Archive for May, 2013|Monthly archive page
Are You Sure You Have No Foreign Reporting Requirements?
Filed under: Foreign Reporting | Tags: $10, 000, Al Capone, civil penalties, criminal penalties, Form 8938, Form TD F 90-22.1, non-willful neglect, penalty, Report of Foreign Bank and Financial Accounts, Statement of Specified Foreign Financial Assets, terrorism, Treasury Department, willful neglect
Leave a comment Originally published in the Cedar Street Times
May 31, 2013
My grandfather’s sister once had the opportunity to go toe-to-toe with the 1920s gangster, Al Capone…or so goes the family story. She had ordered a fancy car and Capone sent a couple of his henchmen to convince her that she should allow him to purchase it since he did not want to wait for another one to be built. She politely refused, at which point, they said Mr. Capone would like to talk with her in person. So she drove to his place in Palm Island, Florida to meet the notorious gangster. She was a rather outspoken individual, and managed to come out with her car, and did not even have to dodge bullets on the way past the front gate! Most people know the interesting story about Al Capone is that the Feds could never get him for bootlegging, racketeering, prostitution, or murder, but they nailed him for tax evasion and failure to file tax returns!
Fast-forward the better part of a century and we are battling terrorism. Sometimes it is difficult to prove that a particular individual was involved in an act of terrorism, but there may be other ways to get them. How about the failure to report foreign accounts or even having signature authority over foreign accounts while residing in the United States?
Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts is required to be filled out each year for anyone that has bank or financial accounts (or is an eligible signer on someone else’s foreign accounts) that were established in a foreign country that aggregate $10,000 or more. The form is due to the Treasury Department each year by June 30th (one month away). Note this form does not go with your tax returns to the IRS. The IRS has its own two-year old Form 8938 Statement of Specified Foreign Financial Assets which is more geared towards tax evasion and is filed with your returns. It covers some additional assets and has different reporting thresholds, so you and your tax professional should review that as well.
The penalties for failure to file Form TD F 90-22.1 can be pretty sickening. Willful neglect to file the form is punishable with civil and/or criminal penalties. Civil penalties could be the greater of $100,000 or half of the account value. Criminal penalties could be $250,000 plus five years in prison, or $500,000 and 10 years in prison if you are also violating another law simultaneously. Even non-willful neglect (a.k.a. – your ignorance) carries a penalty of up to $10,000. These are also applicable per year you fail to report!
The IRS was recently seeking six years in prison for a 79 year-old widow in Palm Beach, FL for such issues and related failure to report the income from foreign accounts. I think the key is to just make sure you file the forms as needed, and have a discussion with your tax professional or an attorney if you are unclear if your assets qualify you to file these forms.
Oh, and if you happen to know any terrorists that need to file, please don’t forward my contact information…
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Health Savings Account – Your Tax Friend
Filed under: Healthcare Costs | Tags: 213(d), beneficiary, California, custodian, estate, family plan, Flexible Spending Arrangement, FSA, HDHP, health savings account, healthcare, high deductible health plan, HSA, individual plan, itemized deductions, Medicare, nonqualified expenses, ObamaCare, out-of-pocket, qualified medical expenses, RMD, spouse
Leave a comment Originally published in the Cedar Street Times
May 17, 2013
Perhaps you remember a time when you thought you would get a nice fat tax deduction because you spent thousands of dollars on health care costs that insurance did not cover, only to realize you got nothing out of the deal? The cause that lead to this depressing realization was either because you did not meet the threshold for medical expenses, based on a percentage of your adjusted gross income, or even if you did, you still did not have enough itemized deductions to get you over the standard deduction.
As of January 1, 2013, that threshold was raised even higher – now 10 percent of your adjusted gross income (7.5% for another three years for people over 65). For most people this would generally mean if you make $100,000, you get no benefit for the first $10,000 of medical expenses.
A health savings account is a fantastic option which basically allows even people taking a standard deduction to effectively get a tax deduction for much, if not all, of their out-of-pocket medical expenses. There is also no “use-it-or-lose-it” clause such as can be found in the less flexible “Flexible Spending Arrangement” (FSA). Qualified medical expenses for HSA purposes used to be a broader definition than medical expenses in IRC section 213(d) used for itemized deductions, but a few years ago it was essentially unified.
Eligibility to open a health savings account is dependent on whether your health plan qualifies as a high deductible health plan (HDHP). For 2013, an individual plan must have a minimum deductible of $1,250, and $2,500 for a family plan, among other requirements. The premiums for high deductible plans are much lower (but shop around!) since you are paying a good chunk of the first-dollar costs – just like car insurance deductibles.
You then open a checking account with a company that provides custodial health savings accounts and contribute money to this account. Any contributions to the account lower your taxable income in the year of contribution, just like contributing to an IRA. Then you in turn use that account to directly pay all your qualified medical expenses (as well as spouse or dependent expenses) with a checkbook or debit card. With the savings created by lower health insurance premiums you should already have some money to contribute to your account. For 2013 you can contribute up to $3,250 for a single plan or $6,450 for a family plan (add a thousand to those figures if you are over 55).
Whatever you do not use stays in your account for the future, and you can keep contributing each year. If you never use it, you can take it out and use it for whatever purpose you want with no penalty after age 65. It would be taxable income, however, if not used for medical purposes. If you use it before age 65 for nonqualified expenses, there is a 20 percent penalty, plus it is taxable income.
Some people even view an HSA as another way to stuff a few more dollars into a “retirement plan,” but without the requirement to have earned income, plus the benefit of not having to take minimum distributions by age 70 1/2. If you are enrolled in Medicare, however, you can no longer contribute. Some custodians also allow you to link the account to an investment firm and then invest the money in stocks, bonds, mutual funds, etc.
If you pass away and your spouse is named as the beneficiary, your spouse steps into your shoes and becomes the new HSA owner. If it passes to your estate, it becomes taxable income included on your final 1040 tax return. If it passes to any other beneficiary, the HSA becomes taxable income to the recipient except for medical expenses paid within one year after death. One other tidbit of information – the State of California does not conform to Federal legislation regarding HSAs, so you receive no deduction for contributing to an HSA account and any income generated by the funds is taxable for California purposes.
Many companies have been switching to these plans over the past five or six years due to the savings in premiums, and many of the companies pass some of the savings back to the employees by contributing to the HSA account.
At this point, it looks like HSAs will still exist under ObamaCare, and could conceivably become even more popular if ObamaCare does not pan out and insurance rates keep rising. HSA plans have been found to lower the consumption of healthcare services since they do place an economic incentive for consumers to find lower cost options since the consumers pay for 100 percent of the care up to the deductible. Plans that shelter the consumer from any cost at all do not provide this incentive.
However long they stay around, HSAs certainly are a great option for many people today.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
When Can I Throw Out My Tax Returns?
Filed under: General | Tags: 1099-B, basis, document retention, FTB, how long should I keep my tax returns, installment sale, IRA, IRS, rental property, save tax returns, statute of limitations, throw away tax returns
Leave a comment Originally published in the Cedar Street Times
May 3, 2013
It is time to do some spring cleaning! Do not miss your opportunity as summer is coming quickly, at which point you will be required to keep everything for another year. Perhaps you will find that old pair of muddy tennis shoes in the garage – now the home to three indignant spiders as you turn their palace upside down. Or maybe you will find that half-used bottle of hotel shampoo under the sink – a small, but satisfying entitlement for a $300 room charge. Ah, and then there are those tax returns you filed way back in April – is it time to get rid of those too?!
You can do whatever you want, but my advice is to keep them. In fact, I would say you may want to keep every tax return (and the supporting documents) you have ever filed – I know I have. Record retention is always an interesting debate and you hear a lot of people say three, five, or seven years as a rule of thumb for many types of documents. Regarding tax returns, the real answer is unique to each person depending on his or her tax circumstances and risk tolerance.
Someone that works a W-2 job, has no other sources of income, no investments, contributes to no retirement plans, and files the returns correctly would have little risk if discarding the returns after four years. If you do make retirement plan contributions, depreciate any assets, have an installment sale agreement, or a host of other things, it would not really be wise to discard the returns in accordance with a rule of thumb.
The IRS generally has three years from the later of the due date (or extended due date) or the date you file to audit your returns. The California FTB has four years from the later of the non-extended original due date or the date you file in order to audit. You should never throw out returns or source documents until you are outside of these statutes of limitation. If you have understated your gross income by more than 25 percent (even if by accident), then the IRS has six years to audit you. People can get tripped up on this pretty easily if they fail to report stock sales. I have seen this before with people preparing their own tax returns that ignore the 1099-B issued year-after-year because they did not really understand it. If you filed a false tax return or there was any kind of fraud, there is no statute of limitations.
Even if you are outside the statute of limitations, however, you may still need prior tax returns to support positions you are taking on current tax returns that are inside the statute of limitations. Think about someone that has been contributing to an IRA for many years and was unable to take deductions due to income limitations. Each of these nondeductible contributions would have created basis in the IRA which would lower the taxable amount of distributions while in retirement. If the IRS audited your returns in retirement and questioned your basis, having all the past tax returns showing the nondeductible contributions would be a saving grace.
People that have rental properties or home offices may find tax returns from twenty-five years ago helpful in proving the basis in the property when it is eventually sells due to depreciation deductions taken on each past return. I have also had situations where clients had no idea what their cost basis was for a stock sale, and we were able to help recreate and substantiate the cost basis by reinvested dividends reported on tax returns stretching back several decades.
The safest thing to do is just keep them, or at least scan them and maintain the electronic files through the years.
One other pointer – be sure you do not throw out purchase records, refinance documents, or receipts of improvements to any type of property you own as you will likely need this information if you ever sell it.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
