Going Nowhere FAST if You Owe Taxes

Posted on May 26 2016 by admin

Tax season has come to an end and the season for travel is approaching. So as I wait for clients that are on extension to provide me some missing information, I found myself browsing tax news and articles (Exciting, I know!). Anyways, I was trying to find a blog topic to jump out at me (harder than you would think), but low and behold….I found one!

I, like most people out there, LOVE to travel, see new things, and experience different cultures, BUT did you know, that President Obama signed a transportation bill that has a provision requiring the IRS to refer “seriously delinquent taxpayers”* to the U.S. State Department for denial or revocation of a passport!? I was shocked, but at the same time, if you are a “seriously delinquent taxpayer”, you probably shouldn’t be traveling the world anyways. But what if it’s your job? … It might then pose a problem, no?

The bill is called, “Fixing America’s Surface Transportation Act” (FAST Act). Section 7345 of the bill is the new provision I am mentioning. Under the bill, the IRS submits the names or certificates of seriously delinquent taxpayers to the Secretary of the Treasury, who then passes it along to the Secretary of State who is REQUIRED to deny, revoke or limit your passport. And by limit, they really just mean if you are already out of the country on travel they will “limit” your passport so that you can come back, but not leave again.

*Seriously delinquent taxpayers are taxpayers that owe the IRS over $50,000 (updated yearly for inflation). This includes penalties, interest, etc. There are also other requirements (not discussed here) that have to be met by either you or the IRS to be considered a seriously delinquent taxpayer.

“When in Rome…” or before going to Rome… PAY your taxes! Otherwise you may going nowhere FAST (Get it?).

By Chris Morrison

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Happy (for Some) 100th Anniversary to the Estate Tax

Posted on May 25 2016 by admin

Back in 1916, Congress wanted to boost U.S. revenues in case America joined in on World War I in Europe. Lawmakers voted for a new tax on a person’s assets at death, which we now call the Estate Tax aka “Death Tax”. This tax affected fewer than 1% of Americans and today only affects 2 out of every 1,000 deaths, which is less than 1%(0.2% to be exact). Most Americans’ life savings (or estates) fall below the federal exemption amount that is currently $5.45 million. Comparing this to 1916, where the exemption amount was $50,000 (roughly $1 million in current dollars), I would think most people would be happy, but the debate continues. Democrats want to strengthen the estate tax by lowering the exemption amount and raising the estate tax rate, while Republicans want to repeal it. This is reflected in history when in 2010 it went away, but not permanently, because it came back in 2011, and it continues into the current debate.

Another label, as you might call it, for the Estate Tax is the “Voluntary Tax”. With proper planning, you can reduce or eliminate the tax entirely. Each person can make an annual tax free gift, in cash or assets, up to a specified amount ($14,000 in both 2015 & 2016) to another individual. The individual does not have to be related to you and there is no current limit on the number of recipients, so plan ahead. You can avoid those taxes that come into play after death, and in doing so, put a few smiles on the faces of those who matter most to you. Instead of making them deal with the headache and stress of the tax consequences after you are gone.

So, once again … Happy 100th Anniversary to the Estate Tax!

Please consult a tax advisor or estate planner before making any rash decisions, just to be safe as these matters can be very complex.

By Chris Morrison

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What Prince’s Death Teaches Us about Estate Tax

Posted on May 24 2016 by admin

Prince Rogers Nelson, American singer, songwriter, and actor, passed away on April 21, 2016. Cities, social media, and fans showed their support and solidarity in a sea of purple. Prince resided in Minnesota at the time of his death.

As of the date of this posting, no Will has been presented to the Carver County Probate Court. If nobody comes forward with Prince’s Will, Minnesota “intestacy” statutes control who receives his estate. Online sources report that he had an estimated net worth of $250-$300 million. With this much money at stake, people have come forward claiming to be related to Prince, in the hope that they will get a portion of Prince’s estate under the intestacy statutes. Minnesota statutes also provide the default person in charge of handling estate matters. This person is called a “personal representative” in Minnesota.

One of the items that the personal representative of Prince’s estate will be responsible for is preparing the federal and Minnesota estate tax returns. A federal estate tax return must be filed if a person’s gross estate, plus lifetime gifts, exceeds the $5.45 million (2016 figure) exemption amount. The gross estate includes anything that the person had an interest in at the time of his or her death, such as real estate, brokerage accounts, retirement accounts, life insurance policies, business entities, copyrights, and bank accounts. From that amount, the estate can deduct outstanding mortgages, liabilities and debts, gifts to charities, gifts to a surviving spouse, and state estate taxes. A flat 40% tax rate applies to the net amount over the $5.45 million exemption.

Minnesota also has a state estate tax that must be paid if a person’s taxable estate exceeds $1.6 million (2016 figure). The Minnesota tax rate ranges from 10%-16%, depending upon the size of the estate.

Prince’s estate may pay as much as $80-$100 million in federal estate taxes and $40-$48 million in Minnesota estate taxes. This means that about half of Prince’s estate will go to the IRS and the Minnesota Department of Revenue. These taxes could have been minimized if Prince had consulted with his tax advisers and set up an estate plan. For example, charitable gifts to worthy causes, such as music education, could have been used to reduce the size of Prince’s estate.

While Arizona does not impose a state estate tax, Arizona residents may still benefit from estate tax planning if they believe they may owe federal estate tax or if they have property in other states that have a state estate tax. If you are interested in seeing if there are ways to minimize your estate tax, you should contact your tax advisers and have them assist you in formulating a plan that works for you. Even if you do not have an estate tax obligation, it is still advisable to contact your estate planning professionals to discuss whether you want to modify the statutory defaults (like the selection of your beneficiaries or your personal representative) or set up a more private mechanism for handling your estate that avoids the court probate process.

By Jenny Maas and Chris Morrison

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Trusts: Fully Deductible Expenses vs AGI Limit

Posted on May 19 2016 by admin

Generally, miscellaneous itemized deductions may be deducted to the extent they exceed 2% of adjusted gross income (AGI). Miscellaneous itemized deductions can include tax preparation fees, investment fees, estate planning legal fees, and safe deposit box charges, to name a few. The same idea applies for estates and trusts, with some exceptions. And the exceptions would not be subject to the 2% of AGI limitation.

For estates and trusts, legislation was passed in May 2014, which takes effect for trust tax years beginning January 1, 2015. This legislation states what is to be included as a deduction subject to the 2% limitation and what is not subject to the limitation. The allocation of costs of a trust or estate that are subject to the 2% floor depends on whether the costs “commonly or customarily would be incurred by a hypothetical individual holding the same property”.

Here are some examples:

  • Ownership costs that apply to any owner of a property held for investment (examples include homeowner’s association fees, insurance premiums, landscaping and pool services, etc.) are subject to the 2% floor.
  • Expenses that are likely fully deductible (not subject to the 2% floor) are expenses related to rents and royalties, trade or business expenses, and tax payments (including state and local, real property, and personal property taxes).
  • There is a safe harbor provision for tax return preparation costs. The costs for preparing estate and GST tax returns, fiduciary income tax returns, and the decedent’s final income tax return are NOT subject to the 2% floor. (Note: Gift tax returns are not included in this exception.)
  • Investment advisory fees for trusts and estates are generally subject to the 2% floor except for any incremental fees above what is normally charged to individuals.
  • Bundled fees like trustee or executor commissions, attorneys’ fees, or accountants’ fees need to be allocated between deductions subject to the 2% floor and deductions not subject to the 2% floor. This is easier to do if the fees are charged on an hourly basis and description of time spent is included. There are other possible ways to allocate the bundled fees. Example:
  • Using the percentage of the value of the trust corpus subject to investment advice,
  • Whether a third party would have charged a similar fee, and
  • The amount of the fiduciary’s attention to the trust or estate that is devoted to investment advice as compared to dealings with beneficiaries and other fiduciary functions.

As always, consult a tax adviser should you have a fiduciary return and you are unsure what would be fully deductible or deductible but subject to the 2% AGI limitation.

By Julie K. Weissmueller, CPA

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Bonus Depreciation Changes

Posted on May 18 2016 by admin

As many of you may know, the Protecting Americans From Tax Hikes (PATH) Act of 2015 extended the bonus depreciation rules through 2019. The Act also calls for a gradual reduction in the percentage: 50% in 2015 – 2017, 40% in 2018, and 30% in 2019. The law then expires after 2019.

What you may not know is that is that PATH also created a new class of property (because the depreciation rules weren’t complicated enough). Beginning in 2016, the PATH Act creates the “qualified improvement property” class of asset. Qualified Improvement Property is defined as improvements to the interior of any nonresidential real property that is placed in service after the building is placed in service. It cannot be structural in nature and cannot be an elevator, escalator or enlargement of the building.

Also, qualified improvement property must be classified as having a 39 year depreciable life. This differentiates it from qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property, all of which have a 15 year life (like I said, complicated). This is the first time that bonus depreciation is available for a 39 year property.

The PATH Act makes other changes to the bonus depreciation rules which are not covered in this blog.

As always, consult your tax adviser before applying these new rules.

By Rick Schultz, CPA

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Amounts Raised for Two Arizona Tax Credits

Posted on May 17 2016 by admin

The Arizona legislature has increased the credits for contributions to qualifying charitable organizations and for contributions to qualifying foster care charitable organizations for 2016.

L. 2016, S1216, effective 08/06/2016 and retroactively applicable to taxable years beginning after 12/31/2015, increases the amount a taxpayer may claim as a tax credit for contributions made to a charitable organization and makes other changes.

The new Arizona credit amounts for 2016:

  • Charitable credit for donations to qualifying charitable organizations: $400 individuals/$800 married couples filing jointly.
  • Foster Care credit for donations to qualifying foster care organizations: $500 individuals/$1,000 married couples filing jointly.
  • In addition, the Foster Care tax credit has been separated from the Charitable tax credit in 2016. So taxpayers may claim either credit or both in the same taxable year.

In prior years, both types of charities shared a total combined maximum credit limit.

So the total of the two credits increased from $400 per individual/$800 per married couple in 2015 to $900 per individual/$1,800 per married couple for 2016.

A list of charitable organizations that qualify for the above credits can be found at the ADOR website.

Great news for Arizona’s non-profit community and taxpayers!

By Melinda Nelson, CPA

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Lose Your Medicare Card? Want a Social Security Estimate?

Posted on May 12 2016 by admin

If you are a Medicare beneficiary and you have lost, damaged, or need to replace your Medicare card, you can easily order a replacement Medicare card using an online “my Social Security” account.

If you are still working, use “my Social Security” account to view your yearly Social Security Statement and verify the accuracy of your earnings record and obtain updated estimates of your future Social Security benefits.

A my Social Security account is available at www.socialsecurity.gov/myaccount.

You’ll want a my Social Security account to:

  • Keep track of your earnings and verify them every year;
  • Get an estimate of your future benefits if you are still working;
  • Get a letter with proof of your benefits if you currently receive them; and
  • Manage your benefits:
  • Change your address;
  • Start or change your direct deposit;
  • Get a replacement Medicare card; and
  • Get a replacement SSA-1099 or SSA-1042S for tax season.

Setting up an account is quick, secure, and easy. Join the millions and create an account now.

By Melinda Nelson, CPA

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Internet Sales Can Be Taxing

Posted on May 11 2016 by admin

Earlier this month, South Dakota lawmakers put into effect a tax on out-of-state online retailers that now requires them to collect state sales tax from customers on internet sales. The law affects those retailers who have done business in the state to the tune of $100,000+ or 400 transactions or more.

I know what you are thinking. Why do I care? I don’t live in South Dakota. Well, the truth is, it looks like South Dakota may be used as a test state to support opposition of a Supreme Court ruling from the early 1990s (Quill vs. North Dakota). The ruling stated that it would be too taxing (see what I did there?) for retailers to enforce the different state sales taxes. However, with the advancements in technology, it is much more feasible to implement software programs and apps to figure out the different rates to be charged to each state’s residents.

Proponents of the tax say that it will help bring customers back to local brick and mortar stores that have always been required to charge sales tax and help the state regain revenues that it has lost since the boom of internet shopping.

Now don’t expect this law to go nationwide anytime soon. It has only been enacted for a couple days and has already spawned two lawsuits that say the law is in violation of the previously mentioned Supreme Court ruling. However, if you enjoy online shopping as much as I do, keep in mind that you may eventually be paying your state’s sales tax there as well.

By Joanna Yergler

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Intergovernmental Agreements

Posted on May 5 2016 by admin

The Foreign Account Tax Compliance Act (FATCA) was created to prevent offshore tax evasion of U.S. taxpayers. As part of the IRS initiative for international data exchange, certain foreign entities have additional reporting requirements. If these entities fail to comply, they could potentially be subject to 30% tax withholding. Please refer to our previous blog to understand the basic reporting requirements.

There may be simplified reporting for foreign financial institutions (FFIs) in those jurisdictions that enter into an Intergovernmental Agreement (IGA) with the U.S. A list of jurisdictions that have an IGA in place can be found here.

There are two types of IGAs: Model 1 and Model 2. Under the Model 1 IGA, the FFI reports information about its U.S. accounts to the jurisdiction and the jurisdiction then reports the information to the IRS. The exchange of information under a Model 1 IGA may be on a reciprocal or nonreciprocal basis. Under the Model 2 IGA, the FFI reports the information directly to the IRS. Each jurisdiction will have its own specific terms under the IGA in place and should be carefully reviewed by those relying on these agreements.

Those FFIs in a jurisdiction without an IGA need to register and agree to comply with the terms of a FFI agreement in order to avoid being withheld upon under chapter 4 regulations. Please note, this information is general in nature and should not be relied upon. Be sure to seek guidance from a professional tax adviser as there are many complexities under the new FATCA rules.

By Jill A. Helm, CPA

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New FATCA FAQs Released

Posted on May 4 2016 by admin

As many taxpayers attempt to comply with the Foreign Account Tax Compliance Act (FATCA), they are facing challenges understanding and conforming to the requirements. In an attempt to clarify these complex rules, the IRS has issued Frequently Asked Questions (FAQs) on the topic. On December 7, 2015, the IRS released some updated FAQs on FATCA. You may find the FAQs by clicking here. The updates can be found under the General Compliance Section, questions 12-17 as follows:

Q12. My courier requires a physical mailing address for delivery service. What is the physical mailing address for Forms 8966 and Form 1042?
Q13. I am an American citizen living abroad and my foreign bank is requesting my social security number, do I have to comply and if so, why?
Q14. How do I submit a request for an initial or additional extension of time to file Forms 8966 for tax year 2015?
Q15. How do I submit a request to waive the requirement to file Forms 8966 electronically for tax year 2015?
Q16. What title should the RO include when indicating their business title in the RO information section of the registration?
Q17. How many Global Intermediary Identification Numbers (GIINs) should a single FI have?

Be sure to contact a qualified tax professional to assist you with any specific advice or conformity to these rules.

By Jill A. Helm, CPA

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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 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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