Virtual activity, real-world taxes

Whether you're a long time technophile or newly computer literate, your use of technology can affect your income tax return. Here are virtual transactions that can have taxable consequences.

• Proceeds from sales of goods and services on Internet marketplaces can be taxable. That's true whether you're a hobbyist or running a business online. Depending on your level of activity, tax rules may limit your deductions.

• Receipts from crowdfunding – where you raise money from others to fund a project – may be taxable income. You probably think of the money as a gift. But when the people providing the funds get something in exchange, such as a reward for participating, the amounts you receive can be considered income from a sale. Keep track of expenses related to the project and document how you spend the money.

• Payments you receive in the form of virtual currency for goods and services are includible in your gross income at fair market value. Other transactions involving virtual currency, such as the sale or exchange of the currency, can result in taxable gains or losses. Under guidance issued in 2014, the IRS treats virtual currency as property.

• Money received from listing your home with sites offering temporary or short-term lodging is generally reportable as rental income. The tax impact can vary based on the length and frequency of the rental activity.

Give us a call. We'll help you sort out the real-world consequences of virtual transactions.

Health care penalty relief may be available

A recent IRS notice explains how to request relief from two penalties connected with advance payments of the premium tax credit in the Affordable Care Act. 

The notice could affect you if you purchased a health insurance policy on the government marketplace during 2014 and qualified for a federal income tax credit to help pay the premium. The "premium tax credit" was based on your estimated income for 2014. You had the option to receive it in advance in the form of payments made by the IRS directly to your insurer. If you chose to do that, you have to reconcile on your 2014 tax return the amount you received with the amount you actually should have received.

That reconciliation may result in having to repay part of the advance credit. What happens if you're unable to pay? Normally you could be subject to two penalties: one for failure to pay the tax due by the due date and one for understating your estimated tax payments.

The new notice abates both of these penalties. To qualify for the relief, you have to meet certain requirements, such as being up-to-date with your tax obligations.

The penalty relief is only available for 2014 federal income tax returns. You're still required to file your return on time, and the IRS will charge interest on the unpaid taxes you owe. In addition, other penalties related to the health insurance laws, such as the penalty for not having health insurance, will still apply.

Please call if you need more details.

2015 Late-Breaking Tax Developments

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
 

New tax-advantaged ABLE accounts. A new law allows states to establish tax-exempt "Achieving a Better Life Experience" (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. They can be created by individuals to support themselves or by families to support their dependents. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren't deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses. Withdrawals are tax-free if the money is used for disability-related expenses including: education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services. A non-qualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).
 

Health care impacts 2014 income tax returns. The IRS has provided details on how health care reform under the Affordable Care Act (ACA) affects the upcoming income tax return filing season. The most important ACA tax provision for individuals and families is the premium tax credit. Under another key provision, individuals without coverage and those who don't maintain coverage throughout the year must have an exemption or make an individual shared responsibility payment, as separately detailed in final regulations and a notice issued by the IRS in November. The IRS stresses that most people already have qualifying health care coverage and will only need to check a box to indicate that they satisfy the individual shared responsibility provision when they file their tax returns in early 2015. Individuals and families who get coverage through the Health Insurance Marketplace (Marketplace, also known as an exchange) may be eligible for the premium tax credit. Eligible individuals and families can choose to have advance credit payments paid directly to their insurance company to lower what they pay out-of-pocket for their monthly premiums. Early in 2015, individuals who bought health insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which includes information about their coverage and any premium assistance received. Form 1095-A will help individuals complete their return. Individuals claiming the premium tax credit, including those who received advance payments of the premium tax credit, must file a federal income tax return for the year and attach Form 8962, Premium Tax Credit.
 

Supreme Court to decide if premium credit is allowed for health insurance purchased on federal exchange. A controversy has erupted concerning the ACA's premium credit. The statute makes the credit available for insurance purchased on an exchange established by a state. A federal exchange was established for many states that did not establish their own exchanges. The IRS has issued regulations making the credit available for insurance purchased on a federal exchange. The regulations were challenged in court; one Circuit Court upheld them and another said they were invalid. After these conflicting decisions, the Supreme Court agreed to resolve the issue. 

The Supreme Court will hear the case in 2015. Its decision could affect about 5 million people getting a credit for insurance purchased on the federal exchange and could affect other key ACA provisions that are intertwined with the credit.

More guidance on toughened IRA rollover rule. A law limits the number of IRA rollovers that can be made in any 1-year period to one. Earlier, the Tax Court held that the limit applies to all of an individual's IRAs even though the IRS had stated that the limit applies to each separate IRA an individual owns. Shortly after this decision, the IRS announced that it will adopt the more restrictive view for distributions after 2014. Then, in November, the IRS issued more guidance to clarify the start of the new policy. As clarified, an individual receiving an IRA distribution on or after Jan. 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding 1-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from an IRA that neither made nor received the 2014 distribution.
 

Personal service corporation in group avoids flat tax. Normally, a qualified personal service corporation (e.g., an employee-owned corporation performing legal, health or other professional services) is subject to a flat tax of 35%, unlike other corporations that are subject to graduated rates of 15%, 25% and 34%. In one case, the IRS sought to tax a qualified personal service corporation that was part of an affiliated group of corporations at the flat 35% rate. The Tax Court wouldn't allow the IRS to do so. Rather, it said that the group's consolidated income, including the income of the qualified personal service corporation, had to be taxed at the graduated rates.
Standard mileage rates up and down for 2015. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 57.5¢ per each business mile traveled after 2014. That's 1.5¢ more than the 56¢ allowance for business mileage during 2014. But the 2015 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23¢ per mile, 0.5¢ less per mile than the 23.5¢ rate for 2014.

Tax developments involving West African Ebola outbreak. The IRS has designated the Ebola outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of the income tax exclusion for qualified disaster relief payments. The IRS also made clear that employer-sponsored private foundations can provide disaster relief to employee-victims in areas affected by the outbreak without jeopardizing their exempt status. In addition, the IRS announced that employees won't be taxed when they forgo vacation, sick, or personal leave in exchange for employer contributions of amounts to charitable organizations providing relief to Ebola victims in Guinea, Liberia and Sierra Leone. Employers may deduct the amounts as business expenses.

IRS announces business mileage rate for 2015

The IRS recently announced that the mileage rate for business driving in 2015 will be 57.5¢ a mile, a slight increase from the 2014 rate of 56¢ per mile. The rate can be used for cars, vans, pickups, and panel trucks.

Companies that don't want to keep track of the actual costs of using a vehicle for business purposes may use this standard mileage rate instead. An annual study of the fixed and variable costs of operating an automobile is used to determine what the standard mileage rate will be for a given year.

In addition to the mileage rate, a separate deduction may be claimed for parking fees, tolls, interest relating to the purchase of the automobile, and state and local personal property taxes.

The standard business mileage rate can't be used for automobiles used for hire (e.g., taxicabs) or for fleets of automobiles used simultaneously by the taxpayer. Nor can the standard rate be used if the vehicle was previously depreciated by other than the straight-line method, including using bonus depreciation or the Section 179 deduction.

When the business mileage rate is used in 2015, depreciation will be considered to have been allowed at a rate of 24¢ a mile. This depreciation reduces the taxpayer's cost basis in the vehicle.

The 2015 rate for medical and moving driving decreases to 23¢ a mile. The rate for charitable driving remains at 14¢ a mile.

Congress passes last-minute extenders bill

Just before adjourning for 2014, Congress passed a bill retroactively extending more than 50 tax breaks, often collectively referred to as the "tax extenders." These tax breaks had already expired, but the new bill, the Tax Increase Prevention Act of 2014, extended them retroactively to January 1, 2014. The extensions granted in the bill remain in effect through December 31, 2014. For these tax breaks to survive beyond that point, they must be renewed by Congress in 2015.

Here are some highlights from the law.

•    The new law retains an optional deduction for state and local sales taxes in lieu of deducting state and local income taxes.

•    The maximum $500,000 Section 179 deduction for qualified business property is reinstated for 2014.The deduction is phased out above a $2 million threshold.

•    50% bonus depreciation for qualified business property is revived. The deduction may be claimed in conjunction with Section 179.

•    Parents may be able to claim a tuition-and-fees deduction of up to $4,000 for qualified higher education expenses. The amount of the deduction is linked to adjusted gross income.

•    An individual age 70½ or older could transfer up to $100,000 tax-free from an IRA to a charity.

•    Homeowners can exclude tax on mortgage debt cancellation or forgiveness of up to $2 million on a principal residence.

•    Taxpayers can take a credit of 10% of the cost of energy-saving improvements installed in the home, subject to a $500 lifetime limit.

•    Educators can take an above-the-line deduction of up to $250 for classroom supplies purchased with their own funds.

Please contact us if you need more details on these or other provisions that apply to you.

Get ready for 1099 filing

Every trade or business must file information returns (Forms 1099) for each year that certain payments are made to non-corporate recipients.

One of the most common information returns for most small businesses is Form 1099-MISC. You use Form 1099-MISC to report miscellaneous payments to non-employees. This includes fees for services provided to your business by independent contractors, such as consultants, cleaning people, and others. Generally, you don't report fees paid to corporations, but there are exceptions. Payments to lawyers, for example, must be reported whether the lawyers are incorporated or not.

This month is the perfect time to start assembling what your company will need to meet the reporting requirements for Form 1099: a list of recipients, verification as to corporate/non-corporate status, and the recipient's taxpayer information. Getting a head start now will eliminate a last-minute scramble next month.

Failure to file returns or to include correct information can result in a fine of up to $100 per information return to a maximum of $500,000 for a small business.

Information returns are to be given to payees by February 2, 2015, and copies are to be mailed to the IRS by March 2, 2015. The IRS due date is extended to March 31, 2015, for electronically filed returns.

If you need help determining your 1099 filing requirements for this year, contact our office.

Consider last-minute tax cutters for 2014

Before you get set to enjoy the holiday season, take a look at steps you can still squeeze into 2014 to minimize your taxes. Here are some possibilities.

*  If you're feeling charitable, consider giving appreciated stock to a favorite charity. You will avoid capital gains tax on the appreciation while claiming a tax deduction for the market value of the stock.

*  Use your credit card to pay tax-deductible expenses by December 31 if you're short of cash. You'll be able to deduct the expenses on your 2014 return even though you don't pay your credit card bill until 2015.

*  Make your January mortgage payment before December 31 to squeeze an extra interest deduction into 2014.

*  Make tax-free gifts to use your annual gift tax exclusion for 2014. You can give up to $14,000 to as many individuals as you like without tax consequences. These gifts to individuals are not deductible by you; nor are they taxable to the recipients.

*  If a wedding or divorce is in your year-end plans, be aware that your marital status as of December 31 determines your tax status for the whole year. Changing the dates of a year-end event may save taxes.

*  Consider investing in a health savings account (HSA). You'll get a current-year tax deduction for your contribution, while providing a savings account to use to pay out-of-pocket medical expenses currently or in the future. An HSA is not a "use it or lose it" plan. Any funds in the plan can be used in future years. Also, be aware that you can make your 2014 contribution up to April 15, 2015.

For guidance in choosing the best year-end moves for your situation, give us a call.

It's Time For a Year-End Tax Tune-up

As year-end approaches, take a closer look at your investment portfolio. There may be some tax-saving strategies worth considering.

For example:

• Offsetting losses and gains. Harvesting your losses – or gains – is a standard year-end strategy. The goal of this strategy is to offset gains and losses, then to use any excess loss to offset up to $3,000 of ordinary income (e.g., dividends, interest, and wages). If you still have an excess loss, it can be carried over to next year. With long-term capital gain tax rates as high as 20% and the 3.8% net investment income surtax, harvesting losses can be an effective year-end tax-cutting strategy.

• Calculating tax efficiency. Have you shifted your asset allocation and begun buying municipal bonds to reduce the effect of the 3.8% net investment income surtax? Review the impact of the change on any alternative minimum tax you may be liable for. Also, assess whether it makes sense to hold bonds in your retirement fund accounts, such as your IRA. Putting nontaxable municipal bonds in a tax-advantaged retirement account means you're effectively converting sheltered income to taxable income when you eventually take distributions from your IRAs and other retirement accounts.

• Wash sale trap. If you decide to sell a security before year-end to take advantage of a capital loss, be sure to avoid the wash sale trap. If you sell a security and then buy a substantially identical security within a 30-day period before the sale and 30 days after the sale, it's considered a wash sale and the loss is not currently deductible.

Consider all the relevant tax and financial factors in making investment decisions. Contact our office for details and assistance in your year-end portfolio review.

Supreme Court rules on inherited IRAs

Your retirement funds are protected from creditors even if you file for bankruptcy, with only a few limitations. This protection extends to funds in all government-qualified pension plans, including IRAs (traditional and Roth), 401(k)s, 403(b)s, Keoghs, profit sharing, money purchase, and defined benefit plans.

A recent U.S. Supreme Court decision has held, however, that an inherited IRA is not a "retirement fund" and therefore doesn't qualify for bankruptcy protection.

An inherited IRA is a traditional or Roth IRA that a deceased owner has bequeathed to a beneficiary. It differs from a "true" retirement account in three ways:

1. The beneficiary is not allowed to contribute additional retirement funds to the inherited IRA.

2. The beneficiary, regardless of age, may withdraw funds from an inherited IRA in any amount and at any time without penalty.

3. The beneficiary, regardless of age, is required to take annual minimum distributions from any inherited IRA.

Based on the above characteristics, the Court unanimously concluded that with respect to beneficiaries, inherited IRAs are "not funds objectively set aside for one's retirement" and instead constitute a "pot of money that can be used freely for current consumption."

If you need more information about this Court ruling in your situation, contact our office.

2014 Smart Tax Moves

You may be able to save a substantial amount on your taxes if you take the appropriate steps now. With the end of the year approaching quickly, smart tax planning can help you reduce the taxes you’ll owe on April 15th.

Give to Charity

Not only is the holiday season a great time to give to charity, but these donations could add up to a significant tax deduction. You must, however, itemize any donations that you make to charity – including any clothing or household items.

Thinking about donating more than $250 cash to charity? Hang on to your canceled check as a receipt– and have the charity acknowledge your donation.

If you’re considering donating your car that is worth more than $500 to charity, you deduction may be limited to the amount the organization is able to sell it for. However, you may be able to claim a larger deduction based on the car’s fair market value.

Review Your Portfolio

If you are thinking about selling appreciated securities or other assets, doing so by end of year will save you money. You should never allow your taxes to dictate your portfolio strategy, but if you are already planning on selling some assets, doing so by the end of the year would be wise.
Gift to Family Members

You can gift up to $14,000 to as many individuals as you would like up to December 31st without filing a gift tax return. Married? You and your spouse are able to give up $28,000 per individual.

Convert to a Roth

Unlike withdrawals from your traditional IRA, Roths are tax-free and penalty-free if you are over 59 ½ and the converted account has been open for at least five years. If your income is expected to increase, you may consider opening a Roth vs. a traditional IRA for these tax benefits.

Clean Out Your Flexible Spending Account

Last year, the Treasury Department changed the rules so that companies could allow employees to carry over $500 in their medical flexible spending accounts (FSAs) from one year to the next. If your employer will not rollover your balance, then you may need to focus on spending the money in your FSA before the end of the year, or risk losing the balance in your FSA.

Ensure Your Return is Penalty-Proof

Avoid an underpayment penalty by boosting your withholding now. If you expect that you will owe on your 2014 tax return, you may prepay 90% of what you think you may owe in the spring. This will ensure that you do not get hit with an underpayment penalty.

Plan Your Itemized Deductions

If your income is expected to drop next year, your deductions will become more important this year. In this case, you will want to pay deductible expenses before near end. Conversely, if you expect your income to increase, hold off on making any charitable contributions or any other deductible expenses, as these will be more valuable if paid in 2015.

Giving Large Amounts to Charity

If you are planning to give a significant amount to charity this year, it may be a good idea to give appreciated stocks or mutual fund shares. This will boost your savings on your tax return. Instead of the contribution deduction being worth how much you paid for the asset, the charitable contribution deduction will actually be the fair market value of the securities on the date of the gift. And, you’ll never have to pay tax on the profit.

If for some reason the charity that you are planning to give to does not accept donations of securities, you may want to open a donor-advised fund instead. Contact our office today to learn more about these funds.

Give Securities

Consider shifting your income to you parents or children by gifting securities. If your parents or children fall in the 10% to 15% tax bracket, they may qualify for the 0% tax rate on long-term capital gains. For assistance with gifting securities to family members to take advantage of tax breaks, please contact our office.

Add to Your 401 K

Any money that you contribute to your 401K by the end of the year will help lower your tax bill, since it lowers your income. Now is the time to direct any extra dollars to your 401K, if you haven’t already maxed out your contribution for the year.

Withhold More from Your Refund

Americans like receiving a large lump of money each tax season – we are addicted to refunds. This is basically giving the government a loan each month, as your taxes are deducted from your income, and then disbursed during tax season. Wouldn’t you rather earn your income as you are working?

To fix this, simply file a revised W4 Form with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld.

Mutual Fund Purchases

It is important to be aware of the tax trap of end of year distributions in mutual funds. Most funds save the bulk of their capital gains and dividend payouts until the end of the year. On a certain day in December, these payments are made to shareholders. Therefore, you are required to pay taxes on these distributions, even if you’ve only owned the funds for a few days.

For more information about any of these smart end-of-the-year tax moves, please contact our office today.

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