You’re on your way to meet friends for dinner and it dawns on you-you need cash. Not a problem-there is an ATM on your route to the restaurant. After typing in your password and the amount of your withdrawal you begin tapping your fingers on the machine. Once again you’ve left yourself with no time to spare. Suddenly the printing of the machine can be heard and you’re ready to snap the twenties as they spit out. What comes out of the machine leaves you breathless! There are no twenties but rather a slip of paper that has a big zero next to the word balance. You stand there, filled with terror, believing that some despicable character has stolen your identity and absconded with your money. It’s late and the bank is closed so after calling your friends and expressing your regrets you head home. The fear of not knowing what has happened to your money feels crushing. Once home you pass by the unopened stack of IRS notices. Just the sight of them compounds the fear you are feeling.
Morning finally arrives and you rush to the bank. You are very succinct in your story. Someone has stolen your money and you want it back! While pulling up your information on the computer screen you sense empathy from the bank official and are hopeful. “The money hasn’t been stolen from your account. The IRS has placed a levy on your bank account.” The words don’t quite sink in but then in an instant the images of all those unopened notices provide an unmistakable clarity to the situation.
The IRS is authorized to collect taxes by levy. A levy is a legal seizure of your property to satisfy a tax debt. Real, personal, tangible and intangible property is all subject to levy. The IRS can seize and sell property that you hold and commonly levy property that is yours but held by someone else such as your wages, retirement accounts and bank accounts. The IRS will proceed with a levy when the following three requirements have been met: (1) the IRS has assessed the tax and sent you a notice and demand for payment (2) you neglected or refused to pay the tax and (3) a final notice of intent to levy and notice of your right to a hearing was sent to you at least 30 days before the levy. The notice may be given in person or by mail.
If your employer has been served with a levy they generally have one full pay period before they are required to send any funds from their employees’ wages. As an employee you can exempt a portion of your wages from the levy. This amount is your standard deduction plus personal exemptions divided by the weeks related to your applicable pay schedule. For example, a single person paid biweekly would be able to exempt $ 384.62. Social security benefits and disability benefits received under the Social Security Administration are subject to levy. Retirement accounts including an individual retirement account are also subject to IRS levy. Your principal residence is however exempt from levy.
If you have an installment agreement pending or in effect the IRS is prohibited from using the levy. Your installment agreement becomes pending when the IRS accepts it for processing and remains in that state until it has been accepted. If your installment agreement offer is rejected the IRS cannot use the levy authority for 30 days following the rejection.
If you are the holder of property and have received a levy request for that property, ignoring the request can have dire consequences to you. If you fail or refuse to surrender the property subject to the levy you become personally liable for payment of an amount equal in value to the property levied upon or the taxpayer’s liability. Additionally, a penalty can be imposed if you fail or refuse in the amount of 50% equal to the value of the property or the tax liability.
The head in the sand approach is not an effective strategy to use in situations where a levy is pending or is in place. The hardship that accompanies a levy is not lost on the IRS and immediate contact with the agency is the first step in working towards a resolution. Contact your tax professional for assistance if you are facing an IRS Levy. Your friends are waiting for you.
Cheryl Dickerson, CPAPosted on December 4 2013 by admin
This article from the Wall Street Journal introduces a way for high-income couples to make Roth IRA contributions.
A physician and his wife were maxing out their 401(k) accounts and 475 savings plans, but were ineligible for deductible contributions to a traditional IRA or contributions to a Roth IRA due to their high income. Their financial advisor recommended a simple strategy. The husband and wife each opened a non-deductible, traditional IRA account and made after-tax contributions of $5,500 each, for a total of $11,000. The advisor invested the non-deductible IRA in a low-yielding money market account.
Although Roth contributions are normally limited to couples filing jointly who earn $188,000 or less, there is no limitation for Roth IRA conversions. The day after maxing out their annual contribution to the traditional IRA, the clients rolled over the $11,000 from their traditional IRAs to a new Roth IRA.
Because the rollover triggers income tax only on the appreciation of the after-tax contributions, after only one day in the traditional IRA, there would be little to no appreciation of the funds invested in the money market account.
Now the client’s money in their Roth IRA can compound tax free. They repeat the technique each year using the same traditional and Roth IRA accounts. Once the couple reaches their 50s, the annual contribution limit will be $13,000 per year. Drawing from the Roth IRA will help reduce the income taxes the couple will owe in retirement when they start taking distributions.
This technique is not for everyone. It works best for young professionals with high incomes that don’t already have a large amount of savings in a traditional IRA. The “pro-rata” rule requires clients with pre-tax contributions in a traditional IRA as well as nondeductible IRA contributions to divide the value of their nondeductible contributions by their total IRA assets to determine what percentage can be converted tax-free. Still, under the right conditions, this solution allows clients to maximize their retirement savings with very little investment of their time.
Janet Berry-JohnsonPosted on December 3 2013 by admin
1. Avoid the mid-quarter convention. Assets purchased in the second half of the year are entitled to less depreciation in the first year under the mid-quarter convention than under the standard half-year convention. Property is subject to the mid-quarter convention if more than 40% of the depreciable assets purchased during the year are purchased in October, November, or December. If some purchases can be made before or after the last quarter, that will help decrease the percentage below 40%. Another approach is to claim the Section 179 deduction for those fourth quarter items, which removes them from the 40% calculation altogether.
2. Be careful when electing Section 179 expense if you have a fiscal year partnership or S corporation. Those businesses can take up to $500,000 of Section 179 expense for years beginning in 2013 and ending in 2014. However, the owners of those businesses will report the K-1 activity from that fiscal year on their 2014 tax returns. Under current tax law, the 2014 Section 179 limit is $25,000. Any amount flowing to the owners in excess of $25,000 is unable to be deducted or carried to another year. There is no guarantee that a fix for this scenario will be passed into law.
3. Make use of 50% bonus depreciation. This tax provision will expire after 2013, so businesses planning on making large purchases of depreciable personal property should consider scheduling those purchases before the end of the year to receive this accelerated depreciation.
4. Take advantage of the higher Section 179 limit for 2013. If your business is not a fiscal year pass-through entity, and it needs equipment or improvements of more than $25,000, then the last months of 2013 can be a great time to purchase assets eligible for the Section 179 deduction. As mentioned above, the limit will decrease from $500,000 to $25,000 on January 1, 2014.
5. Draft and use a capitalization policy before the end of the year. New repair and capitalization regulations go into widespread effect in 2014. Having a written policy in place offers de minimis safe harbors for companies to write off repairs, supplies, and purchases under a specified dollar amount. This amount is $500 for any business and $5,000 for businesses with certified audited financial statements or financial statements that are required to be sent to the SEC or other government agency.
Brandon Harbeke, CPAPosted on November 27 2013 by admin
In 2013 Trusts are subject to the new 3.8% Medicare tax on net investment income (“NII”) when adjusted gross income reaches the extremely low amount of $11,950! Compare this to the much higher threshold amounts for individuals:
With the increase in the top income tax rates to 39.6% on ordinary income and 20% on long-term capital gain income, plus the new 3.8% tax, trusts quickly reach a 43.4% tax rate on ordinary investment income and a 23.8% tax rate on long-term capital gains.
As a trustee what can you do to minimize the tax burden?
1. Make additional income distributions to beneficiaries in lower tax brackets, including using the 65 day rule to treat early 2014 distributions as 2013 distributions.
2. Reduce taxable income by investing in tax-exempt assets which are not subject to ordinary income tax or the 3.8% Medicare tax.
3. Reduce capital gains by harvesting capital losses before year end.
4. Distribute capital gain income to beneficiaries if permitted by the Trust document and state law.
5. Have trustee materially participate in trade or businesses to keep business income out of the 3.8% Medicare tax regime.
6. Structure sales of business or investment assets as like-kind exchanges or installment sales when possible.
7. Examine your rental agreements to determine if rental income can be excluded from the 3.8% Medicare tax regime.
8. Allocate expenses to interest first, then rents, then dividends and finally to active business income when possible.
9. Talk to your tax and legal professionals to see if old distribution planning no longer applies and more tax efficient strategies are available.
Tax planning in the fiduciary environment has never been more critical and the Trust and Estate planning professionals at Henry & Horne, LLP are ready to help!
Melinda Nelson, CPAPosted on November 26 2013 by admin
Generally speaking, the United States imposes gift tax on all gifts above a certain threshold. But, in general, in the case of a nonresident not a citizen of the United States, gift tax shall apply to a transfer only if the property is situated in the United States.
CAVEAT…. a U.S. recipient of this gift may have disclosure requirements with respect to the gift of non United States property from a non U.S. person. The U.S. citizen or resident who receives the gift is required to report the gift to the IRS if the value is above a certain threshold and is reportable on Form 3520, Part IV.
To determine whether a person is a U.S. resident or nonresident for gift tax purposes, the facts and circumstances should be carefully analyzed. If the individual is domiciled in the United States at the time of the gift, he/she is determined to be a resident for gift tax purposes. A person is usually domiciled in the U.S. by residing there with no immediate intent of leaving, however, the residency rules should be thoroughly reviewed before making any determination.
A U.S. citizen or resident is required to report a foreign gift that exceeds $10,000 (adjusted annually for inflation) during the year if the gift is from a foreign corporation or foreign partnership. The reporting threshold is increased to $100,000 when the gift is from a nonresident alien individual. The U.S. gift recipient should total all gifts from that foreign donor and any foreign person related to the donor for the year to determine if the reporting threshold has been met. For example, a U.S. citizen or resident receives gifts totaling $80,000 during the year from a nonresident alien individual. During that same year, $30,000 was received from a second nonresident alien individual. These gifts are generally not required to be reported unless there is reason to believe the donors are related.
Penalties for noncompliance are equal to five percent of the gift amount for each month past the due date of filing, not to exceed 25 percent.
Jill A. Helm, CPAPosted on November 21 2013 by admin
A medical flexible spending account (FSA) is a tax-advantaged account that can be set up through a cafeteria plan of an employer in the United States. The FSA allows employees to set aside a portion of earnings to pay for qualified medical expenses not covered by insurance, such as deductibles and co-payments. Money deducted from the employee’s wages is set aside “pre-tax”, resulting in payroll tax savings. One disadvantage of the FSA is known as the “use it or lose it” rule: funds not used by the end of the plan year, and sometimes a grace period of up to two and a half months following plan year-end, were lost. Any money left unspent at the end of the coverage period was forfeited and could be applied to future plan administrative costs.
Prior to January 1, 2011, over-the-counter medications were considered qualified medical expenses under FSA rules. A typical strategy for an FSA participant with funds remaining in their account at the end of the plan year was to stock up on OTC pain relievers, cold remedies, and other such items in order to “spend down” the remaining balance prior to the end of the plan year. The Patient Protection and Affordable Care Act (ACA) limited the breadth of medical FSAs, imposing a limit of $2,500 for annual contributions to medical FSA accounts and stating that drugs must be prescribed to be reimbursable.
Recently, the Treasury Department and the Internal Revenue Service loosened the “use it or lose it” rule for medical FSAs, allowing participants to carry over up to $500 from their FSAs from year to year. The goal is to make medical FSAs more consumer-friendly and encourage a greater number of workers, especially low- and moderate-income taxpayers, to take advantage of FSAs without worrying that they will lose the money put into plan accounts.
This change came in response to public comments requested by the Treasury Department and the IRS. Individuals and employers overwhelmingly asked that the “use it or lose it” rule for medical FSAs be modified. Commenters cited the difficulty of predicting future medical expenses and the desire to minimize incentives for unnecessary spending at the end of the year. A senior Treasury official noted that there weren’t any comments from employers indicating that they wanted to keep unused money left by employees in their FSA accounts.
There are two things to note about the changes to medical FSAs. First, while existing plans have the option of allowing employees a grace period of up to two and a half months after the end of the plan year to use up plan funds, FSAs can either have a grace period or allow the carryover of up to $500 of unused amounts. Second, it will be up to the employer to decide whether or not to offer the carryover option to employees. Employers still have the option of providing neither a carryover nor a grace period.
Janet Berry-Johnson, CPAPosted on November 20 2013 by admin
Did you know that the IRS relies heavily on correspondence audits? Correspondence audits address those individuals suspected of underreporting their income tax liabilities. Correspondence audits result in significant additional tax assessments and are more economical than other types of audits. IRS statistics show that in Fiscal Year 2012, the IRS conducted 1.1 million correspondence audits and recommended approximately $9.2 billion in additional taxes.
According to the most recent Treasury Inspector General for Tax Administration (TIGTA) report, the IRS is leaving potential tax revenue on the table by not following up on and examining prior or subsequent year returns when a tax understatement is identified during a correspondence audit. The TIGTA looked at a sample of 102 IRS correspondence audits with tax understatements of $4,000 or more and found 43 of those taxpayers had similar noncompliance issues in either a previous or subsequent year. Of the 43, the IRS failed to pursue follow up audits with 32 taxpayers, possibly resulting in additional tax assessments ranging from $2,343 to $18,874. The report recommended, and the IRS agreed, that procedures should be established to help agents determine when additional returns of a taxpayer deserve an audit. In other words, be prepared for the possibility of audit on multiple years anytime a correspondence audit notice is received.
With this information in hand, it seems that individuals will be receiving more “love” letters from the IRS. If you need assistance with these type letters, please do not hesitate to contact our office.
Danette Hefty, EAPosted on November 19 2013 by admin
If you are an Arizona resident, you may want to take advantage of the following Arizona tax credits which are a dollar for dollar reduction in Arizona tax. Among the numerous credits available to Arizona residents are:
1. Credit for Contributions to Private School Tuition Organizations ($517 Single/$1,034 Joint)
2. “Switcher” Credit to Certified School Tuition Organizations ($514 Single/$1,028 Joint)
The “Switcher” credit is only available if you have first done the Private School Tuition Organization credit. The combined credits are $1,031 Single / $2,062 Joint.
3. Credit for Contributions Made or Fees Paid to Public Schools ($200 Single/$400 Joint)
More information can be found at the ADOR website.
4. Credit for Contributions to a Qualifying Charitable Organization (QCO) formerly the Working Poor Credit ($200 Single / $400 Joint)
5. *NEW* Credit for Contributions to a Qualified Foster Care Organization (QFCO) ($400 Single/$800 Joint). Your maximum allowed credit to a QFCO is lowered by any allowable credit paid to a QCO. See below for additional information regarding the limitations.
More information can be found at FAQs regarding Charitable Tax Credits
6. Credit for Donations to the Military Family Relief Fund ($200 Single/$400 Joint)
The Arizona Military Family Relief fund is administered by the Arizona Department of Veterans’ Services so support goes directly to Arizona families in need.
More information can be found at the MFRF website.
In addition to receiving a Federal charitable deduction for the contributions above, you receive a dollar for dollar credit to reduce your Arizona tax liability to zero when you file your return. Most unused credits can be carried forward for up to 5 consecutive taxable years.
Livonia Winkles, EAPosted on November 15 2013 by admin
Yesterday morning, President Obama announced that 2014 sales of previously-canceled individual health plans that don’t meet ACA standards would be allowed to be issues and stay in force for another year.
The change will offer a temporary “fix” to the millions of consumers whose policies have been canceled or altered as a result of healthcare reform.
That means carriers offering policies deemed not “ACA compliant”—and the producers who sell them—can continue to offer the same coverage to insured through the coming year.
Insurers will be required to notify clients that “alternatives exist” under the ACA, including the availability of tax credits, and to point out the areas where their plans fall short of government requirements. These government requirements are generally consumer friendly and could provide for a more complete health insurance coverage.
This option will only apply to those who have lost their insurance coverage. Carriers and producers cannot offer such plans to other Americans as it would threaten the ACA’s financial viability.
The insurance companies policies will continue to be regulated under the states’ insurance department.
If you have further questions related to your options and/or responsibilities as an individual employer under the Affordable Care Act or would like and evaluation, please contact your Henry & Horne accountant.
Gary W. Fleming, CPAPosted on November 14 2013 by admin
The Internal Revenue Service has announced its 2014 inflation adjustments for various tax provisions, tax rate schedules and other tax changes. Listed below are the 2014 rates for items of the greatest interest to most taxpayers.
• The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
• The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
• The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
• The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)
• The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).
• The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
• Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
• The annual exclusion for gifts remains at $14,000 for 2014.
• The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.
• The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
• The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.
Additional details on these and other adjustments can be found in Revenue Procedure 2013-13.
Lisa J. Wolford, CPA-- Older Entries »
There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne, LLP we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.
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- The IRS Levy or How to Ruin an Evening
- Roth IRA Contributions for a High-Income Couple
- Five Depreciation Tips for Year-End Tax Planning
- Trust Taxation in 2013 – A Potential New Paradigm
- Foreign Gift Reporting Requirements
- Relaxing the “Use it or Lose it” Rule for Flexible Spending Accounts
- Correspondence Audit Selection Process
- Don’t Miss Out on Taking Your 2013 Arizona State Tax Credits!
- The Evolving Affordable Care Act – Health Insurance
- Various Tax Benefits Increase Due to Inflation Adjustments for 2014