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Retirees & Taxes

Forget what you know about withdrawal rates. The key to making your nest egg last is to spend less money than you earn. 

Due to state tax law differences, however, you'll soon learn that where you live during retirement largely dictates what you spend.

Some states, such as Minnesota and Vermont, impose a hefty tax on retirement income, while California's top income tax rate is a budget busting 13.3 percent. Others, including New Jersey, have the highest property tax rate in the nation, while 14 states tax Social Security benefits either in part or in full. They are: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. (Not all, though, made our list of least tax friendly states for retirees.)

Also, the sheer size of the aging baby boomer population has encouraged most states to consider more tax-favorable legislation for seniors, said Kathleen Thies, state tax analyst for CCH tax services firm in Riverwoods, Ill. And some relief programs have already been enacted.

But due to their combination of taxes on ordinary income, pensions, real estate, inherited property and estates, the following 10 states can best be described as hostile territory for retirees.

The list was culled with data collected from CCH, the Tax Foundation, state revenue departments, and the Federation of Tax Administrators. (Property tax rates, compiled by the Tax Foundation using Census Bureau data, are through calendar year 2011 and reflect the mean property tax as a percentage of mean home value.)

And because tax laws impact retirees differently, depending on their financial circumstances, we did not attempt to rank each state in terms of tax friendliness—or lack thereof. The states are instead presented in alphabetical order.

By Shelly Gigante, Special to  Posted 22 Aug. 2013


State income tax: 1% - 13.3%
State sales tax: 7.5% (combined state, local rate)
Mean property tax rate as a percentage of mean home value: 0.8% 
Property tax ranking: 33 
Estate tax: Limited to the federal estate tax collection rate
Inheritance tax: None

The sunny skies of California may be a playground for movie stars and millionaires, but retired residents should take their money and run.

The so-called Golden State, where fortune cookies, blue jeans and Apple computers were invented, levies one of the nation's highest personal income tax rates. Its tax exemption for Social Security benefits is little comfort, given that most other retirement income gets taxed in full.

And property taxes are assessed at 100 percent of the home's value, up to a maximum of 1 percent of the home's cash value. That can deliver a serious dent to your standard of living. Median home prices for new and existing houses and condominiums reached $340,000, with high real estate prices in cities including San Francisco, Los Angeles and San Diego.


State income tax: 3% - 6.7%
State sales tax: 6.3%
Mean property tax rate as a percentage of mean home value: 1.49%
Property tax ranking: 10 
Estate tax: 7.2% - 12%, exemption amount $2 million 
Inheritance tax: None

This commuter haven for New York's business elite may be famous for Yale University and its maritime past, but the Constitution State doesn't cut seniors any slack—especially those of means.

Indeed, Connecticut levies a progressive estate tax of up to 12 percent beyond the $2 million exemption. It also taxes pension benefits, and is one of only 14 states that tax Social Security income. Seniors looking to stretch their hard-earned savings further might do well to cast a wider net. 



State income tax: 0.36% - 8.98%
State sales tax: 6% (but local taxes can add up to 2% more) 
Mean property tax rate as a percentage of mean home value: 1.36% 
Property tax ranking: 14 
Estate tax: None
Inheritance tax: 5% - 15%, depending on amount, relationship of the heir to the decedent.

The Hawkeye State is fertile ground for farming, but it also harvests tax revenue from every available source.

Its personal income tax rate tops out at a punishing 8.98 percent, while inherited property is taxed at a maximum rate of 15 percent. Retirement income is also partially taxed, but married taxpayers age 55 or older may exclude from up to $12,000 ($6,000 for single filers) of pension benefits and other retirement pay.

Relief on some fronts, however, is already in sight. The heartland state is phasing out its tax on Social Security income by 2014, and lawmakers this year approved a property tax cut to the tune of $4.4 billion over the next 10 years—agricultural and residential property tax payers will save an estimated $500 million annually by the 10th year. On balance, however, Iowa still leaves most seniors with a bigger tax bill than they bargained for.



State income tax: 2% - 8.5%
State sales tax: 5%
Mean property tax rate as a percentage of mean home value: 1.11%
Property tax ranking: 18 
Estate tax: 8.0% - 12%, with a $2 million exemption 
Inheritance tax: None

Maine is long on lobsters and lakefront cabins, but short on tax breaks. The Pine Tree state has a whopping 8.5 percent top marginal income tax rate, and hefty property taxes to boot.

Maine also hits wealthy retirees hard, taxing estates over $2 million up to 12 percent. Seniors may deduct up to $6,000 per taxpayer ($10,000 after 2013) of all pension annuities, and retirement plan income included as federal adjusted gross income, but that amount is reduced by any Social Security and Railroad Retirement benefits they receive. 



State income tax: 2.46% - 6.84%
State sales tax: 5.5%
Mean property tax rate as a percentage of mean home value: 1.72% 
Property tax ranking: 6 
Estate tax: None
Inheritance tax: 1% for immediate relatives with a $40,000 exemption, 13% for remote relatives with a $15,000 exemption, and 18% for all others, with a $10,000 exemption. Spouses are exempt.

The Cornhusker State, famous for fossil beds and historic trails (Pony Express, Lewis & Clark and Oregon), not to mention Omaha Steaks, is phasing out its inheritance tax over the next nine years, but still takes a piece of Social Security benefits.

Property taxes, assessed at 100 percent of actual market value, are also among the nation's highest, but homestead exemptions exist for those 65 and older based on income. Married couples with household income of up to $31,000.99, for example, are 100 percent exempt, while those making $39,301 or more get no exemption. 


New Jersey

State income tax: 1.4% - 8.97%
State sales tax: 7%
Mean property tax rate as a percentage of mean home value: 1.98%
Property tax ranking: 1 
Estate tax: 0.8% - 16%, with a $675,000 exemption 
Inheritance tax: 0% - 16%, applies only to estates over $1 million

With many of its most populous suburbs in the shadow of Manhattan or Philadelphia, New Jersey offers aging adults proximity to urban culture and fine dining—if they can afford it.

The Garden State has the nation's highest mean property tax rate and a maximum state income tax rate of 8.97 percent. It also levies a sizable tax on estates and inherited property. Social Security benefits are not taxed on the state level, but all forms of retirement income are included on state tax return as income.

A "Pension Exclusion" does help, however, allowing retirees 62 or older with income below $100,000 to exclude up to $20,000 per year for married joint filers in taxable pensions, annuities and IRA distributions. The limit for single taxpayers is $15,000. 


New York

State income tax: 4% - 8.82% (not including local income tax)
State sales tax: 4%
Mean property tax rate as a percentage of mean home value: 1.38%
Property tax ranking: 13 
Estate tax: 0.8% - 16%, $1 million exemption 
Inheritance tax: None

It's no secret that New York City is a pricey place to live. But the rest of the state also packs a wallop on your wallet.

The Empire State has the highest individual income tax collections per capita, at $1,865, according to the Tax Foundation. New York's income tax rate is already steep, but the Tax Foundation notes many taxpayers with income above $100,000 pay their top tax rate on all of their income, not just the amount above the bracket threshold. Social Security benefits are exempt.

While property taxes are high, seniors in some localities may be able to reduce the assessed value of their home for tax purposes by up to 50 percent. Income restrictions apply.



State income tax: 5.35% - 7.85%
State sales tax: 6.875%
Mean property tax rate as a percentage of mean home value: 1.09%
Property tax ranking: 19 
Estate tax: 0.8% - 16%, with $1 million exemption 
Inheritance tax: None

The North Star State where ice hockey reigns and moose roam free gives retired residents a chilly reception.

Minnesota imposes a hefty personal income tax, sale tax (though food, clothing and medication is exempt) and property tax. It also taxes retirement income, including Social Security benefits and pensions, and wants a piece of your estate.

The state does offer a break to those 65 and older with household incomes of $60,000 or less, with a property tax deferral program that limits the amount of property tax they pay to 3 percent of total household income. 


Rhode Island

State income tax: 3.75% - 5.99%
State sales tax: 7%
Mean property tax rate as a percentage of mean home value: 1.41% 
Property tax ranking: 11 
Estate tax: 0.8%-16%, with a $910,725 exemption 
Inheritance tax: None

What it lacks in size, Rhode Island more than makes up for in tax collections.

The quaint coastal state taxes most forms of retirement income in full, including Social Security, pensions and capital gains income. Real estate, personal income, and consumer goods are taxed at a higher than average rate, which cuts into your savings faster than you can say steamed clams. 



State income tax: 3.55% - 8.95%
State sales tax: 6%
Mean property tax rate as a percentage of mean home value: 1.59%
Property tax ranking: 8 
Estate tax: 0.8% - 16%, with $2.75 million exemption 
Inheritance tax: None

Beloved by skiers, leaf peepers, and Ben & Jerry's ice cream aficionados, the Green Mountain State gets extra points for New England charm. But that hardly negates the impact of a tough tax climate.

There are no exemptions for most retirement income, and property taxes here are the eighth-highest in the nation. Tack on an income tax range that tops out at nearly 9 percent and retirees on the hunt for a new home state might decide to vacation in Vermont instead.



The most friendly states


State income tax: 2 percent to 5 percent

State sales tax: 4 percent

Mean property tax rate as a percentage of mean home value: 0.40 percent, but seniors 65 and older do not pay state property tax 

Property tax ranking: No. 49 (with one being the highest and 50 the lowest.) 

Estate tax: None—but taxpayers pay a "pickup" tax for state death taxes 

Inheritance tax: None 

The Yellowhammer State boasts a balmy Gulf Coast breeze and one of the most favorable retirement tax climates. Senior homeowners pay nothing, nada, zilch in property taxes, and retirement income from Social Security and most pensions is also exempt.

Add low income tax rates and a sales tax exemption on prescription drugs, and you might be left with enough in your wallet to enjoy more seafood gumbo with sweet iced tea.


State income tax: None 

State sales tax: None, but many municipalities impose a local sales tax of 2 percent to 5 percent.

Mean property tax rate as a percentage of mean home value: 1.01 percent

Property tax ranking: No. 22 (with one being the highest and 50 the lowest)

Estate tax: Limited to federal estate tax collection

Inheritance tax: None 

For the intrepid senior who's not repelled by subzero temps, the state aptly known as the Last Frontier offers breathtaking scenery, more than half of the world's glaciers and front-row seats to the famed northern lights. But the zero tax policy on retirement benefits and lack of state income tax might be its biggest attractions for boomers seeking a new address.

Property taxes, which are assessed at full market value, can sting, but homeowners 65 and older are exempt from municipal taxes on the first $150,000 of assessed value of their home.

Oh, and did we mention the government gives you money to live there? The state issues an annual dividend check to each resident based on its oil revenues, which has ranged recently from $875 to more than $2,000.



State income tax: 2.2 percent to 6.75 percent 

State sales tax: None

Mean property tax rate as a percentage of mean home value: 0.52 percent

Property tax ranking: No. 46 (with one being the highest and 50 the lowest)

Estate tax: Expired in 2013

Inheritance tax: None 

With its coastal shoreline of picturesque beaches (cue the dolphins) and proximity to both Philadelphia and Washington, the first state to ratify the Constitution has become a haven for the senior set seeking to stretch their dollars. Indeed, despite being diminutive, Delaware offers significant big tax breaks.

There is no sales tax, no inheritance or estate tax, Social Security benefits are exempt and up to $12,500 of retirement income is exempt for those 60 and older, including income derived from pensions, dividends, interest, capital gains and rental income. Not sold, yet? Homeowners 65 and older can get a credit equal to half of the school property taxes, up to $500.



State income tax: 1 percent to 6 percent

State sales tax: 4 percent

Mean property tax rate as a percentage of mean home value: 0.97 percent

Property tax ranking: No. 25 (with one being the highest and 50 the lowest)

Estate tax: None

Inheritance tax: None

The largest state east of the Mississippi, known for peaches and the Masters Golf Tournament, spares none of its southern charm on retired residents. In 2012, the exemption on most retirement income jumped to $65,000 per spouse for those 65 and older.

Social Security benefits are not taxed at all. Neither are estates or inherited property. Toss in the comfortable climate, access to culture (Atlanta, Savannah), and low state sales tax and Georgia easily maintains its position as a perennial hot spot for aging adults.



State income tax: 2 percent to 6 percent 

State sales tax: 4 percent

Mean property tax rate as a percentage of mean home value: 0.48 percent

Property tax ranking: No. 48 (with one being the highest and 50 the lowest)

Inheritance tax: None 

With its world-famous Mardi Gras, Cajun cooking and river boat casinos, the Pelican State has no trouble keeping tourists entertained. But Louisiana makes a special effort to make people feel at home. Make that double the effort if you happen to be retired.

Since the destruction of Hurricane Katrina, the state has stepped up its marketing efforts to attract more residents, promoting not only its attractions but its tax breaks for seniors. Besides having the second-lowest property tax rate in the nation, the state exempts from taxation all Social Security benefits and income from military, federal, state and local government pensions.



State income tax: 3 percent to 5 percent 

State sales tax: 7 percent

Mean property tax rate as a percentage of mean home value: 0.63 percent

Property tax ranking: No. 40 (with one being the highest and 50 the lowest)

Estate tax: Imposed on the value of the decedent's estate when the total gross estate exceeds the available exemption amount of $1 million, which follows the federal exemption

Inheritance tax: None 

As the only state besides Pennsylvania that exempts all forms of retirement income from taxes, including Social Security, pensions, 401(k)s and IRAs, Mississippi cannot be ignored at a retirement haven.

The Magnolia State, which spawned B.B. King, Oprah Winfrey, Elvis Presley and authors William Faulkner and John Grisham, also exempts prescriptions drugs, motor fuel and health-care services. Payments made by Medicare and Medicaid are also exempt. 



State income tax: 6 percent on dividends and interest income only 

State sales tax: 7 percent, but municipalities can add their own tax up to 2.75 percent. Prescription drugs are exempt.

Mean property tax rate as a percentage of mean home value: 0.74 percent

Property tax ranking: No. 37 (with one being the highest and 50 the lowest)

Estate tax: None

Inheritance tax: 5.5 percent to 9.5 percent on all real and personal property inherited above the $1.25 million exemption in 2013 and $2 million in 2014. 

Seniors who reside in the birthplace of blues get a heaping helping of tax breaks with their pulled pork sandwiches. And it's only getting better. Salaries, Social Security and retirement income from IRAs and pensions are not taxed. And while stock dividends and interest are taxed at 6 percent, residents 65 and older with total annual income of up to $26,200 are exempt.

Though in a national ranking, Tennessee's sales tax is undeniably high, prescription drugs, which consume a major portion of most retirees' budgets, are exempt. And while the state's inheritance tax remains in effect, it is slated to be eliminated by 2016.



State income tax: None. Income, Social Security benefits and retirement income are not taxed

State sales tax: 6.5 percent

Mean property tax rate as a percentage of mean home value: 0.90 percent

Property tax ranking: No. 28 (with one being the highest and 50 the lowest)

Estate tax: None

Inheritance Tax: None 

This southwestern state has long been a draw for tourists and, if you believe the conspiracy theorists, extraterrestrials. (Area 51 lies in the desert off Rt. 375). With Lake Tahoe, Las Vegas and the majestic Sierra Nevada mountains within its borders, it's easy to see why.

But the Silver State is also an oasis for retirees. There is no state income tax, and income generated from retirement accounts and Social Security benefits is exempt. The sales tax rate is admittedly steep, but food and prescription drugs get a refreshingly budget-friendly pass. 


South Carolina

State income tax: 3 percent to 7 percent (adjusted for inflation annually) 

State sales tax: 6 percent

Mean property tax rate as a percentage of mean home value: 0.54 percent

Property tax ranking: 45 (with one being the highest and 50 the lowest)

Estate tax: None

Inheritance tax: None 

The birthplace of music legends James Brown and Chubby Checker, not to mention game show host Vanna White, rolls out the red carpet for retirees. This sunny southern belle levies no tax on Social Security and issues homeowners who are 55-plus a property tax break, allowing a local tax exemption on the first $50,000 of a property's fair market value.

Those 65 and older can also deduct up to $15,000 per spouse in qualifying retirement income, offset by other retirement deductions claimed. Absent any state inheritance or estate tax, you might be able to upgrade your pad to a historic townhouse in Charleston or a beachfront bungalow near Myrtle Beach. 



State income tax: None

State sales tax: 4 percent; prescription drugs and groceries are exempt

Mean property tax rate as a percentage of mean home value: 0.58 percent

Property tax ranking: No. 44 (with one being the highest and 50 the lowest)

Estate tax: None

Inheritance tax: None 

If Yellowstone National Park or the snow-capped peaks of the Grand Tetonsare your idea of a great backyard, the Cowboy State could be an ideal spot to spend your retirement. That taxes are senior-friendly is an added bonus. Wyoming has no state income tax, no estate or inheritance tax, and sales taxes are minimal. Retirement income, including Social Security benefits, is also tax-free.

Old West enthusiasts can enjoy covered wagon rides and trips to Native American museums while they count the money they save on property taxes, which are among the lowest in the nation. Residential real estate is taxed on less than 10 percent of a property's assessed value.

*This list combines data from CCH, the Tax Foundation, state revenue departments, retirementliving.comand the Federation of Tax Administrators. (Property tax rates, compiled by the Tax Foundation using Census Bureau data, are through calendar year 2011 and reflect the mean property tax as a percentage of mean home value.)




Ten Tax Tips for Individuals Selling Their Home


If you’re selling your main home this summer or sometime this year, the IRS has some helpful tips for you. Even if you make a profit from the sale of your home, you may not have to report it as income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. If you sell your home at a gain, you may be able to exclude part or all of the profit from your income. This rule generally applies if you’ve owned and used the property as your main home for at least two out of the five years before the date of sale.

2. You normally can exclude up to $250,000 of the gain from your income ($500,000 on a joint return). This excluded gain is also not subject to the new Net Investment Income Tax, which is effective in 2013.

3. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.

4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S, Proceeds From Real Estate Transactions.

5. Use IRS e-file to prepare and file your 2013 tax return next year. E-file software will do most of the work for you. If you prepare a paper return, use the worksheets in Publication 523, Selling Your Home, to figure the gain (or loss) on the sale. The booklet also will help you determine how much of the gain you can exclude.

6. Generally, you can exclude a gain from the sale of only one main home per two-year period.

7. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.

8. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523 for details.

9. You cannot deduct a loss from the sale of your main home.

10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822, Change of Address, to notify the IRS.



Give Withholding and Payments a Check-up to Avoid a Tax Surprise

Some people are surprised to learn they’re due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. When this happens, it’s a good idea to check your federal tax withholding or payments. Doing so now can help avoid a tax surprise when you file your 2013 tax return next year.

Here are some tips to help you bring the tax you pay during the year closer to what you’ll actually owe.

Wages and Income Tax Withholding

  • New Job.   Your employer will ask you to complete a Form W-4, Employee's Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
  • Life Event.  Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W–4 anytime.
  • IRS Withholding Calculator.  This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.

Self-Employment and Other Income

  • Estimated tax.  This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
  • Form 1040-ES.  Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
  • Change in Estimated Tax.  After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.
  • Additional Medicare Tax.  A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. For additional information on the Additional Medicare Tax, see our questions and answers.
  • • Net Investment Income Tax.  A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. For additional information on the Net Investment Income Tax, see our questions and answers.



Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement. For information on filing an amended return, see Tax Topic 308, Amended Returns, available on, or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

Other agencies may provide guidance on other federal programs that they administer that are affected by the Code. 

Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on See also Publication 555, Community Property.

Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on Sept. 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired.




Three Tax Scams to Beware of This Summer

Are you thinking about taxes while you’re enjoying the warm summer months? Not likely! But the IRS wants you to know that scammers ARE thinking about taxes and ways to dupe you out of your money.

Tax scams can happen anytime of the year, not just during tax season. Three common year-round scams are identity theft, phishing and return preparer fraud. These schemes are on the top of the IRS’s “Dirty Dozen” list of scams this year. They’re illegal and can lead to significant penalties and interest, even criminal prosecution.

Here’s more information about these scams that every taxpayer should know.

1. Identity Theft.  Tax fraud by identity theft tops this year’s Dirty Dozen list. Identity thieves use personal information, such as your name, Social Security number or other identifying information without your permission to commit fraud or other crimes. An identity thief may also use another person’s identity to fraudulently file a tax return and claim a refund.

The IRS has a special identity protection page on dedicated to identity theft issues. It has helpful links to information, such as how victims can contact the IRS Identity Theft Protection Specialized Unit, and how you can protect yourself against identity theft.


2. Phishing.  Scam artists use phishing to trick unsuspecting victims into revealing personal or financial information. Phishing scammers may pose as the IRS and send bogus emails, set up phony websites or make phone calls. These contacts usually offer a fictitious refund or threaten an audit or investigation to lure victims into revealing personal information. Phishers then use the information they obtain to steal the victim’s identity, access their bank accounts and credit cards or apply for loans. The IRS does not initiate contact with taxpayers by email to request personal or financial information. Please forward suspicious scams to the IRS at You can also visit and select the link “Reporting Phishing” at the bottom of the page.


3. Return Preparer Fraud.  Most tax professionals file honest and accurate returns for their clients. However, some dishonest tax return preparers skim a portion of the client’s refund or charge inflated fees for tax preparation. Some try to attract new clients by promising refunds that are too good to be true.

Choose carefully when hiring an individual or firm to prepare your return. All paid tax preparers must sign the return they prepare and enter their IRS Preparer Tax Identification Number (PTIN). The IRS created a webpage to assist taxpayers when choosing a tax preparer. It includes red flags to look for and information on how and when to make a complaint. Visit




IRS Releases Latest $10K Video Spoofing The Apprentice



The Internal Revenue Service on Friday released to the House Ways and Means Committee another video spoof to add to their infamous collection, a parody of Donald Trump’s The Apprentice.

The latest video, which joins the IRS’s past nods to Star Trek, Gillian’s Island and line dancing, cost approximately $10,000 to make, based on information provided by the IRS. It was made to be shown at an IRS small business/self-employed division conference, which was later cancelled.

“Another day, another example of abuse and waste at the IRS,” commented Charles Boustany Jr., R-La., chairman of the Ways and Means Subcommittee on Oversight.

“Months ago, I demanded the IRS come clean about the time and money it spent to produce these frivolous videos. While we may have no answers, we do have an endless supply of what appears to be the IRS’s idea of entertainment. Whether it is wasteful conferences and videos or the inexcusable targeting of taxpayers based on their personal beliefs, there is nothing amusing about the American people footing the bill for this rogue and out of control agency.”

"These two videos made in 2010 and 2011 are from a prior era and do not reflect the stringent policies IRS now has in place to ensure that all training videos are made at the lowest possible cost and with appropriate content," the IRS said in a statement. "Simply put, these videos would not be made at the IRS today. It’s important to note that video costs by IRS business units are down by 90 percent this year compared to a year ago. In addition, the use of videos provides critical taxpayer information and employee training, which helps the IRS save millions of dollars each year."

Here is the link:




Man Pays $7K Tax Bill in Single Dollars



A disgruntled Pennsylvania man protested his $7,143 tax bill by paying it—in single dollar bills, for a video he later posted to YouTube.

Last week, Forks Township, Penn., resident Robert Fernandes took his wife and three children to the Forks Township tax office to pay school taxes for a district his kids don’t attend, according to

“We don't even use the public system, yet I am being forced to pay all this money into a public school system," Fernandes said. "I don't think that's really either fair or just or even ethical. It would be the equivalent if McDonald's were to force vegetarians to pay for their cheeseburgers."

Fernandes also said he got a great deal on a short sale when he bought the home he moved into a year ago, but his annual property taxes total nearly $10,000.

He documented his unusual payment method via YouTube video to create a visual for taxpayers to see how much in taxes was “being stolen from them,” he told the news outlet.

Fernandes told tax collector Anne Bennett-Morse that he did not mean to be difficult, but balked when she asked to count the sum at a nearby bank, stressing that his hard-earned money “needs to be seen.”

It now has been by nearly 40,000 YouTube viewers and presumably Forks Supervisors chairman Erik Chuss, who responded to that residents with concerns should bring them to elected officials, attend public meetings or run for office themselves.

Fernandes said his filmed protest wasn’t about politics, but morality and ethics, explaining that if he retires by age 50, it would cost him an estimated $400,000 in property taxes to remain in his home until age 90.

Bennett-Morse later said it was the first time in her tenure anyone paid their bill in single dollars or change.



IRS’s Final Repair Regs May be Bad News for Small Businesses


The Internal Revenue Service has released final regulations for repairs of tangible property, providing some benefits for small businesses that were not in the earlier temporary regulations, but also perhaps shutting them out from breaks available to larger companies.

The long-awaited repair regulations in TD 9636 that were released last Friday provide guidance on the deduction and capitalization of expenditures related to capital property (see IRS Releases Final Tangible Property Repair Regulations). They aim to clarify and expand the standards in the current regulations, as well as replace and remove temporary regulations that were issued in 2011 (see IRS Issues Regulations on Tangible Property Repairs).

“In a number of different areas you can elect to follow your book capitalization policy,” said Eric Lucas, a principal at KPMG’s Washington National Tax Office. “You don’t have to dig in and analyze the fact-based tests that are in the tax standards. The de minimis expensing rule goes to whether a company can follow its policy in expensing items that fall below a certain threshold. In the tax rule, the final regs create a $5,000 safe harbor. Most companies have a book policy that’s $5,000 or less, so some companies will be able to elect and use the safe harbor, which I think they’ll find helpful. For those companies that have a policy that exceeds $5,000, they can still follow that policy, but it’s up to the examining agent to determine whether it’s a clear reflection of income.”

There is also some help in the final regulations with deductible capital improvements.

“Similarly in determining whether you have a deductible repair or a capital improvement, the final regs allow you to elect to follow your book policy, which I think is helpful, because there are a number of companies out there that don’t want to have to dig in and apply the fact-based tests with the regs, and would rather just follow their book capitalization policies each year,” Lucas explained. “If they make an election each year to do that, they can follow their book policy. I think that’s helpful. And then lastly, the final regs retain the ability to take a partial disposition on building property, and they have made some changes that make it a bit easier practically to implement that than what existed under the temp regs.”

The de minimis expensing rule can also help businesses that need to deduct expenses such as laptop computers.

“That’s the tax rule that tells you whether you can follow your book minimum capitalization threshold,” said Lucas. “Most companies have a sort of materiality threshold. If they buy property like a laptop or a phone, and the cost of those individual units falls below a certain threshold, then they’ll just expense it on their books and records. The tax rule goes to whether you can just follow that same policy for tax purposes because financial reporting and tax operate under different rules. The tax rule in the final regs makes it easier to just follow your book policy as long as your book policy is $5,000 or less.”

For small businesses, however, the IRS is limiting the rule to some extent. “Generally to follow that rule, you have to have an applicable financial statement, which is a financial statement that’s filed with the SEC,” said Lucas. “It is a certified audited financial statement, or it’s a financial statement that is filed with a state or local government. If you don’t have those types of financial statements—and many small businesses don’t—you’re not able to use the $5,000 safe harbor and you’re limited to a $500 threshold. So you have a lower threshold because you don’t have the backstop of having an independent audited financial statement that you can rely on. The government is concerned with abuse. If there’s no independent audited financial statement, then that can lead to abusive situations where companies start deducting the cost of these items for tax purposes. That’s why you have the lower $500 threshold.”

Lucas pointed out that KPMG does not work extensively with smaller business, but he said he is interested to hear what their reaction will be on the $500 threshold. “I expect there will be some comments if small business is not pleased with that,” he said.

Other changes may be of advantage to small taxpayers, but that too is open to debate. The final regulations permit a qualifying small taxpayer to elect to not apply the improvement rules to an eligible building property if the total amount paid during the taxable year for repairs, maintenance, improvements and similar activities performed on the eligible building does not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building. The eligible building property includes a building unit of property that is owned or leased by the qualifying taxpayer, provided the unadjusted basis of the building unit of property is $1 million or less.

“It seems somewhat low to me,” said Lucas. “Because if it’s the lesser of $10,000 or 2 percent of adjusted basis, that ends up being a low number. A lot of companies are going to spend a lot more than $10,000 on building repairs each year, so they wouldn’t be able to use the safe harbor. I’m interested in the reaction from the small business community as well on whether that threshold is helpful. But at least there is something out there for small business that they can rely on. In the temporary regulations there were no provisions for small business.”

The final regulations also cut back somewhat on flexibility for many materials and supplies, except for temporary spare parts.

“In the temporary regulations, you could elect to capitalize and depreciate any material and supply,” said Lucas. “I think they were concerned with some abuses there where you have a material and supply, it really should have a shorter life, and you end up capitalizing and depreciating it over, let’s say, a 20- or 15-year period. I think the government was concerned that if you use something in your trade or business and it gets consumed right away, and then you’re going to depreciate it over a much longer life, that really doesn’t clearly reflect the cost of that item or one that should be taken into account. They cut back on that and said, no, for materials and supplies, they’re deducible when they’re used and consumed unless they’re a rotable, a temporary or emergency standby spare part. For rotable spare parts, there’s some case law out there. A number of companies do want to capitalize and depreciate them, and there are some rulings that say yes, you can capitalize and depreciate rotable spare parts. So the rule in the final regs just follows those results. It probably gets you closer to the right answer, but it does take away some of the flexibility that existed in the temp regs.”

The IRS plans to issue further guidance for specific industry sectors, including cable networks, natural gas firms and retailers. “There are probably going to be revenue procedures that are going to be industry specific and they will be issued under the various industry resolution programs where the industry gets together with the IRS and Treasury and they craft a safe harbor,” said Lucas. “It’s kind of an add-on to the rules and regulations that’s more industry specific. There are a number of those currently ongoing that we expect to be released in the next year.”

The final repair regulations generally provide some positive benefits for businesses and tax practitioners, according to Lucas. “I think the expansion of the routine maintenance safe harbor in the building property is helpful, although they used a 10-year period to apply the test, which may be somewhat limiting, but overall it’s more than what existed under the temporary regulations,” he said. “Just overall I would say the rules are more user friendly in allowing companies to follow their book policy, so I think many companies and practitioners will find that helpful.”




Former IRS Manager Sentenced on Conflict of Interest Charges for Running Her Own Tax Business



A former Internal Revenue Service manager has been sentenced to a year in prison after she was convicted of accessing IRS computers on behalf of a tax business that she operated on the side.

Jeanne L. Gavin, 62, was sentenced Thursday in a Louisiana federal court to 12 months in prison, followed by 12 months of supervised release, along with a $20,000 fine. The sentence stems from Gavin’s convictions on charges of exceeding authorized access to a government computer, and engaging in a criminal conflict of interest.

While serving as a supervisory Internal Revenue agent and group manager in the Baton Rouge, La., office of the IRS, Gavin supervised about 10 revenue agents who were responsible for determining federal tax liability and collecting taxes.

Gavin admitted that, while working for the IRS, she engaged in a criminal conflict of interest with her IRS employment by owning and operating a private tax and accounting business that generated over $70,000 (seeFormer IRS Manager Pleads Guilty to Conflict of Interest after Opening Her Own Tax and Accounting Firm). She also admitted to using her position to improperly cause her subordinates to access IRS databases on over 2,000 occasions for the benefit of her private tax and accounting business.

Gavin worked for 34 years at the IRS. Chief U.S. District Court Judge Brian A. Jackson admonished her at the sentencing, saying, “I think you compromised the public’s trust in the IRS,” according to The Advocate, a local Baton Rouge news outlet.

The prosecutor pointed out that Gavin had defrauded her subordinates by leading them to believe they were accessing tax records for official IRS business, as opposed to doing work on 70 of Gavin’s own tax clients.

The Treasury Inspector General for Tax Administration worked with Acting U.S. Attorney Walt Green’s office and the Federal Bureau of Investigation on the case. “As our voluntary system of tax administration relies heavily upon the public’s confidence in a fair tax system, IRS employees must conduct themselves with the highest level of integrity and their conduct must be above reproach,” TIGTA Inspector General J. Russell George said in a statement. “Our message is loud and clear: TIGTA will vigorously investigate and recommend criminal prosecution for any IRS employee who violates the law.”




IRS Admits Sending Erroneous Penalty Notices



The Internal Revenue Service said Friday that approximately 4,000 plan sponsors received erroneous penalty notices.

The erroneous notices were dated between July 28 and Aug. 26, 2013. The IRS mistakenly sent out the CP 283C, Notice of Balance Due for Incomplete/Late Penalties, for the Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits to thousands of businesses. The agency has now fixed the problem and alerted the recipients of the erroneous notices.

“We corrected the programming error that generated the notices and abated the erroneous penalties,” the IRS said in an email to employee benefit plan professionals. “We also sent letters apologizing for the error; it isn’t necessary to reply to the notice or to contact the IRS.”

However, some of the penalty notices were correct.

“If you received an IRS penalty notice dated between July 28 and August 26, 2013, for an issue unrelated to this programming error, you must respond according to the instructions in the notice,” the IRS added.




Calif. Man Convicted of Embezzling $550K from Payroll Service


A 35-year-old Watsonville, California man was convicted of felony embezzlement Tuesday after he skimmed money from two San Jose companies and left them delinquent on their taxes.

Jason Matthew Haas was sentenced to four years and eight months in prison and ordered to pay $550,000 in restitution, authorities said.

The trouble started in June 2011, when the owner of Bite of Wyoming restaurant on Alum Rock Avenue in San Jose contacted San Jose police about possible embezzlement from its payroll service, said Watsonville police Sgt. Eric Taylor.

The restaurant used a payroll business called Payroll Management Group, which Haas worked for. It had an office on Rio Del Pajaro Court in Watsonville.

"Haas was skimming money off the books and not paying payroll taxes, which alerted the IRS," Taylor said.

San Jose police forwarded a report to Watsonville police detective Charles Bailey, who conducted an extensive investigation.

In October 2012, another San Jose business came forward with a similar complaint of embezzlement.

Royal Coach Tours, a charter bus company, said Haas and Payroll Management Group stole more than $520,000 from March to September 2012. The company also was delinquent on its taxes, according to police.

Police at the time said Haas used payroll software to convert Royal Coach payroll tax money into checks made out to Payroll Management Group.

In November 2012, Watsonville police arrested Haas at his Watsonville home on suspicion of grand theft.

Tuesday, Haas was convicted of two counts of felony grand theft and one count of felony embezzlement.




The Multi-Generational Workplace and How It Affects Your Team
By Jennie Hollmann


Currently, there are five generations being represented in the work force. So for managers and talent management leaders, this can pose challenges — as well as opportunities. 

For leaders, the differences that multi-generational teams bring to the workplace can be transformed from a questionable factor into a powerful asset to create a varied idea exchange, as well as a source of innovation. 

So what are the commonalities between generations? While there are generational differences in both overall attitudes and experiences, the Center for Creative Leadership found that most of us have similar core values, want to be challenged at work and have a leader we can trust. This holds true even as we express ourselves differently and have preferences on how we want to communicate and be managed.

According to a recent Lee Hecht Harrison survey, 60 percent of employers report experiencing multi-generational conflict of some kind, particularly in the area of communication and conflict, which reaches beyond the Human Resources department. Organizations that successfully manage conflict embrace and accommodate multi-generational differences, and work to maintain a level of respect regarding what each generation can bring to the workforce. Success stems from understanding and leveraging the strengths of different generations and creating a work environment that values the differences between them. 

The fluctuating state of the economy and the growth of technology have a direct impact on generations moving in and out of the workforce. As the Baby Boomers retire, Gen Xers and Gen Yers will be poised for career opportunities. However, the impact of current economic conditions is leading to a prolonged retirement age. Changes due to the growth and speed of technology continue to impact how we communicate and learn in the workforce. The younger generations have been referred to as “technology natives,” and are relied upon for that skill set in increasing numbers, while the older generations have the depth and breadth of experience that companies cannot afford to dismiss. 

So how can you most effectively manage the diverse mix of employees in your company or even on your team? Below are some quick tips on managing the generations ranging from Traditionalists to Linksters.

Traditionalists. They are defined as loyal, having a strong work ethic and being civic minded. They come from the experiences of the Great Depression, World War II and the rise of labor unions, and have a “waste not, want not” and a “no news is good news” philosophy.

Tips for Managing Traditionalists (born between 1922 and 1945):

    • Make them mentors
    • Teach old dogs new tricks
    • Accommodate their needs
    • Recognize and applaud their contributions
    • Give one-on-one support

Baby Boomers. They are typically defined as idealists, coming from experiences of the Civil Rights and Women’s Rights movements, Vietnam and Woodstock, and as having a “He who dies with the most toys wins” and a “Hell no, we won’t go” philosophy.

Tips for Managing Boomers (born between 1946 and 1964)

    • Engage them and their ideas
    • Offer them opportunities to be mentors and to volunteer
    • Confront resistance in constructive ways and offer them 
      opportunities to voice their opinions in a safe and 
      trusting environment

Generation Xers. They are typically defined as working to live and by their experiences, including growing up as latchkey kids with single parents, corporate downsizing and “I’m not 40, I’m 18 with 22 years of experience” philosophy.

Tips for Managing Generation X (born between 1965 and 1980)

    • Provide autonomy and recognition for a job well done
    • Offer them challenges and opportunities to work in teams
    • Coach them in ways that prepare them for their next potential 
      opportunity/role within your company 

Generation Yers. They grew up with experiences, such as 9/11, Columbine and Oklahoma City bombings, and being part of an era of multi-cultural, widespread technology trends.

Tips for Managing Generation Y (born between 1981 and 1995)

    • Be open to working virtually and giving them the autonomy to 
      maximize their strengths in ways that result in enhanced 
    • Give them opportunities to build meaningful relationships in the 
    • Give feedback often and provide individualized coaching and 

Linksters. The defining events of this generation include cell phones, reality TV, helicopter parents and a financial crisis. They are looking for friends at work.

Tips for Managing Linksters (generation born after 1995)

    • Lead by example and make them feel valued
    • Give them appropriate supervision, while balancing autonomy
    • Create micro-career paths to keep them motivated and engaged

About the Author
Jennie Hollmann, Ph.D., is Director of Organizational Research at Caliper Corporation, a Princeton-based international management consulting firm, which, throughout the past 50 years, has helped over 25,000 companies, from Fortune 500 to start-ups and everything in between, hire and develop top performers. Interested readers may contact Dr. Hollmann at




How to Protect Children from Identity Theft with Safe Business Practices
By Robert P. Chappell, Jr.


According to the 2012 Javelin Strategy and Research Identity Fraud Report, someone falls victim to identity theft every three seconds in the U.S. In fact, there were 12.6 million victims of identity theft last year alone. The report shows a three-year pattern of continuous increase in identity theft starting in 2010 when there were 10.2 million victims. This was followed by 11.6 million victims in 2011 and a three-year high of 12.6 million in 2012.

The Federal Trade Commission’s Consumer Sentinel Network Data Book for January – December 2012 states that six percent of all identity theft victims are age 19 and under. This means that approximately 756,000 victims last year were children. Many of our readers, such as school photographers, portrait studios, and photo labs, work with children on a daily basis. The 2012 AllClear ID Alert Network Child Identity Theft Report stated that the rate of identity theft for children has now reached an astounding 35 times higher than the rate for adults. 

As a business owner or financial leader, instituting safe business practices will help you protect your customers, their families and your business. Critical to implementing a strategy is first understanding why children are being targeted and what vital information needs protection. 

Children as Targets

Children are now the preferred target for identity thieves for several reasons:

1.Length of time someone can use a child's identity without discovery.

2."Clean" credit record children possess.

3.Lack of national date of birth verification system.

4.Ease with which credit agencies issue credit and forgive debt owed by victims.

Education is the key to prevention of this crime. Child identity theft thrives because parents and businesses do not understand the concept of a child’s information being of any value. Many view children as being excluded from the income-earning workforce, therefore, not at risk of becoming a target. This is not true.

Tips to Prevent Child Identity Theft
A few steps your business can take to help prevent child identity theft are as follows:

  • Use identification numbers on documents to identify children instead of requiring Social Security numbers.
  • Ensure all business documents are destroyed using a shredder. The best shredding method is to use a cross-cut shredder.
  • Institute a business policy that requires "hard" passwords on all computers. Hard passwords avoid family child names, pet names and information known to friends. Passwords should not be sequential, and should include a combination of letters and numbers.
  • Develop policies that address the destruction of client information on your computer system when no longer needed. This should include the destruction of your laptop and desktop hard drives after the life of the computer is over.

Failing to institute identity theft prevention can result in liability for your business. You could find your business involved in a civil court action. At a minimum, you may have to purchase identity theft services for your clients if you contribute to their victimization. Take simple steps today to protect your clients and business.

About the Author
Robert P. Chappell, Jr. is a twenty-seven-year veteran law enforcement officer. He has served as a trooper, Narcotics Special Agent, Assistant Special Agent-in-Charge with the Bureau of Criminal Investigation, and currently serves as a lieutenant with the Bureau of Field Operations. He is the author of Child Identity: What Every Parent Needs to Know. Interested readers can contact Robert and visit his website




Get Ready for Enrollment in Health Exchanges

Sign-Up Starts Oct. 1, but Consumers Should Start Evaluating Their Needs Now


In about six weeks, Americans will have a new kind of open enrollment to consider.

Starting Oct. 1, people without health insurance can sign up for standardized coverage through new health-insurance marketplaces run either by their state, the federal government or a combination of the two—the centerpiece of the Patient Protection and Affordable Care Act.

WSJ peers into the future with this first-person look at how the Affordable Care Act, commonly known as 'Obamacare,' will impact individuals. Visit for the interactive version of this video.

The coverage will take effect Jan. 1. And people with incomes between 100% and 400% of the federal poverty level—about $23,500 to $94,000 for a family of four—can receive financial help on a sliding scale to offset the costs.

These marketplaces, also known as exchanges, will make shopping for health insurance easier than it is today, says Sarah Dash, a research fellow at Georgetown University who has studied the new marketplaces. "Consumers are going to get a much more transparent, apples-to-apples shopping experience."

If you have affordable insurance through an employer, or if you have coverage through a government program such as Medicare or Medicaid, you won't be affected by the exchanges.

Exchange shoppers will fill out a single insurance application, which will be used to "find out if they can get a tax credit on their premium, help with cost-sharing or if they're eligible for Medicaid in their state," Ms. Dash says.

You can calculate your potential premium assistance with an online tool from the Kaiser Family Foundation, which conducts health-care research.

This first open-enrollment period will last six months, from Oct. 1, 2013 to March 31, 2014. It generally takes two weeks for a policy to go into effect after enrolling, so you'll need to sign up by Dec. 15 to get coverage starting Jan. 1.

You can sign up by using the Internet, phone, mail or in person at a designated center. The centers will have people trained to help with the enrollment process, according to the U.S. Department of Health and Human Services. Insurance agents and brokers may be there as well. In many states, people who enroll online can tap into a live chat window for customer-service troubleshooting.

Many state call centers already are running. Visit or call 1-800-318-2596 for more information.

The law states that people looking for insurance can't be denied coverage or charged higher premiums because of pre-existing health conditions. However, premiums can vary based on four characteristics: age, tobacco use, geographic area and family size—though there are limits. Older people may be charged up to three times as much as younger people and smokers may be charged up to 50% more than nonsmokers.

The law also requires that health-insurance plans cover a set of 10 essential benefits such as hospitalization, doctors' visits, prescription drugs, maternity care, pediatric care, and substance-abuse and mental-health care.

Before diving into the enrollment process, be sure to have the Social Security numbers of the people you're looking to insure; employment and income information, such as pay stubs, tax return or W-2 form; and policy numbers if you currently have any health insurance. Eligibility for tax credits and subsidies is based on modified adjusted gross income.

Five different plan levels will be available on the new marketplaces. Four of the levels have metal names: bronze, silver, gold and platinum.

The bronze plan generally offers the lowest premium in exchange for the highest out-of-pocket costs. The silver level is the level you must choose if you want to get financial help with out-of-pocket costs such as copayments and deductibles. "I call the silver level a mid-range plan," says Sarah Lueck, senior policy analyst for the Center on Budget and Policy Priorities, a public-policy research organization in Washington. Under the gold and platinum levels, premiums will be higher, but your share of costs when you get health care will be lower.

The fifth level, a catastrophic plan, is available for people younger than 30 and those suffering financial hardship.

Think about how much coverage you can afford and how much care you anticipate needing, says Carter Price, a mathematician with Rand, a nonprofit research group in Arlington, Va. "People will need to decide what level of coverage they want to take, whether it's very bare-bones or very generous."

Write to Kristen Gerencher at




Explore a Quick and Simple Way of Understanding Taxes

IRS Summertime Tax Tip 2013-21


If you’re a student or teacher, the summer months may be a nice break from class, but they’re also a good time to learn something new. A quick and simple way to learn about taxes is by using the IRS Understanding Taxes program.

The program is a free online tool designed in partnership with teachers for classroom use. The interactive tool is a great resource for middle, high school or community college students. However, anyone can use it to learn about the history, theory and application of taxes in the U.S. 

         Here are seven reasons why you should consider exploring the Understanding Taxes program:


1. Understanding Taxes makes learning about federal taxes easy, relevant and fun. It features 38 lessons that help students understand the American tax system. Best of all, it’s free!


2. The site map helps users quickly navigate through all parts of the program and skip to different lessons and interactive activities.

3. A series of tax tutorials guide students through the basics of tax preparation. Other features include a glossary of tax terms and a chance to test your knowledge through tax trivia. Interactive activities encourage students to apply their knowledge using real world simulations.

4. Understanding Taxes makes teaching taxes as easy as ABC:

  • Accessible (web-based)
  • Brings learning to life
  • Comprehensive

5. It’s easy to add to a school’s curriculum. Teachers can customize the program to fit their own personal style with lesson plans and activities for the classroom. They will also find links to state and national educational standards.

6. The program is available 24 hours a day. All you have to do is access the IRS website and type “Understanding Taxes” in the search box.

7. There are no registration or login requirements to access the program. That means people can take a break and return to a lesson at any time.

You can use the Understanding Taxes anytime during the year. The IRS usually updates the program each fall to reflect current tax law and new tax forms.

Additional IRS Resources:

Understanding Taxes




Simplified Option for Home Office Deduction

Do you work from home? If so, you may be familiar with the home office deduction, available for taxpayers who use their home for business. Beginning this year, there is a new, simpler option to figure the business use of your home.

This simplified option does not change the rules for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements. The new option can save you a lot of time and will require less paperwork and recordkeeping. 

Here are six facts the IRS wants you to know about the new, simplified method to claim the home office deduction.

1. You may use the simplified method when you file your 2013 tax return next year. If you use this method to claim the home office deduction, you will not need to calculate your deduction based on actual expenses. You may instead multiply the square footage of your home office by a prescribed rate.

2. The rate is $5 per square foot of the part of your home used for business. The maximum footage allowed is 300 square feet. This means the most you can deduct using the new method is $1,500 per year.

3. You may choose either the simplified method or the actual expense method for any tax year. Once you use a method for a specific tax year, you cannot later change to the other method for that same year.

4. If you use the simplified method and you own your home, you cannot depreciate your home office. You can still deduct other qualified home expenses, such as mortgage interest and real estate taxes. You will not need to allocate these expenses between personal and business use. This allocation is required if you use the actual expense method. You’ll claim these deductions on Schedule A, Itemized Deductions.

5. You can still fully deduct business expenses that are unrelated to the home if you use the simplified method. These may include costs such as advertising, supplies and wages paid to employees.

6. If you use more than one home with a qualified home office in the same year, you can use the simplified method for only one in that year. However, you may use the simplified method for one and actual expenses for any others in that year.


IRS Begins Crackdown of Small Businesses



Joseph Donegan

Small businesses may face increased scrutiny from the Internal Revenue Service, which recently announced that it believes small companies may be under-reporting cash payments.

Resulting from the possibility of many small business audits in the future, the agency recently sent out 20,000 letters since fall 2012, notifying owners of "possible income under-reporting." The IRS said it sent out these letters after examining the credit card transactions of a large number of small entities across the country. After its analysis, the tax agency said it is now trying to identify companies that receive an "unusually high portion" of reported sales through credit card transactions and may be under-reporting cash payments, CNN Money reports. The IRS is essentially targeting companies whose ratio of credit card to cash seems unusual for their industry, the news source added. The possible impending small business audits has owners and entities worried.

"You received one or more of these letters and notices because you may have under-reported your gross receipts," said the agency. "This is based on your tax return and Form(s) 1099-K, Payment/Merchant Cards and Third Party Network Transactions that show an unusually high portion of receipts from card payments and other Form 1099-K reportable transactions."




House Republicans Release Principles for Online Sales Tax Legislation



Republican leaders of the House Judiciary Committee released a set of principles Wednesday for taxing Internet sales, offering the first tentative move toward compromising on legislation passed by the Senate earlier this year that has not yet advanced in the House.

The Senate passed the Marketplace Fairness Act in May, requiring Web sites with more than $1 million in remote sales to collect sales taxes from customers in states that have joined the Streamlined Sales and Use Tax Agreement (see Senate Passes Internet Sales Tax Legislation). However, the bill provoked opposition among many House Republican lawmakers and has stalled until now.

On Wednesday, House Judiciary Committee chairman Bob Goodlatte, R. Va., released a set of basic principles on the issue of Internet sales tax, supported by a key subcommittee chairman:

1. Tax Relief: Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by states.

2. Tech Neutrality: Brick and mortar, exclusively online, and “brick and click” businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.

3. No Regulation Without Representation: Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.

4. Simplicity: Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.

5. Tax Competition: Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.

6. States’ Rights: States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that states impose any sales tax compliance burdens.

7. Privacy Rights: Sensitive customer data must be protected.

To develop the principles, the House Judiciary Committee received input from taxpayers, industry and trade groups, and representatives of state and local governments. The committee indicated that the principles are intended to guide discussion on the issue and spark creative solutions.

“Americans across the country are affected by the issue of Internet sales tax whether they are consumers or business owners,” Goodlatte said in a statement. “The aim of the principles is to provide a starting point for discussion in the House of Representatives. I greatly look forward to hearing fresh approaches to this issue and continuing the discussion.”

Goodlatte received support from Rep. Spencer Bachus, R-Ala., who chairs the Subcommittee on Regulatory Reform, Commercial and Antitrust Law and formerly chaired the House Financial Services Committee. “The principles issued by Chairman Goodlatte provide a thoughtful framework for discussion on the Internet sales tax issue,” said Bachus. “As chair of the subcommittee with jurisdiction over Internet tax issues, I appreciate that the chairman is giving it serious consideration.”

The National Governors Association, which has been pushing for legislation requiring Internet retailers to collect and remit sales and use taxes from their customers to help support their revenue-starved state governments, commended the set of principles released by Goodlatte.

“The National Governors Association applauds Chairman Goodlatte for his focus on this critical state-federal issue and for making it a priority of the committee,” the group said in a statement. “Marketplace Fairness is common-sense legislation that upholds the principles of federalism and levels the playing field between Main Street and e-street. It helps states, encourages competition and preserves Main Street jobs. We are pleased by the release of the principles and praise the chairman’s efforts to move this legislation. We look forward to working with the committee to ensure this legislation moves through Congress this year.”

The National Retail Federation, whose brick-and-mortar retailers have long complained about the tax benefits afforded to their online competitors, also hailed the release of Goodlatte’s principles.

“The National Retail Federation welcomes the release of these principles and appreciates the House Judiciary Committee’s continuing dedication to, and leadership on this retail industry priority,” said NRF senior vice president for government relations David French. “These principles will serve as a legislative roadmap for advancing sales tax fairness legislation in the House of Representatives, and demonstrate that Congress is listening to the pleas of local, community retailers and merchants, who continue to face an unfair competitive disadvantage with their online competitors. NRF looks forward to analyzing and discussing these principles with our members, and remains confident that Congress will address the unlevel playing this legislative session. We look forward to providing critical feedback to the committee and welcome any opportunity to participate in forthcoming legislative hearings.”

Many online retailers have traditionally failed to collect sales and use taxes from customers, leaving it to the customer to report the taxes on their tax returns and remit it to their state government. Few taxpayers do so. A 1992 decision by the Supreme Court in the case of Quill Corp. v. North Dakota ruled that remote sellers such as catalog merchants were only required to collect use taxes from customers in the states where the retailer has a physical presence, or nexus. Many states have passed their own laws requiring online merchants to collect sales and use taxes, noting that large online businesses like frequently have affiliates in their states who pass along Web site visitors to the e-tailer in exchange for a percentage of any sales that are made.

Amazon has traditionally waged legal battles against online sales tax laws in various states, but has thrown its support behind the Marketplace Fairness Act as it opens physical distribution centers across the country. Its rival eBay has continued to oppose the legislation, but it signaled Wednesday that it approves of the principles released by Goodlatte.

“eBay is very encouraged that the remote sales tax principles released today by Chairman Goodlatte address concerns that we have raised on behalf of our small business community,” said Brian Bieron, executive director of global public policy at eBay Inc. “The principles create a sensible starting place to develop legislation that considers the interests of many stakeholders.  We appreciate all the effort Chairman Goodlatte and his staff have put into developing these principles, and we look forward to continued partnership on this important issue.”




The Real Obstacle to Tax Reform? Let’s Look in the Mirror

Posted by Ann Marie Maloney on Sep 19, 2013 in Ann Marie MaloneyTax

In one of the better teen movies of the '80s, "Better Off Dead," a paperboy ruthlessly stalks the main character in an intense pursuit of what he is owed, repeating, “I want my two dollars.”  

Johnny the paperboy is not alone, as the senators who proposed a blank slate approach to tax reform found out.  And of course, taxpayers want a lot more than two dollars.   I admit, I am one of those “what’s in it for me?” taxpayers but I am slowly coming around to a different philosophy. 

Earlier this year, I was considering signing up for a class that was rather expensive and went down the hall to ask a colleague to determine how I could deduct it as it was not directly related to my work.  Not if I could deduct it, mind you, but how. (One of the great things about working at the AICPA is the availability of great tax knowledge.) I have a pretty simple return since I am renting and do not have enough qualifying deductions to itemize.

She checked and shook her head no. (I am abbreviating here but that was the bottom line.)  I sat there in disbelief.  “Are you sure?” 

 I asked again.  I must be able to get something, I thought.  It’s bad enough I don’t get to put anything on most of the lines of the 1040 so I am owed something, right?

The answer did not change, but there I sat.  I start to suspect that she is looking out the door to catch someone’s eye, anyone’s eye, to be rescued from my interrogation. I finally get up, conceding that the answer will not change, but remained in shock.  Not to mention a state of outrage. 

Fast forward a month or two later, I walk down the sidewalk to the subway and passed a man who sits at the corner of 13th and F Streets in downtown DC most afternoons and asks passersby, “Can anyone spare a penny?” He varies his routine occasionally by asking if someone could pick him up a caramel Frappuccino or some other treat.  I think, “I don’t even buy those for me, why would I buy one for him?”

Then it kind of hit me.  Maybe I’m not one to judge.  After all, I am the one expecting other taxpayers to pay for my personal development.  If I were to go to my neighbor John and ask him to chip in for a PhotoShop class, he’d think that was very strange, not to mention inappropriate.  And could you blame him?  The question is, should he as a taxpayer be treated any differently? 

Individual tax breaks help defray the costs of achieving important goals, such as paying for education or owning a home, but they also consume a large chunk of revenues. As our nation’s debt grows higher, we need to start asking the tough questions and perhaps letting go of a few of our “two dollars.”  Otherwise, what are we leaving behind? What can you afford to give up?

(Author’s Note:  The AICPA has outlined recommendations to Congress to simplify the tax system in many ways, such as the consolidation of certain education tax provisions to ease compliance for taxpayers.  However, it generally does not take a position on elimination or adoption of any specific tax benefit. For more information on the AICPA's thought leadership on tax reform,

Ann Marie Maloney, AICPA Staff





Beanie Babies Creator Admits Tax Evasion

Will pay $53 mn penalty for FBAR failure

SEPTEMBER 19, 2013


(Bloomberg) H. Ty Warner, the creator of Beanie Babies plush toys, was charged with tax evasion for failing to report $3.2 million in income on a secret Swiss bank account that held as much as $93.6 million in assets, and will pay over $50 million in penalties for failing to file an FBAR.

Warner, 69, will plead guilty in federal court in Chicago for hiding income at UBS AG, the largest Swiss bank, U.S. Attorney Gary Shapiro said in a statement. Warner falsely reported his 2002 income as $49.1 million, omitting money he made on his UBS account. He amended his 2002 return in 2007, yet understated his tax by $885,300, according to court papers.

Since 2009, the U.S. has prosecuted about 70 U.S. taxpayers and 30 bankers, lawyers and advisers in a crackdown on offshore tax evasion. Warner, the sole owner of TY Inc., held the highest account balance of the taxpayers prosecuted in the crackdown.

“This is an unfortunate situation that Mr. Warner has been trying to resolve for several years now,” Gregory Scandaglia, Warner’s attorney, said in a statement. “Mr. Warner accepts full responsibility for his actions with this plea agreement.”

Warner, of Oak Brook, Illinois, also will pay a civil penalty of $53.6 million for failing to file a required Report of Foreign Bank and Financial Accounts, or FBAR, according to Scandaglia. He is scheduled to appear in court for his plea on Octocber 2, according to Shapiro’s spokesman Randall Samborn.

Through his Ty Warner Hotels & Resorts, he owns the Four Seasons Hotel New York, the San Ysidro Ranch in Santa Barbara, California, and Las Ventanas al Paraiso in Los Cabos, Mexico, according to the company’s Web site.

Secret Account

Warner opened a secret account at UBS in 1996. From there, he transferred $93.6 million in December 2002 to another secret Swiss account at Zurcher Kantonalbank, according to his criminal charging document known as an information.

He disguised his ownership of the ZKB account by holding it under an entity called the Molani Foundation, court papers show. In 2002, he failed to report his UBS income of $3.2 million to his outside accountants, and didn’t file an FBAR. The tax return he filed for 2002 also was false, according to the information.

In 2009, Warner tried to avoid prosecution through an amnesty program at the Internal Revenue Service known as the Offshore Voluntary Disclosure Program, according to Scandaglia. He was denied entry, the lawyer said.

Warner found Ty Inc. in 1985. It took off after he created the Beanie Baby, a children’s toy, in the 1990s. Ty Inc., based in Westmont, Ill., is a $4.5 billion business, according to his biography. Since 1995, he has donated almost $140 million in cash and plush toys to charities and organizations.





IRS Sets Per Diem Rates for Lodging, Meals and Incidental Expenses



The Internal Revenue Service has set the per diem rates that taxpayers can use to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home.

Notice 2013-65 announces the special per diem rates, effective Oct. 1, 2013, which taxpayers may use in the year ahead to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. The annually announced rates are the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Rev. Proc. 2011-47 provides the rules for using per diem rates, rather than actual expenses, to substantiate the amount of expenses for lodging, meals, and incidental expenses for travel away from home. Taxpayers who may use per diem rates to substantiate the amount of travel expenses under Rev. Proc. 2011-47 may use the federal per diem rates published annually by the General Services Administration, the IRS pointed out. Rev. Proc. 2011-47 allows certain taxpayers to use a special transportation industry rate or rates under a high-low substantiation method for certain high-cost localities.

The IRS announces these rates and the rate for the incidental expenses only deduction in an annual notice.

“Use of a per diem substantiation method is not mandatory,” the IRS pointed out. “A taxpayer may substantiate actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.”

Notice 2013-65 will be published in Internal Revenue Bulletin 2013-42 on Oct. 15, 2013.




How Will Health Insurance Exchanges Benefit Employers?

SEPTEMBER 25, 2013


Much attention has been focused on the postponement of the Affordable Care Act’s employer mandate—the requirement that businesses with 50 or more employees provide them with health insurance or face significant fines, which the Obama Administration delayed for one year.

But largely lost in the furor have been the ways in which employers could potentially benefit from the ACA and the launch of the new public health insurance exchanges, starting October 1.

Results from a survey of more than 100 large employers, released last month, reveal that companies are looking to the online marketplaces to help them save on a variety of health-related benefit costs. These include benefit options for part-time and retired workers, as well as furloughed workers who currently rely on COBRA coverage.

“One of the strongest arguments for the Affordable Care Act has been that there are a number of people who historically have had little or no opportunities to buy affordable coverage,” Helen Darling, president and chief executive officer of the National Business Group on Health, which conducted the survey, said in a statement.  “The exchanges specifically change that outlook and enable functional marketplaces all around the country in a way that we have never had. So it is not surprising that employers would see the exchanges as solutions for some groups.”

The savings on COBRA alone could total in the billions.

Because insurance under COBRA—short for the Consolidated Omnibus Budget Reconciliation Act of 1985—is no longer subsidized by their former employers, individuals who are often still unemployed must pay premiums in excess of $5,000 a year for the coverage. And since it’s so expensive, only people who know they’ll need the insurance tend to sign up.

But once they do, they are still covered under their former employer’s health plan, and the average COBRA member costs his former employer 54 percent more—or $3,800—than the average active worker, according to a 2009 survey by the newsletter Spencer’s Benefits Reports.

Spencer estimates that there were 4.8 million COBRA beneficiaries in 2008—the most recent year for which figures are available. Based on those figures, COBRA would have cost employers more than $10 billion that year, according to a Kaiser Health News report.

However, with the launch of the exchanges next month, many COBRA recipients will qualify for federal tax credits and subsidies, making insurance purchased through an exchange a far less costly alternative. As a result, the exchanges are expected to all but replace COBRA coverage.

“As soon as the law was passed, the question among employers and benefits people was: Is there still going to be a reason for COBRA?” Steve Wojcik, vice president of public policy for the National Business Group on Health told Kaiser Health News and the Chicago Tribune in an interview. Offered a choice between heavily subsidized coverage through the exchanges or paying full price under COBRA, he said, “most people are going to choose the exchange.”




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.


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