FOREIGN EARNED INCOME

Question:

I am a US citizen and recently moved back to the United States from another country. I earned income while abroad. What are my tax issues with regard to my foreign earned income.

Response:

U.S. citizens and resident aliens are generally taxed on their worldwide income regardless of where the income is earned or received. A U.S. citizen who earns income in a foreign country may also be taxed on that income by a foreign host country, thus leading to double taxation. However, a number of tax provisions provide relief from this inequity, including the foreign tax credit or deduction, the foreign earned income exclusion, and the foreign housing cost exclusion.

As you may know, taxes paid to a foreign country or possession of the United States can be claimed as either a credit or deduction. In most cases, it is more advantageous to claim the credit rather than the deduction. The credit, however, is limited to the amount of the U.S. tax that is in proportion to the foreign source taxable income over worldwide taxable income.

As an alternative, qualifying individuals may elect to exclude from gross income up to $92,900 (in 2011) of foreign earned income, as well as certain employer-provided housing costs. Individuals with self-employment income are also entitled to deduct certain non-employer-provided housing costs. In order to qualify for these exclusions and deductions, an individual’s tax home must be in a foreign country and he must meet either a residence or physical presence test. A determination of whether a taxpayer qualifies is based on all the facts and circumstances including:

  • the taxpayer’s intention,
  • the length of stay in a foreign country,
  • the nature and duration of employment,
  • the establishment of a home in the foreign country, and
  • the nature, extent and reasons for temporary absences from the foreign home.

To substantiate eligibility for the foreign earned income and housing exclusion, a taxpayer must have adequate documentation. The IRS plans to improve compliance on international issues and expects to increase the use of foreign information documents and data sharing with other federal agencies. For instance, travel dates may be verified with U.S. passport information.

Taxpayers may not elect to take both the foreign-earned income and housing exclusions and the foreign tax credit or deduction. Also, if a taxpayer claims the foreign earned income exclusion, the taxpayer will not qualify for the earned income credit for that year. The choice between the foreign earned income and housing exclusions and the foreign tax credit depends on which option more effectively reduces taxes. If the taxpayer’s foreign earned income is subject to a higher foreign income tax than his U.S. income, it is more advantageous to claim the foreign tax credit.

In selecting the more appropriate option, a taxpayer must also consider factors, such as length and certainty of stay in a foreign country. If a taxpayer working in a high tax country revokes the election, he may not take the election for five years without permission from the IRS and, therefore, would be at a disadvantage if he were transferred to a low tax country. In addition, a “stacking rule” has been added to ensure that U.S. citizens living abroad are subject to the same U.S. tax rates as individuals living and working in the United States. Thus, income that is excluded from gross income is included for determining the applicable tax rate.

Finally, certain provisions of income tax treaties negotiated between the U.S. and certain foreign countries usually include help to prevent double taxation of the same income by the U.S. and the other country. If covered by a treaty, the applicable provisions of the treaty must be analyzed to verify the best overall tax saving strategy. You might want to consult IRS Publication 901, U.S. Tax Treaties. IRS Publication 54, Tax Guide for U.S. citizens and Resident Aliens Abroad, and IRS Publication 514, Foreign Tax Credit, should also be consulted.

Considering the complexity of issues regarding foreign earned income, it is important that we review either your eligibility for the foreign earned income and housing exclusion, or the possibility of revoking the election in future years for the benefit of tax credits denied. Also, we can review any applicable tax treaty provisions. In addition, we can assist you in documenting your foreign travel and housing expenses.

07. May 2012 by Bartolme CPA
Categories: Tax Questions | Tags: | Leave a comment

Tax Effects of Business Start-Up Costs

Question:

I started a business last year. How do I handle the operating expenses I incurred before I actually opened my business to the public?

Response:

Taxpayers may elect to deduct up to $5,000 of business start-up expenditures (up to $10,000 for tax years beginning in 2010). The remainder of any start-up expenses must be ratably amortized over the 180-month period beginning the month in which the active trade or business begins.

Taxpayers can elect to deduct up to $5,000 of business start-up expenditures paid or incurred. The $5,000 must be reduced, but not below zero by the amount that the start-up expenditures exceed $50,000. The remainder of any start-up expenditures, those that are not deductible in the year in which the trade or business begins, must be ratably amortized over the 180-month period in which the active trade or business begins. For tax years beginning in 2010, the deductible limit is $10,000, reduced by the amount that expenditures exceed $60,000.1 For start-up expenditures paid or incurred on or before October 22, 2004, taxpayers can elect to amortize business start-up expenditures over a period of at least 60 months, beginning with the month in which the active trade or business begins.2 Any start-up expenditures for which an election to amortize is not made must be capitalized.3 An election to amortize start-up costs must be made by the due date of the tax return (including extensions) for the tax year in which the trade or business begins. See DEPR: 21,406.

Only the taxpayer who incurs the start-up expenditures and enters the trade or business can amortize the expenditures. The taxpayer must have an equity interest in, and must actively participate in the management of, the trade or business. For start-up expenditures incurred by a corporate taxpayer (including S corporations), the corporation, rather than any individual shareholder, takes the deduction. For a sole proprietor, the deduction is allowed as a deduction for the trade or business for which the startup expenditures were paid or incurred. For start-up expenditures incurred by a partnership, the deduction is taken into account in computing the taxable income of the partnership, except to the extent otherwise required by the partnership regulations. The deduction for qualifying investigatory expenses incurred in connection with the acquisition of a partnership interest is taken by the partner incurring the expenses.4 Similar rules apply to corporations and partnerships.

30. March 2012 by Bartolme CPA
Categories: Startup Costs | Tags: , , | Leave a comment

Farm Income and Deductions

Question:

I purchased a home with land set up for a small vineyard. I am considering hiring a local wine guru and starting a side business. What are the tax issues?

Response:

Like any other business “with profit motive” the income less allowable expenses is a taxable event. Farms have some special rules that need to be understood and considered for tax planning.

This helpful IRS Tax Tip is a good starting point in understanding the basics around farm taxation.

Farm Income and Deductions: 10 Key Points
IRS Tax Tip 2012-56
You are in the business of farming if you cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes plantations, ranches, ranges and orchards.
The IRS has 10 key points for farmers regarding federal income taxes.
1. Crop insurance proceeds You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.
2. Sales caused by weather-related condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone until the next year the reporting of the gain from selling the additional animals.
3. Farm income averaging You may be able to average all or some of your current year’s farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.
4. Deductible farm expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses.  An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
5. Employees and hired help You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold Social Security, Medicare and income taxes for employees.
6. Items purchased for resale You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.
7. Net operating losses If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
8. Repayment of loans You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.
9. Fuel and road use You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.

27. March 2012 by Bartolme CPA
Categories: Farm deductions and income | Tags: , , | Leave a comment

IRS Tax Tip — Employee Business Expenses

Question:

I am having trouble understanding employee business expenses.

Response:

This useful IRS Tax tip can help explain.

Some employees may be able to deduct certain work-related expenses. The following facts from the IRS can help you determine which expenses are deductible as an employee business expense. You must be itemizing deductions on IRS Schedule A to qualify.

Expenses that qualify for an itemized deduction generally include:

• Business travel away from home
• Business use of your car
• Business meals and entertainment 
• Travel
• Use of your home
• Education
• Supplies
• Tools
• Miscellaneous expenses

You must keep records to prove the business expenses you deduct. For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.

An accountable plan must meet three requirements:

1. You must have paid or incurred expenses that are deductible while performing services as an employee.

2. You must adequately account to your employer for these expenses within a reasonable time period.

3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.

Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.

22. March 2012 by Bartolme CPA
Categories: Employee business expenses | Tags: | Leave a comment

2012 Travel and Entertainment Update — Per Diem Allowances

Question:

What are per diem travel and entertainment amounts. What do they mean?

Response:

In lieu of substantiating actual travel-related meal and lodging costs, the IRS provides optional per diem allowances, which employers and employees are deemed to have substantiated by adequate records or other sufficient evidence.  The per diem amounts also satisfy the requirement that employees provide an adequate accounting to the employer of meal and lodging expenses.

Per diem allowances

In October 2012, the IRS provided rules for using a per diem rate to substantiate the amount of an employee’s expenses for lodging, meal and incidental expenses, or for meal and incidental expenses only, that a payer reimburses.  The IRS also clarified that partners and volunteers who receive reimbursements from payers may use the methods in Rev. Proc. 2011-47 to substantiate their expenses.  Additionally, the IRS explained that taxpayers may use the high-low substantiation method in lieu of the meal and incidental only per diem method in Rev. Proc. 2011-47 for travel within the continental United States (CONUS).

High-low method

The IRS-approved per diem rate for high-cost areas is $242 ($177 for lodging and $65 for meals and incidental expenses). The IRS-approved per diem rate for all other areas is $163 ($111 for lodging and $52 for meals and incidental expenses). The revised rates apply to per diem allowances paid for travel on or after October 1, 2011.

20. March 2012 by Bartolme CPA
Categories: 1040, Accounting Questions, Individual Tax, Schedule C, Tax legislation | Tags: , | Leave a comment

IRS Form 1098

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Question:

What purpose does IRS form 1098 serve

Response:

Returns by persons receiving mortgage interest payments are made on Form 1098, Mortgage Interest Statement, and must include:

· the names, addresses and identification numbers of the payer and the recipient;

· the telephone number of the information contact of the person required to file the form.

This number should provide direct access to the individual or individuals with the immediate resources to resolve a taxpayer’s question promptly (for example, the department of the payer with the relevant information).

· the amount of mortgage other than points received during the calendar year;

· the amount of reimbursements of mortgage interest.

· the amount of points paid directly by the payer of record; and

· any other information required by Form 1098 or its instructions.

An interest recipient must make all reasonable efforts to obtain the payer of record’s taxpayer identification number (TIN). If the interest recipient does not have the TIN, it must make the request at least annually. The request does not have to be made on any particular form and can be mailed together with other material. The request must be on a separate paper and clearly notify the payer that the IRS needs his TIN to verify any mortgage interest deduction. Form W-9, Request for Taxpayer Identification Number and Certification, can be used to make the request.

Returns on Form 1098 must be filed on magnetic media unless the interest recipient reasonably expects to file less than 250 such returns for the calendar year. Magnetic media filing may be waived in cases of undue hardship. A waiver is requested on Form 8508, Request for Waiver From Filing Information Returns on Magnetic Media.

The information return must be filed with the IRS office designated in the instructions to the Form 1098 on or before February 28 of the year following the calendar year in which the mortgage interest being reported was received. For returns filed after 1999, the due date for electronically filing Form 1098 is March 31 of the year following the calendar year in which the mortgage interest was received.

Every person required to file a return for mortgage interest received must furnish the payer with a written statement showing the name, address and identification number of the person filing the return and of the payer of record, the aggregate interest paid and a legend stating that the information is being reported to the IRS. Another legend must state that the reported interest payment is deductible on the payer’s federal income tax only to the extent that he actually paid the interest and was not reimbursed by another person and that, depending on the cost and value of the property securing the mortgage, limitations on deducting mortgage interest may apply. This requirement can be met by providing the payer with Copy B of Form 1098. The statement should be mailed to the payer at his last known address. The statement can be provided together with other information as permitted by applicable revenue procedure. An interest recipient that furnishes a statement to a payer of record under a federal mortgage program satisfies the requirement to provide a written statement if the statement contains all the information and legends discussed above and is furnished by the time and at the place required.

An interest recipient who is permitted to use the Rule of 78′s method of accounting can use this method to report mortgage interest only if the interest recipient notifies the payer of record that the Rule of 78′s was used to calculate interest received on the mortgage. The notice must state that the payer may use the Rule of 78′s for determining interest deductions only if the rule is properly applied to a self-amortizing consumer loan requiring level payments at regular intervals for no longer than five years, with no balloon payment at the end of the loan term, and the loan agreement provides for use of the rule. This notice is provided to the payer with the statement required to be furnished to the payer.

22. February 2012 by Bartolme CPA
Categories: 1098, Mortgage interest, Schedule A 1040 | Tags: , , | Leave a comment

Student Loan Interest Deduction

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Question:

Is student loan interest deductible and are there limitations?

Response:

An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student’s qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds. Some income from the cancellation of student loans avoids taxation as cancellation of indebtedness income.The deduction is scheduled to change for tax years beginning after 2012, upon the sunset of provisions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001.

The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation.

Lenders who receive payments aggregating $600 or more for a calendar year on one or more qualified education loans must comply with reporting requirements and provide information statements to the persons paying the interest.

Loan Interest Deduction Phase-out

The student loan interest deduction begins to phase out for taxpayers whose modified AGI exceeds $50,000 ($100,000 for joint returns), and phases out to zero at modified AGI of $65,000 ($130,000 for joint returns). The phase-out thresholds are adjusted each year for inflation in increments of $5,000.

For tax years beginning in 2010 and 2011, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified AGI exceeds $60,000 ($120,000 for joint returns), and is completely eliminated when modified AGI is $75,000 or more ($150,000 or more for joint returns).

For tax years beginning in 2009, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified AGI exceeds $60,000 ($120,000 for joint returns), and is completely eliminated when modified AGI is $75,000 or more ($150,000 or more for joint returns). For tax years beginning in 2008, the $2,500 maximum deduction is reduced when modified AGI exceeds $55,000 ($115,000 for joint returns), and is completely eliminated when modified AGI is $70,000 or more ($145,000 or more for joint returns). For tax years beginning in 2007, the maximum deduction is reduced when modified AGI exceeds $55,000 ($110,000 for joint returns), and is completely eliminated when modified AGI is $70,000 ($140,000 for joint returns).

For this purpose, modified AGI is AGI increased by adding back:

  • the domestic production activities deduction

  • otherwise deductible student loan interest

  • otherwise deductible qualified tuition and related expenses

  • otherwise excludable foreign earned income and housing costs

  • otherwise excludable income from sources within Guam, American Samoa, and the Northern Mariana Islands, and Puerto Rico

Modified AGI is calculated after

  • the disallowance of passive activity losses

  • the exclusion of qualified social security benefits

  • the exclusion of U.S. savings bond interest used for higher education

  • the exclusion of payments from adoption assistance programs

  • the exclusion of qualified contributions to IRAs

    • Bartolme and Associates, Inc..

    Certified Public Accountants

    www.bartolmecpa.com

    2134 Main Street Suite 270

    Huntington Beach, CA 92648

    714-969-1663

    Fax 714-969-7225

    We use industry standard tax research and professional service platforms.

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22. February 2012 by Bartolme CPA
Categories: 1040, Individual Tax, Student Loan Interest | Tags: , , , | Leave a comment

2011 Planning: Employee Business Expenses

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Question:

Can expenses I incur as an employee be tax deductible?

Response:

Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.

In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:

  1. Travel, transportation, meal, or entertainment expenses
  2. Safety equipment, small tools, or supplies
  3. Uniforms required by your employer that are not suitable for everyday wear
  4. Required protective clothing
  5. Dues to professional organizations
  6. Subscriptions to professional journals
  7. Certain job hunting expenses
  8. Certain expenses for the business use of your home
  9. Computer costs
  10. Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense.

Bartolme and Associates, Inc.

Certified Public Accountants

www.bartolmecpa.com

2134 Main Street Suite 270

Huntington Beach, CA 92648

714-969-1663

Fax 714-969-7225

We use industry standard tax research and professional service platforms.

http://www.cchgroup.com

Visit us on Yelp.

http://www.yelp.com/biz/bartolme-and-associates-huntington-beach

Visit our twitter feed

http://twitter.com/#!/bartolmecpa

We are proud members of Pacific Coast Letip. Visit the groups web site to gather information for other professional and quality services and products.

http://www.pacificcoastletip.com

16. February 2012 by Bartolme CPA
Categories: 1040, Employee business expenses, Tax Questions | Tags: , , | Leave a comment

IRS – Offers in Compromise program

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Question:

How does the IRS Offers in Compromise program work?

Response:

The IRS’s Offers in Compromise program allows settlement of tax liability with the IRS at an amount that is less than the original tax liability. However there are some ground rules that clearly must be part of any deal that will be made for you with the IRS. Here is a summary of the operative rules as they now exist.

First contact. The first contact that the taxpayer who needs an offer in compromise will generally have with the IRS is on audit. There, the IRS examiner will make an assessment of taxes owed, and issue a notice of deficiency. Offers in compromise as to doubt of liability usually take place at an earlier stage than offers based on doubt as to collectability. Offers in compromise as to doubt of collectability almost always take place at the collection stage, after a liability has been reduced to judgment or is uncontested by the taxpayer. Some taxpayers combine the two grounds for an offer as a strategic move, on the assumption that the IRS will assume that the odds are greater that the amount will not be collected. Offers based on doubt as to collectability must be accompanied by a nonrefundable $150 fee. This fee has been imposed primarily to keep frivolous claims from clogging up the system for taxpayers with legitimate problems. If the offer is based on doubt as to liability, submission of a personal statement is not required, but the taxpayer must explain why the amount is owed to the IRS.

Financial statement. The financial statement form that a taxpayer is required to file with a formal offer in compromise is at the heart of the IRS’s examination of whether an offer is acceptable. Documentation required for the IRS’s financial statement analysis must include a full credit report for liabilities greater than $100,000. Financial statements must reflect information no older than the six-month period prior to submission of the offer in compromise.

Quick sale value, which is used to value most assets, generally is an amount less than fair market value (FMV), but greater than forced sale value (generally 75% of FMV). Determining fair market value for many items turns into a matter of opinion in many situations and it is often good strategy to document how valuation is determined on the taxpayer’s property so that the IRS is not tempted to call for its own valuation. Fair market value itself can reasonably vary by 15 or 20 percent depending upon the type of property and market conditions, which in turn can lower the figure set for quick sale value. The IRS cannot use the hindsight of any actual sale after the offer in compromise is in place to negate the agreement (absent a showing of fraud). However, taxpayers who wish to renegotiate a compromise offer may introduce evidence of a sale that brought in substantially less than had been anticipated on the financial statement.

Agent’s Worksheets. The IRS agent is instructed to use worksheets in evaluating an Offer in Compromise. Made available to tax professionals through the Freedom of Information Act, we know that this form requires that the IRS agent weigh nine principal factors included in “total income” compared against ten factors included in necessary living expenses. Necessary living expenses include:

•   the National Standard expense;

•   housing and utilities;

•   transportation;

•   health care;

•   taxes;

•   court ordered payments;

•   child/dependent care;

•   life insurance;

•   secured or legally perfected debt;

•   other miscellaneous expenses.

While the IRS is considering an offer, penalties and interest continue to accrue on the unpaid tax liability.

Payment requirements. Generally, an individual can offer one of three payment plans: (1) a lump sum cash offer, which must be paid in five or fewer installments; (2) a short-term periodic payment offer, which must be paid within 24 months from the date the IRS receives the offer; or (3) a deferral periodic payment offer, which must be paid over the remaining statutory period for collecting the tax. The offer must be accompanied by a partial payment. For example, the required partial payment for a lump sum offer is 20 percent of the amount of the offer.

Offer rejection? Having an Offer in Compromise rejected should not deter a taxpayer from further action. The taxpayer may ultimately win through an appeals process, through a resubmitted Offer, or through alternative terms such as an installment agreement.

The IRS Restructuring and Reform Act of 1998 requires the IRS to implement procedures to review all proposed rejections of taxpayer offers in compromise prior to the rejection being communicated to the taxpayer. This review is not conducted by the front line manager with direct supervisory authority over revenue officers working in compromise cases. The taxpayer’s second bite at the apple comes after the rejection letter is sent. Appeals rights are available to the taxpayer when any reasonable offer is rejected. Collection is prohibited during the appeal period.

In early 2011, the IRS announced an expanded streamlined offer in compromise program. The expanded program is intended to cover more taxpayers experiencing economic hardship. The streamlined offer in compromise program is expected to allow taxpayers with annual incomes of up to $100,000 to participate. Participants generally must have a tax liability of less than $50,000.

So, the upshot of all this information is that you may stand “a fighting chance” to strike a compromise with the IRS on your tax liability through their “new and improved” offers in compromise program. The IRS is still not “giving it away,” however, though with careful adherence to their new, less stringent guidelines, compromise is certainly more likely now than ever before.

Bartolme and Associates, Inc.

Certified Public Accountants

www.bartolmecpa.com

2134 Main Street Suite 270

Huntington Beach, CA 92648

714-969-1663

Fax 714-969-7225

We use industry standard tax research and professional service platforms.

http://www.cchgroup.com

Visit us on Yelp.

http://www.yelp.com/biz/bartolme-and-associates-huntington-beach

Visit our twitter feed

http://twitter.com/#!/bartolmecpa

We are proud members of Pacific Coast Letip. Visit the groups web site to gather information for other professional and quality services and products.

http://www.pacificcoastletip.com

07. February 2012 by Bartolme CPA
Categories: 1040, How to settle tax debts, Offer in Compromise, Settle Tax Debt | Tags: , , , | Leave a comment

2011 Fourth Quarter Federal Tax Developments

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Question:

I remember there being several tax developments in late 2011. What were they and how do they effect my tax planning in 2012?

Response:

During the fourth quarter of 2011, there were many important federal tax developments that now have a direct impact on 2012.

Tax legislation

President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011, extending the employee-side payroll tax cut through the end of February 2012. In November, President Obama signed the 3% Withholding Repeal and Job Creation Act of 2011, which repeals three percent government withholding, enhances the Work Opportunity Tax Credit (WOTC) to cover more military veterans, expands the IRS’s continuous levy authority, and more. In October, President Obama signed the Trade Adjustment Assistance Extension Act, enhancing the health care tax credit (HCTC) for qualified individuals. 

In related news, the IRS advised employers to implement the reduced employee-side payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees’ pay as soon as possible but no later than March 31, 2012, the IRS instructed. 

Foreign accounts

The Foreign Account Tax Compliance Act (FATCA) generally requires certain U.S. taxpayers holding specified financial assets outside the United States to report them to the IRS. FATCA also requires foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The IRS posted a final version of Form 8938, Statement of Specified Foreign Financial Assets, and Instructions on its website in December. 

The IRS also issued a Fact Sheet alerting dual citizenship taxpayers, as well as U.S. citizens who reside abroad, to their obligation to file U.S. income tax returns and, if appropriate, a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The IRS described possible penalties for failure to file, and grounds for avoiding the penalties.

Mileage rates

The IRS announced in December that the business standard mileage rate for 2012 will be 55.5 cents-per-mile, which is unchanged from the second half of 2011. The standard mileage rate for medical and moving expenses will be 23 cents-per-mile, reflecting a 0.5 cents-per-mile reduction from 2011. The statutorily-determined rate for the charitable deduction remains unchanged at 14 cents-per-mile for 2012.

Capitalization of tangibles

Just before year-end 2011, the IRS issued much-anticipated revised regulations on the capitalization of tangible assets. The IRS withdrew proposed regulations issued in 2008 and issued temporary and proposed regulations. The new guidance, the IRS explained, is intended to clarify existing standards and provide certain bright-line tests for applying the standards. The text of the temporary regulations serves as the text of the proposed regulations. The temporary regulations are binding on both taxpayers and the government. 

Worker classification

A new IRS program – the Voluntary Classification Settlement Program (VCSP) – will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied. 

Inflation adjusted amounts

The IRS issued cost of living adjustments (COLAs) for various provisions in the Tax Code for 2012. Because of inflation, many provisions are adjusted upward for 2012. For example, the standard deduction for single taxpayers increases from $5,800 for tax years beginning in 2011 to $5,950 for tax years beginning in 2012, and the standard deduction for married couples filing a joint return increases from $11,600 for 2011 to $11,900 for 2012.

Social Security wage base

The Social Security Administration (SSA) announced that the maximum amount of earnings subject to Social Security will be $110,100 for 2012, up from $106,800 for 2011. SSA also reported that the so-called “nanny tax” threshold will increase to $1,800 for 2012.

Qualified plans

Many retirement plan contribution and benefit limits will increase in 2012, the IRS announced. The 2012 cost of living adjustments (COLAs) affect a variety of retirement savings vehicles, including defined contribution plans, defined benefit plans, employee stock ownership plans (ESOPs), and individual retirement arrangements (IRAs). 

Decedents’ estates

The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, and its Instructions. Executors will use Form 8939 to make a “Section 1022 Election” to opt out of the 2010 estate tax and apply modified carryover basis.

IRS basis regulations

The U.S. Supreme Court agreed to resolve the split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis. The government asked the Supreme Court to decide whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the extended six-year assessment period; and whether a final Treasury regulation, which reflects the IRS’s view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference.

“Hot Stock” rule

The IRS finalized temporary regulations, which the agency described as mitigating the impact of the “hot stock” rule on Code Sec. 355 spinoffs if the controlled corporation is a member of the distributing corporation’s separate affiliated group (SAG). The final regs generally adopt the substantive rules of the temporary regs without change.

Per diem rates

The IRS issued the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2011, retaining the high-low method. The simplified high-low per diems have increased for 2012 to $242 for high-cost localities and to $163 for all other localities, an increase from $233 and $160, respectively, for 2011. The IRS also announced it will not discontinue use of the “high-low” method for substantiating travel expenses.

Whistleblowers

A whistleblower who reported her employer’s significant tax underpayment to the IRS would be entitled to anonymity, the Tax Court held in December. However, the court found the whistleblower was not entitled to an award because the IRS had been unable to collect any additional tax from the employer. 

IRS operations

The Treasury Inspector General for Tax Administration (TIGTA) highlighted some of the management and performance challenges confronting the IRS for fiscal year (FY) 2012 in November. According to TIGTA, the challenges include: keeping taxpayer data secure; tax compliance initiatives; modernization; implementing major tax law changes; fraudulent claims and improper payments; providing quality taxpayer service operations; human capital; globalization; taxpayer protection and rights; and achieving program efficiencies and cost savings.

Identity theft

A top IRS official told Congress that the IRS intends to take additional measures to combat identity theft during the 2012 filing season. In 2011, the IRS began issuing Identity Protection Personal Identification Numbers (IP PINs) to victims of identity theft under a pilot program The IRS intends to expand the IP PIN program. 

Ponzi schemes

The IRS modified guidance issued in 2009 that allows investors to take losses in certain Ponzi schemes. The new guidance, the IRS explained, ensures that investors will still be able to deduct their losses if the lead figure in the Ponzi scheme has died. 

If you have any questions about these or any federal tax developments, please contact our office.

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01. February 2012 by Bartolme CPA
Categories: Individual Tax, Payroll tax Questions., Ponzi schemes, Retirement Savings Plan, S-Corporation 1120S, Schedule A 1040, Schedule C, Schedule E 1040, Tax developments, Tax legislation, Tax Questions, Tax updates, Worker classification | Tags: , , , , , , , , , , , , , , , | Leave a comment

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