Archive for June 25, 2013

Social Security Planning For Spouses

iStock_Elderly Pig SS CardXSmallStart with the previous post about the basics of Social Security.  Now that’s out of the way, let’s go over some of the extra complexity when you have a spouse.  One of the most overlooked and unknown aspect of Social Security is the spousal benefit.

If your spouse is at full retirement age (66), they are eligible for their full retirement benefit or 100% based on their work history.  Sometimes both spouses have been working and paying in a similar amount to Social Security so their benefits are similar.  Other times one spouse has been working while the other one either did not work or was paying in much less to Social Security because they had a lower paying job.  This can lead to some large discrepancies in the full retirement benefit.  Bill Johnson’s Social Security benefit might be $40,000 per year, but if his wife Barb hasn’t worked as much, her retirement benefit might be only $16,000.

The spousal benefit would allow Barb the option of claiming her $16,000 benefit at age 66 or 50% of her husband’s full benefit, which would be $20,000 (50% of his $40,000).  That spousal benefit is going to add $4,000 a year to her Social Security benefit for the rest of her life.  That certainly seems nice, but wait, there is more.  At age 66, Barb can claim her spousal benefit and receive the $20,000 per year.  She will collect $80,000 by age 70.  When she Read More

Written by | Posted in Federal • Individual

Section 501(c)(4) Background

Climbing a Pile of FilesThe drama surrounding Section 501(c)(4) – the IRS reviews of applications, congressional investigation and hearings, and news stories are likely not over yet. The Senate Finance Committee asked the IRS for lots of documents and information in May (Forty one questions seeking what must be thousands of pages of information). The House asked TIGTA to further explore possible improper disclosure by the IRS.

I’ve got a short article with background on this controversy and Section 501(c)(4). I’ve also created a resource site you might find of interest.  I will post it in sections during the week.

Perhaps tax reform will take a look at 501(c) and its 20+ different types of non-profit entities. Can this be simplified? Does the list still make sense? Should the 501(c)(4) regulations be modified to tie to the statute (the statute uses exclusive and the regs use primary purpose – two different terms!).

What do you think?

Social welfare, inappropriateness, resignations, hearings, and complexity—the Sec. 501(c)(4) story has it all…

This blog post is written in five parts:

1.  The Sec. 501(c)(4) Story: Program Notes – Part 1
2.  The Sec. 501(c)(4) Story: Program Notes – Part 2-Plot and Controversy #1
3.  The Sec. 501(c)(4) Story: Program Notes – Part 3-Controversy #2
4.  The Sec. 501(c)(4) Story: Program Notes – Part 4-Controversy #3
5.  The Sec. 501(c)(4) Story: Program Notes – Part 5-Controversy #4 & Resolution
Written by | Posted in Tax Policy

Mining Nuggets of Gold From Military Tax Reporting Documents Part 5

Today we are going to finish up our series on the military tax documents.  We will look at some miscellaneous items on the RAS that can affect your client’s tax return.

The bottom of the first page and the second page of the RAS has various areas for deductions, including the items mentioned below.  One thing on the RAS that is pre-tax is the deduction for Survivor Benefit Program (SBP) Coverage.  This is a deduction from the retiree’s pay that is set aside for the surviving spouse to receive after the retiree’s death.  It is pre-tax because it is taxable to the surviving spouse.

The middle of the second page has a spot for Former Spouse Protection Act Deductions.  This is a tricky area because it is not straightforward.  In most cases, the amount is not included in the taxable income on page one, nor is it included on the 1099R since the former spouse receives a 1099R of their own.  But, in some older divorces and divorces which occur in non-community property states this amount may be included in the taxable income, and should be deducted from the retiree’s income as alimony.  If the Former Spouse deduction is taxable to the retiree it will not show in the Pay Item Description box under Gross Pay.  This is the case where you would show an adjustment for alimony on the retiree’s 1040.  The way this is reported changed several years ago, and some retirees Read More

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Swiss Banks “Wanted” With or Without Co-Operation!

iStock_Rubber Stamp WantedXSmallPreviously we posted “DOJ Requests Identification of US Depositors in Bank Weglin – Time To Come Clean” where we discussed the United States Department of Justice has submitted another administrative assistance request to the Swiss authorities, this one demanding the identification of American clients of the private bank Wegelin who were beneficiaries of asset management companies between 2002 and 2012.

Two weeks previous to this Bank Wegelin Request, the private bank Julius Baer was also notified it was subject of a similar request by Washington.

U.S. authorities have more than a dozen banks under formal investigation, including Credit Suisse, Julius Baer, the Swiss Branch of HSBC, Pictet and local government-backed Zuercher Kantonalbank and Basler Kantonalbank.

The US government agency for tax collection and tax law enforcement has been the driving force behind the legal enquiries, while the U.S. justice department has now taken over the settlement with Swiss banks suspected of violating U.S. law. Now on June 19, 2013, the Swiss Parliament’s lower house voted 123 to 63 against debating a Read More

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Social Security Starter Pack

iStock_Social Security CardsXSmallThere is a lot to consider when deciding when to take your Social Security, but let’s start off with the basics.  Every year you get a statement from Social Security that tells you what your benefit will be when you retire.  Full retirement age is currently 66, but forty years from now I assume it will be much higher for me.  The statement will tell you the benefit is $20,000 (depending on your earnings history) when you are 66 years old.

But there are choices, so many choices to be made.  If you claim Social Security early (before you are 66) you get a smaller amount.  If you claim when you are 62 years old, you get 75% of the full amount which would be $15k a year in this case.  If you claim at 63 it’s 80%, 64 it’s 87% and at 65 it’s 93% of the full value.

Taking your Social Security early will pay off if you are planning on getting hit by a bus at your 71st birthday party, but if you are planning to live to 100 it probably won’t work out well.  Another choice is to claim the Social Security later at 67, 68, 69 or 70 years old.  For every year you wait after 66, you get an additional 8%.  Meaning if you wait until 70 years old, you get 132% of the full value every year for the rest of your life.  $26,400 instead of $20,000 a year is a big difference and over the long haul you will come out ahead. Read More

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Mining Nuggets of Gold From Military Tax Reporting Documents Part 4

We are going to switch gears and look at the military retiree statement, the Retiree Account Statement or RAS. This is the report of pension received by a military retiree. Several tax related items of interest here. Unlike the LES, the dates are a little funky on the RAS, and this is important for determining taxable income and deductions. The “statement effective date” is always the month before the date the income or deduction is actually taken.  There is now a new box of this statement that shows the date that the changes on the RAS will take effect marked “New Pay Date As Of”, which makes things easier. Defense Financial Aid Services (DFAS) and Veterans Administration people use this as a standard dating system. Example: The effective date of 1 September does not actually kick in until 1 October.

Here’s something that may gain you a client for life – especially one who retired in the last 5 years or so – taking notice in the Pay Item Description section of the RAS if there is any VA offset.  If there is, chances are he is still in position to amend prior year returns for any back-dated award.  You should be asking every single military retiree or veteran if they have any kind of awarded VA or military disability income.  If the answer is yes, it should lead you to a discussion about the tax implications of that award.

For a detailed narrative on the ways to handle a disability award for a military member please see my article on this subject here.

Tomorrow we will finish up our series with a look at some miscellaneous items on the RAS that can help you help your clients.

Written by | Posted in TaxConnections

“Quite Disclosure” Caught – DOJ Files To Collect 50% FBAR Penalty!

We first posted that on Wednesday, June 5, 2013 Internal Revenue Service Cracks Down on “Quiet Disclosures” which discussed that the IRS is cracking down on so-called soft or “Quiet Disclosures.”According to a recent the U.S. Government Accountability Office (GAO) report, more than 10,000 taxpayers showed signs of having avoided offshore penalties by making “Quiet Disclosures” of foreign bank accounts for tax years 2003 through 2008, a period for which the IRS has detected several hundred quiet disclosures.

The IRS stated that they will audit Taxpayers who file amended or late return with income from Foreign Bank Accounts and in FAQ #16 they state:

“The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice.” Read More

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Mining Nuggets of Gold From Military Tax Reporting Documents Part 3

Continuing our discussion on the Military Leave and Earnings Statement (LES) and how it can help your clients.  Today we are going to talk about credits you may be missing for your military clients and retirement contributions.

The LES and Credits

As you know, for the most part, military members do not contribute to their own retirement.  However, there is a Thrift Savings Plan (TSP) option, the government version of a 401K, to which members can voluntarily contribute.  This is also reported on the W2 in box 12 code D or box 14 code E. This line will not usually have a direct effect on the current year’s tax return, as they are already deducted from Box 1 of the W2, unless your client was deployed to a combat zone while making these contributions.

In the middle of the LES the section marked TSP shows the differing characteristics of the TSP program contributions.  The box marked “TSP YTD Deductions” shows the total actual contributions year to date. The box marked “Deferred” shows the amount of those contributions that are deferred; this is because the taxpayer made contributions just like any 401K type contribution.  The box marked “Exempt” shows the total the member has contributed this year that came from exempt combat pay or allowances.  Unlike regular TSP contributions, which are pre-tax and fully taxable on distribution, these contributions are not taxable on distribution and are considered a basis Read More

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Cycle To Work Scheme – Ireland

This scheme was introduced on 1st January 2009 to encourage employees/directors to cycle to and from their place of work and between work places.  The reasons for this tax incentive are to reduce carbon emissions and traffic congestion as well as to improve general health and fitness.

So, What Are The Benefits?

1.  The employee/director will not be liable to Income Tax, PRSI or USC on the cost of the benefit because the bicycle and safety equipment are exempt from tax up to a limit of €1,000.00.  Where the cost exceeds €1,000.00 a Benefit in Kind charge will apply to the balance only.

2.  The employer does not have to pay employer’s PRSI on the cost of the bicycle and/or safety equipment.

An Important Point To Remember:

The employer cannot reclaim the VAT paid on the bicycle and/or safety equipment.

How Does This Scheme Work?

1.  This is a voluntary scheme which may be implemented under a salary sacrifice arrangement through the payroll system.  Employers should ensure this scheme is generally available to all employees/directors who wish to avail of it. Read More

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TIGTA Study Shows Business Tax Assessments Are Increasing

Assessments against business taxpayers that have not filed required tax returns have soared by nearly 60% according to the Treasury Inspector General for Tax Administration’s (TIGTA) report dated September 17, 2012. However, the IRS needs to improve internal controls to ensure staff follow the correct procedures in documenting the reasons for these assessments, according to this report.

The report found that in 10% of the cases, taxpayers were not provided a full thirty days to respond to proposed assessments prepared for them by IRS before the returns were processed as Collection Field function assessments under tax code Section 6020(b). This is a potential violation of taxpayers’ rights.

TIGTA also determined that during Calendar Year 2008, taxpayers with stand-alone 6020(b) assessments (assessments made in which the taxpayers had potential delinquent returns due but no outstanding tax liabilities) were less compliant in subsequent years than taxpayers without 6020(b) assessments. However, a more in-depth study of delinquent returns in which the for the Small Business/Self-Employed Division. Use of I.R.C. § 6020(b) authority was considered but not used may be needed to better understand these results. The IRS does not track subsequent filing compliance when The IRS has the ability to prepare returns and I.R.C. § 6020(b) authority is used.

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Mining Nuggets of Gold From Military Tax Reporting Documents Part 2

Continuing our discussion on the Military Leave and Earnings Statement (LES) and how it can help your clients.  Today we are going to rev up your client’s itemized deductions.

The LES and Itemized Deductions

Let’s look at some other areas of the LES.  Military members get lots of different types of pay and allowances depending on their job, marital status, where they live and where they are assigned.  Other than base pay, enlistment or special duty bonuses, most of these allowances are non-taxable.  Of course, you are all aware that all combat and hazardous duty pay is also non-taxable.  For the most part DFAS, the military pay system, is pretty good about getting these numbers right on the LES and the W2s, but it never hurts to check.

There are several items on the LES that affect the itemized deductions on a tax return.  Let’s start with state and local sales taxes.  We all know that as of today, at least, the itemizing taxpayer has the choice of taking a deduction for either the state income taxes paid or estimated sales taxes.  How many of you know that you can increase your client’s formula-calculated standard sales tax deduction by making use of certain items on the LES?

Look at bottom part of the LES on the line titled “YTD Entitle”, this is the total income of all kinds the taxpayer received from the military.  Now, look at box in the middle section of the LES titled “Wages YTD” which should match the W2 box 1.  Quite a difference, isn’t there?  The difference between these figures needs to be added to Read More

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SALT Alert: Texas Becomes Latest State To Join Multi-State Research Tax Incentives Program

Overview of Multi-State Research Tax Incentives

Multi-State Research Tax Incentives (e.g., whether in the form of a credit, deduction or grant) are a highly advantageous way to supplement the federal-level research and development tax credit pursuant to I.R.C. § 41 in tax effecting companies true cost of their research and development spend while lowering a companies blended multi-state effective tax rate for both tax accrual and tax return purposes at the multi-state levels.

More specifically, in addition to the Federal-Level Research and Development Tax Credit pursuant to I.R.C. § 41, there are now approximately forty states that offer research tax incentives and these states generally follow the federal statutory, administrative and judicial Read More

Written by | Posted in State And Local Tax (SALT)
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