Posts Tagged ‘Internal Revenue Service’
Posted by William Byrnes on July 18, 2011
A recent IRS Revenue Ruling provides an important reminder for us of the rules for deducting interest that’s paid or accrued on a business life insurance policy loans. Knowing how and when policy loan interest is properly deductible can mean the difference between closing the sale in the first instance and an IRS audit down line if these rules are ignored.
In general, interest paid on a life insurance policy loan is not deductible for income tax purposes; but there are some exceptions for life insurance purchased for business purposes. The deductibility of policy loan interest has changed significantly over the past 20 years, so an intimate knowledge of the specifics is imperative when selling or transacting on a policy that’s issued to a business. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous Advisor’s Journal coverage of the exception to the pro rata limitation on interest deduction, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC-11-41).
For in-depth analysis of corporate-owned life insurance, see Advisor’s Main Library: D—Deductibility Of Business Insurance Premiums, E—Premiums As Taxable Income To The Insured & F—Taxability Of Corporate Owned Life Insurance Proceeds At Death.
Posted in Taxation, Wealth Management | Tagged: Agents and Marketers, Business, Financial services, insurance, Insurance policy, Internal Revenue Service, life insurance, Taxable income | Leave a Comment »
Posted by William Byrnes on July 11, 2011
If you have small business clients who are struggling with back taxes and/or tax liens, you can tell them help is on the way. The IRS is offering assistance for both individuals and small businesses that are struggling to “meet their tax obligations, without adding unnecessary burden to [the] taxpayers.” The new program includes a number of features discussed in today’s Advanced Markets Journal. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Posted in Taxation, Wealth Management | Tagged: accounting, Business, Internal Revenue Service, IRS, Small business, tax, Tax lien, TurboTax | Leave a Comment »
Posted by William Byrnes on May 9, 2011
As we have discussed in the past at AdvisorFYI, there is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions. “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.”
Generally, “Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.”
Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. Read the analysis at AdvisorFYI
Posted in Compliance, Financial Crimes, Taxation | Tagged: Bank account, Finance, Internal Revenue Service, Offshore bank, Teachta Dála, U.S. Treasury Department, United States, United States Treasury Department | Leave a Comment »
Posted by William Byrnes on May 2, 2011
A recent report by the Internal Revenue Service shows that total return filings are down this year as compared to the same time last year. The report shows that over 51.927 million individual taxpayers have filed through the end of February 2011. During this same period for the 2009 taxable year/2010 filing year the total number of returns by the end of February was around 53.556 million. The difference between the two years amounts to approximately a decrease of three percent.
What’s more, the average refund for the 2010 tax year/2011 filing season is also down from calculations from the same time last year. This year’s average individual refund is currently $3,129, down $20 from $3,149 in 2010. Read the analysis at AdvisorFYI
Posted in Taxation | Tagged: accounting, Fiscal year, Government, Internal Revenue Service, tax, Tax refund, Tax return (United States), United States | Leave a Comment »
Posted by William Byrnes on April 29, 2011
Today we re-examine the case in-depth, focusing on how the IRS utilizes the step transaction doctrine to deny taxpayers valuation discounts. The case is yet another example of how important the dating of transactions is when you’re looking to secure a valuation discount. A single date on a document can mean the difference between a substantial valuation discount on a gift and the expense of fighting the IRS through the court system. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of valuation discounts in Advisor’s Journal, see IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case (CC 11-21), Vigorous Debate over Qualified Appraisal Standard for Valuation of Donated Policies (CC 10-92) & Valuation Discounts: Only for a Bona Fide Business (CC 10-60).
For in-depth analysis of gift tax valuation discounts, see Advisor’s Main Library: A—Family Limited Partnerships and Estate & Gift Tax Valuation Discounting.
Posted in Estate Tax, Taxation | Tagged: Business, Discounting, Facebook, Foursquare, Internal Revenue Service, IRS, tax, valuation | Leave a Comment »
Posted by William Byrnes on April 28, 2011
In the midst of the tax filing season, the Internal Revenue Service released the 2011 version of its discussion of many of the more common “frivolous” tax arguments made by individuals and groups that oppose compliance with federal tax laws.
The Service suggested that “anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read their 84-page document, The Truth About Frivolous Tax Arguments.” At AdvisorFYI, we are not contemplating any particular legal grounds for not paying a “fair share of taxes”, whatever that may be, but rather are interested in presenting some of the frivolous positions argued and how the Government generally responds. We’ve presented a few select ones below.
The 2011 IRS document explains many of the common “frivolous” arguments made in recent years and it presents a legal position that attempts to refute these claims. The IRS claims, the document “will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.”
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
Here are some of positions we found to be commonly marketed to the public, and how the IRS responds to the positions: Read the analysis at AdvisorFYI
Posted in Taxation | Tagged: Internal Revenue Service, IRS tax forms, law, Offer in compromise, tax, TurboTax, United States, United States Congress | Leave a Comment »
Posted by William Byrnes on April 6, 2011
Taxpayers with assets hidden in offshore accounts will get a second chance to voluntarily declare their assets to the IRS in return for reduced penalties under the new Offshore Voluntary Disclosure Initiative (“OVDI”).
This newest offshore amnesty program offers a reduced, 25% penalty which will be calculated based on the highest aggregate amount in the taxpayer’s offshore account between 2003 and 2010. In addition to penalties, program participants will be required to pay eight years of back taxes plus interest, accuracy related penalties, and delinquency penalties. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of offshore issues in Advisor’s Journal, see IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118), Offshore’s Limited Shelf Life (CC 10-47) & IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52)
Posted in Compliance, Tax Policy | Tagged: Douglas Shulman, Internal Revenue Service, IRS, Offshore bank, Switzerland, tax, UBS, United States | Leave a Comment »
Posted by William Byrnes on April 1, 2011
Why is this Topic Important to Wealth Managers? This topic discusses the potential consequences of not playing by the rules; it is important to constantly keep in mind the balance between providing the most efficient and effective services to clients and crossing the line into illegal territory. Clients may not realize the harsh penalties associated with offshore activity, and although when performed by expert planners under the proper circumstances, that some offshore transactions may be legal and beneficial, it is the job of informed wealth managers to keep clients abreast of information that is useful in making long-term financial decisions.
Four bankers at an international bank incorporated and with its headquarters in Zurich, Switzerland, with offices worldwide, including New York City and Miami, were indicted by a federal grand jury in the Eastern District of Virginia and charged with conspiring with other Swiss bankers to defraud the United States, the Justice Department and the Internal Revenue Service (IRS) announced Wednesday.
According to the indictment, the international bank’s managers and bankers engaged in illegal cross-border banking that was designed to assist U.S. customers evade their income taxes by opening and maintaining secret bank accounts at the bank and other Swiss banks. As of the fall of 2008, the international bank maintained thousands of secret accounts for customers in the United States with as much as $3 billion in total assets under management in those accounts.
The Justice Department announced the scheme dates back to 1953 and involved two generations of U.S. tax evaders including U.S. customers who inherited secret accounts at the international bank.
The indictment asserts that four foreign individuals, members of senior management, bankers and others assisted U.S. taxpayers in evading their U.S. taxes through the use of secret bank accounts in Switzerland.
According to the indictment, the defendants and their co-conspirators solicited U.S. customers to open secret accounts because Swiss bank secrecy would permit them to conceal from the IRS their ownership of accounts at the bank and other Swiss banks. It is further alleged that they provided unlicensed and unregistered banking services and investment advice to customers in the United States in person while on travel to here, including at the international bank’s representative office in New York City and by mailings, e-mail and telephone calls to and from the United States.
Read the analysis at AdvisorFYI
Posted in Compliance, Money Laundering | Tagged: Banking in Switzerland, Internal Revenue Service, New York City, Switzerland, UBS, United States, United States Department of Justice, Zurich | 2 Comments »
Posted by William Byrnes on March 29, 2011
Why is this Topic Important to Wealth Managers? This discussion is focused on a hot topic in Washington and around the country. The new 1099 reporting requirements that are expected to come into effect next year may be amended or removed all together. Wealth managers would be well served to be knowledgeable on the subject that not only affects clients and their businesses, but it also directly affects many wealth managers themselves who pay for goods and services as a trade or business. Thus, here at Advanced Markets we bring wealth managers in particular the most relevant and up-to-date information on the web.
Repeal of the health reform law’s business-to-business 1099 reporting requirement is a step closer, with the U.S. Senate passing an amendment on February 2 that would repeal the provision. Praising passage of the Senate amendment, Senator Stabenow said, “Today we provided a common-sense solution for business owners so they can focus on creating jobs, not filling out paperwork for the IRS…. If left unchecked, 40 million small businesses would see their IRS 1099 paperwork increase 2000 percent.”
President Obama even praised the repeal efforts in his state of the union address, receiving a resounding round of applause. Acknowledging that his health care reform law has its share of flaws, and offering to work with the Congress to correct those flaws, he said that “We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.” Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
The House of Representatives passed H.R. 4, the Small Business Paperwork Mandate Elimination Act of 2011 by majority vote (314-112, with 76 Democrats joining a unanimous House GOP).[1] The legislation, if passed by the Senate and signed into law by President Obama, would repeal an expansion currently scheduled to take effect in 2012 of information that businesses must report to the Internal Revenue Service on Form 1099.
Specifically, the new legislation would amend the Internal Revenue Code to repeal the expanded 1099 information reporting requirements on payments made to corporations, rental property expense payments, and payments for property and other gross proceeds. The legislation would thus strike portions of section 6041 of the Internal Revenue Code which were added by the Patient Protection and Affordable Care Act of 2010 (PPA).
The PPA expanded tax information reporting requirements to require businesses to issue a Form 1099 for any payments to corporations (rather than just to individuals) and for any payments for property (rather than just for services or investment income) that exceed $600 per year per payee. H.R. 4 would strike language requiring “amounts in consideration for property” and “gross proceeds” to be subject to 1099 reporting requirements under section 6041 of IRS Code in order to eliminate the expanded reporting requirements. The bill would also repeal expanded information reporting requirements on rental property expense payments that are currently in effect.
According to the Joint Committee on Taxation, repealing these expanded 1099 information reporting requirements for rental property expense payments as well as certain payments of more than $600 will reduce taxes by approximately $24.7 billion over ten years. [2]
Section 6041 of the Internal Revenue Code outlines reporting requirements and generally requires information returns to be made by every person (payor) engaged in a trade or business that makes payments aggregating $600 or more in any taxable year to another person (payee) in the course of the payor’s trade or business. The information returns must be filed with the Internal Revenue Service and corresponding statements must be sent to each payee.
Beginning in 2012, certain payments not previously subject to 1099 reporting requirements, including those made to corporations and those made for property, will become subject to the reporting requirements under the PPA. The PPA and subsequent legislation expanded information reporting requirements of businesses for payments of $600 or more to any vendor and on rental property expense payments. Some argue, these new requirements would likely impose a huge tax compliance burden on small businesses, forcing them to devote resources to tax filing instead of to business expansion and job creation.
For previous coverage of the Health Care Reform Act’s enhanced 1099 reporting requirement in Advisor’s Journal, see Health Care Reform Causes an Avalanche of 1099s (CC 10-84).
Please check back with Advisorfyi and Advisorfx for more timely information on 1099 reporting.
Posted in Tax Policy | Tagged: Business, Debbie Stabenow, Health care reform, Internal Revenue Service, Repeal, Small business, United States Congress, United States Senate | 1 Comment »
Posted by William Byrnes on March 29, 2011
Why is this Topic Important to Wealth Managers? This topic presents a discussion on information reporting regarding nonresident aliens and domestic interest income. Because some wealth managers work with international clients, or a family in which at least one family member like a spouse or child is foreign, it is helpful to discuss the new proposed reporting requirements as issued by the Department of the Treasury. Having a better understanding of the reported information that will end up in the hands of the IRS will hopefully help wealth managers focus on compliance, as well as wealth preservation and growth.
The Internal Revenue Service recently released new proposed regulations regarding reporting interest payments made to nonresident aliens. A nonresident alien is an individual who is neither a citizen of the United States nor a resident of the United States.[1] We will discuss in a later blogticle this week about how to determine if someone is either a US taxpayer or instead is a non-resident alien (not a US taxpayer).
The new proposed rules require the payor to make an information return on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding” on interest payments aggregating $10 or more each year paid to a nonresident alien, that is otherwise reportable on a Form 1099 (interest income). [2]
The payor shall generally prepare and file Form 1042-S at the time and in the manner prescribed by the code and the regulations, for the calendar year in which the interest is paid. [3]
The IRS and Treasury Department first published, in 2001, a notice of proposed rulemaking which provided that U.S. bank deposit interest paid to any nonresident alien individual must be reported annually to the IRS. [4] Then in 2002, the Treasury Department and the IRS withdrew these regulations and proposed narrower regulations that would require reporting only on interest payments to nonresident alien individuals that are residents of certain designated countries or, at the option of the payor, on interest payments to all nonresident alien recipients of bank deposit interest. [5]
Under regulations currently in effect, reporting of U.S. bank deposit interest is required only if the interest is paid to a U.S. person or a nonresident alien individual who is a resident of Canada. [6]
The newest proposed regulations published this month withdraw previous regulations and provide proposed regulations that extend the information reporting requirement to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country.
The Treasury Department notes this extension is appropriate for several reasons: Read the analysis at AdvisorFYI
Posted in Tax Policy | Tagged: Alien (law), Deposit account, Internal Revenue Service, IRS tax forms, Regulation, Report, Treasury Department, United States | Leave a Comment »
Posted by William Byrnes on March 26, 2011
Why is this Topic Important to Wealth Managers? Increasing the IRS staffing budget in certain departments may be indicative of increasing scrutiny of client’s information and tax returns. Increasing government scrutiny may lead to increased compliance costs in time and fees. Consequently, a wealth manager may want to address with client the need for increasing diligence in preparation of their affairs. Thus, Advanced Market Intelligence presents a discussion on the Internal Revenue Services’ allocations for fiscal year 2012, and contrasts 2010 data and figures.
The fiscal year 2012 proposed budget allocates $14 billion to the Department of the Treasury; a 4 percent increase above the 2010 enacted level. [1] The increase over 2010 levels is attributed to costs associated with implementation of legislation and new investments in IRS tax compliance activities that are aimed to help reduce the deficit. Of the $14 billion appropriated to the Treasury operations, over $13.28 billion is encumbered for the Internal Revenue Service.[2]
The Internal Revenue Service has allocated its appropriations to the tune of $2.345 billion for “Taxpayer Services”; $5. 96 billion for “Enforcement” of which over $5 billion is apportioned to “Exam and Collections”; “Operations and Support” represent $4.62 billion; and “Business Systems Modernization” together with “Health Insurance Tax Credit Administration” represent approximately $351 million. [3]
The main function of the Internal Revenue Service is to collect he revenue that funds the government and administer the nation’s tax laws. [4] The IRS collected $2.345 trillion in taxes (gross receipts before tax refunds) in 2010, or 93 percent of all federal government receipts.
Total resources to support the IRS activities for fiscal year 2012 are estimated to be around $13.626 billion, including $13.283 billion from direct appropriations, an estimated $138 million from reimbursable programs, and an estimated $204 million user fees. The direct federal budget appropriation is $1,137,784,000, 9.37 percent, more than the fiscal year 2010 enacted level of $12,146,123,000. [5]
The 2012 budget provides funding to implement enacted legislation; handle new information reporting requirements; increase compliance by addressing offshore tax evasion; expand enforcement efforts on noncompliance among corporate and high-wealth taxpayers; and enforce return preparer compliance.
The IRS estimates new enforcement personnel will generate more than $1.3 billion in additional annual enforcement revenue once the new hires reach full potential in fiscal year 2014.
Even the Department of the Treasury notes, the tax law is complex and that even sophisticated taxpayers can make honest mistakes on their tax returns. To this end, the IRS states that it remains committed to a balanced program of assisting taxpayers to both understand the tax law and remit the proper amount of tax.
In fiscal year 2010, revenue from all enforcement sources at the IRS reached $57.6 billion, 18 percent more than in 2009. The significant increase was attributable in part to: Read the analysis at AdvisorFYI
Posted in Tax Policy | Tagged: Budget, Business, Douglas Shulman, Fiscal year, Internal Revenue Service, Republicans, tax, United States Department of the Treasury | 1 Comment »
Posted by William Byrnes on March 24, 2011
In a recent case, the IRS denied an estate a fractional interest discount on the family ranch, resulting in a seven digit tax bill and the likely liquidation of the family homestead. The father had numerous options for securing a valuation discount on, or excluding the value of, a significant tract of property from his gross estate, but hadn’t done any planning since 1965, resulting in total denial of a discount. When he died in 2004, the property was worth $6,390,000. Don’t let this be your client.
The dispute between the IRS and the father’s estate centered on whether the property’s value in the gross estate was: (1) the undiscounted value of a fee simple interest in the property or (2) the aggregated value of the children’s fractional interests in the property—valued separately with fractional interest discounts. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of valuation discounts in Advisor’s Journal, see IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case (CC 11-21) and Valuation Discounts: Only for a Bona Fide Business (CC 10-60).
For in-depth analysis of valuation discounts, see Advisor’s Main Library: A—Family Limited Partnerships and Estate & Gift Tax Valuation Discounting.
Posted in Estate Tax | Tagged: Business, Internal Revenue Service, IRS, law, Property, TurboTax, United States, Valuation (finance) | Leave a Comment »
Posted by William Byrnes on March 18, 2011
Company is an accrual basis fiscal year taxpayer. Company pays severance benefits in its discretion on an ad hoc basis, and vacation benefits pursuant to its established policy.
Historically, Company has paid both severance and vacation pay from its general assets. Due to a decline in the Market over the past few years, Company has paid significant severance and expects to continue to pay additional severance over the next few years. Effective Jan 1, 2009 Company established Trust to pay this anticipated severance and vacation pay. Trust intends to submit an application for recognition of exempt status in 2010. On 1/1/2009 Company contributed over $1,000,000 to the Trust and deducted that amount on its tax return for 2009. Company indicates that beginning in 2010, Company will make payments for vacation and severance and will seek reimbursement from the Trust.
Company computed the amount deducted based on the limitation set forth in the Code.
Company has not provided any information documenting any severance claims incurred in 2009 that it expects to pay in 2010. Company indicates that because the Trust was established “to pay severance that they anticipate they will have to pay over the next few years …”, and because the amount deducted is within the limit set forth in the Code that the deduction is proper. Read the analysis at AdvisorFYI
Posted in Retirement Planning, Taxation | Tagged: Employment, Fiscal year, Internal Revenue Service, IRS tax forms, Severance package, tax, Tax deduction, TurboTax | Leave a Comment »
Posted by William Byrnes on March 17, 2011
The Internal Revenue Service announced earlier this week a special voluntary disclosure initiative (the second one of its kind in the past few years). The Internal Revenue Service states the program is designed to bring offshore money back into the U.S. tax system and assist individuals that may have undisclosed income from hidden offshore accounts to pay taxes owed. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. According to the IRS, the first special voluntary disclosure program finished with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, the Service notes, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world.
The new initiative is being called the 2011 Offshore Voluntary Disclosure Initiative, which includes several changes from the 2009 Offshore Voluntary Disclosure Program. The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does have additional features.
For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. However, some taxpayers will be eligible for lower 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Read the analysis at AdvisorFYI
Posted in Uncategorized | Tagged: Bank, Bank account, Douglas Shulman, Internal Revenue Service, Offshore bank, tax, UBS, United States | 1 Comment »
Posted by William Byrnes on March 12, 2011
How does the average gambler determine wagering gains and losses for tax purposes?
Mrs. X is a casual gambler. She uses the cash receipts and disbursements method of accounting and files her returns on a calendar year basis. Mrs. X’s gaming practice is to commit only $100 to slot machine play on any visit to a casino. She wagers until she loses the original $100 committed to gambling or until she stops gambling and “cashes out.”
Upon cashing out, there are three possibilities, that she have $100 (the basis of her wagers), less than $100 (a wagering loss), or more than $100 (a wagering gain). She went to a casino to play the slot machines on ten separate occasions throughout the year. On each visit to the casino, she exchanged $100 of cash for $100 in slot machine tokens and used the tokens to gamble. On five occasions, the she lost her entire $100 in tokens before terminating play. On the other five occasions, the she redeemed her remaining tokens for the following amounts of cash: $20, $70, $150, $200 and $300.
Under the Internal Revenue Code, gross income means all income from whatever source derived, which has been determined to include wagering gains. [1]
The Code further allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. [2] In the case of losses from wagering transactions, losses are allowed only to the extent of gains from such transactions. [3]
In ordinary practice, a wagering “gain” means the amount won in excess of the amount bet (basis). [4] That is, the wagering gain is the total winnings less the amount of the wager. The term wagering “loss” means the amount of the wager (basis) lost.
Generally, gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income. [5] Nor may casual gamblers net their gains and losses from play throughout the year and report only the net amount for the year. [6]
It is accepted that fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. [7]
Under the facts presented above, Mrs. X purchased and subsequently lost $100 worth of tokens on five separate occasions. As a result, the taxpayer sustained $500 of wagering losses. She also sustained losses on two other occasions, when she redeemed tokens in an amount less than the $100 (basis) of tokens originally purchased.
Therefore, on the day the taxpayer redeemed $20 worth of tokens, the taxpayer incurred an $80 wagering loss. On the day the taxpayer redeemed $70 worth of tokens, the taxpayer incurred a $30 wagering loss. On three occasions, the taxpayer redeemed tokens in an amount greater than the $100 of tokens originally purchased. The amount redeemed less the $100 basis of the wager constitutes a wagering gain. [8] On the day the taxpayer redeemed $150 worth of tokens, the taxpayer had a $50 wagering gain. On the day the taxpayer redeemed $200 worth of tokens, the taxpayer had a $100 wagering gain. And on the day the taxpayer redeemed $300 worth of tokens, the taxpayer had a $200 wagering gain.
For the year, the taxpayer had total wagering gains of $350 ($50 + $100 + $200) and total wagering losses of $610, ($500 from losing the entire basis of $100 on five occasions + $80 and $30 from two other occasions). Mrs. X’s wagering losses exceeded her wagering gains for the taxable year by $260 ($610 – $350). She must report the $350 of wagering gains as gross income under IRC § 61. However, under IRC §165(d), she may deduct only $350 of the $610 wagering losses. In this case, the taxpayer may deduct only $350 of her $610 of wagering losses as an itemized deduction. Generally, a casual gambler who takes the standard deduction rather than electing to itemize may not deduct any wagering losses. [9]
[1] IRC Section 61; Rev. Rul. 54-339; Umstead v. Commissioner, T.C. Memo. 1982-573, 44 TCM 1294, 1295 (1982).
[2] IRC Section 165(a).
[3] IRC Section 165(d); Treasury Regulations Section 1.165-10.
[4] See Rev. Rul. 83-103.
[5] Skeeles v. United States, 118 Ct. Cl. 362 (1951), cert. denied, 341 U.S. 948 (1951).
[6] See United States v. Scholl, 166 F.3d 964 (9thCir. 1999).
[7] See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).
[8] See Rev. Rul. 83-130.
[9] See Rev. Rul. 54-339.
We invite your opinions and comments by posting them below, or by calling the Panel of Experts.
Posted in Taxation | Tagged: Gambling, Games, Internal Revenue Code, Internal Revenue Service, Itemized deduction, Shopping, Slot machine, tax | Leave a Comment »
Posted by William Byrnes on March 9, 2011
Last month the National Taxpayer Advocate Nina E. Olson released her annual report to Congress, identifying the need for tax reform as the number one priority in tax administration. The report also examines challenges the IRS is facing in implementing the new health care law. Below is a highlight of some points made in the report: [1]
Tax Reform
“There has been near universal agreement for years that the tax code is broken and needs to be fixed,” Olson said in releasing the report. “Yet no broad-based attempt to reform the tax code has been made. This report documents the burdens the tax code imposes on taxpayers and explores why many taxpayers may nevertheless feel wedded to key aspects of the current system, undermining efforts at reform.”
Analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements. “If tax compliance were an industry, it would be one of the largest in the United States,” the report says. “To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”
Read the analysis at AdvisorFYI
Posted in Tax Policy | Tagged: Health law, Internal Revenue Service, Nina E. Olson, tax, Tax law, Tax reform, United States, United States Congress | Leave a Comment »
Posted by William Byrnes on March 6, 2011
Valuation discounts will always be a disputed issue between taxpayers and the IRS, but as illustrated by the recently published Ninth Circuit Court of Appeals case, a properly timed gift can still qualify for a discount. The parents contributed cash, securities, and real property to an LLC and then transferred LLC interests to a trust (“the children’s trust”) naming their children as beneficiaries.
The IRS rejected the valuation discount, claiming that the parents did not make a gift of the LLC interests to the trusts as they claimed, but instead made an indirect gift of the assets owned by the LLC. The IRS also argued that, even if the LLC were funded prior to the gifting of the LLC interests to the children, the transaction’s two steps—transfer of assets to the LLC and the gift of the LLC interest to the children’s trust—were really a single transaction, an indirect gift of the assets, under the step transaction doctrine. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Posted in Estate Tax | Tagged: Internal Revenue Service, IRS, Limited liability company, tax, Trust law, United States, United States Court of Appeals for the Ninth Circuit, Valuation (finance) | Leave a Comment »
Posted by William Byrnes on March 3, 2011
Late last year the IRS published proposed regulations regarding the classification for Federal tax purposes a domestic series limited liability company (LLC), a domestic cell company, or a foreign series or cell that conducts an insurance business.
A number of States, such as Delaware, have enacted statutes providing for the creation of entities that may establish series, including limited liability companies (series LLCs). In general, most series LLC statutes provide that a limited liability company may establish separate series.
Although the series LLC generally are not treated as separate entities for State law purposes, the treatment of rights and obligations is similar to separate entities, creating in essence “associated members”. Members’ association with one or more particular series is comparable to direct ownership by the members in such series, in that their rights, duties, and powers with respect to the series are direct and specifically identified. If the conditions enumerated in the relevant statute are satisfied, the debts, liabilities, and obligations of one series generally are enforceable only against the assets of that series and not against assets of other series or of the series LLC.
Read the analysis at AdvisorFYI
Posted in Taxation | Tagged: Business, Delaware, insurance, Internal Revenue Service, IRS, Limited liability company, Small business, United States | Leave a Comment »
Posted by William Byrnes on March 2, 2011
SEP is a written plan that allows a business to make contributions toward executive’s retirement and employees’ retirement without getting involved in a more complex qualified plan.
Under a SEP, the business makes the contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and the business makes contributions to the financial institution where the SEP-IRA is maintained.
SEP-IRAs are set up for, at a minimum, each eligible employee. An eligible employee means an individual who meets all the following requirements: the individual has reached age 21, has worked for the business in at least 3 of the last 5 years, and has received at least $550 in compensation from the business in 2010.
There are three basic steps in setting up a SEP. Read the analysis at AdvisorFYI
Posted in Retirement Planning | Tagged: Business, Employment, Individual Retirement Account, Internal Revenue Service, Pension, Retirement, SEP-IRA, tax | Leave a Comment »
Posted by William Byrnes on February 27, 2011
A significant number of Offshore Voluntary Disclosure Practice cases (remember the Swiss Bank Accounts) involve Passive Foreign Investment Company (PFIC) investments. A lack of historical information on the cost basis and holding period of many PFIC investments, the Service notes, may make it difficult for taxpayers to prepare statutory PFIC computations and for the Internal Revenue Service to verify them. As a result, resolution of many Disclosure Practice cases are said to be unduly delayed. Therefore, for purposes of this initiative, the Internal Revenue Service is offering taxpayers an alternative to the statutory PFIC computation that will resolve PFIC issues on a basis that is consistent with the Mark to Market (MTM) methodology authorized in Internal Revenue Code section 1296 but will not require complete reconstruction of historical data.
Posted in Tax Policy | Tagged: Banking in Switzerland, Internal Revenue Service, Investment, Passive Foreign Investment Company, PFIC, tax | Leave a Comment »
Posted by William Byrnes on February 25, 2011
The Internal Revenue Code provides an exclusion from income for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. [1] Thus, there are no tax consequences to the individual if the total amount of such policies does not exceed $50,000. However, the imputed cost of coverage in excess of $50,000 must be included in income to the individual, using the IRS Premium Table, [2] and are subject to social security and Medicare taxes.
A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the employer if:
- The employer pays any cost of the life insurance, or
- The employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee (known as the “straddle” rule).
A policy that is not considered carried directly or indirectly by the employer has no tax consequences to the employee. Also, because the employees are paying the cost and the employer is not redistributing the cost of the premiums through an insurance system, the employer has no reporting requirements.
Read the analysis at AdvisorFYI
Posted in Insurance | Tagged: Employee benefit, Employment, Federal Insurance Contributions Act tax, insurance, Internal Revenue Service, Policy, tax, term life insurance | Leave a Comment »
Posted by William Byrnes on February 24, 2011
The topic Self-Employment Tax on wages versus distributions has reared its head again – as shown by the recent Federal District Court case involving David E. Watson.
The C.P.A. recently disputed and lost to the Government’s position which recharacterized dividend and loan payments from David E. Watson, P.C. (a Subchapter S corporation) to its sole shareholder and employee, David E. Watson. The IRS assessed additional employment taxes, interest and penalties against Watson for each of tax years in which Watson’s salary was significantly lower than his total distributions.
Read the analysis at AdvisorFYI (sign up for a 2 week online free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Posted in Tax Policy | Tagged: Corporation, Internal Revenue Service, IRS tax forms, Self-employment, tax, Taxation, United States, Withholding tax | Leave a Comment »
Posted by William Byrnes on February 22, 2011
As reported earlier this month in Advisor’s Journal [Qualified Charitable Distributions from an IRA (CC 11-03))], a qualified charitable distribution (QCD) of up to $100,000 made from an IRA will not be included in the taxpayer’s gross income, as long as the contribution is made directly from the trustee to a public charity or conduit private foundation when the account owner is at least 70½ years old.
One benefit of taking a QCD is that it can qualify as a required minimum distribution (RMD). For the taxpayer who does not have a financial need for the distribution, making a QCD is an opportunity to take the RMD—avoiding the severe tax penalties for not taking the distribution—while excluding the distribution from taxable income.
But because the QCD provision lapsed during 2010, taxpayers who took an RMD during 2010 are out-of-luck.
Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Posted in Retirement Planning | Tagged: Charitable organization, Individual Retirement Account, Internal Revenue Service, Pension, Roth IRA, tax, Taxation, Traditional IRA | Leave a Comment »
Posted by William Byrnes on February 16, 2011
Why is this Topic Important to Wealth Managers? Discusses the new income reporting threshold for non-profit organizations. Provides details on the new level of reporting required on Form 990 for 501(c) organizations.
Generally the Internal Revenue Code requires the filing of an annual return by exempt organizations. [1] However, there are certain mandatory exceptions to the annual filing requirement for exempt organizations provided by the Code. [2]
Further, the tax law provides that the Secretary of the Treasury, through the Commissioner of the Internal Revenue Service may relieve exempt organizations from the annual filing requirement if the Secretary determines that such filings are not necessary to the efficient administration of the internal revenue laws. [3]
Before, exempt organizations were relieved from the Form 990 (Return of Organization Exempt from Income Tax) filing requirement for organizations described in § 501(c) (other than private foundations) whose annual gross receipts are normally not more than $25,000. [4]
Read the full analysis and on similar issues – AdvisorFYI
Posted in Tax Exempt Orgs | Tagged: 501(c), income tax, Internal Revenue Code, Internal Revenue Service, IRS tax forms, Non-profit organization, tax, Tax exemption | Leave a Comment »
Posted by William Byrnes on February 12, 2011
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) extended the income tax deduction for state and local sales taxes through December 31, 2011. The deduction expired on January 1, 2009, but Congress amended the provision retroactively, which will allow taxpayers to take the deduction on their 2010 taxes. The deduction, which has been slated to expire a number of times, has been revived by Congress repeatedly since it was introduced but has not yet been made a permanent part of the Code. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), & 2010 Estates: To Elect or Not to Elect (CC 10-124).
For in-depth analysis of income tax deductions, see Advisor’s Main Library: B4—Business Income and Deductions.
We invite your questions and comments by posting them or by calling the Panel of Experts.
Posted in Taxation | Tagged: accounting, Internal Revenue Service, Itemized deduction, January 1 2009, tax, Tax deduction, Unemployment benefits, United States | Leave a Comment »
Posted by William Byrnes on February 11, 2011
Recently, in a series of Announcements the Internal Revenue Service stated that it was developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns.
Now the new requirements have been finalized, businesses and wealth managers have a better idea of the direction of Uncertain Tax Position reporting.
Reported under Schedule UTP for Form 1120 series, the Uncertain Tax Position reporting currently applies to a select number of corporations (however phase-in provisions will change this by 2012 and 2014).
Who must file a Schedule UTP?
The class of organizations that must file is limited (for now). Generally, for 2010 tax year returns most small businesses will not be included in the reporting, but that will probably change. Nevertheless, a corporation must file Schedule UTP with its 2010 income tax return if: To read this article excerpted above, please access AdvisorFYI
Posted in Tax Policy | Tagged: Business, Corporation, Internal Revenue Service, IRS tax forms, tax, Tax return (United States), TurboTax, United States | Leave a Comment »
Posted by William Byrnes on February 9, 2011
Although trusts can be taxpayers, Sections 671 to 679 of the Internal Revenue Code contain the so-called ‘grantor trust rules’, which treat certain trust settlors (and sometimes persons other than the settlor) as the owner of a portion or all of a trust’s income, deductions and credits for US tax purposes. A trust where the settlor (or other person) is treated as the owner of the trust assets for US tax purposes is referred to as a ‘grantor trust’. The grantor trust rules apply to both foreign and domestic trusts, but in different ways.
Under the grantor trust rules, a US person who transfers property to a foreign trust is generally treated for income tax purposes as the owner of that portion of the trust attributable to the transferred property, even if the trust would not have been a grantor trust had it been domestic.
This is the result for any tax year in which any portion of the foreign trust has a US beneficiary. A foreign trust is treated as having a US beneficiary for a tax year unless (i) under the terms of the trust, no part of the trust’s income or corpus may be paid or accumulated during the tax year to or for the benefit of a US person, and (ii) if the trust is terminated at any time during the tax year, no part of the income or corpus could be paid to or for the benefit of a US person. The Internal Revenue Service (IRS) regulations under Section 679 of the Internal Revenue Code generally treat a foreign trust as having a US beneficiary if any current, future or contingent beneficiary of the trust is a US person. To read this article excerpted above, please access AdvisorFYI.
Posted in Taxation | Tagged: Fiscal year, income tax, Internal Revenue Code, Internal Revenue Service, IRS tax forms, tax, Taxation, United States | Leave a Comment »
Posted by William Byrnes on February 8, 2011
Recently some wealth managers have established trustee services with regards to retirement accounts. It’s a good fit, generally, when the wealth manager can offer clients information regarding deductible contributions to a retirement account, and further act as a fiduciary vis-à-vis trustee of those funds.
What are the basic requirements in order to act in the capacity as a trustee for IRA and other retirement account purposes?
First, an Individual Retirement Account (IRA) must be a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries. Such trust must be maintained at all times as a domestic trust in the United States. The instrument creating the trust must be in writing.
Secondly, the trustee of an IRA trust may be a person other than a bank if the person demonstrates to the satisfaction of the Commissioner of the Internal Revenue Service that the manner in which the person will administer trusts will be consistent with the requirements of the tax code. The person must submit a written application including the information discussed below. Read further at AdvisorFYI
Posted in Pensions, Trusts | Tagged: Individual Retirement Account, Internal Revenue Service, Retirement, Roth IRA, tax, Trust law, Trustee, United States | Leave a Comment »
Posted by William Byrnes on February 5, 2011
Some taxpayers are going to have to wait until mid-to-late February to file their 2010 income tax returns, delaying much needed refunds and potentially clogging up the system for other taxpayers. The IRS is blaming the filing delay on Congress waiting until the end of December to pass the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, H.R. 4853 (Tax Relief Act), which includes a bevy of tax provision extensions, a new two-year estate tax, and a one-year, 2 percent Social Security tax holiday. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), and 2010 Estates: To Elect or Not to Elect (CC 10-124).
Posted in Taxation | Tagged: Congress, Internal Revenue Service, IRS, tax, Tax return (United States), Unemployment benefits, United States, United States Congress | Leave a Comment »
Posted by William Byrnes on February 4, 2011
What are the tax procedures for requesting exempt status recognition?
Generally, an organization seeking recognition of an exempt status is required to submit the appropriate application. Specifically, an organization seeking recognition of exemption under § 501(c)(3) \ must submit a completed Form 1023.
What fees are required by those requesting an exempt status?
Generally, an application for exemption under § 501(c)(3) includes a $400 fee for organizations that have had annual gross receipts averaging not more than $10,000 during the preceding four years, or new organizations that anticipate gross receipts averaging not more than $10,000 during the first four years.
Application for exemption under § 501(c)(3) includes an $850 fee for organizations whose actual or anticipated gross receipts exceed $10,000 averaged annually. For those seeking the $400 fee, the Service also requires the organization to sign a certification with their application that the receipts are or will be not more than the indicated amounts.
Read the full analysis and on similar issues – http://www.advisorfyi.com
Posted in Tax Exempt Orgs | Tagged: 501(c), Fee, Internal Revenue Service, Non-profit organization, Organization, Receipt, Tax exemption, United States | Leave a Comment »
Posted by William Byrnes on January 31, 2011
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Prior to January 1, 2011, any individual could prepare a tax return or claim for refund for compensation. An individual who prepared and signed a taxpayer’s return or claim for refund as the preparer generally could also represent that taxpayer during an examination of the taxable period covered by that return or claim for refund.
All that has changed ever since the IRS issued regulations which state that after December 31, 2010, in order to prepare a tax return for a fee, or to otherwise represent a taxpayer before the IRS, an individual must obtain a preparer tax identification number (PTIN). …
The Treasury Department and the IRS have decided to adopt the proposed regulations that establish a $50 user fee to apply for or renew a PTIN, which are estimated to recover the full cost to the IRS for administering the PTIN application and renewal program.
Read the full analysis at AdvisorFYI
Posted in Tax Policy | Tagged: Internal Revenue Service, IRS, Social Security number, tax, Tax preparation, Tax refund, Tax returns, United States | 1 Comment »
Posted by William Byrnes on January 29, 2011
President Obama’s tax compromise—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act)—includes a provision that permits qualified charitable distributions to be made directly from an individual retirement account.
Generally, to make a charitable contribution from an IRA, the account owner has to take a distribution from the account, pay any tax due on the contribution, and then make the charitable contribution. An account owner can also name a charity as a beneficiary of the retirement account. Direct qualified charitable distributions take out the middle step, keeping the distribution out of the taxpayer’s taxable income … Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of individual retirement accounts in Advisor’s Journal, see Maximize IRA Stretch with Individual Inherited IRA Accounts (CC 10-69) and The Automatic IRA Act of 2010: Boon for Advisors? (CC 10-56).
For in-depth analysis of individual retirement accounts, see Advisor’s Main Library: IRAs and SEPs.
We invite your questions and comments by posting them in our blog AdvisorFYI or by calling the Panel of Experts.
Posted in Taxation | Tagged: Barack Obama, Boon, Individual Retirement Account, Internal Revenue Service, Retirement, Roth IRA, tax, Unemployment benefits | Leave a Comment »
Posted by William Byrnes on January 19, 2011
Life insurance policies are granted preferred tax treatment, with death benefits distributable tax-free to beneficiaries, but some distributions from a life insurance policy are subject to income tax. For instance, although inside buildup of policy value occurs tax-free, when that value is tapped through policy withdrawals, the policy owner may be taxed on the distribution. Current income taxation can also result when a policy is cancelled or otherwise terminated when a policy loan is outstanding, as illustrated by a recent Tax Court case.
For previous coverage of life insurance developments in Advisor’s Journal, see Life Insurance: Iron-Clad Asset Protection or Chink in the Armor? (CC 10-114) and IRS Blesses Life Insurance Policy Held by Profit-Sharing Plan (CC 10-96). Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For in-depth analysis of policy loans and withdrawals, see Advisor’s Main Library: Section 19.1 G—Tax Treatment Of Policy Loan Interest and Section 19.1 C—Taxation of Amounts Payable During Life.
Posted in Insurance, Taxation | Tagged: insurance, Insurance policy, Internal Revenue Service, life insurance, Policy, tax, term life insurance, United States | Leave a Comment »
Posted by William Byrnes on January 18, 2011
The recent Obama Tax Cuts reinstated the estate and generation skipping transfer taxes effective for decedents dying and transfers made after December 31, 2009. As was discussed earlier this week, the estate tax applicable exclusion amount is $5 million for decedents dying in calendar years after 2011, and the maximum estate tax rate is 35 percent. Furthermore, the generation skipping transfer tax exemption for decedents dying or gifts made after December 31, 2009, is equal to the applicable exclusion amount for estate tax purposes ($5 million for 2010).
For a general background on the Generation Skipping Transfer Tax, see our November 1st Blogticle entitled: Life Insurance and the Generation—Skipping Transfer Tax
Although technically the generation skipping transfer tax is applicable for 2010, the generation skipping transfer tax rate for transfers made during 2010 is zero percent. After this year, the generation skipping transfer tax rate equals the highest estate and gift tax rate in effect for such year (35 percent in 2011 and 2012), notwithstanding the exclusion amounts.
Moreover, under the new law, a recipient of property acquired from a decedent who dies after December 31, 2009, generally will receive fair market value basis (i.e., “step up” in basis). [1]
To read this article excerpted above, please access http://www.advisorfyi.com/2010/12/obama-tax-cuts-analysis-estate-and-generation-skipping-transfer-tax/
Posted in Estate Tax | Tagged: Death, Estate tax in the United States, Generation-skipping transfer tax, gift tax, Inheritance tax, Internal Revenue Service, tax, United States | Leave a Comment »
Posted by William Byrnes on December 29, 2010
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Why is this Topic Important to Wealth Managers? We examine the IRS requirements set out in its Publication 587 for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.
Yesterday we opened the discussion by what authority of the Code a taxpayer may be allowed to deduct a business expense for use of part of his home in the pursuit of a trade or business. Today we turn to the following questions: What type of residence qualifies for this deduction? And the requirements for determining when a “part” of a home is used and whether that use qualifies as “exclusively and regularly as your principal place of business”.
What type of residence qualifies for this deduction? Many taxpayers narrowly consider that the “home office” deduction only applies for the traditional house with the white picket fence. But the Code’s section does not use the word “home”. Yesterday we noted that Congress chose the phrase “dwelling unit”. So what is a dwelling unit? The Section toward its end contains this definition: “The term ”dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property ….” Thus, taxpayers who are homeowners, condo-owners, renters of apartments, even a boat owner or renter, may potentially leverage this deduction.
What constitutes a “portion” of the dwelling unit? To read this article excerpted above, please access www.AdvisorFX.com
Posted in Taxation | Tagged: Business, Earned Income Tax Credit, Internal Revenue Service, Itemized deduction, tax, Tax credit, Tax deduction, TurboTax | Leave a Comment »
Posted by William Byrnes on December 28, 2010
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Why is this Topic Important to Wealth Managers? Americans are increasingly using their personal residence as their office. This trend has picked up much steam since the financial crisis began. Businesses cut costs during this period by not just allowing, but requiring, employees to telecommute. In fact, government, including the IRS, has also jumped on the bandwagon.
Yesterday we opened the discussion of when may a taxpayer be allowed to deduct a business expense from his gross income. That article noted that Congress grants the authority to the Treasury department to write corresponding “Regulations” to address the administration and enforcement surrounding the ability of taxpayers to take such deductions allowed by the Code. Treasury, being the Internal Revenue Service in this case, promulgated such regulations for Section 162 to guide taxpayers through its morass, and provide some example scenarios and the IRS’ application of the Code to those scenarios.
By example, Treasury’s Regulation for Section 162 states that: “Among the items included in business expenses are management expenses, commissions …, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business …, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.”
Home Office Deduction
To read this article excerpted above, please access www.AdvisorFX.com
Posted in Taxation | Tagged: Business, Expense, Home Office, insurance, Internal Revenue Code, Internal Revenue Service, tax, Tax deduction | Leave a Comment »
Posted by William Byrnes on December 23, 2010
Why is this Topic Important to Wealth Managers? Discusses gifts and the general income tax implications gifts have to those who are the beneficiaries. Also discusses gifts as they relate to estate taxes.
As Christmas and Holiday time approaches, some clients who may be expecting large sums from Santa or other sources as gifts, may be interested to know the tax laws on gifts generally; today’s blogiticle present’s our “re-gifting” of an old idea, Section 102 of the Internal Revenue Code.
For those who haven’t had an opportunity to read the Code lately, (some estimate the Code and Regulations are close to 80,000 pages) there are still a few “friendly” sections that remain which serve as a reminder of a time gone by. Side Note: These authors have not yet evaluated the shortest Code section in terms of actual words, but if we were to, our guess is that Section 102 would be in the running at 212 words.
Section 102(a) reads: “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” It is worth noting, if we go back to Section 61, and the starting point for gross income, that Section 61(a) states: “Except as otherwise provided in this subtitle gross income means all income from whatever source derived…” The “[e]xcept as otherwise provided” is applicable here to amounts received as a gift, bequest, devise, or inheritance, which are specifically excluded from gross income. In other words, a taxpayer can give another taxpayer a gift of $1,000,000 and the latter will not recognize a penny of income for tax purposes, so long as it is really a gift, bequest, devise or inheritance. To read this article excerpted above, please access www.AdvisorFX.com
For further discussion on the gift tax generally see, AdvisorFX: Nature and Background of the Federal Gift Tax (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Posted in Estate Tax | Tagged: gift tax, Gross income, Income, Internal Revenue Code, Internal Revenue Service, Itemized deduction, tax, Taxation | Leave a Comment »
Posted by William Byrnes on December 13, 2010
Why is this Topic Important to Wealth Managers? Many US expats who do not work for a US headquartered company are failing to report pensions they are accruing from the companies they are working for overseas. These clients may incur large reporting penalties.
Submission by Thomas Carden, IRS Enrolled Agent
Many expats that do not work for a US based company are failing to report pensions they are accruing from the overseas companies they are working for. They often disregard the pension because they incorrectly assume that it is not taxable in the US.
However, the vast majority of foreign pension plans are not considered to be qualified by the IRS. Consequently, these foreign pension plans do not enjoy any tax mitigation – the plans are taxable.
The IRS has very rigorous regulations for plan reporting and for the criteria to be a qualified plan, and thus foreign employers rarely seek such plan qualification. Compounding the problem is that most financial professionals are rarely asking their clients with foreign employers “Do you have a foreign pension that contributions are being made to?”
Because of this mistaken belief that such foreign pension plans are to be treated like those in the US, many expats are incorrectly reporting their income net of any pension contributions.
Before FATCA (the Foreign Account Tax Compliance Act of 2010) the pension contributions were generally not being reported to the IRS, thus they were incorrectly escaping taxation on US returns. The goal of FATCA is to substantially capture information on the number of these accounts and many other foreign account types turning that information over to the IRS. The act puts onerous penalties on financial institutions that do not report accounts that are in the names of US citizens and other US taxable persons.
Any foreign institution that does not agree will be subject to a thirty percent withholding rate on payments made to it. Because of the penalties and the general move toward cross border reporting in financial transactions, the IRS will be receiving a large amount of information on these previously unreported accounts. The act also requires individuals to disclose any foreign accounts with a balance that exceeds $50,000. Failure to do so may result in an initial fine of $10,000 plus additional penalties.
The good news is that the acts reporting requirements are set to begin on January 2nd of 2012. Thus, expats have time to address the issue of unreported foreign pensions. The problem for expats with these unreported accounts is that the contributions are counted as taxable income in the US for the year they were made to the pension. If the IRS receives information about such an account, it is highly probable that it will send a “deficiency letter” stating that tax is due on the unreported amount. At worst, finding an unreported account may trigger an arduous audit.
The solution for the problem is for expats with any unreported pension accounts to amend the returns and restate the income received, for any years that contributions were made to the accounts. Such disclosures for past non-reporting should probably be handled by a expert in this area to avoid any unnecessary penalties.
Submission by Thomas Carden, a IRS Enrolled Agent and Expatriate Tax Specialist with 15 years of Tax and Financial Services Experience. He is currently enrolled in the Diamond Program at Thomas Jefferson School of Law while also studying to sit for the ATT tax designation in the UK. You may contact him via his email – tmcarden@yahoo.com.
Posted in Taxation | Tagged: Financial services, Individual Retirement Account, Internal Revenue Service, Pension, tax, Tax avoidance and tax evasion | Leave a Comment »
Posted by William Byrnes on December 9, 2010
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Record numbers of taxpayers will be subject to the 2010 alternative minimum tax (AMT) if Congress does not act by the end of the year. Congress has considered a number of possible AMT “patches” that would reduce the number of taxpayers subject to the AMT but has been unable to agree on the right approach. Although Congress passes an AMT patch annually, this year’s patch is coming later than usual.
In a November 9, 2010, letter to the IRS’s Douglas Shulman, House Ways and Means and Senate Finance committee members said that the IRS should expect Congress to pass 2010 alternative minimum tax relief by the end of this year. The joint letter was signed by Finance Committee Chair Max Baucus (D-Mont.), Finance Committee ranking minority member Chuck Grassley (R-Iowa), acting Ways and Means Committee Chair Sander M. Levin, (D-Mich.), and Ways and Means Committee ranking minority member Dave Camp (R-Mich.). Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For in-depth analysis of the AMT, see Advisor’s Main Library: Section 19.D—Additional Taxes; Credits For Prepayments.
We invite your questions and comments by posting them below or by calling the Panel of Experts.
Posted in Taxation | Tagged: Alternative Minimum Tax, Chuck Grassley, Douglas Shulman, Internal Revenue Service, Sander M. Levin, Senate Finance committee, United States Congress, United States House Committee on Ways and Means | Leave a Comment »
Posted by William Byrnes on December 7, 2010
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Although IRS-approved retirement plans are intended to allow plan participants to sock away cash for retirement, some emergencies will permit a participant to withdraw plan funds prior to retirement—and there may be options to reduce or eliminate any tax due on the withdrawal.
Serving as a great reminder of the general principals of emergency distributions, the IRS recently ruled whether a qualified plan was permitted to make “unforeseeable emergency distributions” in three fact scenarios. In the first, the plan participant wanted to take an emergency distribution to repair water damage to his home. In the second situation, the participant requested an emergency distribution to pay his nondependent son’s funeral expenses. In the third situation, the participant requested an emergency distribution to pay “accumulated credit card debt.” Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
Posted in Taxation | Tagged: Business, Credit card debt, Individual Retirement Account, Internal Revenue Service, Pension, Retirement, Roth IRA, tax | Leave a Comment »
Posted by William Byrnes on December 1, 2010
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The Energy Improvement and Extension Act of 2008 created new laws requiring most regulated securities transactions occurring after December 31, 2010 to be subject to cost basis reporting by securities brokers to the IRS. [1] Currently, brokers are required to report the gross proceeds from the sale of a security on Form 1099. [2] The new law will add reporting of client’s adjusted basis of the security, and whether the gain is a short or long-term. [3] Mutual fund cost basis reporting is to start a year after regulated securities reporting, and options and debt contracts are to follow a year after mutual funds. The reports are to be filed on a Form 1099-B, Proceeds from Broker and Barter Exchange. [4]
Why is it important to know that the IRS will be receiving information about the values of securities of clients? Read the entire article at AdvisorFYI.
Posted in Taxation | Tagged: Broker, Cost basis reporting, Form 1099, Internal Revenue Service, IRS tax forms, Mutual fund, Public Law 110-343, Security (finance) | Leave a Comment »
Posted by William Byrnes on November 24, 2010
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The Federal Government has estimated that the “United States loses an estimated $345 billion in tax revenues each year as a result of offshore tax abuses primarily from the use of concealed and undeclared accounts held by U.S. taxpayers or their controlled foreign entities.” [1]
In consideration of the goal of eliminating this gap, “it is not surprising that the government recently ratcheted up its pressure on taxpayers who structured their activities, in many cases, with the active help and assistance of promoters and facilitators to avoid reporting their taxable income on their tax returns or hide these offshore accounts from the government.” [2] This increased “pressure” came in the form of the HIRE Act passed in the first quarter of 2010. [3] As was discussed earlier this week,[4] the new law provides for reporting requirements by foreign financial institutions with U.S. accountholders about the status, specifically identity and balance, of their account. [5] Read the entire article at AdvisorFYI.
Posted in Compliance, Reporting | Tagged: Employment, Federal government of the United States, Hiring Incentives to Restore Employment Act, Internal Revenue Service, Offshore bank, Social Security, tax, United States | Leave a Comment »
Posted by William Byrnes on November 22, 2010
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There is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions. “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [1]
“Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.” [2]
Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. [3]
Read the entire article at AdvisorFYI.
Posted in Compliance, Reporting | Tagged: Bank, Bank account, Citizenship in the United States, Congress, Finance, Internal Revenue Service, United States, United States Department of the Treasury | 1 Comment »
Posted by William Byrnes on November 15, 2010
Why is this Topic Important to Wealth Managers? Provides details about one concept that wealth managers often overlook, the generation skipping transfer tax. Also presents general concept themes and examples to show effective uses of life insurance and trust in consideration of the tax.
In general, the generation-skipping transfer tax is levied on the value of life insurance that is transferred during the grantors lifetime or at death, to a skip person. [1] The GST is levied in addition to estate and gift taxes. [2]
The generation-skipping transfer (GST) tax “scheduled to resume in 2011 at a rate of 55%, with a $1 million exemption. The rate was 45% in 2009, with a $3.5 million exemption.” [3] For more information about the expiring tax cuts and new tax rates, see our blogticle: AdvisorFYI: Estate and Gift Taxes, Tax Cuts and More.
“Certain direct gifts that qualify for the gift tax exclusion may also qualify for an annual exclusion that can be applied against the GST tax.” [4] Many wealth managers encourage clients to take full advantage of the annual exclusion to avoid GST tax considerations at some later point. However, “the expiration of the GST tax has complicated matters for wealthy individuals hoping to make 2010 gifts in trust that skip generations.” [5] The use of trusts in consideration of the GST tax is discussed below. For examples of insurance uses with trusts generally, see our previous blogticle: Trusts that Purchase Life Insurance; Known Formally as the “Irrevocable Life Insurance Trust
Please link to AdvisorFYI for the entire blogticle.
Posted in Estate Tax | Tagged: Generation-skipping transfer tax, gift tax, Goods and Services Tax (Canada), GST, Internal Revenue Service, life insurance, tax, Tax cut | Leave a Comment »
Posted by William Byrnes on November 13, 2010
The estate tax is scheduled to explode in 2011. Analysts have assumed for years that Congress would act to fix the estate tax before it expired in 2010 and reverted to its pre-2001 levels in 2011, but it is looking more and more likely that the current Congress will hand the problem off to the next Congress on January 11, 2011. Although movement during the lame duck session is possible, it is not likely to generate any positive action on the estate tax.
Whether Congress acts on the estate tax or not, 2011 will likely bring drastic changes to the estate tax, requiring your clients to do significant tinkering on their estate plans. In the interim, estate planning professionals will continue to use disclaimer planning as a stop gap measure to deal with 2010′ s estate tax uncertainty. For instance, rather than split an estate’s assets between credit shelter and marital deduction trusts—which is unnecessary when there is no estate tax—all of the assets are devised to the spouse or the marital deduction trust. The surviving spouse can then disclaim up to the tax-free amount— … Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of the estate tax conundrum in Advisor�s Journal, see Estate Tax Chaos (CC 10-02).
For in-depth analysis of the federal estate tax, see Advisor�s Main Library: Section 2 A—Overview Of The Federal Estate Tax And Its Calculation.
Posted in Estate Tax | Tagged: estate planning, Internal Revenue Service, Lame duck session (United States), law, Marital deduction, tax, United States, Widow | Leave a Comment »
Posted by William Byrnes on November 12, 2010
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Charitable contributions offer an opportunity to do good in the community while reaping tax benefits, but the tax benefit of a charitable contribution can be jeopardized by poor planning. Especially challenging can be the structuring of contributions by complex trusts as illustrated by the recently released IRS ruling, ILM 201042023.
There, a trust’s charitable contribution deduction was limited to the trust’s basis in the property; a deduction was not permitted for unrealized appreciation of the donated property. Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of the benefits of charitable giving, see Use Charitable Giving to Enhance Family Business Succession Planning (CC 10-76).
For in-depth analysis of the use of charitable giving in estate planning, see Advisor’s Main Library: F�Estate Planning Through Charitable Contributions.
Posted in Taxation, Wealth Management | Tagged: Charitable contribution, Charitable organization, Donation, estate planning, Internal Revenue Service, tax, Tax deduction, Trust law | Leave a Comment »
Posted by William Byrnes on November 11, 2010
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The Health Care Act includes many provisions that are not directly related to health care but which are intended to fund the colossal government expenditure necessitated by the Act. One of the most burdensome changes imposed by the Health Care Act is the massive expansion of the payees and payment types that require a 1099. The new requirements will trigger a flood of paperwork for everyone involved, including payors, payees, and the IRS.
The new information reporting requirement will kick in on January 1, 2012. But the IRS will not be releasing guidance on the changes right away, so the time for taxpayers to implement the new requirements may run short. The comment period preceding the IRS’s release of proposed regulations passed at the end of September, so we can expect proposed regulations in the coming months. Advisor’s Journal will keep you informed as the IRS implements these new rules. Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For previous coverage of the Health Care Act in Advisor’s Journal, see Changes Affecting Individuals in the 2010 Health Reform Law (CC 10-15), Changes Affecting Business in the 2010 Health Reform Law (CC 10-16), and Changes Affecting Large Employers in the 2010 Health Reform Law (CC 10-17).
Posted in Taxation | Tagged: Employment, Health care, Health care reform, Internal Revenue Service, Patient Protection and Affordable Care Act, Politics, tax, United States | Leave a Comment »
Posted by William Byrnes on October 29, 2010
A rush of IRS challenges to transactions that provide your clients with a significant tax benefit may be on its way. The IRS has new options for denying tax deductions and other tax benefits when it— at its discretion—believes that a transaction has been entered into solely for a tax reduction and not a valid business purpose.
This IRS`s “new” tool is the recently-codified economic substance doctrine, which was signed into law earlier this month by President Obama as part of the Health Care and Education Affordability Reconciliation Act of 2010. The IRS says that the act codifies only existing case law, but in practice, it gives the service the power to supplant a taxpayer`s business judgment with the service`s judgment of whether a transaction has profit potential, the end result being a denial of the tax benefit of transactions that the IRS judges not to have an economic purpose other than the reduction of taxes.
Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
We look forward to your comments on AdvisorFYI.
Posted in Taxation | Tagged: Barack Obama, Business, Economic substance, Internal Revenue Service, IRS, Obama, tax, United States | Leave a Comment »
Posted by William Byrnes on October 27, 2010
A disclaimer in the estate planning context is a voluntary refusal to accept a gift from a will. A properly structured disclaimer can be a great tax planning technique, allowing the person making the disclaimer to pass a gift on to the next person in line—for instance, someone in the next generation—without being subject to the gift tax. But a disclaimer should not be made lightly because a disclaimer that is not “qualified” for tax purposes can create serious gift tax consequences for the person making the disclaimer.
The danger of an improperly made disclaimer was clearly illustrated in a recent U.S. District Court, Estate of Tatum v. U.S. There, Son disclaimed his interest in the residue of his father`s estate. But because Son`s disclaimer was not a qualified disclaimer, Son was treated as if he received the gift and then made a taxable gift to his children, resulting in a gift tax bill for Son and his wife of over $1,600,000.
Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
For in-depth analysis of qualified disclaimers, see the AUS Main Libraries Section 7 B1—What Transactions Constitute Taxable Gifts
Posted in Taxation | Tagged: estate planning, Estate tax in the United States, Gift, gift tax, Internal Revenue Service, law, tax, United States | Leave a Comment »
Posted by William Byrnes on October 25, 2010
Valuing a donated life insurance policy can be tricky when taking a charitable contribution deduction. Detailed IRS guidance on insurance policy valuation has been confined to other scenarios, such as where a policy is sold or included in an estate. Also complicating policy donation is the requirement that a qualified appraisal of the donated policy be included with the taxpayer’s return.
For in-depth analysis of the topic of charitable giving, see Advisor’s Main Library Section 1 F—Estate Planning Through Charitable Contributions
Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).
We invite your questions and comments by posting them at AdvisorFYI, or by calling the Panel of Experts.
Posted in Estate Tax, Insurance | Tagged: Charitable contribution, Donation, insurance, Insurance policy, Internal Revenue Service, life insurance, term life insurance, Whole life insurance | Leave a Comment »
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