London Embassy Makes Applying for an ITIN a Little Easier

Posted on October 16 2014 by admin

Many foreign taxpayers who need to apply for an Individual Taxpayer Identification Number (ITIN) have struggled to comply with strict new requirements set forth by the IRS. The new requirements insist applicants send in original documents, such as passports or other support, or have these documents certified by the issuing agency. You can review the new requirements in my other blogs by clicking here and here.

Many ITIN Applicants find it difficult or even impossible to send in original documents or to return to the issuing agency to have their documents certified. The U.S. Embassy in London has made the process a little easier for those traveling or living near London. This Embassy will take your completed W-7 and supporting forms and documents, have your passport (or other document) certified, and complete the filing process for you. There is no need for you to leave your passport as they will certify it and return it to you while you are in the Embassy. You also won’t need to send anything to the IRS, since they will take care of all the necessary filing. The London Embassy contact information is as follows:

Internal Revenue Service
American Embassy
24 Grosvenor Square
London W1K 6AH
Phone: [44] (0)20 7894-0477
Fax: [44] (0)20 7495-4224

Please note, these services are specific to London. Not all U.S. Embassies offer this service.

By Jill A. Helm, CPA

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Taxes and International Boycott Operations

Posted on October 15 2014 by admin

U.S. taxpayers who have operations in, with, or related to certain countries participating in boycotts not sanctioned by the U.S. government may be required to report such operations to the IRS. Willful failure to file may result in large penalties, including $25,000 and/or imprisonment.

As of August 20, 2014, the current list of countries that participate in an international boycott is as follows:

  • Iraq
  • Kuwait
  • Lebanon
  • Libya
  • Qatar
  • Saudi Arabia
  • Syria
  • United Arab Emirates
  • Yemen

A report must be filed with the IRS on Form 5713 if you or any of the following persons have operations in or related to a boycotting country or with the government, a company, or a national of a boycotting country.

  • A foreign corporation in which you own 10% or more of the voting power of all voting stock, but only if you own the stock of the foreign corporation directly or through foreign entities.
  • A partnership in which you are a partner.
  • A trust you are treated as owning.

In addition to the reporting requirement, taxpayers participating in boycotts with the above mentioned countries may forfeit certain tax benefits. For example, you must reduce either the total taxes available for the foreign tax credit or the credit otherwise allowable by your foreign taxes resulting from boycott activities. Other tax benefits that may be lost or reduced include: deferral of income from a controlled foreign corporation; deferral of tax of IC-DISC income; exemption of foreign trade income of a foreign sales corporation; and exclusion of extraterritorial income from gross income.

By Jill A. Helm, CPA

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Record Retention: When to Hold ‘Em and When to Fold ‘Em

Posted on October 9 2014 by admin

As the world continuously moves toward digital bill paying, statement delivery, and record retention, why do we still have so much paper? No matter how much of your financial life you move online, there are still some documents you’ll need to maintain, whether in paper form or in a backed-up digital file. But, for how long? Here are some guidelines:

Tax Returns: You should retain tax returns and the supporting documentation for at least seven years. The IRS can audit you for three years from the date you filed your return, six years if they believe you underreported income by at least 25%, or seven years if you claim a loss for bad debt or worthless securities. If you don’t file, or file a fraudulent return, then there is no statute of limitations. If you file a state return, the statute of limitations depends on the state. In Arizona, that is generally four years after the return is filed or required to be filed, whichever is later. Like the IRS, Arizona extends the statute of limitations for six years if you understated your gross income by 25% or more and there is no statute of limitations for a fraudulent return.

Year-end Account Statements: Because these statements show the cost basis of your investment, you’ll want to hold on to them for as long as you own the investment, plus a bit longer to support the sale reported on your tax return. While brokerage houses are now required to report cost basis for securities sold on your year-end 1099-B, shares of corporate stock purchased prior to January 1, 2011 and shares of stock in mutual funds and stock acquired in connection with a dividend reinvestment plan purchased prior to January 1, 2012 are exempt.

Home-related Documents: Keep your purchase and refinance documents as long as you own the property, then an additional seven years as support for your tax return. You should also maintain records for home improvements, additions, and remodels, which can be used to calculate your cost basis if you sell the home or convert it to a rental property.

Insurance Policies: Hold on to your homeowners or renters insurance policies, car, umbrella, and health insurance policies for the policy year. They can be shredded once you receive the renewal. Keep life, disability, and long-term care policies as long as they are in force.

Monthly utility bills: Once you know the bill is correct, you can shred it. However, if you deduct some of these expenses on your tax return (such as for a home office deduction or in the case of a rental property), you’ll want to maintain these with your tax return.

Credit card statements: Again, these can be shredded if the charges are correct, but if there are deductible purchases on the statement (perhaps for medical expenses or business-related expenses), hold on to it for your tax return.

Bank statements and/or cancelled checks: These should be maintained for three years. While you can often obtain statements online from your bank, they may be limited as to how far you can go back or may charge for copies.

Pay stubs: If your employer still gives out paper pay-stubs, these can be shredded after you’ve reconciled them to your W-2 at year end. However, if you’re planning on applying for a mortgage, your lender may ask to see a few months’ worth.

Loan paperwork: As long as you are still paying on a loan, maintain the loan documents and/or contract. Once the loan is paid in full, the lender should give you a pay-off statement. This should be kept indefinitely in case of errors on your credit report.

The following documents should be kept forever. While they can be replaced, it is often a major headache to do so. Maintain them in a firebox or a safety-deposit box:

  • Birth and death certificates
  • Adoption records
  • Pension and retirement plan documents
  • Marriage and divorce papers
  • Military records
  • Wills, powers of attorney and health care proxies
  • Social security cards
  • ID cards and Passports
  • Appraisals for jewelry and other valuables (unless you sell the item)
  • Vehicle titles (for as long as you own the vehicle)
  • Inventories along with videos or photographs of your home’s contents to help with insurance claims in the event of a home fire. This should also be updated once a year.

In general, you should shred any document that contains identifying information such as your name, address, social security number or account numbers. Shred anything with your signature, which could be used to forge documents. Even mailings from your financial institution that don’t contain account numbers should be shredded, since they give fraudsters a little more information that could be used to commit identity theft.

If you prefer to maintain records digitally, make sure they are backed up beyond your computer’s hard drive. In the event of the “blue screen of death”, you’ll need to make sure you still have access to those documents.

By Janet Berry-Johnson, CPA

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Received a Notice from the IRS or a State…Now What?

Posted on October 8 2014 by admin

It appears that more and more notices are being sent out than ever from the IRS and state agencies. Most letters from these agencies don’t make anyone jump for joy when spotted while sifting through the week’s mail. Unless, of course, you are expecting a check back for overpaid taxes, in which case, lucky you.

The first recommendation is to open the notice to see what it entails. Ignoring a notice could lead to heavy penalties and interest on any monies owed that accumulate by the day; so the sooner the reason for the notice is resolved, the less likely you will be paying extra.

Carefully read the notice and follow any instructions given. If you agree with the notice and no money is due, you are not required to respond. If you owe money and agree with the amount, simply write a check and mail it as soon as possible. We recommend you send any check or correspondence by certified mail.

If you disagree with the amount or reason for the notice, call the number given in the upper right hand corner. Make sure to have copies of checks written and the form or tax return the notice pertains to before calling. Always retain a copy of any notice received and notes regarding conversations for your records.

Your accountant can be helpful in resolving any matters related to notices received. Be sure to get them involved as soon as possible. They will ask that you sign a power of attorney in order to speak on your behalf, so be prepared to sign a form.

Don’t fall prey to any scams. The IRS will always contact you first by mail, not by phone or email. Click here for more details on scams.

By Julie Duley

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Proceed with Caution When Helping Children Purchase a Home

Posted on October 7 2014 by admin

According to The Project on Student Debt, in 2013 more than 7 in 10 college graduates carried an average student debt of $29,400. Add to that the sluggish job market that promises low starting wages and little job security, and it is very difficult for first-time homeowners to jump into the market.

But there are some tough questions you should ask – and answer – before jumping in with home loan help. How much will your help cost you both now and in the future? Is this the right time for your child to purchase a home? Are you giving up more than you can afford? Can you continue to meet your own needs now and still maintain a comfortable retirement in the future? Are you prepared for the possibility of never seeing the money again? Do you intend your help to be a gift or a loan?

If you are planning to gift the funds, you are allowed to give $14,000 (in 2014) to your child per year without it counting against your lifetime gift-tax exemption. If your child is married you could give up to $56,000 in a year ($14,000 from you to your child and $14,000 from you to their spouse, plus $14,000 from your spouse to your child and $14,000 from your spouse to your child’s spouse). The advantage of a gift is that it does not add to the child’s debt burden and therefore should not hurt the child’s chances of qualifying for a loan. However, you probably need to make sure the gift is given long before your child tries to buy a home as some banks want to make sure the money is not a loan, which will affect their debt-to-asset ratio.

If the funds are a loan, be sure to fully document the note. You should have your attorney review the note to be sure it is legal and that it includes all of the necessary information including the repayment terms, the interest rate, and the consequences if the note is not repaid timely. The note must include a reasonable interest rate or risk being reclassified as a gift by the IRS.

There are a few more options to consider including co-signing a loan, having a shared-equity arrangement, and setting up a rent-to-own plan. Keep in mind that co-signing a loan should only be done if you are confident your child has stable employment and can meet their mortgage payments. You may be on the hook for the mortgage payments if your child fails to make them which could affect your standard of living and potentially impact your retirement plans. Be sure to consult your attorney if you decide to go the route of rent-to-own or shared equity to be sure all legal contingencies are covered and help mitigate your risk in the event anything goes wrong.

By Pamela Wheeler, EA

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Tax Aspects of Employee Terminations

Posted on October 2 2014 by admin

Although taxes probably are the last thing on your mind after losing or quitting a job, tax aspects of your changed personal and professional circumstances can be significant. Depending on your situation, the tax aspects can be complex, and require you to make decisions that can affect your tax picture this year and for years to come. Here are just a few of the factors to think about.

Although severance pay is taxable and is subject to federal income tax withholding, some elements of a severance package may be specially treated. For example:

  • If you sell stock acquired by way of an incentive stock option (ISO), part or all of your gain may be lightly taxed long-term capital gain, depending on whether you meet a special dual holding period.
  • If you received or will receive what is commonly referred to as a golden parachute payment, you may be subject to an excise tax equal to 20% of the portion of the payment that’s treated as an “excess parachute payment” under extremely complex rules.
  • The value of job placement assistance you receive from your former employer usually is tax-free. However, the assistance is taxable if you had a choice between receiving cash or outplacement help.

You should also be aware that under the so-called COBRA rules, most employers that offer group health coverage must provide continuation coverage to most terminated employees and their families. The cost of any premium you pay for insurance that covers medical care is a medical expense and as a general rule, results in a tax benefit to you if you claim itemized deductions and your total medical expenses exceed 10% (7.5% for those 65 and older) of your adjusted gross income. If your ex-employer pays for some of your medical coverage for a period of time following termination, you will not be taxed on the value of this benefit.

Employees who terminate employment also need tax planning help to determine the best course of action for amounts they’ve accumulated in retirement plans sponsored by their former employer. For most, a tax-free rollover to an IRA is the best move, if the terms of the plan allow a pre-retirement payout. If you are under age 59 1/2, and must make withdrawals from your company plan or IRA to supplement your current income, there may be an additional 10% penalty tax to pay unless you’re positioned to qualify under one of several escape hatches.

Further, any loans you’ve taken out from your employer’s retirement plan, such as a loan from a 401(k) plan, may be required to be repaid immediately, or within a specified period of your termination of employment, or be treated as if it were in default. If the balance of the loan is not repaid within the required period, it will typically be treated as a taxable deemed distribution.

Finally, the expenses, including travel expenses, of hunting for a new job in the same trade or business are deductible as miscellaneous itemized deductions if certain requirements are met.

By Scott Clouse, CPA

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Whose Property Is It?

Posted on October 1 2014 by admin

The IRS filed liens against Christopher Deinlein who owed taxes to the IRS. Chris was a 1/3 beneficiary in his mother’s estate. Presumably to prevent the IRS from receiving his share of the estate’s assets, Chris disclaimed his interest in the estate under Kentucky law. The IRS sought to seize his 1/3 interest. The District Court held that the assets due to an estate beneficiary can still be reached by the IRS in payment of the beneficiary’s delinquent federal taxes, even if the beneficiary disclaims the estate interest.

What’s interesting in this case is that typically, state disclaimer law creates the legal fiction that the disclaimant predeceased the decedent. On its face, this would appear to prevent a creditor of the disclaimant from reaching the disclaimed assets since the disclaimant is never treated as owning the disclaimed assets.

However, when the creditor is a nonfederal creditor, whether this holds up is a question under state law. But when the creditor is the IRS, this brings in a blend of state and federal law and a determination of property rights.

The District Court walked through several steps to reach its final conclusion, including looking to state law to determine what rights the taxpayer has in the property the IRS seeks to reach. It then applied federal law to determine whether such state rights qualify as “property or rights to property” under federal law. It determined since a potential disclaimant inevitably exercises dominion over the property simply by determining whether the subject property will remain with him or pass to a known other, the disclaimer statute gives the taxpayer the power to channel the estate’s assets. Therefore, the taxpayer retained some rights in the property under state law, despite the disclaimer, and the property can be reached by the IRS in payment of the beneficiary’s delinquent federal taxes.

By Pamela Wheeler, EA

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Tax Implications of the Sharing Economy

Posted on September 30 2014 by admin

With the rise of sharing economy websites such as Airbnb and RelayRides, it may be appealing to rent out your home or car when not in use and pocket some extra cash. But before you do, make sure you understand the tax consequences. Money earned from renting out your home (or even a room in your home), renting out your car, or from any other sharing economy business is considered income and you may have to pay taxes on those earnings.

You can rent out all or part of your home or apartment for up to 14 days per year and all of the rental income you receive is free from federal income taxes, no matter how much you earn. The home must be used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price. If you rent out a room in your home or apartment but continue to live in the rest of the space, you’ll easily meet the personal use requirement. However, if you rent out your entire home or apartment, you’ll need to keep careful track of your rental and non-rental days. If you qualify for this tax-free treatment, you may not deduct any operating expenses for the property (such as utilities, repairs and maintenance) or take any depreciation. This tax-free option has worked out well for residents of Augusta, GA, who may rent out their residences during the week-long Masters golf tournament for anywhere from $3,000 to $30,000 for the week, tax free.

If you rent your home or apartment for more than 14 days during the year, you’ll have to report and pay tax on your rental income by including IRS Schedule E along with your federal income tax return. You are allowed to deduct direct rental expenses, such as commissions paid to the rental service, credit checks, cleaning costs, and depreciation. You may also deduct a portion of your general expenses such as mortgage interest and real estate taxes, utilities, and insurance. Your deduction for such general expenses will be based on the amount of time the property served as a rental versus the time it was used personally during the year.

In some cases, renting out all or a part of your house or apartment can be classified for tax purposes as the equivalent of running a bed and breakfast or hotel. This will be the case if you dedicate a room or rooms in your home solely for the use of paying customers and never personally live in those rooms. You’ll be classified as running a hotel business if you provide substantial services for your guest’s convenience such as regular cleaning and changing linens. In this case your rental activity would be considered a business for tax service and you will be subject to both federal income and self-employment (Social Security and Medicare) taxes on your rental income.

Federal tax compliance with these rules is fairly straight-forward. Compliance with state and local regulatory obligations can get trickier. While Airbnb mentions on their website that the host’s state or locality may require that short-term rental fees or taxes be paid, it is entirely up to the host to include the proper taxes in their rental listing rates, and it is up to the host to pay them.

In 2012, San Francisco made it clear that short-term rentals are indeed subject to hotel taxes. The city’s treasury office reiterated that existing laws require anyone who rents out a guest room to pay the city’s roughly 15% transient occupancy tax.

The city of Los Angeles recently began sending warning letters to residents advertising rentals on Airbnb and other sites reminding them that they are to collect taxes from guests on behalf of the city. Los Angeles makes it even more complicated by requiring that the tax be separately stated from the amount of rent charged. So hosts are not allowed to just pay the taxes out of their cut of the rents.

The city of Scottsdale charges a 1.65% Transaction Privilege Tax on rental of real property and an additional 5% Transient Tax on any hotel, motel, apartment, or lodging space rented to any person for 29 days or less.

Renting out your home or a portion thereof can be a great way to generate income. Just be sure you know the rules for your particular circumstance and locale prior to listing your property for rent.

By Janet Berry-Johnson, CPA

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RIA Releases Preliminary 2015 Tax Items

Posted on September 25 2014 by admin

Every year certain tax items are adjusted for inflation including standard deduction amounts, tax tables, and earned income credit. Although the official release of these items is required by the IRS by December 15, 2014, here is an unofficial look at some of the more common tax item adjustments for 2015 as reported by the RIA.

Standard Deductions

Married Filing Jointly $12,600
Single $6,300
Head of Household $9,250
Married Filing Separately $6,300

Kiddie Tax and Personal Exemptions

The exemption for Kiddie tax increases from $2,000 to $2,100 in 2015. Also personal exemptions increase from $3,950 to $4,000 in 2015.

Tax Rate Brackets

Married Filing Jointly
If Taxable Income is: Tax

  • Less than $18,450: 10%
  • $18,450 – $74,900: $1,845 + 15% of the amount over $18,450
  • $74,900 – $151,200: $10,312.50 + 25% of the amount over $74,900
  • $151,200 – $230,450: $29,387.50 + 28% of the amount over $151,200
  • $230,450 - $411,500: $51,577.50 + 33% of the amount over $230,450
  • $411,500 – $464,850: $111,324 + 35% of the amount over $411,500
  • $464,850 <: $129,996.50 + 39.6 of the amount over $464,850

Single
If Taxable Income is: Tax

  • Less than $9,225: 10%
  • $9,225 – 37,450: $922.50 + 15% of the amount over $9,225
  • $37,450 – $90,750: $5,156.25 + 25% of the amount over $37,450
  • $90,750 – $189,300: $18,481.25 + 28% of the amount over $90,750
  • $189,300 – $411,500: $46,075.25 + 33% of the amount over $189,300
  • $411,500 – $413,200: $119,401.25 + 35% of the amount over $411,500
  • $413,200 <: $119,996.25 + 39.6% of the amount over $413,200

AMT

For those of you subject to alternative minimum tax, the exemption amount for joint filers increases to $83,400, and $53,600 for single filers in 2015.

Final amounts will be updated once officially released by the IRS towards the end of the year.

By Julie Duley

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IRS Releases Health Care Information Reporting Draft Forms

Posted on September 24 2014 by admin

The Affordable Care Act is requiring nonexempt individuals to have minimum essential coverage or to pay the individual shared responsibility payment. On July 24, the IRS released the draft forms that the providers of health care must use to fulfill the reporting requirements stated in the new health care reform. The forms will begin being used in 2016 for the 2015 calendar year; however, for 2014 the forms are not required to be filed, but can be voluntarily. The IRS has also released draft instructions in August for taxpayers to view for the forms which are 1095-A, 1095-B and 1094-B, and 1095-C and 1094-C.

Form 1095-A (Health Insurance Marketplace Statement):

Health Insurance Marketplaces use this form to report information on the enrollments in qualified health plans through the Marketplace. It also allows individuals to claim and reconcile the premium tax credit and to make sure their return is accurate.

Form 1095-B (Health Coverage) & 1094-B (Transmittal of Health Coverage Information Returns):

Those who provide minimum essential coverage during the year must file the information return and the transmittal. The forms are used to report the information regarding those individuals who are covered by the minimum essential coverage. Some of the information reported will be the individual’s personal information and the number of months the individual is covered. By having the coverage, taxpayers are not required to pay the individual shared responsibility payment.

Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) & 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns):

This form is used to verify that large employers with more than 50 full-time employees offered health coverage to their employees during the year. These are filed by the employers and like a W-2, a copy Form 1095-C is provided to the employees by the employer. Taxpayers again, are not required to make the individual shared responsibility payments if the terms are met with these forms. The forms are also used to show whether or not the employer owes any payments under the employer shared responsibility provisions.

By Kelsey Olsen

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Welcome


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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