Form 56- Notice Concerning Fiduciary Relationship
Form 1040-Final Individual Income Tax Return and the State Tax Return
Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return
TAX FILINGS FOR ESTATES AND TRUSTS
FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP
This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address. By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.
FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN
The decedent’s final individual tax returns, Form 1040 and state return. The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.
FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN
This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time. It does not report income and it is not an income tax return.
The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.
There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:
- real estate
- a closely held business
- partnership interests
- jewelry
- art, antiques, and collectibles
The return is required if the net value is in excess of $5.43 million in 2015. This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.
The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE). In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.
The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months. The extension is for filing, not paying. The estate tax is due by the original filing date.
FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN
Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31. It is important to keep track of income and deductions during these two periods of time.
FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN
- Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
- Gifts are never taxable to the recipient.
- Gifts may be taxable to the giver.
- You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
- All gifts and the net estate value are totaled on the Form 706.
- Annually, any gifts in excess of $14,000 are reported on the Form 709.
- The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.
What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values
FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE
What is Proposition 60?
Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).
What is Proposition 90?
Proposition 90 has the same provisions and qualifications as Proposition 60. The difference is that it allows base year transfers from one county to another county in California. The only counties that have adopted an ordinance to allow values from other counties are:
o Alameda
o El Dorado
o Los Angeles
o Orange
o Riverside
o San Bernardino
o San Diego
o San Mateo
o Santa Clara
o Ventura
This list can change at any time. Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.
How do I qualify for these property tax benefits?
- Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
- Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
- As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
- The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
- The replacement dwelling must be of equal or lesser value than the original property.
- The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
- Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
- The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
- Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.
Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?
Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.
Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?
No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.
What is meant by "equal or lesser value" than the original dwelling?
In general, "equal or lesser value" means:
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.
105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.
110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.
Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?
No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.
If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?
No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.
May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?
No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify. See the FAQ’s below re Propositions 58 and 193.
Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?
Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified. You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling. In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.
You and your spouse, as the claimants, will use your "one time only" benefit. An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.
Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?
No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.
May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?
No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.
What if I am the co-owner of a property with more than one residential unit?
A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).
Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?
Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.
Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?
No. Both properties must be within Orange County.
Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?
You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.
If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?
Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.
However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.
May parents transfer the family home to their children without a property tax reassessment?
YES. Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence. The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.
May parents transfer other property to their children without a property tax assessment?
Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment.
May grandparents transfer property to their grandchildren without a property tax assessment?
Proposition 193 expanded the benefits of family transfers of real property to grandparents. They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.
How do the transferor and transferee obtain the relief of Propositions 58 and 193?
In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by both the property owner or deceased owner’s estate and by the person to whom title is being transferred. The Claim must be filed within three years of the date of the transfer of the real property. It is filed with the county Assessor.
International estates, an increasing concern.
Situation: One of our clients referred a challenging fiduciary issue to our firm. A U.S. citizen had died and left his assets to relatives in India. The benficiaries of the estate were not U.S. citizens. The trustee had to travel to the U.S. to settle the estate, creating a compressed timeline. The trustee was facing a large tax bill as the rule for income paid to a non-U.S. citizen is that tax must be withheld at a rate of 30%, and the trustee is liable for the withholding.
Action: The fiduciary accounting team at Green Zahn & Associates determined that the tax convention with The Republic of India provided for relief from double taxation and that the fiduciary was not required to withhold tax.
Results: GZA saved the taxpayer tens of thousands of dollars in tax withholdings, and the cost of a second year's tax return preparation, by being proactive in researching and understanding international tax laws.
We need to prepare a burden calculation, what?!
Situation: Our client needed to submit burden calculations, in a proposal, to a major customer.
Action: We helped our client determine what costs should be included in the burden pool to enable the client to accurately calculate the burden.
Results: Our client received acceptance of their proposal to produce parts for the customer.
We need to expand to another state...
Situation: A construction company client wanted to be qualified to do business in another state. The state required audited financial statements to be submitted in the qualification process.
Action: Our client included reviewed financial statements prepared by Green Zahn & Associates in the qualifications package submitted to the state.
Results: The state accepted the reviewed financial statements and the company received its license to operate in the state.
As a firm, we believe in giving back to our community. This year we have achieved this through cash and time donations. We regularly support the Long Beach Symphony, the Long Beach Rescue Mission, the Orange County School of the Arts, and (of course!) UCLA. Allison dedicates quite a bit of time to the National Association of Women Business Owners' Mentoring Committee where she helps new business owners receive invaluable coaching from seasoned professionals. Several staff members participated in the Run Seal Beach 5k & 10k this year and Rachel went on to participate in the Long Beach Half Marathon, the rest of the staff was happy to cheer for her!
In July the entire staff headed over to the Ronald McDonald House in Long Beach to prepare lunch for the families staying there. We toured the facility, learned about the charity and its services, and prepared a fresh Chinese chicken salad luncheon. It was very gratifying to help an organization with such a noble cause. We highly reccomend adding this charity to the list you support, there are many ways to get involved, from preparing meals, to helping out with odd jobs, or donating household supplies. Cash donations are always useful as well. Did you know that you can rent their beautiful, high tech boardroom for your company's off-sites? Find out more at their website:
http://www.longbeachrmh.org/about_us.php
In November we headed over to Working Wardrobes in Costa Mesa to help prepare for a workshop they hold at Camp Pendleton in suport of our returning troops. Working Wardrobes is a smart organization that not only helps individuals put together a professional wardrobe, but offers workshops, mentoring and training on subjects such as networking the art of management, marketing, and change management. Check out their offerings at:
http://www.workingwardrobes.org/
We are always looking for opportunities to get involved, so let us know if you have a favorite not-for-profit that could use the likes of us for a day's worth of labor. You can email your ideas to: greenzahn@greenzahn.com
Help! Are we growing too fast?
Situation: A manufacturing client was experiencing extremely rapid growth and their accounting needs were not being met by their in-house team, creating hazards on their path to success.
Action: GZA stepped in to provide additional support to their existing accounting department as well as assisting with creating a policies and procedures manual to provide a basis for future growth.
Results: The client was able to maintain stability and meet the demands of their clients while sustaining the rapid growth.
House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.
House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.
House action
In the House, the Budget Committee approved along party lines a fiscal year (FY) 2018 budget resolution. The resolution calls for:
- Simplifying the tax code to promote fairness for American families and businesses;
- Lowering tax rates for individuals and consolidating the seven tax brackets into fewer brackets;
- Repealing the alternative minimum tax (AMT); and
- Reducing the corporate tax rate.
The budget resolution does not set out specific tax changes or include legislative language. Rather, according to GOP leaders in the House, the budget resolution will serve as the vehicle for tax legislation at a future date. House Budget Committee Chair Diane Black, R-Tennessee, predicted that tax reform will be "deficit neutral" and will "reduce tax rates and simplify the tax code." Budget Committee Ranking Member John Yarmuth, D-Kentucky, said that the resolution "adopts the worst extremes of the President's proposals by cutting taxes for millionaires and billionaires at the expense of everyone else."
Administration discussions
Since May, White House and Treasury Department officials have been meeting with business leaders, representatives of business and taxpayer groups, and other stakeholders in "listening sessions" about changes to the tax code. In July, Treasury Secretary Steven Mnuchin, after meeting with representatives from the agriculture sector, predicted that tax reform "would be done this year." Mnuchin said that "tax reform is one of our most important areas of focus.”
Bipartisan bills
Meanwhile, some stand-along tax bills have either passed committee or have been introduced. In July, the House Ways and Means Committee approved bipartisan legislation to overhaul the IRS's forfeiture authority. The Clyde-Hirsch-Sowers RESPECT Bill (HR 1843) was sponsored by Ways and Means Tax Policy Subcommittee Chair Peter Roskam, R-Illinois, and Democratic Caucus Chair Joe Crowley, D-New York. The RESPECT Act generally prohibits the IRS from seizing funds relating to a structuring transaction unless the property to be seized is from an illegal source.
In the Senate, the Senate Finance Committee may take up a bipartisan bill to encourage retirement savings by enhancing growth of S corporations owned by employee stock ownership plans (ESOPs). The Promotion and Expansion of Private Employee Ownership Bill was introduced by Sen. Ben Cardin, D-Maryland, and Sen. Pat Roberts, R-Kansas. The lawmakers explained that their bill would amend the tax code to eliminate barriers that business owners face in establishing or expanding S corporation ESOPs. Similar bipartisan legislation is pending in the House.
Other pending tax bills include:
- HR 3068, which would enhance the research tax credit for domestic manufacturers.
- HR 3126, which would provide a tax credit to individuals for legal expenses paid to establish guardianship of a family member with disabilities.
- HR 3138, which would generally treat Native American governments in the same manner as state governments for certain federal tax purposes.
Treasury tax position
The Treasury Department's top tax professional is the assistant secretary for tax policy. That position has been vacant since January 20. In July, the Senate Finance Committee unanimously approved President Trump’s nomination of David Kautter to serve as Treasury assistant secretary for tax policy. "This position is particularly important in the current environment as the administration is engaging with Congress on comprehensive tax reform," SFC Chair Orrin Hatch, R-Utah, said. Ranking member Ron Wyden, D-Oregon, said "it’s my hope that Mr. Kautter can help to bring Democrats and Republicans together." Kautter has worked at several major accounting firms over the past 30 years.
Please contact our office if you have any questions about tax legislation.
The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.
The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.
Weighing the factors
Whether a worker is an employee or an independent contractor depends on a number of considerations that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient. Within these categories, the IRS has identified 20 factors that can be used to determine whether an individual is an independent contractor or effectively an "employee."
The determination of independent contractor versus employee status is based on all of the facts and circumstances surrounding the relationship. None of the identified factors is determinative. In addition, not all factors are present in all employee or independent contractor relationships. Frequently, the relationship of a worker is clear cut using these factors; but sometimes a worker can fall into a gray area.
The Form SS-8 route
An employer who is unsure of how to classify its workers can file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. There is no fee for requesting a worker classification determination. Because worker classification has become such a “hot” audit trigger, many employers opt for the Form SS-8 route, particularly because penalties on top of back employment taxes can result from a classification misstep.
Other relief
After emphasizing in its latest Fact Sheet that employee misclassification as independent contractors exposes the employer to employment tax liability, the IRS also highlighted two ways to escape or ameliorate liability, even for an after-the-fact classification: “Section 530 relief” and relief under the Voluntary Classification Settlement Program.
Section 530 relief: An employer that has a reasonable basis for classifying its workers as independent contractors may be entitled to special relief under section 530 of the Revenue Act of 1978. "Section 530 relief" protects taxpayers who have consistently treated workers as independent contractors and have a reasonable basis for doing so. The rule covers workers who are common law employees, but it does not cover certain third-party-arranged technical service workers.
A reasonable basis for classification for purposes of Section 530 relief generally includes an employer's treatment of the individual based on any of the following:
- judicial precedent, published rulings, technical advice to the employer or a letter ruling to the employer;
- a past examination of the taxpayer by the IRS in which there was no assessment attributable to the treatment for employment tax purposes of individuals holding positions substantially similar to the position held by this individual; or
- long-standing recognized practice of a significant segment of the industry in which the individual was engaged.
Voluntary Classification Settlement Program. Entry into the Voluntary Classification Settlement Program (VSCP) can provide an opportunity to reclassify workers as employees for future tax periods, with partial relief from federal employment taxes. Under the program, the employer:
- Agrees to prospectively treat the class of workers as employees for future tax periods;
- Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under reduced rates;
- Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years; and
- Will not be liable for any interest or penalties on the liability.
Under the VCSP, an employer may reclassify some or all of their workers. Once reclassified, all workers in the same class must be treated as employees for employment tax purposes.
Worker initiative
The IRS also makes it clear in its latest Fact Sheet on employee misclassification that action on its part may take place not only based on an employer-based initiative; workers can also have indirect input on whether an audit will take place. “Workers who believe an employer improperly classified them as independent contractors may use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected social security and Medicare taxes,” the IRS Fact Sheet concludes.
If you have any concerns surrounding possible worker misclassification within your business, please feel free to contact this office for a more targeted discussion.
A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.
A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.
Timing stock trades to maximize the tax advantage of long- and short-term capital gains and losses has always made sense, particularly as a year-end planning technique. This year, tax reform may make such strategies considerably more lucrative. If tax rates are suddenly set lower, either retroactively for this year or, more probably, starting January 1, 2018, managing stock basis becomes more significant. As a result, investors should consider carefully whether they may be better off tax-wise to give their brokers specific instructions in certain cases not to use the default FIFO method when selling certain holdings of the same company purchased at different times.
General FIFO rule
If a taxpayer purchases identical shares of stock at different prices or on different dates and then sells only part of the stock, the basis and holding period of the shares sold are determined on a FIFO basis unless the specific shares sold are adequately identified. The date of acquisition for purposes of the FIFO rule is determined by reference to the holding period of the securities for capital gain or loss purposes, including any prior holding period that has been tacked on.
Comment. Securities in a margin or other account with a broker are considered sold in the order in which they were purchased, not the order in which they were placed in the account. The FIFO rule is applied by allocating the earliest lots acquired to the securities sold rather than to the securities removed from the brokerage account but still owned.
Alternate identification
When the securities to be sold are specifically identifiable, FIFO does not apply for purposes of allocating basis. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee.
Planning Tip: Thus, taxpayers who have records showing the cost and holding period of securities represented by separate certificates can control the amount of gain or loss realized by selecting the certificates to be transferred.
A standing order or instruction to a broker is treated as adequate identification. The instructions need not be in writing. Sufficient instruction to a broker or other agent of the particular securities to be sold or transferred does not require designation by certificate number; any designation that specifically identifies the securities to be transferred is adequate. Orders to sell the highest priced shares, shares with the highest cost basis, or the shares purchased at a certain price or on a specific date have been ruled acceptable.
Broker reporting
A broker is required to report the customer’s basis in securities sold, classifying the gain as short or long term. Identification of the securities is made at the time of sale, transfer, delivery, or distribution. Clarifying instructions before the sale takes place, or immediately thereafter, is important since a broker is obligated to report to the IRS on Form 1099-B. Once the report is sent to the IRS, changing basis is more likely to raise a red flag with the IRS.
Please contact this office if you need to discuss a strategy of tax selling that is more specific to your portfolio and Congress’s plans for tax reform.
Country-by-Country (CbC) reporting is part of a larger initiative by the Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.
Country-by-Country (CbC) reporting is part of a larger initiative by the Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.
BEPS
The BEPS project is designed to curb tax avoidance. "No single rule or provision is the root cause of base erosion," the OECD has explained. "It is the interplay among different rules that generate base erosion and profit shifting: domestic laws and rules, international standards, and the lack of data and information."
As part of BEPS, the OECD recommended that jurisdictions adopt CbC reporting by multinational groups to report their business activity for each country where they operate. The U.S. has signed on.
IRS regulations
The IRS issued regulations last year. The "ultimate parent entity" of a multinational entity (MNE) generally must file a CbC report with the IRS. The MNE group must include at least one business entity organized in, or be a tax resident of, a jurisdiction outside the U.S., and must have revenues of $850 million or more for its preceding annual accounting period.
Special form
The IRS is developing a special form for CbC reporting. This is Form 8975, Country-by-Country Report. Currently, Form 8975 is in draft form.
Form 8975 is to be used to report a U.S. multinational entity (MNE) group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis. The reporting period covered by Form 8975 is the period of the ultimate parent’s annual applicable financial statement that ends with or within the parent’s tax year, or, if the parent does not prepare an annual applicable financial statement, the ultimate parent’s tax year.
The IRS generally will make the reports available to tax authorities. However, there will be limits on disclosure. The IRS has explained that the data captured by Form 8975 will be used for "high-level assessment of transfer pricing, and other base erosion and profit shifting tax risks, and for economic and statistical analysis."
Filing period
Beginning on September 1, 2017, Form 8975 may be filed for a reporting period with the income tax return for the tax year of the ultimate parent of the U.S. MNE with or within which the reporting period ends. In Revenue Procedure 2017-23, the IRS allowed U.S. ultimate parents to file Form 8975 for periods beginning after January 1, 2016, and prior to the required reporting period.
Other developments
Recently, a group of lawmakers in Congress asked the Financial Accounting Standards Board (FASB) to look at country-by-country reporting. The lawmakers recommended that FASB "require multinational corporations to disclose their income, assets, number of employees, and taxes paid on an annual, country-by-country basis.”
If you have any questions about CbC reporting, please contact our office.
An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.
An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.
The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation. For tax years beginning in 2017, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income (AGI) exceeds $65,000 ($135,000 for joint returns), and is completely eliminated when modified AGI reaches $80,000 ($165,000 for joint returns).
Planning tip: Some taxpayers may choose to take out a home equity loan to pay off their student debt. Use of a home-equity loan of up to $100,000 principal is allowed for purposes other than home improvement or purchase. Interest up to that amount is fully deduction, as an itemized mortgage interest deduction.
Student loan interest is an “above-the-line” deduction; the taxpayer need not itemize.
Eligible student. An eligible student for purposes of eligible debt is a student enrolled in a college degree, certificate or other program, including a program of study abroad approved for credit at an institution of higher learning where the student is enrolled, and leading to a recognized educational credential at an eligible educational institution. The student must also carry at least one half of the normal full-time workload for the course of study being pursued during at least one academic period beginning during the tax year.
Student loan interest is not deductible if a dependency exemption is allowed for the taxpayer on someone else's return. Thus, if parents take a dependency exemption for a student who is the only person legally obligated to pay interest on a qualified loan, neither the parents nor the student is entitled to deduct any interest paid by the student during the time he is claimed as a dependent. A student may deduct interest paid in years after the student has ceased to be a dependent.
Legal obligation. The taxpayer claiming the deduction must be legally obligated to make the interest payments. Thus, a parent who had signed for the student loan and is liable personally for its payment may deduct interest paid on the loan.
If a third party who is not legally obligated makes an interest payment on behalf of a taxpayer who is legally obligated, the taxpayer is treated as receiving the payment from the third party and using it to pay the interest. For instance, if an employer makes an interest payment on behalf of the employee, and the payment is included in the employee's income as compensation, the employee can deduct the payment. Similarly, if a parent pays interest on behalf of a non-dependent borrower, the borrower may deduct the interest.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.
August 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 26-28.
August 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 29- Aug. 1.
August 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates Aug. 2-4.
August 10
Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.
Social security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2017. This due date applies only if you deposited the tax for the quarter timely, properly, and in full.
August 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 5-8.
August 15
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July. Nonpayroll withholding: If the monthly deposit rule applies, deposit the tax for payments in July.
August 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 9–11.
August 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 12–15.
August 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 16–18.
August 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 19–22.
August 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 23-25.
September 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 26-29.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
Taxes and spending
Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff. Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect. Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012. The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation. Also, the employee-side payroll tax cut is scheduled to expire after 2012.
Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012. The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended. Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000.
President Obama has talked about trimming $4 trillion from the federal budget deficit. Approximately $1.6 trillion would come from increased taxes on higher income individuals. To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals. Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.
The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff. House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals. Revenue could also be raised by limiting or abolishing business tax deductions and credits. Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.
Possible scenarios
Looking ahead, several scenarios may play out before year-end. President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets. President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal. On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled. The spending cuts also would kick-in as scheduled.
Filing season
Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems. Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.
IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT. In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach. The IRS appears to be anticipating that Congress will patch the AMT for 2012. If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.
The IRS also must reprogram its processing systems for the tax extenders. These tax law changes generally do not require the level of reprogramming the AMT patch requires. The IRS has predicted that any year-end extension of the extenders will be manageable.
Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
Additional tax on higher-income earners
There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.
The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).
Passthrough treatment
For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.
Withholding rules
Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.
Planning techniques
One planning device to minimize the tax would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.
Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.
If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Home sale exclusion
Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.
To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.
Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.
Unforeseen circumstances safe harbors
The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.
Facts and circumstances test
If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.
Events deemed as unforeseen circumstances
Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.
If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:
- Who are your taxable workers?
- What payroll taxes apply?
- What compensation is taxable?
- When are your payroll taxes due?
- What payroll and other returns should you file?
Taxable workers
The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.
It's more likely that you hire employees. In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.
There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.
If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.
What taxes apply
Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.
You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.
Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.
Compensation
Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.
There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.
Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.
Deposit schedule
Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.
Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.
Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.
Forms
If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.
The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.
Penalties are costly
Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.
The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.
You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.
Reporting obligations
Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.
Staying out of trouble with the IRS
Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.
