microturbine property.
NEW MODIFICATIONS. For expenditures made after 10-03-2008, the $500 per
0.5 kilowatt of capacity for qualified fuel cells is increased to $1,500 per kilowatt
of capacity. In addition, three new categories of property are eligible for this
credit. (1) combined heat and power system property (10% credit), (2) small
commercial wind property (30% credit), and (3) geothermal heat pump systems
(10% credit).
For tax years beginning after 10-03-2008 and for carry backs of those credits,
this credit can be claimed against both regular tax and AMT.
Energy Policy Act of 2005, Tax Relief & Health Care Act of 2006 and Emergency
Economic Stabilization Act of 2008.
Form 3468
Page 241
Form 3468
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 4562
DEPRECIATION & §179
SECTION 179
Summary Chart – Section 179 Deductions
Year
2015
Maximum
Deduction
Phase out
Begins
Phase out
Complete
Software
Revoke Sec 179
election on
1040X
$25,000
$200,000
$225,000
No
No
2010 through 2014
$500,000
$2,000,000
$2,500,000
Yes
Yes
2009
$250,000
$800,000
$1,050,000
Yes
Yes
2008
$250,000
$800,000
$1,050,000
Yes
Yes
2007
$125,000
$500,000
$625,000
Yes
Yes
2006
$108,000*
$430,000
$538,000
Yes
Yes
2005
$105,000*
$425,000
$530,000
Yes
Yes
2004
$102,000*
$410,000
$512,000
Yes
Yes
2003
$100,000*
$400,000
$500,000
Yes
Yes
$24,000*
$200,000
$224,000
N/A
N/A
$20,000
$200,000
$220,000
N/A
N/A
2001 & 2002
2000
* plus $35,000 for NYC Liberty Zone – applies 9/11/2001 through 12/31/2006
IN GENERAL. Tangible, personal property used greater than 50% in a trade or
business is eligible for Section 179. Section 179 property may also include
some “Qualified Real Property” (see next page), single-purpose agricultural or
horticultural structures, certain storage facilities and off-the shelf software.
Buildings and their structural components and property acquired by gift or
inheritance, from related parties or property used outside of the U.S. is not
eligible property. Section 179 election is made on an item-by-item basis for
qualifying property. Taxpayer can make or revoke this expensing election on a
timely filed return. Once revoked, it cannot be remade.
Section 179 deduction is limited to taxpayer’s total taxable income from the
active conduct of a trade or business. Taxable income is computed without
regard to any Section 179 deduction, NOLs, or the deduction for S/E tax. If the
cost of property for which a current year Section 179 election is made exceeds
the taxable income limit, taxpayer may select properties for which all or a part
of the cost is carried forward.
Form 4562
Page 242
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXPIRING – SEC 179 FOR SOME REAL PROPERTY
$250,000 LIMIT FOR "QUALIFIED REAL PROPERTY" ENDS 12/31/2014.
$500,000 is the normal Section 179 limit for 2010 - 2014. However, for 2010
through 2014, property qualifying for expensing is extended beyond the existing
"depreciable tangible personal property used in a trade or business" to include
“Qualified Real Property” (see below).
HOWEVER, no amount attributable to these real properties can be carried
over to years beginning after 2014. For such carryovers, the law will apply as if
no Section 179 expensing election had been made for that property.
Small Business Jobs Act of 2010 & ATRA 2012 & TIPA 2014
“QUALIFIED REAL PROPERTY” consists of three types of property listed below.
1) QUALIFIED LEASEHOLD IMPROVEMENTS made to the interior portion
of nonresidential buildings are allowed if three conditions are met:
1. The improvement is made under or pursuant to a lease either by the
lessee, sub-lessee or lessor of the building portion. Leases between
related parties are not treated as leases for this purpose.
2. The portion of the building is to be occupied exclusively by the lessee
(or sub-lessee).
3. The improvement is placed in service more than 3 years after the date in
which the building was placed in service.
The following types of structural improvements would be allowable if they
benefit the tenant’s space only, rather than a common area:
Electrical or plumbing systems (including sprinkler systems);
Permanently installed lighting fixtures;
Heating and cooling equipment, air conditioners and other air
handling equipment; and
Ceilings and doors.
2) QUALIFIED RETAIL IMPROVEMENT PROPERTY must conform to the
second and third conditions above. This is generally any improvement to an
interior portion of a non-residential building if such portion is open to the
general public and is used in the retail business of selling tangible personal
property to the general public.
3) QUALIFIED RESTAURANT PROPERTY must conform to the second
condition above and has an additional requirement – more than 50% of the
building's square footage is devoted to the preparation of, and seating for, onpremises consumption of prepared meals.
Form 4562
Page 243
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
“Qualified Real Property” Special Rules
Qualified
Leasehold
Improvement
Qualified
Restaurant
Property
Qualified
Retail
Improvement
Property
15 Yrs
15 Yrs
15 Yrs
Yes
No *
No *
Yes **
Yes **
Yes **
Building Interiors?
Yes
Yes
Yes
Buildings?
No
Yes
No
Elevators & Certain
Structural Improvements? ***
No
Yes
No
Must Be Placed In Service More
Than 3 Years After Building
Is Placed In Service?
Yes
No
Yes
Must Be Made Pursuant To A Lease?
Yes
No
No
Item
MACRS Recovery Period
Eligible For Bonus Depreciation?
Eligible For Sect 179?
Includes:
*
Exception: If property also meets definition of a “Qualified
Leasehold Improvement” it also qualifies for Bonus depreciation.
**
Property used to furnish lodging is not eligible.
Heating and air conditioning units are not eligible.
***
“Certain Structural Improvements” includes elevators, escalators,
enlargement of the building, structural components that benefit a
common area and internal structural framework.
EXPIRING – 15-YR LIFE FOR SOME REAL PROPERTY
15-YEAR LIFE FOR "QUALIFIED REAL PROPERTY" ENDS 12/31/2014. 15
year life is used for 2010 through 2014. After 2014, depreciable life again
becomes 39 years.
Small Business Jobs Act of 2010 & ATRA 2012 & TIPA 2014
CALIFORNIA SECTION 179 CONFORMITY AND DIFFERENCES
CONFORMITY ENDED AT 2002. CA has NOT conformed to ANY Section 179
changes since 2003. The maximum §179 deduction since 2003 is $25,000, and
phase out begins at $200,000. Election to claim §179 must be made on an
original return, and may be altered up to the extended due date of the return.
Form 4562
Page 244
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
BONUS DEPRECIATION
VERY IMPORTANT!! IRS in all of their publications refers to “Bonus
Depreciation” as “Special Depreciation Allowance.” We will continue to call
this special depreciation allowance by the term “bonus depreciation”.
BONUS DEPRECIATION. Unusual choices arise from current tax law changes.
100% BONUS - 9/9/2010 THROUGH 2011. In 2011 we could use 100%
bonus or no bonus at all!
50% BONUS FOR 2012 - 2014 ONLY. In 2012, 2013 & 2014, we could use
50% bonus or no bonus at all!
NO BONUS AFTER 12-31-2014. Unless extended no bonus depreciation is
available for tax years 2015 and on!
REVIEW OF BONUS DEPRECIATION (IRC §168(k)). Bonus depreciation is
automatic. No election necessary. Not affected by short-tax years.
QUALIFYING PROPERTY. The property must be:
1) 20-YR OR LESS. Property must be in MACRS Class Life of 3, 5, 7,
10, 15, or 20-years. It may include computer software not covered by
the Section 197 intangible rules, some water utility property and
qualified leasehold improvement property (defined later). Thus
qualifying property generally is non-real estate property.
2) NEW PROPERTY. Taxpayer must be original user of property.
(Property converted from personal to business use may qualify if other
tests are met.)
3) ACQUIRED AFTER 12/31/2007 AND BEFORE 01/01/2015.
4) PLACED IN SERVICE BEFORE 01/01/2015.
5) NO ANNUAL MAXIMUM DOLLAR AMOUNT.
AMT. There is no AMT adjustment for bonus depreciation.
ELECTING OUT. Bonus depreciation applies to all qualified property, but T/P
may elect out. The law is clear here. “Electing out” of bonus applies to all
property in the same MACRS Class which is placed in service in the tax
year in question. Rev Proc 2002-33 says the taxpayer has two options.
A. ELECT-OUT BY THE DUE DATE (plus extensions) of the return for the
tax year property is placed in service. Instructions to Form 4562 require
taxpayer to attach a statement to return indicating the class of property
for which he is electing-out of the additional depreciation deduction.
Form 4562
Page 245
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
B. AFTER FILING – 6-MONTH LIMIT. On timely filed returns with no
elect-out election, an automatic 6-month extension applies. It extends 6
months from the due date (excluding extensions). File an amended
return and elect-out statement citing Reg. 301.9100-2.
OTHER WAYS TO ELECT-OUT. A T/P who does not elect-out under any
rules above, but wants to do so, must file a request for extension of time to
make the election under Reg. 301.9100-3. See Rev Proc 2002-33.
ELECTING OUT APPLIES TO ALL NEW §168(k) BENEFITS. Election-
out applies to all new benefits. These include 50%/100% bonus
depreciation, exemption from AMT adjustment and the $8,000 increase in
1ST year auto caps.
FAIL TO ELECT – ALLOWED OR ALLOWABLE. If a taxpayer does not
elect-out, depreciation allowable for qualified property is determined by taking
into account the additional first-year bonus depreciation. Election-out cannot
be made in any other manner, or by requesting a change in accounting method.
REVOKING THE ELECTION. Once made, an election-out is revocable only
with IRS written consent, and must be requested by way of a letter ruling.
MID-QUARTER CONVENTION. If more than 40% of total basis of all “personal”
property placed in service for the year is placed in service in the last quarter of
the year, the mid-quarter convention applies to all “personal” property placed in
service during the year. 50%/100% BONUS DEPRECIATION ALLOWANCE
IS ALLOWED whether the half-year or mid-quarter convention applies.
NON-QUALIFYING PROPERTY. No special allowance for:
ADS SYSTEM. Property that must be depreciated under the ADS system
(tangible personal property used predominately outside of the U.S.).
Property taxpayer elects to use ADR system is still qualifying property.
LISTED PROPERTY that is not used more than 50% for business.
NON CODE SECTION 168 PROPERTY such as intangible property and
property that the taxpayer elects not to depreciate under Code Section 168.
CALIFORNIA BONUS DIFFERENCES – NO CONFORMITY
CALIFORNIA HAS NOT CONFORMED to any bonus depreciation now or in the
past. Thus assets depreciated using bonus depreciation will have different
California basis and different California AMT preference amounts FOREVER!
Form 4562
Page 246
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
Section 179 Expensing – Vs. – Bonus Depreciation
Item
Section 179 Expense
Deduction
Section 168(k) Bonus
Depreciation
Annual $$$ Limits?
Yes
No
Qualifying Property
Tangible Personal Property Used In
Trade/Business
(But See Exceptions For
Qualified Real Property)
MACRS Property With Recovery
Period of 20 Years Or Less
(But See Exceptions For
Qualified Real Property)
Elect In Asset By Asset
Can Choose Any Amount Up To
100% Of Basis
Automatically In
Elect Out Class By Class
Election Details
Elect In By Extension Date
Exception: Elect In Or Out Anytime
In 2003 - 2013 Only
Elect Out By Extension Date
Back In Only With
IRS Consent
New Property?
Yes
Yes
Used Property?
Yes
“1st Use By Taxpayer”
No
“Taxpayer Must Be 1st User”
But See “Converted From Personal
Use” Two Rows Below
Acquired By Purchase From Unrelated
Party?
Yes
Yes
Converted From Personal Use?
No
Yes
But Only If Taxpayer Was Original
User Of Property
Property Must Be Used More Than
50% In Trade/Business?
Yes
No
Only Business Basis Qualifies
For Listed Property - Recapture Of
Excess Deduction Above Normal
MACRS Depreciation?
If Business Use Falls To 50% Or
Less During MACRS Recovery
Period, Recapture As Ordinary
Income On Original Form/Schedule
And Readjust Basis
Upon Sale, Bonus Is Treated As
Normal Depreciation
(Taxed As Ordinary Income Under
Code Sect 1245 Rules)
If Business Use Falls To 50% Or
Less During MACRS Recovery
Period, Recapture As Ordinary
Income On Original Form/Schedule
And Readjust Basis
Upon Sale, Bonus Is Treated As
Normal Depreciation
(Taxed As Ordinary Income Under
Code Sect 1245 Rules)
For Property Other Than Listed
Property - Any Additional Recapture
Rules?
Yes If Business Use Falls To 50% Or
Less During MACRS Recovery
Period, Recapture As Ordinary
Income On Original Form/Schedule
And Readjust Basis
None
Annual Deduction Limited To Net
Income From Trade/Business Before
Using This Provision?
Yes
But Excess Amount Can Be Carried
Over Indefinitely
No
Deduction Can Create Loss
Use For Real Estate Buildings?
No
Exception For Certain
“Qualified Real Property”
Must Make Election To Use
No
Exception For “Qualified Leasehold
Improvements”
Personal Property Inside Lodging
Facilities?
No For Resid Rental (Sch E)
Yes For Hotel/Motel (Sch C)
Yes For Both
Sch E and C Activities
Yes
N/A
Election Or Automatic?
Basis Used For Deduction May Be
Limited In Section 1031 Exchange?
Form 4562
Page 247
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
LEASEHOLD IMPROVEMENTS
GENERAL RULE. Generally, any improvement to depreciable property has the
same recovery period and method as the improved property. It is treated as
placed in service when the improvement is made. Therefore, an improvement
to a commercial building (whether made by the lessor/landlord or the
lessee/tenant) is depreciated straight-line over 39 years.
However, see the rules for “Qualified Leasehold Improvements” (which is one
of the elements of “Qualified Real Property) defined on page 243.
LESSEE/TENANT. Any remaining undepreciated basis is fully deductible by
the lessee as an ordinary, business expense when the lease terminates.
LESSOR/LANDLORD. Any remaining undepreciated basis is fully deductible
by the lessor as an ordinary, business expense when the lease terminates
ONLY if the actual improvement is irrevocably disposed of or abandoned by
the lessor at the termination of the lease. Otherwise, depreciation of the
leasehold improvement continues as usual.
Upon sale, original total cost of the leasehold improvements are added to
the basis of the building and any depreciation taken is added to the
depreciation allowed/allowable to determine the gain or loss on sale.
REPAIR OR IMPROVEMENT?
EXPENSE IT OR DEPRECIATE IT? The issue of whether expenses should be
deducted currently as repairs or materials or supplies, or capitalized, has been
central in many court cases over the years. New final regulations (TD 9636)
effective 1-1-2014 (or 1-1-12 by election) are the IRS's most recent attempt to
provide comprehensive guidance to simplify this complex decision.
The new regs provide some new safe harbors, but most taxpayers will have to
track through detailed, highly structured rules to determine if an expense must
be capitalized, and wade through hundreds of examples, to see if there is one
that is similar to their situation.
This entire topic was covered in detail (complete with multiple examples) in
our 2014 Brass Tax Tool Box program. A handy chart incorporating all of the
new final regulations (“Repair or Improvement???”) is shown on the next page.
Form 4562
Page 248
Form 4562
BRASS TAX Presentations
Form 4562
1040/540 TUNEUP 2014
Page 249
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
“PASSENGER AUTOS” HAVE CAPS
A “Passenger Auto” is any vehicle
Comment
With 4 wheels
Exclude motorcycles and multiple-axle
vehicles. Note: Some pickups have 4
rear tires, but these are “4-wheeled”
unless multiple axles drive the tires.
Made primarily for use on public streets, roads,
and highways
This excludes most tractors, grading
equipment, and so on.
(Through 10/22/04) With unloaded (loaded for
trucks or vans) GVW not over 6,000 pounds.
NOTE: The luxury caps normally apply
(10/23/04 and on) NEW LAW: An SUV from
6,000 - 14,000 pound GVW has no MACRS caps,
but has a $25,000 cap for Section 179.
Exceptions: A vehicle is not an “SUV” if it
•
•
•
Is designed for more than 9 individuals in
seating rearward of driver’s seat, or
Is equipped with an open cargo area, or a
covered box not readily accessible from the
passenger compartment, of at least six feet in
interior length, or
Has an integral enclosure, fully enclosing the
driver compartment and load carrying device,
does not have seating rearward of the driver’s
seat, and has no body section protruding more
than 30 inches ahead of the leading edge of
the windshield.
to the combined deductions for Section
179 and MACRS recovery
(depreciation). After 10/22/04 the
special rule for SUVs cause us to look at
the caps separately.
Passenger vans and shuttles
Pickups, rental vans for moving, etc
Sounds like a UPS truck
A vehicle meeting one of these
exceptions has no caps for either
depreciation or for Section 179.
Exceptions
Any ambulance, hearse, or combination
ambulance hearse used directly in a business
Vehicles used directly in the business of
transporting persons or properties for pay or hire.
Taxis, delivery vehicles, shuttles, limos.
Any truck or van that is a qualified non-personal
use vehicle.
IRS Reg. § 1.280F-6 (effective July 7, 2004)
excludes any vehicle that, by reason of its
nature (i.e. design) is not likely to be used
more than a de-minimus amount for
personal purposes. This standard is
discussed in Reg §1.274-5T(k)(7) and uses
as examples vehicles with one bench seat in
the front, and/or special racks for tools or
merchandise, and/or with company logo
painted on the side.
SO “PASSENGER AUTOS” DO HAVE “CAPS”. See the next page for those
annual cap amounts. For new vehicles only, notice the increased 1st year amount
for 2008 through 2014!
NON-PASSENGER AUTOS HAVE NO “CAPS”. So skip the next page.
Form 4562
Page 250
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
“LUXURY” CAPS. Business autos have annual caps to limit §168 depreciation
and §179 expensing to the lesser of allowable depreciation/expensing or the cap.
SUV rules (no MACRS Caps and $25K Max Section 179) began on 10-23-2004.
Luxury Car “Caps” under IRC §280(F)
Yr Placed
In Service
st
nd
1 Year
2
rd
Year
3 Year
Later Years
2014
$3,160 + $8,000 “bonus”
truck/van - $3,460 + $8,000 “bonus”
$5,100
truck/van - $5,500
$3,050
truck/van - $3,350
$1,875
truck/van - $1,975
2013
$3,160 + $8,000 “bonus”
truck/van - $3,360 + $8,000 “bonus”
$5,100
truck/van - $5,400
$3,050
truck/van - $3,250
$1,875
truck/van - $1,975
2012
$3,160 + $8,000 “bonus”
truck/van - $3,360 + $8,000 “bonus”
$5,100
truck/van - $5,300
$3,050
truck/van - $3,150
$1,875
truck/van - $1,975
2010-2011
$3,060 + $8,000 “bonus”
truck/van - $3,160 + $8,000 “bonus”
$4,900
truck/van - $5,100
$2,950
truck/van - $3,050
$1,775
truck/van - $1,875
LEASED AUTO INCLUSION TABLES. Taxpayers who lease a business auto may
deduct the portion of the lease payment representing the business or investment
use. If business/investment use is 100%, the full lease cost is deductible. So
that auto leases cannot avoid the effect of the luxury auto limits, however,
taxpayers must include a certain amount in income during each year of the
lease to partially offset the lease deduction per IRC §280F(c). The income
inclusion amount varies with the initial FMV of the leased auto and the year of
the lease, and is adjusted for inflation each year. Revenue Procedures that
contain the Income Inclusion Tables are outlined in the chart below.
Year Vehicle First
Leased
Revenue Procedure
2014
2013
2012
2011
2010
2014-21
2013-21
2012-23
2011-21
2010-18
CALIFORNIA DIFFERENCE & CONFORMITY
LUXURY CAPS – CONFORMITY. California conforms to luxury car caps above,
but for 2001-2004 & 2008-2014 doesn’t conform because of bonus depreciation.
LEASED AUTOS – CONFORMITY. California conforms to the leased auto
income exclusion tables.
Form 4562
Page 251
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
CLAIMING VEHICLE DEDUCTIONS
1. IS THE MILEAGE DEDUCTIBLE?
FOR EMPLOYER’S BENEFIT. The driving must be for a bona-fide and nontrivial business purpose. Moreover, if the mileage could have been reimbursed,
you may not claim a deduction simply because you did not seek reimbursement.
2. IF YOU CHOOSE OPTIONAL METHOD - - CENTS PER MILE. Use the applicable cents-per-mile figure. There is no limit
regardless the number of miles.
DEEMED DEPRECIATION. Reduce business basis by the deemed amount of
depreciation. Business basis is never reduced below zero.
3. IF YOU CHOOSE ACTUAL EXPENSES METHOD
A. ANY VEHICLE IS “LISTED PROPERTY”
50% RULE. The vehicle must be used more than 50% for business until fully
depreciated.
IF THIS TEST IS FAILED, depreciation is recaptured by comparing
actual amount of depreciation plus Section 179 & 168 deductions to
MACRS straight-line.
CONVENIENCE OF EMPLOYER. This is not the same as “employer’s
benefit” above. This test essentially asks whether it was required to have a
vehicle in order to get the job. Test must be passed at all times until the
vehicle is fully depreciated.
IF THIS TEST IS FAILED, no depreciation of any sort (or lease
payments) may be claimed. Consider using optional method instead.
B. DO LUXURY CAPS APPLY?
PASSENGER AUTOS (see chart 2 pages back) will have “caps”. These
limit the combined deductions for Section 179 and Section 168 (depreciation).
NON-PASSENGER AUTOS have no MACRS caps, and only the overall
annual limit on Section 179 applies.
SUV IN THE 6,000-14,000-POUND GVW CLASS has no MACRS
caps, but has a $25,000 cap on Section 179 beginning with such
vehicles placed in service after 10/22/04.
C. DISPOSITIONS AND RECAPTURE.
PASSENGER AUTOS have recapture issues if disposed of before the
vehicle is fully depreciated (listed property that has fallen below 50% business
use). 5-yr MACRS asset normally requires 6 tax years to be fully depreciated,
but the caps may cause a vehicle to require many more years for complete
depreciation. After the 6th tax year, recapture is normally not a problem.
NON-PASSENGER AUTOS have no MACRS caps, and thus can be fully
depreciated in 6 tax years regardless of price. Recapture is not an issue once
the 6th tax year is reached.
Form 4562
Page 252
Form 4562
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 4684
CASUALTIES & THEFTS
Disaster Losses
CASUALTY LOSS OVERVIEW. When property is lost or damaged due to an
earthquake, fire, flood, or similar event that is sudden, unexpected, or unusual,
it is considered a casualty loss. The damage to that property that is not repaid
by insurance or other reimbursements usually qualifies as a casualty loss
deduction for income tax purposes.
DISASTER LOSSES. The casualty loss becomes a disaster loss when both of
the following occur:
1) The loss is sustained in an area the U.S. President designates as a
disaster area. (A California-only disaster loss can occur when the
Governor of California, but not the President, designates a disaster area.)
2) The loss is sustained because of the declared disaster.
WHEN TO CLAIM A DISASTER LOSS. Special rules apply to disaster losses.
A disaster loss can be claimed in the tax year the disaster occurred or in the
tax year before the disaster occurred.
Type Of Return
Individual
Prior Year Return
Current Year Return
For Federal & California:
Claim on original or
amended prior year return
filed by due date of
current year return.
For Federal & California:
Claim on original return filed
by due date.
For California only Extended to 10th month
after close of disaster
year if added to Calif
R&TC Section 17207.
For California only Extended to due date plus
extensions if added to Calif
R&TC Section 17207.
For example, a calendar-year taxpayer generally has until April 15, 2015 to
amend their 2013 return for a disaster that occurred during 2014. For
California, the due date could possibly be extended until October 15, 2015
if added to R&TC Section 17207.
Form 4684
Page 253
Form 4684
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORMS TO USE. Use IRS Form 4684 to calculate the loss. For California,
use IRS Form 4684 and the California amounts if different than Federal.
Part A of this form is for personal use property and Part B for business and
income producing property.
HOW TO CALCULATE THE LOSS. Use the chart below to calculate the loss
for personal and business property. Note that for “Federally Declared
Disasters,” the 10% reduction (Step 4) was waived for 2008 and 2009.
Personal Use
Business & Income Producing
Step 1(a)
Calculate FMV of asset
before and after disaster.
Determine FMV decrease.
Step 1(a)
Calculate FMV of asset
before and after disaster.
Determine FMV decrease.
Step 1(b)
Determine adjusted basis
of asset.
Step 1(b)
Determine adjusted basis
of asset.
Step 1(c)
Smaller of 1(a) or 1(b)
Step 1(c)
Smaller of 1(a) or 1(b)
Step 2
Reduce Step1(c) by
insurance or other
reimbursement received or
expected to be received.
The remainder is the
total casualty loss.
Step 2
Reduce Step1(c) by
insurance or other
reimbursement received or
expected to be received.
The remainder is total &
allowable casualty loss.
Step 3
Reduce Step 2 by $100.
For each separate casualty
($500 in 2009).
Step 4
Reduce Step 3 by 10% of
AGI. The remainder is
the allowable casualty
loss.
DOCUMENTATION REQUIRED. The following is required to be attached to
Form 4684.
1) Date of disaster.
2) Location of disaster (city, county and state).
3) Statement of decision to deduct loss in tax year prior to disaster
loss year, if that is what is chosen.
EXCESS LOSSES. If the disaster loss exceeds the income on the return a
NOL is created. The carry back or carry forward rules for NOLs start on
page 83. Remember, Federal and California NOL rules vary greatly.
Form 4684
Page 254
Form 4684
BRASS TAX Presentations
1040/540 TUNEUP 2014
2014 CALIFORNIA DISASTER LOSSES
OVERVIEW. As of late November 2014, California has announced the following
declared disasters for 2014. See FTB Publication 1034 for update.
Date
Occurred
Item
Counties
Covered
Federal
Disaster
Loss
Carryback
California
Disaster
Loss
Carryback
Calif
Disaster
100%
Loss
20-Year
Carryover
Aug-Sep 2014
Napa Earthquake
Napa & Solano
Yes
Yes
Yes
May 2014
Wildfires
San Diego
No
Yes
Yes
SPECIAL RULES FOR MAIN HOMES INSURANCE PROCEEDS IN
PRESIDENTIALLY DECLARED DISASTERS
SPECIAL RULES FOR MAIN HOME DISASTER. Very strict rules apply to
replacement of property and contents lost due to a casualty. If taxpayer’s main
home or any of its contents is damaged or destroyed as a result of a disaster in a
Presidentially declared disaster area, special rules apply. Renters qualify to
choose tax relief under these same rules if the rented residence is their main
home.
TYPE OF PAYMENT determines the tax treatment. In common cases of loss of a
personal residence, there are 4 different types of payment you might see:
1. UNSCHEDULED PERSONAL PROPERTY. This is a general allowance
for furniture, appliance, clothing, other personal belongings inside the
structure, even automobiles.
2. STRUCTURE. This is payment for loss of the building or structure.
3. SCHEDULED PERSONAL PROPERTY. Items like jewelry or antiques
must often be listed in a “schedule” – if they are not, most policies offer a
very modest blanket figure for such property, say, $3,000 or $5,000.
4. TEMPORARY LIVING EXPENSES. Policies typically offer some daily or
weekly maximum, with a limit in time or amount.
Form 4684
Page 255
Form 4684
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXAMPLE – HOME DESTROYED BY WILDFIRE
Imagine the Smith family has their home totally destroyed by the fire. Their
insurance company offers the following money:
$ 100,000 – Loss of unscheduled personal property.
$ 250,000 – Loss of structure.
$
5,000 – Policy limit for jewelry even though scheduled list showed
$21,000 worth of jewelry.
$
1,800 – Monthly temporary living expense for up to 8 months.
How is each of these treated?
TAX IMPLICATIONS OF THESE PAYMENTS. Below is a very brief summary of
the tax treatment of each of these.
1. UNSCHEDULED PERSONAL PROPERTY PAYMENTS.
GAIN? The Smiths may do as they choose with the $100,000. It is never
considered income. IRC §1033(h)(1)(A)
LOSS? To claim a deductible casualty loss they must be able to
substantiate a loss greater than this.
2. LOSS OF STRUCTURE PAYMENTS. The $250,000 gets a slightly
different treatment.
SPEND LESS. If they can rebuild for, say $150,000, the additional
payment first reduces the adjusted basis of the property. If the basis is
reduced below zero, any excess is a taxable gain.
SPEND MORE. If the home costs up to $350,000 to rebuild, there is no tax
event – the $250,000 earmarked for the structure and the $100,000 for
the unscheduled personal property form a “common pool” – until the
pool is exhausted there is no tax event. If more than $350,000 is spent,
the additional costs increase the basis of the home.
3. SCHEDULED PERSONAL PROPERTY PAYMENTS. The Smiths
received $5,000 for “jewelry”. Any portion of the $5,000 not spent for
jewelry by the end of the replacement period is deemed to be income. Any
additional amount spent is simply the basis of the property. Scheduled
property has strict rules about “similar in function and use”. Money for
jewelry can only be used to buy jewelry—not furniture or computers.
Form 4684
Page 256
Form 4684
BRASS TAX Presentations
1040/540 TUNEUP 2014
4. TEMPORARY LIVING EXPENSES. The Smiths receive $1,800 monthly.
This is income, except to the extent they can show an increase in their
living expenses – that is, the $1,800 must be spent on new expenses!
HOMEOWNERS may ignore their mortgage payment – it goes on. They
are now paying rent for an apartment, hotel, or motel. If meals expenses
increase because of greater dependence on restaurants, they may claim
the additional cost if they can document it. Decreases count against
them – if normal utility bills were $100 monthly, but the temporary
lodging only includes $60 monthly for utilities, this must be taken into
account. A schedule of living costs (exclusive of mortgage payment)
must be prepared to justify excluding these payments from income.
RENTERS have a similar rule, but a greater likelihood of experiencing
income from these payments. They were already paying rent – if the
insurance company pays it for a few months, this is income!
20 09
PONZI – STYLE INVESTMENT FRAUD RELIEF
OVERVIEW. IRS has issued guidance for many investors caught in Ponzi style
investment frauds similar to the recent Bernard Madoff scheme. The guidance
consists of (1) a revenue ruling (Rev Rul 2009-9) dealing with seven specific tax
issues that victims of these schemes may confront; and (2) a revenue procedure
(Rev Proc 2009-20) providing safe harbors for determining the proper time and
amount of the loss. This guidance applies to investors caught up in any fraud, if
they qualifiy for relief under this revenue ruling and revenue procedure.
REVENUE RULING 2009-9 offers generous tax treatment for Ponzi victims. The
seven specific tax consequences to investors in these schemes are listed and
explained.
WHEN APPLICABLE. All open tax years.
REVENUE PROCEDURE 2009-20 allows Ponzi victims to use safe harbors to
measure loss and determine year of loss. These safe harbors are listed and
explained.
WHEN APPLICABLE. To losses for which the discovery year is a tax year
beginning after 12-31-2007.
Rev Rul 2009-9, Rev Proc 2009-20 and Rev Proc 2011-58.
Form 4684
Page 257
Form 4684
BRASS TAX Presentations
2013
1040/540 TUNEUP 2014
ADDITIONAL PONZI – STYLE INVESTMENT FRAUD RELIEF
SIMILAR TO REV PROC 2009-20. This guidance is for investors involved in a
Ponzi-style investment scheme who do not or cannot use the safe harbor
procedures provided in Rev Proc 2009-20. Under this guidance, IRS allows
investors to deduct the net investment (gross investment less any cash
withdrawals) in the Ponzi scheme in the year the theft is discovered.
PROGRAM MANAGER TECHNICAL ADVICE 2013-003 also offers additional
guidance on two subjects.
1) Recharacterizing prior withdrawals as a return of capital; and
2) Constructive receipt of income.
This part of the guidance allows investors to amend any open returns to remove
any “phantom income” that was reported by the investment company from
taxable income.
WHEN APPLICABLE. All open and closed tax years.
Program Manager Technical Advice 2013-003.
2013
FORM 4684 MODIFIED FOR PONZI INVESTMENT FRAUD
NEW SECTION “C” ADDED TO FORM 4684. A new section is added to Form
4684 for theft loss deductions involving Ponzi-style investment schemes if the
taxpayer is using the guidance provided in Rev Proc 2009-20, as modified by
Revenue Procedure 2011-58. This new section replaces Appendix A in
Revenue Procedure 2009-20.
Form 4684
Page 258
Form 4684
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 5329
RETIREMENT PLAN PENALTIES
10% PENALTY – EXCEPTIONS
REFERENCE GUIDE TO PENALTY EXCEPTIONS. Not all retirement
distributions taken prior to age 59½ are subject to a 10% penalty on Form
5329. The 2014 Reference Guide for Form 5329 Exceptions follows on the
next page. An expanded guide to these penalty exclusions was presented in our
BrassTax Stocking Your Tax Tool Box program in 2010.
IMPORTANT. See Form 8863 later in this outline for a discussion of how to
apply special rules relating to the education exception to reduce this penalty.
CALIFORNIA DIFFERENCES – PENALTY EXCEPTIONS
CONFORMITY. California has conformed to all Federal exceptions.
RECENT TAX COURT CASE
FACTS
Borrower Bob was under age 59 ½.
Borrowed $40,000 from 401(k) plan at work.
Upon employment termination, requested $100K distribution from 401(k) plan.
Plan administrator offset outstanding $40K loan against requested $100K
distribution and distributed $60K net amount.
How much is subject to income tax? Penalty?
RULING
The Tax Court concluded that the penalty applies because plan loan offsets are
treated as actual distributions. (Reg 1.402(c)-2, Q&A 9; Reg 1.72(p)-1, Q&A 13)
No exception applied so the entire $100K was subject to tax and penalty. (David
C. Matthews, TC Summary Opinion 2014-84)
Form 5329
Page 259
Form 5329
BRASS TAX Presentations
1040/540 TUNEUP 2014
2014 GUIDE TO FORM 5329 PENALTY EXCEPTIONS
Form
5329
Except.
Number
Reference
Distributions That AreZ
01
§72(t)(2)(A)(v)
And
§72(t)(10)(A)
By Employee Separated From
Service In/After Year Of Age 55
(Age 50 If Qualified Public Safety)
02
§72(t)(2)(A)(iv)
Part Of A Series Of Substantially
Equal Periodic Payments
X
Below
03
§72(t)(2)(A)(iii)
Made Because Owner Is Totally &
Permanently Disabled
X
04
§72(t)(2)(A)(ii)
Made Because Of Owner's Death
X
05
§72(t)(2)(B)
Payments For Medical Expenses
Above 7.5% or 10% Limit
X
06
§72(t)(2)(C)
Payments Under A QDRO (Qual
Domestic Relations Order)
07
§72(t)(2)(D)
Made To Unemployed Individuals
For Health Insurance Premiums
X
08
§72(t)(2)(E)
Made To Extent Of Higher
Education Expenses
X
09
§72(t)(2)(F)
Used For 1st Home Purch/Build
Expenses--$10K
X
10
§72(t)(2)(A)(vii)
Made Because Of IRS Levy
Under §6631 On IRA Or Plan
X
11
§72(t)(2)(G)
Made To Reservists On Active
Duty For At Least 180 Days
401(k)
403(b)
12
§72(t)(2)(A)(i)
Form
1099-R
Ltr Rul
9010007
Form
1099-R
§402(g)(3)
Form
1099-R
§72(t)(2)(A)(vi)
None
Ltr Rul
8531078
None
Notice 89-25
Q&A #11
All
Plans
No
IRA
or
Roth
X
X
Made On/After Owner Is Age 59½
(And All Other Distributions From
Form 5329 Instructions Including
Those Listed Below)
X
Tax-Free Rollovers
X
X
Distrib Of Elect Defer & Employee
Contribs Above §415 Limits
X
ESOP Stock Dividends
X
Transfers Terminated Defined
Benefit Plan Assets To 401(k)
X
Contributions & Income That
Purchased Life Insurance
IRA &
Roth
Only
X
EXCEPTION 02 applies to all IRA plans. However, it only applies to non-IRA plans if
payments begin after the owner separates from service.
Form 5329
Page 260
Form 5329
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 5405
FIRST-TIME HOMEBUYER CREDIT
REPAYMENT
2014
HOMEBUYER CREDIT 2014 UPDATE
REPAYMENT OF 2008 HOMEBUYER CREDIT CONTINUES. The 2008
Homebuyer Credit (maximum credit of $7,500) is being repaid in equal payments
over 15 years with the first repayment due in 2010. This repayment is further
accelerated if the home ceases to be used as a principal personal residence at
any time during those 15 years. This repayment is reported on Form 5405 and
appears on Form 1040, line 59b.
REPAYMENT OF 2009 & 10 HOMEBUYER CREDIT. The 2009 and 2010
Homebuyer Credit (maximum credit of $8,000 or $6,500) must be repaid only if
the home ceases to be used as a principal personal residence within 36 months
from date of original purchase.
American Recovery & Reinvestment Act Of 2009 and Worker, Homeownership &
Business Assistance Act Of 2009.
CALIFORNIA DIFFERENCES
CALIFORNIA no longer has a credit for purchase of homes. The 2009 and 2010
credits were claimed equally over a 3-year period of time.
Form 5405
Page 261
Form 5405
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 5695
RESIDENTIAL ENERGY CREDITS
2013
NON-BUSINESS ENERGY PROPERTY CREDIT – EXPIRING!
“Conserve It”
OVERVIEW.
This credit expires 12-31-2014!
It is covered by IRC §25(C).
This is a Federal only non-refundable credit.
For 2009-2014 only, it is available to offset AMT—Normally no AMT offset.
Any excess cannot be carried over to another tax year.
Applies to energy improvements to taxpayer’s principal residence inside the U.S.
It is not available for second or vacation homes or residential rental property.
Manufactured homes are specifically included.
It was previously available in 2006 & 2007 and 2009 & 2010, but not in 2008.
Energy Policy Act of 2005, Emergency Economic Stabilization Act of 2008,
ARRA 2009, Tax Relief Act of 2010 & ATRA 2012 & TIPA 2014.
2014
RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT
“Do It”
OVERVIEW.
It is covered by IRC §25(D).
This is a Federal only non-refundable credit.
It is permanently available to offset AMT.
Any excess can be carried over to another tax year.
It applies to the purchase of residential energy efficient property for the
taxpayer’s residence located in the U.S.
It is available for the principal residence as well as for second or vacation homes
(fuel cell property requires principal residence only) but not for residential rental
property.
Originally available 2006 through 2008, it is extended through 2016.
This law is effective for tax years beginning before 2017 only.
Energy Policy Act of 2005, Tax Relief & Health Care Act of 2006 and Emergency
Economic Stabilization Act of 2008.
Form 5695
Page 262
Form 5695
BRASS TAX Presentations
1040/540 TUNEUP 2014
“Do It”
“Conserve It”
ENERGY TAX CREDITS
(See Notice 2013-70)
Discussion
Items
Amount Of Credit
Maximum Credit
Non-Business Energy Property
Credit – §25(C).
10% X Cost Of “Qualified Energy
Efficiency Improvements”
Plus
10% X Cost Of “Residential Energy
Property Costs”
(Costs = No Max Limit)
Maximum Credit = $500 for all years
after 2005 combined!!
Residential Energy Efficient
Property Credit – §25(D).
30% X Cost of “Qualified Residential
Energy Efficiency Property”
(Costs = No Max Limit)
No Maximum Credit Amount
(For Fuel Cell Property, See Below)
Note: Max lifetime credit for windows
& skylights is $200 after 2005.
Effective Date
Purchases Before 01/01/2015
Purchases Before 01/01/2017
Type Of Credit
Use Against Regular Tax + AMT;
Not Refundable
Cannot Be Carried Forward
Use Against Regular Tax + AMT;
Not Refundable, But
Can Be Carried Forward Indefinitely
Type Of Dwelling
Dwelling Unit In United States And
Used By Taxpayer As Principal
Residence (Section 121)
Dwelling Unit In United States And
Used By Taxpayer As A Residence.
(Fuel Cell Property Requires Principal
Residence (Section 121))
Use Of Energy
Property
Taxpayer Must Be Original User Of Energy Property.
Qualified Energy Efficiency Improvements Must Last 5 Years.
Basis Reduction
Basis Reduced By Credit Amount
Labor Costs
Include If For Onsite Preparation, Assembly Or Original Installation
(But Not For QEEI Items Shown Below)
Type Of Property
“Qualified Energy Efficiency
Improvements” (QEEI)
1) Insulation Material/Systems To
Reduce Heat Loss Or Gain
2) Exterior Windows Including
Skylights ($200 Max for yrs > 2005)
3) Exterior Doors
4) Metal/Asphalt Roof With
Pigmented Coatings Or Cooling
Granules
“Qualified Residential Energy
Efficiency Property”
1) Solar Electric Property
2) Solar Water Heating Property
3) Small Wind Energy Property
4) Geothermal Heat Pump Property
5) Fuel Cell Property
(Max Credit = Kilowatt Capacity X
$1,000)
“Residential Energy Property
Costs”
1) Energy Efficient Bldg Property
($300 Max in 2013)
2) Natural Gas, Propane Or Oil
Furnace And Hot Water Boiler
($150 Max in 2013)
3) Advanced Main Circulating Fan
Used in #2 Above ($50 Max in 2013)
Forms/Pubs
Form 5695
Expired 12-31-2013
Page 263
Form 5695—Page 1
Form 5695
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 6251
ALTERNATIVE MINIMUM TAX
EXEMPTION AMOUNTS – FEDERAL AMT – INDEXED ANNUALLY
Year
Exemption Amount
$83,400 – MFJ
$53,600 – Unmarried
$41,700 – MFS
$82,100 – MFJ
$52,800 – Unmarried
$41,050 – MFS
$80,800 – MFJ
$51,900 – Unmarried
$40,400 – MFS
$78,750 – MFJ
$50,600 – Unmarried
$39,375 – MFS
2015
2014
2013
2012
2012
Exemption Phase out
Range
$158,900 - $344,300
$119,200 - $301,700
$ 79,450 - $172,150
$156,500 - $339,000
$117,300 - $299,800
$ 78,250 - $169,500
$153,900 - $333,400
$115,400 - $294,900
$ 76,950 - $166,700
$150K - $330K
$112.5K - $247.5K
$ 75K - $165K
FOR 2012 & ON – NON-REFUNDABLE PERSONAL CREDITS
All non-refundable personal credits will be allowed against Federal AMT.
ATRA 2012
EXEMPTION AMOUNTS – CALIFORNIA AMT – INDEXED ANNUALLY
Year
2015
2014
2013
2012
Form 6251
Exemption Amount
Unknown – MFJ & Surv Spouse
Unknown – Single & H of H
Unknown – MFS & Estate/Trust
$86,502 – MFJ & Surv Spouse
$64,878 – Single & H of H
$43,250 – MFS & Estate/Trust
$84,640 – MFJ & Surv Spouse
$63,481 – Single & H of H
$42,319 – MFS & Estate/Trust
$83,225 – MFJ & Surv Spouse
$62,420 – Single & H of H
$41,612 – MFS & Estate/Trust
Page 264
Exemption Phase out
Begins
Unknown
Unknown
Unknown
$324,384
$243,288
$162,191
$317,401
$238,051
$158,700
$312,095
$234,072
$156,047
Form 6251
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 6765
RESEARCH CREDIT
RESEARCH CREDIT OVERVIEW. This credit is covered by IRC Section 41.
The research credit equals the sum of: (1) 20% of the excess (if any) of the
qualified research expenses (QREs) for the tax year over a base amount, (2)
20% of the basic research payments determined under section 41(e)(1)(A) (the
“university basic research credit”) and (3) 20% of the taxpayer’s expenditures
on qualified energy research undertaken by an energy consortium.
The taxpayer can elect either the alternative incremental research credit or the
alternative simplified research credit which would then replace item (1) above.
The base amount is a fixed-base percentage (not to exceed 16%) of the
taxpayer’s average annual gross receipts from a US trade or business, net of
returns and allowances, for the four tax years before the credit year, and can’t
be less than 50% of the year’s QREs.
EXPIRING – RESEARCH CREDIT
RESEARCH CREDIT ENDS 12/31/2014.
HOWEVER, for purposes of the orphan drug credit, Code Section 41 is
considered to remain in effect for ALL periods after 12-31-2009.
Small Business Jobs Act of 2010 & ATRA 2012& TIPA 2014
Form 6765
Page 265
Form 6765
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8582
PASSIVE ACTIVITY LOSS
LIMITATIONS
DISPOSITIONS
If a taxpayer disposes of his entire interest in a passive activity in a fully taxable
transaction to an unrelated party, then previously suspended Passive Activity
Losses (PALs) from that activity are finally recognized. (IRC §469(g))
RECENT CHIEF COUNSEL ADVICE
FACTS
Propertyowner Paul purchased property for $1M with $1M mortgage.
Leased property to Tommy Tenant.
No other passive activities.
Suspended passive losses of $100,000 accumulated over 3 years.
Paul defaulted and bank foreclosed property.
$75,000 COD excluded using insolvency.
How are suspended losses handled?
RULING
Chief Counsel advised that a foreclosure on real property comprising the
taxpayer’s entire interest in a passive activity is a fully taxable transaction, and
any previously suspended PALs are recognized. The result is the same
regardless of whether or not the taxpayer can exclude COD income related to
the transaction. In addition, the PAL is not subject to attribute reduction after use
of the insolvency exclusion, because attribute reduction occurs after the tax is
determined for the year of discharge. In determining the taxpayer’s tax for the
year of the discharge, all previously suspended losses are fully allowable
because of the taxable foreclosure. Thus, there are no remaining PALs that are
reduced at the beginning of the next tax year. (CCA 201415002)
Form 8582
Page 266
Form 8582
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Freddy Fighter owned real estate rental property.
Property foreclosed by bank.
Freddy sued regarding deficiency judgment on the property.
Can Freddy deduct suspended passive losses on the property?
RULING
The Tax Court determined that the foreclosure was not a fully taxable disposition
due to the pending lawsuit. Therefore the suspended PALs were not deductible
in the current year. (They will be deductible when the lawsuit is settled.)
(Alexander Herwig, TC Memo 2014-95)
RECENT CHIEF COUNSEL ADVICE
FACTS
Connie Converter converted rental property to personal residence.
PALs of $30,000 at time of conversion.
Also had another rental with PALs of $15,000.
Later sold personal residence for gain of $100,000.
Entire $100,000 gain excludable under IRC §121.
Can any PALs be deducted in year of sale?
RULING
Chief Counsel advised that the use of §121 does not serve to create a
transaction that is not a “fully taxable transaction”. Thus it is a taxable
transaction but the income can be excluded. Therefore, the PALs on this
property are freed-up and fully deductible in the year of sale. However, the
suspended passive losses first reduce the gain recognized before the §121
exclusion. In other words, you don’t get to use the §121 exclusion and then
offset suspended passive losses on the same gain.
The gain excluded under §121 is not an item of passive income and cannot be
used to free up losses from other passive activities, so the $15,000 PAL on the
rental is not freed-up. (CCA 201428008)
Form 8582
Page 267
Form 8582
BRASS TAX Presentations
1040/540 TUNEUP 2014
REAL ESTATE
PROFESSIONALS
GROUPING ELECTION. Taxpayers are allowed to elect to treat all interests in
rental real estate as a single activity to determine if they materially participated.
However, a qualifying taxpayer may not group a rental real estate activity with
any other activity of the taxpayer for this purpose. (Reg 1.469-9(e)(3)(i))
RECENT TAX COURT CASE
FACTS
Realestateagent Rhonda worked full-time in real estate sales.
She also owned 2 rental properties with $40,000 total losses.
Can she deduct the full amount of these losses this year?
RULING
The taxpayer wanted to deduct the full amount of the losses as non-passive
based on the theory that she could attribute her involvement as a real estate
professional to her personal rental real estate activities, resulting in satisfaction
of the material participation requirement. The court ruled against her because a
taxpayer cannot group a rental real estate activity with any other type of real
estate activity. (Reg 1.469-9(e)(3)) (Gragg (2014))
WHICH COMES FIRST –
RE PRO OR GROUPING?
REAL ESTATE PROFESSIONAL ELIGIBILITY. If the “real estate professional
exception” applies, a rental activity is automatically treated as nonpassive if the
taxpayer materially participated in the activity. To be eligible for this
exception, both of the following conditions must be met:
1. More than half of the personal services performed by the taxpayer during
that year are performed in real property trades or businesses in which the
taxpayer materially participates, and
2. The taxpayer performs more than 750 hours of services during that year in
such trades or businesses.
Form 8582
Page 268
Form 8582
BRASS TAX Presentations
1040/540 TUNEUP 2014
MATERIAL PARTICIPATION TESTS. In order to use the real estate professional
exception, the taxpayer must materially participate in the real estate activity, by
passing one of 7 tests:
1. Work more than 500 hours a year;
2. Participation is the only activity;
3. Works more than 100 hours and no one works more hours;
4. Several passive activities in which he participates between 100-500 hours
each, and the total time is more than 500 hours (Rental activities,
investment activities, and activities in which the taxpayer does most of the
work are not included in this test.);
5. Materially participate in activity for any 5 out of 10 preceding years;
6. Material participation in a personal service activity for any 3 prior years; or
7. Facts and circumstances if taxpayer worked more than 100 hours, no paid
manager, and no one spent more time
NO ELECTION REQUIRED TO USE REASONABLE GROUPING. Depending
on the facts and circumstances, a real property trade or business consists either
of one or more than one trade or business. A taxpayer may use any reasonable
method of applying the fact and circumstances in determining what constitutes
an activity in which the taxpayer provides personal services. (Reg 1.469-9(d))
GROUPING ELECTION. Taxpayers are allowed to elect to treat all interests in
rental real estate as a single activity to determine if they materially participated.
However, a qualifying taxpayer may not group a rental real estate activity with
any other activity of the taxpayer for this purpose. (Reg 1.469-9(e)(3)(i))
RE PRO QUALIFICATION COMES FIRST. In a chief counsel memorandum, the
IRS indicated that the grouping election does not affect the determination of
whether the taxpayer qualifies for the real estate professional exception.
Instead, the taxpayer first determines if the real estate professional exception
applies using a reasonable combination of the activities based on the facts
and circumstances. If the RE Pro exception applies, real estate activities in
which the taxpayer materially participated are treated as nonpassive. The
material participation determination is made separately for each rental property
unless the taxpayer makes the election to treat all interest in rental real estate as
a single activity. (CCA 201427016)
However, even if a grouping election is made, rental activities cannot be
grouped with other activities for this purpose, as stated above.
Form 8582
Page 269
Form 8582
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT CHIEF COUNSEL MEMO
FACTS
Taxpayer owns 2 rental properties.
Also owns real estate property development business.
Owns no other businesses that provide personal services.
No election to group activities.
Total hours on all activities exceed 750 hours.
Are rental properties subject to passive loss limitations?
What if he had made election to group all activities?
RULING
First – Determine if Taxpayer is a RE Pro. Chief Counsel advised that the 2
rental activities and the real property development business are all real property
trades or business and are treated as one activity for this purpose (no grouping
election required), and since Taxpayer spent more than 500 hours on this
business, he materially participates. Therefore, time spent on the 2 rental
properties and the real property development business may count towards
meeting RE Pro status. Taxpayer qualifies as a RE Pro since he spent more
than 750 hours on the combined activities. Thus, the passive activity limitations
do not apply to any rental real estate activity of Taxpayer if he materially
participates in the activity.
Second – Must determine whether Taxpayer materially participates in each
activity. No election to group the activities was made, so the 2 rental properties
are each treated as separate activities. Thus, Taxpayer must demonstrate
material participation for each property separately (pass one of the 7 tests).
Taxpayer’s participation in the real property development business is
disregarded in determining whether he materially participates in the rental
activities, even if he had elected to group them. (Reg 1.469-9(e)(3))
Even if he had made the election to group the activities, he cannot include the
real estate development business with the rental activities, so he could only
group the 2 rental properties together. (Chief Counsel Memorandum 201427016)
Form 8582
Page 270
Form 8582
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8606
NONDEDUCTIBLE IRAS
CONTRIBUTIONS, DISTRIBUTIONS & BASIS
RETIREMENT PLAN BASIS – HOW MUCH IS IT? Form 8606 presumably has
been tracking the basis of contributory IRAs. Federal basis! Federal has
allowed a basis only since 1987. Before this, all contributions were deductible.
Not so for California. Other retirement plans also have different rules.
The chart on the next page shows the maximum deductible contribution to an IRA,
Keogh, SEP or SIMPLE plan. Unless noted, the maximum contribution that
can be deducted is equal to the maximum contribution that was made.
California and Federal amounts may differ and thus a different basis will exist.
TAXATION OF RETIREMENT PLANS FOR CALIFORNIA
RESIDENCY CONTROLS TAXATION. Taxation of any IRA plan and qualified
retirement plan is controlled by Federal law. The law is simple! Retirement plan
distributions are taxed to the state of residence when they are received. This is
true no matter if paid by a California employer or where services were performed
or where retirement was earned or funded.
CALIFORNIA RESIDENT. If taxpayer is a resident of California when payments
are received, retirement distributions are taxed to California.
NOT A CALIFORNIA RESIDENT. If taxpayer is not a resident of California
when payments are received, no retirement distribution is taxable to California.
LAW CHANGES RETIREMENT PLAN BASIS. Starting 1-1-2002, the tax on
new residents of California is calculated as if the taxpayer had been a resident of
California for the entire current year and as if the taxpayer had been a resident
for all prior taxable years. (AB 1115, Ch. 01-920).
The law allows basis only if the taxpayer would have had any basis if they had
been a California resident. For many of our clients who have moved to California
from other states, this creates little or no basis in their retirement plan. For more
information on this California law, see page 190.
CALIFORNIA BASIS. Different rules apply to each of Traditional IRA, Keogh,
SEP IRA, SIMPLE IRA and Roth IRA. The charts on the next two pages will help
you. In addition, FTB Publication 1005, “Pension and Annuity Guidelines”,
Publication 1031, “Guidelines For Determining Resident Status” and Publication
1100, “Part-year Residents and Non-residents” will also help you in obtaining the
correct taxation of retirement plan distributions.
Form 8606
Page 271
Form 8606
BRASS TAX Presentations
1040/540 TUNEUP 2014
Maximum Deductible Contributions (Under Age 50)—2014 Chart
Year
IRA
Keogh/PSP/MPP
SEP
SIMPLE
Fed
Calif
Fed
Calif
Fed
Calif
Fed
Calif
1963-67
n/a
n/a
$1,250
$0
n/a
n/a
n/a
n/a
1968-70
n/a
n/a
$2,500
$0
n/a
n/a
n/a
n/a
1971-74
n/a
n/a
$2,500
$2,500
n/a
n/a
n/a
n/a
1975
$1,500
$0
$7,500
$2,500
n/a
n/a
n/a
n/a
1976-78
$1,500
$1,500
$7,500
$2,500
n/a
n/a
n/a
n/a
1979-81
$1,500
$1,500
$7,500
$2,500
$7,500
$2,500
n/a
n/a
1982-83
$2,000
$1,500
$15,000
$2,500
$15,000
$2,500
n/a
n/a
1984-86
$2,000
$1,500
$30,000
$2,500
$30,000
$2,500
n/a
n/a
1987-93
$2,000
$2,000
$30,000
$30,000
$30,000
$30,000
n/a
n/a
1994-96
$2,000
$2,000
$30,000
$30,000
$22,500
$22,500
n/a
n/a
1997-99
$2,000
$2,000
$30,000
$30,000
$24,000
$24,000
$6,000
$6,000
2000
$2,000
$2,000
$30,000
$30,000
$25,500
$25,500
$6,000
$6,000
2001
$2,000
$2,000
$35,000
$35,000
$25,500
$25,500
$6,500
$6,500
2002
$3,000
$3,000
$40,000
$40,000
$40,000
$40,000
$7,000
$7,000
2003
$3,000
$3,000
$40,000
$40,000
$40,000
$40,000
$8,000
$8,000
2004
$3,000
$3,000
$41,000
$41,000
$41,000
$41,000
$9,000
$9,000
2005
$4,000
$4,000
$42,000
$42,000
$42,000
$42,000
$10,000
$10,000
2006
$4,000
$4,000
$44,000
$44,000
$44,000
$44,000
$10,000
$10,000
2007
$4,000
$4,000
$45,000
$45,000
$45,000
$45,000
$10,500
$10,500
2008
$5,000
$5,000
$46,000
$46,000
$46,000
$46,000
$10,500
$10,500
2009-2011
$5,000
$5,000
$49,000
$49,000
$49,000
$49,000
$11,500
$11,500
2012
$5,000
$5,000
$50,000
$50,000
$50,000
$50,000
$11,500
$11,500
2013
$5,500
$5,500
$51,000
$51,000
$51,000
$51,000
$12,000
$12,000
2014
$5,500
$5,500
$52,000
$52,000
$52,000
$52,000
$12,000
$12,000
2015
$5,500
$5,500
$53,000
$53,000
$53,000
$53,000
$12,500
$12,500
KEOGH: Tax years 1963-67, max contribution was $2,500. 50% of this contribution was deductible.
SIMPLE: Employer & employee can each contribute $12,000 max for total contribution of $24,000.
Form 8606
Page 272
Form 8606
BRASS TAX Presentations
1040/540 TUNEUP 2014
Additional Amount For Age Add-On (Age 50 & Over)—2014 Chart
Year
IRA
PSP
MPP
SEP
401(k)
403(b)
457
SIMPLE
2001
$0
$0
$0
$0
2002
$500
$0
$1,000
$500
2003
$500
$0
$2,000
$1,000
2004
$500
$0
$3,000
$1,500
2005
$500
$0
$4,000
$2,000
2006-2008
$1,000
$0
$5,000
$2,500
2009-2014
$1,000
$0
$5,500
$2,500
2015
$1,000
$0
$6,000
$3,000
Form 8606
Page 273
Form 8606
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8615
“KIDDIE TAX” CALCULATION
UNDER THE “KIDDIE TAX” RULES, the unearned income (i.e. investment
income) of certain children that exceeds an inflation-adjusted prescribed
amount is taxed to the children, but at the rates that would apply if that income
were included in the parent’s return, if the parent’s rate is higher than the
child’s rate.
“KIDDIE TAX” UNEARNED INCOME LIMIT
Applies To Unearned Income In
Excess of This Amount
2013
2014
2015
$2,000
$2,000
$2,100
UNEARNED INCOME. Unearned income includes all taxable income that is not
defined as earned income. It includes taxable interest, ordinary dividends,
capital gains (including capital gain distributions), rents, royalties, taxable
social security, pension/annuity benefits, taxable scholarships and income
received as a trust beneficiary (except for certain qualified disability trusts).
TO WHOM DOES THIS APPLY? Since 2008, Kiddie Tax is expanded to apply to
a child (1) who turns age 18, and, if a full-time student, turns age 19-23, before
the close of the tax year, and (2) whose earned income for the tax year does not
exceed 50% of his or her support, and (3) who has more than the inflationadjusted prescribed amount of unearned income ($2,000 for 2014) for the tax
year, and (4) who had at least one living parent at year end, and (5) who didn’t
file a joint return for the tax year.
CALIFORNIA CONFORMITY
CALIFORNIA conforms to this rule for tax years beginning on or after January 1,
2010.
Form 8615
Page 274
Form 8615
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8812
ADDITIONAL CHILD TAX CREDIT
2014
EARNED INCOME THRESHOLD REMAINS AT $3,000
THRESHOLD DECREASES FOR 2009 THROUGH 2017 ONLY. The earned
income threshold used in Method #1 below is reduced to $3,000. Normal cost of
living indexing will return for 2018 and on unless Congress agrees to extension.
ARRA 2008, TRA 2010 & ATRA 2012.
TWO METHODS TO QUALIFY for this credit:
(1) LOW TAX. If any of the Child Tax Credit is “lost” due to low tax liability,
the test below converts some or all the lost credit into a refundable credit.
GENERAL RULE: Lost Child Tax Credit is converted to a refundable credit
to the extent of 15% of earned income exceeding an income threshold.
Year
Lost Child Tax Credit Is Refundable
To Extent Of A Percentage Of Earned
Income Above A Certain Threshold
% Of
Earned Income
Threshold
2009-2017
15%
$3,000
2008
15%
$8,500
2007
15%
$11,750
(2) 3 OR MORE TIER 1 DEPENDENTS, AND - - - . Certain low-income
taxpayers with 3 or more Tier 1 Dependents can have a portion of their lost
Child Tax Credit converted to a refundable credit based on the interplay of
their Earned Income Credit and the amount of FICA (or SE) Tax paid. To
benefit from this section of the form requires:
• 3 or more Tier 1 Dependents age 16 or less, and
• at the same time taxpayer is sending more to the Government in the
form of employee’s share of FICA than taxpayer is claiming an EIC.
Form 8812
Page 275
Form 8812
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8815
EDUCATION SAVINGS BONDS
EDUCATION SAVING BOND PROGRAM. Interest income from U.S. Savings
Bonds may be excludable from income if T/P paid qualified educational
expenses during the same year. (§135)
BASIC QUALIFICATIONS. Any filer except those filing MFS may claim the
exemption. Other requirements:
• Bonds must be Series EE or Series I issued after 1989,
• Bonds are in the name of TP and/or Spouse,
• The owner had to be at least 24 years of age at the time of issue.
• You’ll need both the interest from the bonds and the total face value of
the bonds redeemed.
• Qualified expenses are generally tuition paid to colleges, universities, or
certain trade schools for T/P, Spouse, or a dependent.
EXCLUDABLE AMOUNT is related to AGI, the total proceeds, and the
qualified educational expense. The calculations are made on the form.
PHASE-OUT of exemption amount depends on “Modified AGI”, which is AGI
plus foreign earned income exclusion or housing exclusion from Form
2555, plus any exclusion for income from Puerto Rico or U.S. Possessions.
MODIFIED AGI LIMITS for current years are:
2013
2014
2015
Single or H/H
$74,700 – 89,700
$76,000 – 91,000
$77,200 – 92,200
MFJ/Qual. Widow
$112,050 – 142,050
$113,950 – 143,950
$115,750 – 145,750
SAVINGS BONDS INTEREST IN CALIFORNIA
CALIFORNIA exempts all interest on all US savings bonds!
Form 8815
Page 276
Form 8815
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8824
LIKE-KIND EXCHANGES
WHO CAN BE AN INTERMEDIARY? Only certain persons qualify as a Qualified
Intermediary and the taxpayer’s agents and family members (including
ancestors and lineal descendants) are disqualified. (Reg 1.1031(k)-1)k))
RECENT TAX COURT CASE
FACTS
Exchanger Edward.
Used his Attorney Son as qualified intermediary.
Does the exchange qualify?
RULING
The son was a disqualified person and the regulations make no exception based
on his profession. The exchange did not qualify. (Frank J. Blangiardo, TC Memo
2014-110)
2014 – NEW CALIFORNIA SECTION 1031 FILING REQUIREMENTS
NEW RULE. For taxable years beginning on or after 1/1/2014, California
Revenue & Taxation Code Sections 18032 and 24953 require taxpayers who
exchange real estate properties located in California for like-kind properties
located outside of California under IRC Section 1031 to file an annual
information return on Form 3840, California Like-Kind Exchange.
WHO MUST FILE FORM 3840? Applies to all individuals and business entities,
regardless of their residency status or commercial domicile, whose like-kind
exchange includes property located in CA exchanged for real property located
outside of CA. See Form 3840 on next two pages.
WHEN TO FILE FORM 3840. Must file form for the year of the exchange AND
annually, thereafter, until the deferred gain or loss is recognized. Form must be
filed with CA tax return by due date of return being filed. If taxpayer, is not
otherwise required to file a CA return, taxpayer must complete and sign Form
3840 and file it separately as an information return by due date as if a CA tax
return filing requirement exists. (Sent separately to FTB; PO Box 1998; Rancho
Cordova, CA 95471-1998).
FAILURE TO FILE. FTB may issue a Notice of Proposed Assessment to adjust
taxpayer’s income to recognize previously deferred gains + penalties & interest.
Form 8824
Page 277
Form 8824
BRASS TAX Presentations
Form 8824
1040/540 TUNEUP 2014
Page 278
Form 8824
BRASS TAX Presentations
Form 8824
1040/540 TUNEUP 2014
Page 279
Form 8824
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8829
HOME OFFICES
(CODE SECTION 280A)
CAN YOU QUALIFY?
Home Office Deductions – Who Qualifies?
1) Character Of Space
Used Regularly and Exclusively for business.
Need not be a separate room.
Usage may not be mixed with any non-qualified usage.
No exceptions, except “time and use” tests for day care centers.
2) Business Use - Meet any ONE of the tests below:
Principal Place
Administrative or management activity at home
PLUS
NO OTHER FIXED LOCATION where
significant amounts of such work is done.
Meet Clients Separate
Structure
Meet clients,
patients, or
customers on
a regular
basis.
Beware of your
state’s definition
of “appurtenant”.
3) Employees Only
Additional test – Required by employer as a condition of employment – no
exceptions.
4) Storage Exception.
Sellers only (wholesale or retail) – space used for storage of inventory and/or
product samples (Do NOT include storage of supplies, records, etc.). Home must
be only fixed location of the business.
Form 8829
Page 280
Form 8829
BRASS TAX Presentations
1040/540 TUNEUP 2014
RECENT TAX COURT CASE
FACTS
Tina Tinyapartment.
Works as an employee from her single-room studio apartment.
Her apartment was sole New York location for the business.
Employer was unrelated.
Single room was divided into 3 equal sections (1 section being the office space).
Met with company clients there.
Performed work using a computer on the desk.
Stored books, magazines, supplies and samples there.
Admitted to using portions of the office space for nonbusiness purposes.
Can she deduct expenses for the home office?
RULING
The Tax Court surprisingly ruled that the personal use of the office space was de
minimis and unavoidable due to the small size of the apartment. The court
allowed a deduction for 1/3 of the rent and cleaning services, charges for the
apartment telephone line, and a portion of the internet service. The taxpayer
was not entitled to deductions for cable television, cell phone service, or clothing.
(Lauren E. Miller, TC Summ Op 2014-74)
RECENT TAX COURT CASE
FACTS
Insuranceagent Irving specialized in RV specific insurance policies.
He was a member of several RV clubs to gain access to RV owners.
Clubs held RV rallies; only RV owners could attend.
He gathered sales leads at every rally.
Attached insurance sales advertisement to his RV.
Invited potential customers to come to his RV to discuss insurance.
Often took months and sometimes years to develop an actual sale.
Business activities conducted in his RV generated significant revenue.
Client testified that he was a “pest about insurance”.
2/3 of time at rallies was for business; 1/3 was for pleasure.
Is Irving allowed a deduction for his RV?
RULING
The office-in-home rules require exclusive business use. Since the same areas
of the RV were used for both business and personal use, no deduction was
allowed. (Jackson, TC Memo 2014-160)
Form 8829
Page 281
Form 8829
BRASS TAX Presentations
1040/540 TUNEUP 2014
NEW “SAFE HARBOR”
CALCULATION
REV. PROC 2013-13 gives a simplified calculation method for home office
deductions. Only the calculation is affected.
$5 PER SQ. FT. – MAX 300 SQ. FT. No record-keeping of separate utility bills,
maintenance, association dues, etc. Safe harbor is a simple $5 per square foot
on up to a maximum of 300 square feet of space.
NORMAL QUALIFYING RULES apply – a dedicated space, regular and
exclusive use, etc.
DETAILS. The rules in the Rev. Proc. include:
• $5 per square foot, with a maximum deduction of $1,500 ($5 rate to
be adjusted as needed by IRS).
• Election by filing. Your choice is signaled by what is claimed on a
timely filed return. No amendments to change method allowed.
• No additional actual expenses allowed.
• Not allowed for an employee who receives any advance, allowance,
or reimbursement for such usage.
• Year-by-Year determination. Use the safe harbor this year, actual
calculation in another year.
• Depreciation neither allowed nor “deemed” for any year the Safe
Harbor method is used. Section 1250 unrecaptured gain is invoked
only for years in which the “actual expenses method” is used.
• Carryovers from prior years are not allowed in any year the Safe
Harbor is used.
• Partial year of usage, prorate by months, where 15 or more days of
use within a month allows the month to be counted.
• Multiple business use - - - spouses or roommates, for example, each
with qualifying business use, could each claim up to 300 square feet
of usage.
• Multiple businesses of a single taxpayer can allocate the 300 square
feet among the businesses.
• Multiple homes in the same year. May use Safe Harbor for at most
one home.
• Income limitation. The deduction cannot exceed net business
income. Any excess deduction is lost, not carried over.
Form 8829
Page 282
Form 8829
BRASS TAX Presentations
1040/540 TUNEUP 2014
OTHER NOTES:
DEPRECIATION TRACKING PROBLEMS. Since there is no deemed
depreciation, we must learn to track the years – which used the Safe Harbor,
and which used “actual expenses method”. This will be important when the
home is sold. (Also a record-keeping problem if we don’t track the years!)
NEW CLIENTS. In a few years we’ll see this one: You take on a new client,
and a look at last year’s return shows a Schedule C with home office. What
happened in prior years? Safe Harbor? Full calculation on Form 8829?
IS THIS A GOOD DEAL? The simplified (“Safe Harbor”) method is much
simpler to calculate and there is no recapture of depreciation at date of sale
which might swing the tax pendulum in favor of this new method of home
office calculation. However, for taxpayers who use their home for family daycare or who do not own a home, but are renting their living space, the actual
cost method may be more appropriate.
AUDIT-RESISTANT? There is some speculation that IRS is less likely to
question the Home Office these days. So is IRS even less likely to audit those
who use the new Safe Harbor method? Wait and see!
ALWAYS REVIEW THE HOME OFFICE QUALIFYING RULES. Since this new
revenue procedure is just a simplified safe-harbor calculation method that can
be used for qualifying home office deductions in place of detailed expenses, we
should always review the general rules to make sure the taxpayer qualifies for a
home office. The chart on page 280 is a good place to start.
Form 8829
Page 283
Form 8829
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8839
ADOPTION CREDIT
OVERVIEW. Credit is non-refundable (§36C) equal to 100% of qualified adoption
expenses incurred in adopting an eligible child under age 18 at the time of the
adoption, or a person 18 or over who is physically or mentally incapable of
taking care of oneself. MFS qualify only if they meet special rules to be
deemed to be “unmarried” under Code §21(e)(4)”. Adoption of a spouse’s
child does not qualify, but adoption of a RDP’s child does. The maximum
annual credit dollar limit is a per-child limit.
SPECIAL NEEDS ADOPTIONS are eligible for the annual maximum credit
allowed regardless of the amount spent. To qualify as a special needs child, the
state must determine that the child cannot or should not be returned to the
parent’s home, and unless adoption assistance is provided to the adoptive
parents, the child will probably not be adopted due to a specific factor or
condition.
UNFAVORABLE COURT DECISION ABOUT SPECIAL NEEDS. A 2014
District Court case considered the statutory meaning of determined. The
taxpayers argued that Florida (where the child was adopted) had already
determined the child they adopted had special needs, as the child was of
racially-mixed parentage, which was previously determined by Florida to be a
specific qualifying factor for the special needs classification. The IRS
prevailed, arguing that Florida had not made a specific individual
determination that the child had special needs. Since no specific state decision
had taken place, the court ruled the adopted child was not a special needs child.
(Joseph and Hannah Lahmeyer (2014) DC FL) If taxpayers receive assistance
from the government to cover adoption costs, or monthly adoption assistance
payments to help cover living costs, qualification for these payments would
have required a determination by the state that the specific child had special
needs.
YEAR TO TAKE CREDIT. For an adoption of a U.S. child, the credit is claimed in
the earlier of (1) the year after the year taxpayer pays or incurs the expense or
(2) the year the adoption is finalized. A credit can be claimed even if the
adoption is not finalized. Expenses paid to adopt a foreign child cannot be
used until the adoption is finalized.
Form 8839
Page 284
Form 8839
BRASS TAX Presentations
1040/540 TUNEUP 2014
CHILD'S "TIN" OR "ATIN". Taxpayer must include a TIN of the child on the
return. An ATIN (Adoption Taxpayer Identification Number) can be issued in
domestic adoptions where the child’s true TIN is not available. Obtain an
ATIN by filing Form W-7A. A foreign adoption requires a valid SSN.
SUBSTANTIATION REQUIREMENTS. Notice 2010-66 requires a copy of the
final adoption order or decree to take the credit.
Year
Maximum Credit
Phase out Begins
Phase out
Complete
2015
$13,400 Not Refundable
$201,010
$241,010
2014
$13,190 Not Refundable
$197,880
$237,880
2013
$12,970 Not Refundable
$194,580
$234,580
2012
$12,650-Not Refundable
$189,710
$229,710
2011
$13,360-Refundable
$185,210
$225,210
CALIFORNIA DIFFERENCES
CALIFORNIA’S ADOPTION CREDIT is equal to 50% of costs with a maximum
credit of $2,500. Adoptions must be through a public agency. Private adoptions
are not covered. Credit is allowed in the year the adoption is finalized—If never
finalized, no credit is allowed. NO FORM—only a special worksheet.
Form 8839
Page 285
Form 8839
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8857
REQUEST FOR INNOCENT
SPOUSE RELIEF
INNOCENT SPOUSE RELIEF. A new revenue procedure updates guidance for
taxpayers seeking equitable innocent spouse relief. (IRC §66(c) or 6015(f))
The guidelines adopt a revised filing timeframe which gives the taxpayer until
the statute of limitation for collection or refund expires (replacing the old 2
year limit). It also modifies and clarifies the factors used in determining
whether the IRS will grant relief. Lack of economic hardship will no longer
weigh against relief, but will instead be neutral. Greater deference is given to
the presence of abuse (including abuse of financial control), although the
procedure clarifies that no one factor or majority of factors will direct the
decision. The procedure also outlines the circumstances when the IRS will
make a streamlined determination in granting equitable relief. (Rev Proc 201334)
Form 8857
Page 286
Form 8857
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8863
EDUCATION CREDITS
2 0 12
6
2012 TAX ACT EXTENDS AOTC LIFE
EXTENDED THROUGH 2017! Since 2009, the American Opportunity Tax
Credit (AOTC) has replaced the original HOPE credit.
ARRA of 2009, TRA of 2010, ATRA 2012 and Code Section 25A.
OVERVIEW
Two credits - Lifetime Learning Credit (LLC) and the American
Opportunity Tax Credit (AOTC). The Hope Scholarship Credit (HOPE) is
currently not available.
Form 8863 is used to compute the credit. 2014 Form 8863 is again two
pages and looks similar to the 2013 version complete with the extra
questions on page 2 of the form.
IRS Publication 970 outlines all educational tax incentives.
Form 1098-T from educational institutions is needed to calculate credit.
The Internet address, “1098T.com”, is the place to find your client’s
missing Form 1098-T information.
“QUALIFIED HIGHER EDUCATION EXPENSES”
Tuition and Related Fees (Hope and LLC)
Tuition and Related Fees and Course Materials (AOTC)
Performed at an eligible education institution
Undergraduate or graduate (generally not for AOTC) level courses
ELIGIBLE EDUCATIONAL INSTITUTION
Accredited post-secondary institutions offering credit towards a bachelor's,
associate or other recognized post-secondary degrees or credentials.
Proprietary and vocational institutions may also qualify.
Must be eligible for Department of Education student aid programs.
CALIFORNIA NON-CONFORMITY
California does not have any of these education credits.
Form 8863
Page 287
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
LLC and American Opportunity Credits (§25A)—2014
Item
LIFETIME LEARNING
Who Can Use?
AMERICAN OPPORTUNITY
Taxpayer, Spouse & Dependent
Years Applicable
No ending date
2009 Through 2017 Only
Credit Amount
Up to $2,000 per family per year.
(20% of first $10,000 of qualified
expense). Non-refundable and no
carryover
Up to $2,500 per student per year.
(100% of first $2,000 of qualified
expense, plus 25% of next $2,000).
No carryover, but part is refundable
(see below).
Refundable?
40% of credit is refundable.
(But not for Kiddie Tax child).
No
Qualifying Person
The credit is claimed on the return where the personal exemption for the
student can be claimed. Thus, parent claims a dependent child’s credit
even if the child pays for the education. In a divorce situation, giving up
dependent exemption means giving up the education tax credit.
EXCEPTION: IRS announced in January 1999 in proposed regulations to
IRC 25A that a parent could waive exemption, allowing the dependent to
claim the credit – this means the exemption is never claimed as parent has
waived and dependent does not qualify. Not allowed if file MFS.
Qualifying
Education
Any undergraduate or graduate
courses and most courses for job
skill improvement. May be used in
many tax years.
Qualifying
Expenses
Tuition and fees - No books, supplies, room & board, student activity or
health fees, insurance, transportation etc. See Form 1098-T for help in
determining the correct amount.
Only allowed for first 4 years of postsecondary education in a degree or
certificate program. IRS instructions
indicate that academic period must
st
begin in 2014 or 1 3 months of
2015. It has been pointed out to
IRS that this time period might
st
include 1 year of graduate school
and IRS has not disagreed with this.
Special: Qualified expenses paid in 2014 for an academic period that
begins in Jan-Mar 2015 are used for 2014 credit.
Special
Rules
No half-time requirement – a single
course could qualify.
No courses involving sports,
hobbies, games - unless part of
degree program. Offsets for
scholarships, VA benefit, etc. A
given student may not claim HOPE
and LL in same year.
Phase Out 2014
Form 8863
$108,000 - $128,000 = couples,
$54,000 - $64,000 = single.
Page 288
Student must be enrolled at least
halftime. Credit denied if student
convicted of felony drug offense
within last 2 or 4 years.
No courses involving sports,
hobbies, games - unless part of
degree program. Offsets for
scholarships, VA benefit, etc. A
given student may not claim HOPE
or AMERICAN OPPORTUNITY and
LL in same year.
$160,000 - $180,000 = couples,
$80,000 - $90,000 = single.
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
Comparing Education Incentives
Expires
American
Opportunity Credit
Lifetime Learning
Credit
Tuition Deduction
12/31/2017
N/A
12/31/2013
Maximum Amount
$2,500 per student
$2,000 per return
$4,000 deduction
Qualified Expenses
Tuition, Fees & Course
Materials
Tuition & Related
Expenses Only
Tuition & Related
Expenses Only
When Eligible
1st 4 Years Of
Postsecondary
Any Post High School
Education
Any Post High School
Education
How Many Years
4 Years (Includes HOPE
Years)
Unlimited
Unlimited
Degree Program
Pursing Undergraduate
Degree Or Credential
No Degree Or Credential
Necessary
No Degree Or Credential
Necessary
Work Load
At Least ½ Time For At
Least 5 Months
One Or More Courses
One Or More Courses
Felony Drug
No Credit Allowed
Felony OK
Felony OK
Refundable
Partially-40%
No
No
Who Gets Benefit
Whoever Claims
Dependency Exemption
OR Student If No One
Claims As Dependent
Whoever Claims
Dependency Exemption
OR Student If No One
Claims As Dependent
Must Pay & Claim
Student As Dependent
OR Student Can Claim If
Not Eligible Dependent
FIRST 4 YEARS OF POSTSECONDARY EDUCATION. The AOTC is allowed
for each of the first four years of the student's post-secondary education. “First
four years” is measured by status at school as a freshman, sophomore, junior, or
senior, not by four calendar years. A student who takes more than 4 years to
complete their undergraduate degree may still claim the credit in years 5, 6,
etc., but the credit may not be claimed in any more than 4 years total. It may be
advantageous to amend prior returns where a lower credit was claimed to make
the taxpayer eligible to claim a higher credit in a current year.
Example
• Pokey Paulie
• Entered college in 2009
• 2009 – 2012 tuition $400 per year
• Claimed credit in 2009 - 2012
• 2013 Junior in college - Tuition $8,000
• How much American Opportunity Credit?
Amend prior returns to remove the lower credit so that full $2,500 credit can be
claimed in 2013. (The oldest returns are out of statute for the IRS assessing tax,
but the taxpayer is always allowed to self-assess tax. The IRS is likely to send
the amended return and payment back and you will have to resubmit them.)
Form 8863
Page 289
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
SOME GRADUATE CLASSES MAY QUALIFY. The IRS has reversed their
earlier statement and now says that if the student begins a masters program
within the first 4 years of postsecondary education, tuition is allowed for the
masters program. It is common for high-achieving students with Advanced
Placement credits to do this! This does not mean they must begin the masters
program within 4 years of graduating from high school; it means they must
begin the masters program within the first 4 years they attend college.
Example
• Harry Highachiever entered college in 2010
• In 2013 - Began Masters program - Tuition $3,000 spring, $5,000 fall
• In 2013 - How much American Opportunity Credit?
AOTC is available for the first 4 years of post-secondary education. If the
student begins a masters program within the first 4 years, tuition is allowed for
the masters program. Harry can use the full $8,000 to calculate his AOTC.
COORDINATION OF CREDITS AND SCHOLARSHIPS. Qualified education
expenses must be reduced by the amount of any tax-free educational assistance
received, but do not have to be reduced by any scholarship reported as income
if the money is used to pay nonqualified expenses (such as room and board). If
use of the scholarship money is restricted to the payment of tuition, qualified
expenses must be reduced, but if the use of the money is not restricted, consider
taxing the scholarship and claiming one of the credits. This strategy also
applies to withdrawals from §529 plans and savings bonds.
Example
• Proud Papa brings Form 1098-T for son
• What is the result on the tax return?
Form 8863
Page 290
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
At first glance it appears that there would be no credits allowed and the student
would have taxable income of $3,715 ($7,915 - $4,200), but a much better tax
outcome can be achieved with a little bit of digging. The following account
summary was provided by the school upon request.
The $4,200 tuition in Box 2 is the total of the $130 tech fee and $15,220
tuition, less $11,150 “Sponsor/Scholrshp/Emplyr/Check” (which is VA
financial aid). The $7,915 in Box 5 is the $6,000 Regent Scholarship and
$1,915 Gonzaga Funding.
Papa can choose to use $4,000 of the tuition and qualified expenses to claim
the full $2,500 American Opportunity Credit rather than claiming the full
amount of the scholarship as tax exempt. Student will have to include $6,708 in
income, but it is treated as earned income, so the first $6,100 will not be
taxable (2013 standard deduction) and the rest will be taxed at the child’s rate
(not subject to Kiddie Tax). The worksheet on the next page leads you through
the calculations.
Form 8863
Page 291
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
Since the $11,150 VA scholarship is required to be used to pay tuition, it must
be treated as tax-free and the qualified tuition must be reduced by that amount,
leaving $5,207 of qualified expenses. $4,000 of the qualified expenses can be
used to claim the AOC, leaving only $1,207 of qualified expenses to offset the
other scholarships. Therefore, only $1,207 of the $7,915 of Regent and
Gonzaga scholarships will be tax free; the remaining $6,708 will be taxable to
Student. Student will probably pay less than $100 of tax, but Papa receives
$2,500 AOC!
An Excel Spreadsheet of this Education Credit Worksheet is found at our Brass
Tax Website and can be downloaded to your computer.
Form 8863
Page 292
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
SAME THEORY APPLIES to distributions from Education Savings Accounts.
Example
• Proud Papa also brings this 1099-Q
• How much is taxable?
Looking back at the worksheet, all of the tuition has already been used to claim
the AOTC and tax-free scholarships. However, room and board are also
qualified expenses for exclusion of benefits from a §529 plan. If the room and
board costs were $8,000, the $9,390 §529 plan withdrawal was more than that,
so part of the distribution will be taxable. At first glance you might think that
the $1,390 excess is the taxable portion, but the most that could possibly be
taxable is the $1,101 of earnings. However, the basis in the plan is allocated
prorata to the taxable and nontaxable portions of the distribution. So as shown
on the worksheet, only $163 of the earnings is taxable.
SPECIAL RULES ALLOW USE OF EXPENSES MORE THAN ONCE.
Generally, if a §529 distribution is taxable, it is also subject to a 10% additional
tax on the amount included in income. However, the 10% tax does not apply to
distributions included in income only because the qualified education expenses
were taken into account in determining the American Opportunity or Lifetime
Learning Credit, or because the beneficiary received a tax-free scholarship, VA
assistance, employer-provided assistance, or attended a military academy.
Example
• How much is subject to the 10% penalty on Form 5329?
The §529 distribution is not subject to the 10% penalty since the $4,000 used
for AOTC can be used to exclude §529 plan withdrawal from the 10% penalty.
Form 8863
Page 293
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
SPECIAL RULES ALSO APPLY TO IRA WITHDRAWALS. Qualified higher
education expenses paid with an individual's earnings, a loan, a gift, an
inheritance given to the student or the individual claiming the credit, or
personal savings (including savings from a §529 qualified tuition program), are
included in determining the amount of the IRA withdrawal which is not subject
to the 10% early withdrawal tax. Expenses paid with tax-free scholarships or
tax-free employer-provided educational assistance lower qualified expenses.
Example
• Proud Papa took $15,000 withdrawal from his IRA
• How much is subject to 10% penalty?
• What if it came from his 401(k)?
IRA Answer
The qualified expenses were $24,357 ($15,350 tuition + $1,007 books + $8,000
room and board). For this purpose, the qualified expenses must be reduced
only by $12,357 ($11,150 VA + $1,207 Regent & Gonzaga) of tax-free
scholarships leaving $12,000 of qualified costs. Papa withdrew $15,000 from
the IRA. Therefore $3,000 is subject to the 10% penalty on Form 5329.
401(k) Answer
The education exception to the penalty is only available for withdrawals from
IRA accounts, so if he had taken the withdrawal from his 401(k) the exception
would not be available and he would have to pay the penalty.
Form 8863
Page 294
Form 8863
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8867
PAID PREPARER’S EARNED INCOME
CREDIT CHECKLIST
SEE SCHEDULE EIC FOR ADDITIONAL DISCUSSION OF EIC.
FORM 8867 IS REQUIRED FOR 2011 AND ON. All paid preparers submitting a
tax return claiming the EITC must include a completed Form 8867, Paid
Preparer Earned Income Tax Credit Checklist, with the return. The IRS
previously sent warning letters to preparers who were not in compliance. With
2013 & on tax year returns, the IRS will impose a $500 per return penalty on
all tax preparers who fail to include the Form 8867 with an EITC return.
TAXPAYERS AND PREPARERS HELD TO DIFFERENT STANDARDS. Issue
Management Resolution Service (IMRS) develops and responds to significant
national and local issues of the tax professional community. They recently
opened a case to determine what the IRS is doing to improve compliance in the
do-it-yourself (DIY) market. Professional preparers are required to address
EITC eligibility criteria by filing Form 8867 with the return but DIY taxpayers
are not. (IMRS Case 141-0001960)
Form 8867
Page 295
Form 8867
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8880
RETIREMENT SAVINGS
CONTRIBUTION CREDIT
"SAVERS CREDIT" encourages lower-income folks to fund retirement accounts.
HOW MUCH? Up to 50% of first $2,000 contributed with a maximum of $1,000
credit is available. Contributions need not be reduced by amount of the credit,
and the credit is not offset by AMT. The credit rate depends on filing status
and AGI. See the chart at the bottom of the page.
WHO? This is for lower-income taxpayers who are over age 18, not a full-time
student or a dependent.
"QUALIFIED RETIREMENT PLANS" are 401(k) plans, 403(b) annuities, Section
457 plans, and traditional IRA, Roth IRA, SAR-SEP or SIMPLE IRA plans.
Also includes voluntary, after-tax contributions to a qualified retirement plan or
a 501(c)(18) plan.
OFFSET PROVISIONS. The amount of contribution eligible for credit is reduced
by taxable and nontaxable distributions from any “qualified retirement plan” as
defined above. All distributions, even if nontaxable, from a Roth IRA are used
to reduce the eligible contribution. The distributions that are included are those
received in the current tax year and the two preceding years plus amounts
distributed before the due date of the return on which this credit is taken. No
reduction is required by reason of a trustee-to-trustee or rollover distribution.
Filing
Status
2013 % Credit
Allowed At AGI Limits
2014 % Credit
Allowed At AGI Limits
2015 % Credit
Allowed At AGI Limits
MFJ
50%:
20%:
10%:
0%:
$0-35,500
$35,500-38,500
$38,500-59,000
Over $59,000
50%:
20%:
10%:
0%:
$0-36,000
$36,000-39,000
$39,000-60,000
Over $60,000
50%:
20%:
10%:
0%:
$0-36,500
$36,500-39,500
$39,500-61,000
Over $61,000
H of H
50%:
20%:
10%:
0%:
$0-26,625
$26,625-28,875
$28,875-44,250
Over $44,250
50%:
20%:
10%:
0%:
$0-27,000
$27,000-29,250
$29,250-45,000
Over $45,000
50%:
20%:
10%:
0%:
$0-27,375
$27,375-29,625
$29,625-45,750
Over $45,750
All
Others
50%:
20%:
10%:
0%:
$0-17,750
$17,750-19,250
$19,250-29,500
Over $29,500
50%:
20%:
10%:
0%:
$0-18,000
$18,000-19,500
$19,500-30,000
Over $30,000
50%:
20%:
10%:
0%:
$0-18,250
$18,250-19,750
$19,750-30,500
Over $30,500
Form 8880
Page 296
Form 8880
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8881
CREDIT FOR SMALL EMPLOYER
PENSION PLAN STARTUP COSTS
2006
6
CREDIT MADE PERMANENT
OVERVIEW. There is a nonrefundable tax credit for costs of adopting a new
qualified retirement plan (including a 401(k), SEP-IRA or SIMPLE IRA) by a
“small employer”. The credit is 50% of the qualified startup costs of a plan.
These costs are defined as the administrative and retirement-education
expenses for the plan for the first three years of the plan. The maximum
qualified startup costs are $1,000 and thus the maximum credit is $500 per year.
This credit was first effective in 2002 and was made permanent beginning in
2006. Form 8881 computes the credit and the result flows to Form 3800.
“SMALL BUSINESS” DEFINED. Defined as a business that employed 100 or
fewer employees with compensation of at least $5,000 in the preceding year.
Business must cover at least one non-highly compensated employee.
Pension Protection Act of 2006.
CALIFORNIA DIFFERENCES
California does not conform to this Federal provision.
Form 8881
Page 297
Form 8881
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8910 & 8936
VEHICLE CREDITS
OVERVIEW. Credits are still available for purchase of certain energy efficient
vehicles.
Code §30B provides a credit for a “Qualified Fuel Cell Vehicle” or a
“Qualified Plug-In Electric Drive Motor Vehicle Conversion.”
Code §30D provides a credit for “Qualified Plug-In Electric Drive Motor
Vehicles” including passenger vehicles and light trucks.
RULES APPLICABLE TO ALL VEHICLE CREDITS. The vehicle must be
certified to be eligible for a credit. Taxpayers can rely on manufacturer’s
assurance that a particular vehicle is eligible for the credit. Taxpayer claiming
the credit is the owner of the vehicle and the original use of the vehicle began
with that taxpayer. The vehicle is acquired for use by the taxpayer or to be
leased to another taxpayer, but not for resale. If the vehicle is leased, only the
lessor and not the lessee, is entitled to the credit. The vehicle is used primarily
in the United States. The credit is available in the year the vehicle is first
placed in service. The credit is used to offset both regular income tax and
AMT. The basis of the vehicle is reduced by the credit. If vehicle no longer
qualifies for a credit, taxpayer may have to recapture part or all of the credit.
CODE SECTION 30B CREDIT. This credit is reported on Form 8910. The credit
is available for a “Qualified Fuel Cell Vehicle” or a “Qualified Plug-In Electric
Drive Motor Vehicle Conversion.” The credit is limited to amounts determined
by IRS tables. This credit has limited applicability in 2014 and is due to expire
at the end of 2014. In the past, this credit was used for “Qualified Hybrid
Vehicles” but that portion of the credit ended on 12-31-2010. For further
information, see instructions for Form 8910.
CODE SECTION 30D CREDIT. This credit is reported on Form 8936. The credit
is available for a “Qualified Plug-In Electric Drive Motor Vehicle” (for 2014
this is the credit that will be used most often) and a “Qualified Two Or Three
Wheeled Plug-In Electric Vehicle” (this credit generally expired for vehicles
acquired after 2013). Examples of cars that qualify are the Nissan Leaf and the
Chevy Volt. All autos eligible for the credit are listed on the IRS website, in an
article titled “Plug-In Electric Vehicle Credit. The credit consists of a $2,500
base amount that is increased for battery capacity and limited by vehicle
weight. The current maximum credit is $7,500.
Form 8910 & 8936
Page 298
Form 8910 & 8936
BRASS TAX Presentations
1040/540 TUNEUP 2014
After 200,000 vehicles are sold in the U.S., the credit is reduced per the
following schedule. For the 1st quarter following the quarter in which 200,000
vehicles are sold, the full credit is still allowed. For the 2nd & 3rd quarter
following, the allowable credit is 50% of the full credit. For the 4th & 5th
quarter following, the allowable credit is 25% of the full credit. No credit is
allowed after the 5th quarter.
CALIFORNIA DIFFERENCES
California does not conform to any of these Federal credits.
Form 8910 & 8936
Page 299
Form 8910 & 8936
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8938
STATEMENT OF SPECIFIED
FOREIGN FINANCIAL ASSETS
SEE SCHEDULE B AND FIN CEN FORM 114 FOR ADDITIONAL DISCUSSION
REGARDING FOREIGN ACCOUNTS.
WITH 1040, EVEN IF FIN CEN 114 IS FILED. This is an income tax form,
while the Fin CEN 114 is completely separate from the tax return.
WHO? – DEPENDS ON ASSET VALUES. If the value of all covered foreign
financial assets is $50,000 at Year-End, or reached $75,000 at any time
during the year, you must file. Double these figures for MFJ.
EXCEPTION – NO TAX RETURN REQUIRED. If you do not meet filing
thresholds for an income tax return, you need not file Form 8938.
WHICH ASSETS? Form instructions give the following list:
• Financial accounts in a foreign financial institution,
• If held for investment, but NOT in an account in a foreign financial
institution:
o Stock or securities not issued by a U.S. person (but not if held in
a U.S. brokerage account).
o Any interest in a foreign entity (but Mexican land trusts are not
considered to be a foreign entity - Rev Ruling 2013-14).
o Financial instruments or contracts not issued by a U.S. person
(including foreign pensions).
• IRS has issued guidance that exempts most foreign real estate, unless it
is held in a foreign entity.
USE FAIR MARKET VALUE to determine worth of tangible assets.
PENALTY – UP TO $60,000 FOR NOT FILING! Steep penalties apply. Start at
$10,000 for not timely-filing the form; then add $10,000 for each additional 30
days, up to an additional penalty of $50,000. If items on this SFFA yield
unreported income, increase this by up to an additional 40% underpayment
penalty! If the underpayment is due to fraud, the penalty is 75%!
Form 8938
Page 300
Form 8938
BRASS TAX Presentations
1040/540 TUNEUP 2014
BITCOIN. Rod Lundquist, a senior program analyst for the Small Business/Self-
Employed Division of the IRS declared during a June 4, 2014 webinar that US
taxpayers are not required to report Bitcoin on FinCen Form 114, “at least for
this filing season” (referring to 2013 returns). He warned that as the IRS
continues to scrutinize the currency and how it is being used the policy could
shift. No mention was made of the Form 8938, so it is still unclear whether
Bitcoin must be reported there. In any case, it is advisable to err on the side of
caution here. The penalties for failing to file foreign account disclosures are
tremendously harsh. If Bitcoin is held in a non-US exchange or wallet, you are
better off assuming that you should report such accounts (subject to the
minimum balance requirements) until told otherwise.
CANADIAN RETIREMENT PLANS. The IRS is automatically providing
favorable tax treatment to US taxpayers with Canadian retirement plans by
eliminating the annual reporting requirement that has long applied to taxpayers
with these plans (i.e. Form 8891, US Information Return for Beneficiaries of
Certain Canadian Registered Retirement Plans). IRS is providing retroactive
relief to eligible taxpayers who failed to properly elect to defer tax on income
accruing in their Registered Retirement Savings Plans (RRSP) or Registered
Retirement Income Funds (RRIF) until it is distributed (a tax treaty benefit).
These plans now automatically qualify for tax deferral similar to that available
to participants in US IRAs and 401(k) plans, as long as they filed and continue
to file US returns for any year they held an interest in the plans, and include any
distributions as income on their US returns. In the past, if a taxpayer failed to
file the Form they had to request a private letter ruling to get relief. FinCen
Form 114 and Form 8938 will still apply to these plan accounts.
Form 8938
Page 301
Form 8938
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8941
SMALL EMPLOYER HEALTH
INSURANCE PREMIUMS CREDIT
HOW TO CLAIM THE CREDIT. The credit is claimed on Form 8941 (Credit for
Small Employer Health Insurance Premiums) or Form 990-T for tax-exempt
organizations.
YEARS 2010 - 2013. For tax years 2010 - 2013, a 35% tax credit was provided to
an eligible small employer for contributions to purchase health insurance for its
employees. Small tax-exempt employers received a 25% credit. Form 8941 is
used to calculate this credit. (IRC Section 45R)
CHANGES FOR 2014 & ON. For tax years beginning in 2014 or later, there are
some changes to the credit. Again, Form 8941 is used to calculate this credit.
Increase in credit percentage. The maximum credit increases to 50% of
premiums paid for small business employers and 35% of premiums paid for
small tax-exempt employers.
Coverage must be purchased through the Small Business Health Options
Program (SHOP). Employers claiming the Small Business Health Care Tax
Credit in 2014 must have an official eligibility determination from the SHOP
Marketplace, or qualify for an exception to this requirement. Employers apply
for and enroll in SHOP coverage for employees directly through an agent,
broker, or insurance company. If the small business is located in California,
they can use the Covered California website to enroll employees in health
coverage. Participating in the direct enrollment process, such as the one
adopted by federally-facilitated SHOP Marketplaces, counts as SHOP
Marketplace participation for 2014 only. An agent, broker, or insurance
company can help submit the application and obtain the eligibility certificate.
(https://www.healthcare.gov/how-do-i-apply-for-coverage-in-the-shop-marketplace/)
IMPORTANT TELEPHONE NUMBERS
Help can be obtained from the SHOP Small Employer Call Center at 1-800-706-7893.
Form 8941
Page 302
Form 8941
BRASS TAX Presentations
1040/540 TUNEUP 2014
Transitional rule for 2014. If an eligible small employer has a fiscal health plan
year and the employer offers its employees a qualified plan through a SHOP
Exchange when the new plan year starts during 2014, the employer is treated as
offering coverage through a SHOP Exchange for its entire 2014 tax year. This
is true if the health care coverage provided from the first day of the 2014 tax
year through the day immediately preceding the first day of the 2014 health
plan year would have qualified for a credit under Code Sec. 45R using the rules
applicable to tax years beginning before Jan. 1, 2014. (Prop Reg § 1.45R3(i)(1))
CREDIT AVAILABLE FOR 2 CONSECUTIVE YEARS. The credit is available to
eligible employers for two consecutive taxable years. (Code Sec. 45R) Credits
claimed in years that began before 1-1-2014 do not count in the 2-year period.
(Code Sec. 45R(g)(1); Prop Reg § 1.45R-1(a)(3)(i))
EXAMPLE
• Employer claimed Credit in 2012 and 2013
• Can he claim Credit in 2014? 2015? 2016?
He can claim the credit in two consecutive years. Years before 2014 do not count, so
he can claim the credit in 2014 - 2015 or in 2015 - 2016.
Eligibility Requirements
PAY AT LEAST 50% OF COST OF SINGLE COVERAGE. To be eligible,
employers must cover at least 50% of the cost of employee-only (not family or
dependent) health care coverage for each employee.
AVERAGE WAGE LIMITATION. The maximum credit goes to employers paying
annual average wages of $25,000 or less, and is phased out for employers who
pay average wages of $25,000 - $50,000 per year. No credit is allowed if the
average annual wage exceeds $50,000. The wage limit is inflation adjusted
starting in 2014. In 2014, the dollar limitation is $25,400. (Rev Proc 2013-35)
FULL-TIME EQUIVALENT EMPLOYEES. Maximum credit goes to employers
with 10 or fewer full-time equivalent (FTE) employees. A phase-out applies
between 10 and 25 FTEs. FTEs are counted based on “hours of service”
where 2,080 hours yield one FTE. Special rules apply for salaried employees.
WHICH EMPLOYEES? Certain people are ignored completely for purposes of the
credit: Owners of more than 5% of the business, family members of these
owners, and dependents of these owners.
Form 8941
Page 303
Form 8941
BRASS TAX Presentations
1040/540 TUNEUP 2014
COUNTING HOURS. Normally one FTE is counted for each 2,080 hours worked.
However,
INCLUDE HOURS for which employee is paid/entitled to be paid. Include
hours for which employee is entitled to be paid, even though no services are
performed due to vacation, holiday, illness, disability, layoff, military duty,
jury duty, or leave of absence (although no more than 180 hours are
required to be counted for any such period).
THREE METHODS are allowed for the actual count. The first rule covers
hourly employees, and the two other rules cover various types of salary
arrangements:
1) ACTUAL METHOD. Count the includable hours for each employee.
2) DAYS-WORKED EQUIVALENCY. Credit 8 hours for any day an
employee works at least one hour or received at least one hour of vacation,
illness, etc.
3) WEEKS-WORKED EQUIVALENCY. Credit 40 hours for each week an
employee worked at least one hour or received at least one hour of vacation,
illness, etc.
An employer with 10 physical employees, each earning $20K might count
hours to find there are 6.87 FTEs. He then rounds down to claim 6 FTEs.
COUNTING SALARY. The wage requirements involve dividing total FICA wages
by the number of FTEs – note that this step asks our employer with 10 physical
employees to divide their total wages of $200,000 by 6, resulting in $33,333
(now he won't stay below the $25K phase-out line). Last step – the average
wage is rounded down to the nearest $1,000 – $33,000 in the example.
Amount Of Premiums
Eligible For The Credit
QUALIFIED PLANS. Health insurance coverage includes coverage under the
following plans:
• Limited scope dental or vision plans.
• Long-term care plans.
• Nursing home care plans.
• Home health care plans.
• Community-based care plans.
• Coverage only for a specified disease or illness.
• Hospital indemnity or other fixed indemnity insurance.
• Medicare supplemental health insurance.
• Certain other supplemental coverage.
Form 8941
Page 304
Form 8941
BRASS TAX Presentations
1040/540 TUNEUP 2014
NON-QUALIFYING PLANS. Health insurance coverage does not include the
following benefits:
• Coverage only for accident, or disability income insurance, or any
combination thereof.
• Coverage issued as a supplement to liability insurance.
• Liability insurance, including general liability insurance and automobile
liability insurance.
• Workers' compensation or similar insurance.
• Automobile medical payment insurance.
• Credit-only insurance.
• Coverage for on-site medical clinics.
• Other similar insurance coverage, specified in regulations, under which
benefits for medical care are secondary or incidental to other insurance
benefits.
Also, because the coverage must be offered by a qualified health insurance
provider, health insurance coverage does not include benefits provided by
the following:
• Health reimbursement arrangements (HRAs).
• Flexible spending arrangements (health FSAs).
• Coverage under other self-insured plans.
• Health savings accounts (HSAs).
However, health insurance coverage may include coverage under the
following plans:
• Church welfare benefit plans.
• Multi-employer health and welfare plans that provide coverage
through a health insurance provider.
REDUCTION FOR STATE TAX CREDITS AND SUBSIDIES. For this purpose,
state tax credits, or a state premium subsidy paid directly to employers for
premiums paid, do not reduce the amount paid that qualifies for the credit. In
addition, if a state pays a premium subsidy directly to the insurance provider,
treat the subsidy amount as an amount the employer paid for employee health
insurance coverage.
However, the amount of your credit cannot be more than your net premium
payments. Net premium payments are employer premiums paid less the
amount of any state tax credits you received (or will receive) and less any state
premium subsidies paid either to you (or directly to your insurance provider)
for premiums for health insurance coverage you provide under a qualifying
arrangement to individuals considered employees
Form 8941
Page 305
Form 8941
BRASS TAX Presentations
1040/540 TUNEUP 2014
PREMIUMS PAID BY EMPLOYEES. If the employer pays only a portion of the
premiums and employees pay the rest, only the portion the employer pays is
taken into account. For this purpose, any premium paid through a salary
reduction arrangement under a §125 cafeteria plan is not treated as an employer
paid premium.
Miscellaneous Items
AMT. An employer can also use the credit to offset alternative minimum tax
(AMT) liability for the year. (Reg § 1.45R-5(b)).
CARRYBACKS AND CARRYOVERS. Employers who did not owe tax during the
year the credit is claimed can carry the credit back 1 year and forward 20 years.
(Code Sec. 39(a)(1)) The credit is refundable for tax-exempt employers, so
even if they have no taxable income, they may be eligible to receive the credit
as a refund so long as it does not exceed their income tax withholding and
Medicare tax liability.
EFFECT ON DEDUCTIONS. Eligible small businesses can still claim a business
expense deduction for the premiums paid, but must reduce the deduction by the
amount of any credit for small employer health insurance premiums allowed
with respect to the coverage.
AMENDED RETURNS? If the credit was overlooked in a prior year, an amended
return can be filed (during the normal statute of limitations). (IR 2011-90,
9/7/2011)
CALIFORNIA DIFFERENCES
California does not conform to this Federal credit.
NEED A MORE COMPLETE EXAMPLE OF HOW TO USE THIS FORM? We
covered this credit more completely with a very detailed example in our 2014
Brass Tax Tool Box program.
Form 8941
Page 306
Form 8941
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8949
SALES AND OTHER DISPOSITIONS
OF CAPITAL ASSETS
OVERVIEW. IRS wants to track different capital transactions, depending upon
whether they are reported by broker on Form 1099-B, or whether they are “selfreported” by the taxpayer. Form 8949 is a backup detail schedule of the
transactions that appear on Schedule D.
COMBINING TRANSACTIONS IS NOW ALLOWED ON RETURNS. Starting
with tax year 2013, we can choose to report some transactions directly on
Schedule D. We do not include them on Form 8949 and do not attach a
statement showing the detail if: (1) the taxpayer received a Form 1099-B (or
substitute statement) that shows basis was reported to the IRS and (2) taxpayer
does not show a nondeductible wash sale loss in box 5, and (3) no adjustment is
required to the basis or type of gain/loss (ST or LT) reported on Form 1099-B
or to taxpayer’s gain or loss.
WHY WOULD WE ADJUST BROKER’S FIGURES? Each Code has a unique
explanation for why we are adjusting the information supplied by broker.
Your software should allow you to make each of these adjustments.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
B –Basis reported is incorrect.
T – Type of gain (long vs. short) reported is incorrect.
N – TP received Form 1099-B or Form 1099-S as a Nominee.
H – Stands for “Home”. You are adjusting gain from a personal residence to show
excludable amount in column (g).
Q – Sale of Qualified Small Business Stock (part of gain is excludable).
X – Part of gain is excludable under DC Zone assets or Community Assets
provisions.
R – TP elected to postpone some gain from QSB stock, empowerment zone assets,
publicly traded securities, or stocks sold to an ESOP or certain cooperatives.
W – Loss from a “Wash Sale” is nondeductible.
L – TP has a nondeductible loss other than a Code W loss.
E – TP received Form 1099-B or 1099-S and there are selling expenses or option
premiums that are not reflected on the form by an adjustment to either the proceeds
or basis.
S – TP has loss from Section 1244 stock and total loss is more than the maximum
amount that can be treated as an ordinary loss.
C – TP disposed of collectibles.
M – TP reports multiple transactions on a single row.
O – TP has an adjustment not covered by any of the Codes above.
Form 8949
Page 307
Form 8949
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8959
ADDITIONAL MEDICARE TAX
ADDITIONAL 0.9% MEDICARE HI TAX ON EARNED INCOME will be imposed
on individual taxpayers on wages and net S/E income in excess of a threshold
amount. It applies to US citizens and resident aliens and began 01-01-2013.
THRESHOLD AMOUNTS. Earned income in excess of the following amounts
will be subject to the increased tax.
Filing Status
Threshold Amount
Married Filing Jointly
$250,000
Married Filing Separately
$125,000
Single
$200,000
Head of Household
$200,000
Qualifying Widow(er)
$200,000
THRESHOLD AMOUNTS. All wages and net S/E income that is currently subject
to Medicare Tax is subject to this Additional Medicare Tax if the taxpayer
exceeds the threshold amounts shown above.
WAGE EARNERS. Employers must withhold Additional Medicare Tax from
compensation that they pay to individuals in excess of $200,000 in a calendar
year, without regard to the individual’s filing status or wages paid by another
employer. There is no employer matching contribution for this additional tax.
Form 941 has been changed to accommodate this additional tax.
S/E INDIVIDUALS. For S/E individuals, this additional tax will be added to their
“normal” S/E tax liability. In addition, the income tax deduction for 50% of
the SECA taxes will be computed without regard to this additional tax. For S/E
individuals, the threshold amounts shown above are reduced by the total
Medicare wages received (but not below zero) for the calendar year.
CALCULATION OF THIS NEW TAX IS DONE ON FORM 1040. Individuals
liable for the Additional Medicare Tax will report this additional tax liability on
their Form 1040, Line 62. Taxpayers will also report Additional Medicare Tax
withheld by their employers on Line 64. Any Additional Medicare Tax
withheld by an employer will be applied against all taxes shown on the
taxpayer’s income tax return (which will include this additional tax).
Form 8959
Page 308
Form 8959
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8960
NET INVESTMENT INCOME TAX
ADDITIONAL 3.8% MEDICARE HI TAX will be imposed on certain net
investment income if MAGI is in excess of a threshold amount for individuals,
estates and trusts. This does not apply to non-resident aliens, certain charitable
trusts or a tax-exempt trust. It is imposed by IRC Section 1411 and is being
referred to as the Net Investment Income Tax (NIIT). It began 01-01-2013
INDIVIDUALS SUBJECT TO THE NIIT. Taxpayers who have any:
(1) Net Investment Income; and whose
(2) MAGI is in excess of the threshold amounts shown below
will be subject to the increased tax. (MAGI for this purpose is AGI without
regard to the foreign earned income exclusion under Section 911).
Filing Status
Threshold Amount
Married Filing Jointly
$250,000
Married Filing Separately
$125,000
Single
$200,000
Head of Household
$200,000
Qualifying Widow(er)
$250,000
INDIVIDUALS NOT SUBJECT TO THE NIIT. Nonresident aliens are not subject
to the NIIT. If a nonresident alien is married to a U.S. citizen or resident and
has made an election under IRC §6013(g) to be treated as a resident alien for
purposes of filing as Married Filing Jointly, the regulations allow these
couples special rules and a corresponding IRC §6013(g) election for the NIIT.
ESTATES & TRUSTS SUBJECT TO THE NIIT. Estates and trusts who have
undistributed Net Investment Income and whose AGI exceeds (as defined in
Section 67(e)) the dollar amount at which the highest income tax bracket
applicable to an estate or trust begins for each taxable year. For tax year 2014,
this threshold amount is $12,150. There are special computational rules for a
Charitable Remainder Trust and Electing Small Business Trusts.
TRUSTS NOT SUBJECT TO THE NIIT.
(a) Trusts exempt from income taxes (Charitable/Qual Retirem Plan Trusts);
(b) Trusts in which all unexpired interests are devoted to charitable interests;
(c) Trusts that are classified as “grantor trusts” under IRC §671-679; and
(d) Trusts that are not classified as “trusts” for federal income tax purposes
(Real Estate Investment Trusts and Common Trust Funds).
Form 8960
Page 309
Form 8960
BRASS TAX Presentations
1040/540 TUNEUP 2014
WHAT IS NET INVESTMENT INCOME? Net investment income is defined as
gross investment income less expenses allocable to investment income.
WHAT IS INCLUDED IN GROSS INVESTMENT INCOME? Gross investment
income includes the following types of income:
(a) Interest;
(b) Dividends;
(c) Capital gains (to the extent taken in account in computing taxable
income) from the disposition of property other than property held in a trade
or business;
(d) Rent and royalty income (generally Schedule E items which are deemed
to be a passive activity) (does not include these items if they are derived
from the ordinary course of a trade or business);
(e) Non-qualified annuities (not covered by Sect 403(a) or 403(b));
(f) Income derived from a trade or business if it is a passive activity of the
taxpayer as defined in Code Section 469; and
(g) Income from the trade or business of trading financial instruments or
commodities as defined in Code Section 475(e)(2).
WHAT IS NOT INCLUDED IN GROSS INVESTMENT INCOME? Gross
investment income includes the following types of income:
(a) Wages;
(b) Unemployment Compensation:
(c) Social Security benefits;
(d) Alimony received;
(e) Tax-exempt interest;
(f) Alaska Permanent Fund dividends;
(g) Income from veteran’s benefits;
(h) Capital gains from property held in a trade or business;
(i) Self-employment income from an active trade or business whether the
business is conducted through a sole proprietorship, a partnership, a LLC or
S corporation (however, income, gain or loss on working capital is not
treated as derived from a trade or business and thus is subject to this tax);
(j) Rents from an active trade or business (generally Schedule C), but rents
from a passive activity (generally Schedule E) are included; and
(k) Distributions from any qualified retirement plans that are (1) qualified
pension, profit-sharing and stock bonus plans (Sect 401(a)), (2) qualified
annuity plans (Sect 403(a) and Sect 403(b)), (3) individual IRAs (Sect 408),
(4) Roth IRAs (Sect 408A)), and (e) deferred compensation plans of
state/local governments and tax-exempt organizations (Sect 457(b)).
Form 8960
Page 310
Form 8960
BRASS TAX Presentations
1040/540 TUNEUP 2014
WHAT INVESTMENT EXPENSES ARE DEDUCTIBLE IN ARRIVING AT
NET INVESTMENT INCOME? Gross Investment Income is reduced by
deductions that are properly allocable to items of Gross Investment Income
to arrive at NII. Examples of properly allocable deductions are:
(a) Investment interest expense;
(b) Investment advisory, management and brokerage fees;
(c) Expenses related to rental and royalty income; and
(d) State and local income taxes properly allocable to items included in Net
Investment Income.
WHAT TYPES 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 included 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);
(d) Gains from the sale of interests in partnerships and S corporations (to
the extent the taxpayer is a passive owner); and
(e) Gain from the sale of a personal residence if the gain exceeds the
Section 121 exclusion amount.
CALCULATION OF THIS NEW TAX IS DONE ON FORM 1040. Individuals
liable for the Net Investment Income Tax will report this additional tax liability
on Form 1040, line 62 while trusts and estates will report it on Form 1041.
Taxpayers will need to adjust estimated taxes to account for this tax as
currently no withholding from Gross Investment Income is legislated.
Form 8960
Page 311
Form 8960
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8962
PREMIUM TAX CREDIT
HEALTH INSURANCE PREMIUM SUBSIDY. Refundable tax credits (IRC§36B)
are available to lower the monthly insurance premium that is paid to buy health
insurance. When an individual enrolls in a health plan offered through an
Exchange, these premium assistance tax credits can be applied to the insurance
premium cost, which reduces the monthly amount paid by the individual.
PREMIUM CREDIT LIMITS.
These refundable and advanceable premium
credits are provided to eligible individuals and families with “household
income” that is between 100-400% FPL who purchase health insurance
through the Exchange. The amount of premium assistance depends on an
individual’s income, age, and where the person lives. The premium credits
are tied to the second lowest cost Silver plan in the area. The Affordable
Care Act sets a monthly maximum that a person can pay for health care,
based on size of income as related to federal poverty levels (FPL). The
assistance is set on a sliding scale such that the actual premium out-ofpocket payment that can be made by an individual is limited to the
following percentages of income for specified income levels.
Up to 133% FPL
133% - 150% FPL
150% - 200% FPL
200% - 250% FPL
250% - 300% FPL
300% - 400% FPL
2% of income
3% - 4% of income
4% - 6.3% of income
6.3% - 8.05% of income
8.05% - 9.5% of income
9.5% of income
These percentages of income are increased for those receiving subsidies
annually to reflect the excess of the premium growth over the rate of
income growth for 2014-2018. In 2019, further adjustments may be made.
HOUSEHOLD INCOME is defined as MAGI of the taxpayer and every other
person in the family for whom the taxpayer can claim a personal exemption
deduction and who is required to file a federal income tax return. MAGI in
this instance is defined as AGI plus excluded foreign income (under IRC
Section 911), plus non-taxable Social Security & Railroad Retirement
benefits (but not SSI) and plus tax-exempt interest.
Form 8962
Page 312
Form 8962
BRASS TAX Presentations
1040/540 TUNEUP 2014
FEDERAL POVERTY LEVEL (FPL) states an income amount considered
poverty level for the calendar year. This amount is adjusted annually for
inflation and is adjusted for family size. The 2013 Federal poverty levels
(for the contiguous 48 states) are presented in the chart below and are used
in determining the 2014 premium assistance.
2013 Federal Poverty Levels
Household
Size
100%
150%
200%
250%
300%
400%
1
$11,490
$17,235
$22,980
$28,725
$34,470
$45,960
2
$15,510
$23,265
$31,020
$38,775
$46,530
$62,040
3
$19,530
$29,295
$39,060
$48,825
$58,590
$78,120
4
$23,550
$35,325
$47,100
$58,875
$70,650
$94,200
5
$38,047
$41,355
$55,140
$68,925
$82,710
$110,280
EXAMPLE OF PREMIUM ASSISTANCE. The table shown below outlines
the maximum contribution, as a percent of income, that an individual is
responsible for toward the cost of the monthly premium. The premium
assistance is based on the cost of the second-lowest Silver plan available in
the zip code area where the individual lives. The premium assistance will
pay the gap between the full cost of the second-lowest Silver plan and an
individual’s monthly maximum portion. The table shown below outlines
the assistance available in the California Exchange.
Federal
Poverty
Level
% Of Income
Maximum
Monthly
Cost
Up To 150%
200%
250%
400%
4%
6.3%
8.05%
9.5%
Up To $57
Up To $121
Up To $193
Up To $364
EXAMPLE. Assume that the monthly cost of the second-lowest Silver plan
of a 40-year-old individual in this zip code is $250. If that person’s income
is 150% of the federal poverty level (an income of less than $17,235), the
following formula will calculate the premium assistance.
$293
Mo Cost of Plan
Form 8962
Less
$57
Mo Maximum
(4% of $17,235)
Page 313
Equal
$236
Premium
Assistance
Form 8962
BRASS TAX Presentations
1040/540 TUNEUP 2014
PREMIUM SUBSIDIES HAVE TO BE RECONCILED ON A TAX RETURN.
Premium subsidies will initially be calculated based on MAGI from the
2012 income tax return (if purchased in October through December 2013)
and from 2014 estimated income (if purchased in 2014). The subsidy
calculation is the difference between the premiums for Covered California’s
2nd lowest cost Silver plan (in a particular area) and the amount of premium
contribution required by the FPL table.
Since people who receive subsidies through the exchange in 2014 will be
subsidized based on 2014 estimated income, the 2014 Form 1040 will true
up the 2014 subsidy to actual 2014 income. When the taxpayer files the
2014 return (by 4/15/2015), they will calculate their actual subsidy based on
actual 2014 income and then will pay or receive any variance.
Premium subsidies diminish, on a sliding scale, as income rises. Therefore,
taxpayers earning more income than the estimated 2014 income used to
calculate the initial subsidy will have to pay back the difference on their
2014 tax return. This could turn out to be a major surprise for taxpayers
who work more hours, get a major raise or promotion, or who obtain a
higher paying job. Of course, someone with lower actual 2014 income than
their estimated 2014 income will receive an additional subsidy/tax credit.
Remember that these subsidies were automatically calculated and received
by individuals when they paid the premiums for health insurance purchased
through California’s Exchange. Since the money never actually passed
through their hands, it may not have been apparent to them and they may
not understand why they are paying a tax on money they never received.
Taxpayers will calculate their correct premium tax credit on Form 8962 (see
next page). Any credit not yet received is calculated and is placed on 2014
Form 1040, line 69. Taxpayers who received too much advance premium
credit, must pay the overage back on 2014 Form 1040, line 46.
CONGRESS HAS ADOPTED MAXIMUM REPAYMENT AMOUNTS FOR
REPAYING PREMIUM SUBSIDIES. The table shown below shows the
four thresholds for repayment of premium subsidies by households and
individuals.
Income Levels
Maximum Repayment Amount
Less Than 200% FPL
$600 Household/$300 Individual
200% TO 300% FPL
$1,500 Household/$750 Individual
300% TO 400% FPL
$2,500 Household/$1,250 Individual
Income Over 400% FPL
Form 8962
100% Of Subsidy
Page 314
Form 8962
BRASS TAX Presentations
Form 8962
1040/540 TUNEUP 2014
Page 315
Form 8962
BRASS TAX Presentations
1040/540 TUNEUP 2014
SHARED POLICY ALLOCATION. If taxpayer marked “Yes” to the question
“Did you share a policy with another taxpayer or get married during the
year and want to us the alternative calculation?” as shown in Part 2, Line 9
on Form 8962, page 1, then this portion of Form 8962 will apply.
Form 8962
Page 316
Form 8962
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 8965
HEALTH COVERAGE EXEMPTIONS
INDIVIDUAL MANDATE. Individuals are required to obtain minimum health
insurance for at least one day in a month, qualify for an exemption, or pay a
penalty (“individual shared responsibility payment”) on their income tax
return The chart below (from the Kaiser Family Foundation website) gives
you an overview of this provision.
Form 8965
Page 317
Form 8965
BRASS TAX Presentations
1040/540 TUNEUP 2014
EXEMPT INDIVIDUALS. Individuals can obtain an exemption by using one of
two methods. The chart shown below outlines the exemptions available and
how they may be granted. A complete list of all hardship exemptions can be
found by using the internet site listed at the bottom of this page.
MP denotes that exemption is obtained through Market Place/Exchange.
TR denotes that exemption is claimed on Tax Return.
Exemptions
MP
MP
TR or
TR
Individuals Exempt From Requirements To Maintain Any Health Coverage
Members of certain religious sects
X
Members of a health care sharing ministry
X
Certain noncitizens
X
Incarcerated Individuals
X
Individuals Exempt From Penalty But Must Maintain Essential Health Coverage
Cannot afford coverage - premiums exceed 8% of household income
X
Household income below filing threshold
X
Native Americans
X
Short lapses of coverage (<3 months during year)
X
Individuals outside of USA
X
Dependents
X
Individuals With Hardships
Purchased insurance through Marketplace, but had coverage gap at
beginning of 2014
X
Experienced circumstances that prevented person from obtaining health
coverage under a qualified plan
X
Does not have access to affordable coverage based on projected
household income
X
Ineligible for Medicaid solely because State does not participate in the
Medicaid expansion under ACA
X
American Indian, Alaska Native or spouse/descendant who is eligible for
services through an Indian health care provider
X
Current health insurance will not be renewed and other available plans
are not affordable
X
List Of Exemptions: www.healthcare.gov/fees-exemptions/hardship-exemptions/
Exempt Application: http://marketplace.cms.gov/applications-andforms/hardship-exemption.pdf
Form 8965
Page 318
Form 8965
BRASS TAX Presentations
1040/540 TUNEUP 2014
OBTAIN EXEMPTION ON TAX RETURN. Form 8965 enables individuals to
obtain an exemption on the tax return or to prove their marketplace granted
exemption. In many cases, we will be preparing this form to help a client
obtain an exemption for 2014.
Form 8965
Page 319
Form 8965
BRASS TAX Presentations
1040/540 TUNEUP 2014
PROVING HEALTH INSURANCE COVERAGE. Form 1095-A, B or C enables
individuals to prove they have health insurance in 2014. Form 1095-A will be
issued by the marketplace (Covered California) and is mandatory in 2014.
Forms 1095-B and C are issued for employers who offer health insurance, but
reporting does not become mandatory until 2015 (IRS Notice 2013-45). This
will be a LARGE PROBLEM for us in 2014!
Form 8965
Page 320
Form 8965
BRASS TAX Presentations
Form 8965
1040/540 TUNEUP 2014
Page 321
Form 8965
BRASS TAX Presentations
1040/540 TUNEUP 2014
THE DREADED PENALTY (INDIVIDUAL RESPONSIBILITY PAYMENT).
Taxpayers who do not obtain health insurance for at least one day in any month
or do not qualify for an exemption, must pay a penalty. This penalty is
calculated and placed on 2014 Form 1040, page 2, line 61.
FORM 1040, LINE 61, “FULL-YEAR COVERAGE” CHECK BOX. IRS has
indicated that the “Full-Year Coverage” checkbox should only be checked for
households where everyone has minimum essential insurance coverage for the
entire year. In addition, IRS said that the box does not have to be checked on a
dependent’s return if the dependent is covered by the parent’s insurance and the
box is checked on the parent’s return.
PENALTY WORKSHEET. Form 8965 instructions have a worksheet that
calculates the penalty. The 2-page worksheet is shown on the next two pages.
PENALTY CALCULATION. The annual penalty is the greater of:
(1) A percentage of household income (above the minimum amount of
income required to file a tax return for taxpayer’s filing status) or;
(2) A flat dollar amount per household.
However, the penalty is capped each year at the national average premium
for bronze level insurance plans.
The actual penalty is calculated monthly and is 1/12 of the above amounts.
PERCENTAGE OF HOUSEHOLD INCOME. The percentage of income is
1% for 2014, 2% in 2015 and 2.5% for 2016 and later years.
FLAT DOLLAR AMOUNT. The flat dollar amount is as follows:
2014 $ 95.00 per adult $ 47.50 per child $ 285.00 family max
2015 $325.00 per adult $162.50 per child $ 975.00 family max
2016 $695.00 per adult $347.50 per child $2,085.00 family max
(After 2016, these amounts will be indexed for inflation.)
NATIONAL AVERAGE FOR BRONZE LEVEL PLANS. The 2014 national
average premium for bronze level plans (per Rev Proc 2014-46) is $2,448
per person with a maximum of $12,240 for a family size of 5 or more
persons.
IRS PENALTY ENFORCEMENT PROVISIONS ARE LIMITED. Taxpayers
who are required to pay the penalty but who fail to do so will receive an IRS
notice about owing the penalty. However, IRS enforcement provisions are
limited:
• Non-compliance is not subject to criminal or civil penalties;
• Liens or seizures authorized for tax collections are not applicable here;
• Interest on the penalty is eliminated.
Form 8965
Page 322
Form 8965
BRASS TAX Presentations
1040/540 TUNEUP 2014
COMPUTER NOTE
Your computer software will require many additional entries to calculate both
Form 8965 (shown a few pages back) and the Shared Responsibility Payment
Worksheet (shown below). Be sure you have found out where those inputs are
before you see your first client!
Form 8965
Page 323
Form 8965
BRASS TAX Presentations
Form 8965
1040/540 TUNEUP 2014
Page 324
Form 8965
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 14039 IDENTITY THEFT
AFFIDAVIT
IDENTITY THEFT VICTIMS. In order to protect taxpayer information, the IRS is
no longer processing transcript requests through the Transcript Delivery
System (TDS) in cases where an identity theft indicator has been placed on a
taxpayer account. Instead, the taxpayer will receive notice that a request was
made for his or her transcript, instructing the taxpayer to contact the ID
Specialized Unit at 1-800-908-4490. Upon authentication, the IRS will issue a
transcript to the taxpayer. A tax professional with a POA can contact the Unit
when a TDS letter instructs his or her client to do so. Authentication of the
client’s tax return and/or income information is required.
PHONE SCAMS. IRS issued a consumer alert providing taxpayers with tips to
protect themselves from telephone scam artists who call and pretend to be the
IRS. These callers demand money or say the taxpayer has a refund due and try
to trick the person into sharing private information. They may know a lot about
the taxpayer, and usually alter the caller ID to make it look like the IRS is
calling. They often leave an “urgent” callback message. The IRS does not use
unsolicited email, text messages, or any social media to discuss personal tax
issues. There are five things scammers often do that are a sign of a scam. The
IRS will never:
1) Call a taxpayer about taxes owed without first mailing an official notice.
2) Demand that a taxpayer pay taxes without giving him the opportunity to
question or appeal the amount they say is owed.
3) Require a taxpayer to use a specific payment method for the payment of
taxes, such as a prepaid debit card.
4) Ask for credit or debit card numbers over the phone.
5) Threaten to bring in local police or other law-enforcement groups to have
the taxpayer arrested for not paying.
WHAT AFFECTED CLIENTS SHOULD DO.
• If the taxpayer knows he owes taxes, call the IRS at 1-800-829-1040 to get
help with a payment issue.
• If the taxpayer has no reason to believe he owes taxes, report the incident to
the Treasury Inspector General for Tax Administration (TIGTA) at 1-800366-4484 or at www.tigta.gov.
• Also contact the Federal Trade Commission and use their “FTC Complaint
Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments
of the complaint.
Form 14039
Page 325
Form 14039
BRASS TAX Presentations
1040/540 TUNEUP 2014
For more information go to www.irs.gov and type “scam” into the search box. (IRS
News Release IR-2014-81)
Form 14039
Page 326
Form 14039
BRASS TAX Presentations
Form 14039
1040/540 TUNEUP 2014
Page 327
Form 14039
BRASS TAX Presentations
1040/540 TUNEUP 2014
MISCELLANEOUS TAX ISSUES
2014
UPDATED FOR 2014 – ESTATE, GIFT & TRUST TAX ISSUES
ESTATE TAXES. The indexed estate tax exemption is $5.340M in 2014 and will
be $5.430M in 2015. It was $5.250M in 2013, $5.120M in 2012, $5.0M in 2011
& 2010 (unless the executor elected out of an estate tax), $3.5M in 2009, $2.0M
for 2006-2008 and $1.5M in 2004 & 2005. The portability of any unused
exemption for spouses was made permanent by ATRA 2012.
The maximum estate rate is 40% for 2013 & on, 35% for 2010-2012, 45% for
2007-2009, 46% in 2006 and 47% in 2005. For 2005 and on, the state death tax
credit was reduced to 0% of the amount allowed in 2001.
GIFT TAXES. The annual exclusion for gifts is indexed in $1,000 increments
after 1998. In 2013, 2014 & 2015, the amount is $14,000. In 2009-2012, the
amount was $13,000. In 2006-2008 the amount was $12,000, in 2002-2005 the
amount was $11,000 and in 1999-2001 the amount was $10,000.
PORTABILITY ELECTION ALLOWED DESPITE LATE-FILED ESTATE TAX
RETURN. The IRS issued Revenue Procedure 2014-18 providing that relief
will be granted if an estate tax return making the portability election was not
filed for a decedent. This revenue procedure applies only if:
1. The taxpayer is the executor (see § 20.2010-2T(6)) of the estate of a
decedent who:
a) has a surviving spouse;
b) died after December 31, 2010, and on or before December 31, 2013; and
c) was a citizen or resident of the United States on the date of death.
2. The taxpayer is not required to file an estate tax return under § 6018(a) (as
determined based on the value of the gross estate and adjusted taxable, and
3. The taxpayer did not file an estate tax return within the time prescribed for
filing an estate tax return required to elect portability.
A person permitted to make the election on behalf of a decedent must file a
complete and properly-prepared Form 706 on or before December 31, 2014,
and must state at the top of the Form 706 that the return is “FILED
PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER
§ 2010(c)(5)(A).” The taxpayer will receive an estate tax closing letter
acknowledging receipt of the taxpayer’s Form 706.
Miscellaneous Tax Issues
Page 328
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
Trust & Estate Income Tax Rates—2014
If Taxable Income Is:
The Tax Is:
$0
Up To $2,500
15%
Over $2,500
Up To $5,800
25% Over $2,500
Plus $375.00
Over $5,800
Up To $8,900
28% Over $5,800
Plus $1,200.00
Over $8,900
Up To $12,150
33% Over $8,900
Plus $2,068.00
39.6% Over $12,150
Plus $3,140.50
Over $12,150
Plus $0
Trust & Estate Income Tax Rates—2015
If Taxable Income Is:
The Tax Is:
$0
Up To $2,500
15%
Over $2,500
Up To $5,900
25% Over $2,500
Plus $375.00
Over $5,900
Up To $9,050
28% Over $5,900
Plus $1,225.00
Over $9,050
Up To $12,300
33% Over $9,050
Plus $2,107.00
39.6% Over $12,300
Plus $3,179.50
Over $12,300
2014
Plus $0
FOR 2014 – FOREIGN EARNED INCOME EXCLUSION
INCREASE FOR 2014. The foreign earned income exclusion amount is $99,200
in 2014. It will be $100,800 in 2015. It was $ 97,600 in 2013, $95,100 in 2012,
$92,900 in 2011 and $91,500 in 2010. The exclusion is claimed on Form 2555
and the result is claimed on Form 1040, line 21.
Miscellaneous Tax Issues
Page 329
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
CALIFORNIA USE TAX FOR PERSONAL PURCHASES
CALIFORNIA USE TAX REQUIREMENTS. Individual taxpayers who make
purchases from out-of-state retailers (by telephone, over the internet, or in
person) where California sales or use tax was not paid and the item purchased is
used in California, must report and pay use tax on their Form 540 on Line 95.
Failure to report and pay timely results in interest, penalties and fees.
CA added instructions to the 2014 forms to clarify that out-of-state purchases for
items such as food and drugs that are exempt from CA sales tax when
purchased within CA are also exempt from use tax when purchased out of state.
For reporting business purchases subject to use tax, see the next California box
on the next page entitled “Mandatory Use Tax Returns For Business Entities.”
TWO CALCULATION METHODS ARE AVAILABLE. California Form 540 offers
two methods of calculating the correct use tax to report. California offers a “Use
Tax Worksheet” and an “Estimated Use Tax Lookup Table.”
The “Use Tax Worksheet” must be used to calculate the use tax liability if any
of the following apply:
1) Taxpayer prefers to calculate use tax due based upon actual purchases
subject to tax, rather than based on an estimate.
2) Taxpayer owes use tax on any item purchased for use in a trade or
business not registered with the State Board of Equalization.
3) Taxpayer owes use tax on purchases of individual items with a
purchase price of $1,000 or more.
If the taxpayer has a combination of individual items purchased for $1,000 or
more and/or items purchased for use in a trade or business not registered with
the State Board of Equalization, and individual, non-business items purchased
for less than $1,000, the taxpayer may either:
1) Use the “Use Tax Worksheet” to compute use tax on all purchases; or
2) Use the “Use Tax Worksheet” to compute use tax on all individual items
purchased for $1,000 or more plus items purchased for use in a trade or
business AND use the “Estimated Use Tax Lookup Table” to estimate the use
tax due on individual, non-business items purchased for less than $1,000. The
total use tax due will be the sum of these two items.
The “Estimated Use Tax Lookup Table” is used to estimate and report use tax
due on individual, non-business items purchased for less than $1,000 each. It is
not used to report business items or items purchased for $1,000 or more. This
option is only available if taxpayer is permitted to report use tax on the individual
Form 540 and taxpayer is not required to use the “Use Tax Worksheet”. The
current table is shown on the next page.
Miscellaneous Tax Issues
Page 330
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
2014 California Estimated Use Tax Lookup Table
California AGI
Range
Use Tax
Liability
California AGI
Range
Use Tax
Liability
Less Than $10,000
$2
$70,000 To $79,999
$26
$10,000 To $19,999
$5
$80,000 To $89,999
$30
$20,000 To $29,999
$9
$90,000 To $99,999
$33
$30,000 To $39,999
$12
$100,000 To $124,999
$39
$40,000 To $49,999
$16
$125,000 To $149,999
$48
$50,000 To $59,999
$19
$150,000 To $174,999
$57
$60,000 To $69,999
$23
$175,000 To $199,999
$66
More Than $199,999 – Multiply AGI by 0.035% (.00035)
MANDATORY USE TAX RETURNS FOR BUSINESS ENTITIES
BOARD OF EQUALIZATION PROGRAM. Starting in September 2009,
“Qualified Purchasers” are required to first register and then file annual use tax
returns with the BOE (Revenue & Taxation Code Section 6225).
BOE has been sending out letters and registration forms to persons they believe
are “Qualified Purchasers.” Persons who qualify as “Qualified Purchasers” (see
Who Is A Qualified Purchaser” below) must register even if not contacted by
BOE. Registration is done by submitting BOE-404-A to the local BOE field
office. Once a business is registered, BOE will send them an account number
and log-in information so the business can e-file their use tax returns.
Annual e-filing of the sales and use tax Form 401-E (at the BOE website, under
the E-services tab) is required even if no use tax is due. These annual returns
are due April 15 of each year.
WHO IS A “QUALIFIED PURCHASER?” A “Qualified Purchaser” is a person
(Revenue & Taxation Code Section 6005) who meets all of the following four
conditions.
(1) Receives at least $100,000 in gross receipts from business operations per
calendar year.
(2) Is not required to hold a seller’s permit or certificate of registration for use tax.
(3) Does not hold a use tax direct payment permit.
(4) Is not otherwise registered with the BOE to report use tax.
UPDATE – OCTOBER 2011. In a letter (BOE-1293-QP) dated October 2011,
BOE is sending out a “Notice Of Close-Out Of Use Tax Account Under The
Qualified Purchaser Program” to those persons who have previously filed returns
showing no use tax for three consecutive years. The letter is to inform the
recipient that BOE is cancelling their qualified purchaser use tax account. If
future purchases subject to use tax are contemplated, the recipient must notify
BOE within 15 days of letter receipt that the account should not be cancelled.
Miscellaneous Tax Issues
Page 331
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
MANDATORY E-FILING
FEDERAL ELECTRONIC FILING IS MANDATORY. Tax return preparers who
prepare more than 10 “individual income tax returns” in a calendar year are
required to electronically file those returns. “Individual income tax returns”
include returns filed for an individual person as well as for estates and trusts.
EFFECTIVE DATES. For returns filed after December 31, 2010, but before
January 1, 2012, anyone filing 100 or more returns must e-file. After
December 31, 2011, anyone filing 11 or more returns must e-file.
IRS ANNOUNCEMENTS. IRS issued TD 9518, Notice 2011-26 and Notice
2011-27 which outline which tax preparers must electronically file tax returns.
For more up-to-date information, visit the IRS website.
FORM 8948 MUST BE FILED WITH ANY PAPER RETURN. This form lists
the exception that applies and must be attached to any paper return that is filed
by a preparer who is not exempt from E-filing.
PREPARER WAIVER FROM E-FILING. Form 8944 allows specific tax
preparers to request a one-year waiver from E-filling due to an undue hardship.
There are four reasons for a hardship listed on the form: (1) Bankruptcy, (2)
Economic, (3) Presidential Disaster Area and (4) Other. Each of these reasons
requires further documentation to be attached to the form. Form 8944 must be
submitted from October 1, 201 until February 15, 2015 for use in preparing
2014 income tax returns.
CALIFORNIA ELECTRONIC FILING MANDATE
CALIFORNIA INDIVIDUAL E-FILING REQUIREMENTS. Since 2002, tax return
preparers who prepare more than 100 “individual income tax returns” in a
calendar year (and more than 25 in the prior year) are required to electronically
file those returns. “Individual income tax returns” include returns filed for an
individual person only. Form FTB 8454, e-file Opt-Out Record must be kept by
preparer and is not attached to the actual return. Penalty for not e-filing is $50
per return.
CALIFORNIA BUSINESS E-FILING REQUIREMENTS. Business entities that
use tax preparation software must file electronically beginning January 1, 2015
for taxable years beginning on or after January 1, 2014. The penalty for failing to
file electronically will not begin until 2017 and will be assessed against the
taxpayer, not the preparer. There will be exceptions for reasonable cause and
technology constraints. (AB 2574 (Ch. 14-478))
Miscellaneous Tax Issues
Page 332
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAX PREPARER REGISTRATION
PREPARER REGISTRATION RULES. Beginning January 1, 2011, ALL paid
preparers must have a Preparer Tax Identification Number (PTIN). They can
be obtained online or by paper application.
ALL CONTINUING PREPARERS MUST RENEW PTIN EACH YEAR.
ALL Preparers who obtained a PTIN prior to 2013 must renew their PTIN for
2015 by December 31, 2014. Renewal cost is $63.00. Detailed instructions are
available at the IRS website (http://www.irs.gov) under the “Tax Professionals”
tab at the “Return Preparer Regulations Overview” topic.
WARNING – RULES KEEP CHANGING! Visit the website often, as we see
changes here every week or so. Final rules are evolving.
ADDITIONAL REQUIREMENTS. In addition to obtaining a PTIN, some preparers
may have additional requirements. The table below outlines the requirements.
Overview Of Tax Return Preparer Requirements
Category
Enrolled
Agent
Registered
Tax Return
Preparer
(RTRP)
PTIN
Yes
Tax
Compliance
Check
Background
Check
Yes
Proposals
Pending
IRS Test
Yes - Special
Enrollment Exam
CE
72 every
3 years
Practice
Rights
Unlimited
RTRP Program Is No Longer Valid. A New AFSP Program Is Coming In 2015.
CPA
Yes
Yes
Proposals
Pending
No
Varies
Unlimited
Attorney
Yes
Yes
Proposals
Pending
No
Varies
Unlimited
Supervised
Preparer
Yes
Yes
Proposals
Pending
No
No
Limited
Non-1040
Preparer
Yes
Yes
Proposals
Pending
No
No
Limited
“Supervised Preparers” are those who do not sign returns and are employed by
attorney, CPA, or EA firms and are supervised by an attorney, CPA or EA. IRS has
a fact sheet online to help make this determination at the IRS website (see above).
“Non-1040 Preparers” are those who do not prepare any Form 1040 series returns.
(Form 1040-PR and 1040-SS are not considered Form 1040 series returns for this
purpose.)
Miscellaneous Tax Issues
Page 333
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
WHO IS EXEMPT? NOBODY is exempt from registration. Attorneys, EAs and
CPAs are exempted from the testing rules, and have tougher CE rules.
CIRCULAR 230 HAS BEEN REWRITTEN. Circular 230 has been rewritten to
include clear terms and definitions for any form of "practice" before the IRS.
Be sure and obtain a current copy! This is important to all of us!
WHAT IS "PRACTICE"? Currently Attorneys, CPAs, and EAs are "enrolled"
to "practice" before the IRS. What does this really mean? Several pages of
Circular 230 are devoted to the topic. Most of us are concerned with the
day-to-day issues of assisting clients when IRS sends a notice. Assuming
your client has signed the "authorization" or “power of attorney" form,
here's a simplistic description of what the revised Circular 230 says.
ATTORNEYS may handle virtually any IRS issue we can imagine for
clients. Plus, they have the "attorney-client" privilege on their side,
which basically prevents them from being forced to testify against the
client. Just like in the movies.
EAS AND CPAS have similar rights, with two key restrictions. They do not
have anything similar to the attorney-client privilege, and may not
practice in the Tax Court without extra training and testing.
UNENROLLED PREPARERS NO LONGER ALLOWED TO
REPRESENT. Unenrolled tax return preparers will no longer be
allowed to represent taxpayers during an examination of a tax return or
claim for refund prepared or signed after December 31, 2015. (Rev Proc
2014-42) They will not be able to correspond with the IRS about tax
law, even on a return they prepared, unless the client is present. In order
to continue to do this after 2015, unenrolled preparers must obtain an
AFSP designation as outlined on the next page.
Miscellaneous Tax Issues
Page 334
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
ANNUAL FILING SEASON PROGRAM
ANNUAL FILING SEASON PROGRAM. Tax return preparers who are not
attorneys, CPAs, or EAs will automatically be considered for the program if
they have obtained a PTIN. After meeting certain continuing education
requirements, an applicant will be issued a Record of Completion that is valid
for tax returns or refund claims prepared and signed during the calendar year
for which it is issued.
ANNUAL CONTINUING EDUCATION REQUIREMENT. 18 hours of
continuing education annually from an IRS-approved continuing education
provider. The hours will need to include 6 hour Annual Federal Tax Refresher
(AFTR) course (including a final exam), 10 hours of federal tax law topics, and
2 hours of ethics. Preparers with the RTRP designation are exempt from the
AFTR, because the RTRP was intended to provide a lifetime designation, but
they must complete 10 hours of federal tax law topics, 2 hours of federal tax
law updates, and 2 hours of ethics to provide their AFSP – Record of
Completion. Qualifying courses must be completed by December 31 of the
previous year to receive your AFSP – Record of Completion for that year
(complete education by 12/31/14 to get AFSP for 2015).
EDUCATION REQUIREMENT PRORATED FOR FIRST YEAR. 2015 is the
first year of the program and a transition rule will prorate the required hours.
Non-exempt persons must complete 6 hour AFTR course, 3 hours of federal
tax law topics, and 2 hours of ethics. Exempt RTRPs must complete 3 hours of
federal tax law topics, 3 hours federal tax updates, and 2 hours of ethics but are
not required to take the 6 hour AFTR course.
CONSENT TO CIRCULAR 230 RESTRICTIONS. As a prerequisite to
receiving an AFSP – Record of Completion, an individual will be required to
consent to the duties and restrictions relating to practice before the IRS in
Circular 230.
AFSP AS A DESIGNATION. IRS announced that preparers who have obtained
the designation will be listed with AFSP after their names in the IRS PTIN
directory and can use AFSP as a designation on business cards and other
marketing materials
CTEC REGISTERED PREPARERS. IRS has announced that CTEC registered
preparers will be exempt from the IRS 6 hour refresher course and the 3 hour
timed exam.
Miscellaneous Tax Issues
Page 335
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
2014 Continuing Education and Licensing/Registration Requirements
Who
CPA
California
Board of
Accountancy
916-561-1702
Renewal Period
Hours For Renewal
Renew license every 2 years
with year ending last day of birth
mo
Born even yr, renew even yr;
born odd yr, renew odd yr
Submit CE hours for previous
renewal cycle
80 hrs/renewal cycle
20 hrs/renewal year
minimum with 12 hrs
in technical subjects
CE credits based on
50 minute hour
rd
Every 3 renewal
cycle (every 6 yrs)
need 2 hrs regulatory
review approved by
Board
CPA
Renew membership every 3
years with year ending Jul 31
AICPA
Submit CE hours and pay dues
annually with year ending Jul 31
120 hrs/renewal cycle
Satisfy state board CE
requirements = OK
Other Requirements
CPA with A&A
requirement = 24 of
80 hrs in A&A courses
and 4 hr fraud course
CPA perform govt
audits = 24 of 80 hrs
in govt courses and 4
hr fraud course
4 hrs Ethics/renewal
cycle
Be member in good
standing with state
board
CE credits based on
50 minute hour
EA
Renew license every 3 years
with year ending Dec 31
IRS
313-234-1280
Submit CE hours for previous
renewal cycle
72 hrs/renewal cycle
16 hrs/calendar year
minimum
2 hrs Ethics or Prof
Conduct in each year
of renewal period
CE credits based on
50 minute hour
EA
Renewal membership annually
with year ending June 30
NAEA/CSEA
Submit CE hours for previous
calendar year
CTEC
Renew license annually with year
ending Oct 31
877-850-2832
Submit CE hours for previous
renewal cycle
30 hrs/calendar year
2 hrs of Ethics in each
calendar year
CE credits based on
50-minute hour
20 hrs/renewal cycle
10 hrs of Fed Tax Law
CE credits based on
50-minute hour
3 hrs of Fed Update
2 hrs of Ethics
5 hrs of California Law
Miscellaneous Tax Issues
Page 336
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
CIRCULAR 230
DISCLAIMERS NO
LONGER NEEDED
CIRCULAR 230 CHANGES. Final Circular 230 rules on practice before the
Internal Revenue Service got rid of the detailed requirements for providing
written tax advice and replaced them with a principles-based standard that is
much clearer. For many years, practitioners used a Circular 230 disclaimer in
their e-mails. Even though the IRS finalized regulations (new Circular 230)
that simplified the rules about written tax advice, many practitioners continue
to use the disclaimer in their e-mail signatures. The IRS Office of Professional
Responsibility (OPR) sent letters asking practitioners to stop using Circular 230
disclaimers saying the disclaimer is required, as that is not longer the case.
DISCLAIMER ALLOWED, JUST NOT REQUIRED BY CIRCULAR 230. It is not
that a disclaimer is not allowed; it just cannot say that it is required under
Circular 230 or by the IRS. Karen Hawkins, Director of OPR stated, "My only
concern and my message is, if a disclaimer says 'The Internal Revenue Service
says' or 'I am required under Circular 230,' I can promise you that you will get a
letter from my office asking you to cease and desist using that kind of language
because I don't want taxpayers to be misinformed. We do not require that
language after last week."
USE A DISCLAIMER WHEN APPROPRIATE. Instead of the standard disclosure
on every e-mail, practitioners should add such language when they believe it to
be appropriate based on the facts and circumstances of the case and the
practitioner advice they are providing.
PRINCIPLES-BASED APPROACH. The principles-based approach requires that
practitioners base written advice on reasonable factual and legal assumptions.
They must consider all the facts and circumstances that they know or ought to
know, and use reasonable efforts to identify and ascertain the relevant facts.
Miscellaneous Tax Issues
Page 337
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
CONTINGENT FEES
CIRCULAR 230 PROHIBITS CHARGING CONTINGENT FEES. In 2007, the
IRS amended Circular 230 to prohibit tax practitioners from charging
contingent fees for preparing, filing, or presenting refund claims. Prior to that
time, this provision applied only to original tax returns. (Circular 230, Sec
10.27) The LOVING CASE shed light on the meaning of the term “practice”,
explaining that practice does not include preparation. The Loving case is now
having repercussions for more reaching than was first expected, as it is being
applied to other issues covered by Circular 230.
A RECENT COURT CASE
• CPA prepares an amended return for Client showing a refund
• Charges 25% of refund if Client receives it
• Is this an allowable fee arrangement?
A CPA brought suit against the IRS, arguing that the preparation and filing of
“Ordinary Refund Claims” – refund claims that practitioners file after a
taxpayer has filed his or her original tax return but before the IRS has initiated
an audit of the return – is not practice before the IRS, because the
arrangement is entered into before the commencement of any adversarial
proceedings with the IRS or any formal legal representation by the CPA, and
thus is not subject to IRS regulation under Circular 230. The Court agreed,
finding that Circular 230 exceeds the IRS’s statutory authority in this matter.
The IRS’s position was that because the representative was a CPA, he “is a
representative who practices before the Department and is therefore subject
to the terms of Circular 230”. In other words, according to the IRS, it has
authority to regulate all actions of a CPA who – at some point – “practice”
before it, regardless of “whether they’re acting in a representational or non
representational capacity.” The Court rejected this argument saying that the
statute does not regulate “practitioners” generally; it regulates “practice”.
It may be important to note that in the ruling it talked about preparing and
filing “an Ordinary Refund Claim before becoming a legal representative”.
The ruling also stated that a representative is traditionally one with authority
to bind others, and tax return preparers neither possess legal authority to act
on the taxpayer’s behalf, nor can they legally bind the taxpayer by acting on
the taxpayer’s behalf, so they are therefore not agents. It is possible this
means that if there is a POA on file for that client, the preparer would be
subject to Circular 230. This issue is still unclear.
Miscellaneous Tax Issues
Page 338
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
CIRCULAR 230 STILL CONTAINS OLD, INCORRECT WORDS. The most
recent revision of Circular 230 (July 2014), stating “A practitioner may not
charge a contingent fee for services rendered in connection with any matter
before the Internal Revenue Service…Matter before the Internal Revenue
Service includes tax planning and advice, preparing or filing or assisting in
preparing or filing returns or claims for refund or credit, …”. The court issued
a permanent injunction against the IRS, preventing them from enforcing this
regulation; they did not require them to remove or delete it.
DIRECTOR OF OPR NOT GIVING UP THE FIGHT. After a practitioner submits
a Form 2848, "Power of Attorney and Declaration of Representative," granting
them power of attorney, the Office of Professional Responsibility (OPR) will
treat the practitioner as covered by Circular 230 for all purposes, Karen
Hawkins, Director of OPR said about her office's interpretation of the Loving
case. She has said that filing a Form 2848 extends beyond the authority
addressed in Loving.
"We can't be expected to guess when the next time is that you might make
yourself a practitioner, so we treat you as a practitioner for all purposes,"
Hawkins said. Lawyers who practice in other areas, such as family or
bankruptcy law, and who file a Form 2848 to obtain their client's tax returns are
subject to OPR jurisdiction the minute they put their power of attorney into the
system, Hawkins said. A line item on Form 2848 says explicitly that the signer
acknowledges that he is covered by Circular 230. "You may never read that
stuff, but you acknowledge by signing it," Hawkins said.
Miscellaneous Tax Issues
Page 339
Miscellaneous Tax Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
TAXPAYER REPRESENTATION
ISSUES
TAXPAYER ADVOCATE CRITICIZES FAQS AS GUIDANCE. National
Taxpayer Advocate, Nino Olson, spoke at an accounting conference,
addressing the IRS’s practice of increasingly providing significant guidance in
the form of Frequently Asked Questions (FAQs) and other formats that are not
published guidance. There are a number of ways that this can be a problem,
including the fact that such guidance can be changed without notice. It is also
unclear who writes FAQs (i.e. no contact name is listed, which is normally
provided in published guidance), what type of vetting process they are subject
to prior to online publication, and the extent (if any) to which taxpayers can
rely on them. This can become a major problem when the FAQs are the
primary guidance available on a topic.
UNDERSTANDING AUTHORITY
OVERVIEW. In its role in administering the tax laws enacted by the Congress, the
IRS must take the specifics of these laws and translate them into detailed
regulations, rules and procedures. The Office of Chief Counsel (the IRS’s
attorneys) fills this crucial role by producing several different kinds of
documents and publications that provide guidance to taxpayers.
COURT DECISIONS. Court decisions are the most substantive authority, because
they interpret all the other forms of authority, but a ruling by a court in one
district does not set a precedent in another district, so different courts in
different parts of the country may rule differently on the same issue. Only a
Supreme Court decision must be followed nationwide.
REGULATIONS. A regulation is issued by the Internal Revenue Service and
Treasury Department to provide guidance for new legislation or to address
issues that arise with respect to existing Internal Revenue Code sections.
Regulations interpret and give directions on complying with the law.
Generally, regulations are first published in proposed form (which is not
binding and cannot be used as authority). After public input is fully considered
through written comments and even a public hearing, a final regulation or a
temporary regulation is published.
Taxpayer Representation Issues Page 340 Taxpayer Representation Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
ALARMING CONSEQUENCES. In the 2014 Bobrow case, the Court
determined that the limitation on IRA rollovers applies on an aggregate basis,
instead of separately. The taxpayers had followed the position outlined in
proposed regulations and the IRS’s publications, but the Court assessed an
accuracy-related penalty anyway, emphasizing that such guidance “is not
binding precedent” and that taxpayers rely on same “at their own peril”.
(Bobrow, TC Memo 2014-21)
REVENUE RULING. A revenue ruling is an official interpretation by the IRS of
the Internal Revenue Code, related statutes, tax treaties and regulations. It is
the conclusion of the IRS on how the law is applied to a specific set of facts.
Revenue rulings are published in the Internal Revenue Bulletin for the
information of and guidance to taxpayers, IRS personnel and tax professionals.
For example, a revenue ruling may hold that taxpayers can deduct certain
automobile expenses.
REVENUE PROCEDURE. A revenue procedure is an official statement of a
procedure that affects the rights or duties of taxpayers or other members of the
public under the Internal Revenue Code, related statutes, tax treaties and
regulations and that should be a matter of public knowledge. It is also
published in the Internal Revenue Bulletin. While a revenue ruling generally
states an IRS position, a revenue procedure provides return filing or other
instructions concerning an IRS position. For example, a revenue procedure
might specify how those entitled to deduct certain automobile expenses should
compute them by applying a certain mileage rate in lieu of calculating actual
operating expenses.
PRIVATE LETTER RULING. A private letter ruling, or PLR, is a written statement
issued to a taxpayer that interprets and applies tax laws to a taxpayer's specific
set of facts. A PLR is issued to establish with certainty the federal tax
consequences of a particular transaction before the transaction is consummated
or before the taxpayer's return is filed. A PLR is issued in response to a written
request submitted by a taxpayer and is binding on the IRS if the taxpayer fully
and accurately described the proposed transaction in the request and carries out
the transaction as described. A PLR may not be relied on as precedent by other
taxpayers or IRS personnel. PLRs are made public after all information has
been removed that could identify the taxpayer to whom it was issued.
Taxpayer Representation Issues Page 341 Taxpayer Representation Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
TECHNICAL ADVICE MEMORANDUM. A technical advice memorandum, or
TAM, is guidance furnished by the Office of Chief Counsel upon the request of
an IRS director or an area director, appeals, in response to technical or
procedural questions that develop during a proceeding. A request for a TAM
generally stems from an examination of a taxpayer's return, a consideration of a
taxpayer's claim for a refund or credit, or any other matter involving a specific
taxpayer under the jurisdiction of the territory manager or the area director,
appeals. Technical Advice Memoranda are issued only on closed transactions
and provide the interpretation of proper application of tax laws, tax treaties,
regulations, revenue rulings or other precedents. The advice rendered
represents a final determination of the position of the IRS, but only with respect
to the specific issue in the specific case in which the advice is issued.
Technical Advice Memoranda are generally made public after all information
has been removed that could identify the taxpayer whose circumstances
triggered a specific memorandum.
Generally, a holding in a TAM that modifies or revokes a holding in a prior
TAM will be applied retroactively. If the new holding is less favorable to the
taxpayer, it will generally not be applied to the period in which the taxpayer
relied on the prior holding in situations involving continuing transactions of a
type specified in the regulations (Reg. 601.105(b)(5)).
RECENT TAX COURT CASE
FACTS
Taxpayer relied in good faith on 2002 TAM (which was good through 2008).
New TAM issued in 2009 was unfavorable to taxpayer.
Can IRS apply new TAM retroactively?
RULING
The District Court ruled that the IRS's decision to apply the 2009 TAM holding to
several prior tax years was arbitrary, capricious, and an abuse of discretion.
(Louisiana Restaurant Association Self Insurance Trust, 113 AFTR 2d 2014-XXX
(D.C. LA))
Taxpayer Representation Issues Page 342 Taxpayer Representation Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
GENERAL COUNSEL MEMOS OR CHIEF COUNSEL ADVICE. These are legal
memos from the IRS’s attorneys. They contain legal analyses of substantive
issues and can be helpful in understanding the reasoning behind a particular
ruling and the IRS’s response to similar issues in the future.
NOTICE. A notice is a public pronouncement that may contain guidance that
involves substantive interpretations of the Internal Revenue Code or other
provisions of the law. For example, notices can be used to relate what
regulations will say in situations where the regulations may not be published in
the immediate future.
ANNOUNCEMENT. An announcement is a public pronouncement that has only
immediate or short-term value. For example, announcements can be used to
summarize the law or regulations without making any substantive
interpretation; to state what regulations will say when they are certain to be
published in the immediate future or to notify taxpayers of the existence of an
approaching deadline.
IRS PUBLICATIONS. IRS publications explain the law in plain language for
taxpayers and their advisors. They are nonbinding on the IRS and should not
be cited to sustain a position.
Taxpayer Representation Issues Page 343 Taxpayer Representation Issues
BRASS TAX Presentations
1040/540 TUNEUP 2014
HEALTH CARE REFORM
“OBAMA-CARE”
OVERVIEW. President Obama signed comprehensive health reform, The Patient
Protection and Affordable Care Act (ACA) (P.L. 111-148), into law on March
23, 2010. The law added Section 5000A to the Internal Revenue Code. The
original law and its subsequent changes are the most sweeping health care
reforms that the United States has ever experienced. We have covered some of
the law as we have presented Forms 8962 and 8965. We will summarize some
of the other most important features of this law – most of them tax related, but
some non-tax related.
THE LAW’S OVERALL APPROACH TO EXPANDING ACCESS TO MEDICAL
COVERAGE. The law requires most U.S. citizens and legal residents to have
health insurance. It will create Health Benefit Exchanges through which
individuals can purchase coverage. Premium and cost-sharing credits will be
available to individuals/families that purchase insurance through these
exchanges if their income is between 138-400% of federal poverty levels
(FPL). Most employers will be required to offer health insurance or pay
penalties for non-covered employees that receive health insurance tax credits
through an exchange. At the end of this section, there is a page showing useful
websites to obtain more information about the Affordable Care Act.
Implementation Timeline
A TABLE SHOWING THE IMPLEMENTATION TIMELINE of this law starts on
the next page. The table will show when certain provisions of the law will
begin and will give a short overview of the provision. We will then focus more
in depth on a few of those provisions.
Health Care Reform
Page 344
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
TIMELINE FOR IMPLEMENTING
HEALTH CARE REFORM
PROVISIONS
Item
Credit For Small
Employer Health
Insurance Premiums
Effective
Quick Overview
Starts 2010
Provides tax credits to small employers with no more
than 25 employees and average annual wages of less
than $50,000 that provide health insurance for
employees. (Phase I (2010-2013) tax credit up to 35%
and Phase II (2014 & later) tax credit up to 50%.)
(Form 8941)
(IRC§45R)
Adult Dependent Child
Must Be Covered By
Parent’s Health
Insurance
Starts 2010
Extends dependent coverage for adult children up to
age 26 for all individual and group policies.
HSA & Archer MSA
Penalty Increase
Starts 2011
Increases penalty tax to 20% if not used for qualified
medical expenses.
HSA, Archer MSA, HRA
& FSA Exclusion For
Certain Drugs
Starts 2011
Excludes costs for over-the-counter drugs not
prescribed by a doctor from being reimbursed from any
of these accounts.
Medicare Premiums for
High-Income Taxpayers
Starts 2011
Freezes the income threshold for income-related
Medicare Part B premiums for 2011 through 2019
levels. Applies to individuals with incomes over $85K
and couples with incomes over $170K. Results in more
people paying income-related premiums.
Itemized Deductions
For Medical Expenses
Starts 2013
Increases the threshold for deduction of medical
expenses from 7.5% AGI to 10% AGI. Waives the
increase for persons age 65 or over for tax years 2013
through 2016.
(IRC§213(f))
0.9% & 3.8% Medicare
Tax Increase
Starts 2013
(IRC§1411)
Flexible Spending
Account (FSA) Limits
For Medical
Health Care Reform
Starts 2013
Additional 0.9% Medicare tax on wages and other
earned income, PLUS
Additional 3.8% Medicare tax on net investment
income.
Limits the contribution amount to FSA for medical
expenses to $2,500 per year, increased annually by
COLA.
Page 345
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
Item
Effective
Quick Overview
Most U.S. Citizens &
Legal Residents Must
Have Health Insurance
“Individual Mandate”
Starts 2014
Requires almost all U.S. citizens and legal residents to
have qualifying health coverage. Certain individuals are
exempt from this provision. Those without coverage
will face a penalty which is phased-in over a 3-year time
period.
Health Insurance
Exchanges Established
Starts Oct 1,
2013 – For
2014 & On
Requires states to create state based health benefit
exchanges through which individuals and small
businesses with up to 100 employees can purchase
qualified coverage or enter into a state-federal
partnership exchange or default into a federally
facilitated exchange. California created its own
exchange which is called “Covered California”.
Health Insurance
Premium Subsidies
Starts 2014
Provides refundable and advanceable tax credits as
premium subsidies to families with incomes between
100%-400% of federal poverty level (FPL) if insurance
is purchased through Exchanges.
Health Insurance CoPayment Cost Sharing
Subsidies
Starts 2014
Provides cost sharing subsidies to families with
incomes up to 250% of FPL.
Guaranteed Availability
Of Insurance
Starts 2014
Requires guarantee issue and renewability of health
insurance regardless of health status. Allows rating
variation based only on age (limited to a 3 to 1 ratio),
geographic area, family composition and tobacco use
(limited to 1.5 to 1 ratio) in the individual and small
group market and the Exchanges.
Essential Health
Benefits Required Of All
Health Insurance
Starts 2014
Creates an essential health benefits package that
provides a comprehensive set of services. Limits the
annual cost sharing to the HSA limits. Creates four
categories of plans (Bronze, Silver, Gold & Platinum) to
be offered through the Exchanges and in the individual
and small group markets.
Expanded Medicaid
Coverage
Starts 2014
Expands Medicaid to all individuals not eligible for
Medicare under age 65 with incomes up to 133% FPL.
Most Employers Must
Offer Health Insurance
“Employer Mandate”
Delayed
Until 2015
Assesses a fee of $2,000 per full-time employee
(excluding the first 30 employees) on employers with
more than 50 employees that do not offer health
coverage and have at least one full-time employee who
receives a premium tax credit. Employers with more
than 50 employees who do offer coverage, but have at
least one full-time employee receiving a premium tax
credit, will pay the lesser of $3,000 for each employee
receiving a premium tax credit or $2,000 for each fulltime employee (excluding the first 30 employees).
(Was 2014)
Health Care Reform
Page 346
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
Everyone Must Have
Health Care Insurance
INDIVIDUAL MANDATE. This was one of the most controversial portions of
the Health Care Reform Act. Individuals are required to obtain minimum
health insurance for at least one day in a month, qualify for an exemption,
or pay a penalty (“individual shared responsibility payment”) on their
income tax return The chart below (from the Kaiser Family Foundation
website) gives you an overview of this provision.
Health Care Reform
Page 347
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
Health Exchange
Overview
MANDATORY HEALTH INSURANCE EXCHANGES. The Health Care Reform
Act requires states to create state based health benefit exchanges through which
individuals and small businesses with up to 100 employees can purchase
qualified coverage OR enter into a state-federal partnership exchange OR
default into a federally facilitated exchange (http://www.healthcare.gov).
Health insurance exchanges are also known as “health insurance
marketplaces”.
The states that have adopted their own state exchanges are California,
Colorado, Connecticut, District of Columbia, Hawaii, Idaho, Kentucky,
Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York,
Oregon, Rhode Island, Vermont and Washington.
BENEFIT CATEGORIES. Each Exchange must have four benefit categories of
plans plus a separate catastrophic plan to be offered through the Exchange and
in the individual and small group markets.
BRONZE PLAN represents minimum coverage which qualifies for the
insurance premium tax credit and provides essential health benefits. It
covers 60% of the benefit costs of the plan, with an out-of-pocket limit
equal to the HSA current law limit ($6,350 for individuals & $12,700 for
families in 2014). This benefit plan offers the largest initial out-of-pocket
costs, but has the lowest premium cost of the four benefit categories.
SILVER PLAN represents coverage which qualifies for the insurance premium
tax credit and provides essential health benefits. It covers 70% of the
benefit costs of the plan, with an out-of-pocket limit equal to the HSA
current law limit ($6,350 for individuals & $12,700 for families in 2014).
GOLD PLAN represents coverage which qualifies for the insurance premium
tax credit and provides essential health benefits. It covers 80% of the
benefit costs of the plan, with an out-of-pocket limit equal to the HSA
current law limit ($6,350 for individuals & $12,700 for families in 2014).
PLATINUM PLAN represents coverage which qualifies for the insurance
premium tax credit and provides essential health benefits. It covers 90% of
the benefit costs of the plan, with an out-of-pocket limit equal to the HSA
current law limit ($6,350 for individuals & $12,700 for families in 2014).
This benefit plan offers the lowest initial out-of-pocket costs, but has the
highest premium cost of the four benefit categories.
Health Care Reform
Page 348
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
CATASTROPHIC PLAN. This plan would be available to those up to age 30
or to those who are exempt from the mandate to purchase coverage. It
provides catastrophic coverage only, with the coverage level set at HSA
current law levels, except that the prevention benefits and coverage for
three primary care visits are exempt from any deductible. The plan is only
available on the individual market and not through the Exchanges.
ESSENTIAL HEALTH BENEFITS. Each type of plan (Silver, Bronze, Gold or
Platinum other than the Catastrophic Plan), must offer a plan which includes
minimum essential health benefits. These benefits must offer coverage that
covers (at a minimum) preventive care, primary care, specialty care, urgent
care, emergency room care, lab tests, x-rays and basic drug coverage.
CALIFORNIA’S STATE EXCHANGE. California was the first state in the nation
to enact legislation to create a health care market place which is called
“Covered California”. For 2014, the exchange is available for individuals,
families and businesses with 50 or fewer full-time equivalent employees.
Health Care Reform
Page 349
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
Employers Must Offer
Health Insurance In 2015
EMPLOYER MANDATE. The chart below (from the Kaiser Family
Foundation website) gives you an overview of this provision.
Health Care Reform
Page 350
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
OVERVIEW OF EMPLOYER MANDATE. For 2015, employers who employ 100
full-time employees or a combination of full-time/part-time employees that is
equivalent to 100 full-time employees will be subject to the IRC Section 4980H
“employer shared responsibility” penalty provisions. Original law specified 50
full-time employees or full-time equivalents. However, to ensure a gradual
phase-in and assist employers for whom the employer mandate does apply, the
2015 number is 100 employees for any employer who provides an appropriate
certification to the government. This certification must state that the employer
has between 50 and 99 employees and that the employer has not reduced its
workforce to fall into that category. For 2016, the number of fulltime (or fulltime equivalent) employees will drop from 100 to 50 employees. Employees
eligible for health coverage from another source (Medicare/Medicaid or a
spouse’s employer) or any exempt individuals are included in this calculation.
Treasury estimates that only 2% of all employers employ 100 or more
employees and that only another 2% employ 50 to 99 employees. They believe
that 96% of employers are small businesses with fewer than 50 employees and
therefore are exempt from this employer mandate.
A full-time employee is an individual employed on average at least 30 hours
per week. An employer who meets the 100 (or 50) full-time employee
threshold is referred to as an “applicable large employer”.
If the employer offers no health insurance coverage or does not offer affordable
health coverage that provides a minimum level of coverage to their full-time
employees (and dependents), the employer will be subject to an employer
mandate penalty payment if at least one of its full-time employees receives a
premium tax credit for purchasing individual coverage from the federal/state
health insurance exchange.
Penalty provisions were originally to be effective in 2014, but were delayed
until 2015 per IRS Notice 2013-45. Employers will gather information about
their number of employees and their hours of service in 2014 to determine
whether they are subject to the “applicable large employer” rules for 2015.
To further phase-in the employer mandate, the rules provide additional relief to
“large employers” by stating that only 70% of full-time employees must be
offered coverage in 2015 and 95% must be offered coverage in 2016 and on.
For purposes of determining the 70% or 95% figure, full-time employees are
reduced by (1) new full-time employees during their first 3 months of
employment, (2) new variable hour or new seasonal employees during
employee’s initial measurement period or (3) employees who were offered
opportunity to enroll in an adequate, affordable employer-sponsored plan.
Health Care Reform
Page 351
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
FULL-TIME EQUIVALENT (FTE) EMPLOYEES DEFINITION. An employer’s
number of FTE employees matters for classification as a “large” employer and
for calculation of any applicable penalty. FTE employees are the sum of actual
full-time employees and the FTE of any part-time employees.
FULL-TIME EMPLOYEES. Employers identify actual full-time employees
based on the employee’s hours of service. A full-time employee is an
employee who is working on average at least 30 hours/week. In addition,
130 hours in a calendar month is also treated as the monthly equivalent of
30 hours/week.
PART-TIME EMPLOYEES. All employees (including seasonal workers) who
are not full-time employees for any month are included in calculating fulltime equivalent (FTE) employees. Obtaining the number of FTEs for the
calendar month is made by:
(1) Calculating the aggregate number of hours (but not more than 120
hours for any employee) for all employees who are not working on average
at least 30 hours/week in that month; and then
(2) Dividing the total aggregate number of hours in Step (1) by 120.
When the above calculation ends in a fraction, round the result down to the
lower whole number.
HOURS INCLUDE HOURS WORKED AND BENEFIT HOURS. Employee’s
hours include each actual hour worked plus benefit hours. Benefit hours are
hours for which an employee is paid, or entitled to be paid by the employer
on account of a period of time during which no duties are performed due to
vacation, holiday, illness, incapacity including disability, layoff, jury duty,
military duty or other leave of absence. All periods of paid leave must be
taken into account for Section 4980H.
SERVICES PERFORMED OUTSIDE UNITED STATES. Hours generally do
not include hours worked outside the United States, regardless of
employees’ residency or citizenship status. However, all hours for which an
employee receives U.S. source income are hours for Section 4980H.
EMPLOYEES NOT PAID ON HOURLY BASIS. Calculate hours using one of
three methods: (1) Count actual hours worked; (2) Use a days-worked
equivalency with employee credited 8 hours for each day worked; or (3)
Use a weeks-worked equivalency of 40 hours for each week worked.
OWNERS NOT INCLUDED. A sole owner, a partner in a partnership or a 2%
S corporation shareholder is not an employee for Section 4980H purposes.
Health Care Reform
Page 352
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
LEASED EMPLOYEES NOT INCLUDED. Employees leased through a
temporary agency are treated as employees of the service recipient for
various purposes, but are not “deemed” employees for Section 4980H.
SEASONAL EMPLOYEES. Seasonal employees who work fewer than 120
days or 4 months (whether or not consecutive) may be excluded from the
calculation of FTE employees. A seasonal employee is a worker who
performs labor or services on a seasonal basis (as defined by the Secretary
of Labor). This can include retail workers employed exclusively during the
holiday season and workers whose employment is ordinarily the kind
exclusively performed at certain seasons or periods of a year and which,
from its nature, may not be continuous or carried on throughout the year.
SPECIAL EMPLOYEE CATEGORIES. Clarifying whether employees of
certain types or in certain occupations are considered full-time include:
VOLUNTEERS. Hours contributed by bona fide volunteers for a
government or tax-exempt entity, such as volunteer firefighters and
emergency responders, will not cause them to be considered to be full-time
employees.
EDUCATIONAL EMPLOYEES. Teachers and other educational employees
will not be treated as part-time for the year simply because the school is
closed or operating on a limited schedule during the summer.
SEASONAL EMPLOYEES. Employees in positions for which the
customary annual employment is 6 months or less generally will not be
considered full-time employees.
STUDENT WORK-STUDY PROGRAMS. Service performed by students
under federal or state-sponsored work-study programs will not be counted
in determining whether they are full-time employees.
ADJUNCT FACULTY. Employers of adjunct faculty are to use a method of
crediting hours of service for those employees that is reasonable. The final
regulations expressly allow crediting an adjunct faculty member with 2.25
hours of service/week for each 1 hour of teaching or classroom time as a
reasonable method.
VERY IMPORTANT DISTINCTION! Part-time employees (but not seasonal
employees) are included in determining whether the employer has at least 50
full-time equivalent employees and is therefore considered a “large employer”
for purposes of applying the penalty. However, the actual penalty calculation
(see next page) if applicable, is levied only on full-time employees (those
working at least 30 hours/week on average). The penalty calculation does not
include part-time employees or any seasonal workers (full-time or part-time).
Health Care Reform
Page 353
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
EMPLOYER MANDATE PENALTY. To ensure that “large” employers continue to
provide some insurance coverage, the ACA includes a “shared responsibility”
provision. The provision does not explicitly mandate that an employer offer
employee health insurance, however it imposes penalties on “large” employers
if at least 1 full-time employee obtains a premium credit through the exchange.
EMPLOYER DOES NOT OFFER HEALTH COVERAGE. This penalty
calculation is for employers who do not offer any health coverage or who offer
coverage to fewer than 95% in 2016 (70% in 2015) of its full-time employees
and at least 1 full-time employee obtains a premium tax credit through the
exchange. The calculation is made on a month-by-month basis.
PENALTY AMOUNT. $2,000 annually for each full-time employee in
excess of 30 in 2016 (80 in 2015) employees (Section 4980H(a)).
EMPLOYER DOES OFFER HEALTH COVERAGE BUT IT IS NOT
AFFORDABLE OR ADEQUATE. This penalty calculation is for employers
who do offer health coverage to no fewer than 95% in 2016 (70% in 2015) of
its full-time employees and at least 1 full-time employee obtains a premium tax
credit through the exchange. The calculation is made on a month-by-month
basis.
PENALTY AMOUNT. $3,000 annually for each full-time employee who
obtained a premium tax credit through the exchange (Section 4980H(b)).
LIMIT ON PENALTY AMOUNT. However, this penalty (Section 4980H(b))
can never be larger than the Section 4980(a) penalty of $2,000 for each fulltime employee in excess of 30 in 2016 (80 in 2015) employees.
HOW TO PAY THE PENALTY. When one or more employees have received a
premium tax credit, the IRS will send the employer a Section 1411 Certificate
which alerts the employer of the potential penalty and provides the employer an
opportunity to respond before any liability is assessed or notice and demand for
payment is made. If it is determined that an employer is liable for the penalty,
IRS will send a notice and demand for payment. The notice will instruct the
employer on how to make the payment. Employers will not be required to
include the penalty on any tax return they file.
IRS will not contact employers for a given calendar year until after the due date
for employees to file their individual returns and after the due date for large
employers to file information returns indentifying their employees and
describing the insurance coverage that was offered (if any was offered).
Health Care Reform
Page 354
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
Healthcare References &
Internet Sites
INTERNET SITES.
http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions-Home
IRS ACA home
IRS topical index for ACA
http://taxmap.ntis.gov/taxmap/acaindex.htm
http://obamacarefacts.com
Discussion of Health Care Reform Act
http://www.coveredca.com
California’s Health Insurance Exchange
http://www.healthcare.gov
Federal Health Insurance Exchange
Federal Poverty Level Guidelines
http://aspe.hhs.gov/poverty/index.cfm
Kaiser Family Foundation Health Reform
http://kff.org/health-reform
http://calc.taxpolicycenter.org/acacalculator/
Individual Mandate Penalty Calculator
http://www.healthcare.gov/fees-exemptions/hardship-exemptions
Health Coverage Exemptions
http://marketplace.cms.gov/applications-and-forms/hardship-exemption.pdf
Health Coverage Exemption Application
http://marketplace.cms.gov/applications-and-forms/exemption-application-instructions.pdf
Health Coverage Exemption Instructions
BASIC INCOME TAX REFERENCES TO “2010 Patient Protection and
Affordable Care Act (P.L. 111-148)” and Internal Revenue Code Section
5000A (including Final Regs Section 1.5000A-0 through 5) are also very
useful.
Health Care Reform
Page 355
Health Care Reform
BRASS TAX Presentations
1040/540 TUNEUP 2014
CHARTS & TABLES
HELPFUL TABLES, CHARTS, WORKSHEETS AND NEW LAW.
The next several pages contain some useful items that do not fit into any particular
section of the outline. If you find any of these to be useful in your own
practice, please feel free to copy these.
PAGE 357-358 – SUMMARY – EDUCATION BENEFITS FOR 2014. An
overview of key requirements and rules for the various incentives.
PAGE 359-360 – COMPARISON OF EDUCATION INCENTIVES FOR 2014.
PAGE 361-362 – CLIENT INTERVIEW GUIDE — 2014 EDUCATION
INCENTIVES. A handy tool for use while interviewing clients with regard to
any of the new education incentives. Helps avoid many pitfalls!
PAGE 363 – RETIREMENT PLAN—COST OF LIVING FACTORS. Retirement
plan cost of living factors for 2013, 2014 and 2015 are given here.
PAGE 364 – INTEREST RATES CHARGED OR PAID BY IRS & FTB. Quarterly
rates are given from 2006 through 2014 with an area to denote 2015 rates.
PAGE 365-366 – CALIFORNIA SHORT SALE – ORIGINAL LETTER FROM
IRS CHIEF COUNSEL. September 19, 2013 letter which gives IRS viewpoint
on California short sales.
PAGE 367-369 – CALIFORNIA SHORT SALE – CLARIFICATION LETTER
FROM IRS CHIEF COUNSEL. April 29, 2014 letter which gives IRS revised
viewpoint on California short sales.
PAGE 370-371 – FORM 1040 — PAGE REFERENCES. A quick visual
overview of where to find information for a specific line on the Form 1040.
Charts, Tables & Worksheets
Page 356
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
SUMMARY OF EDUCATION BENEFITS—2014
Benefit
Effective
Date
Overview
Filing Status &
Phase Out (MAGI)
Basic Requirements
Coverdell
Education
Savings
Account
(ESA)
1-1-98
Exclusion of IRA S/HH/QW/MFS $2,000/yr contribution
earnings from
$95,000-110,000 maximum per beneficiary
income tax
who is under age 18
Contributions are nonMFJ
§530
$190,000-220,000 deductible
Notice 97-60
Beneficiary does not have
Publication 970
to be related
For education expenses of
No Form
kindergarten and above
Also for computers
Sect 529
Qualified
Tuition Plan
(QTP)
1-1-96
Exclusion of
account's
earnings from
income tax
NONE
§529
Publication 970
No Form
Education
Savings
Bond
(ESB)
1-1-90
Exclusion of
bond interest
from income tax
§135
Publication 970
Special account to pay for
education expenses of
beneficiary
Contribution is nondeductible, but may be
taxable for gift tax
Beneficiary does not have
to be related
For expenses for
undergraduate & graduate
courses
Bonds issued after 1989 to
filer or spouse over age 24
Used for education for
filer, spouse or dependent
MFJ/QW
$113,950-143,950 Not for MS status
S/HH
$76,000-91,000
Form 8815
American
Opportunity
Tax Credit
(AOTC)
1-1-09
Tax credit per
student
$2,500/yr
100% of first
$2,000
25% of next
$2,000
§25A
Publication 970
Form 8863
Form 1098-T
Charts, Tables & Worksheets
Tuition & Fees & Course
Materials Only
1st four yrs of
undergraduate college
MFJ
$160,000-180,000 only for at least 1/2-time
student in a degree
program
Max of 4 yrs usage
Used for education for
filer, spouse or dependent
No drug conviction within
previous 2 yrs
Dependent can not claim;
person claiming can
Not for MS status
S/HH/QW
$80,000-90,000
Page 357
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
SUMMARY OF EDUCATION BENEFITS—2014 (con’t)
Benefit
Lifetime
Learning
Credit
(LLC)
Effective
Date
Overview
Filing Status &
Phase Out (MAGI)
7-1-98 Tax credit per
family
$2,000/yr
20% of $10,000
§25A
Notice 97-60
Publication 970
Basic Requirements
Tuition & Fees Only
For any undergraduate or
graduate expenses (single
course = OK)
MFJ
$108,000-128,000 Used for education for
filer, spouse or dependent
Dependent can not claim;
person claiming can
Not for MS status
S/HH/QW
$54,000-64,000
Form 8863
Form 1098-T
IRA Penalty
Exclusion
(PENX)
1-1-98 Exclusion of IRA
withdrawal from
penalty if have
educational
expenses
NONE
Penalty free withdrawal
from IRA to extent of
qualifying educational
expenses for filer, spouse,
child or grandchild
§72(t)(2)(E)
Notices 97-53 &
97-60
Publication 970
Form 5329
Student
Loan
Interest
Deduction
(INTR)
1-1-98 Tax deduction of
interest paid
(adjustment to
income)
$2,500/yr max
§221
Notice 97-60
Publication 970
Deduction for interest paid
on educational loans for
filer, spouse or dependent
Dependent can not claim;
MFJ
Education expenses must
$130,000-160,000
be incurred by at least 1/2
time in a degree program
Not for MS status
S/HH/QW
$65,000-80,000
Form 1098-E &
Worksheet to
Form 1040, Ln 33
Tuition &
Fees
Deduction
(TFD)
1-1-2002
(Final
Year
Is
2014
Unless
Extend)
Tax deduction of
education exps
$4,000/yr max
OR
$2,000/yr max
S/HH/QW
$80,000 Cutoff
MFJ
$160,000 Cutoff
Tuition & fees only
For filer, spouse or
dependent
Not for MS status
Dependents cannot claim
Can’t use if use HOPE or
LLC credit in same year.
Form 1040, Ln 34
Charts, Tables & Worksheets
Page 358
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
EDUCATION INCENTIVES—2014
ITEM
ESA = Education Savings Account
QTP = Qualified Tuition Program
ESB = Educational Savings Bond exclusion
AOTC = American Opportunity Tax Credit
LLC = Lifetime Learning Credit
PENX = Penalty Exclusion on IRA withdrawal
INTR = Student Loan Interest Deduction
TFD = Tuition & Fees Deduction
“Qualifying Education Expenses”
st
Post-secondary—1 Four Yrs Only
Post-secondary including graduate school
Elementary & Secondary (Public, private or religious)
Tuition & fees
Required Books, supplies & equipment
Room & board if at least half-time student
Transportation expenses
Tutoring, uniforms & extended-day expenses
Computer equip/software & Internet access/services
Special needs services for special needs persons
½ time student & courses lead to degree or certificate
Includes contributions to ESA
Includes contributions to QTP
Reduce Qualifying Education Expenses ByZ
Tax-free scholarships, fellowships & Pell grants
Tax-free veteran’s benefits & employer assistance
Expenses paid from US educational savings bonds
Expenses used for Hope or Lifetime Learning credit
Expenses paid by ESA distribution
Excludible Earnings from a QTP
Any education expenses for which deduction taken
Coordination With Other Education Benefits
No credit allowed in same year on income excluded
No HSC or LLC in same year on income excluded
Can’t claim another education credit for same student
Modified AGI (MAGI) Includes AGI Plus:
§135 US education savings bond exclusion
§137 adoption assistance exclusion
§911, §931 and §933 income exclusions
MAGI limitations are not applicable
Charts, Tables & Worksheets
Page 359
E
S
A
Q
T
P
E
S
B
A
O
T
C
L
L
C
P
E
N
X
I
N
T
R
T
F
D
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
?
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Charts, Tables & Worksheets
X
X
X
X
X
X
X
X
BRASS TAX Presentations
1040/540 TUNEUP 2014
EDUCATION INCENTIVES—2014 (con’t)
ITEM
ESA = Education Savings Account
QTP = Qualified Tuition Program
ESB = Educational Savings Bond exclusion
AOTC = American Opportunity Tax Credit
LLC = Lifetime Learning Credit
PENX = Penalty Exclusion on IRA withdrawal
INTR = Student Loan Interest Deduction
TFD = Tuition & Fees Deduction
Age Limits
No age limits for all persons
No age limits for special needs individual only
Penalty on Distributions
10% penalty is possible
No 10% penalty if less than qualified education exps
No 10% penalty if death or disability
No 10% penalty if less than tax-free scholarship
No 10% penalty ever
Penalty is not applicable
Charts, Tables & Worksheets
X
A
O
T
C
L
L
C
P
E
N
X
I
N
T
R
T
F
D
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Page 360
E
S
B
X
Taxation Of Distributions
Principal is always tax-free
Principal is taxable if it is not tax-free basis
Earnings are always taxable
Earnings are possibly taxable
Distributions taxed pro-rata for principal & earnings
Taxed to whoever benefits from distribution
Earnings not taxed if used for qualifying educat exps
Taxation of distributions is not applicable
California Conformity
California conforms
California does not conform
Q
T
P
X
X
X
X
Original beneficiary must be under age 18
Rollover beneficiary must be under age 30
Taxable unless withdraw 30 days after age 30
No maximum age to withdraw (California = 45)
Rollover
OK to another ESA if family of original beneficiary
OK to another QTP if family of original beneficiary
Roll over beneficiary must be under age 30
Roll over beneficiary must be a life in being (alive)
Rollovers are not applicable
E
S
A
X
X
Charts, Tables & Worksheets
X
BRASS TAX Presentations
1040/540 TUNEUP 2014
INTERVIEW GUIDE – EDUCATION INCENTIVES—2014
EDUCATION SAVINGS ACCOUNT (ESA)
Contributions
Made for a person (beneficiary) under age 18 or special needs individual?
Are all contributions for beneficiary less than $2,000?
Check MAGI phase out limits.
Distributions
Has beneficiary turned age 30 or is a special needs individual?
Used for qualified education?
Elementary, Secondary undergraduate or graduate school?
Expense - tuition, fees, books, supplies – add room/board if half time student.
Expense - tutoring, uniforms or extended-day programs?
Expense - Computer hardware/software purchases?
Expense - Internet access or services for beneficiary or anyone in family?
Expense - special needs services for special needs individuals?
Any scholarship, fellowship, Pell Grant, VA or employer payment?
Used to fund contribution to ESA?
Savings bond interest excluded this year?
Education tax credits also taken? Don’t double dip!
Rolled over to a beneficiary in same family who is not yet age 30 or rolled over to
special needs individual of any age?
QUALIFIED TUITION PLAN (SECT 529)
Contributions
Gift-tax consequences?
Distributions
Used for qualified education?
Undergraduate or graduate school?
Expense - tuition, fees, books, supplies – add room/board if half time student.
Expense – computer technology and equipment.
Expense - special needs services for special needs individuals?
Any scholarship, fellowship, Pell Grant, VA or employer payment?
Savings bond interest excluded this year?
Education tax credits also taken? Don’t double dip!
Rolled over to a beneficiary in same family?
EDUCATION SAVINGS BONDS
Series EE or Series I bonds issued after 1989.
Taxpayer or spouse must own.
Owner age 24 on issue date?
No if file MFS.
Expenses incurred for taxpayer, spouse or dependent?
Undergraduate or graduate school?
Expenses – only tuition and fees?
Contributions made to an ESA or QTP?
Any scholarship, fellowship, Pell Grant, VA or employer payment?
Any payment received from an ESA or QTP?
Education tax credits also taken?
Check MAGI phase out limits.
Charts, Tables & Worksheets
Page 361
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
EDUCATION CREDITS (AOTC & LIFETIME LEARNING)
American Opportunity Tax Credit Only
First four years of undergraduate school?
Enrolled at least half time in a degree or certificate program?
Credit used more than four times for this student?
Felony drug conviction during current or prior academic year?
LL credit for same student?
Lifetime Learning Credit Only
Undergraduate or graduate? (Single course OK)
Hope credit for same student?
Prepaid expenses – before 12/31/2014. Courses – on or before 4/1/2015?
Either Credit
No, if student claimed as a dependent by another or if file MFS.
Parent claims if expenses incurred by dependent.
Incurred for taxpayer, spouse or dependent?
Expenses – tuition and fees and not for courses involving sports, hobbies or games.
Any scholarship, fellowship, Pell Grant, VA or employer payment?
No credit on same expenses paid for by tax-free distribution from ESA or QTP.
Check MAGI phase out limits.
IRA PENALTY EXCLUSION
Distribution from an IRA only (includes traditional, Roth, SEP & SIMPLE IRAs).
Incurred for taxpayer, spouse, child or grandchild? (Need not be dependent).
Undergraduate or graduate school?
Expense - tuition, fees, books, supplies – add room/board if half time student.
Any scholarship, fellowship, Pell Grant, VA or employer payment?
Expenses paid for with distributions from ESA or QTP?
STUDENT LOAN INTEREST DEDUCTION
In Year Of Deduction
Is this taxpayer’s loan as opposed to student’s loan? No for loan from relative.
Did taxpayer pay the interest?
No if taxpayer can be claimed as a dependent or if file MFS.
Check MAGI phase out limits.
In Year(s) Loan Taken
Incurred for taxpayer, spouse or dependent’s education?
Student enrolled at least halftime in degree program?
Expense - tuition, fees, books, supplies, room & board and transportation.
Any scholarship, fellowship, Pell Grant, VA or employer payment?
Tax-free distributions from an ESA or QTP received this year?
Savings bond interest excluded this year?
TUITION & FEES DEDUCTION (EXPIRES 12-31-2014)
Expenses – only tuition and fees?
Incurred for taxpayer, spouse, or Tier 1dependent?
Undergraduate or graduate school?
Check MAGI cutoff limits.
No, if student claimed as a dependent by another or if file MFS.
No if use HOPE credit or LLC for same student this year.
Tax-free distributions from an ESA or QTP received this year?
Any scholarship, fellowship, Pell Grant, VA or employer payment?
Charts, Tables & Worksheets
Page 362
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
RETIREMENT PLAN
COST OF LIVING FACTORS
Code §415 requires that the factors limiting contributions and benefits for qualified
plans be adjusted annually for inflation factors. The chart below summarizes the
factors for the various categories.
Cost-of Living Adjustments – IRC §415
Description (Annual Maximum)
2013
2014
2015
2012-77
2013-86
2014-99
Traditional IRA max contribution
$5,500
$5,500
$5,500
Roth IRA max contribution
$5,500
$5,500
$5,500
Catch-up contribution for IRA/Roth IRA
$1,000
$1,000
$1,000
Max contribution to defined contribution plans
$51,000
$52,000
$53,000
Max contribution for SIMPLE plans
$12,000
$12,000
$12,500
Catch-up contribution for SIMPLE plans
$2,500
$2,500
$3,000
Benefit for defined benefit plans
$205,000
$210,000
$210,000
Elective deferrals to Cash or Deferral
Arrangement Plan like 401(k) or 403(b)
$17,500
$17,500
$18,000
Elective deferrals to Section 457 deferred
compensation plans (government employees)
$17,500
$17,500
$18,000
Catch-up contribution for 401(k), 403(b) and
457
$5,500
$5,500
$6,000
$255,000
$260,000
$265,000
$550
$550
$600
“Control employee” definition for fringe benefit
valuation purposes
$205,000
$210,000
$215,000
Key employee in top-heavy plan
$165,000
$170,000
$170,000
Highly compensated employee under
414(q)(1)(B)
$115,000
$115,000
$120,000
Amounts Released in IR #
Compensation limit for calculating contributions
to qualified plans and SEPs
Compensation Minimum for which SEP
coverage is required for employees
Charts, Tables & Worksheets
Page 363
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
INTEREST RATES CHARGED OR PAID
BY IRS (§6621) AND FTB
Period
2007
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2008
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2009
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2010
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2011
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2012
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2013
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2014
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
2015
10/01 – 12/31
07/01 – 9/30
04/01 – 06/30
01/01 – 03/31
Charts, Tables & Worksheets
IRS Rate
FTB Rate
8%
8%
8%
8%
8%
8%
8%
8%
6%
5%
6%
7%
7%
8%
8%
7%
4%
4%
4%
5%
4%
4%
4%
5%
5%
5%
5%
4%
4%
4%
4%
4%
3%
4%
4%
3%
3%
4%
3%
4%
3%
3%
3%
3%
3%
4%
3%
4%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
%
%
%
%
%
3%
3%
3%
Page 364
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
Original Letter to Barbara Boxer
Charts, Tables & Worksheets
Page 365
Charts, Tables & Worksheets
BRASS TAX Presentations
Charts, Tables & Worksheets
1040/540 TUNEUP 2014
Page 366
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
Clarification Letter to Barbara Boxer
Charts, Tables & Worksheets
Page 367
Charts, Tables & Worksheets
BRASS TAX Presentations
Charts, Tables & Worksheets
1040/540 TUNEUP 2014
Page 368
Charts, Tables & Worksheets
BRASS TAX Presentations
Charts, Tables & Worksheets
1040/540 TUNEUP 2014
Page 369
Charts, Tables & Worksheets
BRASS TAX Presentations
1040/540 TUNEUP 2014
FORM 1040 – PAGE REFERENCES
P35
P24
P30
P25
P37
P176
P177
P107
P181
P191 & 307
P45
P55
P203
P205
P58
P60
P89
P90
P91
P209
P99
P105
P107
P111
P125
P126
P127
Form 1040-Page References
Page 370
P129
Form 1040-Page References
BRASS TAX Presentations
1040/540 TUNEUP 2014
P161
P132
P134
P264
P312
P140 &P230
P287
P296
P275
P262
P209
P259
P206
P261
P317
P308 & 309
P211
P228
P204
P275
P287
P312
P156
P157
P228
P9
Form 1040-Page References
Page 371
Form 1040-Page References
BRASS TAX Presentations
1040/540 TUNEUP 2014
OVERVIEW – 2014 ABLE ACT
NEW TAX-EXEMPT “ABLE” ACCOUNT. The 2014 TIPA passed on December
19, 2014 also included the Achieving a Better Life Experience” Act of 2014
(ABLE Act of 2014). This act establishes a program (new IRC §529A) which
allows certain individuals to establish a tax-exempt ABLE account to pay for
qualified disability-related expenses. The account will operate similar to a
Qualified Tuition Plan (IRC §529) where contributions are made with after-tax
dollars and earnings accumulated on a tax-deferred basis. The key features of
ABLE accounts are shown below.
• Accounts are established by individuals or families to support
themselves or dependents.
• Accounts are established for eligible individuals who are (a) blind or
disabled before reaching age 26, (b) eligible for Supplemental Security
Income (SSI) or Social Security Disability Insurance (SSDI) or (c)
eligible after a disability certificate is filed with the IRS.
• Each individual is limited to one ABLE account.
• Total annual contributions by all individuals are limited to the gift tax
exclusion ($14,000 for 2014 and 2015).
• Aggregate life-time contributions are subject to the state limit for
education-related IRC §529 plans.
• ABLE accounts can be rolled over into another ABLE account for the
same individual or into an ABLE account for a sibling who is also an
eligible individual.
• Distributions are considered “qualified” and are thus tax-free if used for
the benefit of an individual with a disability and related to the disability.
Expenses include (a) education, (b) housing, (c) transportation, (d)
employment support, (e) health, prevention and wellness costs, (f)
assistive technology and personal support services, or (g) other IRSapproved expenses.
• The portion of “non-qualified” distributions attributable to earnings are
subject to tax and a 10% penalty.
• Upon death of an eligible individual, the remaining ABLE account
balance goes to the deceased’s estate or to a designated beneficiary.
Earnings are subject to income tax but no 10% penalty.
• Contributions by a parent or grandparent of a designated beneficiary are
protected in bankruptcy if made 365 days prior to the bankruptcy filing.
Form 1040-Page References
Page 372
Form 1040-Page References