Author Archives: Administrator

Understanding Box 9B on Form 1099-R

When a taxpayer retires, they will start to receive money from their retirement plan (e.g. pension or annuity).  As the payments are made to you, each payment will consist of two parts.  One portion will be the amount (if any) that you contributed to the plan and the second portion will be the piece the employer contributed (or the earnings).

You are not required to enter the total employee contributions or designated Roth contributions that are reported in box 9b. However, failing to do so may cause you to pay more tax than you should.

What does an amount in box 9b mean?

The amount shown is the total amount of after-tax contributions you paid to your retirement plan while working.  It’s used to determine the after-tax contribution amount shown in Box 5.  If you want to know what each field on Form 1099-R means, then check out this informative illustration.

Do you pay tax on this amount?

If you made post-tax contributions to your retirement account, you don’t pay income taxes on the portion of the distributions you receive based upon the amount for which you were already taxed.  This is referred to as your “basis” in  the plan.  If the taxpayer didn’t make any after-tax contributions to the retirement plan (which is often the case), then the “basis” is zero, and each distribution from the retirement plan is 100% taxable.

So what do you do with this amount?

If you are using software, then you want  to include it somewhere to indicate your basis.  If you are doing your taxes manually, then there is an IRS Simplified Method Worksheet that determines the amount of basis that is included in each periodic payment.  This worksheet will help you  determine how much basis the taxpayer should spread out over the payments they receive.  If you are using a professional, they should  know what to do!

S-Corp Automobile Deduction

Who owns the vehicle matters!

You want your S-Corporation (S-Corp) to have a nice clean set of books, and the cleaner they are, the better.  Corporate payments of personal expenses either dirty up the accounting or can create a strong impression of impropriety.  The IRS is attracted to things that look suspect, which is an even better reason for you to make sure your S-Corp has a clean set of books.  So how does one go about deducting the expenses of a vehicle that is used by a S-Corp.  Well, the answer depends largely on who the vehicle is titled to.

Vehicle Titled In Corporation’s Name.  Corporations, S-Corps, and Partnerships may only claim actual expenses for vehicles.  Thus, your S-Corp may claim depreciation, fuel expenses, oil expenses, repairs, insurance, and so forth.  But what about mileage?  When the car is owned in the corporation’s name, it is not allowed to deduct mileage, just the actual expenses incurred for it’s use in business.

Vehicle Titled Personally.  To deduct the expenses of a vehicle that is owed personally by the business owner, the S-Corp can reimburse the employee expenses under an accountable plan or a non-accountable plan.  The expenses are deductible under either methodology, but the rules are different.

Accountable Plan
When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation.  The reimbursements are not taxable income to the business owner nor are they reported on their W-2.  What the owner needs to submit to the business depends on what expenses they will be reimbursed for.  In this post about S-Corp Home Office Deductions, we provide a sample accountable plan that will give you an idea of the reimbursement language.

  • Mileage Reimbursement.  The business can reimburse at the IRS standard mileage rate.  This rate includes allowances for depreciation (i.e. wear and tear), maintenance, repairs, gas, insurance, and a host of other things.  The proof the business owner would need to provide for reimbursement would be a mileage log.  This log would need to show the date, business purpose of the trip, miles driven and should be submitted to the business on a routine and timely fashion (e.g. once a month).  One important thing to note is that the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
  • Actual Expense Reimbursement.  The business can also reimburse for the actual expenses the business owner incurs.  The business does not have to reimburse for every expense, for example, you could reimburse gas and insurance and not tires and oil changes.  However, for any expenses the business does reimburse, it must have adequate proof.  Adequate proof means you need to see all the receipts for the expenses that will be covered.  In addition to the expenses, the owner also needs to supply the total vehicle mileage for the year as well as the mile log.  Why?  So it can determine the number of business miles and the number of personal miles to compute the percentage of business use.  This percentage is then applied to the total amount of expenses incurred to determine how much is reimbursed to the employee.

Non-accountable plan
If a non-accountable plan is used, then the business does not need to keep or see any vehicle records.  They can reimburse any amount, from below the IRS standard rate, or above the IRS standard rate.  They can reimburse for gas and insurance but not oil changes, or anything else that it wants to pay for (that is vehicle related).  But under this method, all the reimbursements get included in the employee’s box 1 W-2 wages and are subject to income and employment tax withholding.  The non-accountable plan is less beneficial to the employee because of the inclusion of the amounts on their W2 as income.

What Is An Eligible Education Institution?

Do I get a tax write off for this?

The IRS provides taxpayers certain tax breaks when you pay for education.  However, there is a catch.  The monies paid (i.e. tuition) have to be to an eligible education institution.  What exactly is that?  Read on my friend.

Tax Benefits Available
The following are the benefits commonly available to taxpayers:

  • Tuition and Fees Deduction: The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.  You may be able to deduct qualified education expenses for higher education paid during the year for yourself, your spouse or your dependent.
  • American Opportunity Tax Credit: A credit for tuition, required enrollment fees and course material for the first four years of post-secondary education for up to $2,500 per eligible student per year. Your modified adjusted gross income (MAGI) must be under $90,000 ($180,000 for joint filers) and you must not have claimed the AOTC or the former Hope Credit for more than four tax years for the same eligible student. Forty percent of this credit may be refundable.
  • Lifetime Learning Credit: The Lifetime Learning Credit is 20% of the first $10,000 of qualified education expenses paid for all eligible students. The maximum credit is $2,000 per return regardless of the number of eligible students. There is no limit on the number of years the credit can be claimed for each student; thus the reason it is referred to as “lifetime.”

Eligible Education Institution Defined
An eligible educational institution is a school offering higher education beyond high school. It is any college, university, trade school, or other post secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.  This includes most accredited public, nonprofit and privately-owned–for-profit post secondary institutions.

With that said, if you are attending a school in another country, there is a possibility that it is NOT considered an eligible education institution.  In general, if you aren’t sure if your school is an eligible educational institution:

• Ask your school (i.e. someone in the financial aid department) if it is, or
• See if your school is on the U.S. Federal Student Aid Code List.

TIP: A small number of schools, not on the list, may be eligible educational institutions and the school can confirm that for you.

Can The IRS Revoke My Passport?

Don’t want to pay your taxes ehh? We’ll get your attention!

So the short answer to the question is yes, the IRS can revoke your passport if you have a “seriously delinquent” tax debt.  But what exactly does that mean?  More importantly, what can you do if your passport is at risk of being revoked?  Read on to learn more my friend!

Background
On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation (FAST) Act (Pub. L. No. 114-94) into law—the first federal law in over a decade to provide long-term funding certainty for surface transportation infrastructure planning and investment.  But like all legislative bills/acts, other things that may appear unrelated often get inserted into them.  This act was no different.

Internal Revenue Code Sec. 7345 was enacted as part of the FAST Act.  A seriously delinquent tax debt is defined as an unpaid, legally enforceable, and assessed federal tax liability greater than $51,000 (adjusted annually for inflation) and for which:

  • The IRS has filed a notice of federal tax lien and the individual’s right to a hearing has been exhausted or lapsed, or
  • The IRS has issued a levy.

Generally speaking a federal tax debt is the sum of all current tax obligations, including penalties and interest.  However, a “seriously delinquent tax debt” does not include any of the following tax debt even if it meets the criteria stated above:

  • Being paid timely with an IRS-approved installment agreement (IA),
  • Being paid timely with an offer in compromise (OIC) accepted by the IRS, or a settlement agreement entered with the Justice Department,
  • For which a collection due process hearing is timely requested regarding a levy to collect the debt,
  • For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made

Furthermore, a passport won’t be at risk under this program for any taxpayer:

  • Who is in bankruptcy
  • Who is identified by the IRS as a victim of tax-related identity theft
  • Whose account the IRS has determined is currently not collectible (CNC) due to hardship
  • Who is located within a federally declared disaster area
  • Who has a request pending with the IRS for an installment agreement (IA)
  • Who has a pending offer in compromise (OIC) with the IRS
  • Who has an IRS accepted adjustment that will satisfy the debt in full

What the IRS does when you have a seriously delinquent tax debt
The IRS is required to notify you in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. This is done via IRS notice CP 508C.  If you have been certified to the Department of State by the Secretary of the Treasury as having a seriously delinquent tax debt, you cannot be issued a U.S. passport and your current U.S. passport may be revoked.

How do you resolve the situation?
The IRS will reverse a certification when the tax debt no longer qualifies as a seriously delinquent tax debt.  This happens when:

    • The tax debt is fully satisfied or becomes legally unenforceable.
    • The tax debt is no longer seriously delinquent meaning:
      1. You and the IRS enter into an installment agreement allowing you to pay the debt over time.
      2. The IRS accepts an offer in compromise to satisfy the debt.
      3. The Justice Department enters into a settlement agreement to satisfy the debt.
      4. Collection is suspended because you request innocent spouse relief under IRC § 6015.
      5. You make a timely request for a collection due process hearing regarding a levy to collect the debt.
    • The certification is erroneous.

The IRS will make this reversal within 30 days and provide notification to the State Department as soon as practicable.

The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a debt that is not the basis of the certification.  Also, the IRS will not reverse the certification because the taxpayer pays the debt below $50,000.  So…if you have been notified that your tax debt has been certified, you should consider:

  1. paying the tax owed in full,
  2. entering into an installment agreement, or
  3. making an offer in compromise.

But what if the IRS made an error?
The State Department is held harmless in these matters and cannot be sued for any erroneous notification or failed decertification under IRC § 7345.  If you believe that the IRS certified your debt to the State Department in error, you can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. If the court determines the certification is erroneous or should be reversed, it can order the IRS to notify the State Department that the certification was in error.

Can I contact the State Department to find out the status of my passport?
The State Department does not have any information about your seriously delinquent tax debt. For questions, or to resolve your seriously delinquent tax debt, they recommend that you contact the IRS via phone at 1-855-519-4965 (1-267-941-1004 international) of via mail at:

Department of the Treasury
Internal Revenue Service
Attn: Passport
PO Box 8208
Philadelphia, PA 19101-8208

How can we help?
As you can tell from above, the IRS will only really reverse the certification if the debt is no longer enforceable (i.e. collectable) or if you enter into a resolution option (i.e. payment plan, currently not collectible, etc).

With regards to enforceability, the IRS only has 10 years from the date of assessment to collect on unpaid taxes.  If you are getting letters, your debt is more than likely still active.  But do you know when it will expire?  This is called the CSED date.

While you could go through the hassle of calculating your CSED (see this blog post), do you really want to?  For a flat $75 fee, and us filing a few forms with the IRS (with your consent), we’ll look at however many years you want to analyze, and provide you with a comprehensive report that will include:

  • Total tax assessment, penalty, interest and accrual amounts for each year (so you know how much you really owe)
  • CSED calculations for each year requested (i.e. when your debt will expire)
  • Tolling events (if any) and the days your CSED has been extended
  • All IRS notices sent/received for each year
  • IRS account activity by year
  • And much, much more (we promise)

If your debt will not expire for some time, we are fully authorized to represent your before the IRS and can can help negotiate a resolution option (i.e. IA, OIC, CNC) that will satisfy the IRS conditions to have your certification revoked/lifted.  You can learn more about our representation services by visiting the IRS Debt Representation page or reading the IRS Talk post within our blog.

When you are ready to get started, simply call us at (773) 239-8850 or click our email address at the bottom of this screen.

How Will The New Tax Law Affect Me?

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law.  It has been touted as one of the most significant overhauls to the Internal Revenue Code since the Tax Reform Act of 1986.  The new law reduces tax rates for corporations and individuals, while repealing many deductions taxpayers were accustomed to, in an attempt to “simplify” the filing of their tax returns.  This post will focus on the changes that will impact individuals.  We’ll follow it up with another that focuses on the changes for business entities at a later date.

One of the most important things to note about the changes outlined below is that many go into effect for tax years ending after January 1, 2018.  As such, most of this will not apply when you file your 2017 tax return during the 2018 filing season (i.e. the ones due 4/17/18).  With that said, under each section you will find a “planning” comment to aid you in preparing for how it may impact the tax return you file in early 2019.

Tax Brackets and Tax Rates
The new law retains the seven tax brackets that previously existed, however, the rates are now 10%, 12%, 22%, 24%, 32%, 35% and 37%. Shown below are how the brackets and rates are applied to each filing status:

Single Taxable Income

$0 to $9,525 × 10.0% minus $0.00 = Tax
$9,526 to $38,700 × 12.0% minus $190.50 = Tax
$38,701 to $82,500 × 22.0% minus $4,060.50 = Tax
$82,501 to $157,500 × 24.0% minus $5,710.50 = Tax
$157,501 to $200,000 × 32.0% minus $18,310.50 = Tax
$200,001 to $500,000 × 35.0% minus $24,310.50 = Tax
$500,001 and over × 37.0% minus $34,310.50 = Tax

Married Filing Joint & Qualified Widow(er) Taxable Income

$0 to $19,050 × 10.0% minus $0.00 = Tax
$19,051 to $77,400 × 12.0% minus $381.00 = Tax
$77,401 to $165,000 × 22.0% minus $8,121.00 = Tax
$165,001 to $315,000 × 24.0% minus $11,421.00 = Tax
$315,001 to $400,000 × 32.0% minus $36,621.00 = Tax
$400,001 to $600,000 × 35.0% minus $48,621.00 = Tax
$600,001 and over × 37.0% minus $60,621.00 = Tax

Married Filing Seperate Taxable Income

$0 to $9,525 × 10.0% minus $0.00 = Tax
$9,526 to $38,700 × 12.0% minus $190.50 = Tax
$38,701 to $82,500 × 22.0% minus $4,060.50 = Tax
$82,501 to $157,500 × 24.0% minus $5,710.50 = Tax
$157,501 to $200,000 × 32.0% minus $18,310.50 = Tax
$200,001 to $300,000 × 35.0% minus $24,310.50 = Tax
$300,001 and over × 37.0% minus $30,310.50 = Tax

Head of Household Taxable Income

$0 to $13,600 × 10.0% minus $0.00 = Tax
$13,601 to $51,800 × 12.0% minus $272.00 = Tax
$51,801 to $82,500 × 22.0% minus $5,452.00 = Tax
$82,501 to $157,500 × 24.0% minus $7,102.00 = Tax
$157,501 to $200,000 × 32.0% minus $19,702.00 = Tax
$200,001 to $500,000 × 35.0% minus $25,702.00 = Tax
$500,001 and over × 37.0% minus $35,702.00 = Tax

Standard Deduction
The new law doubled the amount of the previous standard deduction to the following amounts:

Standard Deductions Per Filing Status

Single or Married Filing Seperate$12,000
Married Filing Jointly of Qualifying Widow(er)$24,000
Head of Household$18,000
Additional age 65 or older, or blind, per person, per event:
MFJ, QW or MFS$1,300
Single or HOH$1,600
Dependents. The standard deduction is the greater of $1,050
or earned income plus $350, up to regular standard deduction

Planning Comment: If you previously  itemized, you may no longer need to due to these increased amounts.  Remember, the IRS lets you take the standard or itemized deduction, whichever is greater.  With that being said,if your itemized deductions (discussed below) do not exceed these amounts, your tax filing just “theoretically” became more simple.

Personal Exemptions
The personal exemption has been repealed and will not be available after tax year 2017.

Planning Comment: If you have a large family and moderate income, this change might hurt you.  Because you will no longer receive an exemption for every member of your household listed on your return (which lowers your taxes), you could see your tax bill increase.

The Alternative Minimum Tax (AMT)
The phaseout thresholds have been increased to $1,000,000 for those filing as married filing joint, and $500,000 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation.

Alternative Minimum Tax (AMT) Exemptions

Individual$70,300
Married Filing Jointly & Surviving Spouses$109,400
Married Filing Separately$54,700

Itemized Deductions
With the exception of the items outlined below, all other itemized deductions are repealed. The overall limitation on itemized deductions for upper income individuals is also repealed.

  • Medical Expenses:  For 2017 through 2018, expenses exceeding 7.5% of income are deductible.  This percentage increases to 10% in 2019.
  • State and Local Taxes (SALT): Taxpayers can claim up to a $10,000 deduction for a combination of state and local income tax, sales tax, or real estate taxes.  Foreign real property taxes are no longer deductible.
  • Mortgage Interest:  The deduction for mortgage interest is capped at $750,000 of debt, but is still allowed on a first or second home.  The interest on home equity loans will no longer be deductible.  Interest on up to $1 million of acquisition debt for loans entered into prior to December 15, 2017 is grandfathered and still deductible.
  • Charitable Contributions: Taxpayers who are able to itemize deductions can still include charitable contributions. The current limitation to 50% of income is increased to 60%.
  • Casualty Losses: Deductions for unexpected losses to personal property are no longer deductible unless covered by specific federal disaster declaration.
  • Wagering Losses: The meaning of losses from wagering transactions (i.e. gambling) is clarified to include other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity (e.g. travel expenses to or from a casino).

Planning Comment: There are two big changes/challenges in this area.  First, since the SALT deduction is capped at $10,000, that means that you have to close a gap of anywhere between $2,000 – $14,000 to keep itemizing depending on your filing status.  As such, we suspect that single homeowners may still find themselves itemizing, but those filing as married filing joint may not (unless they pay a significant amount of mortgage interest).

The second area revolves around the removal of the items that were subject to a 2% floor of your income.  So, if you previously deducted any of the items listed below, know that you will not be able to claim them after filing your 2017 tax return:

  • work-related travel, transportation, meal, and entertainment expenses
  • depreciation on a computer or cellular telephone your employer requires you to use in your work
  • dues to a chamber of commerce (or professional societies) if membership helps you do your job
  • education (work-related)
  • home office expenses for part of your home used regularly and exclusively in your work
  • legal fees
  • subscriptions to professional journals and trade magazines related to your work
  • tools and supplies used in your work
  • union dues and expenses
  • work clothes and uniforms (if required and not suitable for everyday use)
  • tax preparation fees

Child Tax Credit
The child tax credit will increase to $2,000 per qualifying child and will be refundable up to $1,400 (subject to phaseouts).   Phaseouts, which are not indexed for inflation, will begin with adjusted gross income of more than $400,000 for those filing as married filing jointly or $200,000 for all other taxpayers.

Non-Child Dependent Credit
A new $500 non-refundable credit covers dependents who don’t qualify for the child tax credit, such as children who are age 17 and above or dependents with other relationships (such as elderly parents). You can’t claim the credit for yourself (or your spouse under married filing jointly status).

Kiddie Tax
The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages. Taxable income attributable to net unearned income will be taxed according to the brackets applicable to trusts and estates. The rules for tax applicable to earned income are unchanged.

Student Loan Interest Deduction
For 2018, the maximum amount that you can deduct for interest paid on student loans remains at $2,500. Phaseouts apply for taxpayers with modified adjusted gross income (MAGI) in excess of $65,000 ($135,000 for joint returns) and is completely phased out for taxpayers with modified adjusted gross income (MAGI) of $80,000 or more ($165,000 or more for joint returns).

Section 529 Plans
Distributions of up to $10,000 per beneficiary can be used for tuition expenses for public, private or religious elementary or secondary school. The limitation applies on a per student basis rather a per account basis. Distributions can also be made for expenses related to homeschool.

Discharged of Student Loan Indebtedness
The exclusion from income resulting from the discharge of student loan debt is expanded to include discharges resulting from death or disability of the student.

Educator Expenses
The bill retains the present law above-the-line deduction of $250 (indexed for inflation) for out-of-pocket expenses.

Bicycle Commuting Reimbursement
The exclusion from gross income and wages for qualified bicycle commuting reimbursements up to $20 is suspended.

Moving Expense Deduction
Moving expenses related to a job change are no longer deductible except for active members of the military.

Alimony
Beginning with divorces in 2019, alimony payments to an ex-spouse are no longer deductible and not taxable to the recipient.

Affordable Care Act
The penalty for failing to maintain minimum essential coverage for individuals (individual mandate) is repealed beginning in 2019.

Estate Tax Exemption
The estate and gift tax exemption is doubled for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026.  The exemption increases to $11,200,000 in 2018. The generation skipping transfer (GST) tax exemption is also doubled.

Changes To Be Aware Of When Filing Your 2017 Tax Return

The U.S. tax code is constantly being modified,  which means that each new filing year brings changes that taxpayers need to remember when filing their tax return.  So what changes took place last year, and how will they impact the filing of your tax year (TY) 2017 federal tax return? Read on my dear friend.

Two extra days to file
This change is probably most important to all those procrastinators out there.  April 15th is the traditional day in which we’re all supposed to file our tax return. But this year, filing day has been pushed back to April 17th due to the combination of a weekend and a Washington, D.C. holiday.

The usual April 15th deadline falls on a Sunday this year.  Normally, taxpayers would have to file their tax returns by the following Monday, which would be April 16th.  But the D.C. holiday Emancipation Day is held on Monday, April 16th.  Since Federal law states that Washington, D.C. holidays impact tax deadlines the same way federal holidays do, that gives taxpayers across the country yet even another extra day to file.

Inflation adjustments
For TY 2017, the IRS increased the value of some different tax benefits:

  • The standard deduction was increased to $6,350, $9,350 and $12,700 for those using the single, head of household and married filing jointly filing statuses respectively
  • The maximum earned income tax credit (EITC) rises to $6,318
  • The maximum income limit for the EITC rises to $53,930
  • The foreign earned income deduction rises to $102,100

You might need a driver’s license or state ID to file electronically
Tax fraud has become a growing problem over the years.  To combat this, many states are now requesting or even requiring that taxpayers provide their driver’s license or state ID information if they want to file their state tax returns electronically.  You’ll still be able to submit your state tax returns electronically without providing this information, but doing so might trigger a manual review by your state to verify your identity. This means it could take longer to receive any refund  you are entitled to if you don’t provide this information.

Refunds will be held for those claiming EITC or ACTC until mid February
The IRS will not issue refunds for people claiming the EITC or Additional Child Tax Credit (ACTC) before mid-February. The law requires the IRS to hold the entire refund, even the portion not associated with EITC or ACTC.  Per the IRS, they expect the earliest EITC/ACTC related refunds to be available in taxpayer bank accounts or debit cards starting on February 27, 2018, if direct deposit was used and there are no other issues with the tax return.  This law change, which took effect at the beginning of 2017, helps ensure that taxpayers receive the refund they’re due by giving the IRS more time to detect and prevent fraud.

The IRS will not accept e-filed returns without indicating health coverage compliance
The IRS has stated that it  will not accept electronic tax returns from individuals who do not address the health coverage requirements of the Affordable Care Act (ACA). The IRS will accept electronic returns only when taxpayers indicate whether they had health insurance, had an exemption, or will make a shared responsibility payment.  The good news is that the penalty amounts remain the same for TY 2017.

The floor to deduct medical expenses has been lowered to 7.5 percent of AGI
The threshold for unreimbursed medical expenses increased from 7.5 percent to 10 percent of Adjusted Gross Income (AGI) for most taxpayers in 2014. There was a temporary exemption from January 1, 2013 to December 31, 2016 that allowed individuals age 65 and older and their spouses to still use the lower 7.5 percent floor.  However, due to the Tax Cuts and Jobs Act of 2017, all taxpayers are now subject to the decreased threshold of 7.5 percent.

Mileage
Do you use your car for business or work?  Well, the standard mileage rate dropped to 53.5 cents per mile, down from 54 cents for 2016.  The rate used for medical and moving mileage drops to 17 cents per mile, down from 19 cents in 2016.  If there is a bright spot, the charitable mileage rate remains unchanged at 14 cents per mile.

Tuition and fees deduction eliminated
This above the line deduction expired at the end of 2016.  While there is a bill proposed by the Senate Finance Committee to “extend” this and other expired tax provisions, it hasn’t been passed as of the writing of this post.  With that being said, you can no longer take a “deduction” for tuition or qualified fees you pay on behalf of yourself or your dependents.  However, the American Opportunity Tax Credit and the Lifetime Learning Tax Credit are still available.  Just noted that they are subject to phase-out limits and some other restrictions that prevent all taxpayers from claiming them.

Exclusion of foreclosure debt forgiveness from income eliminated
Another big change is the elimination of the tax code provision that allowed taxpayers who had discharged indebtedness related to home foreclosure to exclude it from their income.  The qualified principal residence indebtedness exclusion allowed individuals to exclude discharged debt from being reported as income. However, similar to above, this provision expired at the en of 2016 and is another item included in the extender bill mentioned above.

Time running out to claim your TY 2014 refund
April 17, 2018, is the last day to file your 2014 tax return to claim a refund. If you miss the deadline, your refund goes to the U.S. Treasury instead of to you. You also lose the opportunity to apply any refund dollars to another tax year (e.g. 2015, 2016, etc.) in which you owe income tax.

You might need to renew your ITIN if you have one
The 2015 Protecting Americans from Tax Hikes (PATH) Act provided that an Individual Taxpayer Identification Number (ITIN) would expire if an individual fails to file a tax return (or is not included as a dependent on another’s tax return) for three consecutive years.  Under this new rule, taxpayers who have an ITIN that has not been used at least once in the past three years will no longer be able to use that ITIN on a tax return as of January 1, 2017.   Additionally, individuals who were issued ITINs before 2013 are now required to renew their ITINs on a staggered schedule between 2017 and 2020.  So, if any of the above situations apply to you and you need to file a tax return in 2017, you may need to renew your ITIN if it has expired.

Foreign financial disclosures
If you are a U.S. resident, you have to file information about your foreign holdings if they exceed $50,000 at year-end, if you’re a single filer.  Foreign holdings exceeding $75,000 at any point during the year must also be reported. For those who are married filing jointly, the limits rise to $150,000 at any time, and $75,000 at year-end.

For U.S. citizens living abroad, the reporting limits rise substantially. Single filers need only report accounts exceeding $200,000 at year-end, or $300,000 at any point during the year. For joint filers, the limits are $400,000 at year-end, or $600,000 at any time during the year.

Joint mortgage, but only one SSN on 1098?

What's mine is yours and what's yours is mine!

What’s mine is yours and what’s yours is mine!

So maybe you purchased a home with your fiance, spouse, parents, friend or business partner.  Each of you pays half (or some other portion) of the mortgage throughout the year.  When it comes time to file your taxes, you plan to file a return separate from the other person, but there is just one problem.  Then 1098 that was provided either list both of your names and the other persons SSN OR it simply just list the other parties information all together.  So how do you go about claiming your piece of what is reported on the 1098?

Figure Your Share
If you and another party (or multiple parties) were liable for, and make payments towards, a mortgage in which another party received the Form 1098, the first thing you must do is figure out each party’s share.   Technically the person that received the From 1098 should do this and provide the amounts to you, but in reality either party may do it.  So, for example, if each person paid 50% of the payments that yielded $9,825 of interest being reported on the Form 1098, then each one is entitled to deduct $4,912.50 on their tax return.

Attach A Statement To Your Return
To report the $4,912.20 of mortgage interest paid, each person should attach a statement to their tax return explaining this. Show how much of the interest each person paid, and give the name and address of the person who received the form. Your share of the interest is then reported on Schedule A (Form 1040), line 11, along with the words “See attached” next to the line.  The person may also deduct their share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13.  If the property in question is a rental property, then you can follow the same procedures stated above, but enter “See attached” on line 12 of Schedule E.

For more information on the above, or reporting home mortgage interest in general, see Publication 936; Home Mortgage Interest Deduction  and refer to the section “How To Report.”

 

How To Report A 1099-A

short sale

If you borrow money from a lender to purchase a property, the lender may require the loan to be secured by the purchased property.  If the lender later acquires the secured property from you or has reason to know that you abandoned or stopped using the secured property, the lender may send you a Form 1099-A (PDF), Acquisition or Abandonment of Secured Property.  So just how do you then use this from to report the sale to the IRS?  What types of tax consequences are involved?  Is there different treatment if the form is issued in connection with you principal residence versus a rental property?  Read on to find out.

Property Sales and Capital Gains
When a property is foreclosed or abandoned, it is treated as a sale from a tax standpoint. This means that one will have to calculate what their gain or loss on the disposition of the property is.  This is usually calculated by taking the sales price and subtracting the cost (or basis) in the property.  The only problem is that unlike a normal sale, there’s no “selling price”  with regards to what the lender paid to buy the property back from you.  This is where Form 1099-A comes into play.

The Information on Form 1099-A
Form 1099-A provides you with the date of sale and the “selling price” of the property.  Taxpayers will use either the fair market value of the property or the outstanding loan balance on the property for the selling price.  Both these figures are reported on the form.

  • If the loan is recourse (one where the borrower is personally liable for the balance), the sales price will be the lesser of outstanding debt reduced by any amount for which the taxpayer remains liable, or FMV of property
  • If the loan is non-recourse, the sales prices will be the full amount of debt regardless of the FMV of property

While this is not an absolute indicator, the loan was probably a recourse loan if the bank has checked “yes” in Box 5, which asks “Was borrower personally liable for repayment of the debt?”

Reporting the Sale
Assuming the foreclosed/abandoned property was your personal residence, you must prepare and file Form 8949 and Schedule D with your tax return. Use the date of the foreclosure in Box 1 of the 1099-A as your date of sale. Then indicate the selling price. This will be either the amount in Box 2 or the amount in Box 4.

Calculate your gain by comparing the “selling price” you used to your purchase price, which is your cost basis in the property. The purchase price and date can be found on the HUD-1 closing statement you received when you purchased the property. The difference between the selling price and your cost basis is your gain or loss.  However, if you have a gain, you  may be able to exclude it so that it’s not taxable.  If you have a loss, it will be considered a a “non-deductible loss” because it is personal in nature.  The following post will go into greater detail.

Investment Properties
If the foreclosed property was used as a rental, then you will need to use Form 4797. For those who have had a rental property foreclosed upon, we advise them to seek assistance from a tax professional because there are additional factors to take into consideration, such as depreciation recapture, passive activity loss carryovers and reporting any final rental income and expenses on Schedule E.

Do You Need Help Reporting Your 1099-A?
If you’ve received a form 1099-A and don’t feel like dealing with the hassle of reporting it, why not give us a call?  We’ve handled this situation numerous times and would be happy to assist you.  Just shoot us an email via the address below or call us at 773-239-8850.

Discharging Taxes In Bankruptcy

bankruptcy

Sometimes a taxpayer finds themselves in the position where they can’t pay their tax liability.  Those taxpayers may come to us and ask us if they qualify to have their taxes discharged in bankruptcy.  Our reply is that while we do help taxpayers deal with resolving their tax debt, they are best advised to consult with an attorney to investigate the bankruptcy option.  You see, only legal counsel, or someone admitted to practice before the tax court, can represent a taxpayer in tax court.  With that being said, we typically help taxpayers with administrative tax resolution methods, which the client should pursue first. These include innocent spouse relief, a request for abatement of penalties, an installment agreement or an offer in compromise (OIC).

However, if those options are insufficient, bankruptcy may be the best way for a taxpayer to either secure a reasonable payment plan (Chapter 11 or Chapter 13) or to liquidate their assets to pay off all or a portion of their tax debt (Chapter 7). Using administrative tax resolution methods help a taxpayer avoid having a “black mark” on their credit history. However, a federal tax lien listed on the debtor’s credit report may damage their credit rating just as much as a bankruptcy notation.  Needless to say, if you think you may qualify based on the information shown below, one is advised to contact an attorney who specializes in bankruptcy law.

What tax debts may be discharged in bankruptcy?
To be dischargeable, individual income tax liabilities must meet the following “technical” rules of 11 USC §§ 523(a)(1) and 507(a)(8):

  • More than three years must have elapsed since the tax return generating the liability was due, including extensions.
  • The tax return must have been filed more than two years earlier than the bankruptcy petition (generally applicable to late-filed returns). Note, however, that IRS-prepared substitute for returns (SFRs) are not considered filed returns for this purpose, and thus a tax liability assessed from them would not be subject to discharge (IRC § 6020(b)).
  • At least 240 days must have elapsed since the date of an IRS assessment (generally applicable to audit adjustments and amended returns). This time frame is extended by an OIC.

Bankruptcy Basics
A bankruptcy court filing immediately stops the collection efforts of all creditors, including the IRS. This legal protection is called the “automatic stay.” At the end of the proceedings, some or all of the petitioner’s debts—including, in some instances, tax liabilities—may be discharged, meaning they are eliminated or no longer legally enforceable. There are two types of bankruptcy:

Liquidation.   A filing under Chapter 7 liquidates assets that are not exempted under federal or state law and distributes pro rata amounts to unsecured creditors. (Keep in mind that proceeds from the forced sale of nonexempt assets in a liquidation bankruptcy may be significantly less than in an arm’s-length transaction outside of bankruptcy.) Any unsecured debts remaining after such distribution are discharged, including certain tax debts. The court forces all creditors (including the IRS) to accept the proceeds of the liquidation in full settlement of all dischargeable liabilities included in the petition. However, a tax lien recorded before the bankruptcy was filed survives the bankruptcy to the extent it attaches to property owned by the debtor at the time of the bankruptcy. Eligibility for a Chapter 7 bankruptcy is limited to debtors whose income is below a “means tested” amount or whose “non-consumer” debts exceed their “consumer” debts.

Deferred payment plans. This type of filing (Chapter 11 for individuals or Chapter 13 for businesses) forces a payment plan on debtors through a trustee. Creditors (again, including the IRS) must accept an installment schedule that pays at least as much of the dischargeable debt as would have been paid in a Chapter 7 proceeding, and which fully pays all secured and priority creditors within five years (11 USC § 1322). Nondischargeable taxes are often priority debts, which must be paid in full over the life of the plan. To qualify for Chapter 13, the debtor must have a steady stream of income: Wages, Social Security, pension payments and receipts of an independent contractor all qualify.

The key takeaways?

  • In order to be dischargable in bankruptcy, the taxes generally have to be “old” in nature.
  • The primary “tax-related” downside to filing for bankruptcy protection is the additional collection time it allows the IRS. Once taxes are assessed, the IRS normally has a total of 10 years to collect them, along with penalties and interest. Therefore, once a bankruptcy case is over, the IRS will retain whatever time remained on the original 10 years, plus the time the bankruptcy case was pending, plus an additional six months (IRC 6503(h)(2)).