Taxes? I’m in Key West!
Filed under: General | Tags: Gardens Hotel, Key West, Peggy Mills, taxes
Leave a Comment Originally published in the Cedar Street Times
April 19, 2013
When this paper hits the newsstands, I will hopefully be far from thinking about itemized deductions, dependent exemptions, and the IRS! This tax season tended to be compressed for many tax professionals due to the last minute changes by Congress which delayed the IRS releasing many common forms until early March of this year. Of course we tried to get the information from clients and prepare the returns except for the remaining forms, but it still had an effect of creating additional late night hours! That is now over, however, and it is time to take a breather! My wife and I and one-year-old son are headed for the southern-most point in the United States – Key West, Florida.
When I was 16 my family took a trip to Key West, Florida. My father enjoyed taking us around to go Key lime pie tasting and to show us the sites he was familiar with from his younger days. My grandfather was an architect in Key West for a number of years and both my uncle and my father were “Conchs.” This term, derived from the shell of the large sea snail, is affectionately given to anyone born in Key West.
My dad’s aunt, Peggy Mills, also lived on the island. She was a collector of orchids from all over the world and received special permission to import unusual orchid varieties into her growing gardens. Over the years she tore down over a dozen buildings in the heart of Key West to make room for her gardens and then made them open to the public. She also imported special bricks and four “tinajones” from Cuba. The tinajones are basically large clay pots weighing about 2,000 pounds each and were used for rainwater collection by Spanish settlers They are the only ones in the United States. She was friends with President Batista of Cuba at the time, which was her connection to obtain these artifacts. When she passed away in 1979, my grandfather sold the property with the pledge from the new owners that the gardens would remain. Although the property has changed hands several times, you can now stay at The Gardens Hotel, arguably the nicest spot in Key West!
Perhaps we can get a tour when we go as The Gardens Hotel only accepts guests 16 and over, and I don’t think we can fudge that with our one-year old, even though he is “very advanced” (as all parents like to say)! I remember we went into the reception area during our trip when I was 16. My dad was telling funny stories about how the room used to be his aunt’s dining room and the chandelier had an active bee hive that dripped honey onto the table! She was eccentric, but I think the concierge thought we were nuts!
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.
Sale of a Residence After Death – Part II
Filed under: Residence Sale | Tags: appraisal, basis, community property, death, decedent, fair market value, fractional ownership, irrevocable trust, joint tenancy, personal residence, revocable trust, rights of survivorship, sale, section 121, sole ownership, step-down, step-up, surviving spouse, survivor, tenancy in common, tenants in common
Comments (10) Originally published in the Cedar Street Times
April 5, 2013
Two weeks ago we discussed the sale of a personal residence after someone passes away when held as joint tenants or community property. We also discussed the concept of a cost basis step up (or down) to the current fair market value at death as it relates to joint tenancy, community property, and tenancy in common. If you missed this article you can find it on my website at www.tlongcpa.com/blog. This week we are going to discuss what happens when a sole owner or tenant in common passes away and the house or fractional interest in a house goes to their trust or estate.
Often children are tasked with figuring out what to do with mom or dad’s house after the second spouse passes. Names like executor, executrix, and trustee get thrown around and sometimes you get to know your accountant and attorney better than if you had gone on a fishing trip together! After death, the house typically become part of the estate if there was no trust in place, and if there was, then it becomes part of an irrevocable trust that has the task of winding up affairs and distributing the assets to the beneficiaries (or trusts for the beneficiaries).
If the surviving spouse held the house as a sole owner or in his or her revocable trust before death, the house receives a full step-up (or down) in basis to the current fair market value at death. If the house is distributed outright to a beneficiary (or beneficiaries) and then the beneficiary immediately sells the home, you often will have a loss due to the real estate commissions and other sales expenses (or perhaps even a market decline between date of death and the sale as we saw so often over the past five years). This loss, however, will generally be a nondeductible personal loss unless you first convert it to a rental property, and then sell it later.
If, however, it is decided the house needs to be sold while it is still in the estate or trust in order to pay debts or to distribute the proceeds to various beneficiaries, you may have a case to take a deductible loss on the sale of the property (which would offset other taxable income in the estate or trust, or perhaps flow through to the beneficiaries reducing their personal taxes). Fair warning, the IRS and the courts disagree on this issue!
The IRS has taken the position that even a trust or estate cannot take a loss unless it is a rental property or converted to a rental property and then sold. However, this conflicts with some of the instructions they provide regarding capital assets held by trusts and estates. The courts, on the other hand, have held that a trust or estate does not hold personal assets, and thus is allowed to take a loss on the sale of what used to be the decedent’s personal residence as long as no beneficiaries live in the property in the interim. There are other issues to consider here, but in the right circumstances, strategic planning could create some large tax savings.
If a tenant in common passes away, his or her ownership percentage receives a step in basis to the current fair market value and the interest flows through to the estate or trust. Similar results would occur as those just discussed for sole owners. It is less common to find someone holding a personal residence as a tenant in common, especially with unrelated people. It also comes with other, more complicated issues, since fractionalizing ownership in a house diminishes the value – basically, who wants to buy a house with other people you don’t know? In all cases after someone passes away, date-of-death appraisals are requisite, and you may need specialized appraisers for fractional interest properties.
This really just scratches the surface of the issues you can encounter, and it is always best to find a CPA and attorney team that is equipped to handle these issues appropriately.
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.
Sale of a Residence After Death – Part I
Filed under: General, Residence Sale | Tags: appraisal, basis, community property, death, decedent, fair market value, joint tenancy, personal residence, rights of survivorship, sale, section 121, step-down, step-up, survivor, tenancy in common
Comments (7) Originally published in the Cedar Street Times
March 22, 2013
When a living individual sells a personal residence that results in a gain, many people are familiar with the rules which may allow an exclusion of the taxable gain of up to $250,000 ($500,000 if married filing joint) if the taxpayer lived in the property two out of the last five years as his or her primary residence. In the depressed real estate markets over the past few years, many people have also learned (sometimes to much dismay) that a loss on a personal residence is not deductible.
But what happens when a house is sold after someone passes away?
The first thing we need to do is determine the cost basis. At the date of death, the cost basis of the property changes to whatever the current fair market value (FMV) is (an appraisal is required – not a market analysis by a real estate agent). If the house is held in joint tenancy or tenancy in common, only the decedent’s share of the home gets a step up (or down) in basis to the current FMV, and the basis for the survivor’s original share does not change.
If, however, it is held as community property, the entire interest in the house gets a step in basis to the current FMV. If the property is held “with rights of survivorship” then the house passes immediately to the survivor which in turn inherits the new stepped up (or down) basis of the decedent to add to his or her own basis-in the case of joint tenancy or tenancy in common, or he or she takes the new FMV as the new basis if it was community property.
When the property is sold, the survivor reports the sales price less the new basis and selling expenses. If it was sold soon after death, the survivor often realizes a loss due to sales expenses if they got a full step-up in basis (albeit nondeductible if maintained as a personal residence). If the survivor realizes a gain, then, the survivor is eligible for the $250,000 exclusion assuming he or she meets all the normal rules. If it was a spouse that passed away, then the widow or widower would have two years from the date of death to sell the house and still be eligible for the $500,000 exclusion.
In two weeks we will discuss the more interesting scenarios that play out when the property is not held “with rights of survivorship” and the property goes to the individual’s estate or trust, such as is often the case at the death of a single individual or the death of the second spouse.
Remember, it is always best to seek competent advice as everybody’s tax situation is unique and there are more rules that could affect you than just those mentioned in this article.
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.
Unmarried with Children – Head of Household
Filed under: General | Tags: biological child, Chief Counsel Memorandum, child tax credit, children, dependent, dependent benefits, dependent care expenses, dependent exemption, earned income credit, exemption, head of household, household, income limit, living together, principal residence, qualifying child, qualifying relative, SCA 1998-041, tie-breaker rules, unmarried, unmarried with children
Leave a Comment Originally published in the Cedar Street Times
March 8, 2013
Article on Unmarried People Living Together with Children
I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate. With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!
When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married. Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.
Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children. This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.
For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.
A qualifying child is someone who must generally be under 19 (24 if full-time student). The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child. The child cannot provide over half of his or her own support, and the child cannot file a joint return.
Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption. (If they cannot decide, tie-breaker rules exist.) Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household. You cannot split up the benefits between parents.
If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent. Or maybe one or both have children from prior partners that live with them and could qualify them as well. (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B. This also qualifies B for head of household.)
Let us assume both unmarried people living together each have a qualifying child. Can they both claim head of household? If their households are maintained in separate dwellings, the answer is almost always yes. But what if they live under the same roof? Can you maintain separate households in the same house?
The answer to this depends on whether they are acting as a family unit or not. IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single. But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household. If you share a biological child as well, it will be nearly impossible for you to make this argument. But never say never!
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.
Military Taxation in CA Part II – Nonresidents
Filed under: California, Military | Tags: California, domicile, military, Military Spouses Residency Relief Act", MSRRA, nonmilitary, nonresident, PCS, Permanent Change of Station, residency, Servicemember Civil Relief Act
Leave a Comment Military Taxation in CA Part II – Nonresidents
Originally published in the Cedar Street Times
February 22, 2013
Two weeks ago I laid the groundwork for important definitions related to taxing military servicemembers. I also discussed how servicemembers are taxed just like California residents if their domicile is California, and they are stationed in California. If a member whose domicile is California has a permanent change of station (PCS) outside of California, they are considered nonresidents. Under California law, nonresidents are not taxed on their military income or intangible income such as interest and dividends. They would also not be subject to taxation on military income in the other state either due to the federal Servicemembers Civil Relief Act which prohibits another state from taxing a servicemember’s military income while domiciled in another state.
Due to the Military Spouses Residency Relief Act of 2009 (MSRRA), spouses that go with the military servicemembers now receive similar treatment and their earnings from personal services and intangible income such as interest and dividends are exempt from tax. In the past they had to file as residents whenever they met the requirements of wherever they were physically living. This act applies to all military servicemembers’ spouses regardless of domicile or station as long as both spouses have the same domicile. This is a very important distinction. And you cannot simply adopt your military spouse’s domicile.
If the military spouse was domiciled in Texas, for instance, and then gets married in another state, the new spouse cannot claim Texas unless he or she actually lives in Texas and takes proper steps to make it his or her domicile. They could both claim the same domicile in the state they are living at the time, but that may be undesirable if that state has unfriendly military tax laws. Regardless, until both spouses are able to claim the same domicile, the coveted provisions of MSRRA generally do not apply.
Another interesting twist to watch out for is if a California domiciled servicemember gets PCS orders to another state and the spouse stays in California. In this case, all of the spouse’s income is now taxable to California as well as half of the military servicemember’s military pay and interest/dividends, etc. as community property of the spouse!
All the same rules apply to servicemembers whose domicile is in another state but are stationed in California, except they would look to their own state of domicile to see how that state may tax or exempt its servicemembers for its own state tax purposes. California, however, would not be able to tax the servicemember or the spouse (assuming they have the same domicile). The most common places I see for military domicile are Texas and Florida: neither has a state income tax. This way, whether they are stationed in their own state of domicile or elsewhere, they have no threat of paying state income taxes.
It is also important to know that the military servicemember’s nonmilitary income would still generally be subject to taxation wherever it is being earned,and so would items like rental property income. Many military people own homes in multiple states. They should be aware they may have to file a tax return in those states. Depending on the state, some people may need to file state returns even if the property produces losses every year which create carryovers to be utilized when the property is sold.
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.
Military Taxation in CA Part I – Domicile, Residency, and CA Residents
Filed under: California, Military | Tags: California, domicile, home of record, military, nonresident, PCS, Permanent Change of Station, residence, residency, resident, service members, servicemember, servicemembers, SLR, state of legal residence, taxation, temporary or transitory
Leave a Comment Originally published in the Cedar Street Times
February 8, 2013
Here in this little part of California that some call heaven, we have a number of military related institutions drawing servicemembers from around the world. The next few articles will focus on military taxation in California.
The first thing we need to do is define a few important terms.
Home of record is a term that indicates the place you were living when you entered the military, and cannot be changed. This generally does not affect taxation, but can affect benefits.
Your residence is the place you are physically living.
State of legal residence for military purposes is typically synonymous with domicile to be discussed next. Do not confuse this with legal residence which you see on many non-military legal forms indicating a desire to know your residence address as opposed to your mailing address!
Domicile is the place that you consider your permanent home; if you are living away from your home, it is the place you would return to after being absent for temporary or transitory purposes (or away on military orders). It is usually the place you are registered to vote, have your bank accounts, have your driver’s license, register your vehicles, perhaps still own a home and store personal items, etc. You have the option of changing your domicile by making convincing changes to items such as the above, but you generally have to be present in the state at the time, show that you have abandoned your prior domicile, and notify the military of this change.
Residency more closely determines how you are to be taxed, but is affected by domicile. For a civilian, residency is a term given if someone is in California for other than a temporary or transitory purpose (generally nine months or more), or conversely someone whose domicile is in California but out of the state for temporary or transitory purposes.
For a military servicemember, residency is even more closely tied to domicile. A military servicemember whose domicile is California is considered a resident if stationed in California, and a non-resident if stationed elsewhere due to Permanent Change of Station (PCS) orders (not temporary orders regardless of duration). A military servicemember whose domicile is outside of California but that is stationed in California is considered a non-resident unless he or she works to change his or her domicile to California. Most people are trying to get out of California taxation, so I rarely see military people changing their domicile to California!
Now let’s start to talk about what this means for tax purposes, including how it affects spouses. Based on the above definitions we will start with those that are considered California residents (again, those that are domiciled and stationed in California). It is pretty straight-forward: these individuals are taxed on all their income including their military income. The spouse will generally also be considered a resident and will be taxed the same, unless the spouse is also a military servicemember, and has a different domicile. That spouse would then be a nonresident and taxed differently.
In my next column in two weeks, we will begin talking about nonresident military personnel, which accounts for the majority of servicemembers living in this area.
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.
Independent Contractor Vs. Employee: 1099s Due Jan. 31
Filed under: Employers | Tags: 1099s, 20 points, California Labor Commission, control, disability, employee, Form 8919, Form SS-8, FTB, independent contractor, IRS, labor laws, payroll taxes, Penalties, Revenue Ruling 87-41, W-2, workers' compensation
Leave a Comment Originally published in the Cedar Street Times
January 25, 2013
By the end of this month, business owners will have sent 1099s to their independent contractors and W-2s to their employees. Many business owners think it is their choice, or perhaps a choice they can make together with the person performing the services on how they are to be treated. It is not.
Business owners certainly see the savings to treat workers as independent contractors – no payroll taxes, no overtime, no break periods, no meal periods, no workers’ compensation insurance, no benefits, or a myriad of other California laws to follow. Even if the worker gets higher pay to cover the extra taxes incurred as an independent contractor, he does not have to carry unemployment insurance or disability insurance on himself and sometimes thinks that is a personal benefit. Of course, not having insurance is problematic for the worker and for the system as a whole, which depends on people paying premiums.
At the end of the day, people who are employees wearing the cloak of an independent contractor, are usually getting the short-end of the stick, because they really are dependent on the employer, and no longer have the ordinary benefits afforded by labor laws. California knows this, and they come down hard on the employers when it is discovered that employees are misclassified as independent contractors. Unfortunately, even for business owners that treat a misclassified independent contractor well, it can come back to haunt them if the individual becomes disgruntled.
Misclassification can get extremely expensive, or even sink a small business. Besides legal fees, you could be hit with the tax liability, penalties, and interest from the IRS and FTB for all the back payroll taxes for the employee during the period misclassified. You may also have to pay back wages and benefits the employee would have been entitled to. The California Labor Commission can also fine you $5,000 to $25,000 per violation.
So, how do you know if someone is an employee or an independent contractor? According to law it comes down to the right to direct and control the details and means of the work. The IRS published Revenue Ruling 87-41 listing twenty points to consider as a guide. They have also published their own internal auditor’s training guide, which provides more insight. You can even file a Form SS-8 Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding to get an IRS determination in writing. This form is most often used by disgruntled workers along with Form 8919 when they feel the employer misclassified them and they now owe tax or cannot get unemployment or disability benefits. However, employers may also file the Form SS-8, or simply use it internally as a kind of double check to see if they feel they are classifying workers correctly. All of these documents mentioned are available free online with a simple Google search.
Here is a simplified rundown of the twenty points from Revenue Ruling 87-41 which would help in the determination process. You do not have to have all of them and no single one is decisive, but the first three are given a lot of weight. You may have an employee if: 1) you require the worker to follow specific instructions on when, where and how work is to do be done; 2) you provide formal or informal training for the worker; 3) the worker has predetermined earnings and always get paid for the work and does not have the ability to make a profit or incur a loss; 4) the services performed by the worker are highly integrated into your own and affect business success; 5) the worker is personally required to perform the services instead of having the option to have their own worker perform the services; 6) you hire, supervise, and pay for your worker’s assistants; 7) you have a continuous relationship with the worker – such as working with you every day; 8) you dictate the hours or days the worker performs services; 9) the worker works full-time for you; 10) you require the worker to perform services at your work site even though it could be done elsewhere;
11) you require the worker to perform services in a specific order or sequence; 12) you require written or oral reports regularly; 13) you pay hourly, weekly, or monthly versus by invoice or project completion; 14) you reimburse the worker’s travel and business expenses; 15) you provide the worker’s supplies, tools, computers, etc.; 16) you provide an office for the worker; 17) the worker does not provide the same services to anyone else; 18) the worker does not advertise his own services to the general public, have business cards, etc.; 19) you can discharge the worker at any time instead of having to honor contract terms; 20) the worker can terminate his services without having to honor any contract terms.
Ultimately, the determination is a legal issue. If you do not feel comfortable making the decision on your own, an attorney that focuses on employment practice matters should be consulted.
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.
American Taxpayer Relief Act of 2012
Filed under: General | Tags: $5 million, American Opportunity Tax Credit, American Taxpayer Relief Act of 2012, bypass trust, cancellation of debt, Capital Gains, child tax credit, code section 179, depreciation, estate tax exemption, itemized deduction phaseout, medical expenses, miscellaneous itemized deductions, net investment income, personal residence, Social Security
Leave a Comment Originally published in the Cedar Street Times
January 11, 2013
The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013. There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people. I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers. That patch has been kicked down the road for years. The indexing will certainly alleviate concerns of a similar problem down the road. Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.
The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property. In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it. Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust. Family dynamics may of course still dictate a B trust is prudent.
Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.
Quite a few things were extended but not made permanent. A big one was extending the exclusion from income of cancelled debt on personal residences for another year. This could be a lifesaver for those still struggling with mortgages that are “underwater.” Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013. More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs. Enhanced provisions of the child tax credit were also extended through 2018.
Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179. This was slated to return to $25,000, but has been extended through 2013 at $500,000. Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.
Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy. For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%. There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000. Itemized deduction phaseouts have also returned for high income earners.
Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result. Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%. Individuals 65 and up will still enjoy the 7.5% rate for another three years.
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.
Do You Have Assets or Investments in Foreign Countries?
Filed under: Foreign Reporting, General | Tags: 8938, bank account, due date, FBAR, foreign, foreign assets, foreign country, foreign investments, Form 8938, Form TD F 90-22.1, investment account, investments, June 30, non-willful neglect, Penalties, real estate, Report of Foreign Bank and Financial Accounts, Statement of Specified Foreign Financial Assets, TD F 90-22.1
Leave a Comment Originally published in the Cedar Street Times
December 28, 2012
Various reasons including the fight against terrorism and failure to pay tax on foreign income are driving our lawmakers to require more stringent reporting of foreign investment activities. This is important because there have been significant changes in the past two years with the addition of a new reporting form, and the penalties for noncompliance include extremely high monetary penalties or jail time. Even cases of non-willful neglect or ignorance could lead to penalties of $10,000.
Generally this affects people who have opened bank or investment accounts in other countries (or are authorized signers on such accounts) or have an ownership interest in businesses in foreign countries. It generally does not include direct holdings of real estate, personal property, or financial investments made through an account setup here in the U.S. with a U.S. institution that diversifies your money and invests internationally. For instance, holding an international stock index fund through Vanguard would not trigger a requirement because Vanguard has reporting requirements here in the U.S. that would cover you. This additional reporting generally covers the things for which the U.S. would not know about unless you told them.
There are two forms which I feel tax practitioners should touch base with their clients about every year. One is the Foreign Bank and Financial Accounts Form TD F 90-22.1 (FBAR), and the other is the relatively new Statement of Specified Foreign Financial Assets Form 8938 which has only been around for about two years. The FBAR is not a tax return filing document, but is due to the Treasury Department by June 30th of each year (watch out if you are on extension and do your taxes late in the year). The new Form 8938 gets filed with your tax returns.
I suggest you think about any connections you have with money or assets in a foreign country and discuss them with your tax professional this coming year. The laws do get complicated and sometimes you may not think you have a reporting requirement when you actually do. For instance, you would have a reporting requirement if you have a relative or friend in a foreign country that adds you on to their bank account as a signer, simply for the convenience that you could write a check on their behalf if needed, regardless of whether or not you actually do.
You may have a reporting requirement if a foreign relative or friend has named you as a beneficiary in his or her trust; or perhaps you have a pension or deferred compensation plan which you will someday receive for past service with a foreign company or country; or maybe you are an owner or a partner in a business that holds assets that qualify (indirect interest). As you can see, it is not always straight-forward, but I hope you are now more alert to the issue, and that you can identify situations that may need further review.
Seeking qualified professional help continues to grow in importance as we continue to move in a direction towards increased complexity.
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.
Ask Your Husband if He is Still Married to Someone Else!
Filed under: Divorce, Retirement Assets, Trusts and Estates | Tags: beneficiary, designation, ERISA, IBEW Pacific Coast Pension Fund v. Lee, pension benefits, U.S. Court of Appeals, Wayne Lee
Leave a Comment Originally published in the Cedar Street Times
December 14, 2012
As professionals dealing with trust and estate issues, CPAs and attorneys talk a lot about making sure your beneficiary designations are up-to-date on any kind of retirement assets you may own, as they generally trump your estate plan. There are many sad stories of widows or widowers losing assets to their deceased spouse’s ex-wife or ex-husband simply because they did not update the beneficiary designation forms. But sometimes, even that is not enough.
At a tax seminar I attended last week, we discussed an interesting court case which makes you think you can never be too careful. The case goes something like this: Wayne and Cleta Lee were married in the state of Washington in 1979. In the early 1990s, Wayne moved to Mississippi. They never got a divorce, but they went their separate ways. In 1995, Wayne decided to marry a woman in Mississippi named Lois, but he did not bother to divorce Cleta.
Wayne was an electrical worker and was entitled to a pension when he retired in 1997. On the pension application he listed himself as married and Lois as his wife. He designated her specifically as the beneficiary and even attached a copy of the marriage certificate. They both signed the application and he started receiving his pension. In January 2007 Wayne passed away and Lois started receiving pension benefits in February. Later that month, his first wife from Washington applied for pension benefits from the company as well!
The case eventually went to court and the district court ruled in favor of Lois since she was specifically identified in the pension application as the beneficiary for spousal benefits. Cleta appealed and the case went to the U.S. Court of Appeals. The U.S. Court of Appeals cited Employee Retirement Income Security Act (ERISA) rules and state laws and said the district court made its decision on the wrong basis. They overturned the ruling and have now sent it back to the district court to determine the legal spouse. They said the benefits go to the legal spouse at the time of his passing regardless of who was specifically named as the spouse. If the district court determines Cleta to be the legal spouse, which the U.S. Court of Appeals hinted at quite heavily, Lois will lose out on her pension benefits. (IBEW Pacific Coast Pension Fund v. Lee (2012) U.S. Court of Appeals for the Sixth Circuit, Case No. 10-6433)
So for all of you with spouses that have multiple wives or husbands, you may want to have a little chat! Obviously the scary situation would be if you never knew your spouse was not officially divorced from a prior marriage, or worse, never knew they were married before.
Does this mean we will be advising clients in the future to have background checks done before picking out a ring? I sure hope not.
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.
Travis H. Long, CPA, Inc. Blog 