Archive for the ‘Social Security Number’ Tag
Back to Basics Part XIII – Form 4868 Application for Automatic Extension
Filed under: Back to Basics | Tags: April 15, automatic extension, certified mail, estimated tax payments, Extension, Form 3519, Form 4868, Franchise Tax Board, interest, IRS, late payment penalty, late return penalty, October 15, Social Security Number, underpayment penalty, United States Treasury
Leave a comment Originally published in the Cedar Street Times
April 3, 2015
Two weeks ago we discussed underpayment of estimated tax – a penalty that is assessed prior to the April 15 due date if you did not pay enough tax in ratably throughout the prior year. Essentially these penalties are the equivalent of the taxing authorities wanting to be paid in installments rather than a lump sum check at the end of the year. (You would be equally upset if your employer only paid you once a year as well!) So they effectively charge you interest (currently a three percent rate) if you do not have enough tax paid in quarterly throughout the year. This week we are going to talk about filing an extension and the penalties and interest that you will incur beginning after April 15 if you do not file and/or pay on time. If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .
The most important piece of advice is to file your return on time! When I say on time, I mean by April 15, or if you file a valid extension, then by October 15. In years where those dates fall on a weekend or holiday, the return due date is pushed to the next business day. There can be hefty penalties for filing a late return, which we will discuss later. Form 4868 is the federal form used to apply for an extension, and you have to postmark it by April 15 for it to be valid. If you are concerned of a postal mishap, U.S. certified mail is the correct way to document it was mailed on time. California gives you an automatic six month extension if you need it, and nothing is required to be filed to receive the extension. (Note there are exceptions regarding extensions for individuals out of the country on April 15, as well as for military people overseas, which we are not discussing in this article.)
Regardless of whether or not you file an extension, the tax is still due on April 15. So you want to be sure you have enough tax paid in to cover the liability when you finally do file the return. This means, you have to do a rough calculation at least, and then send in a check for the estimated tax with the 4868. It would be prudent to estimate on the high side if there is any doubt. If you end up not owing as much as you paid in, you can get a refund when you file the returns, or you can have it applied to the next year’s tax returns, and it will be credited to you as of the original April 15 due date when the first estimated tax payment was also due for the current year taxes (for those that pay quarterly estimates, this is very helpful).
When putting people on extension that pay quarterly estimated taxes, I will typically have them pay the remaining projected balance due from the prior year, plus the first quarter estimate for the current year and have all of this applied as a payment towards the prior year return. This gives them a cushion in case the estimates are wrong. Then, after the returns are filed, any leftover amount is then applied to the current year return and gets credit as of April 15 and everything is fine. If you project you will owe to California, then you will have to fill out a California Form 3519 Payment for Automatic Extension for Individuals and remit a check with that form.
The mechanics of filing the federal Form 4868 are quite simple. On the left side of the form you fill out your name, address, and social security number. On the right side you list your estimate of your total tax liability, the amount you have paid in so far, and then subtract the two to get the estimated amount you are short or over. If you are short, then you write in how much you are planning to pay with the extension. Hopefully you have enough to pay the balance, but if you do not, just pay what you can, and keep making payments when possible. Write your name, social security number, the year for which the tax is due and “Form 4868” on the check as well.
The California Form 3519 Payment for Automatic Extension is quite simple also. You do not even have to list estimates, but just the amount you are paying in addition to your name, address, etc. You would provide similar information on your check to California as well. Federal checks are made out to the “United States Treasury.” California checks are made out to the “Franchise Tax Board.” The mailing addresses are on the forms and related instructions, which can be downloaded online for free. If you are sending in a check for a married filing joint tax return, it is best to put both taxpayer names and social security numbers on the forms AND on the checks.
Now let’s talk about what penalties and interest you will incur if you do not file on time and/or pay on time.
Late Return Penalty
As I mentioned earlier, the most important piece of advice is to file your return on time! A late tax return with the IRS carries a hefty penalty of five percent of the unpaid tax PER MONTH or portion of a month until you file your tax returns. For those of you who aren’t doing the math in your head, that is the equivalent of an annualized interest rate of 60 percent per year (and you thought credit cards were bad!). Fortunately they cap that penalty after five months of delinquency thus maxing it out at 25 percent. Not to be left out, California conforms to this and charges the same for late returns based on the amount of California tax owed.
Late Payment Penalty
Regardless of whether or not you file an extension, if you do not pay the tax by April 15, the IRS will assess you 0.5 percent PER MONTH on the unpaid tax, capping out after 50 months at 25 percent. If the return is also delinquent (no extension filed), the five percent per month late return penalty includes the 0.5 percent per month late payment penalty for the first five months. After the first five months, then you only pay the additional 0.5 percent late payment penalty. So the maximum federal late return and late payment penalty could be 25 percent late return penalty (4.5 percent plus 0.5 percent for five months) plus another 22.5 percent (0.5 percent per month for the next 45 months for the continuing late payment penalty) equals a total of 47.5 percent. California has a slightly different approach on this and immediately charges five percent of the balance if you are even one day late. In addition they assess 0.5 percent PER MONTH or part of a month for the first 40 months, also capping you at 25 percent. So one day late in California will actually cost you 5.5 percent in late payment penalties.
Interest
In addition to the above penalties, interest is also charged starting on April 16 until the taxing authorities get paid in full. Since you had the use of the money and they did not, they want to be paid for their lost use of the funds. The interest rate varies and is adjusted each quarter for the IRS and twice a year for California. The current interest rate is three percent for both the IRS and California. If you had the money sitting in a bank account, you clearly lost out, however, if you had it invested in the markets, you would have probably come out ahead in the past few years. Whereas, you can sometimes get the taxing authorities to waive penalties if you had reasonable cause, interest is virtually impossible to waive. Without the before mentioned penalties, there are many people that would love a three percent loan!
If you have noticed a common thread for the above interest and penalties, it is that they are all based on the amount of tax you were short starting on April 15. If you had paid in more than enough on April 15, there would be no penalties and interest, even if you did not file an extension. Theoretically, you could file several years late and incur no penalties as long as you eventually give them a return showing all the tax had been paid in on time. I do not recommend this practice, however! Eventually you would receive notices and they would even estimate a tax return for you and assess tax, penalties, and interest. Those are usually not in your favor! Also, you never start the statute of limitations running, so you keep yourself open for audit longer.
Most importantly, like me, have fun when you are preparing these forms. If you find all of this interesting, perhaps you should have become an accountant!
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.
Back To Basics Part VI – Schedule B
Filed under: Back to Basics | Tags: 1099-INT, address, amortizable bond premiums, dividends, FinCen 114, foreign assets, Form 3520, Form 8938, interest, muni bonds, municipal bonds, nominee distributions, ordinary dividends, original issue discount, private activity bond interest, qualified dividends, Schedule B, seller-financed mortgage, Social Security Number, tax-exempt, U.S. Treasury Bonds, W-9
Leave a comment Originally published in the Cedar Street Times
December 26, 2014
In this issue, we are discussing Schedule B – Interest and Ordinary Dividends. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
Interest you earn from the use of your money by others is reported in detail in Part I of Schedule B and then summarized on Line 8a of Form 1040. Interest is taxed as ordinary income depending on your tax bracket. The most common form is interest earned from your banks or investment companies. You will generally receive a Form 1099-INT telling you the amount you paid if the amount is over $10. If it is under $10, there is no requirement for the payor to go through the hassle to report it to you and the IRS; technically that does not alleviate your responsibility to report it on your tax returns, however. This holds true for all IRS reportings. Some people think if no tax document is received, they are somehow relieved from the responsibility to report. This is an incorrect notion.
Other forms of interest to report on Schedule B could be interest earned from personal loans made to friends or family, or loans made to a business. In practice, you often will not receive a 1099-INT from individuals you loan money to, but they actually have the same requirements as a bank to file a 1099-INT for interest they pay to you, and they could be penalized for not doing so.
Another form of interest you need to report on Schedule B is interest earned from a seller-financed mortgage. If you sold your home and carried back a note on the house from the buyer, the interest they pay you is reportable interest on Schedule B. You are required to track the interest and report it properly. You and the buyer are both required to provide your names, Social Security numbers, and addresses to each other for proper tax reporting and matching. You list the buyer’s information in Part I of Schedule B next to the amount they paid you. A buyer will do the same for reporting the mortgage interest on Schedule A. A Form W-9 is the best document to request and provide Social Security Numbers. Buyers and sellers could each be penalized if they fail to provide their Social Security numbers for this purpose or if they simply get it verbally, and it is incorrect. A W-9 signed by the other party is a protection to you.
Be careful to not include any tax-exempt interest such as from U.S. Treasury Bonds or tax-free municipal bonds on Schedule B. These would be reported on Line 8b of Form 1040 and are generally not taxable unless there are other adjustments such as those made for Alternative Minimum Tax on Form 6251. Another source of interest to avoid reporting on your Schedule B is interest earned from investments in your retirement plan (I have see people make this mistake!).
There are other forms of interest or adjustments such as original issue discounts, private activity bond interest, amortizable bond premiums, and nominee distributions which are beyond the scope of this article.
Dividends are reported in detail in Part II of Schedule B and summarized on Line 9a of Form 1040. Dividends are essentially a return of part of the profits of the business to the owners. When you own shares of stock in a company, for instance, they may pay out a certain amount per share if the company is doing well. You can reinvest the dividends and buy more shares or take the cash. Either way, the dividends get reported on Schedule B.
Dividends are taxed at your ordinary income tax bracket rate unless they qualify for special capital gains rate treatment. Then they are called qualified dividends. To qualify for special treatment the dividends must be from U.S. corporations, corporations set up in U.S. Possessions, or in foreign countries with certain tax treaty benefits, or if readily tradable on U.S. stock exchanges. If you have held the stock for less than a year, there are also some specific holding period requirements that could still allow the stock to qualify.
The portion of ordinary dividends that are considered qualified are reported on Line 9b of Form 1040, and don’t actually show up on the Schedule B. This is a large advantage as people in the 10 percent or 15 percent income tax bracket pay no tax on capital gains and qualified dividends! People in the top 39.6 percent bracket pay a 20 percent rate on qualified dividends and everyone in between pays 15 percent.
Part III of Schedule B consists of questions about any foreign accounts or trusts you own or have signature authority over. These questions are EXTREMELY important to answer correctly. If you have a foreign account you will also need to file FinCen Form 114 with the Treasury Department. There are potentially massive penalties for failure to properly report on FinCen Form 114, even if unintentional, and possible jail time if you willfully do not report. You may also need to file a Form 8938, a 3520 or other forms related to foreign assets. If you have foreign assets, you should seek professional support that has experience in this area. Getting caught is much worse than coming forward.
In two weeks we will continue our Back to Basics series with Schedule C – Profit or Loss from Business
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.
New Tax Impacts for Trusts with Capital Gains – Part II
Filed under: Trusts and Estates | Tags: $11950, 1040, 3.8%, B trust, beneficiary, bypass trust, California, Capital Gains, dividends, gifting trust, income, income beneficiary, interest, irrevocable trust, IRS, lawsuit, net investment income, principal, private, remainder beneficiary, revocable living trust, revocable trust, Social Security Number, tax, Uniform Principal and Income Act, UPIA
Comments (1) Originally published in the Cedar Street Times
November 15, 2013
Two weeks ago I laid the groundwork of some of the basics on revocable and irrevocable trusts in order to start discussing new implications due to law changes in 2013. Revocable trusts such as the common revocable living trust most people use for estate planning is disregarded for tax purposes as separate from the owner – in other words all of the income generated by its assets gets reported on your personal 1040 tax return. Irrevocable trusts, such as a bypass trust commonly used in estate planning, or a gifting trust, are treated as separate tax paying entities, get their own taxpayer identification number, and file their own tax returns.
In early 2013 new laws were passed that increased the personal income tax rates from 35 percent to 39.6 percent on people in the highest tax bracket ($400,000 filing single or $450,000 married filing joint). It also raised the capital gains rate to 20 percent for these same people (up from 15 percent). In addition, a new 3.8 percent Medicare surtax is assessed on net investment income (think interest, dividends, capital gains, among others) for people making over $200,000 single or $250,000 filing joint. Most people do not make $450,000 or even $250,000 a year, so this seems innocuous to many.
However, many people making less than these thresholds do have irrevocable trusts – most commonly after a spouse has passed away. The problem with irrevocable trusts is that the thresholds to be impacted are so much lower. Once your trust has just $11,950 (2013) of income, you have hit the top bracket and will be subject to the 39.6 percent income tax rate, 20 percent capital gains rate, and the 3.8 percent Medicare surcharge! One stock sale could easily put you in the top bracket! This effectively means an 8.8 percent tax increase on capital gains and 4.6 percent to 8.4 percent increase on other types of income. That is a big hit every year, and will be something new to battle.
If you can avoid having the income taxed to the trust, and instead have it distributed out and taxed to the beneficiaries, you can probably save a chunk of taxes since it will be taxed at the lower rates on the beneficiary tax returns – assuming your individual beneficiaries are not in the top tax bracket!
Whether or not you have discretion or are required to distribute income to beneficiaries is defined in your trust document. Even the very definition of “income” itself, for trust accounting purposes, is governed by your trust document primarily and the state’s principal and income act, secondarily. The proper allocation of income and expenses to trust accounting income or principal is very important to beneficiaries (whether they realize it or not), since trust accounting income generally goes to one beneficiary, and the principal often goes to a different beneficiary down the road…so it determines the amount the beneficiaries receive. Many common irrevocable trusts are written to require the distribution of trust accounting income each year to the current beneficiaries with rights to dip into principal as needed to maintain an ascertainable standard of living. Upon death, the remaining principal goes to the remainder beneficiaries.
The California Uniform Principal and Income Act does not define capital gains as income, but as a principal transaction – basically an asset changing form – for instance from real estate to cash. I hardly ever see trusts that even mention capital gains, much less defining it as a part of income. In the absence of trust language, the principal and income act governs, therefore many trusts in California are not permitted to distribute capital gains to the beneficiaries.
It is amazing to me how many trust tax returns I have seen over the years that violate this – often because the preparer does not really understand trust taxation rules. I have even run into cases where the prior preparer has never even asked for the trust document, and thus relies on the default settings in their tax software in conjunction with “the way we’ve always done it” to govern! This would be analogous to creating a detailed shopping list and asking your neighbors to go shopping for you; in lieu of taking your list, they go on the internet and print out a list of common things people buy, and then supplement it with things they have bought for other neighbors in the past! Chances are pretty good; you will not get what you need! Enforcement of correct trust income tax preparation comes much more often by threats of lawsuit against the trustee than by IRS audit. Keep in mind the remainder beneficiary’s attorney would be happy to sue the trustee for shorting his client’s share by not following the terms of the trust.
In two weeks we will conclude our discussion.
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.
New Tax Impacts for Trusts with Capital Gains – Part I
Filed under: Trusts and Estates | Tags: 1040, B trust, bypass trust, Capital Gains, control, credit shelter trust, estate tax exemption, gifting trust, irrevocable trust, petition, portability, private, probate, revocable living trust, revocable trust, Social Security Number, tax, trust administration
Leave a comment Originally published in the Cedar Street Times
November 1, 2013
In order to discuss the new challenge trustees have regarding capital gains, let us first review some basics regarding revocable and irrevocable trusts.
A revocable living trust is a trust created during your lifetime that spells out what you want to happen with, and who you want to control, your assets if you become incapacitated or pass away. This is the most common type of trust, and many people set these up because it has many advantages over just having a will upon death: the chief reasons are that it provides more control, has more tax advantages, it is more private, it is faster, and it is less expensive than the default court process called probate.
I would say the one major drawback of a trust administration process compared to probate is that you do not have the standardized court oversight and genuine closure that you have with the probate process. If there are difficult problems with trust administration, it often stems from that fact that most people appoint one of the recipients of their assets (beneficiaries) as the person responsible for carrying out the trust terms (the trustee).
Money does strange things to people, and I have witnessed it lead to families ripped apart when the non-trustee siblings start questioning the integrity of the sibling appointed as trustee. Generally, beneficiaries want their money yesterday! And they do not understand that it still takes a good bit of time, effort, and expense to handle everything. That said, I would still choose to have a trust 98 percent of the time, instead of just a will. If there are concerns about the solidarity of the beneficiaries, a corporate trustee could always be a solution.
Another characteristic of a revocable living trust is that it can be changed or even scrapped at anytime while you are alive – hence the name “revocable.” As a result of this control feature, of being able to terminate the trust and retain the assets, the trust is disregarded as a separate taxpaying entity, and you just report all the eligible income and expenses of the trust on your personal 1040. Everything gets reported under your Social Security Number instead of having a separate taxpayer identification number.
Now let us turn the tables and speak about irrevocable trusts. These are trusts that generally cannot be changed once they are created. (Of course, nothing is set in stone, and well drafted trusts with trust protector language can assist in making changes, or if all the beneficiaries agree and the court approves a petition, changes or even revocation of an irrevocable trust are possible!)
An example of an irrevocable trust would be your revocable living trust after you pass away. At that point, your wishes regarding the disposition of your assets are irrevocable – locked-in as you specified – and the trustee must carry out your wishes. Often a revocable living trust will contain provisions to set up other trusts. For married couples, it has been very common to create an irrevocable trust called a bypass trust, (aka credit shelter trust, ‘B’ Trust, etc.).
Prior to some new “permanent” laws passed in January ($5 million indexed-for-inflation estate tax exemption with portability), it was important for estate inheritance tax reasons for many people to create bypass trusts. For most people estate inheritance tax will not be a concern now, but bypass trusts, or similar types of trusts, can still be important for controlling where the deceased spouse’s assets end-up, especially in blended family situations with children from prior marriages. In other words, dad doesn’t want mom to disinherit the children he had from a prior marriage once he dies!
Another type of common irrevocable trust is a gifting trust. These are commonly created by a parent or a grandparent to permanently move assets out of their estate and into a trust for the benefit (or future benefit) of a child or grandchild with certain stipulations and protections governing the assets in the trust. We saw a lot of these set up in 2012 due to the uncertainty of the estate tax laws and the possibility of missing an opportunity to save estate inheritance tax down the road.
Due to the fact that you have relinquished a lot of control with an irrevocable trust, and it will no longer be included in your estate, the taxing authorities view this trust as a separate tax paying entity. This means it has its own tax return each year and gets its own taxpayer identification number.
In two weeks we will begin discussing the new tax rate changes and their impacts on trusts.
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 