GEAR UP
2014
Individual Taxation
Form 1040
Seminar Facilitators
Day 1
Morning Session
Day 2
Joe Santoro
Joe Santoro
Gary Steinberg Gary Steinberg
Afternoon Session Joe Santoro
Joe Santoro
Gary Steinberg Gary Steinberg
2
1
Time Protocol
Alternating Breaks:
Short Breaks
hour
3-5 Minutes every other
Long Breaks:
hour
15 Minutes every other
3
Speaker Slides
Step One: checkpointlearning.thomsonreuters.com/GearUp
Step Two:
- create a user account and a password at sign-in
- Free to Gear Up Attendees
Step Three:
At Screen right, go to “Members”
Step Four:
- Select a Year Group [2013, 2014, etc.]
- Select Subject and Slides by Speaker Name
4
2
Joe Santoro’s Topics
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
1
2
3
4
5
6
7
8
9
Affordable Care Act
Wages and Other Income
Net Operating Losses
IRS Update
Deferred Compensation
Retirement Resources
Retirement Savings
Retirement Account Distributions
Education Planning
Joe Santoro’s Topics
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
10
11
12
13
14
15
16
17
18
Net Investment Income Tax
Interest & Dividends
Passive and Rental Activities
Capital Gains and Losses
Installment Sales
Sale of A Principal Residence
Reverse Mortgages
Debt Forgiveness & Foreclosures
Household Employees
3
Joe Santoro’s Topics
Chapter 19 Alternative Minimum Tax
Chapter 20 Gambling Income
Chapter 21 Personal Credits
Gear Up Cheat Sheets
2014
• Current as of November 1, 2014
8
4
2013
$3,900
2014
$3,950
Personal Exemptions
Standard Deduction
Single
$6,100
$6,200
Married Jt. & QW
$12,200 $12,400
Married Filing Sep.
$6,100
$6,200
Head of Household
$8,950
$9,100
Additional Deductions for Elderly and Blind
Single
$1,500
$1,550
Married (each)
$1,200
$1,200
Dependent of Another
Greater of $350 or ???
but not in excess of Std
$1,000
$1,000
Cheat Sheets
2015
$4,000
$6,300
$12,600
$6,300
$9,250
$1,550
$1,250
$1,050
2013
2014
2015
hhhh
Social Security Information based on SSA Estimates
FICA Wage Base
$113,700 $117,000 $118,500
Below FRA Limit
$15,120 $15,480 $15,720
FRA Year Limit
$40,080 $41,400 $41,880
$2,100
Kiddie Tax [Under 18]
$2,000
$2,000
$1,000
Child Tax Credit
$1,000
$1,000
Standard Mileage Rate
56.0¢
00.0
Business
56.5¢
Depreciation per mile
Charitable
Medical & Moving
Qualified Parking
23.0¢
14.0¢
23.0¢
Cheat $245
Sheets
22.0¢
14.0¢
24.0¢
$250
1
1
00.0
14.0¢
0
00.0
$250
5
1
2013
Comm. Veh. & Transit Bus Pass
$245
2014
$130
Luxury (Non-electric) Auto Depreciation Limits
First Year Bonus Depr
$8,000
$0
Year 1
$3,160
$3,160
Year 2
$5,100
$5,100
Year 3
$3,050
$3,050
Year 4 and After
$1,875
$1,875
2015
$130
$000
$000
$000
$,000
$0,000
Cheat Sheets
2013
2014
2015
2
IRC Section 179
Depreciation
$500,000 $25,000 $25,000
Investment Limitation
$2 Mil $200,000 $200,000
SUV Limitation
$25,000 $25,000 $25,000
Estate Tax Unified Cr $5.25 Mil $5.34 Mil $5.43 Mil
Annual Gift Exclusion $14,000 $14,000 $14,000
IRA
$5,500
Base Contribution
$5,500
$5,500
Age 50 Catch Up
$1,000
$1,000
$1,000
Simple IRA
Base Contribution
$12,000 $12,000 $12,500
Age 50 Catch Up
$2,500
$2,500 $ 3,000
Cheat
Sheets
6
2
2013
17.5
401(k), 403(b), and 457 Plans
Base Contribution
$17,500
Age 50 Catch-Up
$5,500
Defined Cont. Limit
Defined Ben. Limit
IRC 415 Comp. Limit
2014
$17,500
$5,500
2015
$18,000
$6,000
$51,000 $52,000 $53,000
$205,000 $210,000 $210,000
$255,000 $260,000 $265,000
Cheat Sheets
2
HSA Limitations
Self Plan
Family-Plan
Age 55 Catch Up
Min. Deductible-Sgl.
Min. Deductible-Fam.
Max. Deductible-Sgl.
Max Deductible-Fam.
2013
2014
2015
$3,250
$6,450
$1,000
$1,250
$2,500
$6,250
$12,500
$3,300
$6,550
$1,000
$1,250
$2,500
$6,350
$12,700
$3,350
$6,650
$1,000
$1,300
$2,600
$6,450
$12,900
Cheat Sheets
7
Page 002
2013
Long Term Care Deduction Limitations
Age 40 or Younger
$360
Age > 40 but < 50
$680
Age > 50 but < 60
$1,360
Age > 60 but < 70
$3,6400
Age > 70
$4,550
2014
2015
$370
$700
$1,400
$3,720
$4,660
$380
$710
$1,430
$3,800
$4,750
Cheat Sheets
Page 003 - Bonus
Personal Exemption Phase Out:
(PEP) 2014 Amounts
2% for each $2,500 or part there-of of adjusted
gross income in excess of thresholds:
Joint
$305,050
HOH
$279,650
Single
$254,200
Will be completely
phased out when AGI
exceeds thresholds by
$125,000
MFS
$152,525
Adjusted for Inflation
Cheat Sheets
8
Page 003 - Bonus
Personal Exemption Phase Out:
2015 Amounts
2% for each $2,500 or part there-of of adjusted
gross income in excess of thresholds:
Joint
$309,950
HOH
$284,050
Single
$258,250
Will be completely
phased out when AGI
exceeds thresholds by
$125,000
MFS
$154,950
Adjusted for Inflation
Cheat Sheets
Page 003 - Bonus
Itemized Deductions Phaseouts
For 2014
3% of adjusted gross income in excess of
thresholds:
Reduction will not exceed
80% of Schedule A.
Joint
$305,050
Medical, Investment
HOH
$279,650
Interest, Casualty and
Single
$254,200
Gambling Losses not
reduced
MFS
$152,525
Adjusted for Inflation
Cheat Sheets
9
Page 003 - Bonus
Itemized Deductions Phase-outs
For 2015
3% of adjusted gross income in excess of
thresholds:
Reduction will not exceed
80% of Schedule A.
Joint
$309,900
Medical, Investment
HOH
$284,050
Interest, Casualty and
Single
$258,250
Gambling Losses not
reduced
MFS
$154,950
Adjusted for Inflation
Cheat Sheets
2015 Tax Rate Schedule
3
Page
• Single
Bracket
Minimum Taxable
End of
Bracket
10.0%
922.50
9,225.00
15.0%
5,156.25
37,450.00
25.0%
18,481.25
90,750.00
28.0%
46,075.25
189,300.00
33.0%
119,401.25
411,500.00
35.0%
119,996.25
413,200.00
39.6%
No Maximum
No End
20
10
2015 Tax Rate Schedule
3
Page
• Married Filing Jointly
Bracket
Minimum Taxable
End of
Bracket
10.0%
1,845.00
18,450.00
15.0%
10,312..55
74,900.00
25.0%
29,837.50
151,200.00
28.0%
51,577.50
230,450.00
33.0%
111,324.00
411,500.00
35.0%
129,996.50
464,850.00
39.6%
No Maximum
No End
21
2015 Tax Rate Schedule
3
Page
• Head of Household
Bracket
Minimum Taxable
End of
Bracket
10.0%
1,315.00
13,150.00
15.0%
6,872.50
50,200.00
25.0%
26,722.50
129,600.00
28.0%
49,192.50
209,850.00
33.0%
115,737.00
411,500.00
35.0%
125,362.00
439,000.00
39.6%
No Maximum
No End
22
11
The 15% Tax Bracket: MFJ
Taxable income
Standard Deduction
Two exemptions @ $ 3,950
Two children @ $ 3,950
IRA Contribution for Two
Health Savings Account
Gross income to stay at 15%
$ 74,900
12,400
7,900
95,200
7,900
103,300
11,000
114,300
6,650
$120,950
=======
Use of Professional
Tax Preparers
2014
Prepared by:
Tax Pro
71,263,000
DIY
46,500,000
Total
2013
AT October 2014
Increase
70,739,000
43,683,000
0.07%
6.44%
117,763,000 114,422,000 2.91%
24
12
Need a Tax Pro?
What IRS already receives:
1. W-2
2. Form 1099 INT
3. Form 1099 DIV
4. Form 1099-B with basis
5. Form 1098 Mortgage Interest
6. Form 1099-NEC
2009 Schedule A Deductions
WSJ
10/20/12
Adjusted G. Income
Returns
$ 10,000 – 15,000
$ 40,000 – 50,000
$ 75,000 - 100,000
$ 1 million – 1.5 million
$ 10 million plus
Total Returns filed in 2009
Returns using Schedule A
Percent using Schedule A
Avg. Schedule A %/AGI
922,814
3,994,552
7,583,001
104,559
8,148
$
16,017
$
17,106
$
22,171
$ 173,119
$ 4,310,230
38%
25%
14%
-
140 million
45 million
32%
13
IR 2014-2
Schedule A:
Average Itemized Deductions
(up $ 237 from 2010)
Component Deductions:
Property Tax Deductions
Income Tax Deductions
Charitable Contributions
Mortgage Interest
Medical Expenses
2011 Tax Year
$ 26,321
Up 4.5%
Up 7.3%
Up 2.5%
Down 7.5%
Down .5%
The Case for Raising the Standard Deduction
Lower tax rates + fewer deductions = incentive
to make investment choices without tax law
influences.
1. Why live with high property/income taxes?
- Move!
- Local government forced to become more
efficient with its budget to retain citizens.
[7 states have no income taxes!]
14
The Case for Raising the Standard Deduction
2. Why purchase a home with a large mortgage/significant
interest expense? Just for a tax deduction?
- Instead, choose to acquire affordable home or rent.
3.
Why make many, small charitable contributions to keep
below record keeping thresholds? Make larger
contributions to the “best”.
- Typical NPO admin cost is $ 15 per donation. Thus:
a. A $50 donation = $ 35 to NPO
= 70% to NPO
b. A $100 donation = $ 85 to NPO
= 85% to NPO
States Claiming Highest Schedule A
Itemized Deductions for Taxes
WSJ 12/17/12
State
California
New York
New Jersey
Maryland
Massachusetts
Top 5 States
All States
2010 State/Local Tax Deductions
$$ Billions
Percent
$ 78.3
17.6
$ 57.4
12.9
$ 27.9
6.0
$ 15.0
3.3
$ 15.3
3.3
$ 193.9
43.1
$ 449.7
100.0
When high income tax/property tax states raise their tax rates:
1. Their citizens pay less federal taxes [higher Schedule A].
2. Citizens in other states pay more federal taxes.
15
Proposed Revenue Enhancements
By Congressional Budget Office WSJ 12/18/12
1.
2.
3.
4.
5.
6.
Raise Capital Gains Tax Rate from 15% to 17%.
Eliminate Deductions for:
a. Home Mortgage Interest
b. State and Local Taxes
Limit the itemized deductions to 15% of AGI.
Raise FICA Earnings Cap to $ 170,000.
Impose a broad-based value added tax of 5%.
Raise the following income tax rates:
a. The 33% rate becomes 36.0%.
b. The 35% rate becomes 39.6%.
Proposed Spending Reductions
By Congressional Budget Office WSJ 12/18/12
1. Raise Medicare Age to 67 from Age 65.
2. Increase Medicare Part B Premium Cost.
3. Slow Social Security cost of living
adjustments.
4. Limit those who benefit from military Tricare
Program.
5. Give control of Medicaid back to the states
and pare back benefits.
16
Max Baucus (D) Montana
Depreciation Proposal for 2014
1.
2.
3.
4.
Eliminate IRC 167, 168, 179.
Eliminate IRC 1031 Exchanges
Treat all gain from sale of property and equipment as ordinary income,
not capital gain.
Create Asset Pools with flat rate depreciation rates:
Pool 1: Business Autos, computers, software 38%
Pool 2: Light Trucks
18%
Pool 3: Furniture & Fixtures
12%
Pool 4: Land Improvements
5%
Baucus Example
Year 1 Purchases:
Computer A:
Computer B:
Computer C:
Total
Depreciation at 38%
Pool at end of Year 1
Year 1
$ 2,000
$ 4,000
$ 3,000
$ 9,000
(3,420)
$ 5,580
17
Baucus Example
Year 2 Pool Beginning Balance
Purchase new equipment
Total Pool Value
Depreciation at 38%
Ending Pool Value
Year 3 Pool Beginning Balance
Sale of equipment item
Net ordinary income gain
Ending Pool Value
Year 2/3
$ 5,580
1,420
$ 7,000
(2,660)
$ 4,340
=======
$ 4,340
(5,000)
$
660
=======
$
-0-
18
11/20/2014
HEALTH CARE REFORM
The Patient Protection and
Affordable Care Act of 2010
Tax Code Section 4980H
The Basics
p. 9
1. Requires “minimum essential coverage”.
Examples:
a. Medicare Part A
b. Medicaid
c. TRICARE
d. Self-insured Employer Plans
e. State Exchange Plans.
f. Plans recognized by HHS and IRS.
1
11/20/2014
The Basics
p. 10
2. New Forms [p 24-26]:
Form 1095-A issued by a State Exchange
Form 1095-B issued by an Insurance Company
Form 1095-C issued by a Large Employer
Form 8965 issued by a State Exchange for
those with coverage exemptions.
3. Creates state-based American Health Benefit
Exchanges for individuals to purchase HI.
Form Submission under IRC 6055
1. Form 1095-A from the State exchange will be
issued by January 31, 2015???
2. Forms 1095-B/C have transitional relief until
January 31, 2016.
Employees still need to obtain information for purposes
of calculating credit/penalty.
2
11/20/2014
Failure to Provide Forms
For entities with gross revenues :
a. Over $ 5 million: penalty of $ 1.5 million.
b. Under $ 5 million: penalty of $ 500,000 per year
Failure to Provide Information Forms
penalties deferred until 2015.
The Basics
p. 11
4. Provides refundable premium tax credits and
cost sharing reductions for :
a. Individuals with income below $46,680*
b. Families with income below $ 95,400*
*[Income under 400% of the federal poverty level;
2014: single $ 46,680; family of four $ 95,400]
3
11/20/2014
The Basics
5. Imposes “shared responsibility” penalties on
those who do NOT purchase MEC.
6. “Grandfathers” existing HI coverage.
7. Establishes Medicaid threshold for all states.
Key Concepts
1. Premium Assistance Credit [Silver Plan Factor]
a. When household income is below 400% of
federal poverty level; and,
b. MEC purchased on a State Exchange.
2 Shared Responsibility Penalty [Bronze Plan]
a. No MEC; and,
b. No qualifying exception.
4
11/20/2014
Failure to Provide Correct
Information Penalty
ACA, P.L. 111-148, Section 1411 (h)(1)(A)
Individuals can be fined up to $ 25,000 for negligent failure to
provide correct information when applying for health insurance
coverage or financial assistance for health coverage (e.g.
premium assistance credit or cost-sharing subsidy).
Penalty increases to $ 250,000 for knowingly failing to provide
correct information.
Health Exchange Plan Types
Plan Name
Single out-ofpocket
Family out-ofpocket
Covers
essentials
Covered Cost
Percentages
Bronze
$ 6,250
$ 12,500
Yes
60%
Silver
$ 6,250
$ 12,500
Yes
70%
Gold
$ 6,250
$ 12,500
Yes
80%
Platinum
$ 6,250
$ 12,500
Yes
90%
5
11/20/2014
Premium Assistance Credit
p. 11
1. An IRC 36B credit for those:
a. Below the 400% poverty level; and,
b. Not eligible for other qualifying coverage.
2. The credit is only available to those who purchase
through a State Exchange.
3. Cannot have access to an affordable MEC provided
by an employer. No credit if could have purchased
MEC through an employer.
Premium Assistance Credit
p. 12
4. Married couples must file jointly.
5. No credit for someone claimed as a dependent.
6. The credit:
a. Is refundable.
b. May be paid in advance to taxpayer or to the
insurer.
6
11/20/2014
Premium Assistance Credit
p. 12
7. Excess credits – determined by the original due date
of Form 1040 -- must be repaid.
a. If household income remains at or below
400% FPL, repayment is limited. [See p. 15],
b. If household income exceeds 400% FPL, the
entire excess payment must be repaid.
Premium Assistance Credit
p. 12
8. The credit is based upon family unit size; must
include in the family total even those exempt
from MEC.
Examples:
1. Nick & Nora file a joint return. Family size: 2.
2. Nora’s mother , who has Medicare A & B,
moves in as a dependent.
Family size: 3.
7
11/20/2014
Premium Assistance Credit
p. 13
9. Household income for a credit includes:
a. MAGI of primary taxpayers.
b. MAGI of dependent family members who
are required to file a tax return.
c. Excluded foreign income.
d. Tax-exempt interest; and,
e. Non-taxed Social Security benefits.
Nora’s mother receives Social Security at a level that does not
require the filing of a tax return. Her income is not included in
Nick & Nora’s household income.
Premium Assistance Credit
p. 13
10. Monthly Coverage:
a. Any month in which for one day individual
is enrolled in a state qualified health plan.
b. Does not include any month the individual
was eligible for an employer plan that is:
(1) affordable; and,
(2) compliant with MEC.
8
11/20/2014
Premium Assistance Credit
p. 14
11. The credit value is the lesser of:
a. Actual premium paid; or,
b. “Benchmark Premium” cost minus
“Applicable share” of premium cost.
(1) The Benchmark is State “silver plan”.
(2) The Applicable Share is derived from a
premium assistance table. See page 14.
Single Tom from Oregon
1.
2.
3.
4.
5.
Household income
Poverty Level [p. 11]
Applicable percentage [p.14]
Oregon single person cost
Affordable Premium:
8.05% times $ 29,175 =
6. Premium Assistance Credit
p. 14
$ 29,175
250%
8.05%
$ 4,500.00
(2,348.59)
$ 2,151.41
9
11/20/2014
Advance Credit Repayments
p. 15
1. Credit advances that exceed actual entitlements
must be repaid.
2. Limitation: if taxpayer remains in the 400% Poverty
Level Range, the repayment is capped. See Page 15
of text.
3. If taxpayer income exceeds 400% of poverty level,
entire excess must be repaid.
Premium Costs for a Family of Four
When actual State premium cost exceeds these limits, a
refundable federal credit is available.
Percent of
Poverty Level
Income Level
(2014 level)
400%
$ 95,400
300%
Percent of
Income
Maximum
Annual Rx
Monthly
Rx Cost
9.5%
$ 9,063
$ 755
$ 71,550
9.5%
$ 6,797
$ 566
250%
$ 59,625
8.1%
$ 4,830
$ 402
200%
$ 47,700
6.3%
$ 3,005
$ 250
150%
$ 35,775
4.0%
$ 1,431
$ 119
133%
$ 31,721
2.0%
$
$
100%
$ 23,850
634
53
10
11/20/2014
The Penalty
p. 16
The lesser of:
a. The sum of the statutory monthly
penalties for each member of a
household; or,
b. The sum of the monthly premium costs
for the national average bronze plan for
each member of the household.
Per Person Annual Penalties for no Health Insurance
p. 17
Greater of:
2014 2015 2016
Flat Dollar
$ 95 $ 325 $ 695
or
Excess Income x 1.0% 2.0%
2.5%
Flat Dollar is
lesser of per person* $ 95 $ 325 $ 695
or per tax return
$ 285 $ 975 $ 2,085
*Dependents under 18 are assessed at ½ penalty rate.
11
11/20/2014
Excess Income IRC 6012 (a)(1)
Threshold Table
p. 11
2014 Filing Status
Age at 12/31/2014
Gross Income
Equals or Exceeds
Single
Under 65
65 or older
$ 10,150
$ 11,700
Head of Household
Under 65
65 or older
$ 13,050
$ 14,600
Married, Joint Return
Under 65 (both)
65 or older (one)
65 or older (two)
$ 20,300
$ 21,500
$ 22,700
Married, Separate Return
Any age
$ 3,950
Qualifying Widow
Widower
Under 65
65 or older
$ 16,350
$ 17,550
Penalty Calculation Example
Assume the following:
1. Mickey & Minnie, each 35 years old, file a joint
return. Their combined MAGI is $ 120,300 in 2014,
2015, and 2016.
2. Their son, Age 14, does not file a tax return.
3. No family medical insurance for last 10 months
during 2014; no insurance in 2015 or 2016.
4. The threshold amount of $ 20,300 remains the
same for 2014, 2015, and 2016.
12
11/20/2014
Mickey’s Excess Income
1
Household Income
2
Threshold [p. 11]
3
Excess Income
4
Applicable Percentage
[p. 17]
5
Excess Income
2014
2015
2016
$ 120,300
$ 120,300
$ 120,300
(20,300)
(20,300)
(20,300)
$ 100,000
$ 100,000
$ 100,000
1.0%
2.0%
2.5%
$ 1,000
$ 2,000
$ 2,500
Mickey’s Family’s
Flat Dollar Amount
2014
1
Penalty Value: Age 18 or more [p.17]
2
Family Members Age 18 or more
3
$
95
2015
$
325
2016
$
695
2
2
2
Applicable Dollars: Age 18 or more
$ 190.00
$ 650.00
$ 1,390.00
4
Penalty Value: Under Age 18
$ 47.50
$ 162.50
$ 347.50
5
Family Members under Age 18
1
1
1
6
Applicable Dollars: Under Age 18
$ 47.50
$ 162.50
$ 347.50
7
Family Total: Line 3 + Line 6
$ 237.50
$ 812.50
$ 1,737.50
8
Maximum Total: Line 1 x 300%
$ 285.00
$ 975.00
$ 2,085.00
9
Flat Dollar Amount: Lesser of
Line 7 or Line 8
$ 237.50
$ 812.50
$ 1,737.50
13
11/20/2014
Mickey’s Penalty
2014
2015
2016
$ 237.50
$ 812.50
$ 1,737.50
1
Flat Dollar Amount
2
Excess Income
$ 1,000.00
$ 2,000.00
$ 2,500.00
3
Greater of Line 1 or 2
$ 1,000.00
$ 2,000.00
$ 2,500.00
4
Monthly Penalty
[Line 3 divided by 12]
$ 83.33
$ 166.67
$ 208.33
5
Months without MEC
10
12
12
6
Tentative Penalty
[Line 4 times Line 5]
$ 833.30
$ 2,000.00
$ 2,500.00
7
Monthly National Bronze
Plan Average family of 3
$ 612.00
$ 612.00
$ 612.00
8
Premiums using Bronze Plan
[Line 5 times Line 7]
$ 6,120.00
$ 7,344.00
$ 7,344.00
9
Actual Penalty [Lesser of
Line 6 or Line 8]
$ 833.30
$ 2,000.00
$ 2,500.00
Penalty for no Rx
p. 17
Year
Flat Fee
Per Person
Per Person
Times 3
2014
$ 95
$ 285
2015
$ 325
$
2016
$ 695
$ 2,085
Adjusted
For inflation
Beyond
975
14
11/20/2014
Example: Change in Family size
Assumptions:
1. Donald and Daisy Duck in 2016 have excess income
of $ 75,000.
2. Using the 2.5% applicable percentage, excess
income becomes $ 1,875.
3. Healthcare penalty is $ 695 per adult, $ 347.50 per
child.
4. On June 30, 2016 the couple gives birth to twins.
5. They do not have medical insurance.
Duck Dynasty Penalty Calculation
Jan-June 2016
1. Flat Dollar 2 Adults @ $ 695.00
July – August 10`6
$ 1,390
$ 1,390
-0-
695
$ 1,390
$ 2,085
2. Excess Income Amount
$ 1,875
$ 1,875
3. Greater of Line 1 or Line 2
$ 1,875
$ 2,085
$ 156.25
$ 173.75
2 Children @ $ 347.50
Total Flat Dollar Amount
4. Monthly Penalty [Line 3 x 1/12]
5. Months without MEC
6. Penalty for Each Period
7. Total Penalty for Year
6
6
$ 937.50
$ 1,042.50
$ 1,980.00
15
11/20/2014
Penalty Collection
p. 18
The law permits the IRS to collect the penalty by
withholding it from a tax refund.
If the taxpayer is not entitled to a refund and still
declines to pay the penalty, the IRS cannot collect it.
The IRS is not permitted to levy any property; offsetting
refunds and credits may be the only practical
enforcement method.
No Penalty if MEC is Unaffordable
p. 18
1. Household income is a key factor in the determination of a
“shared responsibility” penalty.
2. Household income includes:
a. Adjusted Gross Income of each family member
obligated to file Form 1040; plus,
b. Foreign income excluded; plus,
c. Tax Exempt interest; plus,
d. Untaxed portion of Social Security.
16
11/20/2014
No Penalty if MEC is Unaffordable
p. 18
For those without employer coverage,
premiums are unaffordable if premium exceeds
8% of adjusted household income.
Note: This exception requires the tax practioner to
calculate a premium assistance credit that (1) the client
does not receive based upon (2) an insurance policy
that the client did not buy.
No Penalty if MEC is Unaffordable
(cost is more than 8% of household income) p. 18
Example
1. Brooke, single, has household income of $ 40,000 when
Bronze Coverage cost is $ 5,000.
2. At 400% of poverty level, she would have been entitled to a
credit of $ 1,700 if she had purchased insurance.
3. Her required share of health insurance would have been
$ 3,300 [$ 5,000 Bronze Plan - $ 1,700 assistance credit].
4. However, as $ 40,000 x 8.0% = $ 3,200, the $ 3,300 required
payment is too high; no penalty imposed.
17
11/20/2014
No Personal Penalty if MEC is Unaffordable
p. 19
For those
with employer coverage,
insurance premiums are unaffordable if
they exceed 8% of adjusted household
income based upon self-only coverage.
No Personal Penalty if MEC is Unaffordable
(self-only coverage exceeds 8% household income)
p. 19
Example
1. Tim’s employer would charge $ 420 per month.
2. Tim’s monthly earnings x 8.0% is $ 400.
3. As premium exceeds 8% threshold, no penalty.
Note: Tim’s employer – if large – could be assessed a penalty for
failure to provide affordable MEC if monthly payment was more
than 9.5% of earnings, i.e. more than $ 475.
18
11/20/2014
Example Child Strategy
Child below Age 30:
a. If under 27, without access to an employer plan, can
stay on parents’ policy provided parent:
(1) Is not retired; or,
(2) Age 65 or above
b. If age 27-29, can purchase “catastrophic insurance”:
(1) Less expensive than Bronze plan.
(2) Provides preventative care plus 3 annual doctor
visits.
Example Child Strategy:
No pre-existing condition restriction
At age 22, Barry rejects health insurance, opting to pay the
penalty. Now 43, diagnosed with a serious health malady, Barry
purchases insurance under the no pre-existing condition
limitation clause, with the following financial results:
Premiums unpaid [20 years @ $ 6,000] = $ 120,000
Penalties paid [20 years @ $ 700]
= ( 14,000)
Cash-in-hand benefit
$ 106,000
Barry has thereby “gamed” the system.
19
11/20/2014
No penalty for:
1. Low income persons who do not file.
2. Low income persons whose required
contribution to an employer’s plan exceeds
8.0% of their household income.
3. Native Americans/religious objectors.
4. Those in prison.
5. Undocumented aliens.
Increased Floor on Medical Deductions
1. Medical expense threshold: 10.0% AGI.
2. Exception: 7.5% AGI limit remains for those
Aged 65 and above but only through 2016.
20
11/20/2014
Penalties on Health Insurance Companies
1. Executive pay deduction is limited to
$ 500,000 per individual.
2. Companies are subject to an annual fee
based upon market share of net premiums
written if the company writes net premiums
of $ 25 million or more.
Medicaid eligibility in 2013/2014 Based on Household Income as
a Percent of the Poverty Level
1.
2.
3.
4.
5.
6.
Pregnant Women
Children 6 & under
Children 7 to 18
Elderly/disabled
Working Parents
Childless Adults
2013
2014
133%
133%
133%
133%
100%
133%
75%
133%
25%
133%
0%
133%
21
11/20/2014
Medicaid State Comparisons 2013
State
Jobless
Parents
Working
Parents
Children
Age 6-19
Average
Rank
MN
275%
275%
275%
275%
1
NM
30%
69%
235%
173%
11
TN
73%
134%
100%
146%
21
KY
36%
62%
150%
128%
31
SD
54%
54%
140%
110%
41
AL
11%
25%
100%
89%
51
Effect of 2014 Medicaid Expansion
1. States like Minnesota will reduce the number of
Medicaid recipients, which will force these people
to pay something for Rx or receive nothing.
2. States such as Kentucky, Alabama, and about 40
others will add Medicaid recipients.
3. Projection: Obamacare will add 15,000,000 to
Medicaid rolls by 2019.
22
11/20/2014
Obamacare Medicaid Enticement
Year
Federal Share
Each State’s Share
2014-2016
100%
0%
2017
95%
5%
2018
94%
6%
2019
93%
7%
2020
90%
10%
2021
Much lower
Much higher
Patient Care?
In a 2010 poll conducted for the Physician’s
Foundation, 40% of doctors surveyed said they
would “retire, seek a non-clinical job in
healthcare, or seek a job unrelated to
healthcare” by 2014.
Primary reasons:
1. Lower Medicare/Medicaid reimbursements.
2. Administrative complexities.
23
11/20/2014
Year 2014: Impact on the Young
Old Health Insurance Premium Standard:
- Aged 65+ premium costs limited to
5 times premium cost of younger persons
New Health Insurance Premium Standard:
- Aged 65+ premium costs limited to
3 times premium cost of younger persons
Year 2014: Impact on the Young
Per Dept. HHS 11/27/2012
Result of Change in Premium Cost Limits
18-24 year olds
25-49 year olds
50- 54 year olds
55-65 year olds
65+
↑ 45%
↑ 35%
↓
5%
↓
12%
↓
13%
24
11/20/2014
Year 2014:
Example Impact on the Young Dept. HHS 11/27/2012
22 year old female
2012
2014
Health Premium cost
Average Expenses
Less penalty for no HI
$ 2,068 $ 3,000
$ (1,642)
( 95)
----------Savings for NOT purchasing
Heath Insurance
$ 1,263
Congressional Budget Office
Recommendation WSJ 11/27/12
To counter the disparity of health insurance
premium costs between young and old, raise
Medicare eligibility age to 67 from 65.
This would obligate more seniors to buy
insurance through their employers or through
the heath care exchanges.
25
11/20/2014
Years 2015 and 2016
Individual Penalty
2015: Per person penalty $ 325
2016: Per person penalty $ 695
Employer Penalty is $ 2,000 per employee
2015 Only when 100 employees or more,
first 80 employees do not count
2016 Only when 50 employees or more,
first 30 do not count
Large Employer Penalty
. For 2016, more than 49 employees
For 2015, more than 99 employees
2015
2016
1. Total Employees
125
125
2. Excluded from penalty
(80)
(30)
45
95
3. Employees subject to penalty,
4. Penalty per employee for no MEC
5. Total Penalty
$ 2,000
$ 2,000
$ 90,000
$ 190,000
26
11/20/2014
Year 2017
States can allow businesses with more than
100 employees to purchase coverage through
SHOP.
Year 2018
40% excise tax on Cadillac plans
Note:
1.More than 60% of existing large employer
health plans are “Cadillac” by definition [valued at
over $ 10,200 for singles, $ 27.500 for families].
2. Unions are upset because their benefits are subject
to excise tax.
27
11/20/2014
Year 2019
???
Year 2014
TR TAM 1654-14 [At Page 5]
Self-Employed Health Insurance Deduction
Proprietors, partners, and 2% shareholders
may still claim this 100% deduction of
health insurance premiums on page 1,
Form 1040.
However …..
28
11/20/2014
TR TAM 1654-14 [at Page 5]
Self-Employed Health Insurance Deduction
Partners and S shareholders should follow prior IRS guidance
that has the entity reimburse the premium and report it as:
1. a guaranteed payment; or,
2. an employee wage, per Notice 2008-1
(except that FICA is now required in order to avoid the $ 100 per
day penalty unless it is a one employee arrangement).
The individual then washes out that extra income with a tax
deduction on page one of Form 1040.
TAM 1654-14
Thomson Reuters
Beginning with the 2014 tax year, employers are
precluded from subsidizing or reimbursing
employees for individual health insurance
policies on a pretax basis.
Employers can do any of the following:
29
11/20/2014
TAM 1654-14
1. Provide a tax fee fringe benefit in the form of an ACA
approved group health plan.
2. Treat premium reimbursements for individual policies as
taxable compensation subject to FIT plus FICA.
3. Provide Group insurance through the SHOP Marketplace
and a Section 125 plan for employee pretax funding
of an any employee premium.
Health Insurance
IRS Notice 2008-1: Health Insurance Premiums
a. S Corporation must issue payment.
b. S Corporation may pay either:
(1) Insurance company directly; or,
(2) Shareholder who submits a bill.
IRS Notice 2013-54 indicates that as of 1/01/14 pre-tax
reimbursements are subject to a $ 100.00 per day per employee
penalty. Thus, reimbursements have become reportable on Form W-2
Boxes 1/3/5.
30
11/20/2014
Health Insurance Limitations
for 2% Shareholders [IRC 162 (l)(2)]
1.
No deduction for self-employed health insurance is allowed for
any calendar month in which a shareholder or spouse is:
a. eligible to participate in
b.
any employer’s subsidized health plan.
Note: To avoid subsidy, all premium costs on behalf of a shareholder is
employee compensation [nothing from entity].
Health Insurance Limitations
for 2% Shareholders [IRC 162 (l)(2)]
2. The deduction cannot exceed earned income
from that entity.
3. The portion of the otherwise allowable
deduction that exceeds earned income is
reported on Schedule A, Form 1040, subject
to the 10.0%/7.5% AGI limitation.
31
11/20/2014
Health Insurance
Example: “S” Profit[Not Earned Income] of $ 10,000
W-2
Box 1
Box 3
Wages
$ 30,000 $ 30,000
Rx Premium
20,000
$ 50,000 $ 30,000 $ 30,000
Earned Income
- $ 30,000
Rx Premium
- $ 20,000
S/E Med. Adj.
- $ 20,000
Sched. A Med
-
Box 5
$ 30,000
-Total
-
Health Insurance
Example: “S” Profit of $ 10,000
W-2
Box 1
Box 3
Wages
$ 15,000 $ 15,000
Rx Premium
20,000
$ 35,000 $ 15,000 $ 15,000
Earned Income
- $ 15,000
Rx Premium
- $ 20,000
S/E Med. Adj.
- $ 15,000
Sched. A Med
- $ 5,000
Box 5
$ 15,000
-Total
-
32
11/20/2014
Health Insurance
Example: “S” Profit of $ 10,000
W-2
Box 1
Wages
$
-0Rx Premium
20,000
$ 20,000 $
-0- $
Earned Income
Rx Premium
S/E Med. Adj.
Sched. A Med
-
Box 3
$
-0-0$
-0$ 20,000
$
-0$ 20,000
Box 5
$
-0-Total
-
Health Insurance
Example: “S” Profit of $ 10,000
W-2
Box 1
Box 3
Box 5
Wages
$ 30,000 $ 30,000 $ 30,000
Rx Premium
20,000
20,000
20,000
-Total
$ 50,000 $ 50,000 $ 50,000
Earned Income
- $ 50,000
Rx Premium
- $ 20,000
S/E Med. Adj.
- $ 20,000
Sched. A Med
-
33
11/20/2014
What entry appears in Box 1/3/5?
Premium Cost of $ 20,000:
1. Should Box 3/5 grossed up to $ 21,700
to allow for FICA/Medicate?
2. Should Form 941 calculations that result in
a FICA/Medicare underpayment cause
the Entity to pay the full 15.3%?
“S” Corp Health Insurance
Deductions for 2% Shareholder
Through December 31, 2013
1. Add only to W-2 Box 1 payments made to insurance
company directly by corporation.
2. Add only to W-2 Box 1 payments made to insurance
company by shareholder reimbursed by corporation.
Since January 1, 2014
1. Shareholder becomes part of group plan; no longer selfemployed?? [AICPA seeking clarification].
2. For reimbursements, must add payments to all three boxes
of W-2; claim SE deduction. No doubt about this.
34
11/20/2014
Special Note:
1. When the “S” corporation shareholder is the only
employee in the company, the old rules continue to
apply: adjust Form W-2 Box 1 only.
2. But, when there are two or more employees:
a. For reimbursements, adjust Boxes 1/3/5.
b. For direct corporate premium payment,
employee’s W-2 requires no adjustment.
c. But, for shareholder???
35
11/20/2014
Wages and Other Income
Chapter 2
Pages 27-36
2014 Year Due Dates
p. 28
1. Form W-2 earlier of:
a. February 2, 2015
b. 30 days after employee separates.
2. Form W-3 later of:
a. March 2, 2015 – paper
b. March 31, 2015 – electronic
1
11/20/2014
Medicare .9% Surcharge
Form 8959
Examples
(1)
(2)
(3)
Wages
$ -0$ -0$ 130,000
SE Income
130,000 220,000 $ 145,000
Thresh hold $ (200,000) (200,000) (200,000)
Excess
N/A
20,000
75,000
Tax Due
N/A $ 180
$
675
p. 31
(4)
$ 260,000
$ 140,000
(250,000)
$ 150,000
$ 1,350
Taxable versus Non-Taxable Income
p. 33/34
• Everything is taxable except that which is
specifically excluded, legal or illegal.
• Examples of Taxable:
1. Bartering.
2. Cancellation of Debt.
3. Gambling Winnings.
4. Prizes & Awards.
5. Jury Pay.
2
11/20/2014
Gambling: W-2G
IRC 165(D)
Activity Receipt Wager Winning Loss
Black jack $ 3,800 $ 3,000 $ 800 $
Poker
$ 2,000 $ 3,000 $
- $ 1,000
Slots
$ 2,500 $ 3,000 $
- $ 500
Results
$ 8,300 $ 9,000 $ 800 $ 1,500
Form 1040, Line 21:
$ 8,300 - $ 7,500 =
$ 800
Schedule A [no 2% AGI] :
$ 800
Taxable versus Non-Taxable Income
p. 33/34
• Examples of Non-Taxable:
1. Return of Capital
2. Payments for bodily damage.
3. Gifts/inheritances.
4. Disaster Relief Benefits
5. Most Public Welfare Benefits.
6. Life Insurance Proceeds?
3
11/20/2014
Analysis of Life Insurance Benefits
Affluence Status
Top 10%
Middle 40%
Lower 50%
Percent of Built-in Gain
Within Life Insurance Proceeds
65.1%
28.4%
6.5%
2010 Proposal: Capital Gains tax of 15% on upper 50%.
Repayment of Excess
Unemployment Compensation
p. 36
1. Repayment $ 3,000 or less:
- Form 1040, Schedule A, subject to 2.0% AGI
2. Repayment more than $ 3,000:
- Form 1040, Schedule A, no AGI test; or,
- Form 1040, page , IRC 1341 tax credit.
4
11/20/2014
State Tax Refunds Taxable?
p. 35
Exceptions to federal taxation:
1.
2.
3.
4.
5.
Use of the Standard Deduction.
Application of AMT.
Tax refund applicable to more than 1 year.
Sales tax option on Schedule A.
Application of itemizations phase-out on
Schedule A.
5
11/20/2014
Net Operating Loss
Chapter 3
Pages 37 - 44
Net Operating Loss
p. 37
1. Pertains to the loss of income due to the
operation of a “business”.
2. A person is “in business” when he/she
performs a service with the intent of
generating revenue for profit.
3. When business expenses exceed business
income, a net operating loss exists.
1
11/20/2014
Example: Ronda
W-2 Income
Schedule C
Realty Sale
Interest
Capital Loss
Sub-total
Standard Ded.
Personal Exempt.
Taxable Income
NOL
Business
$ 1,225
(5,000)
2,000
(1,775)
$(1,775)
General Rule
1.
2.
3.
4.
5.
p. 37
Other
425
(1,000)
( 675)
$
Total
$ 1,225
(5,000)
2,000
425
(1,000)
(2,650)
(5,800)
(3,700)
$(11,850)
p. 38
NOL carry back 2 years/carry forward 20.
Carry back can be waived with timely election.
Absent timely election, must carry back.
Election to forego carry back may not be revoked.
An amended return to make the election must be
filed within 6 months of return due date – without
extension.
2
11/20/2014
General NOL Rule:
Carry-back 2 years; Carry-forward 20 years
Loss Year
Carry back
Years
Conditions
Any
2
General Rule
Any
3
-Federal Disaster Area:
-- Farming Loss
-- Any business receipts $ 5 M or less
-Fire/Storm/ Casualty/Theft
Any
5
Farming Loss
2008 & 2009
2008
5
2,3,4,5
2008 & 2009
3,4,5
Federal Disaster Area
Revenues not more than $ 15 million
5 year carry-back limited to 50% of
income; 3,4 years 100%
2014 NOL of $ 76,000
Carried Back 2 years
Original 2012 Taxable Income
Add-back:
Capital Loss
IRC 1202/199 Deductions
Special allowances/SSA/IRA
Schedule A medical adjustment
Personal Exemptions
Modified AGI
2014 NOL Carryback
NOL carried to 2013
p. 40
$ 29,475
3,000
225
3,700
36,400
(76,000)
$(39,600)
3
11/20/2014
Claim for Refund
p. 42
Must be filed by the later of:
1. Three years from the date the original return was filed; or,
2. Two years from the date the tax was paid.
Example:
A claim for refund on a 2012 return, filed 10/15/2013, with an NOL must be
filed by 10/15/2016. [within 3 years of filing]
The law presumes timely filing. Three year clock runs from the original due
date plus extension.
Example:
Original return due 10/15 but filed:
Amendment filed:
Three year clock expired:
10/31/2014
10/27/2017
10/15/2017
Form 1045 Filing
p. 43
Use Form 1045:
a. 90 day refund.
b. File by 12/31 of the year after loss year.
Example:
Loss year is 2013
File 1045 by 12/31/2014
4
11/20/2014
Form 1040-X Filing
p.44
Use Form 1040-X:
1. Within 3 years of due date plus extension
2. For the tax return that reports the loss year.
Example:
Loss Year is 2013
Tax return is due 10/15/2014
File 1040-X by 10/15/2017
Form 1040-X Filing
p. 44
Do NOT file Form 1040-X to:
1. Claim 2d refund until 1st refund received.
2. Correct math errors discovered by the IRS.
3. Provide a missing schedule or document.
Note:
1. 1040-X address not same as 1040 address.
2. 1040-X may take 3 months to process.
3. Call 1-856-464-2050 Toll Free to check status.
5
11/20/2014
IRS ISSUES
Chapter 04
Pages 45 - 54
IRS Scam Alert
p. 45
1. Call IRS at 800-366-4484.
2. Complain to FTC at www.FTC.gov
3. Forward scam e-mails to: phishing@irs.gov
1
11/20/2014
Circular 230 Update
p. 45
Section 10.35:
1.
Practioner practicing before IRS must be competent.
2.
Competence requires having the appropriate level of knowledge,
skill, thoroughness, and preparation necessary for the matter at
hand.
No need to add a footnote to an e-mail warning about reliance and
imposition of penalties. OPR Chief Hawkins: stop using those
words!
Circular 230, Part B, Section 10.34(d)
Relying on Information Furnished by Clients
A practioner advising a client to take a position on a tax
return …generally may rely in good faith without verification
upon information furnished by the client.
The practioner may not, however, ignore the
implications of information furnished to, or actually
known by, the practioner.
2
11/20/2014
Circular 230, Part B, Section 10.34(d)
Relying on Information Furnished by Clients
[The practioner] … must make reasonable inquiries if
the information furnished appears to be incorrect,
inconsistent with an important fact or another factual
assumption, or incomplete.
Revenue Procedure 80-40
The penalty under section 6694(a) of the Code will
generally not apply when a preparer in good faith relies
without verification upon information furnished by the
taxpayer.
Thus, the preparer is not required to audit, examine, or
review books and records, business operations, or
documents or other evidence in order to verify
independently the information furnished to the preparer or
which was actually known by the preparer.
3
11/20/2014
Revenue Procedure 80-40
Additionally, some sections of the Code require the
existence of certain facts and circumstances, such as the
maintenance of specific documents, before a deduction
may properly be claimed.
The preparer shall make appropriate inquiries to determine
the existence of facts and circumstances required by a
Code section or regulations as a condition to claiming a
deduction.
Revenue Procedure 80-40
However, the preparer:
1. May not ignore the implications of the information …
2. Shall make reasonable inquiries if the information as
furnished appears to be incorrect or incomplete…
4
11/20/2014
Karen Hawkins, OPR, 2010
“You may reasonably rely on information provided by
your client…but there is a second piece to [10.34(d)]
that everybody doesn’t seem to read … that …essentially
says …if you’ve got information that you know is
incorrect or that you think is inconsistent …then you
don’t get to just rely on your client.
You have to ask some questions”.
IRS Stricter on Preparer Penalties
AT Nov 2013
1. TIGTA report:
a. IRS is weak enforcing IRC 6694 tax preparer penalties.
b. Enforcement penalties have been a priority as intended.
c. Per IRS October 2014, 47% of complaints logged against
preparers 10/01/2012 and 9/13/2013 not started.
2. TIGTA recommends and IRS agrees that:
a. Evaluating tax preparer performance is a priority.
b. IRS manual should be updated to require that IRS
managers and field agents pay more attention to tax
preparer performance.
5
11/20/2014
Return Preparer Visitation
1. IRS sends 10,000 letters annually to preparers to insure
adherence to professional standards.
2. Publication 1345 for Electronic Return Originators .
3. Improper Earned Income Tax Credit: $ 500 penalty.
4. Office Visitations:
a. Approximately 2,500 visits; mostly unannounced.
b. Review of operating procedures.
c. Review of EITC diligence. [25% claims fraud; $ 13 Bill]
d. Requests for specific Forms 8879. [Electronic file]
e. Copy of fee schedule/engagement letter.
Return Preparer Visitation
5. Data Driven Visitations to firms with:
a. Large percentage of EITC returns.
b. Greater than average ERO error rate.
c. Consumer complaints.
d. Statistically larger IRS adjustments.
e. Association with problem tax return preparers.
6
11/20/2014
Itemized Deductions As Percent of AGI
AGI
Medical
Taxes
Interest
$ 15,000 –
$ 30,000
2.4%
10.5%
30.8%
6.8%
$ 30,000 –
$ 50,000
12.3%
7.7%
18.1%
4.4%
$ 50,000 –
$ 100,000
7.1%
6.1%
10.7%
2.7%
$ 100,000 –
$ 200,000
4.6%
5.4%
6.9%
1.9%
$ 200,000 –
$ 250,000
8.6%
7.3%
7.4%
2.4%
Over $ 250,000
Incomplete
Incomplete
Charitable
Incomplete
Circular 230 Update
Incomplete
p. 46
Section 10.31:
Practioner cannot deposit IRS check issued to
a taxpayer.
Section 10.37:
No practioner advice without:
1. Knowing facts.
2. Identifying issue.
3. Applying Rule of Law
4. Analysis.
5. Drawing a reasonable conclusion.
7
11/20/2014
Delinquent Return Refund Hold Program
p. 47
1. IRS can delay a refund for up to six months if it
determines there are issues with prior year tax returns.
2. Processing refunds too quickly allowed too many
taxpayers to escape detection of unfiled returns.
3. A taxpayer denied a refund is more likely to work with
IRS to resolve prior year problems.
4. This form of “catch before release” has generated more
than $ 1.1 billion in delinquent taxes since 2009.
Identity Theft
p. 48
1. If you suspect theft, file Form 14039, Identity Theft
Affidavit.
2. If IRS suspects theft, it will send Letters 5071-C or
4883-C to taxpayer.
8
11/20/2014
Identity Theft Cost
FNC 11/11/2013
To date the IRS has issued more than
$ 4,000,000,000
in tax refunds to identity thieves.
Identity Protection IPINs
p. 48
1. IRS may issue IP PINs issued:
a.
b.
c.
d.
2014
2013
2012
2011
1,200,000
770,000
600,000
350,000
2. Per TIGTA 10/29/2014 IRS failed to issue IPINS:
a. Those with an identity theft indicator
532,637
b. Those with personal information lost or
stolen or breached by IRS itself
24,628
3. PIN is unique and issued separately for each of four years.
9
11/20/2014
IRS Identity Verification Service
If taxpayer receives Letter 4883C/5071C, the practioner
should:
1. Complete Form 2848, Power of Attorney.
2. Assemble copies of tax returns, current and prior.
3. Then:
a. Complete IRS questionnaire at idverify.irs.gov. Or,
b. Call TPL at 800-834-5084.
IRS Steps to Control Fraud
p. 49
1. No more than three tax refund deposits to a single
account.
a. The purpose is to catch bad tax return preparers.
b. More than 4,400 Practioners have been found to
have directed multiple refunds to a single account.
2. Check compliance with Form 8867: $ 500 per failure.
3. IRS to Initiate a pilot program to provide e-file PINS in
Florida, Georgia, and the District of Columbia.
4. Slow down refunds in general.
10
11/20/2014
IRS Advisory Council Recommendation:
Identity Theft 11/15/12
p. 50
1. To better control identity theft in tax filings delay
refunds until verification of taxpayer identity.
2. Consider:
a. Requiring fingerprints or other unique identifiers
associated with Social Security numbers.
b. Delay issuing early refunds to January filers:
(1) Refund 25% of refund in January;
(2) Refund remaining 75% upon identity verification.
IRS Acting Commissioner Steven Miller responded positively.
Bar Coding SSN’s
p. 50
1. IRS is changing the notice format of its letters to refer to
taxpayers as XXX-XX-1234.
2. Practioners should respond similarly: XXX-XX-1234.
11
11/20/2014
Victims of Preparer Fraud
p. 50
1. Tax return preparers have been stealing their clients’
identities in order to file fraudulent tax returns.
2. Office of Chief Counsel has complained that IRS is too
slow to return refund money to rightful taxpayer. Some
have been waiting more than five years.
3. IRS Commissioner John Koskinen: refunds will be
issued to those who provide:
a. Evidence of the filing of a police report.
b. Certain substantiation requirements [undefined].
Electronic Signatures
p. 51
1. Modified rules have expanded the current two-PIN
process to one that uses an electronic signature.
2. Rules apply to Forms 4868, 2350, 8878, and 8879.
3. Rules located at:
irs.gov/uac/Electronic-Signature-Guidance-for-Forms8878-and-8879.
12
11/20/2014
New Form 2848
p. 52
1. New language at Item 3 as of July 2014:
“I authorize my representative to receive and inspect
my confidential tax information and to perform acts that
I can perform with respect to tax matters described
below. For example, my representative shall have the
authority to sign any agreements, consents, or similar
documents.”
2. Best way to get Form 2848 to IRS is by FAX.
Power of Attorney Update
p. 52/53
IRS has promised to update its system to allow for:
1. Revocations and withdrawals.
2. Accommodate business entities.
3. Practioners to manage the CAF by accessing listings of
active authorizations.
13
11/20/2014
ITIN Issues
p. 53
Former ITIN Rules
ITINS for aliens are supposed to be valid for five years;
alien was supposed to reapply.
New ITIN Rules
1. ITIN expires if not used in five consecutive years.
2. If ITIN is used, it remains active.
3. Unused ITINS to be deactivated in 2016.
IRS Correspondence Process
p. 53
1. An IRS correspondence request is difficult to resolve
since it is often hard to locate the assigned examiner.
2. The correspondence exam group struggles when it
receives more than 10-20 pages of documentation.
3. IRS admits that it has no methods in place to insure a
timely response.
Guidance to Practioner:
1. Document and carefully index your response.
2. Follow-up. Follow-up. Follow up.
14
11/20/2014
New Audit Guideline: Jan 2014
p. 53
1. For certain taxpayers, IRS document requests must be
satisfied within 49 days.
2. Applicable to:
a. Entities with assets of $ 10,000,000 or more; or,
b. Individuals with assets of $ 10,000,000 or more.
3. Procedure:
a. Initial IRS requests under flexible deadlines.
b. If deadline not met, 49-day clock begins.
c. Taxpayer to receive 2 warnings during 49 day period.
d. Absent compliance, IRS can seek court summons
and divulge its audit request to general public.
First Time Penalty Abatement
Abatement for failure to:
1. File
2. Pay
3. Deposit
Available for a single time period if:
1. First time problem; recent three years of clean history.
2. No significant prior penalty.
3. Reasonable cause.
Request Abatement By:
1. Letter to the IRS.
2. Telephone call to Practioner Priority Service 866-860-4259.
15
11/20/2014
12 Audit Red Flags
Earning more than $ 200,000: Audit rate 3.7%
Mismatch of Forms 1099 and W-2 income.
3. Large charitable contributions over “norm”. [2%-7% of AGI]
4. Improper home office deductions.
5. Improper rental real estate losses. [passive versus active]
6. Improper meals and entertainment deductions. [“S” Corp.]
7. Claiming 100% business use of vehicles.
8. Filing Schedule C with large losses. [more than $ 25 k for 3 years]
9. Businesses using the cash method of accounting.
10. Foreign Bank Accounts
11. Improper reporting of cash deposits above $ 10,000.
12. Itemized deductions beyond parabolic curve.
1.
2.
Fresh Start Initiative
1. Make it easier to settle tax debt.
2. Offer-in-Compromise periods:
a. Lump Sum settlement within 6 months:
RCP: reasonable monthly collection times 36.
b. Short Term payments from 5 months to 24 months.
c. Discontinued 10 year deferred payment option.
Note: effective 1/1/2014 application fee is $ 186.00
16
11/20/2014
Fresh Start Initiative
1. Installment Agreements (Fee is $ 120 at 1/1/2014):
a. Statutory:
under $ 10,000.
b. Streamlined: from $ 10,000 to $ 50,000.
2 For obligations of $ 25,000 or less:
a. Term up to 72 months.
b. No: managerial approval/Form 433/Tax Lien.
3. For obligations greater than $ 25,000 up to $ 50,000:
a. Term up to 72 months.
b. Direct deposit required.
c. File Form 433.
Comfort Letters
Avoid them.
But, if a letter is issued, provide historical,
factual statements – not theoretical,
prospective information.
Do not “confirm” self-employed status; rather, say client
represents Schedule C is the appropriate form to file.
17
11/20/2014
Proprietorship Problem
TIGTA STUDY: Sept 7, 2007
Schedule C filers/Hobby Loss under IRC 183:
1.
2.
3.
Those with income above $ 100K, who also:
Filed a Schedule C for the years 2002-2005,
who also:
Claimed Schedule C losses in all four years ---
Avoided $ 2.8 Billion in
taxes in 2005
Proprietorship Problem
• IRS estimates inappropriate Schedule C filings result
in $ 30 Billion in unpaid taxes annually.
• These “businesses” are really hobbies.
18
11/20/2014
IRC 183
• IRC and Treasury Regulations do not require that the
taxpayer have a “reasonable expectation” of a profit;
rather,
• There need only be the “objective” of making a profit.
No “bright line” definition of a business:
but, there are nine guideline factors
1.
2.
3.
4.
5.
6.
7.
8.
9.
Manner the taxpayer carries on the activity.
Expertise of taxpayer/his advisors.
Taxpayer time and effort.
Expectation of asset appreciation.
Prior taxpayer success.
Profit/loss history of the activity.
Amount of occasional profit, if any.
Taxpayer’s financial status.
Elements of personal pleasure in the activity.
19
11/20/2014
General guidelines:
• Was the non-farm business profitable in 3 of last
five consecutive years?
• Was the farm/breeding business profitable in 2 of
the last 7 years?
Note: in 1969 House Ways & Means Committee felt
that a Schedule C reporting losses of more than $ 25K in
3 or more years was a hobby.
History of IRC 183
• Created in 1943 because Marshall Field, owner
of the Chicago Sun, used his publications to
promote a liberal agenda.
• Federal Govt. believed that the Schedule C
losses were used to offset Field’s personal
income, thereby enabling him to finance his
liberal agenda with ”lost” tax revenues.
20
11/20/2014
IRC 183 Continuing Problems
• In 2003 an IRS correspondence examination [no
books/records] of 148 Schedule C’s with continuing losses
determined:
a. 139 were “hobbies”.[94%]
b. those taxpayers owed $ 372,000.
• A follow-up study found that 51% of those same tax
payers continued to file Schedule C losses in later years.
TIGTA Recommendations
• Establish a “bright line” definition of a business.
• Coordinate with tax preparer organizations to encourage
compliance with existing provisions under IRC 162 and
212
21
11/20/2014
Deferred Compensation
Chapter 5
Pages 55-60
Two Classifications
p. 57
1. Non-Statutory:
a. No special tax treatment.
b. Compensation reported on W-2, Box 12, Code V.
2. Statutory:
a. Employee Stock Purchase [IRC 423]
(1) Partial ordinary income
(2) Partial capital gain/loss.
b. Incentive Stock Options [IRC 422]
(1) All capital gain/loss.
1
11/20/2014
Three tests to minimize Ordinary Income
p. 57
1. Do not sell stock within 2 years of grant date.
Example: Grant date
Jan 2013
Do not sell prior to
Jan 2015
2. Do not sell stock within 1 year of purchase date.
Example: Purchase Date
Jan 2014
Do not sell prior to
Jan 2015
3. Remain an employee from grant date until at least 3
months prior to exercise date.
Example: Purchase Date
Jan 2014
Do not quit prior to
Oct 2013
ESSP/ISO Differences
p. 58
Employee Stock Purchase Plan [IRC 423]:
1. Usually at a discounted price (not more than 15%)
2. An employee can purchase on a regular basis.
Incentive Stock Option Plan [IRC 422]:
1. Usually has a minimum service obligation.
2. Has a pre-determined expiration date.
3. Often used as an alternative form of compensation.
4. FMV over option price subject to AMT.
2
11/20/2014
Employee Stock Purchase Plan
Selling Price
Grant Value
Exercise Price
Basis
Ordinary income
Capital Gain/Loss
Grant
Step 1
$ 100
( 85)
-----$ 15
-
Sale
Step 2
$ 150
(100)
-----$ 50
Incentive Stock Option Plan
Selling Price
Grant Value
Exercise Price
Ordinary income
Capital Gain/Loss
Grant
Step 1
$ 100
( 85)
-----$ N/A
-
Sale
Step 2
$ 150
(85)
-----$ 65
p. 58
Short term
Variation
$ 75
(85)
---$ (10)
p. 58
Short term
Variation
$ 75
(85)
---$ (10)
3
11/20/2014
Jeffrey Chou Case
p. 60
1. Purchased stock for $ .05 when it was worth $ 64.69.
2. Decided to hold stock for one year for capital gain.
3. For AMT purposes, stock gain was $ 64.64 per share
when exercised purchase option.
4. By sale date, actual gain was $ 17.59 per share.
Result: AMT Tax Owed:
Total Stock Value
Excess of tax over
stock value
$ 1,962,365
(1,879,718)
$
82,647
All proceeds to IRS – and then some!
4
11/20/2014
Retirement Resources
Chapter 6
Pages 61-72
Primary Retirement Resources
1.
2.
3.
4.
5.
p. 61
Pension Plans
Annuities
Individual Retirement Accounts
General Savings Accounts
Social Security
1
11/20/2014
Will Social Security survive to 2100?
WSJ 10/20/12 p. B9
1. If the SSA formulas do not change, beginning in
2036 all benefits will be reduced to 70% of
scheduled amounts.
2. If the FICA cap on W-2 Box 1 earnings is removed,
according to SSA the system in its present form
could last at least 75 years.
3. Other modification?
SOCIAL SECURITY
p. 62
What it is.
How it Works.
2
11/20/2014
American Genesis
1601: English Poor Law Act
Government has a responsibility to assist the
“deserving” poor -- versus the “undeserving” poor.
1795:
Thomas Paine’s “Agrarian Justice”
A 10% tax on inherited property to fund:
a. A one-time stipend to a 21 year old starting out on
his own.
b. Annual benefits to those age 50 and above to
ward off poverty.
American Social Law History
1776: National Pension Program for Revolutionary War Soldiers
1862: The Civil War Pension Program [for service related disability]
1890: Service related disability dropped: became any disabled
Civil War Veteran
1906: Disability requirement dropped: became any Civil War Veteran
1910: CWP for Civil War Veterans included coverage for
disability, survivors, and old-age benefits similar to
the present version of Social Security
Note: The last payments to a spouse entitled to Civil War Pension
benefits were issued in 1999 : 135 years after war ended.
3
11/20/2014
FDR & The Great Depression
1929: Stock Market crash : no money, no jobs.
1934: President’s Committee on Economic Security
a. 5 cabinet members chaired by Labor Secretary.
b. Within 6 months designed the first U.S.
comprehensive Social Insurance program.
c. Became law in 1935.
Note: some claimed FDR was a communist for doing this.
Implementation
1. Social Security “board” 3 bi-partisan members.
2. Administration handled by U.S. Post Office.
3. First Social Security system (not card) record:
* John David Sweeney Jr.
New Rochelle NY at age 23
055-09-0001
* Died in 1974 at age 61; never received a
payment; widow collected until 1982
4
11/20/2014
The Card
1. SS Board crafted a numbering system based
upon a 3 digit “zip” code, beginning with the
eastern most state to be assigned 001-XX-XXXX.
2. The SSB Chair, John Winant, was from NH. He
decided to assign 001 to NH, not Maine, but
refused to give the first issued card to himself.
3. First number: 001-01-0001 given to Grace D.
Owen of Concord NH 11/24/1936.
Social Security Trivia
1. The card’s designer was paid $ 60.
2. From 1937-1939, “lump-sum” benefits only.
3. First lump sum to Ernest Ackerman, Cleveland.
a. A participant for one day before retiring.
b. Contributed: $ .05
c. Received:
$ .17
5
11/20/2014
Trivia (continued)
4. First monthly benefits paid 1/31/1940:
Ida May Fuller Vermont
a. Total she paid-in:
b. First check received:
b. From 1940-1975
total received:
$ 25.00
$ 22.54
$ 22,889.00
Milestone Dates
1935: Enactment of insurance benefits for the
the contributing worker
1937: First lump-sum check issued
1939: Benefit program changed to include:
a. For a living retired worker his:
Spouse and minor children.
b. For a deceased retired worker his:
Spouse, children, and dependent parents
6
11/20/2014
Milestone Dates
1939: Federal Insurance Contributions Act
[FICA] taxes to fund the new benefits.
1940: First monthly benefit check issued to Ms.
Fuller.
Note: No SS benefits were paid to a worker
earning over $ 15.00 per month at
another job.
Milestone Dates
1950: Cost of Living Adjustments [COLA]
a. The 1950 COLA was 77.0%. [first one!]
b. The 1952 COLA was 12.5%
c. In 1972 automatic COLA provisions.
Historical COLA
2014 1.5% Average monthly increase $ 19
2013 1.7% Average monthly increase $ 21
2012 3.6% Average monthly increase $ 43
2011 0.0%
2010 0.0%
7
11/20/2014
Milestone Dates
1956 Women allowed retirement at Age 62
1957 Disability coverage added
1961: Men permitted retirement at Age 62
1965: Medicare added. First Medicare Card:
Harry S Truman 7/30/1965
1970: Supplemental Social Security Income
Milestone Dates
1983:
p.64
Changed full retirement age:
Age 65
Those born prior to 1937
[pro-rated 1938 – 1942]
Age 66
Those born 1943-1954
[pro-rated 1955-1959]
Age 67
Those born 1960 or later
8
11/20/2014
Key Concepts
1. Full benefits at Full Retirement Age [FRA]
2. Early retirement benefits reduced by 20-30%
based upon birth year.
3. Full benefits increased by 8% per year for
each year of delay up to Age 70.
4. Must work 10 years to be eligible.
5. Benefits based upon best 35 years, indexed
for inflation.
Qualified Worker
1. Must have 40 quarters of work history
2. Prior to 1978, an earnings test based on 40
separate quarters.
3. Subsequent to 1977, a dollar test:
a. 2015 per Quarter: $ 1,250 = $ 5,000 for year.
b. 2014 per Quarter: $ 1,200 = $ 4,800 for year.
c. Maximum credit per year: 4 quarters.
9
11/20/2014
“Best” 35 Years
1. All wage-earning years through Age 60 are
adjusted for inflation.
2. Years above Age 60 use absolute value.
3. From all work years, the best 35 are chosen.
4. Best 35 averaged for primary insurance
amount [PIA].
5. The actual worker check is approximately
34% of the PIA.
“Best 35”:
Zero Profit Example: Sched. C
Assume:
25 years profit $ 10,000; 10 years zero profit.
1.
25($10,000) + 10 (zero) = $ 250,000
2. $ 250,000/35 = $ 7,428
3. $ 7,428/12 = $ 619 x 34% = $ 210.40 .
10
11/20/2014
“Best 35”: Non-Farm Option
Assume:
25 years profit $ 10,000; 10 years non-farm option.
1.
25 ($10,000) + 10 ($ 2,000) = $ 270,000
2. $270,000/35 = $ 7,714
3. $ 7,714/12 = $ 643 x 34% = $ 218.60
SPECIAL MINIMUM PIA
1. Applies to those of low earnings of:
a. Covered employment; and/or,
b. Self-employment.
2. With a:
a. Minimum of 10 years coverage; but,
b. No more than 30 years of coverage.
11
11/20/2014
SPECIAL MINIMUM PIA
Participation Years
PIA
Participation Years
PIA
11
38.20
21
434.10
12
77.80
22
473.40
13
117.60
23
513.60
14
157.00
24
553.10
15
196.20
25
592.50
16
236.00
26
632.70
17
275.60
27
671.80
18
315.20
28
721.50
19
354.70
29
751.10
20
394.40
30
790.60
Social Security Planning
Fact Pattern: Jack & Jill
Jack, the husband:
a. Elects Medicare at Age 65; costs $ 170 per month.
b. Does not apply for SSA; plans to work until Age 70.
c. If retired, would receive a monthly check of:
(1) At age 66, $ 2,000;
(2) At age 70, $ 2,640.
12
11/20/2014
Social Security Planning
Fact Pattern: Jack & Jill
Jill, Jack’s wife, is one year younger than Jack.
At Age 66, Jill would receive:
a. $ 800 on her own work record; or,
b. $ 1,000 based on 50% of Jack’s $ 2,000 Age 66
PIA—if he is retired.
Recommend A Social Security Strategy
Age
Full PIA at 66
Full PIA at age 70
50% of Spousal
Benefit:
Medicare B
Jack
66
$ 2,000
$ 2,640
Jill
65
$ 800
$ 1,056
$ 400
$ 170
$ 1,000
$ 170
13
11/20/2014
Social Security Planning:
Decision
1. At 65, Jack goes on Medicare; pays for it
himself.
2. At 67, when Jill is 66, Jack elects Social
Security retirement status. But:
a. Jack places his record on suspended status.
b. Jack’s personal record grows 8% per year.
Social Security Planning:
Results
1. At 66, Jill can now choose:
a. Her own $ 800; or,
b. $ 1,000 [50%] of Jack’s suspended $ 2,000.
2. At 70, Jack’s benefit is $ 2,640; Jill still receives spousal
benefit of $ 1,000, limited ,while Jack is alive, to his
maximum Age 66 benefit.
3. At Jack’s death, Jill receives widow’s benefit that is
Jack’s $ 2,640, the amount he was receiving prior to death.
14
11/20/2014
Social Security Planning Results
Assume in 2013 Jack becomes Age 65
Net Medicare Cost
2013 (Jack 65)
2014 (Jack 66)
2015 (Jack 67)
2016 (Jack 68)
2017 (Jack 69)
2018 (Jack 70)
2019 (Jack 71)
Jack
Jill
(2,040)
(2,040) (2,040)
(2,040) 9,960
(2,040) 9,960
(2,040) 9,960
(2,040) 9,960
29,640 9,960
Net SSA
(2,040)
(4,080)
7,920
7,920
7,920
7,920
39,600
Social Security Planning: Total Benefits
Jack’s $ 2,000 at Age 66 versus $ 2,640 at Age 70
Age
66
67
68
69
70
Age 66 Value
$ 24,000
$ 24,000
$ 24,000
$ 24,000
$ 96,000
Age 70 Value
$
-
15
11/20/2014
Social Security Planning: Total Benefits
Jack’s $ 2,000 at Age 66 versus $ 2,640 at Age 70
Age
66 - 70
71
72
73-83
Totals
Age 66 Value
$ 96,000
$ 24,000
$ 24,000
$ 264,000
------------$ 408,000
========
Age 70 Value
$ 31,680
$ 31,680
$ 348,480
------------$ 411,840
========
Social Security Tax Impact
If Jack works to 70, tax on Age 66-69 could be:
Gross Receipts
Less tax of:
$ 96,000 x 50% x 25%
Time Period
Age 66 – 83
$ 408,000
Time Period
Age 70 – 83
$ 411,840
(12,000)
$ 396,000
$ 411,840
Note: Due to Jack’s benefit suspension, Jill or Jack
receives an extra $7,680 annually, plus COLA.
16
11/20/2014
Benefit Projection:
Single/FRA 66/$ 2,500 per month
Claim SSA at
62
66
70
Die at 85 Die at 90 Delta
$ 522,100 $ 635,200 $113,100
$ 575,000 $ 725,000 $150,000
$ 600,600 $ 798,600 $198,000
Increase in Benefits Due to Suspension
Age 70
$ 600,600 $ 798,600
Age 62
(522,100) (635,200)
Delta
$ 78,500 $ 163,400
Maximum Social Security Benefit
Per SSA 10/31/2013
2014
2013
$ 2,642
32%
$ 3,487
$ 2,533
32%
$ 3,344
Estimated Annual Pension:
Claiming SS at Age 66
Claiming SS at Age 70
$ 31,704
$ 41,844
$ 30,396
$ 40,128
Annual gain by waiting
$ 10,140
$ 9,732
Full Retirement Age
Increase of 8% times four years
Estimated Age 70 monthly check
17
11/20/2014
Social Security Planning
Fact Pattern: Paul & Paula
1. Paul at Age 66 would receive $ 1,000.
2. Paula at:
a. Age 66, on her record, gets
$
b. Age 66, on Paul’s record, gets
$
c. At Age 62, on her record, gets
$
d. At Age 62, on Paul’s record, gets $
400
500
320
375
Recommend a strategy.
Strategy: Fact Pattern: Paul & Paula
1. At Age 62, Paula applies for retirement
using the Restricted Spousal Application.
2. Paula, from Age 62 to Age 70 receives $ 375 per
month on Paul’s record, not hers!
3. Meanwhile, Paula’s own retirement benefit of $ 400
grows to $ 528 by Age 70, which is now larger than
the $ 500 which is 50% of Paul’s $ 1,000.
18
11/20/2014
Strategy: Paul & Paula
Benefits: Early (Reduced); Normal (Suspended)
Early Retirement
Age 62-70
Age 71
Normal Retirement
Age 66-70
Age 71
Restricted
$ 375
$ 528
Self/Spousal
$ 320
$ 320
$ 500
$ 528
$ 500
$ 500
Facts: Bonnie & Clyde each Age 66
Age 66 SSA
Age 70 SSA
Clyde
$ 1,000
$ 1,320
Bonnie
$ 400
$ 520
50% of Bonnie
50% of Clyde
$ 200
$ 500
Strategy:
1. Bonnie claims 100% benefit on her own record:
$ 400.00
2. Clyde applies for 50% restricted benefit on Bonnie’s record:
$ 200.00
Total for Bonnie & Clyde:
$ 600.00
(which is $ 100 more per month than Bonnie would get if she
chose 50% of Clyde’s benefit.)
3. Meanwhile, Clyde’s “suspended” benefit is growing at 8% per year.
4. At 71, Clyde drops restricted spousal check, claims own SSA benefit:
$ 1,320
6. When Clyde drops from Bonnies record, Bonnie gets 50% of Clyde’s:
$ 500
New Monthly Total
$ 1,820
19
11/20/2014
Normal Retirement Age p.65
Age
Status
Circumstances
FRA Benefit
Percentage
Below Age 18
Child
Parent Retired
50%
Below Age 18
Child
Parent Deceased
75%
Any Age
Spouse
Caring for Worker’s
Child Under 16
50%
Age 0-22
Child
Disabled
50%
Age 50-59
Widow/Widower
Disabled
71.5%
Age 60 - FRA
Widow/Widower
Age 62
Dependent Parent
Deceased Child
75%
Age 62-65,66,67
Spouse/Former
Ex married 10 yrs
37.5 – 50%
71.5% - 100%
Age 62
Worker
80-70%
Age 65/66/67
Worker
100%
Adjustments for Maximum
Retired FRA: $ 300.60
Family Maximum: $ 535.00
Beneficiary
Original Benefit
Adjusted Benefit
Percentage
Insured Individual
300.60
300.60
56.20
Spouse
150.30
58.60
10.95
First Child
150.30
58.60
10.95
Second Child
150.30
58.60
10.95
Third Child
150.30
58.60
10.95
Total
901.80
535.00
100.00
20
11/20/2014
Adjustments for Maximum
Retired FRA: $ 300.60
Family Maximum: $ 535.00
Beneficiary
Original Benefit
Adjusted Benefit
Percentage
Insured Individual
300.60
300.60
56.20
Spouse
150.30
78.10
14.60
First Child
150.30
78.10
14.60
Second Child
150.30
78.10
14.60
535.00
100.00
Third Child
150.30
Total
901.80
Adjustments for Maximum
Retired FRA: $ 300.60
Family Maximum: $ 535.00
Beneficiary
Original Benefit
Adjusted Benefit
Percentage
Insured Individual
300.60
300.60
56.20
Spouse
150.30
117.20
21.90
First Child
150.30
117.20
21.90
535.00
100.00
Second Child
150.30
Third Child
150.30
Total
901.80
21
11/20/2014
Adjustments for Maximum
Retired FRA: $ 300.60
Family Maximum: $ 535.00
Beneficiary
Original Benefit
Adjusted Benefit
Percentage
Insured Individual
300.60
300.60
66.66
Spouse
150.30
150.30
33.34
First Child
150.30
Second Child
150.30
450.90
100.00
Third Child
150.30
Total
901.80
Spousal Benefit
p.67
1. Worker’s PIA times 50%.
2. Exceptions:
a. When family maximum benefits apply.
b. Spouse receives reduced benefit due to filing prior to
full retirement age.
Note:
Benefits are not reduced due to the spouse’s age if the
spouse is caring for a disabled child or a child below Age 16.
22
11/20/2014
“Spousal” Benefits Terminate When:
1. Child is Age 16, child-in-care benefits end.
2. Spouse dies; payments stop.
3. Spouse divorces worker. Ex-spouse benefits
may apply.
4. Worker dies; Survivor benefits may apply.
5. Divorced spouse re-marries before Age 60;
becomes current spouse of someone else.
Reduced Spousal Benefit
Spouse electing early retirement will never
obtain a full retirement spousal check.
Example:
Mary, Age 62, gets 37.5% of her husband’s
retirement check due to her early retirement.
When Mary becomes Age 66, she will not get a
50% spousal check ; always gets just 37.5% while
husband is alive.
23
11/20/2014
Spousal Benefit Requirements
1. Valid Marriage
Current
Former
Yes
Yes
2. Invalid marriage due to prior unknown impediment
Yes
Yes
3. Age 62 or more
Yes
Yes
4. Any age if caring for worker’s child below Age 16
Yes
No
5. Any age if caring for a worker’s disabled child
Yes
No
6. If not parent to worker’s biological child,
married to worker at least one year.
Yes
No
7. If not married to worker for at least one full year,
parent to worker’s biological child.
Yes
Yes
8. Married to worker at least 10 years.
N/A
Yes
9. Currently unmarried.
Yes
Yes
Re-Marriage
1. After Age 60, a qualifying widow or surviving
former spouse can remarry without loss of
benefits.
2. Re-marriage before Age 60 terminates survivor
benefits with respect to the former spouse.
Exception: A disabled spouse re-marrying after
Age 50 retains benefit status.
3. Former spouse benefits are restored if unmarried, due either to death or divorce.
24
11/20/2014
Who pays into the System
The Worker:
a. For retirement, 6.2% of gross pay up through
$ 117,000 [for 2014]; for 2013, $ 113,700.
b. For Medicare, 1.45 % of gross pay – no limit.
The Employer:
Matches employee contribution 100%
The Self-Employed:
a. The entire 15.3% up to $ 113,700.
b. Medicare at 2.9% above $ 113,700.
Who does NOT pay in
1. State/local government workers: Medicare only.
2. Election workers who earn less than $ 1,000.
3. Career federal employees hired prior to 1984
who chose not to go on Social Security.
4. College students working at their college.
5. Ministers who choose not to be covered.
6. Household workers earning under $ 1,800
annually.
7. Self-employed who earn less than $ 400.
25
11/20/2014
U.S. Life Expectancy
Birth Year
Life Expectancy
1789
1890
1930
1983
2000
35 years
42.4 years for men/44.4 for women
59 years for men/62.5 for women
81 years for men/84 for women
52% chance to reach 100 years of age
Sample 2011 Benefits: FRA 66
[Average actual 2011 Benefit: $ 1,082]
Work Life
Monthly
Earnings
Retire
Age 62
Retire
Age 66
Retire
Age 70
Projected 2014
Increase in Monthly
Benefit by waiting to
Age 70
$ 2,000
810.90
1,140.70
1,505.72
365.02
$ 3,000
1,050.90
1,498.50
1,978.02
479.52
$ 4,000
1,290.90
1,847.70
2,438.96
591.26
$ 5,000
1,478.20
2,015.40
2,660.33
644.93
$ 6,000
1,590.70
2,183.10
2,881.69
698.59
$ 7,000
1,703.20
2,346.80
3,097.78
750.98
$ 7,949
1,809.90
$ 8,900
1,917.00
26
11/20/2014
Medicare Part B Costs by AGI
Single
Married Filing Jointly
2011
2010
Up to $ 85,000
Up to $ 170,000
115.40
110.50
$ 85,001 - $ 107,000
$ 170,001 - $ 214,000
161.50
154.70
$ 170,001 - $ 160,000
$ 214,001 - $ 320,000
230.70
221.00
$ 160,001 - $ 214,000
$ 320,001 - $ 428,000
299.90
287.30
Above $ 214,000
Above $ 428,000
369.10
353.60
Medicare Part D Costs by AGI
Single
Married Filing Jointly
2011
2010
Up to $ 85,000
Up to $ 170,000
40.72
-
$ 85,001 - $ 107,000
$ 170,001 - $ 214,000
52.72
-
$ 170,001 - $ 160,000
$ 214,001 - $ 320,000
71.82
-
$ 160,001 - $ 214,000
$ 320,001 - $ 428,000
90.82
-
Above $ 214,000
Above $ 428,000
109.82
-
27
11/20/2014
Financial Points
1. Source of Social Security Trust Fund Revenues:
From employer/employee payments:
84%
From investment income/dividends:
14 %
From taxation of Social Security benefits: 2%
2. Even if the Trust Fund is fully depleted by 2040,
continuing revenues could maintain benefits at
a minimum of 70% of the current level.
Financial Points
3 Of those over Age 65:
a. 90% receive SSA benefits.
b. 39% of their income is from Social Security.
c. 67% receive 50% of income from Social Security
d. 22% are 100% dependent upon Social Security.
4. 32% of the American work force has no money set
aside for retirement.
5. 53% have no pension system other than Social
Security.
28
11/20/2014
Financial Points
6. If the existing 15.3% FICA/Medicare tax rate
applied to gross income – without any earnings
limitation –
the existing Social Security could continue as-is
another 75 years -- through 2085--, perhaps
beyond.
Estimated Average Monthly Social
Security Benefits
All retired workers
Aged couple, both on SS
Widow with 2 children
Widow or Widower
Disabled with children
A disabled worker
2014
$ 1,294
$ 2,111
$ 2,622
$ 1,243
$ 1,943
$ 1,148
2013
$ 1,275
$ 2,080
$ 2,583
$ 1,225
$ 1,914
$ 1,131
29
11/20/2014
Other Proposals to
“Save” the System
1. Remove the CAP on FICA wages: make all
income subject to employer/employee match
– as with Medicare.
2. Raise full retirement age to 68, 69, …75.
3. Raise Medicare eligibility age to 67 from 65.
ROTH Conversion Tactics
p. 68
1. Convert taxable into non-taxable accounts:
a. By the young with time to recover tax.
b. By seniors to avoid RMD.
2. “Stretch” value to younger generation.
30
11/20/2014
Grandpa Simpson
1.
2.
3.
4.
Starting ROTH Balance:
Beneficiary RMD Ages 4-18:
Account Balance at Age 18:
Beneficiary RMD Ages 4-65:
a. Gross tax free distributions:
b. Account balance Age 65:
p. 69
$
10,000
$ 134 - $290
$ 22,289
$ 69,590
$ 303,258*
*Assumed annual growth rate of 7%
General IRA Rules
Required Minimum Distributions:
Traditional IRA
ROTH IRA
- for contributor and spouse
- for non-contributor
Yes
No
Yes
31
11/20/2014
ROTH Conversions in a Bad Market
IRA
IRA
Normal
Bad
Value
$ 10,000 $ 6,000
Recover Value?
Taxable
10,000
6,000
First Tax at 25% ( 2,500) (1,500)
Net After Tax
7,500
4,500
Less first tax
Net Cash
7,500
4,500
ROTH
Convert
$ 6,000
4,000
(1,500)
8,500
Borrowing Retirement Funds p. 71
1. No loans from accounts that end in IRA.
2. For other plans:
a. Written document, legally enforceable.
b. Loan lesser of $ 50,000 or 50% value.
c. Repaid within 5 years.
d. Level repayments at least every 90 days.
e. Repay immediately if change employers.
32
11/20/2014
Retirement Savings
Chapter 7
Pages 73-88
GAO Study on
Individual Retirement Accounts
1. There has been speculation that Congress
may limit IRA accumulations in order to raise
taxes, specifically on “the rich”.
2. GAO Report [GAO-14-878T] found that few
IRAs have balances of $ 5 million or more.
3. Report also indicates that a stock-based IRA
is best long term approach.
1
11/20/2014
GAO Report 14-878T
4. States that in 2014 IRA contributions and IRA
earnings will deprive IRS of $ 17.5 billion.
5. Notes that most eligible taxpayers do not
invest in IRAs; benefits are primarily for
higher income taxpayers.
GAO Statistics for 2011
6. 42.4 million [99%] have IRAs valued at
$ 1 million or less.
7. Median IRA balance is $ 34,000.
8. About 600,000 taxpayers have balances
exceeding $ 1 million with a median value of
$ 1.4 million.
2
11/20/2014
GAO Report 14-878T
Values of
Values of
Values of
Values of
Values of
Values of
$ 1 - 2 million
$ 2 - 3 million
$ 3 - 5 million
$ 5- 10 million
$ 10 -25 million
$ 25 million or more
502,392
83,529
36,171
7,952
791
314
Those with large balances tended to be over 65 years
old, MFJ filers, with high AGI.
How to invest in IRAs
Someone who invested the IRA maximum from
1975 to 2011 [36 years]in a Standard & Poor’s
500 portfolio would have a value of $ 729,508.
Someone investing the same amount in a riskaverse fund based upon historical rates for
government bonds would have $ 303,420:
A difference of $ 426,000!
3
11/20/2014
IRA Contribution History
Years
1974-1980
Maximum
Catch Up
Total for One
Total for Two
$ 1,500
-
$ 8,500
$ 17,000
1981-2001
$ 2,000
-
$ 20,000
$ 40,000
2002 - 2004
$ 3,000
$ 500
$ 10,500
$ 21,000
2005 - 2007
$ 4,000
$ 500
$ 16,500
$ 33,000
2008 - 2012
$ 5,000
$ 1,000
$ 30,000
$ 60,000
2013 - 2014
$ 5,500
$ 1,000
$ 13,000
$ 26,000
$ 98,500
$ 197,000
Possible Total
Since 1974
General IRA Rules
p. 74
1. Contributions by April 15. No extension.
2. One spouse can contribute for both
3. No contributions to inherited IRA
[except for spouse – rollover]
4. Contributions must be in cash
5. Age limit – traditional: not year turns 70.5
6. Age limit – ROTH :
none
4
11/20/2014
General Rules IRA
p. 75-77
7. Contribution limits [$ 5,500 plus $ 1,000]:
Traditional IRA
-- limited if:
(1) Active plan participation
(2) And above specified AGI
For ROTH IRA: limited by AGI only
Non-Deductible IRA
Anyone with qualifying earnings can make a non-deductible IRA
contribution.
Consider this:
1. If AGI is too high for a traditional IRA due to plan
participation [MFJ $ 181,000 - $ 191,000]; or.
2. Too high for ROTH IRA [MFJ $ 181,000 - $ 191,000],
3. Make a non-deductible IRA contribution, followed by
4. A rollover of the contribution amount to a ROTH.
No income or plan participation limit for a non-deductible IRA.
5
11/20/2014
General IRA Rules
p. 75-77
8. Required Minimum Distributions [RMD]?:
a. Traditional IRA at Age 70.5
b. ROTH IRA:
- for contributor and spouse
- for non-contributor
Yes
No
Yes
IRC 25B Savers Credit
Non-refundable for contributions to 401-k, 403b, 457, or SIMPLE/Traditional/ROTH IRA based
upon first $ 2,000 and MAGI.
Credit
MFJ*
50%
$
0 - 36,000
20%
$ 36,001 - 39,000
10%
$ 39,001 - 60,000
HOH
$
0 - 27,000
$ 27,001 - 29,250
$ 29,251 - 45,000
.
* AGI for MFS & Single is half
6
11/20/2014
Elderly and others may benefit from IRA.
Example: Jack & Jill, each 68 and retired.
Jill’s W-2
Pensions & Interest
Traditional IRA
Social Security: (Gross $ 18K)
AGI
Taxable Income
Income Tax [10%]
Savers 50% Credit
Net Tax
Without IRA
$ 8,000
$ 24,000
$
-0$ 4,500
$ 36,500
$ 16,200
$ 1,620
$
-0$ 1,620
IRA Contribution Rules
Have “Earned” Income
Claim Deduction
Plan Participant Limit
AGI Income Limit
Non-deductible Option
Contribute Post 70.5 Age
Convert to ROTH:
Pre 2010 AGI $100K+
After 2009 any AGI
Traditional
Yes
Yes
Yes
No
Yes
No
No
Yes
With IRA
$ 8,000
$ 24,000
$ (2,000)
$ 3,500
$ 33,500
$ 13,200
$ 1,320
$ ( 1,000)
$
320
p. 75-77
ROTH
Yes
No
No
Yes
N/A
Yes
N/A
N/A
7
11/20/2014
Factors favoring a ROTH or Traditional IRA
1. For a long term investment, ROTH provides more
cash through tax free distributions.
2. For a short-term investment, Traditional IRA
deductions offer immediate tax savings.
3. Tax-free withdrawal from a ROTH favors those in a
high income tax bracket.
4. For those in a low tax bracket who expect to remain
there, the tax free withdrawals of a ROTH may be of
more advantage than minor tax deduction benefits.
2014 Plan Contribution Limits
Biz
$ By
IRA Traditional
IRA Roth
401-K
34,500 9/15/15
SIMPLE
3% Comp 9/15/15
SEP IRA
52,000 9/15/15
Worker
Age 50+
5,500
5,500
17,500
12,500
-
1,000
1,000
5,500
2,500
$ By
4/15/15
4/15/15
12/31/14
12/31/14
-
8
11/20/2014
Re-Characterization/Conversion
1. Re-characterize:
To change your mind.
i.e. To change previous current year deposit
from traditional to ROTH IRA.
By original due date of return; no extension.
2. Convert:
To change classification.
i.e. To change prior year funds from
traditional IRA to a ROTH IRA.
By original due date of return – plus extension.
SEP- IRA
p. 78
1. Covered employees:
a. Age 21 or over.
b. Earned at least $ 550 during 2014.
c. Provided services in any three years:
2013 2012 2011 2010 2009
2. Company contribution 0-25% of gross wage but no
more than $ 52,000 for 2014.
3. Contribute by tax return date plus extension.
4. Complete Form 5305-SEP.
9
11/20/2014
SIMPLE – IRA
p. 78
1. Establish by October 1.
2. Covered employees:
a. Earn $ 5,000 in 2014; and,
b. Earn $ 5,000 in two preceding years.
3. Employee deferral $ 12,000 plus $ 2,500 at Age 50.
4. Mandatory employer match:
a. Up to 3.0% of participating employees.
b. At least 2.0% of all employees.
c. Average 2.5% over 5 years.
MyRA
[My retirement account]
p. 80
A proposed retirement account
option for 2014.
Established by executive order.
10
11/20/2014
What is a MyRA?
p. 80
1. A cross between a ROTH IRA and the direct
purchase of government bonds.
2. The principal is guaranteed by the U.S.
government; it cannot be lost.
3. Investments will earn at a variable rate,
currently at 1.0%
What is a MyRA?
p. 80
4. Contributions are with after-tax money.
5. The program can run through an employer’s payroll
deduction system:
a. Initial contribution:
$ 25.00
b. Minimum subsequent contribution: $ 5.00
6. Participation subject to ROTH earning limits, currently
at $ 191,000 for a married couple/$ 129,000 single.
11
11/20/2014
What is a MyRA?
P. 80
7 Employers are encouraged but not required
to establish MyRA accounts.
8. Program continues automatically until
stopped by employee.
9. The MyRA will adopt all existing ROTH rules.
What is a MyRA?
P. 80
10. There are no fees.
11. Multiple MyRAs can be established; an employee can
have a MyRA with each employer.
12. Earnings can be withdrawn tax free after 5 years if
contributor is 59 ½.
13. Plan purchases will not acquire “new” securities;
subsequent purchases add to the value of the original
security.
12
11/20/2014
MyRA Investment
p. 80
1. Similar to existing federal employee’s Thrift Savings
Plan Securities Investment Fund.
2. MyRA participants can withdraw principal at any
time without penalty.
3. Once the account accumulates $ 15,000 it can be
rolled into a private sector ROTH IRA.
4. MyRA must be rolled into a ROTH at 30 year point.
MyRA Background
p. 80
1. More than 40,000 employers currently offer a
payroll deduction program to purchase U.S.
Bonds in denominations of $ 25.00 or higher.
2. Payroll deductions are held in a non-interest
bearing escrow account until funds
accumulate to purchase the bond of the
specified denomination.
13
11/20/2014
MyRA Background
p. 80
3. Currently, existing bonds provide a fixed rate
of return stated at the purchase date: MyRA
purchases would have a variable rate.
4. Interest on MyRA bonds are exempt from
state and local taxation. MyRA bonds used for
higher education would be exempt from
federal tax.
U.S. Government administers MyRA
p. 80
1. Savings amounts are too small to attract
institutions. U.S. government will have to
administer program.
2. Still not clear whether MyRA’s will qualify for
the Retirement Saver’s Credit [50% of $ 2,000
with maximum credit of $ 1,000] which is
non-fundable.
14
11/20/2014
MyRA Anticipated Problems
p. 80
1. Ready-withdrawal feature makes it unlikely
the funds will stay in the account long enough
to make it to the retirement years.
2. Low contribution rates unlikely to attract
lower income workers who tend to spend on
basics of food, shelter, etc. due to the
immediacy of the need.
Self-Directed IRA
p. 80
1. Most investments allowed.
2. Held by a trustee.
3. No prohibited transactions with owner such as:
a. Sale or lease of property.
b. Lending money.
c. Furnishing of goods and services.
d. Transfer to or use by a disqualified person.
15
11/20/2014
IRAs and Real Estate
p. 81-82
1. Realty inside an IRA must be business use.
a. IRA must pay all expenses.
b. Owner cannot perform services/repairs.
c. Owner cannot negotiate/collect rent.
2. If debt used to acquire real estate, gain on
the sale is subject to Form 990-T.
3. Rental income over $ 1,000 of debt-financed
property reported on Form 990-T by 05/15.
Solo 401-K
p. 83-84
1.
2.
3.
4.
5.
One person plan [husband/wife count as one].
No other employees work more than 180 days.
May contribute for 2014 up to $ 17,500.
May contribute Age 50 catch-up of $ 5,500.
Permits a second contribution of up to 25% of
compensation to a profit sharing plan.
6. Employee-share due 12/31/14; employer share due
by tax return filing date plus extension.
16
11/20/2014
Doctor Scope
Comment
401-K deferral
Self-employment income net
½ SE Tax [$ 172,500 x 20%] =
Base contributions
Age 50 catch-up contribution
Total Deductible Contributions
401(K) Plans
p. 84
Amount
$ 17,500
34,500
$ 52,000
5,500
$ 57,500
========
p. 85/86
1. Considered a profit sharing plan with an
elective deferral feature.
2. Annual limitation: lesser of –
a. $ 52,000; or,
b. 100% of compensation.
3. Elective deferrals must be non-discriminatory.
17
11/20/2014
401(k) Safe Harbor
Provisions p. 86
1. Provide employee notice of:
a. 3% employer contribution for all eligibles;
or,
b. 100 % fully vested match up to 4%.
2. Safe Harbor applies to all employees,
including those who terminate.
Penalties
p. 86
1. Excess contributions subject to 6% excise tax.
2. An employee participating in multiple plans
and/or with multiple employers are
responsible for:
a. Determining whether excess contributions
have been made.
b. Removing excess amounts by 04/15.
18
11/20/2014
Deferral Limits & Multiple Plans
p. 87
1. The 2014 elective deferral limit of $ 17,500 is
an annual limit aggregation for all plans.
2. Contribution aggregation rules differ from
Deferral aggregation rules. For deferrals:
a. For related employers, combine.
b. For unrelated employers, separate.
Jack owns A-1 & A-2, works also at unrelated Z.
2014 Contribution Cap: $ 260,000/25%/$ 52,000
A-1
A-2
Salary
$ 100,000 $ 300,000
25%
$ 25,000 $ 52,000
Maximum $ 25,000 $ 27,000
Total Allowed
$ 52,000
Z
$ 500,000
$ 52,000
$ 52,000
$ 52,000
2014 Combined Employer/Employee Amounts: $ 104,000
19
11/20/2014
Jack owns A-1 & A-2, works also at unrelated Z.
2014 Deferral Limit is $ 17,500 (Salary as before)
A-1
A-2
25% Cap
$ 25,000 $ 52,000
Cap Maximum
$ 25,000 $ 27,000
Total Allowed
$ 52,000
Employer Max
$ 52,000
Emp. Deferral
-0Total Contribution
$ 52,000
$
$
$
$
$
$
Z
52,000
52,000
52,000
34,500
17,500
52,000
2014 Total Employer Amounts:
$ 86,500
2014 Total Employee Deferrals:
17,500
2014 Total Contributions
$ 104,000
Jack owns A-1 & A-2, works also at unrelated Z.
2014 Deferral Limit is $ 17,500 (Salary as before)
A-1
A-2
25% Cap
$ 25,000 $ 52,000
Cap Maximum
$ 25,000 $ 27,000
Total Allowed
$ 52,000
Employer Max
$ 42,000
Emp. Deferral
10,000
Total Contribution
$ 52,000
$
$
$
$
$
$
Z
52,000
52,000
52,000
44,500
7,500
52,000
2014 Total Employer Amounts:
$ 86,500
2014 Total Employee Deferrals:
17,500
2014 Total Contributions
$ 104,000
20
11/20/2014
Jill: Participates in Apple’s 401-K Plan and Orange’s SIMPLE-IRA
2014 Maximum Deferral all plans: $ 17,500.
2014 Maximum Deferral SIMPLE: $ 12,000
Earnings
25% Cap
Deferral Options:
Option 1
Option 2
Option 3
Option X
Apple
$ 100,000
$ 25,000
Orange
$ 100,000
$ 25,000
$ 17,500
$
5,500
$
8,500
???
$
-0$ 12,000
$ 8,500
$ 12K or less
Jill: Participates in Apple’s SIMPLE-IRA and Orange’s SIMPLE-IRA
2014 Maximum Deferral all plans: $ 17,500.
2014 Maximum Deferral SIMPLE: $ 12,000
Earnings
25% Cap
Deferral Options:
Option 1
Option 2
Option 3
Option X
Apple
$ 100,000
$ 25,000
Orange
$ 100,000
$ 25,000
$ 12,000
$
-0$
6,000
$ 12 K or less
$
-0$ 12,000
$ 6,000
$ 12K or less
21
11/20/2014
THE RULE OF 72
How long would it take for an investment
to double in value?
• Take the number 72.
• Divide it by the expected investment rate of
interest.
• The result:
The number of years it would take
for that investment to double in value.
1
11/20/2014
Example:
• Assume an investment rate of return of 4%.
• The investment would double in value every
eighteen years as follows:
72/4% = 18 years.
Practical Application: Assumptions
•
•
•
•
•
A child works for a sole proprietor parent.
Child begins useful work at 7 years of age.
The rate of pay is $ 8.00 per hour.
Child works average of 10 hours per week.
The investment rate of 4%.
2
11/20/2014
Results:
• The child would earn $ 4,000 per year:
$ 8 per hour/10 hours per week/50 weeks =
4,000.
$
• The investment value doubles every 18 years:
72/4% = 18 years
AGE [$ 8.00 per hour] Value at 4%
•
•
•
•
•
7
25
43
61
79
• 4,000
• 8,000
• 16,000
• 32,000
• 64,000
3
11/20/2014
AGE ($ 10 per hour) Value at 4%
•
•
•
•
•
7
25
43
61
79
•
•
•
•
•
AGE
•
•
•
•
•
•
7
19
31
43
55
67
5,000
10,000
20,000
40,000
80,000
Value at 6%
•
•
•
•
•
•
$
4,000
$
8,000
$ 16,000
$ 32,000
$ 64,000
$ 128,000
4
11/20/2014
AGE ($10 per hour) Value at 6%
•
•
•
•
•
•
7
19
31
43
55
67
•
•
•
•
•
•
$
5,000
$ 10,000
$ 20,000
$ 40,000
$ 80,000
$ 160,000
Assumptions:
• Child works for parent for 10 years.
• Each year the parent contributes $ 4,000 to
the child’s ROTH IRA
5
11/20/2014
Results using 6%:
For the parent:
1. Deductions from taxable income:
$ 4,000 x 10 years =
$ 40,000.
2. Personal income tax savings:
$ 40,000 x 25% =
$ 10,000.
3. Self-employment tax savings:
$ 40,000 x 15.3% =
$ 6,220
4. Net cost to parent:
$ 40,000 - $10,000 - $ 6,220 = $ 23,780
Results: 6%, $ 4,000 per Year
For the child:
1. $ 128,000 of tax free retirement earnings
for each $ 4,000 ROTH IRA.
2. Ten contributions of $ 4,000 per year
would yield $ 1,280,000.
6
11/20/2014
Assume $ 10.00 per hour
Starting at Age 7, Ten Payments
First Unit Matures
79
79
77
67
67
Rate Ten Year Yield
3%
$ 400,000
4%
$ 800,000
5%
$ 1,600,000
6%
$ 1,600,000
7%
$ 3,200,000
How about the parents: what can they
do for themselves?
Assumptions:
1.
2.
3.
4.
5.
6.
Married couple.
Sole Proprietorship
Annual $ 5,000 ROTH IRA for each.
Annual Health Savings Account $ 6,000
Begin the program at Age 30.
Annual rate of return: 6%.
7
11/20/2014
Age
•
•
•
•
30
42
54
66
Value
•
•
•
•
$
$
$
$
16,000
32,000
64,000
128,000
If:
• A couple at Age 30 set aside funds of $ 10,000 for two
ROTH IRA’s plus $ 6,000 for an HSA
• That would total $ 16,000 per year, or
$ 1,333
per month, or
$ 334
per week, or
$ 66
per work day, or
$
8.20 per work hour
8
11/20/2014
Then:
• Beginning at Age 67 they would receive
$128,000 per year for each of the next ten
years.
• Plus Social Security estimated at $ 45,000 per
year.
Assuming that the couple could live
comfortably on $ 73,000 per year:
Annual Gross Revenues:
ROTH IRA Maturity
Social Security
Total
Less Taxes
Less Expenses
Net Excess Cash
$ 128,000
45,000
-------------$ 173,000
(73,000)
-------------$ 100,000
9
11/20/2014
By Age 77 the couple would have:
1. Ten years savings of $ 100,000 = $ 1,000,000
========
2. At 6.0% interest, annual earnings = $ 60,000.
3. Pre- COLA Annual Social Security = $ 45,000
Result: Gross annual income
= $ 105,000
For the remainder of their lives!
And again, all this is predicated upon:
1. Annual contributions of $ 16,000
2. For just ten years starting at Age 30
10
11/20/2014
Applying this savings discipline:
1. The average couple would retire in comfort.
2. Dependency upon Social Security would be reduced
and possibly eliminated.
SEP FEATURES
Need not be repeated in subsequent years
Flexibility of contribution percent [0%-25%]
No increase in Workman’s Comp Insurance
No payroll taxes
Option to limit to long-term employees (more than 3
years service)
• No Form 5500, disparity testing, etc.
• Immediate 100% vesting
•
•
•
•
•
11
11/20/2014
SEP OPTIONS: 0-25%
W-2
Wages
Qual.
Wages
2%
SEP
5%
SEP
10%
SEP
Frank
30,000
30,000
600
1,500
3,000
Alice
20,000
John
20,000
---------
20,000
---------
400
------
1,000
-------
2,000
--------
70,000
50,000
1,000
2,500
5,000
(250)
--------
(625)
--------
(1,250)
---------
750
1,875
3,750
Tax Saved
(25%)
Net Cost
Practical Business Application:
• Can taxable profits be reduced?
• Can owner pension contribution be
increased?
12
11/20/2014
Current Wages/Proposed SEP
Workers
Owner
Present
W-2
50,000
Available
SEP Cash
5,000
SEP
Percentage
10%
Emp. #1
30,000
3,000
10%
Emp. #2
20,000
2,000
10%
100,000
10,000
Owner Bonus/Proposed SEP
Workers
Owner
Revised
W-2 Wage
100,000
Cash for
SEP
6,700
SEP
Percentage
6.7%
Emp. #1
30,000
1,980
6.7%
Emp. #2
20,000
1,320
6.7%
150,000
10,000
13
11/20/2014
Tax Return Results
•
•
•
•
SEP for Employees: $ 2,300
Tax Savings at 15%: $ 1,500
Net Cost:
$ 800
Owner Benefit:
Owner SEP of $ 6,700
Accounting Entries:
• Debit Officer Wages:
$ 50,000
• Credit Officer Loan:
Less FICA [$50,000] x .062
Less Medicare [$50,000 x .0145]
Less FIT at 25%
Net Loan:
$ 50,000
( 3,100)
( 725)
(12,500)
-----------$ 33,675
=======
14
11/20/2014
What about that $ 33,675?
1. Purchase IRC 1244 stock.
2. Keep it as debt; receive interest income.
3. Make an IRC 368 (a)(1)(E) election.
Type E Reorganization
IRC 368 (a)(1)(E) election
1. Converts debt to equity.
2. Requires:
a. A debt with status equal to a security.
b. A security exists if there is a written
obligation to pay a debt within
2-5 years.
15
11/20/2014
Journal Entry:
Before
After
Liability:
Debt
Basis
$ 33,675
$ 33,675
-
Equity:
Stock
Basis
$ 10,000
$ 1,000
$ 43,675
$ 34,675
Type E Reorganization
1. Include a detailed declaration statement with
the tax return.
2. Make reference to IRC 368 (a)(1)(E).
16
11/20/2014
What about 529 Plans/530 Plans?
Monthly Payments
529 Plan:
$ 12,000 down;
$ 1,000 per month,
for 17 years
530 Plan:
$ 2,000 down;
$150 per month for
17 years
5% Interest
8% Interest
$ 344,632
$ 464,047
$ 52,153
$ 70,347
17
11/20/2014
Retirement Account
Distributions
Chapter 8
Pages 89-118
General IRA Rules
Required Minimum Distributions [RMD]:
Traditional IRA
ROTH IRA
- for contributor and spouse
- for non-contributor
Yes
No
Yes
1
11/20/2014
Traditional IRA Distributions
p. 90
1. Distribution requirements applies to the total
of all non-ROTH IRA accounts:
a. Traditional IRA
b. SIMPLE IRA
c. SEP-IRA
2. Non-deductible IRA amounts at measurement
period reduce the taxable IRA portion.
3. Example: if 10% of total funds was nondeductible, only 90% of distribution is taxable.
ROTH Distibutions
p. 91
Order of distribution:
1. Original contribution.
2. Conversions.
3. Earnings.
An original ROTH contribution dollar at any
time without penalty. Taxes/penalties only
apply to values that exceed contributions.
2
11/20/2014
ROTH Distributions/Conversions
Penalties
p. 92
1. Distributions from an original ROTH
prior to completion of 5 year period
subjects earnings to a 10% penalty plus
taxation.
2. Distributions from a ROTH conversion
prior to completion of a 5 year period
subjects the entire distribution to the
10% penalty, plus tax on the earnings.
Distributions prior to
5 year investment period
Original Contribution/
Conversion amount
p. 92
Original
ROTH
ROTH
Conversion
$ 100,000
$ 100,000
12,000
12,000
Earnings
Distribution prior to 5 year
investing period penalty:
10% on earnings amount
(
10% on conversion amount
1,200)
-
(
1,200)
( 10,000)
Distribution net of penalties
$110,800
$ 100,800
Amount subject to regular taxation
$
$
12,000
12,000
3
11/20/2014
Minimum Distribution Rules
p. 93
ROTH 401-K Others
Contributor:
Required Minimum
*When work stops
**Age 70.5
Beneficiary:
Required Minimum
No
Yes*
Yes
Yes
Yes**
Yes
Required Minimum Distribution
See Life Tables Appendix C Pub 590
Value of All Accounts at
Prior Year December 31
Age at Distribution
Factor at Distribution Age
Calculation:
$ 100,000/26.5 =
$ 100,000
71
26.5
$ 3,774
4
11/20/2014
Qualified Longevity Annuity
Contracts [QLAC]
p. 94
1. New as of 07/02/2014.
2. Allows IRAs/SEPS/401(k)/403/457
amounts to be converted to an
annuity to begin by Age 85.
3. Limited to lesser of $ 125,000 or
25% of Retirement Account Values.
4. QLAC amounts are not included in
calculation of RMD of other funds.
Qualified Longevity Annuity
Contracts [QLAC]
p. 94
1. The plan’s purpose is to provide another
way of assuring that:
a. IRA will not run out of funds before
IRA owner runs out of life.
b. Minimize current taxation.
c. Reduce Medicare premium cost.
2. May contain a return-of-premium
feature to guarantee 100% payments
before death – probable insurance cost.
5
11/20/2014
Marty’s $ 500,000 IRA split into $ 375,000 IRA
plus QLAC of $ 125,000
p. 94
Annual RMD
Average Distributions
Total Distributions
Total Tax at 15%
Balance at Age 85
Annuity Value
Interest at 4% per year
Total Value at Age 85
No QLAC
$ 16,368 to
$ 18,248
$ 17,490
$ 262,657
$ 39,399
$ 237,343
$ 237,343
With QLAC
$ 12,276 to
$ 13,686
$ 13,133
$ 196,993
$ 29,549
$ 178,007
$ 125,000
$ 75,000
$ 378,007
Beneficiary Distribution Rules
Based Upon Owner’s Death
Spouse
Pre-RBD:
1. Rollover
2. Base Distributions upon:
a. Deceased’s 70.5 year
b. New owner’s expected life
c. Year following deceased’s death
After RBD:
1. Rollover to Spouse
2. Use New Owner’s expected life
3. Use Deceased’s life if younger
3. Use Beneficiary Table
Others
Option
No
Option
Option
N/A
No
Yes
Yes
Yes
Yes
N/A
N/A
N/A
Option
Option
Yes
6
11/20/2014
Life Expectancy Tables
Per $ 100,000 IRA
Current
Age
2
10
70
80
90
115
Life
RMD
Expectancy RMD % Dollars
80.6
1.24 1,241
72.8
1.37 1,374
27.4
3.65 3,650
18.7
5.34 5,348
11.4
8.77 8,772
1.9
52.63 52,632
25 year“Stretch” IRA: Assume
value of $ 100,000 at age:
Age
80
85
90
100
105
Remainder
94,652
68,889
45,629
12,299
4,179
Age
10
15
20
30
35
Remainder
98,626
91,764
84,914
78,080
71,262
Note: Does not include compound interest effect.
7
11/20/2014
IRA/RMD in a “bad” stock market:
Transfer to Taxable Account; don’t sell it.
Good
Bad
Value
$ 10,000 $ 6,000
Growth
Total
10,000
6,000
Basis
Taxable
10,000
6,000
Tax
( 2,500)* (1,500)*
Net Cash $ 7,500 $ 4,500
Trans. Tax
After Tax $ 7,500 $ 4,500
Transfer
$ 6,000
4,000
10,000
( 6,000)
4,000
( 600)**
$ 9,400
(1,500)
$ 7,900
* 25% ordinary
Spousal Consent Rules
** 15% capital
p. 103
1. For Qualified Plans other than IRAs
spouse must consent to:
a. Distributions.
b. Plan loans.
2. For IRAs, account owner free to
determine distributions and name
beneficiaries.
8
11/20/2014
Substantial Periodic Payments
p. 107
Plan distributions may be made prior to
age 59 ½ without penalty if:
a. Substantially equal payments;
and,
b. For at least the later of:
(1) Five years; or,
(2) Age 59 ½.
Exceptions: Premature Distributions p. 109
1. IRA Only: Medical Expenses above
10% AGI.
2. Federal levies.
3. Reservist post 9/1/01 active 179 days.
4. Other than IRA: Service Separation
a. All workers: Age 55 or later.
b. Public safety worker: Age 50/later.
9
11/20/2014
Exceptions: Premature Distributions p. 110
5. IRA Only: Unemployed 12
consecutive weeks and
used for Rx insurance.
6. IRA Only: First time homebuyer:
a. Lifetime limit up to $ 10,000.
b. No home ownership prior 2 years.
c. Funds used within 120 days.
Exceptions: Premature Distributions p. 111
7. IRA Only: Higher education expense
applied during year of
withdrawal.
10
11/20/2014
Self-Funding a “C” Corp
p. 111
1. Get new or existing “C” Corp to set up a
retirement plan.
2. Rollover IRA or 401-K into C Corp
pension plan. [Rollover Business Startup allowed under Reg. 1.401]
3. Have pension purchase stock in C Corp;
cash goes to C Corp checking.
Rollovers
p. 113
1. Rollovers allowed:
a. To an IRA from a defined contribution plan.
b. To a defined contribution plan from an IRA.
c. To a SIMPLE IRA only from a SIMPLE IRA.
d. From a SIMPLE IRA to any qualified plan
after 2 years from its creation date.
2. The non-deductible portion of an IRA
can only be rolled into another IRA.
11
11/20/2014
Rollover Rules
1. An IRA to IRA rollover is allowed once in any
365 day period.
2. Rollover from a non-IRA plan into an IRA does
not count for the one rollover per year limit.
3. Funds re-deposited within 60 days are not
taxed or penalized, but, such funds count
against the one rollover per limit rule.
Example Rollover
IRA 1
$ 200,000
( 20,000)
(50,000)
-
IRA 2
IRA 3
$ 100,000 $
-0$ 20,000
$ 50,000
-
Balance 1/1
Withdraw 8/1
Contribute 8/15
Withdraw 10/30
Contribute 10/30
Notes:
1. August transactions meet 60 day test. No tax.
2. October transactions constitute:
a. Violation of the once per year rollover rule.
b. Fully taxable transfer.
c. Excess contribution subject to 6% penalty.
12
11/20/2014
Rollover Example:
p. 115
1. IRA account consists of:
Deductible Contributions
Earnings
Non-deductible amount
$ 100,000
20,000
30,000
$ 150,000
2. Rollover:
To any qualified plan
To a ROTH IRA
$ 120,000
30,000
$ 150,000
Law Change Alert
1. Prior to 2015 IRA position has been one
rollover per IRA account per year.
2. Effective 1/1/2015, all IRA accounts are
to be aggregated for the one rollover
per year rule. (IRS Ann. 2014-15).
3. Still time before 12/31/2014 to rollover
multiple IRA accounts.
13
11/20/2014
SIMPLE IRA Rollover
p. 116
1. Without penalty, to another SIMPLE IRA.
2. Must meet 2 year rule; “premature” amount is
subject to 25% penalty.
3. After two years, any other “premature”
distribution is subject to just a 10% penalty.
4. A transfer within the two year period is not a
“rollover”.
Premature Transfer from SIMPLE IRA
to Traditional IRA
p.116
Withdrawal
Penalties
Withdrawal
$ 8,000
Contribution
Penalty
$ 8,000
Total
Effect
$ 8,000
Tax at @ 20%
[Estimate]
(1,600)
(1,600)
Penalty @ 25%
[Actual]
(2,000)
(2,000)
Net Cash
Contribution Limit
$ 4,400
(5,500)
Excess contribution
$ 2,500
Penalty at 6%
[Actual]
$
Cash Value
150
(150)
$ 4,250
14
11/20/2014
Education Planning
Chapter 9
Pages 119-146
US Dept. of Labor Age 25-34
2010 Annual Earnings
WSJ 11/23/12
Degree Status
Average Annual
Some college
$ 32,900
Bachelor’s Degree
$ 45,000
Default Rate on Student Debt
Some College
16.8%
Bachelor’s Degree
3.7%
1
11/20/2014
Of Those with College Loans
Institute for Higher Education D.C. WSJ 11/23/12
1. Did not earn college degree: 58%.
2. In Default:
a. Without a degree:
b. With a degree:
59%
38%
Repayment Options: WSJ 11/07/2013
1. Routine repayment process; or,
2. Repayment based upon poverty level.
a. Repayable over 10/20/25 years, if
b. Borrower’s income under 150% of
poverty level.
For 2014, poverty level for a family of four is
$ 23,850; 150% equals $ 35,275.
2
11/20/2014
WSJ 11/07/2013
1. Fewer than 7.0% of borrowers rely upon the
income test.
2. If income remains under FPL, the loan is
forgiven after the 10/20/25 year agreement
period.
Education Secretary
Arne Duncan WSJ 11/28/12
1. Of all student loans, the federal government
issues 93%.
2. Federal education loan application
documents do not verify ability to repay.
3
11/20/2014
Education Secretary
Arne Duncan WSJ 11/28/12
The goal is to “make student loans available to
as many people as possible.”
Asking if a student can repay the loan, or
establishing minimum education credit scores to
qualify for a loan, would serve only to block
people from going to college.
Gainful Employment and the Higher Education Act of
1965 WSJ 11/17/2014
1. The 1965 act authorizes federal student aid for
programs that “prepare students for gainful
employment in a recognized occupation”.
2. On November 3, 2014 the Department of Education
redefined the phrase “gainful employment”.
4
11/20/2014
Gainful Employment and the
Higher Education Act of 1965
3. Schools will lose federal student aid if:
a. Annual loan payments exceed 8% of total
earnings within 3 years of graduation; or,
b. Annual loan payments exceed 20% of
discretionary earnings within 3 years.
Example:
If school loan debt is $ 25,000, the former student within 3 years
of graduation would have to earn at least $ 33,000.
Gainful Employment and the
Higher Education Act of 1965
4. While most loans have 25 year pay-outs, the new schedule
amortizes loans over 15 years, increasing the loan
debt/earnings ratios.
5. According to the National Center for Education Statistics,
loan-to-income ratios for 2009 are:
a. Grads of For Profit schools:
13%
b. Grads of Non-Profits:
16%
c. Grads of Public Schools:
12%
5
11/20/2014
Gainful Employment and the
Higher Education Act of 1965
6. Gainful employment under these new rules:
a. Grads accepting either a non-profit job
or a government position will have their
loans forgiven in ten years or less.
b. Grads accepting “non-gainful” employment
at for-profit entities will cause their
educational institutions to lose the ability to
offer federal student loan aid.
Gainful Employment and the Higher Education Act of
1965 WSJ 11/17/2014
7. Under the newly defined
“gainful employment” concept,
an estimated 1,400 programs
educating 840,000 students
will lose federal student aid.
6
11/20/2014
Education Codes
IRC 25A American Opportunity Credit $ 2,500
Lifetime Learning Credit
$ 2,000
IRC 222 Higher Education Expense $ 4,000 Exp. 2013
IRC 221 Student Loan Interest
$ 2,500
IRC 162 Ordinary & Necessary
Unlimited
IRC 132 Working Condition Fringe
Unlimited
IRC 127 Employer Provided Assistance $ 5,250
IRC 117 Scholarships & Grants
Unlimited
IRC 135 Education Savings Bonds
Not over expenses
IRC 530 Coverdell Savings Accounts $ 2,000
IRC 529 Qualified Tuition Programs $ 14,000 per donor
American Opportunity
Tax Credit [25A]
p. 121
1. Up to $ 2,500 credit; but only 4 college years.
2. Up to $ 1,000 refundable cash.
3. Credit based upon:
a.100% of first $ 2,000 expensed, plus,
b. 25% of second $ 2,000 expended.
4. Extended to 12/31/2018.
7
11/20/2014
American Opportunity
Tax Credit [25A]
p. 122
Special Rule About Eligibility – Student:
1. Must not have completed first four years of
post- secondary education; and,
2. Must not have claimed credit on more than
four tax returns. [Pub 970].
John is enrolled in a four-year bachelor’s degree program which
will take six calendar year’s to complete. John must choose which
four of the six years to claim the credit.
AOTC Eligibility:
p. 122
1. A student in a credentialed program:
a. For at least one academic period; or,
b. With at least 50% normal course hours.
2. Not completed four years of undergraduate college.
3. Can not have been convicted of a federal or
state felony for the possession or sale of illegal
drugs while receiving federal financial aid.
8
11/20/2014
AOTC and Dependency
p. 123
1. A student who is not a dependent may claim:
a. An exemption;
b. The non-refundable credit; and,
c. The refundable credit.
2. A student who is a dependent may:
a. NOT claim an exemption.
b. NOT claim refundable credit.
c. Claim the non-refundable credit.
Lifetime Learning
Credit [25A]
p. 124
1. Credit up to $ 2,000.
2. 20% of first $ 10,000 expended to acquire or
improve job skills.
3. No degree or workload requirement.
No restrictions on:
1. Number of years credit claimed.
2. Drug possession/sale conviction.
9
11/20/2014
Higher Education
Expense Deduction [222]
p. 127
1. AGI based deduction up to $ 4,000.
2. Not available in any year for which the
Lifetime or AOTC credit was claimed for the
same student.
3. Expired 12/31/2013.
Student Loan
Interest Deduction [221]
p. 127
1. AGI limitation.
2. Up to $ 2,500 deduction.
3. Loan must be:
a. From a bona fide lending institution.
b. Solely to pay higher education
expenses.
c. Certified on Form W-9S.
4. Made permanent.
10
11/20/2014
Ordinary & Necessary [162]p. 130
1. Deductible if:
a. Expressly required by employer;
or,
b. Maintains or improves skills
required for current employment
or trade/business.
2. Temporary work suspension okay.
Working Condition
Fringe Benefits [132]
p. 131
Deductible expense paid by the employer:
1. In accordance with an accountable plan.
2. Qualified as a deductible business expense.
Cannot be an expense to meet minimum job
requirements/skills.
11
11/20/2014
Employer Provided Education
Assistance Program [127] p. 131
1. Employer can pay/employee can exclude up
to $ 5,250.
2. Graduate level courses qualify.
3. No need to be job related.
4. Not more than 5% of benefits paid for owner
or owner’s dependents.
5. Made permanent.
Scholarships/Tuition
Assistance [117]
p. 132
1. Non-taxable if directly related to qualified
education expenses.
2. Must be a degree candidate below the
graduate level.
3. Cannot be compensation for services.
4. Must not favor the highly compensated.
12
11/20/2014
Education Savings
Bonds Interest [135]
p. 133
1. Bond proceeds exceeding qualified education
expenses in current year become taxable.
2. Expenses must not be those already claimed
to support other tax credits.
Coverdell Savings
Account [IRC 530]
p. 134
1. Contributions limited to $ 2,000 per child per year from all
sources.
2. Beneficiary cannot be 18 or older at the contribution date.
3. Broad array of qualifying expenses; any level.
4. Distribution of earnings in excess of expenses are taxable to
the beneficiary.
5. AGI limitation for contributor.
6. Must be used prior to beneficiary’s Age 30.
7. Made permanent.
13
11/20/2014
Qualified Tuition
Programs [529]
p. 137
1. Contributions up to Gift Tax Exclusion amount [$ 14,000 for
2014] per year per donor.
2. Qualified expenses relate to higher education.
3. Earnings related to non-qualified distributions are taxable to
contributor.
4. No AGI limitation.
“Crowd funding”
WSJ 10/20/12 p. B-8
1. Warren Buffet: will pay $ 100,000 for any
student’s college expenses in exchange for
10% of future earnings.
2. www.upstart.com
a. an investor with $ 200K GI plus net worth of
$ 1 million can provide student loans for
a % of student’s income over ten years.
b. Available at Stanford + 29 others.
14
11/20/2014
529 Registries
WSJ 10/20/12
www.gradsave.com and www.givecollege.com
1. Register child’s name for families and friends to provide 529
plan fund.
2. Registry fee is 6% of contributed amounts.
3. 4,100 families have registered since 2011.
Other sites:
www.upromise.com www.sofi.com
www.gofundme.com www.commonbond.com
Financial Aid
p. 142
Assets used as of application date:
Student’s Assets
20.00%
Parent’s Assets
5.64%
Income from prior year:
Student’s Income
50.0%
Parent’s Income
22-47%
[Both include untaxed income and benefits.]
15
11/20/2014
Net Investment Income Tax
Chapter 10
Pages 147 - 160
Personal Tax Rates: 2014
Permanent: 0% & 15% Rates
Income
Tax
Rate
$
10.0%
-
-
-
$ 17,851 – 72,500
15.0%
-
-
-
$ 72,501 – 146,400
25.0%
15%
-
-
$ 146,401 - 223,050
28.0%
15%
-
-
$ 223,051 - 398,350
33.0%
15%
3.8%
.9%
$ 398,351 - 450,000
35.0%
15%
3.8%
.9%
$ 450,001 -
39.6%
20%
3.8%
.9%
0 - 17,850
Div/Cap
Gain Rate
Passive Income Earned Income
Surcharge
Surcharge
1
11/20/2014
Net Investment Income Tax
p. 147
Surtax of 3.8% on income except where:
(1) There is material participation in the production
of trade/business income.
(2) With respect to rental income, the person is
“active” when:
a. A real estate professional; or,
b. A material participant.
Medicare Surtax Does
Not Apply TO:
Non-passive trade/business income of:
a. A Sole proprietorship.
b. Partnerships with material participation.
c. Corporations with material participation.
2
11/20/2014
NIIT affected by source of income:
passive versus non-passive participation activity
Income Type
Subject to NIIT
Dividends
Active Business
Material
Participation
Passive Business
No
Material Participation
No
Yes
Interest
No
Yes
Rents
No
Yes
Capital Gains
No
Yes
Annuity
No
Yes
Royalties
No
Yes
Sale of Entity Stock
No
Yes
Sale of Partnership Interest
No
Yes
Surcharge: Passive Income,
Single Filing Status
Investment
Wages/IRA $
Passive Loss (30,000)
Interest
75,000
Total
45,000
Misc. Adj.
MAGI
AGI Limit
Base
$ 40,000
Rate
3.8%
Tax
$ 1,520
Earned
$ 200,000
200,000
(200,000)
$
.9%
$
-
IRA
$ 20,000
20,000
N/A
-
Total
$ 220,000
(30,000)
75,000
265,000
( 25,000)
240,000
(200,000)
40,000
$ 1,520
3
11/20/2014
Surcharge: Passive & Earned Income,
Single Filing Status
Investment
Earned
Total
Wages
$
- $ 300,000 $ 300,000
Interest
100,000
100,000
Total
100,000
300,000
400,000
Misc. Adjustments
( 25,000)
MAGI
375,000
AGI Limit
(200,000) (200,000)
NIIT Base
$ 100,000 $ 100,000
175,000
Rate
3.8%
.9%
Tax
$ 3,800 $
900
$ 4,700
Jack & Jill
Investment Income: $ 50,000
Example 1
$ 275,000
(250,000)
$ 25,000
MAGI
MFJ Threshold
Excess Income
Lesser of Excess or
or Interest
$ 25,000
Tax at 3.8%
$
950
p.148
Example 2
$ 375,000
(250,000)
$ 125,000
$ 50,000
$ 1,900
4
11/20/2014
Net Investment Sources
Subject to NII Tax
p. 149-151
Excluded from NII Tax
1. Interest & Dividends
1. Wages and Self-employment income
2. Income from Annuities
2. Social Security/Pension/Alimony
income
3. Net income from rents & royalties
3. Operating income from partnerships
and/or S corporations where there is
material participation.
4. Mutual fund capital gains distributions
4. Pass through income, gains, and losses
when material participation in a
partnership and/or an S Corporation.
5. Gain from sale of investments
5. Tax exclusions & deferrals
6. Gain from disposition of partnerships
and/or S Corporations when there is a
lack of material participation.
7. Minor child’s income on Form 8814
Tom Collins Capital Loss
Capital Gain
Capital Loss
Capital Loss Carried
Capital Gain (Loss)
Loss Limitation
Dividends
Taxable Income
Loss Carry forward
2014
$ 10,000
(40,000)
$ (30,000)
$ ( 3,000)
$ 5,000
$ 2,000
$ 27,000
p. 152
2015
$ 30,000
(27,000)
$ 3,000
$ 6,000
$ 9,000
-
5
11/20/2014
Jim Beam Capital Loss
Regular Tax
Annuity Income
$ 50,000
IRC 1231 Gain-Active
21,000
Capital Loss
(15,000)
Taxable Income
$ 56,000
p. 153
NII Tax
$ 50,000
(15,000)
$ 35,000
Jose Cuervo
p. 153
NIIT Capital Loss Carry-forward limited to the lesser of:
(1) Capital loss for regular tax or
(2) Excluded business capital loss from prior year.
2014: Capital Gain Stock Sale
Sell Active Partner Share
Net Income
Exclusion Allowed
Carried to 2015
2015: Exclusion Allowed
Regular Tax
NII Tax
$ 4,000
(19,000)
$ (15,000)
$ ( 3,000)
$ (12,000)
$ 4,000
$ 4,000
$ (12,000)*
$ (3,000)
Remove due to Non-Passive
Carried to 2016
$ (9,000)
$ 12,000
-
* $ 19,000 active loss less than $ 12,000 passive loss: no carry-forward.
6
11/20/2014
Rob Roy
p. 154
“S”
Interest
Material Participant
Interest subject to 3.8%
Sale of Assets at 3.8%
Ordinary Income:
a. SE Tax
b. .9% earnings tax
“Partner”
Dividends
Yes
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
Yes
Yes
NIIT Comprehensive Income Example
Taxable Interest
Muni Bond Interest $ 30K
Taxable Dividends
Non-qualified Annuities
Rental Income
“S” Non-passive income
Total
Less:
“S” Non-passive Income
Capital Loss of $ 30 K
Total Investment Income
p. 157
$ 100,000
50,000
70,000
83,000
100,000
$ 403,000
(100,000)
( 3,000)
$ 300,000
7
11/20/2014
NIIT Comprehensive Example
Total Investment Income
Less:
Investment Interest Expense
State Income Tax Allocation*
Misc. Investment Expense
Net Investment Income
p. 157
$ 300,000
( 40,000)
( 18,000)
( 30,000)
$ 212,000
• Investment Income/Total income = $ 300,000/$1,000,000 =
30%. State Tax of $ 60,000 x 30% = $ 18,000
NIIT Comprehensive Example
p. 157
Modified Adjusted Gross Income
Filing Status Threshold
Excessive Income
$ 1,000,000
( 200,000)
$ 800,000
Excess NIIT
$ 212,000
Tax on Excess NIIT at 3.8%
$
8,056
8
11/20/2014
Interest and Dividends
Chapter 11
Pages 161 - 168
Personal Tax Rates: 2013
Permanent: 0% & 15% Rates
Income
Tax
Rate
$
10.0%
-
-
-
$ 17,851 – 72,500
15.0%
-
-
-
$ 72,501 – 146,400
25.0%
15%
-
-
$ 146,401 - 223,050
28.0%
15%
-
-
$ 223,051 - 398,350
33.0%
15%
3.8%
.9%
$ 398,351 - 450,000
35.0%
15%
3.8%
.9%
$ 450,001 -
39.6%
20%
3.8%
.9%
0 - 17,850
Div/Cap
Gain Rate
Passive Income Earned Income
Surcharge
Surcharge
1
11/20/2014
Original Issue Discount
p. 164
1. Interest is earned/reported over bond life.
2. Premium cost is amortized over bond life.
3. Bond sale prior to maturity can result in
gain or loss. [See Blue Ribbon/Ken p. 165]
IRC 7872
p. 166
Below Market
Interest Rates
on Loans
2
11/20/2014
IRC 7872 applies when:
For Business Loans:
1. At least one of the parties is a corporation;
2. The loans aggregate to more than $ 10,000;
3. The interest rate is less than the AFR.
IRC 7872 applies when:
For Personal Loans
1. Both parties to the transaction are unincorporated;
2
The loans aggregate to more than $ 100,000;
3
The receiving party earns more than $ 1,000 in interest
and/or dividends from another source or sources.
4
The rate of interest (stated or unstated) is below the AFR.
3
11/20/2014
Other Exceptions to IRC 7872
p. 167
1. An employee relocation loan (employee
borrows funds from an employer to purchase
a home)
2. Commercial Loan incentives (0% financing)
Applicable Federal Rate
[AFR]
1. Divided into three time spans:
a. Short Term Rates: repaid within 3 years.
b. Mid-term Rates: repaid in more than 3 but fewer than 9
years.
c. Long Term Rates: repaid in 9 years or more.
2. Rates are published monthly at irs.gov
4
11/20/2014
Accounting/Tax Treatment
• Debit/credit entries can be made to either the
income statement or the balance sheet or both. But:
• An entry that affects the balance sheet can only
adjust Equity.
• Compliance with IRC 7872 cannot raise the amount
of a loan due-to or a loan due-from.
Example: Stockholder Borrows
$ 100,000; AFR is 4.0%
Corporation journal entries:
Debit Retained Earnings $ 4,000; issue Form 1099-DIV.
Credit Interest Income $ 4,000; Income Statement.
Do not change the balance of the loan itself.
5
11/20/2014
Example: Stockholder loans
$ 100,000; AFR is 4.0%
Corporation journal entries:
Credit of $ 4,000 stockholder contribution to Additional
Paid in Capital.
Debt interest expense; issue Form 1099-INT to the
stockholder for $ 4,000.
Do not change the amount due on the loan.
Tracing Rules Problem:
• Was the true nature of the transaction a loan?
• Was the transaction a distribution?
• Was the transaction disguised compensation?
6
11/20/2014
Assumption:
Disguised Compensation
• If there was no “loan” to the shareholder, then
IRC 7872 compliance entries primarily affect
the income statement.
• Entries are adjustments to payroll tax and
compensation, which was the true nature of
the transaction.
“Disguised Compensation” of
$ 100,000; AFR is 4.0%
• Corporation is deemed to have provided $ 4,000 of net
compensation [$ 100,000 times 4.0%].
• Net compensation is grossed up for FICA/Medicare. W-2 is
issued/increased by $ 4,331 to allow for “net” distribution of
$ 4,000.
• Corporation:
1. Increases Wage Expense by $ 4,331.
2. Increases payroll tax expense by $ 331.
3. Records Interest income of $ 4,000.
4. Records additional paid in capital of $ 662.
7
11/20/2014
Personal Loans & IRC 7872
• Child borrows $ 50,000 from parent.
• Child promises annual repayments of $ 10,000.
• AFR on loan date is 3.0%.
• Child earns $ 1,200 annually in interest/dividends.
Personal Loans (continued)
Steps:
• Consult a present value table to determine the
PV of a series of $ 10,000 payments made
once annually for 5 years using a 3.0% rate.
• Presume that the PV table yields a present
value of $ 43,000.
8
11/20/2014
Personal Loan (continued)
Net Result:
The $ 50,000 transaction is deemed to be:
1. A $ 43,000 loan under IRC 7872;
2. A $ 7,000 gift under IRC 2512.
As the $ 43,000 loan is repaid, the pro-rata receipt
of $ 50,000 includes $ 7,000 of taxable interest.
9
11/20/2014
Passive and Rental Activities
Chapter 12
Pages 169-194
Net Investment Income Tax
p. 169
Surtax of 3.8% on income except where:
(1) There is material participation in
the production of trade/business
income .
(2) With respect to rental income, the
person is:
a. A real estate professional; or
b. A material participant.
1
11/20/2014
Medicare Surtax Does
Not Apply TO:
Non-passive trade/business income of:
a. A Sole proprietorship.
b. Partnerships with material
participation (non-passive).
c. Corporations with material
participation (non-passive).
NIIT affected by source of income:
passive versus non-passive participation activity
Direct Income Type
Subject to NIIT
Active Business
Material Participation
Passive Business
No Material Participation
Dividends
No
Yes
Interest
No
Yes
Rents
No
Yes
Capital Gains
No
Yes
Annuity
No
Yes
Royalties
No
Yes
Sale of Entity Stock
No
Yes
No
Yes
Sale of Partnership Interest
2
11/20/2014
Notable Exceptions to Income flow
though avoiding NIIT
1. Interest income.
a. From savings: subject to NIIT
b. From finance charges: No NIIT
2. Sale of Stock/Partnership Interest:
a. Test IRC 1411 holding period.
b. Allocate passive/active [See p. 187]
Surcharge: Passive Income, Single
Filing Status
Investment
Wages/IRA $
Passive Loss (30,000)
Interest
75,000
Total
45,000
Misc. Adj.
MAGI
AGI Limit
Base
$ 40,000
Rate
3.8%
Tax
$ 1,520
Earned
$ 200,000
200,000
IRA
$ 20,000
20,000
(200,000)
$
.9%
$
-
N/A
-
Total
$ 220,000
(30,000)
75,000
265,000
( 25,000)
240,000
- (200,000)
40,000
$ 1,520
3
11/20/2014
Surcharge: Passive & Earned Income,
Single Filing Status
Investment
Wages
$
Interest
100,000
Total
100,000
Misc. Adjustments
MAGI
AGI Limit
NIIT Base
$ 100,000
Rate
3.8%
Tax
$ 3,800
IRC 469
Earned
$ 300,000
300,000
(200,000)
$ 100,000
.9%
$
900
Tax Act of 1986
Total
$ 300,000
100,000
400,000
( 25,000)
375,000
(200,000)
175,000
$ 4,700
p. 170
Created three Income Classes:
1. Non-passive [active]
2. Portfolio [interest/dividends]
3. Passive:
a. Rental activity of non-professional.
b. A business activity without
material participation.
4
11/20/2014
General Passive Rule
p. 148
1. Passive losses:
a. Only offset passive income.
b. Cannot offset income from wages or from a
trade/business with material participation.
2. Unused passive losses are:
a. Suspended;
b. Carried forward indefinitely, but
recognized upon asset disposition.
Caution
Claiming a passive loss is subject to:
1. Having sufficient basis.
2. Being “at risk” [IRC 465].
3. Passive loss limitations [IRC 469].
5
11/20/2014
Two Types of Passive
p. 170
1. A trade or business activity without material
participation; and/or,
2. Any rental activity that does not meet
specified exceptions for:
a. The type of rental property; and,
b. Material participation.
Single Property Rental
[Final Regs. Under IRC 1411]
1. Rental of a single property may be an IRC
162 business, not subject to NIIT, due to the
level of the owner’s regular and continuous
involvement.
2. However: IRS does not believe that all single
property rentals are immune from NIIT.
6
11/20/2014
Rental Exception Test
p. 172
A rental activity is passive unless:
1. It meets one of six exceptions; AND,
2. It passes one of seven tests for material
participation.
Rental Activity is a
Non-passive Business if:
p. 172
1. Average customer use under 8 days;
2. Average customer use under 31 days
and provide significant personal services.
3. Provide extraordinary personal services.
4. Rent incidental [2% FMV] to active business.
5. Non-exclusive use by many customers
during defined business hours.
6. Taxpayer’s property is used in a partnership,
“S” Corporation, or venture he/she owns.
7
11/20/2014
Rental is Non-Passive if Material Participation passes 1
of 7 tests
p. 173
1. “Active” more than 500 work hours.
2. Taxpayer participation is substantially all the
participation by all persons.
3. Taxpayer activity exceeds 100 hours and also
exceeds that of anyone else.
Example for Test 3:
Marlin &
p. 174
Version 1:
1.
2.
3.
Marlin & Gil each work 8 hours x 50 weeks = 400 hours.
Marlin’s time exceeds 100 hours; but nobody works more; entity is an
“active” business.
Entity’s loss is deductible against “active” income, but not deductible
against “passive” income, such as Marlin’s rental property profit.
Version 2:
1.
2.
If Marlin’s entity participation hours under 100, then:
Entity loss is “passive”, offsets other rental profit.
8
11/20/2014
Material Participation:
1 of 7 tests
p. 174
4. Taxpayer’s participation in a series of activities
is significant when work exceeds 500 hours.
Ray Tampa’s Hours:
Business A
Business B
Business C
Business D
Total “Active”
Initially
Active Passive
550
245
175
350
550
670*
* Activities grouped.
Material Participation:
1 of 7 tests
p. 174
5. Taxpayer participated materially in any
5 of most recent 10 years.
6. Taxpayer participated materially in this
personal service activity for any 3 years
preceding the current tax year.
7. Relying upon facts and circumstances,
taxpayer participation exceeds 100 hours
regularly, continuously, and substantially.
Note: Spousal and taxpayer activity is combined.
9
11/20/2014
Choose 1 from each column to
avoid passive activity rules.
Rental Use Exception
Material Participation Exception
1. Use less than 8 days.
1. Work More than 500 hours.
2. Use less than 30 days plus have
significant personal service.
2. Substantially all participation.
3. Extraordinary personal service.
3. Work more than 100 hours, with
no one else participating more.
4. Rents less than 2% of basis.
4. Participate in a non-rental activity
for 100-500 hours, and working in
all such activities for more than
500 hours.
5. Property available during defined
business hours.
5. Material participant in 5 of
preceding 10 years.
6. Owner provides property for use
by a non-rental business activity.
6. Material personal service
participant in any 3 prior years.
7. Participate on a regular,
continuous, and substantial basis.
Limited Partner
p. 175
1. By definition not a material participant.
2. Material if one test below applies:
a. Pass 500 hour test.
b. Material participant in 5 of 10 prior years.
c. Material participant in a personal service
activity in any 3 prior tax years.
If exception applies, may need to over-ride limited partner status box in
computer software and apply S/E tax and Net Investment Income Tax of
.9%.
10
11/20/2014
Publicly Traded Partnerships
Special Rule:
Suspended losses from a publicly traded
partnership can only be used to offset income or
gain from that specific publicly traded
partnership.
Active Participant Standard Rental Loss
Deduction Up to $25,000
p. 175
1. For an active participant:
a. If MAGI under $ 100,000.
b. MAGI $ 100,000 to $ 150,000 phase out.
2. Active participation does not apply to:
a. Limited partners; or,
b. Those who own less than 10%.
3. Active participant makes decisions. He/she:
a. Does not ratify decisions of others.
b. Need not work a specific number of hours.
11
11/20/2014
Active Participant Standard Rental Loss
Deduction Up to $25,000
p. 175
Modified Adjusted Gross Income equals:
Adjusted Gross Income plus:
1.
2.
3.
4.
5.
6.
7.
8.
Passive loss deductions
IRA Deductions
Taxable Social Security/RR Retirement
Excluded US Series EE Education Bond Interest
Employer adoption assistance excluded income
Higher Education Loan interest deduction
Qualified Tuition/Expense Deductions
Rental Real estate losses of a real estate professional who materially participates.
That are deemed to be non-passive.
$ 25,000 Rental Loss Phase-out
When MAGI is between $ 100,000 to $ 150,000
Jon’s income in 2014:
Form W-2 Wages
Schedule C Income
Schedule E Loss
IRA Deduction
SE Tax ½ Deduction
Tentative AGI
$ 20,000
100,000
(35,000)
( 2,000)
( 5,363)
$ 77,637
=======
12
11/20/2014
$ 25,000 Rental Loss Phase-out
When MAGI between $ 100,00 to $ 150,000
Per IRS
Per IRC 469
Instructions
(i)(3)(E)
Tentative AGI
$ 77,637
$ 77,637
Add back:
Sched. E /loss
35,000
35,000
IRA Deduction
2,000
2,000
SE ½ Deduction
5,363
Modified AGI
$ 120,000
$ 114,637
======
=======
$ 25,000 Rental Loss Phase-out
When MAGI between $ 100,00 to $ 150,000
Per IRS
Instructions
Modified AGI
Per IRC 469
(i)(3)(E)
$ 120,000
$ 114,637
======
=======
Allowable Loss is
$ 25,000 minus:
50% ($120K-100K)
$ 15,000
50% ($114,637-$100K)
-
$ 17,681
13
11/20/2014
Self-Rental
p. 176
1. Profit from renting to an entity in which landlord
materially participates is re-characterized to “nonpassive” income. [Cannot off-set passive losses]
2. But, self-rental losses are “passive”.
3. Re-characterized self-rental profit is NOT subject to Net
Investment Income Tax surcharge of 3.8%
Example: Gary the Landlord
p. 177
1. Owns rental properties “A”, “B”, “C”, and “D”.
2. “A” is rented to C-Corp; “B” is rented to S-Corp; “C/D” are
rented to unrelated parties.
3. He works at C-Corp (not an owner).
4. He owns S-Corp B (self-rental).
Non-passive
Passive
NIIT
“A” rents
$ 20,000
“B” rents
($ 6,000)
“C” rents
($ 4,000) ($ 4,000)
“D” rents
$ 9,000
$ 9,000
$ 20,000
$
$ 5,000)
Suspended:
($1,000)
-
14
11/20/2014
Real Estate Professional
p. 178
Treat real estate losses as “active” if:
a. More than 50% of work hours is
in active real estate business;
and,
b. More than 750 work hours is in
active real estate business; and,
c. Rental participation is material.
Note: Spousal hours are not combined.
Real Estate Professional
p. 180
1. Rentals could be separate or combined.
2. Election to aggregate makes satisfying the test
easier, but election irrevocable.
3. Late election [Rev. Proc. 2011-34] possible: attach
statement to amended return for most recent tax
year.
15
11/20/2014
Grouping Activities
p. 181
1. A reasonable economic unit is one that “stands
alone”.
2. Two or more units can form a single “stand alone”
economic unit.
3. Suspended losses can only be deducted upon
disposition of entire “stand alone” economic unit.
Red
Groupings
A B C D
Columbus:
Store
X Y
Z
Batting Cage X Y
Cincinnati:
Store
X
Y Z
Batting Cage X
Y
p. 182
E
Z
Z
Note: Suspended losses apply to group disposition
16
11/20/2014
NIIT Regrouping
p. 182
1. Taxpayers are permitted a one-time “fresh
start” regrouping, but only:
a. For the first year the taxpayer’s
MAGI exceeds threshold; and also,
b. Has NIIT.
2. Applies to year of regrouping and all
future years.
Regrouping on Amended Returns
1. Permitted only if:
a. On the original return MAGI did not
exceed thresholds, but the amended
return does exceed threshold; and,
b. The amended return creates NIIT tax.
2. If, after amending, the taxpayer
determines that he/she was not subject
to NIIT, the re-grouping is void.
17
11/20/2014
Re-grouping Restrictions
p. 183
1. Rental activities cannot be grouped with
business activities unless:
a. Rental activity is insubstantial.
b. Business activity is insubstantial.
2. Effective for 2011 tax year must:
a. Include grouping statement with tax
return for new groups, additions to old
groups, or any regrouping.
b. Describe basis for economic unit.
“Insubstantial”
p. 183
Regs do not define “insubstantial”. But, a Texas
district court applied an 80/20 rule. [Candelaria 100
AFTR 2d 2007-6381]
No more than 20% of gross receipts from the
combined activities are derived from the
“insubstantial” activity.
18
11/20/2014
Suspended Losses
p. 185
1. Suspended passive losses are carried forward
to a year:
a. With net passive income.
b. When the $ 25,000 loss applies.
c. There is a qualifying disposition.
2. Sale of a passive activity generates
income subject to NIIT unless there
was material participation.
Partnership Interest/
”S” Corporation Stock
p.187
1. Generally, the sale of a partnership interest or stock
in an “S” corporation is subject to NIIT. However;
2. A sale by a partner or “S” shareholder who
materially participates is not subject to NIIT.
19
11/20/2014
Short Cut Method Calculation of NIIT on
flow through income p. 187
1. Is gain on sale not more than $ 250,000? Or,
2. Is partner/shareholder’s allocation of NIIT income not more
than 5% of total pass-through income received during the
IRC 1411 holding period* and total gain not more than $ 5
million?
* Lesser of total pass through income from:
(1) Year of Sale plus two prior years; or,
(2) Transferor’s total time of ownership.
Tiger [Short Cut]
p. 187
1. Sale gain in 2015 is $ 200,000, which is below the
$ 250,000 limit.
2. During 2015, 2014, and 2013 receives:
Interest $ 25,000 5%
Income $ 475,000 95%
Total
$ 500,000 100%
NIIT = 5% x $ 200,000 = $ 10,000 x 3.8% = $ 380.
20
11/20/2014
Tiger Sale: Regular Method
1. Calculate theoretical gain or loss of each of
the entity’s assets using Fair Market Values.
2. Interpolate such gains against the real gain
from disposition to determine the amount
subject to the Net Investment Income Tax
surcharge of 3.8%.
Self-Charged Interest
p. 188
1. Occurs when taxpayer receives interest
income from a loan to his own entity.
2. If entity is “passive”, taxpayer can elect to
treat interest income as “passive” using
applicable ownership ratio.
21
11/20/2014
Self-Charged Example: Phil/Delphia
p. 189
1. Each owns 50% of realty partnership; each partner issues a
loan to partnership.
2. Phil receives $ 1,000 interest on his loan;
Delphia receives $ 500 interest on his loan.
3. Each partner’s share of partnership’s interest
expense is $ 750 [$ 1,500 times 50%].
4. Interest income is reported as follows:
Phil Delphia
a. Passive Income:
$ 750 $ 500
b. Portfolio interest:
$ 250
-
Vacation Home/Mixed Use p. 190
1. Residential rentals under15 days per year generates
neither reportable income nor deductible expense.
2. A vacation home is a residence [mixed use]if
personal use is greater than:
a. 14 days; or,
b. 10% of the days rented to others.
22
11/20/2014
Expense Allocation
p. 190
IRS Prop. Reg. 1,280A-3
Allocate all expenses by actual usage days
9th & 10th Circuit
1. Allocate mortgage interest and property taxes
by calendar days. But,
2. Allocate other expenses by usage days.
Jon’s Vacation Home is used by all parties
no more than 4 months per year:
p. 192
Rental Jon’s Use
Total
Months
1
3
4
Rent-in
$ 10,000
$10,000
Deduct:
Advertise
(400)
(400)
Realtor
(800)
(800)
Prop. Tax
(2,500) (7,500) (10,000)
Interest
(3,000) (9,000) (12,000)
Sched. E
$ 3,300
- $(13,200)
Sched. A
- $ (16,500)
-
23
11/20/2014
Capital Gains
Chapter 13
Pages 195-210
Capital Gains Tax Rates
2012
Tax Bracket 15%
0%
Above 15% - 35 %
15%
Above 35% [39.6%] N/A
Other Tax Classifications
Collectibles
IRC 1250 Un-recaptured
IRC 1202 Stock
2013
0%
15%
20%
2014
0%
15%
20%
Up to 28%
Up to 25%
Up to 14%
1
11/20/2014
20% Capital Gains Rate
Applies when Taxable Income Exceeds:
Married Joint
Married Separate
$ 450,000
$ 225,000
Head of Household
$ 425,000
Single
$ 400,000
Health Care Sur-charges Since 2013
p. 169
Earned Income
MAGI
Investment Medicare
MFS over $ 125,000
3.8%
0.9%
MFJ over $ 250,000
3.8%
0.9%
Single over $ 200,000
3.8%
0.9%
Investment income: interest, dividends, rents,
annuities, capital gains, royalties, etc.
2
11/20/2014
Capital Loss Treatment
p. 196
1. Net losses against gains:
a. Short term, first.
b. Long term, second.
c. Short term against long term by tax
bracket, third.
2. Net capital loss deducted against ordinary
income up to $ 3,000 --- since 1978!
Gain/Loss Treatment
Class
Gain
Personal
Capital
Investments
Capital
Business Assets:
Non-depreciable Ordinary
Depreciable
Recapture
p. 196
Loss
N/A
Capital
Form
D
D
Ordinary
Ordinary
C/F
4797
3
11/20/2014
Form 8949
p. 197
1. Brokers provide cost basis on Form 1099-B.
2. Taxpayers report gains/losses separate
Forms 8949 for transactions:
a. With basis in Form 1099-B, Box 3.
b. Without basis in Form 1099-B, Box 3.
c. No Form 1099-B issued.
Form 8949 Short-cut
p. 200
Skip Form 8949;
Go directly to Schedule D line 1A (short term)
and/or line 8a (long term) if:
1. Taxpayer’s Form 1099-B includes basis, and,
2. No code adjustments are necessary.
4
11/20/2014
Avoid Entering Each Transaction
on Form 8949
p. 200
On line 1:
1. Enter broker’s name in Column A. [Description]
2. Enter “code M” in Column F. [Code]
3. Enter “Zero” in Column G. [Amount of Adjustment]
4. Attach broker’s statement to return.
Gift Basis
p 201
Process
1. Identify donor’s adjusted basis.
2 Identify date of gift fair market value.
3 Compute any gift tax paid.
5
11/20/2014
Gift tax basis calculation
1. Adjusted basis:
2. Fair value:
3. Gift Tax paid:
p. 201
$ 5,000
$ 15,000
$ 2,800
(15,000-5,000)*
------------------- = 2/3 ($ 2,800) = $ 1,867
15,000
New Basis = $ 5,000 + $ 1,867 = $ 6,867
* Gain component
Gain on Gift Disposal
p. 201
Sale Price $ 11,000 $ 3,000 $ 8,500 $ 8,500
Basis
(10,000)
- (10,000)
Gift FMV
(5,000)
- (5,000)
------------ ---------- --------- --------Gain/Loss $ 1,000 $(2,000)
N/A* N/A*
*If [Price – Basis] = loss and [Price – Gift Value] =
gain, neither gain nor loss is recognized.
6
11/20/2014
IRC 1202 Stock
p. 201
1. “C” corporation stock, not more than
$ 50 million in assets, held five years.
2. Special gain tax rates:
Regular AMT
Acquisition Dates
Tax Rate Adjust.
8/10/1993 to 2/17/2009
14%
7%
2/18/2009 to 9/27/2010
7%
7%
9/28/2010 to 12/31/2013
0%
0%
1/01/2014 to ???
14%
7%
Caution about Client Disclosures
1. Stock sales rare; but, tell client of the option.
2. Example asset sale:
Item
Sale Price Tax
Seller Net
Group 1
$ 100,000 25%
$ 75,000
Group 2
$ 200,000 15% $ 170,000
$ 300,000
$ 245,000
Buyer and seller might agree to a stock sale below
$ 300,000 but above $ 245,000.
7
11/20/2014
Excluded Businesses from
IRC 1202 provisions
1.
2.
3.
4.
5.
6.
7.
p. 202
Professional services
Banking/Insurance/Financing/Investing
Leasing
Farming
Depletion activities
Hotels
Restaurants
Wash Sales IRC 1091
p. 202
A loss on the disposition of stock is disallowed if within
30 days before or 30 days after the disposition the
taxpayer acquires substantially identical stock.
Disallowed loss increases basis.
Example:
Basis on Day 1
$ 50
FMV on Day 1
$ 20
Disallowed Loss
$ 30
$ 30
Purchased Day 29
$ 18
Adjusted Basis Day 29
$ 48
8
11/20/2014
Short Sales
p. 203
[Sale of borrowed stock]
1. Gain is recognized on the date the
replacement stock is purchased.
(control acquired)
2. Loss is recognized on the date the
replacement stock is delivered.
(control surrendered)
Puts and Calls
p. 204
1. “Put”:
a. The right to “put” up stock for sale.
b. A guaranteed sales price.
2. “Call”
a. The right to “call” in a stock for purchase.
b. A guaranteed purchase price.
9
11/20/2014
Bad Debts
p. 205
Business Non-Business
Yes
No
Yes
No
Yes
Yes
Direct Business Tie
Partially worthless
Totally worthless
Deduction reported:
Sole Prop: Schedule C/F
Others: Schedule A 2% AGI
Schedule D Short Term
“Trader” Status
Yes
Yes
-
Yes
p. 208
1. Traders file Schedule C:
a.
b.
c.
d.
No $ 3,000 capital loss limitation.
Expenses deducted from gains.
All stock positions “liquidated” at December 31.
“Liquidations” result in adjusted basis January 1.
2. Election made on preceding year tax return.
3. Form 3115 attached to first year return.
10
11/20/2014
Installment Sales
Chapter 14
Pages 211-218
Basic Rules
p. 211
Installment Revenue from an asset sale is:
a. Received in two or more tax years.
b. Taxed at capital gain rate for receipts year.
The interest component is based upon the time
value of money [AFR minimum].
1
11/20/2014
Miscellaneous
p.212
1. Pledge of installment note:
a. Equates to full receipt of all payments;
b. Effectively accelerates installment sale.
2. Payments received in two or more years are
always installment sales -- unless the election
is made to “opt” out.
Miscellaneous
p. 215
3. Depreciation recapture is:
a. Recognized in full in year of sale.
b. Always treated as ordinary gain.
c. Added to cost basis for purposes of
determining remaining installment gain.
4. Installment sale treatment to related party
ends if related party resells within 2 years.
All remaining gain recognized that date.
2
11/20/2014
Disposition prior to full payment
1. Disposition can lead to gain acceleration.
2. Debt reduction by seller:
a. Buyer reduces basis.
b. Seller re-computes profit percentage.
3. Repossession can result in gain or loss.
Repossession: Personal Property p. 216
FMV of repossessed property
Original Sales Price
$ 1, 600
Less receipts to-date
( 600)
Unpaid balance
1,000
Assume lost Gross Profit 25%
(250)
Net remaining basis
Repossession costs
Taxable Gain on Repossession
$ 1,400
(750)
(100)
$ 550
New Basis is FMV at repossession: $ 1,400
3
11/20/2014
Repossession: Real Property p. 216
Original Profit
Prior Taxable Gain reported
Taxable Gain on Repossession
Repossession Costs
Installment Note Basis Repossession
Basis in Repossessed Property
$ 5,000
(2,300)
$ 2,700
500
12,800
$ 16,000
4
11/20/2014
Sale of Principal Residence
Chapter 15
Pages 219-232
IRC 121 Exclusion
If for 2 of the 5 years preceding the date of sale:
1. The taxpayer’s principal residence; and,
2. Owned by the taxpayer; then,
3. Gain exclusion: $ 250,000 per qualifying
taxpayer.
Limit: one full exclusion per two years.
1
11/20/2014
Gary and his Two Parcels
p. 220
House
Vacant Land
2008
2009
2014
2015
($25,000) -- $ 270,000
$ 245,000
($ 250,000)
Purchase date
Sale Date
Gain/(Loss)
Net
IRC 121 Exclusion
Notes:
1. If land sold first, report and pay tax; then amend.
2. If house sold first, provide disclosure on land sale year.
3. Sales must be within 2 years of each other.
Abe converts: Cost Basis for Gain: $ 280,000;
FMV at Rental Date $ 260,000
p. 223
FMV at Conversion
For Gain
Basis:
$ 260,000
Depreciation
( 16,000)
Adjusted Basis
$ 244,000
Sale Price
$ 260,000
Non-Deduct Pers.
Taxable Gain
$ 16,000
Acquisition Cost
For Loss
$ 280,000
( 16,000)
$ 264,000
$ 260,000
$ ( 4,000)
-
2
11/20/2014
Two Exclusions Available to MFJ
p. 224
For two full exclusions ($ 250,000 x 2) if:
1. One spouse passes ownership test.
2. Both must pass:
a. The primary use test; and,
b. 1 sale in 2 years’ test.
Exceptions to the Use Test
p. 226
1. Incapable of self-care; in state licensed home.
2. Divorced under terms of an agreement.
3. U.S. Armed Forces up to 10 year suspension.
3
11/20/2014
Mitigating Circumstances to
One Sale Per Two Years Test p. 227
1. Change in job (50 mile test)
2. Health of a household member.
3. Unforeseen circumstances.
Then, a pro-rata exclusion available.
[$ 250,000/24 months = $ 10,417 per month]
IRC 121 Revision
p. 228
Housing Assistance Act 2008
1. Applies to house sales after 12/31/2008.
2. Applies to house use after 12/31/2008.
3. Excluded gain reduced for non-qualifying
use prior to primary residence use. [e.g.
vacation home, rental, etc.]
4. No reduction if initial use primary home.
4
11/20/2014
Home Purchased 1/1/2008
Home Sold 12/31/2012
A.
B.
C.
D.
Use
Use
Use
Use
2008
Res.
Vac
Rent
Rent
X
X
X
X
2009
Res.
Vac
Rent
Rent
2010
Res.
Res.
Res.
Rent
2011 2012
Vac. Vac.
Res. Res.
Res. Vac.
Res. Res.
Analysis:
A. Initial Use as primary residence; full exclusion.
B. Initial use not a primary residence:
- Vacation after 2008 and prior to 2009: 1 year.
- Disqualified Gain: 1/5 = 20%
C. Initial use not a primary residence: Same as B
D. Two years after 2008 disqualifying: 2/5 = 40%.
Example: $ 250,000 sale
(Sale at/below Exclusion Amount)
Initial Use
Gain from Sale
Disqualified 20% (*)
Eligible Gain
Exclusion
Disallowed Loss
Taxable Gain
(*)
Residence Vacation/Rental
$ 250,000
$ 250,000
( 50,000)
--------------------$ 250,000
$ 200,000
(250,000)
(250,000)
--------------------$
$ ( 50,000)
=======
=======
$
$ 50,000
=======
=======
5
11/20/2014
Example: $ 400,000 sale
(Sale above Exclusion Amount)
Scenario
Gain from Sale
Disqualified 20% (1)
Eligible Gain
Exclusion
Gain/Loss
(2)
Taxable Gain (1+2)
A
B
$ 400,000
$ 400,000
( 80,000)
--------------------$ 400,000
$ 320,000
(250,000)
(250,000)
--------------------$ 150,000 $ 70,000
=======
=======
$ 150,000 $ 150,000
=======
=======
What if exclusion – not gain - was “disqualified”?
“C” is NOT the law!
Scenario
Gain from Sale
Disqualified (1)
Eligible Gain
Exclusion
Gain/Loss
(2)
Taxable Gain (1+2)
A
$ 400,000
---------$ 400,000
(250,000)
----------$ 150,000
=======
$ 150,000
=======
B
$ 400,000
( 80,000)*
----------$ 320,000
(250,000)
----------$ 70,000
======
$ 150,000
======
C
$ 400,000
---------$ 400,000
(200,000)**
-----------$ 200,000
=======
$ 200,000
=======
* $ 400,000 * .20%
** $ 250,000 - (250,000*20%) = $ 200,000
6
11/20/2014
Non-qualified Use Formula
p. 229
Sample Example Assumptions:
1. House acquired 1/1/2009.
2. Property a vacation home prior to being used as a primary residence.
3. Excludable gain prior to reduction for non-qualified use: $ 100,000.
Vacation Use
3
3
3
3
Residence
2
7
12
17
Total Use
5
10
15
20
60%
30%
20%
15%
$ 60,000
$ 30,000
$ 20,000
$ 15,000
Disqualified Gain percent
Taxable Gain
Special Circumstances:
1031 Exchange p. 230
The IRC 121 exclusion available for:
(1) Residential property acquired via
1031 exchange, but only if:
(2) Sold 5 years from exchange date
7
11/20/2014
IRC 1031 & 121 Example p.230
1031 Acquisition Date:
Became Principal Res.
Sale Date:
Residence Period
Holding Period
Exclusion
1/1/09
1/1/10
1/1/13
3 Yrs
4 Yrs
None
1/1/09
1/1/10
1/1/14
4 yrs
5 yrs
Full
8
11/20/2014
Reverse Mortgages
Chapter 16
Pages 233-238
Home Equity Conversion Mortgage
p. 233
1. HUD program for those Aged 62 and above.
2. Home Owner must earn Certificate of HECM
counseling before processing an application.
3. If HECM is approved, the home owner:
a. Retains property title; FHA has first mortgage.
b. Free to sell home provided HECM repaid.
c. Must use home as primary residence.
1
11/20/2014
Home Equity Conversion Mortgage
p. 233
HECM need not be repaid as long as borrower:
1. Uses home as primary residence; and,
2. Pays property taxes and insurance; and,
3. Does not leave the home for 12 consecutive
months; and,
4. Does not permit the house to fall into
disrepair.
Basic Four HECM Requirements
p. 233-234
1. All persons holding property title are 62
years of age or older.
2. The HECM property must be borrower’s
primary residence.
3. The HECM must meet FHA guidelines.
4. Bankruptcy and/or delinquent federal debt
must be discharged by HECM closing.
2
11/20/2014
HECM Proceeds
p. 234
Dollar value of HECM is based upon:
1. Lesser of Single National Maximum Claim Amount
[SNMC] or appraised value.
For 2014, SNMC maximum is $ 625,500.
2. Borrower’s age. [Older persons can borrow more.]
3. Interest Rate at closing. [Low rate; borrow more.]
4. On average, 60% of the lesser of appraised value or
SNMC value. [Approximate max of $ 375,300].
HECM compared to Other Types
p. 235
Home Equity
Traditional Mortgage
HECM
Use income & credit
scores
Yes
Yes
No
Monthly payments
required
Yes
Yes
No
Limited Term
Yes
Yes
No
Loan is a fixed amount
No
Yes
No; can vary
3
11/20/2014
HECM Types
1.
2.
3.
4.
5.
6.
Lump Sum payment.
Tenure Payment: unlimited monthly payments.
Line of Credit: discretionary withdrawals.
Term Loan: structured monthly payment.
Modified Term: pre-determined years.
Modified Tenure: combination line of credit and
monthly payments.
HECM Uses
1.
2.
3.
4.
5.
6.
7.
p. 236
p. 237
Supplement monthly income.
Pay-off debt.
Make home improvements; vacation; etc.
Fund health care or purchase LTC insurance.
Provide gifts to family or charities.
Purchase a primary home or vacation home.
Just imagine!
4
11/20/2014
Melanie
p. 237
1. Wants to purchase AZ home for $ 295,000.
2. Owns MN condo that nets $ 130,000 at sale.
3. Qualifies for $ 175,000 HECM [59%] on the AZ home.
Results:
1.
2.
3.
4.
From MN home sale uses:
$ 120,000
Proceeds from HECM:
175,000
Purchase AZ home:
$ 295,000
Spend $ 10,000 [$ 130,000 - $ 120,000] on
a new set of golf clubs, a golf cart, and a party.
5. Never has to repay HECM.
5
11/20/2014
Debt Forgiveness and
Foreclosures
Chapter 17
Pages 239-252
General Rules
1. All income is taxable.
p. 239
2. Cancelled debt is income.
3. Cancelled debt is taxable:
a. To a solvent taxpayer.
b. To the extent solvency is restored.
1
11/20/2014
Warning!
P. 239-240
1. Form 1099-A is issued by a lender when property is
acquired. At this time debt has not been forgiven.
2. Form 1099-C is issued by a lender when debt is
forgiven.
3. The forms could be issued in different years!
Note: if acquisition and debt forgiveness occur in the
same year, only Form 1099-C need be issued.
Proposed Withdrawal of 36 Month Rule
Form 1099-C
Checkpoint 10/15/2014
1.
IRC 6050P imposes a cancelled debt reporting obligation on a creditor
when any one of eight identifiable events has occurred. [Judicial
proceeding; formal agreement; etc.]
2.
One of those Eight is a 36 month non-payment period. Even though
creditor is still pursuing legal action, if within a 36 month period the
creditor has not received a payment, Form 1099-C must be issued.
In many cases, the Form 1099-C is premature, causing taxpayer a
liability without foundation.
3.
4.
IRS proposes to remove the 36 month trigger.
2
11/20/2014
Cancelled Debt
p. 240-241
1. A cancelled debt represents income.
2. Exceptions:
a. Bankruptcy
b. To the extent of insolvency.
c. Qualified debts:
(1) Farm
(2) Business real estate
(3) Principal residence
Cancelled Debt is Taxable if:
Net worth + cancelled debt =
Positive amount.
Cancelled debt is taxable to
the extent of the positive amount.
3
11/20/2014
Cancelled debt NOT taxable if:
Net worth + cancelled debt =
a Negative Amount
Cancelled debt is NOT taxable;
reductions to tax attributes may apply.
Cancellation of Debt
Net Worth
Cancelled
Debt
Net Gain
(loss)
Cancellation
of Debt
Income for
Line 21, Form
1040
( $ 8,000)
5,000
----------( 3,000)
-0-
p. 242
( 2,000)
5,000
---------3,000
Positive
5,000
--------5,000
3,000
5,000
4
11/20/2014
Recourse/Non-Recourse
Personal Liability
Deemed Sale Price:
Balance of Note
Property FMV
Recourse
Yes
p 242
Non-Recourse
No
Maybe*
Maybe*
Yes
No
* Lesser of Note Balance or FMV
Recourse Debt: Personal Liability
p. 242
Sean’s Home
Facts
Home Basis
Mortgage Balance
Deemed Sale Value
Home Fair Value
Debt Discharge income
$ 300,000
Non-deductible loss
$ 70,000
Tax Effect
$ 260,000
(230,000)
(230,000)
$ 30,000
5
11/20/2014
Non- Recourse: No Personal
Liability
p. 242
Sean’s Home
Facts
Home Basis
Tax Effect
$ 300,000
Mortgage Balance
Deemed Sale Value
$ 260,000
Home Fair Value
(230,000)
Debt Forgiven
(260,000)
$
Deemed Adjustment to home
value (260,000 – 230,000)
Non-deductible loss
-0-
(30,000)
$ (40,000)
Bankruptcy Filings
Estimated 2009: 1.5 million
Education Level
1991
2001
2007
No college
53.5%
47.9%
41.1%
Some college
35.1%
38.6%
43.4%
College and more
11.4%
13.5%
15.5%
Source: 2007 Consumer Bankruptcy Project
Note that better educated people have begun to over extend themselves. Too
optimistic?
6
11/20/2014
Bankruptcy
p. 243
Chapter 7 (no chance to recover- termination)
1. For individuals or businesses
2. May be voluntary or involuntary
3. Full liquidation of all assets except those
exempted by state law
4. Bankruptcy Law of 2005 restricts a
bankruptcy filing
to those who earn less than state’s median
income;
otherwise, a “means test”/file Chapter 13
Bankruptcy
p.243
Chapter 13 (2nd chance - Personal)
1. Voluntary basis.
2. Must have stable income so as to repay debt.
3. Can continue to hold assets.
4. A trustee is usually appointed.
5. Creditors must accept long-term payment plan.
6. Debt must be repaid in 3-5 years.
7
11/20/2014
Bankruptcy
p. 243
Chapter 11 (2nd chance – Business)
1. May be voluntary or involuntary.
2. Usually no trustee appointed.
3. Purpose is to stay in business with a reorganized
business plan.
4. Creditors have a “say” in business operations.
General Bankruptcy Provisions
p. 243
1. Bankruptcy estate succeeds to the tax loss
and deduction carryovers, as well as all
debtor tax attributes.
2. IRC 1398 election terminates the prebankruptcy short year
8
11/20/2014
IRC 1398 Election
p.243
Without
1398 Election
With
1398 Election
120,000
120,000
Prior Year NOL
Not allowed
(100,000)
Taxable Income
120,000
20,000
Income before bankruptcy
filing
NOL to Debtor
Yes
NOL to Estate
Yes
Maria’s C.O.D
p. 244
Net Worth
( $ 8,000)
( 2,000)
Any Positive
Cancelled Debt
5,000
-----------
5,000
----------
5,000
---------
Net Gain (loss)
( 3,000)
3,000
5,000
3,000
5,000
Cancellation of
Debt Income for
Line 21, Form
1040
-0-
9
11/20/2014
George’s Debt
Property FMV $ 350,000; Insolvent $ 400,000
p. 244
Rental Property
Recourse
Non-Recourse
Note Balance
$ 500,000
$ 500,000
Deemed Sale Price
( 350,000)
-------------
(500,000)
------------
Cancelled Debt
150,000
=======
$
-0=======
Deemed Sale Price
$ 350,000
$ 500,000
Less property basis
(375,000)
------------
(375,000)
------------
$ (25,000)
=======
$ 125,000
=======
Taxable Business
Gain (Loss)
Cancelled Debt
150,000
Insolvency
(400,000)
-----------
(400,000)
-----------
$ (250,000)
=======
N/A
======
Taxable Debt Income (none)
Tax Attributes Reduced
-0-
p. 245
Dollar reduction for tax attributes:
1. NOL
[1 for 1]
2. Tax credits
[1 for 3]
3. Capital losses
[1 for 1]
4. Passive Losses
[1 for 1]
10
11/20/2014
Tax Attributes Reduced
p. 245
Dollar reduction for tax attributes:
5. Property Basis in this sequence: [1 for 1]
a. Business real property.
b. Business personal property.
c. Other business except inventory,
receivables, etc.
d. Inventory, receivables, etc.
e. Personal property.
6. Passive losses & credits.
7. Foreign tax credits.
Depreciable Property Basis
Adjustments due to COD
p. 246
In this sequence for trade/business/held for
investment:
1.
2.
3.
4.
Real property.
Personal property.
Other depreciable.
Real property classified as business inventory.
11
11/20/2014
Jon’s Debt
Original Basis $ 220,000
Retail Building
Solvent
FMV Building
$ 165,000
Loan Value
Cancelled Debt
p. 247
Insolvent
(185,000)
(20,000)
$ 20,000
======
Insolvency: COD Adj.
(12,000)
Insolvency: Qualified
(8,000)
Adjusted Basis
Election Basis Adjusted
Depr. for recapture
Cancelled Debt
Plus Prior Depreciation
Robert’s Debt
200,000
200,000
$ 180,000
180,000
$ 20,000
$ 10,000
$ 20,000
$ 10,000
p.
248
Original Basis $ 500,000/COD $ 80,000
Office Building
Acquisition
Sale
Basis
$ 500,000
$450,000
Regular Depreciation
(58,228)
Adjusted Basis
441,272
Cancelled Debt Basis
Adjustment
(80,000)
Basis at sale date
361,772
(361,771
Gain upon sale
$ 88,228
Allocation:
IRC 1017 ordinary recapture
IRC 1231 capital gain
$ 80,000
$ 8,228
12
11/20/2014
Home Mortgage Debt Forgiveness p.250
Effective 1/1/2007 - 12/31/2013
• Limited to $2 million of qualified principal residence
debt ($1 million for MFS).
• Qualified debt is:
1. Acquisition/improvement debt residence liens.
2. For principal residence, not 2nd home.
3. Forgiven due to a decline in value; not for
any other reason.
Principal Residence Debt
Laurie: Original Loan $ 800,000
250
Debt
Debt Composition:
Balance Initial Debt
Credit Card Related
Total
740,000
110,000
850,000
“Short sale” Value
(735,000)
Cancelled Debt
Qualified Exclusion
(115,000 – 110,000 c/card)
Debt income line 21
Adjusted Home Basis
p.
House
1,000,000
115,000
( 5,000)
(
5,000)
110,000
995,000
13
11/20/2014
Qualified Home Debt
Assets:
House FM value
Other Assets
Liabilities:
Mortgage
Credit Card Debt
Insolvency
$ 1,750,000
42,000
(2,500,000)
( 18,000)
-------------$ ( 726,000)
Example
Amount of Loan
House “sold” FMV
Debt Forgiven
C.O.D. Exclusion
($2 M Limit - $1.75 FMV)
C.O.D. Balance
Insolvency
Taxable (Non-taxable)
p. 239
P. 239
$ 2,500,000
(1,750,000)
750,000
( 250,000)
500,000
(726,000)
$ (226,000)
14
11/20/2014
IRS to Probe Mortgage Debt Forgiveness
Accounting Today 11/15/2010
1. For 2008: 126,000 to 169,000 filed Form
982 excluding debt of $ 15.2 billion to $ 24.6
billion
2. 61,000 to 93,000 used qualified principal
residence debt to exclude $ 6.4 billion to $
11.8 billion.
3. These are IRS Estimates since Form 982
allows choices but does not indicate amount
15
11/20/2014
Household Employees
Chapter 18
Pages 253-256
Household Employee
p. 253
Any person working:
a. In or around a private residence; and,
b. Subject to the control (exercised or not).
Expense may qualify for:
a. Medical expense deduction on Schedule A.
b. Dependent care credit on Form 2441.
1
11/20/2014
Payroll Tax Issues
p. 254
FICA
1. None required in 2014 if cash wages paid during
that year is less than $ 1,900 [per employee].
2. When wages paid reaches $ 1,900, FICA is required
on all wages paid for 2014 [per employee].
FUTA
1. None required if cash wages in any quarter of 2014,
or the total paid in the 2013 year, is under $ 1,000.
2. Applies to the first $ 7,000 paid to each employee.
Other Nanny Tax Issues
p. 255
1. No requirement for FIT withholding.
2. Form I-9 required by the first day of
employment.
3. Schedule H is used to report:
a. FICA.
b. FUTA.
c. FITW.
2
11/20/2014
Alternative Minimum Tax
Chapter 19
Pages 257 - 264
AMT: Genesis
Wall Street Journal 9/20/2011
Alternative Minimum Tax: 1969
1. Treasury Secretary Barr’s complained that during 1967:
A. Of all millionaires in the United States , 21
paid no income tax.
b. Of all households in the U.S. with income above
$ 200,000, 115 paid no income tax.
2. Consequence: AMT.
a. In 2008 almost 20 million tax payers affected.
b. 27% of households that paid AMT had household
incomes below $ 200,000 or less.
3. Observation: Tax laws tend to expand.
1
11/20/2014
AMT: Genesis
Forbes 10/24/2011
Reports that Mrs. Horace (Anna) Dodge
placed her $ 59 million car company fortune into
tax exempt bonds that generated$ 1.5 million in
annual tax free income spurred Congress in
1969 to create the Alternative Minimum Tax.
Note:
AMT does not affect most tax-exempt income.
IRS Reported Average Tax Rates in
2008
Wall Street Journal 9/20/2011
Adjusted Gross Income
More than $ 1,000,000
$ 500,000 - $ 1,000,000
$ 200,000 - $ 500,000
$ 100,000 - $ 200,000
$ 50,000 - $ 100,000
$ 30,000 - $
50,000
Average Tax Rate
23.3%
24.1%
19.6%
12.7%
8.9%
7.2%
2
11/20/2014
Start with Regular Tax
Adjusted Gross Income p. 258
Subtract:
a. Charitable Contributions
b. Casualty losses
c. Miscellaneous deductions not
subject to 2% AGI
d. Estate taxes on decedent income
e. Medical expenses above 10% AGI
f. Eligible home mortgage interest
Make “preference” adjustments
[see p 262-264]
Add back:
a. Net operating losses
b. Gain on IRC 1202 stock x 7.0%
c. FMV gain from incentive stock options
Subtract
a. State tax refunds
b. Installment sale income
c. AMT Net operating loss
3
11/20/2014
Calculate the Alt Min Tax
1.
2.
3.
4.
Determine AMT Income
Less AMT Exemption [Single; 2014]
Result: AMT Taxable Income
Calculate Tax
*Rate: 26% of first $ 182,500
28% of remainder
$ 87,100
(52,800)
34,300
$ 8,918*
5. Subtract Foreign Tax Credit
(618)
6. Net AMT Tax
$ 8,300
AMT Liability
1. AMT Tax
2. Regular Tax
3. AMT Liability
4. Tax to be paid:
Regular Tax
AMT Liability
Total Tax
$
8,300
( 6,000)
$ 2,300
$ 6,000
2,300
$ 8,300
4
11/20/2014
Minimum Tax Credit
p 258
1. For an income item deferred from regular
tax but added to income for AMT.
2. If in a following year regular tax exceeds
AMT tax, credit may be applied.
Rick
Tax liability in 2014:
Regular Tax
AMT
Excess of regular over AMT
AMT Credits
Total from 2013
Applied in 2014
Available 2015
p. 259
Tax Paid
$ 70,000
(65,000)
$ 5,000
$ 65,000
$ 50,000
( 5,000)
$ 45,000
5
11/20/2014
Frank
Original Loan $ 325,000; Balance 12/31/10
Refinanced amount balance 3/1/14
Loan
Interest Paid
$ 300,000
$
1/1 to 2/28
$ 5,000
3/1 to 12/31
15,000
$
AMT Deductible Interest
$ 20,000
=======
Reg. Tax Interest
$ 20,000 + $
p. 261
$ 300,000
$ 330,000
Loan
30,000
7,000
7,000
6
11/20/2014
Gambling Winnings
Chapter 20
Pages 265 - 268
Gambling Winnings
IRC 165(d)
Revenue Rule 77-29
Page 266
1
11/20/2014
Gambling “Winnings”
A “winning” represents a receipt in excess of the
return of capital.
1. Bill brings $ 3,000 to a casino to play Black-jack.
2. That day, Bill goes home with $ 3,800.
3. How much did Bill win?
Gambling “Loss”
A “loss” represents a receipt below the return of
capital.
1. Bill brings $ 3,000 to a casino to play Poker.
2. That day, Bill goes home with $ 2,000.
3. How much did Bill win? How much did Bill lose?
2
11/20/2014
Gambling: W-2G
Activity Receipt Wager Winning Loss
Black jack $ 3,800 $ 3,000 $ 800 $
Poker
$ 2,000 $ 3,000 $
- $ 1,000
Slots
$ 2,500 $ 3,000 $
- $ 500
Results
$ 8,300 $ 9,000 $ 800 $ 1,500
Form 1040, Line 21:
$ 8,300 - $ 7,500 =
$ 800
Schedule A [no 2% AGI] :
$ 800
Lois
Day
Wager
Receipts
1-5
$ 500
6
$ 100
$ 20
7
$ 100
$ 70
8
$ 100
$ 150
9
$ 100
$ 200
10
$ 100
$ 300
Totals
1040, Line 21
Schedule A [No 2% AGI adj.]
p. 266
Winnings
$ 50
$ 100
$ 200
$ 350
$ 350
-
Loss
$ 500
$ 80
$ 30
$ 610
$ 350
3
11/20/2014
Personal Tax Credits
Chapter 21
Pages 269 - 284
Home Buyer Refundable Credit IRC 36
p. 270
Qualified
Dates
Funding
Maximum
Credit Recapture
If Residence
stops within
First Time
4/9/08 12/31/08
Loan paid back
in 15 years
starting in 2010
$ 7,500
15 years
First Time
1/1/09 –
11/06/09
Refundable
Credit
$ 8,000
3 years
First Time and
Long Time
11/07/094/30/10
Refundable
Credit
FT $ 8,000
LT $ 6,500
3 years
1
11/20/2014
Home Buyer Credit Recapture
p.270
1. For the 15 year “credit” recapture of $ 500 per
year began with 2010 Form 1040.
2. Full recapture occurs when home:
a. Ceases to be a primary residence.
b. Is sold, converted to business or rental,
destroyed, or condemned.
3. IRS Website tracks original credit and recapture
status. See page 251, paragraph B (5).
Earned Income Refundable Credit
IRC 32
p. 271-274
3. For all:
a. Earned income test.
b. Investment income must be below $ 3,300.
c. Cannot be Married Filing Separately.
d. Earned Income phase-out limits.
Note:
Fraudulent EIC claims range from 23-28% annually.
2
11/20/2014
EIC Enforcement
p. 272
Taxpayers
1. Prior Denial: File re-instatement Form 8862
2. Reckless Disregard: Denied EIC for next 2 years.
3. Fraud: Denied EIC for 10 years.
Tax Preparers
1. Penalty for non-compliance: $ 500 per
2. Submit Form 8867
3. Make reasonable inquiries, documentation.
Refundable
Earned Income Credit IRC 32
p. 272
1. Without children tests:
a. U.S. abode for at least 6 months.
b. Between ages of 25-64
c. Not someone else’s dependent.
2. With children: must be “qualified” children.
a. Relationship [child/step-child/sibling].
b. Under Age 19; or, under Age 24 if a student; or, any
age if disabled.
c. Child did not file a tax return.
d. US resident more than half the year.
3
11/20/2014
Non-Refundable
Child Tax Credit IRC 24
p. 274
1. Per Qualifying Child:
a. Amount:
$ 1,000
b. Subject to MAGI phase-out.
2. A qualifying child:
a. A dependant.
b. Under Age 17
c. A U.S. citizen or resident alien.
3. Refundable if:
a. 1-2 kids: 15%(Earned income minus $ 3,000)
b. 3 or more: FICA paid – 15% (Earned income - $ 3,000 )
Adoption Credit IRC 36C
Adoption Income Exclusion IRC 137 p. 276
1.
2.
3.
4.
5.
6.
For 2012 a non-refundable credit: $ 12,650
For 2013 a non-refundable credit: $ 12,670
For 2014, a non-refundable credit: $ 13,190
Same income exclusion for employer paid expenses.
Taxpayer could qualify for both amounts!
Domestic child: claim expense in year after expense
incurred [unless finalization year]
7. Foreign child: claim expense in year of finalization.
4
11/20/2014
Child & Dependent Care Credits
IRS 21 & 129 p. 277
1. [Non-refundable] Credit if MFJ or HOH:
a. Child under Age 13.
b. Dependent /spouse incapable of self-care.
c. Earned income.
d. Qualifying expenses.
2. Credit is 20%-35% qualifying expenses.
3. Maximum credit: $ 3,000/$ 6,000.
4. Dependent Care Employer Expense NOT taxed if:
a. Up to $ 5,000 for MFJ.
b. Up to $ 2,500 for MFS.
Other Non-refundable Credits
1.
2.
3.
4.
Plug-in Electric Vehicle [Expired 2013]:$ 2,500 - $ 7,500
Alternative Motor Vehicle: $ 4,000 - $ 40,000
Solar Residential Energy:
[30% of costs, no limit]
Primary Residence Energy [Expired 2013]:
[10% of costs; Lifetime $ 1,500]
5
11/20/2014
Qualified Primary Residence Expenditures
[Expired in 2013]
p. 282
Expenditure
Maximum Expense
1. Insulation/windows/doors
$ 200
2. Furnaces
$ 150
3. Air conditioners/heat pumps
$ 300
4. Main Circulating Fans
$ 50
Other Non-refundable Credits
5. Foreign Tax Credit:
Lesser of foreign tax paid or the
U.S. tax due on that foreign income
a. File Form 1116; or,
b. A direct credit on Form 1040, page 2 if
tax paid is not more than $300/$600
6
11/20/2014
Other Non-refundable Credits
6. Mortgage Interest Credit: $ 2,000 max
a. Need Mortgage Credit Certificate [MCC].
b. Maximum ratio is 20% of MCC interest.
c. File Form 8396.
d. Must remain a residence for 9 years.
Otherwise, file recapture Form 8828.
Other Non-refundable Credits
7. Credit for the Elderly: 15% eligible income
a. Base amount Single: $ 5,000
b. Base amount MFJ:
$ 7,500
c. Base amount MFS:
$ 3,750
8. Credit for Retirement Savings:
a. Credit max $ 1,000 Single/ $ 2,000 MFJ
b. Based upon MAGI .
7
11/20/2014
November 2011 IRS Audits
1. Per IRS, 100,000 filers in 2009/2010 claimed
more than $ 1,500 in energy savings credits.
2. PER IRS, in 2010 many filers did not comply
with state sales tax or use correct vehicle
deduction dates: 2/16/2009 to 12/31/2009.
3. Special audits planned.
8
11/20/2014
SSARS No. 21
Released October 23, 2014
Mandatory use for Periods Ending on or after
December 15, 2015.
Optional use begins October 23, 2014.
SSARS No. 21
1. Replaces all prior SSARS except No. 14 [Pro Forma]
2. Introduces a new level of service:
a.
b.
c.
d.
e.
3.
The Audit.
The Review.
The Compilation with full disclosure.
The Compilation without disclosures.
The Preparation.
New reports/engagement letters for Compilations/ Reviews.
1
11/20/2014
Changes to Reporting &
Documentation
SSARS Changes
SSARS No. 01
12/15/1979 - 12/14/2010
SSARS No. 19
12/15/2010 - 12/14/2015
SSARS No. 21
10/23/2014 - ???
Accounting Basis Change
Financial Reporting Framework [FRF]
for Small and Medium Sized Enterprises
June 10, 2013
SSARS No.21
The “Preparation”
of
Financial Statements
2
11/20/2014
“Preparation” of financial statements
1. Occurs when the accountant has not been
engaged to issue a compilation, review, or
audit report.
2. The ARSC has determined that preparation of
financial statements is simply a book-keeping
function.
3. Hence, “preparation” of financial statements
does not require a report – even if the
financial statements are expected to be used
by or provided to a third party.
4. But -- a preparation should include a legend.
A “Preparation”: Four Points
1. Is not an attest service.
2. Does not require an accountant to:
a. verify the accuracy or completeness of
management’s information.
b. gather any supporting evidence.
3. If accountant becomes aware of incomplete,
inaccurate, or unsatisfactory information, the
accountant should withdraw if not corrected.
4. Requires a statement on each page – including
the notes -- that there is no assurance.
3
11/20/2014
Legend for a “Preparation”
Notation on Each Financial Statement Page
“No assurance is provided on these financial
statements.”
Notation on Transmittal “Letter”
“These financial statements have not been subjected to
an audit or review or compilation engagement, and no
assurance is provided on them.”
“Preparation” Transmittal Letter
Disclaimer/Transmittal Letter
“The accompanying financial statements of XYZ
Company as of and for the year ended December 31,
2015 were not subjected to an audit, review, or
compilation engagement by me (us) and, accordingly, I
(we) do not express an opinion or a conclusion nor
provide any assurance on them.”
4
11/20/2014
“Preparation” Engagement letters are Required
May have multiple engagement letters for:
1. The “preparation” of monthly or other
interim financial statements; and,
2. The annual, formal compilation, review,
or audit of those interim “preparations”.
Must still comply with independence and impairment
rules if a preparation converts to a higher service level!
Seven “Preparation” Specific Requirements
1. Obtain an engagement letter.
2. Obtain an understanding of the AFRF [applicable
financial reporting framework.]
3. Justify a departure from a relevant presumptively
mandatory requirement and explain the alternative
procedures performed.
4. When using a special purpose AFRF [OCBOA], describe
it on the face of the statements or in financial statement
note. [Modify Title]
5. Permit “no disclosures” if absence not misleading.
6. Put a “No Assurance” legend on every page.
7. Retain a copy of the financial statements that the
accountant prepared.
5
11/20/2014
“Preparation” engagement letter
(paragraph 1)
You have requested that we prepare the financial statements of
the ABC Company, which comprise the balance sheet as of
December 31, 2015, and the related statements of income, and
changes in stockholders’ equity. These statements will not
include the statement of cash flows and the related notes to the
financial statements. We are pleased to confirm our acceptance
and our understanding of this engagement to prepare the
financial statements of ABC Company by means of this letter.
“Preparation” engagement letter
(paragraph 2)
Our Responsibilities
The objective of our engagement is to prepare financial
statements in accordance with the tax basis of accounting. We
will conduct our engagement in accordance with the Statements
on Standards for Accounting and Review Services (SSARS)
promulgated by the Accounting and Review Services Committee
of the AICPA and comply with the AICPA’s Code of Professional
Conduct, including the ethical principles of integrity, objectivity,
professional competence, and due care.
6
11/20/2014
“Preparation” engagement letter
(paragraph 3)
Our Responsibilities (Continued)
We are not required to, and will not, verify the accuracy or
completeness of the information you will provide to us for the
engagement or otherwise gather evidence for the purpose of
expressing an opinion or a conclusion. Accordingly, we will not
express an opinion or a conclusion or provide any assurance on
the financial statements.
“Preparation” engagement letter
(paragraph 4)
Our Responsibilities (Continued)
Our engagement cannot be relied upon to disclose any financial
statement misstatements including those caused by fraud or
error, or to disclose any wrongdoing within the entity or
noncompliance with laws and regulations.
7
11/20/2014
“Preparation” Engagement Letter
(paragraph 5)
Your Responsibilities
The engagement to be performed is conducted
on the basis that you acknowledge and
understand that our role is the preparation of
the financial statements in accordance with the
income tax basis of accounting. You have the
following overall responsibilities that are
fundamental to our undertaking, in accordance
with SSARS, the engagement to prepare your
“Preparation” engagement letter
(paragraph 5)
Your Responsibilities (continued)
a. The prevention and detection of fraud;
b. To ensure that the entity complies with the laws and
regulations applicable to its activities;
c. To make all financial records and related information
available to us.
d. The accuracy and completeness of the records,, documents,
explanations, and other information, including significant
judgments, you provide to us for the engagement to prepare
financial statements.
You agree that the financial statements will clearly indicate that no
8
11/20/2014
“Preparation” Engagement Letter
(paragraph 6)
Other Relevant Information
Our fees for these services …..
You agree to hold us harmless and to release,
indemnify, and defend us from any liability and
costs, including attorney’s fees, resulting from
management’s knowing misrepresentations to
us.
SSARS No. 21
A
Compilation
Engagement
9
11/20/2014
“Compilation” engagement requirements
1. The engagement letter identifies:
a. The applicable financial reporting framework.
b. Management’s responsibilities.
c. Report form and content.
“Compilation” engagement requirements
2. Document understanding of the AFRF and the
significant policies adopted by management.
3. Read the financial statements.
4. Withdraw if management fails to provide sufficient
documentation or explanations, or if management
declines to make revisions or appropriate
disclosures.
10
11/20/2014
“Compilation” engagement requirements
5. With respect to the compilation report:
a. Refer to management’s responsibility to select AFRF.
b. If a compliance report, reference its purpose.
c. If an OCBOA, state that it differs from U.S. GAAP.
d. If supplementary information is included, indicate
the accountant’s level of responsibility.
e. If independence is impaired, indicate the absence of
independence, generally, or by disclosing the reasons.
Requisite “Compilation” documentation
1. The engagement letter.
2. A copy of the financial statements.
3. A copy of the accountant’s report.
11
11/20/2014
“Compilation” Engagement Letter (paragraph 1)
You have requested that we prepare the financial statements of
the ABC Company, which comprise the statement of assets,
liabilities, and equity – tax basis of December 31, 2015, and the
related statements of operations and retained earnings – tax
basis, and cash flows – tax basis for the year then ended, and the
related notes to the financial statements, and perform a
compilation engagement with respect to those financial
statements. We are pleased to confirm our acceptance and our
understanding of this compilation engagement by means of this
letter.
“Compilation” Engagement Letter (paragraph 2)
Our Responsibilities
The objective of our compilation engagement is to:
a. prepare financial statements in accordance with the tax
basis of accounting based on information
provided by you,
and
b. apply accounting and financial reporting expertise to
assist you in the presentation of financial statements without
undertaking to obtain or provide any assurance that there are
no material modifications that should be made to the
12
11/20/2014
“Compilation” Engagement Letter (paragraph 3)
We will conduct our compilation engagement in accordance
with the Statements on Standards for Accounting and Review
Services (SSARS) promulgated by the Accounting and Review
Services Committee of the AICPA and comply with the AICPA’s
Code of Professional Conduct, including the ethical principles of
integrity, objectivity, professional competence, and due care.
“Compilation” Engagement Letter (paragraph 4)
We are not required to and will not verify the accuracy or
completeness of the information you will provide to us for the
compilation engagement or otherwise gather evidence for the
purpose of expressing an opinion or a conclusion. Accordingly,
we will not express an opinion or a conclusion nor provide any
assurance on the financial statements.
13
11/20/2014
“Compilation” Engagement Letter (paragraph 5)
Our engagement cannot be relied upon to disclose any financial
statement misstatements, including those caused by fraud or
error, or to identify or disclose any wrongdoing within the entity
or noncompliance with laws and regulations.
Compilation Engagement Letter (paragraph 6)
Your Responsibilities
The engagement to be performed is conducted
on the basis that you acknowledged and
understand our role is the preparation of
financial statements in accordance with the tax
basis of accounting, and to assist you in the
presentation of the financial statements in
accordance with the tax basis of accounting. You
have the following overall responsibilities that
are fundamental to our undertaking the
14
11/20/2014
Compilation Engagement Letter (paragraph 6)
a. The preparation and fair presentation of financial statements in
accordance with the tax basis of accounting.
b. The inclusion of all informative disclosures that is appropriate for
the tax basis of accounting. This includes:
i. a description of the tax basis of accounting, including a
summary of significant accounting policies, and how the tax
basis of accounting differ form accounting principles generally
accepted in the United States of America, the effects of which
need not be quantified, and
ii. Informative disclosures similar to those required by accounting
principles generally accepted in the United States of America.
Compilation Engagement Letter (paragraph 6)
c. The design, implementation, and maintenance
of internal control relevant to the preparation
and fair presentation of the financial statements.
d. The prevention and detection of fraud.
e. To ensure that the entity complies with the laws
and regulations applicable to its activities.
15
11/20/2014
Compilation Engagement Letter (paragraph 6)
f. To make all financial records and related
information available to us.
g. The accuracy and completeness of the records,
documents, explanations, and other
information, including significant judgments,
you provide to us for the compilation
engagement.
Compilation Engagement Letter (paragraph 7)
Our Report
As part of our engagement, we will issue a
report that will state that we did not audit or
review the financial statements and that,
accordingly, we do not express an opinion, a
conclusion, nor provide any assurance on them.
16
11/20/2014
Compilation Engagement Letter (paragraph 8)
Other Relevant Information
Our fees for these services …..
You agree to hold us harmless and to release,
indemnify, and defend us from any liability or
costs, including attorney’s fees, resulting from
management's knowing misrepresentations to
us.
SSARS No. 21
The Compilation Report
17
11/20/2014
“Compilation” Report SSARS No.
21
1. The new report format must be so different that it
does not to lead a reader to conclude that any
assurance is provided. [Not mini-review/audit]
2. There is an option to:
a. Omit substantially all disclosures.
b. Lack independence and/or disclose all
reasons for the lack of independence.
3. There shall no longer be a distinction between
general use statements and management use only
financial statements.
“Compilations”
Each page of the financial statements should include a
reference such as:
“See Accountant’s Report”
Or
“See Accountant’s Compilation Report”
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“Compilation” report (paragraph 1)
Management is responsible for the accompanying financial statements of XYZ
Company, which comprise the statements of assets, liabilities, and equity –
tax basis as of the years ended December 31, 2015 and 2014 and the related
statements of revenue and expenses -- tax basis, and equity – tax basis, for
the years then ended in accordance with the tax basis of accounting. I (We)
have performed a compilation engagement in accordance with Statements
on Standards for Accounting and Review Services promulgated by the
Accounting and Review Services Committee of the AICPA. I (we) did not audit
or review the financial statements nor was (were) I (we) required to perform
any procedures to verify the accuracy or completeness of the information
provided by management. Accordingly, I (we) do not express an opinion, a
conclusion, nor provide any form of assurance on these financial statements.
“Compilation” report (optional paragraph 2)
The financial statements are prepared in accordance
with the tax basis of accounting, which is a basis of
accounting other than accounting principles generally
accepted in the United States of America.
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“Compilation” report (optional paragraph 3)
Management has elected to omit substantially all of the
disclosures ordinarily included in financial statements prepared
in accordance with the tax basis of accounting. If the omitted
disclosures were included in the financial statements, they might
influence the user’s conclusions about the company’s assets,
liabilities, equity, revenue, and expenses. Accordingly, the
financial statements are not designed for those who are not
informed about such matters.
Comparisons
Compilation
1. Applicable?
When engaged to
perform a compilation
Preparation
When engaged to
prepare financial
statements
2. Engagement Letter?
Yes
Yes
3. Independence issues?
Yes
No
4. Disclose lack of
independence?
Yes
N/A
5. Report required?
Yes
No
6. Allowed to give to third
parties?
Yes
Yes
7. May omit disclosures?
Yes
Yes
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SSARS No. 21
The Review Engagement
Proposed Review “SSARS”: 2015
Seven Special Considerations: the Highlighted
Paragraphs
1. The need to draw the user’s attention to an
emphasis-of- a- matter paragraph or othermatter paragraph, such as the use of a nonGAAP framework.
2. To express known departures from an
applicable financial reporting framework.
3. To include an alert restricting the use of a
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Independent Accountant’s Review
Report
I(We) have reviewed the accompanying financial
statements of XYZ Inc., which comprise the
statements of assets, liabilities, and equity – tax
basis as of December 31, 2015, and the related
statements of revenues and expenses – tax
basis, and retained earnings – tax basis for the
year then ended, and the related notes to the
financial statements. A review includes primarily
applying analytical procedures to management's
financial data and making inquiries of the
company’s management. A review is
Independent Accountant’s Review
Report
Management’s Responsibilities for the
Financial Statements
Management is responsible for the preparation
and fair presentation of these financial
statements in accordance with the basis of
accounting the Company uses for income tax
purposes; this includes determining that the
basis of accounting that the company uses for
income tax purposes is an acceptable basis for
the preparation of financial statements in the
circumstances. Management is also responsible
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Independent Accountant’s Review
Report
Accountant’s Responsibility
My responsibility is to conduct the review
engagement in accordance with Statements on
Standards for Accounting and Review Services
promulgated by the Accounting and Review
Services Committee of the American Institute of
Certified Public Accountants. Those standards
require me to perform procedures to obtain
limited assurance as a basis for reporting
whether I am aware of any material
modifications that should be made to the
Independent Accountant’s Review
Report
Accountant’s Conclusion
Based on my review, I am not aware of any
material modifications that should be made to
the accompanying financial statements in order
for them to be in accordance with the basis of
accounting the Company uses for income tax
purposes.
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Drawing Attention to a
Non-GAAP Framework
Basis of Accounting
I draw attention to Note X of the financial
statements, which describes the basis of
accounting. The financial statements are
prepared in accordance with the basis of
accounting the Company uses for income tax
purposes, which is a basis of accounting other
Drawing Attention to Going Concern Issues
Emphasis of a Matter
The accompanying financial statements have
been prepared assuming that the Company will
continue as a going concern. As discussed in
Note X to the financial statements, the Company
has suffered recurring losses from operations
and has a net capital deficiency that raises
uncertainty about its ability to continue as a
going concern. Management’s plans in regard to
these matters are also described in Note Y. The
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Drawing Attention to Going Concern When
Disclosures are Not Included
Other Matter
The accompanying financial statements have
been prepared assuming that the Company will
continue as a going concern. The Company has
suffered recurring losses from operations and
has a net capital deficiency that raises
uncertainty about its ability to continue as a
going concern. Management’s plans in regard to
these matters are … [insert a summary of
management’s plans ] The financial statements
Drawing Attention to a Known Departure
Known Departure from Accounting Principles
Generally Accepted in the United States of
America
During our review engagement, I became aware
of a departure from accounting principles
generally accepted in the United States of
America.
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Drawing Attention to a Known Departure:
Emphasis of a Matter
Known Departure from Accounting Principles
Generally Accepted in the United States of
America
A statement of cash flows for the year ended
December 31, 2015 has not been presented.
Accounting principles generally accepted in the
United States of America require that such a
statement be presented when financial
statements purport to present financial position
Drawing Attention to
Supplementary Information
Other Matter
The [identify the information presented] is
presented for purposes of additional analysis
and is not a required part of the basis financial
statements. Such information was not compiled,
reviewed, or audited by me and, accordingly, I
do not express an opinion or other form of
assurance on it.
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New SSARS Guidance Format
Review
Title
2011
Introductory Paragraph
2011
Management’s Responsibility
2015
xxxxxx
xxxxxx
Audit
Yes
Yes
2012
QUESTIONS?
27