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