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Tax Alternative for Divorced Parents

If you are a parent who is (or was) involved in a separation or divorce, you’re aware that many important issues can be overshadowed by emotional concerns during this often contentious process. We would like to offer our family tax expertise to help you maximize the benefits of various child-related tax alternatives. In some instances, the value of these benefits can be quantified in order to offer them as a concession in your divorce or separation agreement. Even if your divorce is finalized, there may be issues that were not adequately addressed during your financial negotiations that can be revisited.

Raising children with an ex-spouse or partner can be very complicated. There are many interrelated tax issues that should be considered, such as:

  • Who gets to claim the dependency exemption for the children?
  • How does the tie-breaking rule work?
  • How does a multiple support agreement affect the dependency exemption?
  • How does a taxpayer qualify for head-of-household filing status?
  • When are children treated as a dependent of both parents?
  • How does a taxpayer qualify for the various child-related tax credits?
  • When can tax-favored education incentives be utilized by divorced or separated parents for their children?
  • How is the “kiddie tax” calculated for children of unmarried parents?
  • How do the tax consequences of child support differ from alimony or maintenance payments?

Taking advantage of the child-related tax benefits available to you can lower your taxable income significantly. By gathering and analyzing pertinent data, we can provide a tax plan tailored to your unique circumstances. Please call our office at your earliest convenience to arrange an appointment.

 

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Retired couple walking in the dunesAs you approach retirement age, it is important for you to consider the proper time to take distributions from your qualified plans and IRAs. There are IRS’s restrictions on pre-mature distributions from your retirement accounts. On the other hand, there are requirements concerning distributions you must take. These distribution requirements were established to prevent you from accumulating funds tax free indefinitely.

In the case of a qualified plan in which you participate, you are required to begin taking at least minimum distributions starting April 1 of the year following the year in which you reach age 70 1/2 or retire, whichever is later. In the case of your IRAs, you must begin distributions starting April 1 of the year following the year in which you turn 70 1/2, regardless of whether you have retired.

Your required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. These withdrawals are included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

Calculating the required minimum distribution

The required minimum distribution for any year is generally calculated as the account balance at the end of the preceding calendar year divided by the appropriate distribution period from IRS tables.

Date that you turn 70½

You reach age 70½ on the date that is 6 calendar months after your 70th birthday. Therefore, if your 70th birthday is June 30, 2015, you will reach age 70½ on December 30, 2015. In that case, if you are retired, you must take your first RMD (for 2015) by April 1, 2016. However, if you are retired and your 70th birthday is July 1, 2015, you will reach age 70½ on January 1, 2016. You will not have an RMD for 2015, but you must take your first RMD (for 2016) by April 1, 2017.

Terms of the plan govern

Of course, there are exceptions to the general rules. The plan’s terms may allow you to wait until the year you actually retire to take your first RMD (unless you are a 5% owner). Alternatively, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired.

5% owners

If you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70½.

Date for receiving subsequent required minimum distributions

For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.

The first year following the year you reach age 70½ you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.

Consequence for failing to take required minimum distributions

If you do not take any distributions, or if the distributions are not large enough, you may be subject to a 50% excise tax on the amount not distributed as required.

Required minimum distributions and estate planning

After your death, your remaining plan assets will be paid to your beneficiary over his or her lifetime (unless you or your plan provide for a shorter distribution period). If you die before naming a beneficiary, but after the date the IRS says you must begin distributions from your plan, your remaining plan assets will be paid out over a period equal to your life expectancy immediately before your death unless your plan calls for a shorter period. If you die before that date without having named a beneficiary, your plan assets must be paid out within five years of your death.

Therefore, at the same time you are arranging your post-retirement finances, you can also incorporate some estate planning. There is some flexibility and opportunity in the designation of your beneficiaries. If you would like to make sure your spouse's financial needs will be taken care of after your death, but you would also like to let your assets continue to accumulate on a tax-deferred basis and eventually provide an inheritance for your children or grandchildren, you should name your spouse the primary beneficiary and your younger heirs the secondary beneficiaries. If your spouse doesn't need your retirement plan assets for his or her support after your death, he or she has until the last day of the year that follows the year of your death to disclaim any interest in your account assets. This allows that amount to pass directly to your younger beneficiaries, over their longer life expectancy, as if your spouse had never been named a beneficiary at all.

Within the context of the IRS rules on retirement distributions, you have an opportunity to do some tax planning. If you want to know more about the rules and how they will work best in your situation, please don't hesitate to call our office.

 

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Proft and Loss bindersIf you reported losses from one or more of your business activities, we would like to remind you that the IRS has rules that limit the deductibility of expenses and losses from a hobby or activity not engaged in for profit. If the IRS determines that an activity is not profit-driven, deductions from the activity are limited to the amount of income the activity generates. Losses from such activities cannot be used to offset other income, such as salary or investments.

You must be prepared to show that an activity that generates deductions is a business from which you intend to profit. It is not necessary that the activity actually earns a profit, so long as a profit is one of the motives for participating in the activity.

The IRS assumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year, or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. Otherwise, the IRS applies non-exclusive tests and factors to the surrounding facts to judge whether activities are more like a business with a profit motive, or are for personal satisfaction.

To make sure you are properly claiming all of the deductions available to you, and to strengthen your position in the event of an IRS audit, it is important to consider all the facts and circumstances surrounding activities the IRS is likely to challenge. If you would like assistance in documenting the for-profit characteristics of your activity, please call our office at your earliest convenience to arrange an appointment.

 

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U.S. citizens and resident aliens are generally taxed on their worldwide income regardless of where the income is earned or received. A U.S. citizen who earns income in a foreign country may also be taxed on that income by a foreign host country, thus leading to double taxation. However, a number of tax provisions provide relief from this inequity, including the foreign tax credit and deduction, the foreign earned income exclusion, and the foreign housing cost exclusion. Based on a review of your prior year’s tax information, we feel it would be beneficial for you to meet with us to discuss tax planning regarding your foreign source income.

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

As an alternative, qualifying individuals may elect to exclude from gross income up to $101,300 in 2016 ($100,800 in 2015) of foreign earned income, as well as certain employer-provided housing costs. Individuals with self-employment income are also entitled to deduct certain non-employer-provided housing costs. In order to qualify for these exclusions and deductions, an individual’s tax home must be in a foreign country and he must meet either a residence or physical presence test. A determination of whether a taxpayer qualifies is based on all the facts and circumstances including:

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

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

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

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

Considering the complexity of issues regarding foreign earned income, it is important that we review either your eligibility for the foreign earned income and housing exclusion, or the possibility of revoking the election in future years for the benefit of tax credits denied. In addition, we can assist you in documenting your foreign travel and housing expenses. Please call our office at your earliest convenience to discuss your options with regard to your foreign income and tax liabilities.

 

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The Gunnip & Company team sends best wishes for a wonderful holiday season.  

Our office will be closed on December 24, 25 and January 1 so our staff can enjoy time with their families.

 
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Your fourth quarter federal estimated tax payment for 2015 is due and payable to the IRS on January 15. If your 2014 return has been filed, the payment amount is based on your taxable income for 2014. If your 2014 return has not been filed, the payment amount is based on your taxable income for 2013. If you anticipate that your taxable income for 2015 will be considerably different from 2013, please contact our office immediately so that we can recalculate your payment.

Mail your estimated tax voucher with your check or money order payable to the “United States Treasury.” Write your social security number and “2015 Form 1040-ES” on your check or money order. Also include your address and daytime phone number. Do not send cash. Enclose, but do not staple or attach, your payment with the voucher. If you are filing a joint estimated tax payment voucher, use the social security number that will appear first on your joint return. However, if you and your spouse plan to file separate returns, file separate vouchers instead of a joint voucher.

Electronic payment options are a convenient, safe, and secure alternative to paying by mail. You can authorize an electronic funds withdrawal, use a credit or debit card, or enroll in the U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS).

For information on paying taxes electronically, go to www.irs.gov/e-pay.

Please call our office if you have any questions regarding your estimated tax payment, or if you would like to discuss the alternative methods of paying your estimated tax.

 

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The Protecting Americans from Tax Hikes (PATH) Act of 2015 makes permanent the exclusion from gross income for qualified charitable distributions of up to $100,000 received from traditional or Roth IRAs ($100,000 for each spouse on a joint return). A qualified charitable distribution is a distribution from the IRA made directly by the IRA trustee to a charitable organization on or after the date the taxpayer has attained age 70 ½. The amount of the distribution is limited to the amount of the distribution that would otherwise be included in gross income.

Taxpayers like you, who receive taxable distributions but also contribute to charitable organizations, may benefit. You can reduce your taxable income by excluding up to $100,000 of your IRA distribution from gross income when you transfer it directly to a charitable organization. This exclusion counts toward satisfying your minimum required distributions from a traditional IRA, but is also available for taxable Roth IRA distributions.

If your IRA includes nondeductible contributions, the qualified charitable distribution is first considered to be paid out of otherwise taxable income. A special ordering rule applies to separate taxable distributions from nontaxable IRA distributions for charitable distribution purposes. Under this rule, a distribution is treated first as income up to the aggregate amount that would otherwise be includible in the owner's gross income if all amounts in all the owner's IRAs were distributed during the tax year, and all such plans were treated as one contract for purposes of determining the aggregate amount includible as gross income.

Qualified charitable distributions are not taken into account for purposes of determining the IRA owner's charitable deduction. The entire distribution, however, must otherwise be allowable as a charitable deduction (disregarding the percentage limitations) to be excluded from gross income. Therefore if the contribution would be reduced for any reason (e.g., a benefit received in exchange or substantiation problems), the exclusion is not available for any part of the qualified charitable distribution.

In order to qualify, you need the same kind of acknowledgment from the charitable institution that would be needed to claim any other charitable deduction.

Although a charitable contribution may be motivated by humanitarian reasons rather than by tax considerations, it is, nevertheless, wise to take tax considerations into account when making a contribution. Since this distribution must be made by the IRA trustee directly to a qualified charitable organization, you should review your charitable tax giving as soon as possible. Please call our office at your earliest convenience to discuss this option.

 

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IRS File Cabinet Safe Harbor Expense ThresholdThe IRS has increased the maximum threshold from $500 to $2,500 for expensing certain capital items under the de minimis safe harbor provided for taxpayer’s without an applicable financial statement (AFS). The threshold for taxpayers with an AFS remains set at a maximum of $5,000 per invoice (or per item as substantiated by the invoice).

The increase is in response to practitioner comments that the $500 limitation was too low to effectively reduce the administrative burden of capitalizing the cost of many commonly purchased items such as computers, smart phones, machinery and equipment parts. The $500 threshold also did not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial.

The increased threshold is effective for tax years beginning on or after January 1, 2016.

For a tax year beginning before January 1, 2016, the IRS will not raise the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor for an amount that does not exceed the new $2,500 limit if the taxpayer otherwise satisfies the requirements for using the safe harbor. Furthermore, if the taxpayer’s use of a threshold greater than $500 but not higher than $2,500 is an issue under consideration for examination, appeals, or before the Tax Court in a tax year that begins after December 31, 2011, and ends before January 1, 2016, the IRS will not pursue the issue as long as the taxpayer satisfied all other applicable requirements for using the safe harbor.

Since the safe harbor is not an accounting method, it is not necessary to file an accounting method change to use the increased threshold amount. However, in accordance with the existing rules, the taxpayer must have accounting procedures in place at the beginning of the tax year to expense for nontax purposes amounts paid for property that costs less than a specified dollar amount (not to exceed the applicable threshold) and the taxpayer must actually expense those amounts on its books and records. In the case of a taxpayer without an AFS the accounting procedures do not need to be in writing.

If you have any questions regarding the change to the safe harbor threshold or tangible property rules in general, please call our office. We are here to assist you.

 

 

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Your corporation may be a personal service corporation (PSC). As such, it would be subject to special tax rules while it remains a qualified personal service corporation, including the ability to use the cash method of accounting and the burden of taxation at a flat rate of 35%. Also, if dividends are not paid regularly, and earnings are retained, the PSC could become subject to the accumulated earnings tax. In addition, in certain circumstances, the IRS is empowered to reallocate income and deductions between the corporation and its shareholders. Other possible pitfalls include a determination by the IRS that compensation paid to employee/shareholders is unreasonable, or loss deductions are disallowed due to the passive activity or at-risk rules.

While there are risks of doing business as a PSC, there also are benefits. The rules are highly technical, however, and avoiding options that result in higher taxes requires careful tax planning. Such planning will enable you to maximize the benefits of the personal service corporation while minimizing the risks.

We would like to help you reduce your corporate tax burden, and minimize other risks associated with personal service corporations. Please contact our offices at your earliest convenience to schedule an appointment.

 

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Microchip credit card reader, EMVDoes your business accept credit cards? You may already know of the recent update to a new style of cards embedded with microchips. This new technology, also known as EMV (for Europay, MasterCard, Visa), makes credit card fraud more difficult. Your business is not required to move to the new technology to process these cards. But you should be aware that as of October 1, 2015, your business is responsible for some fraudulent transactions that were previously covered by the cardholder's bank. 

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