When not spending these hot summer days at the pool, golf course, or the air conditioned great indoors, many people take time out of their summer schedules to volunteer with a local charity. Volunteering often involves traveling to and from the volunteer site, the cost of which is a valid tax deduction under the Internal Revenue Code.
Of course, it wouldn’t be a tax deduction without a list of rules that need to be followed. The IRS has clearly stated the qualifications that must be met in order to deduct charitable travel costs, which include:
- Donation of time and services must be made to a qualified charity. It is a good idea to ask the charity about their status with the IRS before deducting any costs associated with that charity. This information can typically be found on the charity’s website as well.
- Costs may not be deducted if a significant portion of the trip involves recreation or vacation. Rather, the volunteer work must be “real and substantial” throughout the duration of the trip. So unfortunately, you can’t deduct the entire cost of your trip to Barbados by spending an hour volunteering at the local Goodwill.
- Deductible costs can include air, rail, bus, and car expenses, lodging costs, meals, and taking a taxi from an airport to your lodging. Auto expenses may be deducted at actual cost, or at a rate of 14 cents per mile traveled.
In addition to travel costs, you may also deduct any other out-of-pocket costs that are incurred as a result of donating your time and services. Keep in mind that these costs must meet several stipulations in order to be deductible. All deductible costs must be:
- Directly connected with the services donated
- Incurred only because of the services that were donated
- Not personal, family, or living expenses
For the full scoop on charitable contribution deductions, check out IRS Publication 526.
By Austin Bradley, CPAPosted on July 23 2014 by admin
In the course of forming a partnership or limited liability company (LLC), you may have heard about the importance of having a written partnership agreement that establishes guidelines for the allocation of partnership interests, profits and losses. You fill in the blanks on a boilerplate agreement found on the internet, sign it and you’re done, right? Not so fast. Sometimes those boiler plate agreements have clauses that are often overlooked but can have significant tax consequences down the road.
Unlike S-Corporations, which must report all income and expense in proportion to stock ownership, partnerships provide the flexibility of making special allocations of income, gain, loss, or deductions among various partners. For example, a partnership agreement may allocate all of the depreciation to one partner or specify that the partners may share capital, profits, and losses in different ratios.
This flexibility has its limits. Internal Revenue Code section 704(b) prevents partners from allocating tax benefits among themselves based on purely tax rather than economic consequences. A partner who benefits economically from partnership income or gain is required to shoulder the corresponding tax burden and a partner who is economically hurt by an item of partnership loss must be allocated the tax benefit of the loss.
If a partnership agreement is silent and does not provide for special allocations, or if a special allocation is made and the allocation lacks substantial economic effect, then a partner’s distributive share of profit or loss can be re-determined by the IRS.
For example, a partnership agreement may require that partners A and B share equally in profits and losses, except that partner A would be specially allocated all of the depreciation expense for a building owned by the partnership. If the building is later sold for a profit and the gain is shared equally by A and B, then the allocation of the gain on the building would not be consistent with the underlying economic effect on the partners. Thus, the IRS could re-determine the partner’s distributive share of income or gain according to what the Service determines to be the partner’s true interest in the partnership.
The boilerplate tax provisions contained in a partnership agreement may be one of the least interesting sections to read in a partnership agreement, and therefore receive the least amount of attention. However, the provisions are extremely important and, if drafted incorrectly, could lead to surprising negative tax and economic consequences. Before signing any partnership agreement, review the boilerplate provisions carefully and seek expert help if needed to ensure you understand how those provisions can affect the partners.
By Janet Berry-Johnson, CPAPosted on July 22 2014 by admin
Senate Bill 1413 will go into effect on August 1st, exempting certain manufacturing and smelting businesses from paying sales tax on their natural gas and electricity utility bills. The exemption applies to both state and county sales taxes, and is available to new and existing Arizona businesses.
In order to qualify for the exemption, two requirements must be met. The business must be “principally engaged” in manufacturing or smelting operations. The “principally engaged” test is met by using at least 51% of the total electricity and/or natural gas purchased for the purpose of manufacturing or smelting operations.
This brings us to our next question. What exactly is a manufacturing or smelting operation? This is an important distinction for obtaining this exemption, because only these two categories of operations will qualify. Manufacturing is defined by the Arizona State Legislature as “principally engaged in the fabrication, production, or manufacture of products, wares, or articles from raw or prepared materials, imparting to those materials new forms, qualities, properties and combinations.” Similarly, smelting is defined as “melting or fusing a metalliferous material to separate the metal.”
If those definitions seem like a mouthful, it’s probably because they are. Business owners who are unsure about whether their operations qualify as manufacturing or smelting can contact the Arizona Department of Revenue for guidance or, of course, consult their tax adviser.
If you’ve made it this far, and have determined that your business qualifies for the Senate Bill 1413 exemption, there is just one administrative step to take in order to start seeing those smaller utility bills. On August 1st, the official exemption form will be made available at www.azdor.gov. Simply complete the form, submit copies to your appropriate utility providers, and enjoy your tax savings!
By Austin Bradley, CPAPosted on July 17 2014 by admin
A unanimous Supreme Court decision in the Clark v. Rameker case has held that inherited IRAs do not qualify for a bankruptcy exemption, i.e., inherited IRAs are not protected from creditors of the beneficiary in bankruptcy.
The Court ruled that an inherited IRA does not fall under the Bankruptcy Code §522(b)(3)(C) exemption which states that a debtor may exempt amounts from bankruptcy that are both (1) “retirement funds,” and (2) exempt from income tax under one of several specified Internal Revenue Code provisions. Code Sec. 408 provides such a tax exemption for IRAs.
The Supreme Court ruled that funds held in an inherited IRA are not “retirement funds” for purposes of the Bankruptcy Code.
According to the Court, the exemptions provided in the Bankruptcy Code create a balance between the rights of creditors and the needs of debtors. Allowing debtors to protect funds held in traditional and Roth IRAs aligns with this balance by helping to ensure that debtors will be able to meet their needs during retirement and get a “fresh start”.
The Court ruled beneficiaries of inherited IRA accounts are not entitled to a “free pass” since there is no limitation on the amount that inherited IRA beneficiaries can receive and the inherited IRA account itself was not tied to the beneficiary’s retirement.
Planning: Make the beneficiary of your IRA or retirement account a trust benefiting family members who have potential creditor problems to protect the IRA account from beneficiary bankruptcy.
In addition, a spouse who inherits an IRA account may receive creditor protection not available to other beneficiaries since a spousal beneficiary has the option of treating the IRA as his or her own, rather than being subject to the general rules for “inherited IRAs.” When the surviving beneficiary spouse chooses to be treated as the IRA owner, he/she may defer the start of lifetime IRA distributions to his or her required beginning date after retirement. This situation is factually distinct from that of the Clark case.
By Melinda Nelson CPAPosted on July 16 2014 by admin
Summer is the perfect time to begin your year-end tax planning so that you have time to identify the strategy (or strategies) that work for you and implement them well before year end.
- Try to avoid the new 3.8% net investment income tax (NIIT). It only affects higher-income individuals, but that can include anyone who has a big one-time shot of investment income or gain – and applies to “unearned income” which means investment income such as interest, dividends, capital gains, rent and royalty income.
- If you realized capital gains earlier this year, you can sell securities now at a loss to offset those gains, plus up to $3,000 of ordinary income. Otherwise, the maximum federal income tax rate on short-term gains is 39.6% or 20% on long-term gains, and you may also owe the 3.8% NIIT and state income taxes.
- Generally, you can defer part of a gain on sales of real estate property if you arrange to receive payments over a period of two years or more. So you may be able to defer income tax and reduce your exposure to the 3.8% NIIT tax.
- Is your vacation home vacant when you are not using it? Why not rent it out? If you lease it to tenants, you can write off certain rental activity costs, including depreciation. However, if your personal use exceeds the greater of 14 days or 10% of the days rented, the IRS limits deductions to the amount of rental income.
- If your child graduated from college this spring, they may have already landed a job. Nevertheless, you can generally claim a dependency exemption for the child in 2014 if you provide more than half of their support. Perhaps an extra-generous graduation gift will push you over the half support mark?
- Wrap up that spring cleaning project and donate old household items and clothing in good condition to a qualified charitable organization. For most noncash items you can claim a charitable deduction based on their fair market value.
- If your child (under age 13) goes to day camp this summer while you and your spouse work, the cost qualifies for the dependent care credit (but not for overnight camp). The maximum credit is usually $600 for one child; $1,200 for two or more children. Note that this tax break also applies to specialty camps geared to a specific activity like soccer or computer science.
- For 2014, you can elect to defer up to $17,500 in salary to your 401(k) account through withholding; $23,000 if you are age 50 or older. Once you clear the Social Security wage ceiling ($117,000 for 2014), you can use all or part of the payroll tax savings to help fund your 401(k).
By Pamela Wheeler, EAPosted on July 15 2014 by admin
The 2012 Offshore Voluntary Disclosure Program (OVDP) has recently undergone some changes that will make it simpler for U.S. taxpayers to come into compliance with the tax law regarding their foreign income and assets.
The streamlined procedures will be available to an expanded group of taxpayers living in the United States and abroad. The risk questionnaire requirement from the previous version of the program has been eliminated, and taxpayers who had more than $1,500 of unpaid tax in a given year are now potentially eligible to participate. Another favorable part of the new version of the program is the ability to submit more documents electronically instead of in paper form.
One extremely important part of the changes is the requirement of certification from the taxpayer that failures to report the foreign income or assets in the past were non-willful. In other words, the lack of reporting was inadvertent, unintentional, or due to a good faith misunderstanding of the law. People who fall into that category can pay a reduced miscellaneous offshore penalty of 5% of the highest value of the foreign assets that were not disclosed. Eligible taxpayers living outside of the U.S. will have all penalties waived.
Those who choose to use the new streamlined procedures should double check that they meet the definition of non-willful noncompliance before submitting anything. The IRS has stated that all streamlined submissions will be reviewed, and the new procedures do not offer protection from criminal prosecution if the lack of reporting is determined to be willful. In fact, the penalties for willful non-filers are even steeper under the streamlined provisions than they were under the 2012 version of the OVDP.
Taxpayers who are already going through the OVDP process but have not finalized it yet with a Form 906 Closing Agreement may be eligible for the more favorable penalty structure under the new streamlined procedures. Those who fall into this area will not have to pay the Title 26 miscellaneous offshore penalty but may be subject to the miscellaneous offshore penalty from the streamlined procedures.
For more specific rules, explanations, and examples, taxpayers should consult the IRS OVDP and Transition Rules FAQ pages available at http://www.irs.gov.
By Brandon Harbeke, CPAPosted on July 10 2014 by admin
With the cost of education climbing and more students graduating with record student loan debt, many college students and families unintentionally miss out on education tax breaks because of the complexity of tax-based student aid. In 2013, families with college students could benefit from the American Opportunity Credit (AOTC), the Lifetime Learning Credit, or the tuition and fees deduction. Eligibility for the three education benefits overlaps and families have to decide which incentive to claim for each student. According to the GAO, 14% of tax filers eligible for either the Lifetime Learning Credit or the tuition and fees deduction in 2009 failed to claim benefits and 40% of filers taking the tuition and fees deduction would have benefitted more from taking the Lifetime Learning Credit.
The House Ways and Means Committee recently approved legislation aimed at simplifying the many tax credits available for education. The bill would consolidate four existing education provisions: the Hope Credit, the American Opportunity Tax Credit, the Lifetime Learning Credit and the tuition and fees deduction into a single American Opportunity Tax Credit.
The new AOTC would be permanent and would provide a 100% tax credit for the first $2,000 of eligible higher education expenses and a 25% tax credit for the next $2,000 of expenses, for a maximum credit of $2,500. The first $1,500 of the credit would be refundable, meaning families could receive the credit regardless of whether they have federal income tax liability. The credit would be available for up to four years of post-secondary education at qualifying four-year universities, community colleges, and trade and vocational schools. The credit would phase out with incomes between $86,000 and $126,000 for married filing joint filers and half those amounts for single filers.
While all this sounds like good news, there are some not-so-favorable provisions to the legislation as well. The plan would eliminate the deduction for interest on student loans and the exclusion for employer-provided education assistance. The proposal also eliminates Coverdell educational saving accounts (but not the more popular 529 college savings plans), the exclusion for discharge of student loan indebtedness, the exclusion for tuition reductions by educational institutions to their employees, and the education expense exception to the penalty for early withdrawal from retirement accounts.
Also, since the AOTC would only be available to undergraduate students enrolled at least half-time in degree programs, graduate students and non-traditional learners would also lose tax benefits. The American Council on Education sent a letter to House Ways and Means Committee members indicating it will not support the proposed bill, as the improvements to the tax credits come at the expense of graduate and adult students.
By Janet Berry-Johnson, CPAPosted on July 9 2014 by admin
The IRS announced on Monday, June 30 that unused Individual Taxpayer Identification Numbers (ITINs) will expire if they have not been used on a federal income tax return for five consecutive years. ITINs are issued to United States taxpayers who are not eligible for a Social Security Number, such as resident or non-resident aliens. If you are a United States citizen with a Social Security Number, there is no need for concern. ITIN holders, however, will want to take note of this policy.
In order to allow holders of ITINs a bit of time to adjust to the new policy, unused ITINs will not begin expiring until the year 2016. Although 2016 may seem a long way away, if you are the holder of an ITIN and have not used it on a federal tax return within the last five years, the upcoming filing season for tax year 2014 will be your last chance to file a valid return and prevent your ITIN from being deactivated.
For taxpayers whose ITINs are eventually deactivated, a new ITIN may be applied for by filing Form W-7, along with all required documentation. But if you prefer to avoid the hassle of needing to re-apply for an ITIN every time you need one, simply be sure to file a federal tax return with your existing ITIN at least once every five years.
For all the details, the full press release from the IRS can be found here.
By Austin Bradley, CPAPosted on July 8 2014 by admin
While most of us are disappointed that the United States soccer team was bounced from the FIFA World Cup, attention in the sports media will now focus on basketball and NBA free agency. And the attention will focus on LeBron James, the biggest prize. LeBron’s decision will once again change the landscape in the NBA. LeBron wants a maximum contract and will want to be on a team with a chance to compete for a title. State income tax considerations can be very important in the decision-making process, although this probably is not on the top of the list for LeBron. Whichever team LeBron lands on will play many of its games in several other states. These states always attempt to extract tax from athletes. LeBron will certainly want to document which state he is a resident of to minimize his state income tax burden. Nearly every state treats a person domiciled in the state as a resident. In general, a domicile is the person’s true, fixed and permanent home. It is the place to which a person has the intention of returning, even if further absent for periods of time. The state of domicile is a question of fact and is usually the state where the person has the most ties. So let’s look at the potential landing spots for LeBron and examine the tax impact.
- Miami Heat – The Heat should be the frontrunner and from a personal income tax perspective, it may be a no-brainer as Florida does not impose a personal income tax.
- Cleveland Cavaliers – This would allow LeBron to return to his home state and play his home games just a quick drive from his hometown of Akron. Currently, Ohio’s personal income tax rate tops out at about 5.4%.
- Chicago Bulls – This is less likely an option as the Bulls are also looking at Carmelo Anthony. The personal income tax rate for Illinois is 5%.
- Los Angeles Lakers or Clippers – Again this is less likely an option, but we need to consider it since it is in a bigger media market. The California personal income tax rate is brutal – it can be as high as 12.3%. There is also the 1% surcharge on taxable income exceeding $1 million.
- Houston Rockets – A potential suitor and like Florida, Texas does not impost a personal income tax.
- Phoenix Suns – This would be a complete long shot, but there are some scenarios where it could happen. The personal income tax rate in Arizona ranges from 2.59% to 4.54%.
It would be great to see LeBron in a Sun’s uniform, but my thought is that he will stay put in South Beach and continue to avoid paying personal income tax in the State of Florida.
By Kelly Lynch, CPAPosted on July 3 2014 by admin
The IRS recently released some statistics regarding the 2014 Filing Season. Included in this release was a projection of the number of amended returns that the IRS expects to be filed during 2014. Believe it or not, they expect more than five million amended returns!
While this may seem like a lot of returns, remember that a taxpayer can amend their return within three years after they filed their original return, or within two years after the date they paid the tax – whichever is later. This means that most people can still amend returns as far back as 2011.
There is another reason that the IRS expects a large number of amended returns this year, and it is the new rules regarding the recognition of same sex couples. The rules for these couples are pretty clear going forward, but they have a few options if they were legally married in a prior year. In some cases, it may make sense for them to amend their prior year returns to claim a married filing status.
One thing to remember when filing an amended return is that these returns are not electronically filed, so they take longer to process than your original return. They can take up to 12 weeks to be processed! Fortunately, the IRS has a tool on its website aptly named “Where’s My Amended Tax Return” that you can use to track the status of your return. They will still need a few weeks from the time you mail in your return to get it logged into the system for tracking, so it is generally recommended that you wait three weeks from the time you file the return to start tracking it. You can find the tool on the IRS homepage (www.irs.gov).
Check out some of our previous blogs relating to this issue: Eight Facts on Filing an Amended Tax Return, When to File an Amended Tax Return, Same-Sex Marriage Recognized for Federal Tax Purposes, and Amended Tax Returns – What is the Status?
By Dan Mace, 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.
Before posting a comment on a blog post please be aware that we do not give free tax advice to non-clients by email, comment response, or phone. Thank you!
- Deducting Travel Costs Related to Volunteer Work
- Partnership Agreements: Why You Should Read the Fine Print
- New Sales Tax Exemption for Manufacturing Businesses Available in August
- Inherited IRAs Don’t Receive Bankruptcy Code Protection
- Mid-Year Tax Planning Tips
- Simpler Offshore Voluntary Disclosure Program Helps U.S. Taxpayers
- Proposed Simplification of Education Tax Breaks: The Good and the Bad
- Unused ITINs to Expire after Five Years
- The Decision: Part 2 – State Tax Impact and NBA Free Agency
- Millions of Amended Tax Returns Expected to be Filed