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News

Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Accounting & Tax

Its Not Too Late To Contribute To Your IRA For 2017

Whether you are still working or retired, you should periodically review your IRAs. Here are few things to remember.

Contribution limits
If you’re still working, review the 2017 IRA contribution and deduction limits to make sure you are taking full advantage of the opportunity to save for your retirement. You can make 2017 IRA contributions until April 17, 2018.

Excess contributions
If you exceed the 2017 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account.

Required minimum distributions
If you are age 70½ or older this year, you must take a 2017 required minimum distribution by December 31, 2017 (by April 1, 2018, if you turned 70½ in 2017). You can calculate the amount of your IRA required minimum distribution by using our Worksheets. You must calculate the required minimum distribution separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs. Remember that you face a 50% excise tax on any required minimum distribution that you fail to take on time.

Click for additional resources

 

image source: http://401kcalculator.org

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Disclosing Noncompliant and Unreported Foreign Accounts and Assets

The IRS has announced that it will close the Offshore Voluntary Disclosure Program (“OVDP”) effective September 28, 2018. The IRS is encouraging taxpayers who need to disclose noncompliant and unreported foreign accounts and assets to come forward before September 28. Qualifying taxpayers who have unreported foreign accounts can use the IRS’s OVDP to come into compliance while avoiding the risk of criminal prosecution and minimizing otherwise applicable civil penalties, such as the FBAR penalty. While the IRS announcement notes that after the 28th, the IRS will make available additional information about possible avenues for taxpayers to disclose unreported foreign accounts in the future, such future programs or opportunities, if any are in fact announced, may subject taxpayers to increased penalties as compared to the current OVDP.

As we have seen in the past, each version of the OVDP (iterations of which date back to 2009) has brought with it increases in the applicable penalties. Therefore, taxpayers who continue to hold non-compliant foreign accounts or assets are encouraged to consult with their advisors about the current OVDP program before that window of opportunity closes.

Negotiating voluntary disclosures with the Internal Revenue Service avoids criminal prosecution and limits civil penalties on behalf of clients with foreign bank accounts.

 

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Accounting & Tax: Identity Theft—IRS Warns Taxpayers about New Refund Scam

The IRS has alerted taxpayers of a new scam in which criminals deposit fraudulent tax refunds into an individual’s bank account and then attempt to reclaim the funds. They accomplish this by (1) hacking tax practitioners’ computers to steal taxpayer data; (2) using the stolen information to file fraudulent tax returns; (3) having the refunds deposited into the taxpayers’ bank accounts; and (4) telling the victims the money was mistakenly deposited into their accounts and asking them to return it. Criminals may pose as debt collection agency officials acting on behalf of the IRS, or the taxpayer may receive an automated call purportedly from the IRS.

The IRS encourages victims of this scam to follow the procedures outlined in Tax Topic Number 161 Returning an Erroneous Refund.

Taxpayers should immediately discuss the issue with their financial institutions and tax preparers. Click to contact us.

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Accounting & Tax: IRS Clarifies Deductibility of Home Equity Loan Interest

For tax years 2018–2025, the Tax Cuts and Jobs Act (TCJA) eliminated the deduction for interest on home equity debt and limited the mortgage interest deduction to qualified residence debt of up to $750,000 ($375,000 for married taxpayers filing separately). In a recent News Release, the IRS advised taxpayers that interest paid on home equity loans and lines of credit is still deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. For example, interest on a home equity loan used to build an addition to an existing home is generally deductible (subject to the new dollar limit on qualified residence debt). However, interest on a home equity loan used to pay personal living expenses, such as credit card debt, is not deductible. Also, interest on a home equity loan on a taxpayer’s main home to purchase a vacation home is not deductible.

To discuss your specific Accounting & Tax Needs, click to contact us.

 

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Financial & Wealth :: What Is the Gift Tax?


Gift_Taxes~001The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.

The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.

In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.

You are not required to file a gift tax return unless any single gift exceeds the annual gift tax exclusion for that calendar year. The exclusion amount ($14,000 in 2014) is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.

Gift taxes are determined by calculating the tax on all gifts made during the tax year that exceed the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.

The 2010 Tax Relief Act reunified the estate and gift tax exclusions at $5 million (indexed for inflation), and the American Taxpayer Relief Act of 2012 made the higher exemption amount permanent while increasing the estate and gift tax rate to 40% (up from 35% in 2012). Because of inflation, the estate and gift tax exemption is $5.34 million in 2014. This enables individuals to make lifetime gifts up to $5.34 million in 2014 before the gift tax is imposed.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC.

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Accounting & Tax :: Beware IRS Imposter Phone Scams

phonepadlFederal law enforcement (FBI, Homeland Security, IRS Criminal Investigation, and Treasury Inspector General or TIGTA) are jointly investigating the “boiler rooms” that originate these calls. The TIGTA believe these operations are located in India and they are pursuing aggressively.

Callers pose as IRS agents or INS agents and have personal information such as social security numbers and home addresses. This data can be easily bought or obtained for free online which is why the imposters seem to know a lot about the person being targeted. The callers then threaten the homeowner with legal action if funds are not transmitted immediately. Many times the money is requested in gift card format! (The IRS does not want to get paid in gift cards and the IRS does not threaten to send the sheriff to your office to arrest you if you don’t go to the bank and pay immediately.)

Please ignore these calls and don’t provide any personal information to these callers who indicate they are from the IRS.

Don’t be scared or threatened.

 

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Accounting & Tax :: Saving for Higher Education: Investing in Your Child’s Future


Saving money for college is one of the most important investments most people will make in their lifetime. Fortunately, there are many investment options for college savings, with particular merits, and certain caveats to bear in mind. Investing parameters to consider include the length of time set aside for savings, the financial return on the investment, whether your child will choose college for his future, and perhaps most importantly, the tax ramifications of the investment choices.

529 Plans

A popular college savings vehicle, known as a 529 Plan, is essentially a qualified tuition plan sponsored by a state or educational institutions that is authorized by Section 529 of the Internal Revenue Service. An account holder may either invest in a prepaid tuition plan, or a college savings plan. A prepaid tuition plan allows the account holder to purchase units or credits at participating colleges and universities for future tuition (and possibly room and board), while an account holder of a college savings plan can use the withdrawals at any college or university. All 50 states and the District of Columbia offer some type of 529 plan.
The tax advantages to 529 plans are that the earnings are not subject to state or federal tax if used to cover the cost of higher education and some states allow a deduction for contributions to 529 plans. An additional benefit is that 529 plans can be funded by parents, grandparents, aunts & uncles, etc.  There is a special gift tax rule that allows five years of 529 plan contributions to be made at one time without gift tax consequences provided that no other gifts are made to that donee during those 5 years. For 2014, $70,000 ($14,000 annual exclusion times 5 years) can be deposited in a 529 plan by each donor. If the 529 investment is withdrawn and not used for college, the owners will be subject to income tax on the earnings plus a 10% federal tax penalty. Some states impose rules limiting annual portfolio allocations. Market risk must also be considered. If you have a child with a 529 plan who decides college is not for them, the account may be transferred to another family member.

Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (formerly called an “Education IRA”) differ from 529 plans in that the funds can be used for primary and secondary education in addition to higher education. They are similar to 529 plans because the earnings are not taxable when used for qualified education expenses but are taxable with a 10% penalty on earnings if not. A contribution to a Coverdell Education Savings Account and a 529 plan can be made in the same year, but the contribution to the Coverdell Education Savings Account is limited to $2,000 each year. In addition, there are income limitations on the contributor to be eligible to make contributions. When the beneficiary reaches age 18, contributions can no longer be made and at age 30, the account has to be closed. Another disadvantage is that state tax deductions are not allowed for these contributions.
Custodial Accounts
Custodial accounts created under the Uniform Gifts/Transfers to Minors Act allow funds to grow in your child’s name. Gifts to these accounts are subject to the annual gift limits. Advantages of UGMA/UTMA gifts are that investment decisions are more flexible and there are no restrictions on the withdrawals. Disadvantages are that the earnings may be subject to the kiddie tax, meaning that they are taxed at the parent’s rate rather than the child’s rate. The parent also loses control of the funds once the child reaches the age of majority, which may differ on a state by state basis.

Mutual Funds            

Mutual funds provide flexibility through diversification of assets. Depending on the firm or firms managing the funds, these investment vehicles can offer great returns. Investors will be subject to taxes on gains from their dividends; however they have the advantage of being able to manage risks by balancing stocks and bonds in one portfolio. To some investors it may seem frightening that someone else is managing their money, but historically mutual funds, especially those in stocks, have proven to show great returns. So risk management and diversification may appeal to some, but don’t expect to find the income tax breaks of IRAs or 529s here.

Savings Bonds and Stock Investments

Other college saving options include the basics, such as government savings bonds or individual stock investments. These alternatives can represent the polarity of investment risk. Saving for college with bonds requires a long time of accruing interest and the investments are limited at $10,000 face value annually. Savings bonds are not taxed on their accrued interest, but their annual cap and slow growth limit their utility. Interest earned on certain Series EE or I bonds is tax free is used for qualified higher-education purposes.  Investing in stocks without a broker can be risky, and land any investor in a situation of fast gain or sharp losses. Investments in stocks are taxed on capital gains and dividend income, so even if you do make some money, don’t expect to get off scot free.

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Accounting & Tax :: ‘Kinder, Gentler IRS’ Finally Arrives at the Doorstep of the Offshore Voluntary Disclosure Program. Or Does It?

Not since Congress demanded a ‘kinder gentler IRS’ in 1998, has the individual owner of bank accounts and other financial assets maintained outside the US, seen that side of the Internal Revenue Service. For many, both inside and outside the current structure of the Offshore Voluntary Disclosure Program[s], that became a reality on June 18th. Well, sort of, – but that is often the way with the IRS.

The KINDER news:
• A significantly expanded ‘streamlined filing compliance’ procedures for non-filers residing outside the US; and for the first time, acceptance into the streamlined program for those residing inside the US. Penalties eliminated for those residing outside the US and 5% for those residing domestically.
• Existing reduced penalties for ‘non-willful’ taxpayers will be eliminated.
• Elimination of the one-size-fits all approach to encourage those ‘non-willful’ taxpayers easier paths to compliance within the program.

The not so GENTLER news:
• A widening of the 50% penalty for ‘willful’ non-filers, as well as an imposition of the 50% penalty where IRS or DOJ has already begun an investigation.
• A significant increase in the information required of taxpayers applying to the program.
• Payment of the offshore penalty at the time of the application.

The CALL-TO-ACTION news:
• JUNE 30, 2014 was a critical date! Under the many layers of ‘transitional rules’ those taxpayers currently participating in the 2012 or Prior Offshore Voluntary Disclosure Program had documents due no later than June 30.
• AUGUST 3, 2014 is also a critical date! Non-filers have to come forward and be subject to the existing 27.5% penalty if their financial institution has been publicly identified as under investigation or cooperating in an investigation. After that date, the penalty will be 50%.

The REALLY BAD news:
• The IRS gets your name on a list of overseas account owners before you come forward with a voluntary disclosure; you are open to criminal prosecution in addition to the civil penalties above.

The DEVIL-IS-IN-THE-DETAIL news:
• There are now 3 full sets of FAQs [Frequently Asked Questions], some spanning over 20 pages, for compliance with just the Overseas Voluntary Disclosure Program [OVDP]. There are 4 distinct programs and options to choose from each with its own sets of rules, compliance provisions and FAQs.

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Accounting & Tax :: The Aragona Trust Case: Can A Trust Be Treated as a Real Estate Professional?

During the last week of March 2014, the Tax Court, in the Frank Aragona Trust Case, held that a trust can qualify as a real estate professional under the passive activity loss rules based on the participation of trustees acting as employees of the rental activities. In its analysis, the Court addressed the issue of how a trust can determine material participation in a business. This decision becomes applicable to a broad range of businesses and not limited to real estate rentals.

There are two major consequences to a trust if a business interest is considered to be a passive activity:

1. Tax losses generated by the business interest can only be applied against income generated from other passive activity interests and cannot be used to offset investment income (e.g., interest, dividends, capital gains) and other non-passive business interests. This causes many trusts to be unable to currently use losses and increases income taxes. The limitation on the use of tax losses is particularly harmful to trusts due to the compressed income tax brackets. The maximum 39.6% tax rate applies to taxable income in excess of $11,950 for 2013.

2. For 2013 and later, the new 3.8% net investment income tax applies to passive activity business interests held by a trust. Unlike individuals, where the tax applies if modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers), the new tax applies to trusts with modified adjusted gross income in excess of only $11,500. Additionally, the 3.8% tax will be imposed on gains generated from a sale of the business interest in the future.

If “material participation” can be demonstrated in the business activity, then income or loss generated from such activity will not be considered passive. However, rental activities are generally treated as passive regardless of the level of participation, unless a specific exception applies.  An exception exists for real estate professionals. A taxpayer is considered to be a real estate professional if:

a. More than one-half of “personal services” performed in trades or businesses during the year relate to certain real property trades or businesses; and

b. Personal Service hours exceed 750 hours.

If these requirements are satisfied, the rental activity is not deemed to automatically be passive. However, the taxpayer must still demonstrate “material participation” in the activity. In its regulations, the Service has provided several methods to determine material participation in an activity, several of which involve counting the hours worked in the business.

The facts of the new Tax Court case are:

• Frank Aragona (the grantor) formed a trust as grantor and trustee with his five children as beneficiaries. The five children were to share equally in the income of the trust. When Frank died in 1981, he was succeeded as trustee by five 5 children (as non-independent trustees) and his attorney (as the independent trustee). Three of the children (Paul, Frank and Annette) worked full-time as paid employees for a limited liability company which was wholly-owned by the trust (Holiday Enterprises LLC). The LLC also employed other persons, including a controller, leasing agents, maintenance workers, accounts payable clerks and accounts receivable clerks. All six trustees formally delegated their powers to Paul (the Executive Trustee) to facilitate the daily business operations. However, the trustees acted as a management board, met every few months, and made all major decisions regarding the trust’s business. The trust conducted some of its rental real estate activities through wholly-owned entities and some through entities in which it held a majority interest. Two of the working trustees (Frank and Paul) also owned minority direct interests in the flow-through entities.

• The trust treated losses from the real estate rental activities as deductible and not subject to the passive activity loss rules. The trust claimed that it should be treated as a real estate professional and that the trust materially participated in its real estate rental activities.

• The IRS determined on audit that the real estate losses should be subject to the passive activity loss limitation rules and were not deducible against non-passive activity income.

The IRS’ position is that a trust can never satisfy the requirements for real estate professional status since it must demonstrate that more than one-half of its “personal services” performed in the tax year were in real property related trades or businesses. The Service argued that “personal services” refer to the acts of individuals and cannot apply to an entity, like a trust.

The court rejected this position. It reasoned that if Congress wanted to exclude trusts from real estate professional status, it could have done so by explicit statutory language. Additionally, it stated that if the trustees are individuals, then personal services can be performed.

Even if a trust satisfies the requirements of being a real estate professional, this merely means that its rental activities are not considered to be per se passive activities. The trust must still demonstrate that it materially participates in the same manner as any non-rental activity. The IRS position has historically been that a trust can materially participate in a business activity only if the trustee of the trust sufficiently participates in the business,in his or her capacity as a trustee . This means that any time spent in the activity in some other capacity (e.g., employee of the business entity) must be ignored.

The Trust argued that it should be able to count the hours worked by certain trustees as employees of the business. It also argued that it should be able to count the hours of non-trustee employees and agents in demonstrating material participation.

The Court stated that the trustees were bound under Michigan law to administer the trust solely for the interests of the trust beneficiaries and they were not relieved of this duty even when acting in another capacity. Therefore, the time of the trustees spent as employees of the businesses owned by the trust should be used in determining material participation. From all the facts of the case, it was clear that the trustees materially participated in the business activities.

This case offers a number of planning opportunities for trusts to maximize the benefits of business losses and to avoid the new net investment income tax.

 

 

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Accounting & Tax :: Full Time Real Estate Agent Did Not Establish Material Participation

The recent Tax Court decision in Charles Gragg and Delores Gragg v. Commissioner of Internal Revenue, stressed the importance of taxpayers correct determination of material participation in rental real estate activity to avoid passive loss treatment. Only participation on the rental real estate activities may be considered when determining if the taxpayer materially participates.

Generally, losses from rental real estate activities are considered passive. The term passive activity includes any activity which involves the conduct of any trade or business, and in which the taxpayer does not materially participate. Passive losses may not be used to offset most taxable types of income. However, taxpayers who materially participate in their rental real estate activities are not subject to this passive-loss limitation.

There are two qualifications that taxpayers must meet in order to be deemed to materially participate:

1. More than one half of the personal services performed in trades or businesses are performed in real property trades or businesses in which the taxpayer materially participates, and

2. The taxpayer must perform more than 750 hours of service.

The facts in the Gragg case are as follows:

In 2006 and 2007, taxpayers Charles and Delores Gragg reported rental real estate losses in excess of their rental real estate income. Charles and Delores argued that because Delores is a qualified real estate agent, her full-time occupation relieves the couple from having to demonstrate material participation.

Delores provided the court with estimates of the amount of time spent rather than actual rental records. In 2006, Delores had estimated that she spent 40 hours over a two month period and an additional 100 hours after the tenants had moved out. She also claimed to have spent approximately 200 hours at another property dealing with tenant problems, and approximately 300 hours restoring property.

The records did not reflect a means of how the hours were calculated. Even if the amount of hours were above 750, Delores would have been required to make an election in order to treat all real estate properties as one activity, which was not done. Since there was no election, the taxpayers were required to separately establish their material participation for each of their rental properties.

The records do not show any estimates for 2007. Because of this, the court concluded that the estimates provided by Delores were not a “reasonable means” of documenting her material participation. The documents provided were deemed unreliable and not deemed a reasonable means to show participation.

Delores Gragg’s real estate activities are treated separately from her rental activities. Her status as a full-time real estate agent did not establish her material participation in each of her separate rental real estate activities. Further, she failed to demonstrate her material participation in the two rental properties which were deemed distinct from her real estate agent job. Therefore, the court decided that the taxpayers did not materially participate in their rentals even though Delores Gragg worked as a full-time real estate agent.

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