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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Tax deduction’

Tax Facts for Travel For Charities

Posted by William Byrnes on September 1, 2014


In the IRS Summertime Tax Tip 2014-06, it discussed the tax tips associated with travelling for a charity.  The IRS directed the tax tips to taxpayers that plan to donate services to charity this summer, such as travel as part of the service.

The IRS disclosed five tax tips to assist with using the travel expenses to help lower taxes when filing the tax return for 2014.

1. A taxpayer cannot deduct the value of your services that is provided to charity.  the taxpayer may be able to deduct some out-of-pocket costs paid to provide the services.  This can include the cost of travel.

The out-of pocket costs must be:

• unreimbursed,

• directly connected with the services,

• expenses you had only because of the services you gave, and

• not personal, living or family expenses.

2. The volunteer work must be for a qualified charity. Most groups other than churches and governments must apply to the IRS to become qualified.  Ask the group about its IRS status before donating services that include out-of-pocket expenses. The Select Check tool on IRS.gov can be used to check a charity’s IRS status.

3. Some types of travel do not qualify for a tax deduction. For example, a taxpayer cannot deduct costs if a significant part of the trip involves recreation or a vacation.

4. A taxpayer can deduct travel expenses if the work is real and substantial throughout the trip.  But the expenses may not be deducted if the taxpayer only has nominal duties or does not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• air, rail and bus transportation,

• car expenses,

• lodging costs,

• the cost of meals, and

• taxi or other transportation costs between the airport or station and your hotel.

2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This book provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

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Medical Marijuana: is it a Deductible Medical Expenses?

Posted by William Byrnes on February 13, 2014


By Sean C. Barber

Section 213 of the Internal Revenue Service (IRS) Code provides for the deduction of medical expenses not otherwise covered by insurance for medical care of the taxpayer, his spouse, or a dependent.  Under Section 213 medical care is defined as “amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease.”  Prescribed drug means “a drug or biological requiring a prescription of a physician.”

Regulation Section 1.213-1(e)(2) defines medicine or drug “as items legally procured and generally accepted as falling within a category of medicine or drugs.”   At first glance based on the Code it would appear that so long as the taxpayer met the requirements of Section 213, in states where medical marijuana is authorized, expenses incurred for its purchase would be deductible.

Read attorney Sean Barber’s analysis of this issue in his article published on > AdvisorFYI <

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Net unrealized appreciation tax break: Still a tax break in 2013?

Posted by William Byrnes on September 4, 2013


The tax break provided for net unrealized appreciation (NUA) on 401(k) account distributions once provided a powerful tax savings strategy for clients with large 401(k) balances — allowing some clients to reduce their taxes on these retirement funds by as much as 20 percent.

Today, as high-net-worth clients are increasingly seeking strategies to help minimize their tax burdens in light of higher 2013 tax rates, the NUA strategy may have become more complicated than ever.   Read the full analysis of William Byrnes & Robert Bloink at > Life Health Pro <

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U.S. History of Non-Profit Tax Exemption and Deduction for Donations

Posted by William Byrnes on August 20, 2013


“. . . [w]hen the Finance Committee began public hearings on the Tax Reform Act of 1969 I referred to the bill as ‘368 pages of bewildering complexity.’  It is now 585 pages  . . . . Much of this complexity stems from the many sophisticated ways wealthy individuals – using the best advice that money can buy – have found ways to shift their income from high tax brackets to low ones, and in many instances to make themselves completely tax free.  It takes complicated amendments to end complicated devices.” Senator Russell Long, Chairman, Finance Committee

Download this entire article at > William Byrnes’ full-lenth articles on SSRN <

From the turn of the twentieth century, Congress and the states have uniformly granted tax exemption to charitable foundations, and shortly thereafter tax deductions for charitable donations.  But an examination of state and federal debates and corresponding government reports, from the War of Independence to the 1969 private foundation reforms, clearly shows that politically, America has been a house divided on the issue of the charitable foundation tax exemption.  By example, in 1863, the Treasury Department issued a ruling that exempted charitable institutions from the federal income tax but the following year, Congress rejected charitable tax exemption legislation.  However thirty years later, precisely as feared by its 1864 critics, the 1894 charitable tax exemption’s enactment carried on its coat tails a host of non-charitable associations, such as mutual savings banks, mutual insurance associations, and building and loan associations.

Yet, the political debate regarding tax exemption for the non-charitable associations did not nearly rise to the level expended upon that for philanthropic, private foundations established by industrialists for charitable purposes in the early part of the century.  But the twentieth century debate upon the foundation’s charitable exemption little changed from that posited between the 1850s and 1870s by Presidents James Madison and Ulysses Grant, political commentator James Parton and Dr. Charles Eliot, President of Harvard.  The private foundation tax exemption evoked a populist fury, leading to numerous, contentious, investigatory foundation reports from that of 1916 Commission of Industrial Relations, 1954 Reece Committee, 1960 Patman reports, and eventually the testimony and committee reports for the 1969 tax reform.  These reports uniformly alleged widespread abuse of, and by, private foundations, including tax avoidance, and economic and public policy control of the nation.  The private foundation sector sought refuge in the 1952 Cox Committee, 1965 Treasury Report, and 1970 Petersen Commission, which uncovered insignificant abuse, concluded strong public benefit, though recommending modest regulation.

During the charitable exemption debates from 1915 to 1969, Congress initiated and intermittently increased the charitable income tax deduction while scaling back the extent of exemption for both private and public foundations to the nineteenth century norms.  At first, the private foundation’s lack of differentiation from general public charities protected their insubstantially regulated exemption.  But in 1943, contemplating eliminating the charitable exemption, Congress rather drove a wedge between private and public charities.  This wedge allowed the private foundation’s critics to enact a variety of discriminatory rules, such as limiting its charitable deduction from that of public charities, and eventually snowballed to become a significant portion of the 1969 tax reform’s 585 pages.

This article studies this American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations.  The article’s premise is that the debate’s core has little evolved since that between the 1850s and 1870s. To create perspective, a short brief of the modern economic significance of the foundation sector follows.  Thereafter, the article begins with a review of the pre- and post-colonial attitudes toward charitable institutions leading up to the 1800s debates, illustrating the incongruity of American policy regarding whether and to what extent to grant charities tax exemption.  The 1800s state debates are referenced and correlated to parts of the 1900s federal debate to show the similarity if not sameness of the arguments against and justifications for exemption.  The twentieth century legislative examination primarily focuses upon the regulatory evolution for foundations.  Finally, the article concludes with a brief discussion of the 1969 tax reform’s changes to the foundation rules and the significant twentieth century legislation regulating both public and private foundations.

Download this entire article at > William Byrnes’ full-lenth articles on SSRN <

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Advanced Markets Preview: Personal and Nonbusiness Deductions

Posted by William Byrnes on March 30, 2011


Why is this Topic Important to Wealth Managers? This topic presents discussion on the individual and nonbusiness deductions offered under the Internal Revenue Code.  Since April 15th is fast approaching, it is important to review common tax positions with regards to client planning.

In addition this blogticle presents a excerpted preview of new, updated material from Advanced Markets which will be available soon (see www.advisorfx.com).   Over the coming 9 months, the entire AUS service is being revised and will be rolling out monthly.  The updating will include many new areas and a sharper focus with practical explanations and client presentation aides for current areas.  We look forward to helping you secure your next sale.

An expense of an individual may be business, nonbusiness, or personal, depending upon which of the individual’s spheres of activity gave rise to the expense.  This Blogticle discusses personal and nonbusiness expenses generally.

Personal Expenses

Personal expenses are all expenses incurred by an individual that are not business or nonbusiness expenses. These would include, for example, food and clothing for the individual and his family, repairs on the family home, and premiums paid on the individual’s personal life insurance. Generally, no deduction is permitted for personal expenses.[1] By specific statutory provision, however, deductions are allowed for some personal expenses, such as certain personal taxes, a limited amount of charitable contributions, medical expenses, certain interest on a principal residence, and alimony.

Most deductible personal expenses are “itemized deductions” and thus may be taken only if the taxpayer chooses to itemize his deductions instead of claiming the standard deduction.

Nonbusiness Expenses

A nonbusiness expense is generally an investment expense incurred in connection with the production of income, other than a trade, business or profession. Expenses of this type would include, for example, fees for tax or investment advice, and the cost of a safe deposit box used to store taxable securities. The deduction of nonbusiness expenses is governed by Code section 212. Specifically, Section 212 allows a deduction for expenses incurred in connection with: (1) the production or collection of income; (2) the management, conservation, or maintenance of property held for production of income; or (3) the determination, collection or refund of any tax.

The deductibility of nonbusiness expenses may be limited or deferred if they arise in connection with a “passive activity” or are interest expenses. Very generally, a “passive activity” is any activity which involves the conduct of a trade or business in which the taxpayer does not “materially participate.” [2] A passive activity also includes any rental activity, without regard to whether the taxpayer materially participates in the activity. Special rules apply to rental real estate activities. Aggregate losses from “passive activities” may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities in that year; credits from passive activities may be taken only against tax liability allocated to passive activities. Disallowed losses and credits may be carried over to offset passive income in later years. [3]

Once other limitations have been applied to the deductibility of nonbusiness expenses (e.g., the passive loss rule), they are generally deductible only to the extent that the aggregate of these and other “miscellaneous itemized deductions” exceeds 2% of adjusted gross income. “Miscellaneous itemized deductions” are deductions from adjusted gross income other than deductions for (1) interest, (2) taxes, (3) non-business casualty losses and gambling losses, (4) charitable contributions (including charitable remainder interests), (5) medical and dental expenses, (6) impairment-related work expenses for handicapped employees, (7) estate taxes on income in respect of a decedent, (8) certain short sale expenses, (9) certain adjustments under the Code’s claim of right provisions, (10) unrecovered investment in an annuity contract, (11) amortizable bond premium, and (12) certain expenses of cooperative housing corporations. [4]

A nonbusiness expense must also be “ordinary and necessary” to be deductible. [5] It must, therefore, be reasonable in amount and must bear a reasonable and proximate relation to (a) the production or collection of taxable income, or (b) the management, conservation, or maintenance of property held for the production of income. [6]

Tomorrow’s blogticle will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

 

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Deductibility of Welfare Benefit Plan Contributions (Section 419)

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

 

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Tax Courts Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit Plan

Posted by William Byrnes on February 18, 2011


A recent Tax Court case demonstrates the severe tax consequences for an employee when a welfare-benefit plan ceases to qualify under section 419A of the Tax Code.  Section 419A governs “qualified asset accounts,” which are employer provided welfare-benefits plans that set aside funds for (1) disability benefits, (2) medical benefits, (3) severance benefits, or (4) life insurance benefits. In general, contributions by an employer to a welfare-benefit plan are tax deductible by the employer if they are ordinary and necessary business expenses. In the case, part of the funds contributed to the plan were used to buy life insurance coverage for the principal and other employees, with the rest of the funds constituting excess contributions. 

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).

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Congress Extends Deduction for State and Local Sales Taxes

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.

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Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011

Posted by William Byrnes on January 27, 2011


Although some items purchased by a business can be written off 100% for income tax purposes in the year of purchase, many types of property are not eligible to be deducted fully in the year they are purchased.  The tax deduction for purchase of a piece of depreciable property is spread out over the life of the property.

Each year during the depreciation period the business is allowed to take a tax deduction for some portion of the purchase price of the property. The Tax Relief Act includes a provision allowing 100% bonus depreciation for some business assets.  It also extends for an additional year the 50% bonus depreciation provisions previously scheduled to expire at the end of 2011.  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).

 

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When may a taxpayer deduct as business expenses the costs related to the use of his residence? Part 2

Posted by William Byrnes on December 29, 2010


Seal of the Internal Revenue Service

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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

 

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When may a taxpayer deduct as business expenses the costs related to the use of his residence?

Posted by William Byrnes on December 28, 2010


Seal of the United States Department of the Tr...

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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

 

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How are business expenses reported for income tax purposes?

Posted by William Byrnes on December 27, 2010


Why is this Topic Important to Wealth Managers? As the end of the calendar and personal tax year approaches, Advanced Market Intelligence will focus on end-of-the-tax-year issues that every wealth manager may relay as helpful information to his and her clients.

“How are business expenses reported for income tax purposes?” may initially seem like an easy question for many wealth managers.  But normally, the easiness of answering this question is a result of referring to an information pamphlet by a service provider or perhaps a newspaper article.  Unfortunately, these public sources of information are not always accurate.  Also, because they are trying to present very complex information in understandable terms, these types of sources gloss over finer, yet very important elements, that if known, would impact a decision.

Seldom does the wealth manager take the initiative to undertake his own initial research of the actual rules and how the rules may be applied.  Advanced Market Intelligence has been committed to empowering the wealth manager with the necessary information to efficiently find the important rules and provide examples of how the rules are applied to various example scenarios.  Thus, let us first turn to the legislative rule applying to business expenses.

The Internal Revenue Code (the “Code”), legislated by Congress, establishes rules regarding ‘if and when’ a taxpayer may choose to deduct certain expenses from income.  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.  Business expenses are one type of such expense Congress has established for a taxpayer to reduce his gross income.

The Code section establishing the ability of a taxpayer to deduct a business expense is Section 162.  The first part of the first paragraph of Section 162 reads:

(a) In general

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including— …

To read this article excerpted above, please access www.AdvisorFX.com

Read the key information you need to know and relate to your client 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):

Tax Facts 7537. How are business expenses reported for income tax purposes?

Main Library – Section 19. Income Taxes B4—Business Income And Deductions


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Year-End Tax Planning Series: Charitable Deductions

Posted by William Byrnes on December 22, 2010


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Why is this Topic Important to Wealth Managers? Discusses charitable contributions for individuals.  May assist wealth managers plan client contributions made to charities this year.

Generally a deduction is allowed to “individuals, corporations and certain trusts for charitable contributions made to qualified organizations, subject to percentage limitations and substantiation requirements.”

The law allows for such charitable contributions as itemized deductions, as “an incentive to encourage charitable contributions”, to certain charitable organizations.

Assuming all other factors equal, “it is usually better for the donor to make a charitable gift during life than at death, because the gift can generate an income tax charitable deduction for the donor.”

How much is the deduction?

The charitable contribution income tax deduction for an individual taxpayer can be classified as not to exceed 50 percent or not to exceed 30 percent of the taxpayer’s adjusted gross income (AGI), depending on the donee charity.

For a discussion of Adjusted Gross Income or AGI, see AdvisorFX—Deductions in Determining Adjusted Gross Income and Taxable Income (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).

To read this article excerpted above, please access www.AdvisorFYI.com


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IRS Changes Value of Charitable Contributions Made by Trusts

Posted by William Byrnes on November 12, 2010


IRS Form 1040X, 2005 revision

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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.

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