Tax Talk – Page 4 – Wilson Rogers & Company

First Time Homebuyer 10% IRA Penalty Exception

If you withdraw amounts from your 401(k) plan or IRA before you are 59 1/2, the amount will be subject to income tax and a 10% early-distribution penalty. But what if you use those funds to purchase your first home? Well, if done properly, you may be able to avoid the 10% penaly.

Avoiding the penalty. The IRS allows taxpayers to avoid the 10% early distribution penalty from a retirement account under certain circumstances. One of those exceptions is if IRA monies are used to purchase a taxpayer’s first home. The maximum amount that may be distributed from the IRA on a penalty-free basis for the purpose of buying a first home is $10,000. This is a lifetime limit.

Qualified expenses defined. Per the IRS, the funds must be used in the following manner to qualify:

It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
It must be used to pay qualified acquisition costs for the main home of a first time homebuyer (defined later) who is any of the following.
- Yourself.
- Your spouse.
- Your or your spouse’s child.
- Your or your spouse’s grandchild.
- Your or your spouse’s parent or other ancestor.
When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
If both you and your spouse are first time homebuyers each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs include the following items.

Costs of buying, building, or rebuilding a home.
Any usual or reasonable settlement, financing, or other closing costs.

Coordination of IRS Form 1099R with your plan administrator. Whenever one takes money out of a retirement plan, the plan administrator will report it to you and the IRS on Form 1099R. The codes in Box 7 will help one report what type of distribution was made and if there were any exceptions. If you are under 59 1/2 an will be using the amounts to purchase a home, while not required, it may be a good idea to let the plan administrator know. That way they can report the amounts with Code 2 on the 1099-R, which indicates that there is an exception to the 10% penalty.

How to make 401(k) funds penalty free. Even if a distribution form your 401(k) will be used towards the purchase of your first home, the first-time homebuyer exception does not apply to distributions from qualified plans such as a 401(k). Furthermore, if the amount you receive is rollover eligible, your employer is required by law to withhold 20% of it for federal income tax.

Assuming you are eligible to receive the distribution and the amount is rollover-eligible, you can instruct the 401(k) plan to process your distribution as a direct rollover to an IRA. You would have to open the IRA before the rollover occurs and tell them to deposit the funds to this new account (or your existing IRA). This will ensure that the 20% federal tax withholding is not applied to the amount. Additionally, you can then withdraw the amount from your IRA for use towards the purchase of your first home, thereby avoiding the 10% early-distribution penalty.

Properly reporting exceptions that were incorrectly reported. Sometimes despite letting the plan administrator know that the IRA funds will be used to purchase your first home, they may still be reported incorrectly on Form 1099R. Typically, this will result in Box 7 of the form indicating Code 1 – Early distribution, no known exception (in most cases, under age 59½).

However, if the funds were used to purchase your first home, there is a fix. One would need to use IRS Form 5329 Part I to report the exception. Specifically, one would list the amount reported on the Form 1099R on line one. You would then list the amount that was used to purchase the home (up to $10K during your lifetime) on line two and enter in exception Code 09 – IRA distributions made for the purchase of a first home, up to $10,000. For more details and specifics on the steps, see the Form 5329 Instructions.

By Jared R. Rogers, CPA|2019-02-17T13:54:30-06:00May 12, 2015|Categories: Tax Talk|Tags: 401(k) 10% penalty exceptions, Can I avoid early withdrawal penalty 401k?, First Time Homebuyer 10% IRA Penalty Exception, Form 1099R Box 7 code 1, Form 1099R Box 7 code 2, form 5329 first time homebuyer, How do I avoid 10 penalty IRA withdrawals?, How do I avoid tax on IRA withdrawals?, How do I avoid tax penalty on 401k withdrawal?, How much are you penalized for early withdrawal of 401k?, How much can I withdraw from my IRA without paying taxes?, how to report IRA withdrawal for home purchase, how to withdraw from ira for home purchase, IRA 10% penalty exceptions, IRS Form 5329, IRS Form 5329 Instructions, qualified first-time homebuyer distributions ira, ROTH IRA first time homebuyer, traditional IRA first time homebuyer, Using 401k funds to purchase first home, Using IRA funds to purchase first home, What are qualified first time homebuyer expenses?, What are the exceptions to IRA early withdrawal penalty?, What are the exceptions to the 10 penalty for early withdrawal?, What reasons can you withdraw from IRA without penalty?|Comments Off

2015 IRS Dirty Dozen

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As the tax season gets under way, the IRS does us all a public service by posting a list of the top tax scams currently making the rounds. Typically this is done by posting one scam per day over a two to three week period; usually right as the filing season opens up. The IRS recently finished releasing their list, which can be found here.

As we often see some of these scams impacting clients that visit our office, we figured we would post a quick summary. So without further adieu here is the…

Recap of the 2015 IRS “Dirty Dozen” scams:

Phone Scams: Aggressive and threatening phone calls by criminals impersonating IRS agents remains a threat to taxpayers. Callers often state that they are IRS agents and mention police arrest, deportation, license revocation and other things if the taxpayer doesn’t immediately pay their bill (i.e. as in on the phone right now as we speak). Remember, the IRS typically contacts taxpayers via letter (not phone) and don’t show up unannounced. If someone is asking for payment over the phone, tell them to give you a phone number, that you are calling your lawyer or simply hang up!
Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. If you believe that a fraudulent return has been filed by someone using your Social Security Number, we urge you to follow the steps we outlined in this identity theft blog post.
Return Preparer Fraud: Taxpayers need to be on the lookout for unscrupulous return preparers. Most tax professionals provide honest high-quality service. But there are some dishonest preparers who’s actions hurt you and the entire profession. Check out this post for the questions you want to ask any tax professional that you are thinking of using.
Inflated Refund Claims: Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund.
Falsifying Income to Claim Credits: Taxpayers should avoid inventing income to erroneously claim tax credits (e.g. the Earned Income Credit or EIC).
Claims for Fuel Tax Credits: The fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers.
Hiding Income with Fake Documents: The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds should be a huge red flag when using a paid tax return preparer.
Phishing: Fake emails or websites looking to steal personal information continue to be a problem. The IRS will not send you an email about a bill or refund out of the blue.
Fake Charities: Taxpayers should be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Follow the 10 steps in this post to ensure that you are giving to a “real” organization and not someone trying to steal your money.
Offshore Tax Avoidance: Anyone suggesting that you can avoid paying tax by hiding it in an “offshore” account is selling you lies. Just research FACTA and you’ll see what the IRS has to say about the topic.
Abusive Tax Shelters: The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true.
Frivolous Tax Arguments: Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. Just know that the penalty for filing a frivolous tax return is $5,000.

By Administrator|2015-02-12T21:47:10-06:00February 12, 2015|Categories: Tax Talk|Tags: 2015 IRS Dirty Dozen, Choosing a tax preparer, IRS Charity Scams, IRS IP PIN, IRS Phone Scams, IRS Tax Scams, Tax Identity Theft, Tax Return Preparer Fraud|Comments Off

Marijuana, The IRS and Taxes

It’s almost impossible not to notice the wave of marijuana legalization spreading across the country. Even Congress is getting into the act. Research hemp crops were recently included in the 2014 Farm Bill. Furthermore, Congress defunded DEA raids on state-legal marijuana facilities in the 2015 stop-gap funding bill.

Regardless of one’s personal feelings on this topic, it’s obvious that voters, legislators, and Congress are, for the most part, on board for the ride. In some states, this is driven by the expected tax revenue. The IRS, however, still has a few things to say when it comes to marijuana.

First of all, for those folks out there that are already medical marijuana patients or have considered getting their “card,” you should know that the costs of obtaining medical marijuana are NOT deductible as a medical expense on Schedule A of your personal income tax return. The reason for this is that marijuana is still classified as a Schedule I drug by the United States Controlled Substances Act.

If you have deducted your medical marijuana expenses in the past, and you ever get audited, do note that this deduction will be disallowed, and you’ll be subject to paying taxes, penalties, and interest as a result. In order to claim a deduction for this in the future, Congress will need to reclassify cannabis as, at the least, a Schedule II drug. If this is an important personal issue to you, your best course of action right now is to lobby your representative and senator, rather than testing this in tax court (it’s already been tested, and the IRS won).

On the business side of things, it gets even more complicated. Under Internal Revenue Code Section 280E, dealers of Schedule I controlled substances are not permitted to deduct the ordinary business expenses involved in selling their products. This means that recreational and medical marijuana dispensary owners cannot deduct the most common business expenses incurred in running a business, such as rent, utilities, wages, marketing, security, etc. To get an idea of how the tax court is thinking about this subject, feel free to take a look at the Olive v. Commissioner case and the ruling of Judge Diane L. Kroupa.

Marijuana businesses are still allowed to take a Cost of Goods Sold (COGS) deduction from gross revenue. COGS includes the hard cost of acquiring marijuana for resale, for example.

Businesses that provide other services beyond just selling marijuana are allowed to deduct reasonable business expenses for those other services and products. For example, many medical marijuana stores also offer various naturopathic services, yoga classes, massage, etc. Expenses related to those services are deductible (reference: 128 TC 173 (2007)).

Whether you’re a medical marijuana patient or contemplating opening a marijuana related business, it’s important to seek proper legal, tax, and accounting counsel to make sure you stay on the right side of the law.

By Administrator|2020-09-16T10:21:49-06:00December 25, 2014|Categories: Tax Talk|Tags: are medical marijuana expenses tax deductible, IRC Section 280E, Judge Diane L. Kroupa, Marijuana and The IRS and Taxes, Medical Marijuana Dispensary Taxes, medical marijuana tax deductible, Olive v. Commissioner, Schedule I Drugs, Schedule II Drugs, The Vapor Room Tax Case, United States Controlled Substances Act, US Controlled Substances Act|Comments Off

He’s Back. Uncle Sam Wants You!!!!

Sometimes things happen. Life get’s in the way. Your health takes an unexpected turn for the worse. You have the best intentions of getting out of the financial hole you are in, but the hole just seems to keep getting deeper. No matter what the reason is, sometimes the tax returns just don’t get filed on time. And sometimes they don’t get filed for a few years. But don’t worry, now you have an option to get back on track. Introducing fileoldtaxreturns.com!

Fileoldtaxretruns.com is our recently developed sister site to helps those who specifically have unfiled tax returns from previous years. Why create a separate website; especially if the services are provided the same fine professionals who run Wilson Rogers & Company? Keep reading.

Software availability. If you have old tax returns to be filed and are the DIY type, you’ll quickly stumble onto something. Software providers typically STOP offering tax software for a particular year once the IRS has shut down the e-file platform. Thus, if you want to prepare your return electronically, there are a limited number of online sites you can use or you have to manually fill out the forms once you download them from the IRS website. But what if you don’t want to prepare the return?

Real people available year round. It’s no secret that most retail tax offices close up shop once the tax season is over. If you have a deadline to provide a tax return to someone (e.g. loan officer for that new home you’re trying to purchase), you might find it hard to locate anyone who can prepare it for you, when YOU need it. Thus, fileoldtaxreturns.com was created as a option so that taxpayers could get these old returns prepared all year round. Depending on the situation, you may be able to get them done in as little as 24 hours!

Real people available year round!

Repository of tax law. Tax laws are constantly changing. Even if you don’t want to have someone prepare your return for you, what laws and tax rates were in effect back when your tax return was due? Not to worry, fileoldtaxreturns.com has a tax help blog that has all of the historical information that you would need to ensure that your return was done right. While only containing historical tax rate tables at the moment, it will soon be expanded to include tax law summaries for each year as well as specific information on various credits, deductions and other items.

Help with IRS debt. It’s not uncommon for those who have unfiled returns to also have amounts owed to the IRS. Sure, you’ve seen all those companies with the late night infomercials telling you how you can settle your debt for pennies on the dollar if you owe more than $10,000 to the IRS. But can you trust them? How do you know if they are reputable? Well, fileoldtaxreturns.com has a dedicated Got IRS Debt page that will not only inform you of your options when it comes to settling your tax debt, but inform you of your rights!

So there you have it. If you have (or know someone who has) unfiled tax returns, why not pay a visit to the site? If you need to speak to someone, you can call the site’s dedicated support number at 844-TAXES88 or 844-829-3788. Plus, when you visit the site, you can sign up and save 30% off current year tax preparation rates.

Until next time…

By Administrator|2014-11-30T08:44:22-06:00November 30, 2014|Categories: Tax Talk|Tags: 844-829-3788, 844taxes88, bus bench ads, bus bench advertising, file old tax returns, file old tax returns turbotax, fileoldtaxreturns.com, IRS Debt, old irs tax tables, old tax tables|Comments Off

10 Options For Solving Your IRS Debt

When it comes to settling your tax debt, there are 10 options “commonly” employed by resolution professionals (such as ourselves) or the individual taxpayer (see full explanations below):

»          Full pay the tax owed
»          File unfiled returns to replace Substitute for Returns (SFR’s)
»          Dispute the tax on technical grounds
»          Currently Not Collectable
»          Installment Agreements
»          Offers In Compromise
»          Penalty Abatement
»          Discharging taxes in bankruptcy
»          Innocent Spouse relief
»          Expiration of the Collection Statute

OPTION ONE – Full pay the tax owed
While seldom a popular option, sometimes the taxpayer does have the ability to pay the tax outright or borrow against an existing asset e.g. refinance a home mortgage or take out a home equity loan.

Surprisingly, in this situation, this option is usually the least costly of viable options available to the taxpayer. The reason for this is two-fold:
» The taxpayer’s equity in assets will usually disqualify the taxpayer from benefiting from options which grant debt forgiveness.
» Until the tax debt is paid in its entirety, it will continue to accrue additional penalties and interest.

OPTION TWO – Filing unfiled tax returns and replacing Substitute for Returns
When resolving a tax problem, it is relatively common to find that the taxpayer has back tax returns which have not been filed. There are three reasons why it is necessary to file the required back tax returns and get the taxpayer “Current” so to speak:
»         Failure to file tax returns may be construed as a criminal act by the IRS and can be punishable by one year in jail for each year not filed. Filing unfiled returns brings the taxpayer “Current”
»          Filing unfiled returns to replace “Substitute for Returns” may lower the tax liability owed and the associated interest and penalties
»          A settlement cannot be negotiated with the IRS until the taxpayer becomes “Current”

OPTION THREE – Dispute the tax on technical grounds
If there is a technical basis to dispute the amount of tax owed, there are a number of paths to consider, including:
» Filing an amended return if the statute of limitations to file has not expired
» Filing an Offer In Compromise – Doubt as to Liability

OPTION FOUR – Currently Not Collectable Status
If a taxpayer does not have positive cash flow above the level to pay their necessary living expenses or have equity in assets to liquidate, the taxpayer may qualify for Currently Not Collectable Status (CNC). This is most commonly seen when the tax payer is unemployed or underemployed. In this situation, the IRS places a temporary hold on the collection of the tax owed until the taxpayer’s financial situation improves. If over a longer period of time, the tax payer’s financial situation does not improve, the taxpayer may then become a viable Offer In Compromise candidate.

OPTION FIVE – Installment Agreements
In most cases, the IRS will accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan the taxpayer must meet set criteria. They include:
»          The taxpayer must be current- all returns must be filed
»          Disclose all assets owned
»          The difference between the taxpayer’s monthly income and allowable monthly expenses will be the amount that the IRS will request that the taxpayer pay on a monthly basis
»          Monthly payments will continue until the taxes owed are paid in full

OPTION SIX – Offers In Compromise
The IRS Offer in Compromise program provides taxpayers that owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final settlement.

»          This program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, a chance to file an Offer in Compromise and have their tax liabilities reconsidered.
»          The Offer in Compromise program allows taxpayers to get a fresh start.
»          All back tax liabilities are settled with the amount of the Offer In Compromise.
»          All federal tax liens are released upon IRS acceptance of an Offer In Compromise and payment of the amount offered.

An Offer in Compromise filed based on the taxpayers inability to pay the IRS looks at the taxpayer’s current financial position and considers the taxpayers ability to pay as well as the taxpayers equity in assets. Based on these factors, an Offer amount is determined.

» Taxpayers can compromise all types of IRS taxes, penalties and interest.
» Even payroll taxes can be compromised.

If the taxpayer qualifies for the Offer In Compromise program, they may be able save thousands of dollars in taxes, penalties and interest.

OPTION SEVEN – Penalty Abatement
In most cases, penalties make up 10-30% of the total tax obligation. A penalty abatement request can eliminate some or all penalties if the taxpayer has reasonable cause for not paying the tax on time or paying the appropriate amount of tax.

Reasonable cause includes:
»         Prolonged unemployment
»         Business failure
»         Major illness
»         Incorrect accounting advice
»         Incorrect advice from the IRS

To prevail in a penalty abatement request, as in most tax matters, the burden rests with the taxpayer to be able to adequately document the reasonable cause.

OPTION EIGHT – Discharging Taxes in Bankruptcy
Bankruptcy can discharge federal income taxes if certain requirements are met. However this depends upon both the type of bankruptcy and the type of tax owed.

Chapter 7 is the chapter of bankruptcy law that provides for the liquidation of non-exempt assets and the discharge of dischargeable debts. Chapter 11 and Chapter 13 provide for repayment of debt in whole or in part.

To discharge taxes in bankruptcy, a number of criteria must be met including:
»         36 months have expired from the tax return due date
»         24 months have expired from the date the tax was assessed
»         240 days have passed since the tax was assessed and filing bankruptcy
»         All tax returns must have been filed

OPTION NINE – Innocent Spouse relief
Sometimes a taxpayer will find themselves in trouble with the IRS because of their spouse’s or Ex-spouse’s actions. The IRS realizes that these situations do in fact occur.

In order to help taxpayers that have tax problems which are due to the actions of their spouse, the IRS has developed guidelines for taxpayers to qualify as an innocent spouse. If a taxpayer can prove they meet these guidelines, then the innocent taxpayer may not have to pay some or all the taxes caused by their spouse or ex-spouse.

OPTION TEN – Expiration of the Collection Statute
The IRS has 10 years from the date of assessment (usually close to the filing date) to collect all taxes, penalties and interest from the taxpayer. The taxpayer does not owe the tax after the 10-year date has passed.

Listed below are some of the most common exceptions to this rule:
»          If the taxpayer agrees in writing to allow the IRS more time to collect the tax
»          If the taxpayer files bankruptcy during the 10 year period
»          If the taxpayer files an Offer In Compromise.

By Administrator|2014-11-20T15:33:14-06:00November 20, 2014|Categories: Tax Talk|Tags: Collection Statute Expiration Date, Discharge Taxes In Bankruptcy, IRS CNC, IRS CSED, IRS Currently Not Collectible, IRS Debt solution options, IRS Innocent Spouse Relief, IRS Offer In Compromise, IRS OIC, IRS Penalty Abatement, IRS reasonable cause, IRS Resolution options, SFR, SUbstitute For Returns|Comments Off

Understanding The Gift Tax

So a few weeks ago, someone posed the following question to us regarding gift giving:

Can you please explain how the gift-tax system works and what its rationale is? I know that if I give someone a gift below a certain amount, then I don’t have to pay gift tax. But what happens if I give over that amount? My contribution was made with after-tax money. Why do I have to pay a gift tax? It just feels like I am being double taxed.

We thought it was a good question, so let’s explain what the so-called gift tax is really all about.

Lifetime Exclusion
Our current tax system essentially treats the transfer of wealth the same whether the transfer was made during the donor’s lifetime or posthumously. However, the IRS grants taxpayers a life time exclusion (also called the lifetime exemption) that allows them to give away $5,340,000 (in 2014) at either stage or a combination of the two. Thus, a taxpayer can give up to this amount during their lifetime or after death without either the recipient or the donor owing any tax on that transfer.

Annual Exclusion
A common source of misunderstanding surrounding gift tax has to do with how the lifetime exclusion amount relates to the annual exclusion. The annual exclusion allows a taxpayer to give $14,000 (in 2014) to another person per year without it counting against the lifetime exemption. You and your spouse can combine this annual exclusion to double the size of the gift to a done if you would like (up to $28,000). So what happens when you give more than the above amounts? Well, you then have to deduct the difference against your $5,340,000 lifetime exclusion. Just how do you do this?

Reporting
You, or your estate if the taxpayer is deceased, must file Form 709 United States Gift Tax Return by the same date that your Individual Tax Return is due (April 15^th). You will owe no tax on your gifts unless you have already given more than the lifetime exclusion. Once you file Form 709, the government notes what your remaining exemption is. The same process is followed every time you exceed the annual exclusion limit (e.g. $14,000). Then at your death, any bequest beyond the remaining limit is subject to taxation. Thus, it’s not until you reach this point that your gift is subject to double taxation so to speak.

If you want more information on the gift tax and reporting, check out this nifty little IRS site
on the topic. Still have questions? Why not give us a call or shoot us an email via our contact information below and we’d be happy to chat with you.

By Administrator|2020-09-16T10:48:03-06:00October 26, 2014|Categories: Tax Talk|Tags: annual gift tax exclusion, Form 706, gift tax, gift tax exclusion, gift tax exclusion amount, gift tax exemption, gift tax exemption amount, gift tax return, gift tax rules, irs gift limit, irs gift tax, irs gift tax form, lifetime gift tax exclusion, understanding gift tax|Comments Off

Restricted Stock Unit (RSU) Taxation

Employee compensation is a major expenditure for most corporations. As such, some firms find it easier to pay, at least a portion of, their employees’ compensation in the form of stock. This post will discuss the tax implications one should be aware of if they are the recipient of Restricted Stock Units or RSUs.

How do Restricted Stock Unit Plans work?
A RSU represents an unsecured promise by the employer to grant a set number of shares of stock to the employee upon the completion of the vesting schedule. Once an employee is granted RSUs, the employee must decide whether to accept or decline the grant. If the employee accepts the grant, they may be required to pay the employer a purchase price for the grant.

After accepting a grant and providing payment (if applicable), the employee must wait until the grant vests. Stock is not issued at the time of the grant. However, once the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit.

Income Tax Treatment
The following example reflects a salary of $65,000, a grant of 400 shares of hypothetical XYZ Company stock and a sale of said stock one day after vesting.

Step 1: Compensation Income From The Vesting Of The RSU Award
Under normal federal income tax rules, an employee receiving Restricted Stock Units is not taxed at the time of the grant. Instead, the employee is taxed at vesting (when the restrictions lapse) unless the employee chooses to defer receipt of the cash or shares. In these circumstances, the employee will have compensation income or “ordinary income” in tax parlance. The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting or distribution, minus the amount paid for the grant (if any).

In our example, the compensation is calculated as 400 shares vesting times the $20 per share fair market price on that date. The employee now has compensation income of $8,000. This will also be the stock basis of said shares for use in the next step. On the employees W2, this $8,000 will be added to the $65,000 in wage compensation and taxed at “ordinary income’ tax rates.

Step 2: Calculating Capital Gains or Losses
For grants that pay in actual shares, the employee’s tax holding period begins at the time of distribution (which may or may not coincide with vesting depending on the plan rules), and the employee’s tax basis is equal to the amount paid for the stock plus the amount included as ordinary compensation income.

In our example, the employee has 400 share of stock with a basis of $8,000. The very next day they sell all 400 shares when the stock is trading at $22 per share. The employee has just created a capital gain of $800, which is the difference between their $8,800 sales price and $8,000 basis. As they held the stock for less than one year between when they obtained it and sold it, the $800 gain will be reported on their tax return as a short term capital gain via Form 8949 or Schedule D (depending on if they had any other adjustments).

Special Consideration – Tax Withholding Choices
Sometimes when one is granted RSUs, they would like the employer to “withhold” some taxes to cover the amount that will be included on their W2 as compensation income. Generally speaking those options will include:

Net Issuance – The employer will deduct a number of shares from your vested shares and give you the rest (broker remits net proceeds to employer, employer remits the value of the deducted shares to Government, money shows up as “withholding” on paycheck).
Same Day Sale – If you make this choice, you sell everything on the day of vesting. The employer will then withhold a portion of the proceeds as “withholding” and report them on your W2.
Sell To Cover – If you make this choice, or if you don’t have a choice, your employer sells just enough shares to cover the tax withholding. The key difference between Sell to Cover and Net Issuance is that the employer uses a broker in Sell to Cover but doesn’t use a broker in Net Issuance.

By Administrator|2014-10-19T21:25:32-06:00October 19, 2014|Categories: Tax Talk|Tags: Restricted Stock Units, Restricted Stock Units and taxation, Restricted Stock Units IRS, Restricted Stock Units tax reporting, RSU Tax Reporting, RSU Taxation|Comments Off

Medicare Premiums & Self Employed Health Insurance Deduction

Many self-employed taxpayers know that come tax time, they can receive a deduction if they pay for health insurance. However, what if you are “semi-retired” and your insurance comes in the form of Medicare? Can you take a deduction for the premiums you paid? Read on to find out!

Generally speaking, a taxpayer may be able to take this deduction if one of the following applies:

They had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
They had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065).
They used an optional method to figure net earnings from self-employment on Schedule SE, Self-Employment Tax.
They were paid wages reported on Form W-2 as a shareholder who owns more than two percent of the outstanding stock of an S corporation.

Before tax year 2010, Form 1040 instructions for line 29 stated, “Medicare premiums cannot be used to figure the [self-employed health insurance] deduction.” Likewise, before 2010, Publication 535, Business Expenses, stated that Medicare Part B premiums were not deductible as a business expense, in keeping with Field Service Advisory (FSA) 3042, issued in 1995.

However, in 2012 the Office of Chief Counsel advised IRS attorneys that self-employed individuals may deduct Medicare premiums from their self-employment income. Chief Counsel Advice (CCA) 201228037 clarified the IRS position that previously had appeared only in the instructions to Form 1040.

So what does this mean? Well, if you meet the requirements, Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction. This is applicable for all Medicare premiums (Parts A, B, C and D).

What if you paid premiums in the past but failed to take the deduction? You can amend your previously filed return (if you’re within the 3 year window) to refigure and claim the deduction. For more information, see Form 1040X, Amended US Individual Income Tax Return.

By Administrator|2014-09-29T23:05:15-06:00September 29, 2014|Categories: Tax Talk|Tags: Chief Counsel Advice (CCA) 201228037, Medicare Part A, Medicare Part B, Medicare Part C, Medicare Part D, medicare premiums deductible for self employed, medicare premiums for self employed, self employed health insurance deduction|Comments Off

FATCA Transitionary Period Announced

The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March of 2010. FATCA targets tax non-compliance by U. S. taxpayers and focuses on the reporting of individuals and financial institutions. However, to aid in compliance with the act, the IRS underwent several “phases” of enforcement (so to speak). Well, the IRS has announced that they will treat the remainder of 2014 and all of 2015 as a “transition period” for financial institutions to comply with FATCA requirements.

This transition period will not postpone the implementation of any parts of the law, including the 30% withholding rate on transactions by non-compliant financial institutions. Rather, the IRS will gauge whether or not financial institutions are moving towards compliance in a good faith manner. If they are, then those financial institutions will not be penalized.

The IRS is still in the process of developing all of the new forms that will be required as part of the FATCA compliance process (the W-8 series). The IRS still expects foreign financial institutions to make progress towards compliance for the next 18 months, but will be lenient towards enforcement. The IRS has also warned that companies that are normally required to withhold funds for various purposes must continue to do so. The FATCA transition will not be an excuse to avoid normal backup withholding, for example.

More and more foreign governments are signing information sharing agreements with the IRS, as well. Even more governments have negotiated agreements that have yet to be signed.

On a personal level, it is becoming more and more difficult to avoid the long arm of the IRS. If you maintain accounts overseas, check to make sure that your foreign financial institution is either compliant, or working towards compliance, with FATCA. This will help you avoid the 30% withholding on any transactions between your foreign and U. S. financial institutions.

If you have questions regarding how FATCA will impact you, have questions about your FBAR filing, or any other matters pertaining to your overseas financial interests, please be sure to give us a call at 773-239-8850 to discuss these matters.

By Administrator|2020-09-18T11:17:41-06:00August 8, 2014|Categories: Tax Talk|Tags: facts on fatca, FBAR, fbar filing, foreign account tax compliance act, what is fatca, who has to file fbar|Comments Off

Wait, another tax?

Many self-employed individuals are considered “sole proprietors” or “independent contractors” for legal and tax purposes. This is true regardless of whether you are turning a hobby into a business, selling an indispensable widget or providing services to others. As a self-employed person, you report your business revenue results on your personal income tax return. The following are a few guidelines and issues you should keep in mind when pursuing your entrepreneurial spirit.

Schedule C – Form 1040
As a self-employed person, you are required to report your business profits or losses on Schedule C of Form 1040. The income earned through your business is taxable to you as an individual. This is true even if you do not withdraw any money from the business. While you are required to report your gross revenues, you are also allowed to deduct business expenses incurred in generating that revenue. If your business efforts result in a loss, the loss will generally be deductible against your total income from all sources, subject to special rules relating to whether your business is considered a hobby and whether you have anything “at risk.” If it generates a profit, then you will have to pay taxes on it.

Home-Based Business
Many self-employed individuals work out of their home and are entitled to deduct a percentage of certain home costs that are applicable to the portion of the home that is used as your office. This can include payments for utilities, telephone services, etc. You may also be eligible to claim these deductions if you perform administrative tasks from your home or store inventory there. If you work out of your home and have an additional office at another location, you also may be able to convert your commuting expenses between the two locations into deductible transportation expenses. Since most self-employed individuals find themselves working more than the traditional 40-hour week, there are a significant number of advantageous deductions that can be claimed. Unfortunately, we find that most self-employed individuals miss these deductions because they are unaware of them.

The Bad News – Self-Employment Taxes
A negative aspect to being self-employed is the self-employment tax. All salaried individuals are subject to automatic deductions from their paycheck including FICA, etc. In that many self-employed individuals often do not run a formal payroll for themselves, the government must recapture these taxes through the self-employment tax. Simply put, you are required to pay self-employment taxes at a rate of 15.3% on your net earnings, up to an annual income cap. Beyond the annual cap, the rate is reduced to just the Medicare tax rate of 2.9%.

In an interesting twist that reveals the confusing nature of the tax code, you are allowed a partial deduction for the self-employment tax. Simply put, you are allowed to deduct one-half of your self-employment taxes from your gross income. For example, if you have to pay $10,000 in self-employment taxes, you are allowed a deduction on your 1040 return of $5,000. Many self-employed individuals miss this deduction and pay more money to taxes than needed.

No Withholding Tax
Unlike a salaried employee sitting in a cubicle, the taxes above are not withheld from your paycheck. While this sounds great, you are required to make quarterly estimated tax payments. If you fail to make the payments, you are subject to a penalty, but the penalty is not the biggest concern. A potentially dangerous pitfall of being self-employed is failing to pay quarterly estimated taxes AND then getting caught at the end of the year without sufficient funds to pay your taxes. The IRS is not going to be happy if you fail to pay your taxes and you will suffer the consequences in the form of penalties and interest. Making sure you pay quarterly estimated taxes helps avoid this situation and it is highly recommended that you follow this course of action. If you have encountered this situation for yourself, be sure to contact us immediately to help you remedy this particular circumstance.

Record Keeping
You must maintain complete records of all business income and expenses. Simply put, document everything. Create a filing system for each month and file every receipt, etc. All business travel expenses must be documented, including auto mileage you incur when performing business tasks. Office supply stores sell business mileage books that you can keep in your car and use whenever you travel. There are even some apps for your phone that will allow you to push a button at the beginning and end of your trip and it will calculate the mileage for you. If you have any doubt about documenting something, just do it!

As a self-employed individual, your focus and time is spent on making your business successful. Your focus is not on the complexities of the tax code and how to limit the amount of taxes you owe. If any of the information in this article is new to you, then it is highly likely you have paid far more in taxes than required.

By Administrator|2020-09-16T10:58:45-06:00July 29, 2014|Categories: Tax Talk|Tags: estimated tax payments, filing taxes for the self employed, Schedule C, Schedule SE, SE Tax, Self Employment Tax, Self Employment Taxes, taxes for the self employed|Comments Off

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