Back to top


IRS Offers Health Care Tax Tips to Help Individuals Understand Tax Provisions in the Affordable Care Act

WASHINGTON — The Internal Revenue Service is offering educational Health Care Tax Tips to help individuals understand how the Affordable Care Act may affect their taxes. 

The IRS has designed the Health Care Tax Tips to help people understand what they need to know for the federal individual income tax returns they are filing this year, as well as for future tax returns. This includes information on the Premium Tax Credit and making health care coverage choices.

Although many of the tax provisions included in the law went into effect on Jan. 1, 2014, most do not affect the 2013 tax returns. 

The Health Care Tax Tips, which are now available at, include:

IRS Reminds Individuals of Health Care Choices for 2014 ─ Find out what you need to know about how health care choices you make for 2014 may affect your taxes.

The Health Insurance Marketplace - Learn about Your Health Insurance Coverage Options – Find out about getting health care coverage through the Health Insurance Marketplace.

The Premium Tax Credit ─ Learn the basics of the Premium Tax Credit, including who might be eligible and how to get the credit. 

The Individual Shared Responsibility Payment – An Overview ─ Provides information about types of qualifying coverage, exemptions from having coverage, and making a payment if you do not have qualifying coverage or an exemption. 

Three Timely Tips about Taxes and the Health Care Law ─  Provides tips that help with filing the 2013 tax return, including information about employment status, tax favored health plans and itemized deductions.

Four Tax Facts about the Health Care Law for Individuals ─ Offers basic tips to help people determine if the Affordable Care Act affects them and their families, and where to find more information.

Changes in Circumstances can Affect your Premium Tax Credit ─ Learn the importance of reporting any changes in circumstances that involve family size or income when advance payments of the Premium Tax Credit are involved.

In addition to Health Care Tax Tips, the website offers informative flyers and brochures, Frequently Asked Questions and in-depth legal guidance regarding the tax provisions of the Affordable Care Act.  


Beware of fake IRS emails and phone calls

Chris Strand, MST, CPA/PFS Trusted advisor to affluent individuals and families--and their businesses, estates, and trusts [Bader Martin, PS]

As usual, crooks are out and about trying new ways to garner information illegally from unsuspecting taxpayers. If taxpayers receive emails or unsolicited phone calls from the IRS, they are most likely fake. The IRS will never initiate contact with a taxpayer via email or phone call. There will always be a written notice mailed to the last known address before any phone calls. The IRS has started using emails, but only sporadically and only at the request of the taxpayer. The issue I have is how do I get people to not open these emails or talk to people on the phone? Typically, I’ll get a phone call from a client AFTER they have talked to someone on the phone or AFTER they have opened and perhaps responded to an email that purportedly came from the IRS. I put it occasionally in our firm newsletter. Does anyone have any other ideas of how to get people to beware of emails and phone calls from the IRS BEFORE they respond?


IRS Reminds Individuals of Health Care Choices for 2014

Everyone has important decisions to make concerning health care coverage in 2014.  Starting in 2014, you must choose to either have basic health insurance coverage (known as minimum essential coverage) for yourself and everyone in your family for each month or go without health care coverage for some or all of the year.

If you don’t maintain health insurance coverage, you will need to either seek an exemption or make an individual shared responsibility payment for the period that you are not covered with the 2014 income tax return you file in 2015.

If you choose to have health care coverage, qualifying coverage includes:

health insurance coverage provided by your employer (including COBRA and retiree coverage),

health insurance coverage you purchase through a Marketplace,

Medicare, Medicaid or other government-sponsored health coverage including programs for veterans, or

coverage you buy directly from an insurance company.

If you purchase health insurance coverage through the Marketplace, you may be eligible for financial assistance including the premium tax credit, which will help lower the out-of-pocket cost of your monthly insurance premiums.  

Qualifying coverage does not include certain coverage that may provide limited benefits, such as coverage only for vision care or dental care, workers’ compensation, or coverage only for a specific disease or condition. 

If you choose to go without coverage or experience a gap in coverage, you may qualify for an exemption if you do not have access to affordable coverage, you have a gap of less than three consecutive months without coverage, or you qualify for one of several other exemptions.  A special hardship exemption applies to individuals who purchase their insurance through the Marketplace during the initial enrollment period but due to the enrollment process have a coverage gap at the beginning of 2014.

If you (or any of your dependents) do not maintain coverage and do not qualify for an exemption, you will need to make an individual shared responsibility payment with your return. In general, the payment amount is either a percentage of your household income or a flat dollar amount, whichever is greater. You will owe 1/12th of the annual payment for each month you (or your dependents) do not have coverage and are not exempt. The annual payment amount for 2014 is the greater of:

1 percent of your household income that is above the tax return filing threshold for your filing status, such as Married Filing Jointly or single, or

Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.

The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. You will make the payment when you file your 2014 federal income tax return in 2015.

For more information about the individual shared responsibility provision and the premium tax credit, visit Visit the Department of Health and Human Services at for more information about health insurance coverage options and the Health Insurance Marketplace, financial assistance and exemptions.


The Premium Tax Credit

The premium tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes.  To be eligible for the credit, you generally need to satisfy three rules. 

First, you need to get your health insurance coverage through the Health Insurance Marketplace. The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from October 1, 2013 through March 31, 2014.

Second, you need to have household income between one and four times the federal poverty line. For a family of four for tax year 2014, that means income from $23,550 to $94,200.

Third, you can’t be eligible for other coverage, such as Medicare, Medicaid, or sufficiently generous employer-sponsored coverage.

If a  Marketplace determines that you’re likely to qualify for the tax credit at the time you enroll, you have two choices:  You can choose to have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out-of-pocket for your monthly premiums during 2014.  Or, you can wait to get all of the credit when you file your 2014 tax return in 2015.

If you wait to get the credit, it will either increase your refund or lower your balance due.

If you choose to receive the credit in advance, changes in your income or family size will affect the credit that you are eligible to receive.  If the credit on your tax return you file in 2015 does not match the amount you have received in advance, you will have to repay any excess advance payment, or you may get a larger refund if you are entitled to more. It is important to tell your Marketplace about changes in your income or family size as they happen during 2014 because these changes will affect the amount of your credit.


Deducting Medical and Dental Expenses

If you plan to claim a deduction for your medical expenses, there are some new rules this year that may affect your tax return. Here are eight things you should know about the medical and dental expense deduction:

1. AGI threshold increase.  Starting in 2013, the amount of allowable medical expenses you must exceed before you can claim a deduction is 10 percent of your adjusted gross income. The threshold was 7.5 percent of AGI in prior years.

2. Temporary exception for age 65.  The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through Dec. 31, 2016.

3. You must itemize.  You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction.

4. Paid in 2013. You can include only the expenses you paid in 2013. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment.

5. Costs to include.  You can include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Any costs reimbursed by insurance or other sources don’t qualify for a deduction.

6. Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The cost of insurance premiums that you pay for policies that cover medical care qualifies, as does the cost of some long-term care insurance. The cost of prescription drugs and insulin also qualify. For more examples of costs you can deduct, see IRS Publication 502, Medical and Dental Expenses.

7. Travel costs count.  You may be able to claim the cost of travel for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 24 cents per mile for 2013.

8. No double benefit.  You can’t claim a tax deduction for medical and dental expenses you paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.



Are Your Social Security Benefits Taxable?

Some people must pay taxes on part of their Social Security benefits. Others find that their benefits aren’t taxable. If you get Social Security, the IRS can help you determine if some of your benefits are taxable.

Here are seven tips about how Social Security affects your taxes:

1. If you received these benefits in 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.

2. If Social Security was your only source of income in 2013, your benefits may not be taxable. You also may not need to file a federal income tax return.

3. If you get income from other sources, then you may have to pay taxes on some of your benefits.

4. Your income and filing status affect whether you must pay taxes on your Social Security.

5. The best, and free, way to find out if your benefits are taxable is to use IRS Free File to prepare and e-file your tax return. If you made $58,000 or less, you can use Free File tax software. The software will figure the taxable benefits for you. If your income was more than $58,000 and you feel comfortable doing your own taxes, use Free File Fillable Forms. Free File is available only at

6. If you file a paper return, visit and use the Interactive Tax Assistant tool to see if any of your benefits are taxable.

7. A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:

$25,000 - for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year

$32,000 -for married couples filing jointly

$0 - for married persons filing separately who lived together at any time during the year


Five Facts about Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.

Here are five important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. For more about the various types, see Publication 525, Taxable and Nontaxable Income.

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

4. You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.

5. If you are facing financial difficulties, you should visit “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.


Four Things You Should Know if You Barter

Bartering is the trading of one product or service for another. Often there is no exchange of cash. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services.

If you barter, you should know that the value of products or services from bartering is taxable income.

Here are four facts about bartering:

1. Barter exchanges.  A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.

2. Bartering income.  Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.

3. Tax implications.  Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.

4. Reporting rules.  How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.


Ten Facts about Capital Gains and Losses

When you sell a ’capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are 10 facts from the IRS on capital gains and losses:

1. Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.

2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income. Beginning in 2013, you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts. For details see

4. You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.

5. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’ 

7. The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.  

8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.

10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.



How Big Will Obamacare Penalty Taxes Be?

Roberton Williams, Contributor - Forbes

The deadline is looming: If you don’t have approved insurance coverage by March 31 (and are not exempt from the requirement), the Affordable Care Act will hit you with a penalty on your 2014 income tax return. It is often said the tax is $95, but for many people it will be much more. A new calculator from the Tax Policy Center shows just how big it could be.

For a single person who makes enough in 2014 to file a 1040, the penalty can be as little as $95 or as much as $3,600, depending on income. For families, the penalty is much larger: A couple with two children could owe between $285 and $11,000.

My TaxVox post last November explained what determines the penalty. For low-income households, it’s a fixed dollar amount: $95 per adult plus $47.50 per child, up to a total of $285. Higher-income families will owe 1 percent of their income (net of specified deductions), up to the average national cost of getting basic (bronze level) insurance coverage for all family members. According to the Urban Institute’s Health Policy Center, that coverage will cost about $3,600 per adult plus $1,900 per child in 2014.

The penalty will be higher in subsequent years—2 percent of income with a minimum of $325 in 2015 and 2.5 percent of income but at least $695 in 2016 (again with a cap equal to the average premium for bronze plans in each year).

Take the calculator out for a spin and see how big the penalty can be. But be warned:  It’s almost always more than that widely-cited $95.

And after you’ve checked out TPC’s calculator to see what people will pay if they don’t enroll, you can use the Kaiser Family Foundation’s subsidy calculator to find out how big a subsidy they’d get if they do sign up for a plan.


Passive activity loss limitations

The passive activity loss (PAL) rules were introduced by the Tax Reform Act of 1986 and were designed to curb perceived tax shelter abuses. However, the PAL rules are far-reaching and affect activities other than tax shelters. Additionally, these rules limit the deductibility of losses for federal income tax purposes.

The PAL rules provide that passive losses can only be used to offset passive income, not active income the owners may earn from business activities in which they materially participate or portfolio income they receive from investments, such as dividend and interest income. So, while taxpayers may not benefit currently from losses sustained from passive activities, they may be able to use those losses to offset gains in future years.

A passive activity is a trade or business in which the taxpayer does not materially participate or, with certain exceptions, any rental activity. Rental activities generally are passive regardless of whether the taxpayer materially participates. However, the rental real estate activities of certain qualifying taxpayers in real estate businesses are subject to the same general rule that applies to nonrental activities. In other words, if the taxpayer satisfies certain participation requirements, the rental activity is nonpassive and any losses or credits it generates can be used to offset the taxpayer’s other nonpassive income. Additionally, federal regulations provide several exceptions to the general rule allowing a rental activity to be treated as either a trade or business or an investment activity.

A special rule allows taxpayers who actively participate in a rental activity to deduct up to $25,000 of loss from the activity each year regardless of the PAL rules. Examples of what would constitute active participation include approving new tenants, deciding on rental terms, and approving capital or repair expenditures. The $25,000 special allowance is, however, subject to a limitation. The $25,000 amount is reduced if the taxpayer has an adjusted gross income (AGI) (before passive losses) in excess of $100,000. The allowance is reduced by 50% of the amount by which AGI exceeds the $100,000 level. Consequently, the allowance is completely phased out when AGI exceeds $150,000. If taxpayers have rehabilitation or low-income housing credits, a special rule allows the credits to offset tax on nonpassive income of up to $25,000, regardless of the limitation based on AGI.

Another special rule is the exception for real estate professionals. This provision allows qualifying real estate professionals to deduct losses from rental real estate activities as nonpassive losses if they materially participate in the activity. To qualify as a real estate professional, a taxpayer must demonstrate that he or she spends more than 750 hours during the tax year in real property businesses in which they are a material participant. In addition, they must demonstrate that more than 50% of the services they perform in all of their businesses during the tax year are performed in real property businesses in which they materially participate.

Please contact us to discuss the passive activity provisions or any other tax planning or compliance issue.


When is a marriage terminated for tax purposes?

A couple remains married for tax purposes until a final decree of divorce is issued by a domestic relations court; a domestic relations court issues a final decree constituting a legal separation under local law, requiring the couple to live apart; or the abandoned spouse rule applies.

An individual is required to live apart from his or her spouse for the entire last six months of the tax year to achieve abandoned spouse status. In some divorce situations, where the abandoned spouse rule does not apply, a spouse may be reluctant to file a joint return due to the joint and several tax liability resulting from joint returns. Accordingly, in situations in which the abandoned spouse rule cannot be met but a spouse is reluctant to file a joint return, one option is for the spouse to file under the status of married filing separately, then wait to determine if any instances of concern regarding joint and several tax liability arise, and then elect to file an amended joint return within three years of the original due date of the separately filed returns. An amended return can be filed under joint return status where separate returns had originally been filed. However, the amended return must be filed within three years of the original due date, excluding extensions, of the separate returns.

An individual who has not received either a decree of divorce or separate maintenance from a court as of the last day of a tax year and who fails to qualify as an abandoned spouse is considered married for tax purposes. The taxpayer must therefore file a joint return or file as married filing separately.

The potential tax savings from delaying the divorce to file a joint return may not justify the additional liability exposure created by the joint filing. In some instances, completing the divorce and terminating the marriage may in fact save income taxes.

Once a marriage is terminated for tax purposes, the former spouses are no longer eligible to file a joint income tax return for that year. The individuals are then faced with the problem of dividing income and deductions on the divorce-year return. Also, special issues arise for allocating mortgage interest and taxes in divorce situations. Finally, the rules governing the reporting of income and deductions differ significantly between community property and equitable distribution states.


IRS Hits Lauryn Hill with $867,000 in Additional Tax Liens


The Internal Revenue Service has filed seven additional tax liens totaling nearly $867,000 against singer/songwriter Lauryn Hill only months after she was released from prison on tax charges.

Hill, a former member of the group the Fugees, was released last October after serving three months in prison, with another three months to be served in home confinement (see Former Fugee Lauryn Hill Released from Prison for Tax Charges). She was sentenced last July for failing to pay taxes on more than $1.8 million in federal taxes in 2005 to 2007, plus unpaid federal and state taxes in 2008 and 2009 of about $500,000 (see Fugees Singer Lauryn Hill Sentenced to Prison for Tax Evasion).

Hill has recently begun touring now that she has completed serving time in prison and home confinement. However, according to Radar Online, the IRS has now filed additional tax liens for unpaid taxes from 2005 to 2011, including $422,008.26 for 2005, $19,838.75 for 2006, $61,158.50 for 2007, $58,405.71 for 2008,; $30370.91 for 2009,; $13,247.73 for 2010, and $261,838.19 for 2011.

Upon her release from prison, Hill thanked her fans for their support and for sending her letters, packages and books. “Because of you there was not one day that I didn’t receive mail while I was away,” she wrote on her site. “I appreciated that. Also, know that many of your letters not only touched me but continued to confirm for me what I already knew but needed to hear again: that sincere expression has a serious purpose.”

            Hill's publicist, Kathryn Frazier, owner of Biz 3 Publicity & Management, denied that the tax liens are new. "So the gist is this: Contrary to media gossip there are no changes in Ms. Hill's legal status," she said in an email to Accounting Today. "Ms. Hill has finished her sentence, has been fulfilling her agreement with the IRS, and is taking care of all outstanding matters in regards to this situation. She is not in jeopardy of any further charges. The press is reporting on paperwork that had recently been filed, and has now become public record.


Changes in Circumstances can affect your Premium Tax Credit

If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace.

Most people already have insurance and they won’t have to do anything new. If you are looking for health insurance, you may be able to get it through the Health Insurance Marketplace and you may qualify for the premium tax credit.  You can “get it now” as an advance payment or you can “get it later” when you file your tax return.

Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Having at least some of your credit paid in advance directly to your insurance company will reduce the out-of-pocket cost of the health insurance premiums you’ll pay each month.

If you decide to get the credit in advance, it’s important to report any changes in your income or family size to the Marketplace throughout the year. Reporting these changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

The government makes advance payments of the credit based on an estimate of the credit that you will claim on your tax return when you file in 2015. If you report changes in your income or family size to the Marketplace when they happen in 2014, the advance payments will more closely match the credit amount on your 2014 federal tax return.  This will help you avoid getting a smaller refund than you expected or even owing money that you did not expect to owe.

More Information

Find out more about the premium tax credit, as well as other tax-related provisions of the health care law at 


Tips on Deducting Charitable Contributions

If you are looking for a tax deduction, giving to charity can be a ‘win-win’ situation. It’s good for them and good for you. Here are eight things you should know about deducting your gifts to charity:

1. You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates.

2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that’s more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services.

4. If you give property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information.

8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift.

For more details, see Publications 526, Charitable Contributions and 561, Determining the Value of Donated Property.



Tax Rules for Children with Investment Income

You normally must pay income tax on your investment income. That is also true for a child who must file a federal tax return. If a child can’t file his or her own return, their parent or guardian is normally responsible for filing their tax return.

Special tax rules apply to certain children with investment income. Those rules may affect the tax rate and the way you report the income.

Here are four facts from the IRS that you should know about your child’s investment income:

1. Investment income normally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.

2. Special rules apply if your child's total investment income is more than $2,000. Your tax rate may apply to part of that income instead of your child's tax rate.

3. If your child's total interest and dividend income was less than $10,000 in 2013, you may be able to include the income on your tax return. If you make this choice, the child does not file a return. See Form 8814, Parents' Election to Report Child's Interest and Dividends. 

4. Children whose investment income was $10,000 or more in 2013 must file their own tax return. File Form 8615, Tax for Certain Children Who Have Investment Income, along with the child’s federal tax return.

Starting in 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax. NIIT is a 3.8% tax on the lesser of either net investment income or the excess of the child's modified adjusted gross income that is over a threshold amount. Use Form 8960, Net Investment Income Tax, to figure this tax. For more on this topic, visit



Don’t Overlook the Child and Dependent Care Tax Credit

Many people pay for the care of their child or other dependent while they’re at work. The Child and Dependent Care Credit can reduce that cost. Here are 10 facts from the IRS about this important tax credit:

1. You may qualify for the credit if you paid someone to care for your child, dependent or spouse last year.

2. The care you paid for must have been necessary so you could work or look for work. This also applies to your spouse if you are married and filing jointly.

3. The care must have been for ‘qualifying persons.’ A qualifying person can be your child under age 13. They may also be a spouse or dependent who is physically or mentally incapable of self-care. They must also have lived with you for more than half the year.

4. You, and your spouse if you file jointly, must have earned income, such as wages from a job. Special rules apply to a spouse who is a student or disabled.

5. The payments for care can’t go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Care payments also can’t go to your child under the age of 19, even if the child isn’t your dependent.

6. The credit is worth up to 35 percent of the qualifying costs for care, depending on your income. The limit is $3,000 of your total cost for the care of one qualifying person. If you pay for the care of two or more qualifying persons, you can claim up to $6,000 of your costs.

7. If your employer provides dependent care benefits, special rules apply. For more see Form 2441, Child and Dependent Care Expenses.

8. You must include the Social Security number of each qualifying person to claim the credit.

9. You must include the name, address and identifying number of your care provider to claim the credit. This is usually the Social Security number of an individual or the Employer Identification Number of a business.

10. To claim the credit, attach Form 2441 to your tax return. If you use IRS e-file to prepare and file your return, the software will do this for you.



Tips for Self-Employed Taxpayers

If you are an independent contractor or run your own business, there are a few basic things to know when it comes to your federal tax return. Here are six tips you should know about income from self-employment:

            Self-employment income can include income you received for part-time work. This is in addition to income from your regular job.

You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040.         

You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. Make sure to file the schedule with your tax return.

You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You may be charged a penalty if you do not pay enough taxes throughout the year.

You can deduct some expenses you paid to run your trade or business. You can deduct most business expenses in full, but some must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.

You can deduct business costs only if they are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.



What You Need to Know about the Amount of Health Insurance Reported on Form W-2

You may be wondering if you have to report the value of your employer-sponsored health insurance coverage, which may appear on your W-2, Wage and Tax Statement when you file your 2013 federal income tax return.

Here is what you need to know about the value shown on your W-2.

The health care law requires certain employers to report the cost of coverage under an employer-sponsored group health plan.

The amount of employer-sponsored health insurance coverage appears in Box 12 of the W-2, and has the code letters “DD” next to it.

Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable or that it needs to be reported on your tax return.

The amount is only for information, and shows the payments made by you and your employer and is not included in the amount shown in Box 1, which is the amount of taxable earnings.


5 Devices That Are Endangering Your Business


With data breaches estimated to cost an average of $5.4 million per incident, businesses need to be aware of five office tools that are particularly vulnerable, according to experts.

After a recent study by the Ponemon Institute revealed the high cost of data breaches, the privacy and information security policy research center teamed with document management company Cintas Corp. to identify overlooked areas of risk for data security.

“With the growing number of digital devices in today’s businesses, it is no longer sufficient to only secure data stored on documents or in computer files,” said Dr. Larry Ponemon, chairman and founder of the Ponemon Institute. “Data stored on digital devices such as fax machines and routers must be securely destroyed to prevent it from getting into the wrong hands.”

The most commonly overlooked digital devices that could create the risk of a security breach are:

1. Old hard drives. Many discarded or unaccounted for hard drives contain confidential and recoverable information. Complete physical destruction is the best way to protect this sensitive data.

2. Copy machines. The latest generation of digital copiers have a hard disk that can often include sensitive information such as Social Security numbers and account numbers. Some devices include a security feature that allows you to overwrite the hard drive, which should be done at least once a month.

3. Fax machines. A fax machine sitting out in the open not only makes it easy for employees to access, but also allows wandering eyes to notice the data as they walk by. Create a corporate faxing policy that forbids employees from leaving documents unattended at the fax machine. Fax machines also contain hard drives that store data from each document they transmit.

4. Routers. Whether you use a wired or wireless router, if it is not configured properly, it could pose potential security risks. Pirates using your Internet connection can not only slow down your connection, they can also gain access to your confidential information.

5. Mobile devices. Businesses must put “Bring Your Own Device” or BYOD and mobile device policies in place to protect against the potential risk of a stolen or missing mobile device. An effective policy should include training programs, and heightened security measures such as remote wipe.


Taxpayers Warned of ‘Largest Ever’ Phone Fraud Scam from IRS Impostors


The Treasury Inspector General for Tax Administration is warning taxpayers to beware of phone calls from individuals who claim to represent the Internal Revenue Service, but in reality are trying to defraud them, in what it is saying is the largest ever scam it has seen to date.

“This is the largest scam of its kind that we have ever seen,” said TIGTA Inspector General J. Russell George in a statement.  He noted that TIGTA has received reports of over 20,000 contacts and has become aware of thousands of victims who have collectively paid over $1 million as a result of the scam, in which individuals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials.

“The increasing number of people receiving these unsolicited calls from individuals who fraudulently claim to represent the IRS is alarming,” said George. “At all times, and particularly during the tax filing season, we want to make sure that innocent taxpayers are alert to this scam so they are not harmed by these criminals. Do not become a victim.”

George urged taxpayers to heed warnings about the sophisticated phone scam targeting taxpayers, noting that the scam has hit taxpayers in nearly every state in the country. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card or wire transfer. The scammers threaten those who refuse to pay with arrest, deportation or loss of a business or driver’s license.

The truth, TIGTA pointed out, is the IRS usually first contacts people by mail—not by phone—about unpaid taxes. The IRS also won’t ask for payment using a pre-paid debit card or wire transfer, and the agency won’t ask for a credit card number over the phone.

“If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you don’t pay immediately, that is a sign that it really isn’t the IRS calling,” said George.

The callers who commit this fraud typically use common names and fake IRS badge numbers, TIGTA noted. The scammers also frequently know the last four digits of the victim's Social Security Number make the caller ID information appear as if the IRS is calling, making the scam even more convincing. In addition, they tend to send bogus IRS e-mails to support their scam, and call a second time claiming to be the policy or department of motor vehicles, and the caller ID again supports their claim.

TIGTA said that if you receive a call from someone claiming to be with the IRS asking for a payment, here’s what to do. If you owe federal taxes, or think you may owe taxes, hang up and call the IRS at 800-829-1040.  IRS workers can help you with your payment questions. If you don't owe taxes, call and report the incident to TIGTA at 800-366-4484. You can also file a complaint with the Federal Trade Commission at  Add "IRS Telephone Scam" to the comments in your complaint. 

TIGTA and the IRS are encouraging taxpayers to be alert for phone and e-mail scams that use the IRS name. The IRS said it will never request personal or financial information by email, texting or any social media. Taxpayers who received scam e-mails should forward them to, but they should not open any attachments or click on any links in those emails.

Taxpayers also should be aware that there are other unrelated scams (such as a lottery sweepstakes winner) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

For more information about tax scams, visit


Common Taxpayer Misconceptions

The NAEA’s collection of ridiculous things tax clients believe


My Social Security benefits aren’t taxable.

Depending on the amount of other income that a taxpayer has to report, their benefits may be taxable – but the maximum amount of Social Security benefits that must be included is 85 percent.


I don’t need to report stock sales if I bought other stocks with the proceeds.

Many taxpayers think that if they reinvested the money from a stock sale, or otherwise didn’t see any cash, that it doesn’t need to be reported. But stock sales outside of retirement accounts must be reported.


I’m a student and only work part-time, so I don’t have to file a return.

Filing requirements are based on filing status, dependency status, amount of income, and whether it is earned or unearned – not whether you’re a student.


It’s my preparer’s fault.

No matter who prepares your tax return, the taxpayer is legally responsible for its contents.


My deadbeat cousin lives in one of my rental properties. He doesn’t pay much, but I can still treat it as a rental.

There are limits on how far below fair market rental value you can go – including the fact that expenses cannot exceed income. There may be other limits as well: The Tax Court has suggested that a fair rent for a family member could be up to 20 percent below market.


My spouse and I separated last year and lived apart for most of the year – so I can file Single.

Unless you were legally divorced or separated as of the end of the year, you cannot file as single.


If I take dividends instead of wages from the S corp I own, I can save on payroll taxes.

In terms of S corp shareholders and employees, reasonable compensation must be paid before any dividends or loan repayments are permitted – and failing to properly report wages could result in reclassification of the dividends or loan repayments as wages, with penalties.



What your car really costs you

By Andrea Coombes

Your vehicle could be driving your budget into the ground

Ever wonder where your money disappears every month? Take a look in your garage.

Your car could be driving your budget into the ground.

If you’re driving 15,000 miles a year — not uncommon for an American worker — in a midsize sedan such as a Toyota Camry or Ford Fusion, you’ll spend more than $760 a month on average, or $9,150 a year, on gas, maintenance, tires, full-coverage insurance, license and registration costs, depreciation and finance charges.

That’s according to an annual report by AAA, the auto club, on driving costs in 2013, based on buying a new car and driving it for five years and 75,000 miles.

But your costs easily could be higher.

Got an SUV? It will cost you about $967 a month, or $11,600 a year, according to AAA.

And don’t forget those one-time and infrequent costs not included in the AAA report — say, $10 a pop for a carwash every other month, an occasional parking ticket of, say, $40. Perhaps you’re also shelling out for paid parking at the baseball game or a downtown garage. Add $300 a year for those types of charges. Let’s just say you avoid budget-busting speeding tickets.

We could add in the square footage of your garage — say 400 square feet at $100 a square foot. That’s $40,000 of your mortgage that’s going to the car.

Plus, if you’re like 76% of Americans, you drive to work alone — and it takes you about 50 minutes a day round-trip on average. Your driving costs are counted in AAA’s estimate, but what about the value of your time?

Let’s say your time is worth $25 an hour. Add up that 50-minute commute every weekday for all but two weeks a year and you’re spending about $5,200 a year.

After 10 years, that’s $52,000 worth of your time, gone, not to mention the $94,500 in direct car costs, without even including your garage financing costs.

Realize, too, that where you choose to live also plays a part. “Transportation costs vary by region,” says Linda Young, research director at Center for Neighborhood Technology in Chicago.

Some of the most expensive U.S. housing markets, including San Francisco and New York, rise high in the Center’s affordability rankings when transportation costs are factored in, and more spread-out places such as Houston or Tampa become less affordable.

“In places that are compact, close to jobs, with a variety of transportation choices, people spend less. In dispersed areas, people need to own a lot more autos and need to drive them farther, so hence the costs go up,” says Ms. Young.

Take a look at these tips for ways to reduce your automobile costs. (Clearly, avoiding costs such as time spent commuting entail major life changes. The point is: Don’t ignore these expenses in your decision making.)

1. Don’t buy more than you need.

Before you rush into a car purchase, consider your long-term finances. The difference in annual cost between a small and medium-size sedan driven 15,000 miles annually is more than $2,000 a year; there’s a similar difference between midsize and large sedans, according to AAA.  “In the showroom it might be a $5,000 difference, but in the long term it’s a five-figure difference,” says Michael Calkins, manager, technical services at AAA in Heathrow, Fla. Mr. Calkins compiles the figures in AAA’s annual “Your Driving Costs” report.  Why not put that money into your child’s college fund or your mortgage?  Making an extra $2,000 house payment once a year can slash your interest payments by more than $40,000, plus reduce your loan term by about seven years, assuming a 30-year, fixed-rate $200,000 loan at 4%.

2. Don’t buy new.

Buying a car new is a losing bet.  “The single biggest expense is depreciation — and that’s probably far and away the most overlooked cost of vehicle ownership,” says Mr. Calkins.  Cars depreciate at different rates, but generally, “in the first year it’s going to depreciate by roughly 20%,” says Ron Montoya, consumer-advice editor with in Santa Monica, Calif. Check out their True Cost to Own tool to see depreciation and other costs for particular models: .  To reduce costs, buy used — and look to cars that hold their value, such as a Honda Accord or Toyota Camry, Mr. Calkins says.  “Mercedes, BMW, Lexus: These are wonderful cars, but they take big hits in the first couple of years in depreciation,” he says.

3. Read the manual.

The good news is that even though repair costs rise as cars age, “the longer you own a car, the less it costs to own and operate,” Mr. Calkins says. “Today’s cars are pretty darned reliable and most will go 100,000 miles without needing a major repair.”  But don’t overmedicate your car with oil changes and the like. Cars have changed a lot in the last couple of decades — engines are stronger and lubricants work better now, he says.  Instead, read your owner’s manual.  “There’s always a section on the upcoming services that are needed,” Mr. Montoya says. Call your mechanic for a cost estimate and figure that into your budget.  Also, various apps can help you track your gas mileage and improve your budgeting. Fuelly is one. Mr. Montoya uses Road Trip.

4. Ask about insurance costs.

Before you buy a new car, ask your insurance company for a quote on that model. You may be surprised at your insurer’s response.  “You’d think that a subcompact economy car would be really cheap to insure, but that’s not necessarily always the case,” Mr. Calkins says. “Conversely, with an expensive car, say, a Mercedes, the cost may actually be fairly reasonable because the people who own those cars tend to drive them very carefully.” 

This story originally ran on Mercedes or Ford, It Costs a Lot More Than You Think 




How to Fire an Employee

Termination, Part I

By James Stork
Senior Vice President, Drake Software

            No one enjoys firing an employee.  Whether it is a seasonal worker or a permanent staff member, termination of employment is stressful for both the employee and the manager who must implement the decision.  

            And it has to be done carefully.  While most professionals working in tax preparation and accounting firms are assumed to be employed “at will,” the courts have not always favored employers when it comes to the legal and emotional issues surrounding the termination of employment.  No termination should be taken lightly, even when it’s well deserved.  Regardless of how badly the employee has performed, and no matter how many times the employee has been disciplined, stay true to the process and make sure your actions are respectful, dignified, and legal.  A mismanaged termination can have a compounding effect on the health of your company.

            Doing a termination well actually requires a few steps long before the final meeting – steps to be taken when you spot the first signs of poor performance, attitude, or disengagement.  Management must quickly hone in on the core problem and determine whether additional guidance or training can resolve the issue.  The firm, in making the ultimate decision to hire the employee, accepts a moral obligation to provide the employee with a path for improvement, and must protect itself by documenting that path with specific guidelines for righting the ship and re-evaluation.

            At a minimum, it is important to have rules for employees, that those rules be uniformly enforced, and that employees certify that they have read and understand the rules.  This generally means the preparation of an employee handbook or list of policies, which in turn will require the assistance of a human resources management consultant and a good attorney.  

            It is also important to have a procedure to follow in terminating an employee.  Having a procedure will take some of the stress out of the situation, giving the manager time to calm down, collect his or her thoughts, and make a more rational decision.  The procedure will also help in planning the termination meeting – while firing a temp may require less planning than firing a permanent or long-term employee, it still has to be done correctly.

            This paper covers best practices for firing an employee.  It includes 10 tips and a “Termination Checklist” that will assist in the process.  

10 Tips for Firing an Employee

            1. Just do it.  There is a reason that you have decided to fire this employee, and if you have followed the correct procedures there is no reason to hesitate at the last minute.  It’s going to be awkward and unpleasant whether you do it today or next week, but putting it off can only make a bad situation even worse.  

            2. Meet in person.  The annals of small business are chock full of horror stories from employees who were fired via email, or by a message left on their cell phones.  Such impersonal notices may save some stress for the manager, but they reflect badly on the firm.  Treating the employee this discourteously also angers them – which may lead them to take retribution such as suing the firm.  In the meeting, cut to the chase.  Don’t hem-haw around.  Let the news sink in, and then cover the details – when they will receive their last paycheck, how they should exit the building, what they should leave behind, etc.  

            3. Be respectful, humane, and brief.  In as few words as possible, tell them you have to let them go and why.  Beyond this, re-hashing grievances or failures of the past will accomplish nothing.   Above all, don’t allow yourself to get sucked in to an argument.  If the former employee wants to debate, attempt to end it by saying, “I understand you probably don’t agree with my assessment or decision.  But I’ve made my decision and it’s final.  It’s time for you to go.”

            4. Let them know what to expect in the future.  Firing the employee does not mean the relationship will come to an end.  If that person is in your profession, chances are good that you will see them again at conferences and meetings.  Whether they speak highly of your firm or not depends a lot on how you handle the post-employment details.  Unless they have been fired for an illegal act, the employee will be entitled to unemployment, so let him or her know up front that they should file and that the firm will not oppose it.  Let them know that you will only provide future employers with basic employment information, such as your dates of service, job titles, and responsibilities.  Let them know when they will receive their last paycheck and what deductions will be made.  Let them know the status of any retirement accounts.  End the meeting on a positive note and wish the former employee good luck in their next job.

            5. Don’t assume the employee will be surprised.  It is sometimes the case that the employee is shocked by the decision to fire them, but in my experience, most are prepared for the worst.  In roughly half of all firings, the employee is aware that their performance does not match the firm’s expectations – particularly if you have done a good job at trying to give the employee a path to improvement and have documented your coaching sessions aimed at improvements.  Do not be surprised if the employee is already job hunting.  Being fired is a part of every business career and often leads the employee to take the actions that will lead to a better career path.

            6. Have a witness in the meeting.  If the termination goes to court, you need to avoid the “he said/she said” disagreements over what happened in the termination meeting.  Having another person in the meeting can keep things calmer and dilutes any incentive for the employee to retaliate after the fact.  Most firms have a senior partner manage the termination meeting with the HR staffer or office manager as the second person.

            7. Recover the company’s property and allow the employee to have theirs.  This usually means that the termination meeting should be done over the lunch break or at the end of the day.  It also allows the employee to leave with some dignity, without the embarrassment of having to be escorted out in the presence of former co-workers.  Before the employee exits, recover all company property – including keys, badges, laptop computers, cellular phones, and keys to company vehicles.  At the same time, provide a container for the employee to use in removing their personal property as easily as possible.  If the former employee is too upset to do this on the day of termination, make arrangements for them to come in at another time to do so – under escort, and not during work hours.

            8. Remove the employee from the accounting and IT systems.  Cut off access to the company computers, to work areas, and from the payroll system.  Minimize interaction with customers and other employees.  Once the termination meeting has taken place, the employee must have no access to email, customer lists, or other company systems.  If the employee wishes to say good-bye to co-workers, he or she should use a personal email account.  Most of the damage done to companies by former employees occurs because they still have access to company networks and email systems.

            9. Review the firm’s non-compete provisions.  Most firms have their professionals sign a non-compete clause, though these have been successfully challenged by court rulings on the matter.  Review the provisions and restrictions under the non-compete so that the former employee understands the limitations and obligations it contains.  Even if the employee has not signed a formal non-compete agreement, the firm’s employee handbook should contain language strictly forbidding employees from sharing confidential or proprietary information about the firm to competitors, prospects, or clients.  Make sure these obligations are covered as well.

            10. Use a Termination Checklist.  A checklist will help to keep the process organized, and will ensure all appropriate items are covered.  A sample checklist is enclosed in the next section of this paper.

The Termination Checklist

            Firing an employee is more than just a single unpleasant meeting.  Long before the event itself, there are requirements for remedial efforts; planning for the event; items that must be covered during the event itself; and post-firing activities.  

            The Termination Checklist must then cover four different and specific areas.  Here’s a sample checklist:

            1. Remedial efforts.

a. Employee handbook and policies have been explained to the employee and employee has signed a document indicating they understand the policies.

b. Job description and performance have been explained to the employee and employee has signed a document indicating they understand the job duties and expectations.

c. Employee has been given an opportunity to explain their performance/behavior and any extenuating circumstances.

d. A remediation plan was created and approved by both the employee and management.

e. Performance reviews have been conducted at intervals sufficient for the employee to demonstrate improvements.  These reviews have been documented and the employee has signed to indicate they understand the review, the expectations going forward, and the criteria that will be used to judge future performance.

f. All remedial and disciplinary actions have been documented. 

            2. Termination Planning.

a. Coordinate with designated Personnel Manager, including the final work date, preparation of a final paycheck, details of retirement and other benefits, and removal of the employee from the HR system.

b. Coordinate with Security, if deemed necessary, for escort from the building and retrieval of company property, keys, access cards, and other items.

c. Coordinate with IT, including the final work date and time for termination of access to all computer, phone, and other systems.  This should coincide with the beginning of the termination meeting.

d. Preparation of a termination letter that notifies the employee of their termination and covers details of final paycheck, retirement, benefits, and a formal request for return of all company property.  This letter should also include non-compete information.

e. Planning for the date and time of termination.

f. Meeting time and date set to minimize impact to the employee and firm.

g. Identification of a witness to the termination.

3. The Termination Meeting.

a. Finalize termination letter, as approved by legal and HR, and present to employee.

b. Discuss effective date, business reasons for termination, and unemployment eligibility.

c. Review confidentiality/proprietary information policies.

d. Confirm employee’s address and contact information for future notifications.

e. List of company property to be returned finalized, including:

1.   Cell phone/calling cards

2.   Tablet/laptop/home computer/scanner/fax machine

3.   Company phone list/client list/employee handbook

              4.   Identification badge/office keys/key cards

              5.   Company car/credit cards/parking pass.

f. Review of personal information on company computer.

g. Review procedure to be used to quickly facilitate return of Company property and retrieval of employee’s personal property with dignity.

h. Establish details of wages owed, including sick pay, vacation pay, stock options, severance pay, bonuses, and deductions if any.

i. Establish details of health insurance continuation, if any

               1.  Coordinate preparation of COBRA notice

               2.  Confirm termination date for health care coverage.

4. Post Termination.

a. Cancel employee access to computer systems, including:

                1.   Change of passwords for system to prevent unauthorized access

                2.   Archiving of all emails for legal/records retention purposes

                3.   Automatic email notification that employee is no longer employed

                4.   Notification of key clients as necessary

                5.   Remove employee from the firm’s web site and marketing materials.

b. Review company information on home/personal computer that needs to be deleted/returned, and set procedure for doing so.

c. Place other documentation related to employee in the employee file, including a copy of the termination letter, and archive.

d. Delete employee from accounting/payroll systems.


IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply

WASHINGTON – The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as Bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

 Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.

The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. 

Further details, including a set of 16 questions and answers, are in Notice 2014-21.


Two Tax Credits Help Pay Higher Education Costs

Did you, your spouse or your dependent take higher education classes last year? If so, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs. Here are some facts from the IRS about these important credits.

The American Opportunity Credit is:

                Worth up to $2,500 per eligible student.

Only available for the first four years at an eligible college or vocational school.

Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.

For students earning a degree or other recognized credential.

For students going to school at least half-time for at least one academic period that started during the tax year.

For the cost of tuition, books and required fees and supplies.

The Lifetime Learning Credit is:

                Limited to $2,000 per tax return, per year, no matter how many students qualify.

For all years of higher education, including classes for learning or improving job skills.

Limited to the amount of your taxes.

For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.

For both credits:

                Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure it’s correct.

You must file Form 8863, Education Credits, to claim these credits on your tax return.

You can’t claim either credit if someone else claims you as a dependent.

You can’t claim both credits for the same student or for the same expense, in the same year.

The credits are subject to income limits that could reduce the amount you can claim on your return.

Visit and use the Interactive Tax Assistant tool to see if you’re eligible to claim these credits.

See Publication 970, Tax Benefits for Education for more on this topic.




Supreme Court Rules Severance Pay Can Be Taxed


(Bloomberg) The U.S. Supreme Court decided in favor of the Obama administration in a dispute over taxes on severance compensation, overturning a lower court decision that could have forced the IRS to refund more than $1 billion.

The court said payments to laid-off workers are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act, or FICA. It was a victory for the Internal Revenue Service, which has been fighting more than 2,400 refund claims from companies and their ex-employees.

The justices’ unanimous ruling yesterday came in the case of Quality Stores Inc., once the country’s largest agricultural specialty retailer. The defunct company fired 3,100 workers when it closed its stores in 2001 and 2002, paid the taxes on their severance and then asked a bankruptcy judge to order the IRS to refund $1 million.

Writing for the court, Justice Anthony Kennedy said the payments were subject to tax. He rejected the company’s contention that what it called supplemental unemployment compensation was exempt from the FICA.

“The severance payments here were made to employees terminated against their will, were varied based on job seniority and time served and were not linked to the receipt of state unemployment benefits,” he wrote. “Under FICA’s broad definition, these severance payments constitute taxable wages.”

Unresolved Lawsuits

Lower courts were divided on the issue. The high court ruling came in the government’s appeal of a September 2012 decision by a Cincinnati-based U.S. appeals court that said Quality Stores was entitled to a refund. The money would have gone to 1,850 ex-employees who paid their share of the taxes and authorized Muskegon, Michigan-based Quality Stores to try to recoup the payments on their behalf.

“The decision is a huge blow for employers and employees alike,” said Bob Hertzberg, the lawyer who represented Quality Stores at the Supreme Court. “In addition to the impact on Quality Stores and its former employees, this ruling has far-reaching implications for the thousands of other organizations and workers fighting for refunds.”

Kathryn Keneally, head of the Justice Department’s tax division, said the government is “pleased that the Supreme Court recognized that there should be no difference in how severance pay is taxed for social security and income tax purposes.”

Program Financing

FICA uses payroll taxes to finance Social Security and part of the Medicare health-care program for the elderly and disabled. Employers and employees each pay 6.2 percent in Social Security taxes on wages up to a cap, which is $113,700 this year, and they each pay 1.45 percent of all wages toward Medicare. High-income taxpayers are subject to additional payroll levies.

According to a brief filed by the Obama administration, the claims for refunds have been made in 11 unresolved lawsuits and 2,400 administrative cases “with a total amount at stake of more than $1 billion.”

“That figure is expected to grow,” the brief said.

The case is United States v. Quality Stores, 12-1408.




Death and Tax Refunds


A decade ago, few of us had heard of identity theft. Now, most of us know someone who has been a victim. And of course, a large portion of ID theft affects tax preparers and taxpayers directly, since tax refunds are a huge target of identity thieves.

“The IRS has been paying out between $3.6 billion and $4 billion in inappropriate refunds every year,” said Adam Levin, former director of the New Jersey Division of Consumer Affairs and co-founder of both and Identity Theft 911.

“In the first six months of 2013, there were more instances of tax ID theft uncovered—1.6 million instances—than in all of 2012, which had 1.2 million instances.”

"Organized crime has gotten into the act because it’s a lot safer than doing a drug deal,” he suggested. “You don’t have to stand under a street light late at night—you can sit in your jammies drinking hot cocoa and playing with your computer. They file as many returns as they can and hope they get lucky. All they need is a name and address, a social security number and a doctored W-2 form.”

Combining and confirming the old adage about death and taxes, a large portion of ID theft involves using the identities of dead people, according to Jean Carter, CPA, Esq., a partner at Hunton & Williams LLP.

“In 2011, for example, one thief received $12.1 million in refund claims using stolen names and Social Security numbers of 5,108 dead people,” she said.

“The unfortunate thing is that dead people notice last, and thieves know this,” she said. “In addition to tax refunds, there’s a world of digital assets out there that thieves can tap into. It’s easy to figure out who is dead simply by using obituaries. Some of these large breaches of credit card data very likely cross-referenced to deceased people to have a body of card numbers that are easy to use.”

The key to protect someone who is dead is to have someone who is alive to monitor what’s going on and take proactive steps, Carter emphasized. “Start by canceling all credit cards. It requires the executor to know what cards there are. Some of us have cards and accounts we don’t even know we have. For example you might be offered 20 percent off a single purchase if you apply for a store credit card. Many people do this, use the card once and never use it again.”

In the traditional world, you can go to a file cabinet and find bank and credit card statements and know what’s going on, Carter observed. “But transactions are increasingly being done online without a paper copy, so the executor or family member might often overlook certain assets,” she said. “It’s important to secure the various assets, and make sure no one can take advantage of the situation.”

“Thieves can exploit anything,” she said. Death gives them one more shot at it.”



IRS Warns of New Email Phishing Scheme Falsely Claiming to be from the Taxpayer Advocate Service

WASHINGTON —The Internal Revenue Service today warned consumers to be on the lookout for a new email phishing scam. The emails appear to be from the IRS Taxpayer Advocate Service and include a bogus case number.

The fake emails may include the following message: “Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.”

Recipients are directed to click on links that supposedly provide information about the "advocate" assigned to their case or that let them "review reported income." The links lead to web pages that solicit personal information.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at For more information, visit the IRS's Report Phishing web page.

The Taxpayer Advocate Service is a legitimate IRS organization that helps taxpayers resolve federal tax issues that have not been resolved through the normal IRS channels. The IRS, including TAS, does not initiate contact with taxpayers by email, texting or any social media.




Dumbest Employee Excuses for Being Late

Running a little late could have big repercussions, especially at a firm in the midst of busy season. From escaped zebras to must-see TV, employers told CareerBuilder some of the most memorable excuses they've heard from tardy employees.

Employee woke up on the front lawn of a house two blocks away from his home. 

Employee's cat got stuck in the toilet. 

Employee ran out of milk for breakfast cereal and had to buy some before getting ready for work. 

Employee was late to work because he fell asleep in the car when he got to work.

Employee accidentally put superglue in their eye instead of contact lens solution and had to go to the emergency room. 

Employee thought Halloween was a work holiday. 

Employee said a hole in the roof caused rain to fall on the alarm clock and it didn't go off. 

Employee was watching something on TV and really wanted to see the end. 

Employee forgot that the company had changed locations. 

Employee got a hairbrush stuck in her hair. 

Employee was scared by a nightmare. 



Taxes Increased on Most Taxpayers Last Year


Whether they realize it or not, taxes ended up going up for most taxpayers last year, despite the extension of the Bush tax cuts at the beginning of last year.

Greg Rosica, a tax service partner at Ernst & Young and contributing author to the EY Tax Guide 2014, pointed to the combined impact of the fiscal cliff deal, which was enacted as the American Taxpayer Relief Act, or ATRA, and the expiration of the payroll tax cuts.

“I think really almost every taxpayer is facing higher taxes for 2013, whether they see it or they don’t see it,” he said in an interview last week. “The obvious part is the higher rates that came through from ATRA that really at different income levels phase in with different items. At $200,000 there’s an impact, at $300,000 of income there’s an impact, and at $400,000 there’s yet another impact. But also anyone who works and earns wages, from $1 to $115,000, had this Social Security payroll tax holiday that went away. It was 4.2 percent and went back to 6.2 percent, so that 2 percent went away. That’s not so visible because it came out of every paycheck and people didn’t see it. But I think the reality is that everyone, from the wage earner up through the higher-income level people, is seeing the impacts of the tax law changes and provisions that sunset.”

The hot topic these days for EY’s clients is the Net Investment Income Tax, which was mandated as part of the Affordable Care Act. The IRS only recently finalized the forms and instructions for that tax, even though it took effect at the beginning of last year (see IRS Finalizes Instructions for Net Investment Income Tax Form).

“One is understanding it, and two is understanding how it applies, and three is getting it on the forms correctly, as all of those things are new,” said Rosica. “They’re being evaluated and we’re trying to understand the implications. Understanding straightforward items like interest, dividends and capital gains from publicly traded securities and those kinds of things, you’re either at an income threshold level where those things apply or you’re not, and there’s not a whole lot to deal with. But in the area of trades or businesses, particularly partnerships or S corporations where there’s flow-through income that comes through to taxpayers, it takes a lot more analysis to determine whether the owners of those interests are involved in the business or not, and whether in fact that income is subject to it or is not subject to it. It’s not something that you get from the K-1 that tells you that answer, so you have to be able to evaluate your situation and look at it from the perspective of what that trade or business is. There may not be just one [business], even though it comes through on one K-1, and then whether you’re able to take that and combine or group it with other types of activities that you have to either make it so it’s not subject to that tax, or if it is subject to that tax to be able to apply that to it.”

Rosica also needs to look at the tax from a planning perspective, particularly when the entities are owned by trusts. “In the trust context, if they’re receiving K-1’s of these S corporations or partnerships, that may or may not be subject to the Net Investment Income Tax, it’s more a function of whether the trustee—the fiduciary in that case—participates in that activity, whether they’re active or passive in that particular activity,” he said.

ATRA also changed the deduction phase-outs that used to be known as the PEP and Pease limitations.

“You’re losing some of the exemptions and itemized deductions based on your income level,” said Rosica. “It enters into a planning discussion as to how we can best plan through those types of items. As we look at a multiyear tax projection that we would typically do with our clients, we’re looking at how we can minimize the impact of that by maybe trying to bunch up some deductions every other year or so. It’s harder to do in certain states and easier in others. If you’re earning a wage in a state like New York that has a state income tax, you’re going to have state income taxes withheld. There’s not a whole lot of navigating around that, so that’s something that’s going to be driving your itemized deductions and perhaps even putting you into AMT. But to the extent those are controllable, maybe you make estimated tax payments or you live in a state without income taxes and you’re able to time when you make your real estate tax payments, when you make your charitable contributions, not so much necessarily on mortgage interest if you have that, but you may very well be in a situation where you can bunch those into an every-other-year pattern and be able to take the standard deduction on the off years and therefore the phase-out, because it’s based on your income level, not your itemized deductions. It’s a set hurdle, and then once you’re over there, you get 100 percent of the benefit of all of those deductions. Trying to plan one’s affairs to be able to maximize that is how we deal with the phase-out of the itemized deductions.”

With talk of Congress soon turning its attention to the renewal of at least some of the tax extenders, there are prospects for several of the more popular ones getting extended again.

“One that comes to mind is the provision around mortgage cancellation of debt that happened,” said Rosica. “When people were having short sales, that was a help that came into play at the height of the mortgage crisis when people were having mortgage forgiveness and here they were in dire straits, having their house potentially foreclosed on, or short sales on these kinds of things. Not only are they dealing with that, but now they find out they potentially had income to the extent of the mortgage forgiveness. There were always provisions in the tax law that allowed for people that were considered insolvent to not include that in income, but that wasn’t necessarily always the case for people that were in that situation. That was extended through 2013, but it’s not there for 2014.”

He hopes to see Congress look into extending that provision, as some clients are still asking about it, even though the mortgage crisis is not as severe as it was a few years ago.

Another good prospect for extension is the $250 above-the-line deduction for teachers who purchase school supplies on their own. That was extended through 2013, but is not in place right now. “That’s a nice thing to have,” said Rosica. “I’m not sure it costs that much to have it. I think we’ll see some of those things being addressed as well.”


How to pay off debt—and save too

Balancing paying off debt and saving can be tricky. Here’s a step-by-step guide.


Student loans, credit-card balances, car loans, and mortgages—oh, my. You probably have a variety of debt—most people do. So which should you focus on paying off first? And how can you save at the same time? Here’s a guide.

1. Set aside money for an emergency.

Losing your job—or being hit with an unexpected expense—could force you into a financial hole, which may take years to climb out of. How much to set aside for an emergency depends on your situation. In general, three to six months of expenses is a good starting point. If you are single, or in a family with two working spouses, three months may be enough. But if you are a one-income family, you may want to have six months of expenses.

Quick tip: Set up automatic payments from your paycheck or checking account into a separate account set up as an emergency fund.

2. Don't pass up "free" money at work.

Paying down debt is important, but if your employer matches money you put into a 401(k) or 403(b), don’t pass it up. Think of it as “free” money. Let's say your company matches 50 cents on every $1 you contribute, up to 3% of your salary. If you make $60,000 a year and contribute 3%, or $1,800, your company kicks in another $900. If you do that every year, in 10 years that $2,700 a year could grow to more than $37,000, assuming a hypothetical return of 7% per year.1

Quick tip: Give this money a chance to grow. If retirement is years away, that means leaning more toward stocks and stock mutual funds. Read ViewpointsWhy choose stocks when saving for retirement?

3. Pay this debt first: high interest credit card balances.

It can be easy to run up a large credit card balance. And once you do, it’s not easy to pay it off. The minimum payments are typically low, which means you are paying mostly interest, so it will take much longer to pay off the balance. And it will cost you more. So if you can, consider paying more than the minimum each month.

Avoid using a credit card to finance purchases. Why? In some cases, it could double the cost of the purchase. Say you buy a $2,000 flat screen TV on a credit card with a 15% interest rate. If you make only the $40 minimum monthly payment, it would take you more than 17 years to pay off the original debt. You would pay the lender more than $2,500 in interest—essentially doubling the cost of the TV.

On the other hand, if you are diligent about paying off your entire balance monthly, you may want to consider a cash-back rewards card. For example, a Fidelity Rewards credit card offers cash back that can be deposited directly into a cash management account.2 That way, your credit card purchases can actually help you accomplish other financial goals.

Quick tip: Check your credit card statement to see how long it will take you to pay off the balance—and how much it will cost you—if you make only the minimum payment.

4. Pay this debt next: private student loans.

Private student loans for college carry higher interest rates than government student loans, in general. Currently, rates on private student loans are from 5% to 12% compared with about 4% for government student loans, according to FinAid. You may be able to deduct the interest on a student loan, however, but only up to $2,500 a year, and only if you are a single filer earning less than $75,000. If you make more than that, you can’t deduct the interest. In general, it is a good idea to pay down student debt above 8% interest. This is especially true when this debt is not tax deductible.

5. Back to savings if you have a 401(k): Contribute beyond the employer match.

Save here if you can: health savings account. 

A health savings account (HSA), can be a tax-efficient way to save and pay for both current and future qualified medical expenses, but not all employers offer one. If your company does, readViewpointsThree healthy habits for health savings accounts.

While you may still have a government student loan, car loan, or a mortgage, these loans typically have much lower interest rates. That’s why it can make sense to bump up your 401(k) contributions and continue to make payments on these loans.

Your savings can really add up. Using the same numbers from our example above, assume you contribute 10%, or $6,000 a year, about $115 a week, of your $60,000 salary to your 401(k), and your company adds $900. If you do that every year, in 10 years that $6,900 a year could grow to more than $95,000, assuming a hypothetical return of 7% per year.3

6. Pay monthly minimum on government student loans, car loans, mortgages.

These loans have lower interest rates, and some offer tax benefits. That’s why it generally makes sense to make only the minimum monthly payments on them. For instance, mortgage interest is deductible for federal tax purposes, and rates have been at historical lows, right now around 4% for a 30-year fixed loan. Car loans are about 3%. Government undergraduate student loans are currently around 4%, and the interest may be tax deductible.

A word about student loan debt. Most college graduates have various types of debt—and various interest rates. Here are some general guidelines.

Pay down: As we said earlier, it makes sense to pay off high interest debt (private student loans above 8% interest) first, especially if you cannot deduct the interest.

Toss up: It may be beneficial to pay down medium interest rate debt, such as Direct PLUS and Direct Unsubsidized loans for graduate students, in certain situations and not others. Many factors can affect this decision, such as current and future tax rates, how comfortable you are with risk, and your goals.

Pay monthly minimum: Low interest rate debt, such as Direct loans for undergraduates and Perkins loans, or medium interest rate debt (see above) that is tax deductible, does not need to be paid down early because of the tax benefits and low interest rates.

If you are disciplined about making payments, you may want to extend low-interest government student loans to lower your minimum payments and use the savings to pay down higher-interest rate loans faster. (The government allows you to consolidate and extend most government student loans at your current interest rate.) However, you may end up paying more interest because the time period is much longer. Contact your loan servicer for information.

In conclusion

Paying off debt is important. That’s why it makes sense to have a strategy that will help reduce what you pay in interest and increase your savings—giving it the potential to grow.




Top 10 Lessons in Financial Literacy


April is National Financial Literacy Month, and in recognition of the importance of the topic New York-based CPA John Vento is partnering with members of Congress from the Financial and Economic Literacy Caucus to speak at high schools and universities in the New York metropolitan area.

“We have already spoken at several colleges and a number of high schools, and are scheduling more during the remainder of April,” said Vento. “I am passionate about the subject of financial literacy and believe the way to rebuild our economy is by changing the behavior and attitude of our citizens one at a time. Furthermore, there is no better time to deliver this message than before they graduate and join the workforce.”

A broader goal of the activities is to make financial literacy an educational requirement in the nation’s schools, he noted.

“I truly believe the most dangerous threat to our nation and its citizens is a lack of financial literacy,” said Vento. “Americans still struggle to make wise financial decisions because these concepts are not a focus in our education system, so when we reach adulthood, it’s either sink or swim—and too often we make bad financial decisions and suffer the consequences later in life.”

“Our educational system devotes a considerable amount of attention to teaching students about the dangers of drinking and driving, using drugs, and practicing safe sex,” Vento added. “But, unfortunately, the topic of financial literacy is largely ignored. Throughout our lives, we will encounter many questions and problems relating to money, but every one of them will fall, in some way, under one or more of 10 financial literacy lessons.”

The curriculum that Vento advocates should be a core component of the requirements to graduate, he urged, “so that students will be better prepared to deal with the financial realities of life.”

Where possible, accountants should be advocates of financial literacy for their younger clients and children of clients. The following lessons can be used as a template for discussing the topic.

Lesson 1: Live within your means. “Living within your means is living on less than your take-home salary and any other resources you receive, such as income from an annuity or a trust,” said Vento. “It means not only figuring out how to pay for your needs and wants, but budgeting our income so that you still have a little money left over.”

Lesson 2: Understand taxes. “The average American family pays more than one-third of its income in federal, state, and local income taxes—and even more in property taxes, excise taxes, sales taxes and other hidden taxes. For just about everyone, taxes are our biggest personal expense, by far.”

Lesson 3: Determine your financial position. “This does not mean simply knowing your annual salary or identifying how much you take home in every paycheck, although that is definitely part of it,” said Vento.

“In order to live within your means, you must have a precise understanding of your financial assets, liabilities, and net worth by preparing a Statement of Financial Position,” he said. “You also need to know—and to track on a regular basis—where all your personal funds are coming from and going to. This is your Statement of Cash Flow. Finally, after taking a careful look at your current financial position, you must determine your financial goals, whether for five years, 10 years, or throughout your retirement years. Only then can you realistically budget for the future—and, of course, reach Point X, or financial independence.”

Lesson 4: Manage debt. For many people, debt is a scary concept, Vento noted. The fact is there is good debt and there is bad debt. Understanding the difference is imperative to becoming financially literate and financially independent. Basically, good debt is money that people borrow for purchases and situations that, in the long term, will help them amass wealth and ultimately reach financial independence. Some examples of good debt include student loans, business loans, certain investment asset loans and some personal-use asset loans (such as an affordable home mortgage). In contrast, bad debt is money that people borrow (usually on a credit card) for the purchase of nonessential expenditures as well as many personal-use assets.

“When you do not use debt properly, that can lead to significant financial hardship and can prevent you from ever becoming financially independent,” said Vento. “However, when you use debt to leverage yourself in the pursuit of accumulating wealth, it can be a very powerful tool.”

Lesson 5: Insure your health and life. Even a sound, carefully planned investment strategy can fall apart if you have not prepared properly for unforeseen problems concerning health and life. “If clients or a member of their family is hit with a prolonged illness, a severe injury, a disability or death (especially of the primary wage earner), the planning and investing they have so carefully developed can quickly disintegrate,” said Vento.

Lesson 6: Protect property with insurance. Protecting property by implementing the proper risk management strategies is critical to achieving and maintaining financial independence. “The type and extent of insurance needed will change throughout a client’s lifetime, as will the types of assets and the extent of wealth they have accumulated. The three major personal property risk management issues include homeowner’s insurance, automobile insurance and umbrella liability insurance,” Vento advised.

Lesson 7: Pay for college. Many people, parents especially, worry about covering the ever-growing expense of getting a college education. “Of course, it’s possible to get academic or athletic scholarships or grants,” said Vento. “But most young people will need additional funds, either from their parents’ savings or through student loans.”

“With the skyrocketing cost of college, it’s important that you start planning early,” Vento added. “Parents and rising college students should take advantage of college savings programs such as Internal Revenue Code Section 529 plans, Coverdell Education Savings Accounts, savings bonds, financial aid (such as federal grants, loans and scholarships), as well as education tax deductions and credits. Understanding how scholarships, government grants and student loans can help is essential.”

Lesson 8: Plan for retirement. Everyone should be planning financially for retirement, regardless of how old or young they are. That’s especially important, given that people coming into retirement are facing concerns that retirees did not face 20 or 30 years ago, including living longer and supporting themselves throughout turbulent financial times.

“The longer a person waits to start saving for retirement, the harder it will be to accumulate the amount they need to be financially independent,” said Vento. “Remember, one of the most valuable investment assets you have is time; the more years you save, the greater your chance of financial success. By far the easiest way to do this is by contributing to your employer’s retirement plan, or if that is not available, to an IRA. Implement a retirement saving strategy that allocates a specific dollar amount or percentage—I recommend at least 10 percent—of your salary every pay period. Therefore, you are paying yourself first, as though saving for retirement is your number one required expense. In fact, saving for retirement is not an expense because it adds to your investable assets, but treating it as such is of utmost importance to your success.”

Lesson 9: Manage your investments. The rewards of proper investing can be very generous when investors adopt an investment discipline that allows them to purchase quality investments and then allows those investments to take their course, according to Vento.

“It is critically important that you select an investment model that you are willing to stay with, even in the worst of markets,” Vento noted. “The appropriate investment plan for you should be the one that provides you with the highest potential rate of return in the long run that is within your risk tolerance.”

Lesson 10: Preserve your estate. If you do not take the necessary steps to preserve your estate, unintended beneficiaries may take a significant amount of your estate instead. These unintended beneficiaries include the federal and state governments, the state administrator, attorneys and perhaps even relatives you have not spoken to in decades. The money you may spend today on a qualified estate attorney may save your estate significant dollars in both estate taxes and administrative costs down the road.

“It is critically important that people of all ages understand these 10 lessons and work within them productively—that they become financially literate,” Vento concluded. “But if we help younger generations avoid the bad habits that have crept into the way so many Americans manage their finances today, we really have a great opportunity to set them up for a brighter future. And when they are more prosperous, the economy as a whole will be more prosperous.”




Is the Taxman Coming for Retirement Entrepreneurs?

By Patrick Clark  April 04, 2014

Baby boomers are proving more likely to launch businesses in their 50s and 60s than members of past generations, in some cases risking retirement savings on the ventures. A small but growing number have adopted a complex strategy to use their retirement nest eggs early to buy or launch businesses—while avoiding taxes and penalties for early withdrawal.

The IRS has repeatedly warned that the strategy—known by the unfortunate acronym ROBS, for Rollovers for Business Startups—lies in a murky area of the law. Two recent tax court decisions show that the federal government may be looking to go after millions of dollars in back taxes.

The ROBS strategy has been around for decades and has gained popularity in recent years, especially with entrepreneurs buying franchise businesses. Guidant Financial, a Bellevue (Wash.) company that specializes in the transactions, handled $232 million in such rollovers in 2012, according to the Franchise Times, which took a long, hard look at ROBS in an article last month. The outlet also reported that new players are emerging to process ROBS.

Here’s one way the maneuver typically works: A would-be entrepreneur creates a shell company and sets up a 401(k) plan for it. She transfers some or all the savings from her personal retirement account into the new company’s 401(k). She uses the new 401(k) to invest in the shell company through an employee stock ownership plan. That gives the shell company cash to buy an existing business or to cover startup costs. The entrepreneur owns the company through shares held in the new retirement plan.

If it sounds complex, that’s because it is. The IRS cast some doubt on ROBS in a 2008 memorandum (pdf) saying the strategy needed further study. “ROBS transactions may violate law in several regards,” the agency noted. In 2010, the agency called ROBS “questionable” but provided the basis for continued use.

Last year the IRS won decisions against entrepreneurs who were found to have misused ROBS. In Peek v. Commissioner, filed in May, the tax court said two Colorado entrepreneurs owed more than $560,000 after they used their company’s retirement plan to guarantee a loan. In Ellis v. Commissioner, filed in October, the court ruled against a Missouri man who used a ROBS transaction to rent space for his business and pay himself a salary.

Proponents of the strategy say those decisions show the importance of hiring a company that knows what it’s doing to manage the transaction. Some tax wonks have warned recently that the cases show the IRS is preparing a crackdown on ROBS and could soon seek back taxes from other entrepreneurs.

A bigger question: Should anyone devote retirement savings to the inherently risky act of launching a business? Michele Markey, a vice president at the Kauffman Foundation, says older entrepreneurs should be more cautious about taking the plunge. “Boomers don’t have time to recover from failure like a 20-year-old does,” she told me.

A dog groomer can do your taxes. Is that wrong?

BY JIA LYNN YANG  Washington Post


Many U.S. taxpayers rely on outside help to file their taxes every year. But there is very little regulation of the industry. (Daniel Acker/Bloomberg News)

Nina E. Olson, the national taxpayer advocate, keeps track of the unlikeliest places people can get their taxes prepared. There was the time someone showed her a photo of a dog groomer advertising tax services. A few years ago when she was in Texas to make a speech, Olson spotted a massage parlor offering to prepare people's tax returns.

"It could be that the person at the massage parlor is a very, very qualified return preparer. But I have no idea," said Olson. "And that's my point: I have no idea. In many states there are regulations of massages. The massage part of what that person does is subject to testing and hygiene visits. But the preparing of taxes? There's no regulation."

Out of 79 million individual tax returns prepared by professionals in 2011, more than half were completed by unregulated tax preparers, according to Internal Revenue Service records. These tax professionals are not licensed lawyers or accountants. Rather, it turns out that anyone -- with no need for a license or particular degree -- can announce they're preparing tax returns, and then start doing it.

"A lot of people think a tax preparer is an accountant or someone who has special training, but that's not necessarily true," said Chi Chi Wu, an attorney with the National Consumer Law Center. "My middle school-aged son could set up a card table and prepare taxes. There's nothing to stop him."

While many of these tax preparers have been making an honest living for years, others are frequently making errors, charging exorbitant fees or committing outright fraud. And the most vulnerable tax payers tend to be those with lower incomes -- especially people who rely heavily on benefits like the Earned Income Tax Credit (EITC) and who otherwise would not need to file or who would have very simple returns.

Of the more than 27 million taxpayers who claimed the EITC in 2011, 59 percent relied on a preparer to do their taxes for an average credit of $2,270, according to data from the IRS. Below are other examples of credits; for all of them, more than half of the taxpayers claiming them turned to outside help. And the sheer array illustrates how the tax code has become not just a way to collect tax revenues but to also enact major social and economic policies.

 (National Taxpayer Advocate)

"As long as the U.S. tax code is so overgrown and complicated that most Americans have to seek out help to file, they shouldn’t have to worry about crooked or incompetent tax preparers," Sen. Ron Wyden (D-Ore.) said Tuesday at a Senate Finance Committee hearing on unregulated tax preparers.

The IRS has tried to regulate the tax preparation business by proposing new rules that would force tax preparers to be licensed and certified. But in 2012, three tax preparers filed suit in federal court saying the agency did not have the authority to issue the new regulations. The courts have agreed. In February, the U.S. District Court of Appeals affirmed a 2013 ruling that the IRS does not in fact have the power to license tax preparers.

The Institute for Justice, a libetarian public interest law firm, joined the lawsuit to block the IRS's effort to regulate. Dan Alban, an attorney with the Institute for Justice, has argued that the rules would put small tax preparers out of business in favor of big companies like H&R Block. He has also said that the root problem with tax preparation has to do with the byzantine nature of the country's tax code -- not a lack of regulation. "The sheer complexity of the federal tax code makes it notoriously difficult to prepare tax returns without any errors," said Alban at the Senate hearing on Tuesday.

Alban also argues that the IRS already had enough tools to keep track of tax preparers by requiring them to have an individualized number, called a PTIN. This solution, he says, allows the government to easily identify bad actors--and at a lower cost to everyone compared to requiring classes and licensing.



Find Out if Your Health Insurance Coverage is Considered
Minimum Essential Coverage Under the Affordable Care Act

The Affordable Care Act calls for individuals to have qualifying health insurance coverage for each month of the year, have an exemption, or make a shared responsibility payment when filing their federal income tax return next year.

Qualifying health insurance coverage, called minimum essential coverage, includes coverage under various, but not all, types of health care coverage plans. The majority of coverage that people have today counts as minimum essential coverage.

Examples of minimum essential coverage include:

Health insurance coverage provided by your employer,

Health insurance purchased through the Health Insurance Marketplace in the area where you live, where you may qualify for financial assistance,

Coverage provided under a government-sponsored program for which you are eligible (including Medicare, Medicaid, and health care programs for veterans),

Health insurance purchased directly from an insurance company, and

Other health insurance coverage that is recognized by the Department of Health & Human Services as minimum essential coverage. 

Minimum essential coverage does not include coverage providing only limited benefits, such as:

Coverage consisting solely of excepted benefits, such as:

Stand-alone vision and dental insurance

Workers' compensation

Accident or disability income insurance

Medicaid plans that provide limited coverage such as only family planning services or only treatment of emergency medical conditions.

More information about the types of coverage that qualify and don’t qualify as minimum essential coverage can be found on the IRS Individual Shared Responsibility page and answers to specific questions can be found on the question and answer page.




IRS Debunks Frivolous Tax Arguments

WASHINGTON – The Internal Revenue Service today released the 2014 version of “The Truth about Frivolous Tax Arguments.” The document describes and responds to some of the common frivolous tax arguments made by those who oppose compliance with federal tax laws. The cases cited demonstrate how frivolous arguments are treated by the IRS and the courts. The 2014 version includes numerous recently-decided cases that demonstrate that the courts continue to regard such arguments as illegitimate.

Examples of frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.

Frivolous Arguments appeared on the IRS annual “Dirty Dozen” list of tax scams that was released on February 19.

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. While taxpayers have the right to contest their tax liabilities, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. The penalty is applied to anyone who submits a tax return or other specified submission, if any portion of the submission is based on a position the IRS identifies as frivolous.

Those who promote or adopt frivolous positions also risk a variety of other penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.  

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.

Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.



Social Security, Treasury target taxpayers for their parents’ decades-old debts

By Marc Fisher, Washington Post

A few weeks ago, with no notice, the U.S. government intercepted Mary Grice’s tax refunds from both the IRS and the state of Maryland. Grice had no idea that Uncle Sam had seized her money until some days later, when she got a letter saying that her refund had gone to satisfy an old debt to the government — a very old debt.

When Grice was 4, back in 1960, her father died, leaving her mother with five children to raise. Until the kids turned 18, Sadie Grice got survivor benefits from Social Security to help feed and clothe them.

If you're one of the millions of Americans using your tax refund like a "forced savings account," here's why you shouldn't—with marshmallow Peeps to help explain. Michelle Singletary contributed to this video.

Now, Social Security claims it overpaid someone in the Grice family — it’s not sure who — in 1977. After 37 years of silence, four years after Sadie Grice died, the government is coming after her daughter. Why the feds chose to take Mary’s money, rather than her surviving siblings’, is a mystery.

Across the nation, hundreds of thousands of taxpayers who are expecting refunds this month are instead getting letters like the one Grice got, informing them that because of a debt they never knew about — often a debt incurred by their parents — the government has confiscated their check.

The Treasury Department has intercepted $1.9 billion in tax refunds already this year — $75 million of that on debts delinquent for more than 10 years, said Jeffrey Schramek, assistant commissioner of the department’s debt management service. The aggressive effort to collect old debts started three years ago — the result of a single sentence tucked into the farm bill lifting the 10-year statute of limitations on old debts to Uncle Sam.

No one seems eager to take credit for reopening all these long-closed cases. A Social Security spokeswoman says the agency didn’t seek the change; ask Treasury. Treasury says it wasn’t us; try Congress. Congressional staffers say the request probably came from the bureaucracy.

The only explanation the government provides for suddenly going after decades-old debts comes from Social Security spokeswoman Dorothy Clark: “We have an obligation to current and future Social Security beneficiaries to attempt to recoup money that people received when it was not due.”

Since the drive to collect on very old debts began in 2011, the Treasury Department has collected $424 million in debts that were more than 10 years old. Those debts were owed to many federal agencies, but the one that has many Americans howling this tax season is the Social Security Administration, which has found 400,000 taxpayers who collectively owe $714 million on debts more than 10 years old. The agency expects to have begun proceedings against all of those people by this summer.

“It was a shock,” said Grice, 58. “What incenses me is the way they went about this. They gave me no notice, they can’t prove that I received any overpayment, and they use intimidation tactics, threatening to report this to the credit bureaus.”

Grice filed suit against the Social Security Administration in federal court in Greenbelt this week, alleging that the government violated her right to due process by holding her responsible for a $2,996 debt supposedly incurred under her father’s Social Security number.

Social Security officials told Grice that six people — Grice, her four siblings and her father’s first wife, whom she never knew — had received benefits under her father’s account. The government doesn’t look into exactly who got the overpayment; the policy is to seek compensation from the oldest sibling and work down through the family until the debt is paid.

The Federal Trade Commission, on its Web site, advises Americans that “family members typically are not obligated to pay the debts of a deceased relative from their own assets.” But Social Security officials say that if children indirectly received assistance from public dollars paid to a parent, the children’s money can be taken, no matter how long ago any overpayment occurred.

“While we are responsible for collecting delinquent debts owed to taxpayers, we understand the importance of ensuring that debtors are treated fairly,” Treasury’s Schramek said in a statement responding to questions from The Washington Post. He said Treasury requires that debtors be given due process.

Social Security spokeswoman Clark, who declined to discuss Grice’s or any other case, even with the taxpayer’s permission, said the agency is “sensitive to concerns about our attempts to arrange repayment of overpayments.” She said that before taking any money, Social Security makes “multiple attempts to contact debtors via the U.S. Mail and by phone.”

Grice, who works for the Food and Drug Administration and lives in Takoma Park, in the same apartment she’s resided in since 1984, never got any notice about a debt.

Social Security officials told her they had sent their notice to her post office box in Roxboro, N.C. Grice rented that box from 1977 to 1979 and never since. And Social Security has Grice’s current address: Every year, it sends her a statement about her benefits.

“Their record-keeping seems to be very spotty,” she said.

Treasury officials say that before they will take someone’s refund, the agency owed the money must certify the debt, meaning there must be evidence of the overpayment. But Social Security officials told Grice they had no records explaining the debt.

“The craziest part of this whole thing is the way the government seizes a child’s money to satisfy a debt that child never even knew about,” says Robert Vogel, Grice’s attorney. “They’ll say that somebody got paid for that child’s benefit, but the child had no control over the money and there’s no way to know if the parent ever used the money for the benefit of that kid.”

Grice, the middle of five children, said neither of her surviving siblings — one older, one younger — has had any money taken by the government. When Grice asked why she had been selected to pay the debt, she was told it was because she had an income and her address popped up — the correct one this time.

Grice found a lawyer willing to take her case without charge. Vogel is exercised about the constitutional violations he sees in the retroactive lifting of the 10-year limit on debt collection. “Can the government really bring back to life a case that was long dead?” the lawyer asked. “Can it really be right to seize a child’s money to satisfy a parent’s debt?”

But many other taxpayers whose refunds have been taken say they’ve been unable to contest the confiscations because of the cost, because Social Security cannot provide records detailing the original overpayment, and because the citizens, following advice from the IRSto keep financial documents for just three years, had long since trashed their own records.

In Glenarm, Ill., Brenda and Mike Samonds have spent the past year trying to figure out how to get back the $189.10 tax refund the government seized, claiming that Mike’s mother, who died 33 years ago, had been overpaid on survivor’s benefits after Mike’s father died in 1969.

“It was never Mike’s money, it was his mother’s,” Brenda Samonds said. “The government took the money first and then they sent us the letter. We could never get one sentence from them explaining why the money was taken.” The government mailed its notice about the debt to the house Mike’s mother lived in 40 years ago.

The Social Security spokeswoman said the agency uses a private contractor to seek current addresses and is supposed to halt collections if notices are returned as undeliverable.

After hours on the phone trying and failing to get information about the debt Mike’s mother was said to owe, the Samondses gave up.

After waiting on hold for two hours with Social Security last week, Ted Verbich also concluded it wasn’t worth the time or money to fight for the $172 the government intercepted last month.

In 1977, Verbich, now 57, was in college at the University of Maryland when he took a full-time job in an accountant’s office. Because he was earning income, he knew he had to give up the survivor’s benefits his mother had received since his father died, when Verbich was 4. But his $70 monthly checks — “They helped with the car payment,” he said — kept coming for a short time after he started work, and Verbich was notified in 1978 that he had to repay about $600. He did.

Thirty-six years later, with no notice, “they snatched my Maryland tax refund,” said Verbich, a federal worker who has lived at the same address in Glendale, Md,. for 30 years and regularly receives Social Security statements there. The feds insisted that he owed $172 but could provide no documents to back up the claim.

Verbich has given up on getting his refund, but he wants a receipt stating that his debt to his country is resolved.

“I’ll put in the request,” a Social Security clerk told Verbich, “but in reality, you’ll never get anything.”

Grice was also told there was little point in seeking a waiver of her debt. Collections can only be halted if the person passes two tests, Clark said: The taxpayer must prove that he “is without fault, and [that] repayment of the overpayment would deprive the person of income needed for ordinary living expenses.”

More than 1,200 appeals have been filed on the old cases, Clark said; taxpayers have won about 10 percent of those appeals.

The Treasury initially held the full amount of Grice’s federal and state refunds, a total of $4,462. Last week, after The Washington Post inquired about Grice’s case, the government returned the portion of her refund above the $2,996 owed on her father’s account.

But unless the feds can prove that she ever received any of the overpayment, Grice wants all of her money back.

“Look, I love a good fight, especially for principle,” she said. “My mom used to say, ‘This country is carried on the backs of the little people,’ and now I see what she meant. This is really sad.”




IRS Hits Courtney Love with $319,749 Tax Lien


Singer and actress Courtney Love has reportedly been on the receiving end of a $319,749 tax lien from the Internal Revenue Service.

Love received the tax lien last month for unpaid taxes from 2012, according to the New York Post. She has faced several other tax liens in the past as well, including one last year for $266,861.01, for unpaid taxes from 2009 and 2011. In 2009, she faced a tax lien for $324,335.21 for taxes from 2007, although she later paid off that tax lien.

Love is the widow of Nirvana lead singer Kurt Cobain and fronted her own rock band, Hole, which had the hit album “Live Through This” in 1994. She also acted in several movies, including the 1996 film, “The People vs. Larry Flynt.”

On Tuesday, a judge ordered Love to pay $96,000 to a fashion designer who claimed that the singer had defamed her on Twitter. Love had already paid about $350,000 of the original $450,000 judgment in the case, according to the Post. But Love also had some good news this week, reuniting onstage with Cobain’s old bandmates, Dave Grohl and Krist Novoselic, at the induction ceremony Thursday night of Nirvana into the Rock & Roll Hall of Fame at the Barclays Centers in Brooklyn, after decades of legal battles.

“This is my family I’m looking at right now,” she said, according to Rolling Stone. “I just wish Kurt could have been here. Tonight he would have really appreciated it.”


IRS Renews Phone Scam Warning

The IRS today renewed its Oct. 2013 warning about a pervasive phone scam that continues to target people across the nation, including recent immigrants. The Treasury Inspector General for Tax Administration called it the largest scam of its kind. As of March 20, TIGTA reported that it has received reports of over 20,000 contacts related to this scam. TIGTA also stated that thousands of victims have paid over $1 million to fraudsters claiming to be from the IRS.

In this scam, the thief poses as the IRS and makes an unsolicited call to their target. The caller tells the victim they owe taxes to the IRS. They demand that the victim pay the money immediately with a pre-loaded debit card or wire transfer. The caller often threatens the victim with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Thieves who run this scam often:

Use common names and fake IRS badge numbers.

Know the last four digits of the victim’s Social Security Number.

Make caller ID appear as if the IRS is calling.

Send bogus IRS e-mails to support the bogus calls.

Call a second time claiming to be the police or department of motor vehicles. The caller ID again appears to support their claim.


If you get a call from someone who claims to be with the IRS asking you to pay back taxes, here’s what you should do:

If you owe, or think you might owe federal taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.

If you don’t owe taxes, call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

You can also file a complaint with the Federal Trade Commission at Add "IRS Telephone Scam" to the comments in your complaint.


Here are a few warning signs so you can protect yourself and avoid becoming a victim of these crimes:

Be wary of any unexpected phone or email communication allegedly from the IRS.

Don’t fall for phone and phishing email scams that use the IRS as a lure. Thieves often pose as the IRS using a bogus refund or warnings to pay past-due taxes.

The IRS usually first contacts people by mail – not by phone – about unpaid taxes.

The IRS won’t ask for payment using a pre-paid debit card or wire transfer. The IRS also won’t ask for a credit card number over the phone.

The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information. This includes any type of e-communication, such as text messages and social media channels.

The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.


The IRS urges you to be vigilant against the many different types of tax scams. Their common goal is to steal your money, and often to steal your identity. Visit the genuine IRS website,, for more on what you should do to avoid becoming a victim.




Obamas Paid IRS 20.4% Tax Rate on 2013 Gross Income of $481,098


(Bloomberg) President Barack Obama and his wife, Michelle, reported adjusted gross income of $481,098 for 2013, down 21 percent from last year, according to tax returns released yesterday by the White House.

The Obamas paid $98,169 in federal taxes, including $2,310 imposed by the 2010 Affordable Care Act that he signed. That’s an effective income tax rate of 20.4 percent.

“In 2013, as a result of his policies, the president was subject to limitations in tax preferences, as well as additional Medicare and investment income taxes, for high-income earners,” Press Secretary Jay Carney said in a blog post on the White House website.

The Obamas aren’t affected by the higher marginal tax rates that took effect in 2013, because their taxable income is less than $450,000. He proposed a $250,000 threshold for higher rates before compromising with Republicans.

They also aren’t directly affected by the limits on itemized deductions and personal exemptions that took effect in 2013, because they pay the alternative minimum tax.

The Obamas donated $59,251 to charity in 2013, down from $150,034 the year before. As a percentage of adjusted gross income, their donations declined to 12.3 percent from 24.6 percent last year.

They gave $4,000 to the American Red Cross, $1,500 to the University of Hawaii Foundation and $5,000 to Sidwell Friends School, which their daughters attend. Their largest donation of $8,751 went to the Fisher House Foundation, which provides temporary housing for families near military and veterans’ hospitals.

‘Basic Return’

The Obamas’ return is “pretty sterile,” said Anthony Nitti, a partner at Withum, Smith + Brown PC in Aspen, Colorado.

“There’s decent-sized dollar amounts, but it’s a very, very basic return,” he said.

The president, 52, made less in 2013 than he did in any year since 2004, when he gave a speech at the Democratic National Convention that made him a national figure.

Obama’s income peaked in 2009, his first year as president, when he reported adjusted gross income of $5.5 million. His $1.8 million tax bill that year is more than three times his income this year.

“Apparently, the books are not selling like they once were,” said Dorothy Brown, a law professor at Emory University in Atlanta who has written about the Obamas’ tax returns.

Before 2004, even with high incomes, the Obamas were one financial emergency away from serious problems, Brown said.

Liquid ‘Reserve’

Now, she said, “They have a reserve that’s liquid that they can draw on.”

Obama continues to be a “lousy money manager,” said Steven Bankler, an accountant in San Antonio, Texas. That’s because the president has invested in Treasuries that generate little return and is still paying his mortgage in Chicago.

“Had he not bought the Treasuries and paid off his mortgage he would have saved $42,000, which is the same as making it,” Bankler said.


Biden Tax Return

The White House also released the 2013 tax returns for Vice President Joe Biden, 71, and his wife, Jill.

The Bidens reported adjusted gross income of $407,009, the most since at least 1997. The Bidens paid $96,378 in taxes, including $1,497 because of the Obamacare tax increases, for a rate of 23.7 percent.

The Bidens donated $20,523 to charity, including $15,300 to the USO and $2,400 to the Catholic Diocese in 


Tax implications of investor or trader status

Most taxpayers who trade stocks are classified as investors for tax purposes. This means any net gains are going to be treated as capital gains vs. ordinary income. That's good if your net gains are long term from positions held more than a year. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.

Traders have it better. Their expenses reduce gross income even if they can't itemize deductions, and not just for regular tax purposes, but also for alternative minimum tax purposes. Plus, in certain circumstances, if they have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss, which is limited to a $3,000 ($1,500 if married filing separate) per year deduction once any capital gains have been offset. Thus, it's no surprise that in two recent Tax Court cases the taxpayers were trying to convince the court they qualified as traders. Although both taxpayers failed, and got hit with negligence penalties on top of back taxes, the cases provide good insights into what it takes to successfully meet the test for trader status.

The answer is pretty simple. A taxpayer's trading must be "substantial." Also, it must be designed to try to catch the swings in the daily market movements, and to profit from these short-term changes rather than from the long-term holding of investments.

So, what counts as substantial? While there's no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days in the year, as substantial. Consequently, a few hundred trades, especially when occurring only sporadically during the year, are not likely to pass muster. In addition, the average duration for holding any one position needs to be very short, preferably only a day or two. If you satisfy all of these conditions, then even though there's no guarantee (because the test is subjective), the chances are good that you'd ultimately be able to prove trader vs. investor status if you were challenged. Of course, even if you don't satisfy one of the tests, you might still prevail, but the odds against you are presumably higher.

If you have any questions about this area of the tax law or any other tax compliance or planning issue, please feel free to contact us.



Double benefit from a tax deduction

For most taxpayers, the amount of federal income tax they pay depends on where they fall in the federal income tax brackets and the breakdown of their taxable income between ordinary (e.g., wages) and capital gains from the sale of assets (e.g., common stock). Taxpayers eligible for the lower federal income tax brackets (those under 25%) on their ordinary income can generally expect to be taxed at 0% on their long-term capital gains. Taxpayers in the 25% or higher federal income tax brackets can generally expect to be taxed at either 15% or 20% (again, exceptions apply) on at least a portion of their long-term capital gains.

It seems inevitable that, as federal taxable income increases, the rate we pay on at least a portion of that income also increases. The converse should and does apply. That is, as federal taxable income decreases, the rate of tax we pay on at least a portion of that income also decreases. In addition, if a taxpayer has a long-term capital gain that, after considering ordinary income, is partially taxed at the 0% rate, any additional deduction that decreases ordinary income will simultaneously decrease the tax rate on a comparable amount of long-term capital gain from 15% to 0%. This has the effect of producing a double benefit for that deduction, as shown in the following example.

Example: Jack and Julie, filing jointly for 2014, have net ordinary income of $60,000 and a long-term capital gain from the sale of stock of $40,000, for total income of $100,000. For 2014, the joint rates applicable to ordinary taxable income change from 15% to 25% at $73,800. Accordingly, $13,800 ($73,800 - $60,000) of their long-term capital gain will be taxed at 0% and the balance of $26,200 ($40,000 - $13,800) is taxable at 15%. All income, both capital and ordinary, is taxed at a rate of 15% or less.

If Jack and Julie contribute $11,000 to their deductible IRAs ($5,500 each for 2014, assuming they are both under age 50), they receive a 30% tax rate savings, even though their highest tax bracket is 15%. The $11,000 IRA deduction reduces ordinary income at the 15% rate, but also shifts $11,000 of capital gain taxation from the 15% to the 0% bracket, for another 15% savings. This produces a total tax benefit of 30% on the $11,000 reduction.

A similar impact would occur for any expenditure or deduction that reduced ordinary income (i.e., Section 179 expense, additional interest expense, etc.). Conversely, adding ordinary income at the 15% bracket would cause a 30% impact, as additional ordinary income would push a portion of the capital gains formerly at 0% upward into the 15% bracket.


College financial aid basics

After your children have submitted their financial aid applications and started receiving award letters from various colleges, it may be difficult to interpret and compare their offers. The following information should be helpful in this regard.

College financial aid is usually characterized as either self-help aid or gift aid. It is awarded based on either need or merit. Self-help aid must be repaid through financial obligation (loans) or service to the college (work-study). These offers are awarded primarily on the basis of need. Gift aid is financial aid that does not require repayment or work (i.e., grants and scholarships). It may be awarded based on either merit or need. Obviously, gift aid is the most desirable form of financial aid.

Merit-based aid is awarded to a student with a special talent (e.g., academic, musical, athletic). Students who have a high GPA, a high class rank, and excellent standardized test scores can earn substantial merit scholarships that can cover a significant amount of college costs. Heavy involvement in activities that colleges are most interested in (athletics, leadership, journalism, music, etc.) will help earn even more scholarship dollars.

The better college financial aid awards usually are given to students with merit. The student’s unique skills and abilities and the college’s interest will determine the amount of merit-based aid offered. Need-based financial aid is awarded solely on the financial needs of the family.

Much financial aid awarded comes from the federal government. This aid is available to students enrolled in an eligible program at a school participating in the federal student aid programs. An eligible program is a course of study that leads to a degree or certificate and meets the U.S. Department of Education’s requirements. Eligible schools include four-year or two-year public or private educational institutions, career schools, or trade schools.

Aid may cover school expenses, including tuition and fees, room and board, books and supplies, transportation, and some personal expenses. Once need has been established, eligible students may be offered some combination of the following types of federal student aid:

a.  Work-study. The Federal Work-Study Program encourages community service and work related to each student’s course of study. Students earn at least the current federal minimum wage, but the amount might be higher depending on the type of work and the skills required.

b.  Loans. The federal government offers two primary loan programs that may be part of a college’s financial aid offer to an eligible student: Perkins loans and Stafford loans. These loans are desirable because they offer low interest rates and generous repayment terms.

c.  Grants. The federal government offers several grant programs for certain low-income students or students in certain fields of study (such as the TEACH grant).

After submitting the financial aid application, the student will receive a Student Aid Report that indicates the amount of money the family (student and parents) is expected to contribute to the student’s college expenses for the upcoming school year. This is the Expected Family Contribution (EFC). All colleges will use this number as the basis for awarding their need-based financial aid.

Families will receive college financial aid awards that will state the amount and type of financial aid offered. Students may accept, decline, or negotiate any part of an aid award. The college should not be allowed to pressure students into accepting an aid award before they have time to receive and compare awards from other colleges. Students should request an extension to reply if they have not received all aid awards. When a particular college will not grant an extension, students can accept the aid award to safeguard the award at that college. The acceptance does not commit the student to attending the college; it merely holds the aid award for the student.



Monitoring Section 530 eligibility

As the IRS continues to focus on worker classification, it has become increasingly important that eligible businesses take precautionary steps to ensure compliance with Section 530 to avoid a costly reclassification. Section 530 of the Revenue Act of 1978 (not part of the Internal Revenue Code) allows the business to treat a worker as an independent contractor (i.e., as not being an employee) for employment tax purposes regardless of the worker’s status under the common law control rules. Many businesses rely on Section 530 relief to provide protection.

Section 530 relief is available only if the business meets all the following requirements:

1.  Files all information returns (i.e., Form 1099-MISC) for the workers or classes of workers at issue for the current year.

2.  Has not and will not treat the workers at issue (or classes of workers performing substantially similar job positions) as employees on income tax returns, payroll tax returns, or other returns filed by the business during the year.

3.  Has a reasonable basis for treating the workers as independent contractors. The law provides certain safe harbors to meet this requirement, or the business can rely on some other reasonable basis.

These requirements must be met each year. If the company fails to file Form 1099-MISC on a worker, it loses Section 530 relief for that worker for that year. More importantly, if the business fails to treat the worker (and workers performing substantially similar job positions) as an independent contractor during a particular year, it loses the Section 530 relief (for the year of violation and for all subsequent years) for the entire class. Thereafter, the company cannot obtain Section 530 relief for that class of workers.

Consistency in treatment and information is the key. A business that wants to use the Section 530 rules to classify workers must be aware of the importance of consistent treatment across the years and throughout the ranks of workers holding substantially similar positions. Treating even one worker as an employee can eliminate Section 530 treatment for all workers within the same class.


Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576  fax (734) 946-8166

website:    email:  Tax ID # 38-3083077