IRS TAX PROBLEMS – Common Tax Filing Mistakes

IRS TAX PROBLEMS – Common Tax Filing Mistakes

Nobody’s perfect. Mistakes happen. But if you make a mistake on your tax return, it will likely take the IRS longer to process it. That could delay your refund.
Here are eight common tax-filing errors to avoid:

  1. Wrong or missing Social Security numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
  2. Wrong names.  Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.
  3. Filing status errors.  Some people use the wrong filing status, such as Head of Household instead of Single.
  4. Math mistakes.  Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.
  5. Errors in figuring credits or deductions.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
  6. Wrong bank account numbers.  You should choose to get your refund by direct deposit. Be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.
  7. Forms not signed.  An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return.
  8. Electronic filing PIN errors.  When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that.

IRS Tax Problems – Children with Investment Income

IRS Tax Problems – Children with Investment Income

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five (5) key points to keep in mind if your child has investment income:

  1. Investment Income.  Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.
  2. Parent’s Tax Rate.  If your child’s total investment income is more than $2,000 then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for IRS Form 8615, Tax for Certain Children Who Have Unearned Income.
  3. Parent’s Return.  You may be able to include your child’s investment income on your tax return if it was less than $10,000 for the year. If you make this choice, then your child will not have to file his or her own return. See IRS Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more.
  4. Child’s Return.  If your child’s investment income was $10,000 or more in 2014 then the child must file their own return. File IRS Form 8615 with the child’s federal tax return.
  5. Net Investment Income Tax.  Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use IRS Form 8960, Net Investment Income Tax, to figure this tax. For more on this topic, visit “IRS.gov”.

Refer to IRS Publication 929, Tax Rules for Children and Dependents, for complete details on this topic.

 

IRS TAX PROBLEMS – Home Office Deduction

IRS TAX PROBLEMS – Home Office Deduction

If you use your home for business, you may be able to deduct expenses for the business use of your home. If you qualify you can claim the deduction whether you rent or own your home. If you qualify for the deduction you may use either the simplified method or the regular method to claim your deduction. Here are six tips from the IRS that you should know about the home office deduction.

  1. Regular and Exclusive Use.  As a general rule, you must use a part of your home regularly and exclusively for business purposes. The part of your home used for business must also be:
    • Your principal place of business, or
    • A place where you meet clients or customers in the normal course of business, or
    • A separate structure not attached to your home. Examples could include a garage or a studio.
  1. Simplified Option.  If you use the simplified option, you multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. This option does not change the criteria for who may claim a home office deduction.
  1. Regular Method.  If you use the regular method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.
  1. Deduction Limit.  If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.
  1. Self-Employed.  If you are self-employed and choose the regular method, use IRS Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You can claim your deduction using either method on Schedule C, Profit or Loss From Business. See the Schedule C instructions for how to report your deduction.
  1. Employees.  If you are an employee, you must meet additional rules to claim the deduction. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions.

For more on this topic, see IRS Publication 587, Business Use of Your Home.

IRS TAX PROBLEMS – Free Tax Help for the Military

IRS TAX PROBLEMS – Free Tax Help for the Military

The IRS offers free tax help to members of the military and their families. The Volunteer Income Tax Assistance (“VITA”) program has help sites both on and off base. This includes VITA sites to help our military overseas. Here are five tips to know about free tax help for the military:

  1. Armed Forces Tax Council.  The Armed Forces Tax Council oversees the military tax programs offered worldwide. AFTC partners with the IRS to do outreach to the military. This includes the Air Force, Army, Coast Guard, Marine Corps and Navy.
  2. Trained volunteers.  IRS-trained volunteers staff the military VITA sites. You can also get help with the new health care law tax provisions.
  3. What to bring.  Take the following records with you to your military VITA site when you go to file your tax return:
    • Valid photo identification.
    • Social Security numbers for you, your spouse and dependents.
    • Birth dates for you, your spouse and dependents.
    • Your wage and earning forms, such as Forms W-2, W-2G, and 1099-R.
    • Interest and dividend statements (Forms 1099).
    • Health Insurance Marketplace Statement (Forms 1095-A).
    • Exemption Certificate Number for exemptions that you obtained through the Marketplace.
    • A copy of your last year’s federal and state tax returns, if available.
    • Routing and account numbers for direct deposit of your tax refund.
    • Total amount you paid for day care and the day care provider’s identifying number. This is usually an Employer Identification Number or Social Security number.
    • Other relevant information about your income and expenses.

Although nothing in the IRS rules or regulations require you to provide proof of health coverage at the time you file, if you have documents that verify your coverage, you should show them to your tax preparer. The IRS will follow its normal compliance approach to filed tax returns, and may ask you to substantiate the information on your tax return. You should keep these documents with your tax records.

  1. Joint returns.  If you are married filing a joint return, generally both you and your spouse need to sign. If you both can’t be present to sign the return, you should bring a valid power of attorney form. Use IRS Form 2848, Power of Attorney and Declaration of Representative. There is a special exception to this rule if your spouse is in a combat zone. The exception allows you to file a joint return with a signed statement explaining that your spouse is in a combat zone and unable to sign.
  2. IRS Free File.  Do your own taxes with IRS Free File. You can use free, brand-name software or online fillable forms. If your income was $60,000 or less, you qualify for Free File software. If you made more than $60,000, you can use Free File Fillable Forms.

See IRS Publication 3, Armed Forces’ Tax Guide, for more on this topic. You can view, download or print the booklet and tax forms on IRS.gov/Forms anytime.

 

IRS Reminder – Good Records & Gifts to Charity

IRS Reminder – Good Records & Gifts to Charity

IRS Reminder – taxpayers planning to claim charitable donations need to make sure they have the records they need before filing their 2014 tax returns.

For any taxpayer, keeping good records is key to qualifying for the full charitable contribution deduction allowed by law. In particular, this includes insuring that they have received required statements for two (2) contribution categories — each gift of at least $250 and donations of vehicles.

First, to claim a charitable contribution deduction, donors must get a written acknowledgement from the charity for all contributions of $250 or more. This includes gifts of both cash and property. For donations of property, the acknowledgement must include, among other things, a description of the items contributed.

In addition, the law requires that taxpayers have all acknowledgements in hand before filing their tax return. These acknowledgements are not filed with the return but must be retained by the taxpayer along with other tax records.

Second, special reporting requirements generally apply to vehicle donations, and taxpayers wishing to claim these donations must attach any required documents to their tax return. The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. IRS Form 1098-C or a similar statement must be provided to the donor by the organization and attached to the donor’s tax return.

The IRS also reminded taxpayers to be sure any charity they are giving to is a qualified organization. Only donations to eligible organizations are tax-deductible. “Select Check”, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible even if they are not listed in the tool’s database.

Only taxpayers who itemize their deductions on IRS Form 1040, Schedule A, can claim gifts to charity. Thus, taxpayers who choose the standard deduction cannot deduct their charitable contributions. This includes anyone who files a short form (IRS Form 1040 or IRS 1040EZ).

A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2014 Form 1040, Schedule A to determine whether itemizing is better than claiming the standard deduction.

Besides Schedule A, taxpayers who give property to charity usually must attach a special form for reporting these noncash contributions. If the amount of the deduction for all noncash contributions is over $500, a properly-completed IRS Form 8283 is required.

The IRS provided these additional reminders about the special rules that apply to charitable contributions of used clothing and household items, monetary donations and year-end gifts.

Rules for Charitable Contributions of Clothing and Household Items

  • This includes furniture, furnishings, electronics, appliances and linens. Clothing and household items donated to charity generally must be in good used condition or better to be tax-deductible. Clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Guidelines for Monetary Donations

  • A taxpayer must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of the amount. The record must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date and the transaction posting date.
  • Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

Year-End Gifts

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2014 count for 2014, even if the credit card bill isn’t paid until 2015. Also, checks count for 2014 as long as they were mailed in 2014.

 

Education Tax Credits – 2014 – Two (2) Benefits to Help Pay for College

Education Tax Credits – Two (2) Benefits to Help You Pay for College in 2014.

Did you pay for college in 2014? If you did it can mean tax savings on your federal tax return. There are two education credits that can help you with the cost of higher education. The credits may reduce the amount of tax you owe on your tax return. Here are some important facts you should know about education tax credits.

American Opportunity Tax Credit:

  • You may be able to claim up to $2,500 per eligible student.
  • The credit applies to the first four years at an eligible college or vocational school.
  • It reduces the amount of tax you owe. If the credit reduces your tax to less than zero, you may receive up to $1,000 as a refund.
  • It is available for students earning a degree or other recognized credential.
  • The credit applies to students going to school at least half-time for at least one academic period that started during the tax year.
  • Costs that apply to the credit include the cost of tuition, books and required fees and supplies.

Lifetime Learning Credit:

  • The credit is limited to $2,000 per tax return, per year.
  • The credit applies to all years of higher education. This includes classes for learning or improving job skills.
  • The credit is limited to the amount of your taxes.
  • Costs that apply to the credit include the cost of tuition, required fees, books, supplies and equipment that you must buy from the school.

For both credits:

  • The credits apply to an eligible student. Eligible students include yourself, your spouse or a dependent that you list on your tax return.
  • You must file Form 1040A or Form 1040 and complete IRS Form 8863, Education Credits, to claim these credits on your tax return.
  • Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. This form contains helpful information needed to complete IRS Form 8863. The amounts shown in Boxes 1 and 2 of the form may be different than what you actually paid. For example, the form may not include the cost of books that qualify for the credit.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim both credits for the same student or for the same expense, in the same year.
  • The credits are subject to income limits that could reduce the amount you can claim on your return.

IRS TAX PROBLEMS – IRS Tax Tips about “Home Mortgage Debt Cancellation” in 2014.

IRS TAX PROBLEMS – IRS Tax Tips about “Home Mortgage Debt Cancellation” in 2014.

If your lender cancels part or all of your debt, you normally must pay tax on that amount. However, the law provides for an exclusion that may apply to homeowners who had their mortgage debt cancelled in 2014. In most cases where the exclusion applies, the amount of the cancelled debt is not taxable. Here are some IRS tax tips about mortgage debt cancellation:

  1. Main Home.  If the cancelled debt was a loan on your main home, you may be able to exclude the cancelled amount from your income. You must have used the loan to buy, build or substantially improve your main home to qualify. Your main home must also secure the mortgage.
  2. .Loan Modification.  If your lender cancelled part of your mortgage through a loan modification or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program, or “HAMP”. The exclusion may also apply to the amount of debt cancelled in a foreclosure.
  3. Refinanced Mortgage.  The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. Amounts used for other purposes don’t qualify.
  4. Other Cancelled Debt.  Other types of cancelled debt such as second homes, rental and business property, credit card debt or car loans do not qualify for this special exclusion. On the other hand, there are other rules that may allow those types of cancelled debts to be nontaxable.
  5. Form 1099-C.  If your lender reduced or cancelled at least $600 of your debt, you should receive “IRS Form 1099-C”, Cancellation of Debt, in January of the next year. This form shows the amount of cancelled debt and other information.
  6. Form 982.  If you qualify, report the excluded debt on “IRS Form 982”, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the form with your federal income tax return.
  7. Exclusion extended.  The law that authorized this exclusion had expired at the end of 2013. The Tax Increase Prevention Act extended it to apply for one year, through Dec. 31, 2014.
  8. More Information.  For more on this topic see “IRS Publication 4681”, Canceled Debts, Foreclosures, Repossessions and Abandonments.

 

IRS Guidance – “S” Corporations & Health Care Coverage Reimbursement Arrangements

IRS Notice 2017-17:   Guidance on “S” Corporations & Certain Types of Health Coverage Reimbursement Arrangements

 

PURPOSE AND OVERVIEW:

 

This IRS Notice reiterates the conclusion in previous guidance addressing employer payment plans, including Notice 2013-54, 2013-40 I.R.B. 287,1 that employer payment plans are group health plans that will fail to comply with the market reforms that apply to group health plans under the Affordable Care Act (ACA).

For this purpose, an employer payment plan as described in Notice 2013-54 refers to a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee, such as arrangements described in Revenue Ruling 61-146, 1961-2 C.B. 25. This notice also provides transition relief from the assessment of excise tax under Internal Revenue Code (Code) § 4980D for failure to satisfy market reforms in certain circumstances. The transition relief applies to employer healthcare arrangements that constitute “S” Corporation healthcare arrangements for 2-percent shareholder- employees.

This IRS Notice supplements and clarifies the guidance provided in Notice 2013-54 and other guidance in response to comments and questions from taxpayers and stakeholder groups about certain aspects of that guidance.

The United States Department of Labor (DOL) and the United States Department of Health and Human Services (HHS) (collectively with the Treasury Department and the IRS, the Departments) have reviewed this notice and have advised the Treasury Department and the IRS that they agree with the guidance provided in this IRS Notice.

This IRS Notice is intended to provide further clarification of the guidance provided in Notice 2013-54 and other guidance and is intended to be read in conjunction with that guidance.

 

GUIDANCE:

 

Treatment of “S” Corporation healthcare arrangements for 2- percent (2%) Shareholder-Employees:    IRS Notice 2008-1, 2008-2 I.R.B. 1, provides that if an “S” Corporation pays for or reimburses premiums for individual health insurance coverage covering a 2-percent Shareholder (as defined in Code § 1372(b)(2)), the payment or reimbursement is included in income but the 2-percent Shareholder- Employee may deduct the amount of the premiums under Internal Revenue Code § 162(l), provided that all other eligibility criteria for deductibility under Internal Revenue Code § 162(l) are satisfied. (This arrangement is referred to in this IRS Notice as a “2-percent shareholder-employee healthcare arrangement”.)

Question: Is a “2-percent shareholder-employee healthcare arrangement” subject to the market reforms?

 

Answer: The Departments are contemplating publication of additional guidance on the application of the market reforms to a 2-percent shareholder-employee healthcare arrangement. Until such guidance is issued, and in any event through the end of 2015, the excise tax under Code § 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement.

Further, unless and until additional guidance provides otherwise, an “S” Corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans under Chapter 100 of the Internal Revenue Code, including the market reforms) solely as a result of having a 2-percent shareholder-employee healthcare arrangement.

The guidance provided in this Q&A (including the guidance provided in the preceding paragraph) does not apply to reimbursements of individual health insurance coverage with respect to employees of an S corporation who are not 2-percent shareholders (but see Q&A-1).

The Treasury Department and the IRS are also considering whether additional guidance is needed on the federal tax treatment of 2-percent shareholder-employee healthcare arrangements. However, unless and until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1 with regard to the tax treatment of arrangements described therein for all federal income and employment tax purposes. To the extent that a 2-percent shareholder is allowed both the deduction under Internal Revenue Code § 162(l) and the premium tax credit under Internal Revenue Code § 36B, Revenue Procedure 2014-41, 2014-33 I.R.B. 364, provides guidance on computing the deduction and the credit with respect to the 2-percent shareholder.

Internal Revenue Code § 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two (2) participants who are current employees on the first day of the plan year. Accordingly, an arrangement covering only a single employee (whether or not that employee is a 2-percent shareholder-employee) generally is not subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan.

If an “S” corporation maintains more than one such arrangement for different employees (whether or not 2-percent shareholder- employees), however, all such arrangements are treated as a single arrangement covering more than one employee so that the exception in Internal Revenue Code § 9831(a)(2) does not apply. For this purpose, if both a non-2-percent shareholder employee of the “S” Corporation and a 2-percent shareholder employee of the “S” Corporation are receiving reimbursements for individual premiums, the arrangement would be considered a group health plan for more than one current employee. However, if an employee is covered under a reimbursement arrangement with other-than-self-only coverage (such as family coverage) and another employee is covered by that same coverage as a spouse or dependent of the first employee, the arrangement would be considered to cover only the one employee.

IRS TAX PROBLEMS – Cancellation of Indebtedness (COI) Income & Partnership Bankruptcy

IRS TAX PROBLEMS – Cancellation of Indebtedness (COD) Income & Partnership Bankruptcy

 

ISSUE:      Whether a General Partner who guaranteed the debt of a Partnership and was not in Bankruptcy in his individual capacity may exclude from gross income under Internal Revenue Code (IRC) Section 108(a) Partnership debt cancelled in a Title 11 Bankruptcy case of the Partnership.

IRS POSITION:       

 

IRC Section 61(a)(12) provides that gross income includes “Cancellation of Indebtedness” (COD) income. IRC Section 108(a)(1)(A) excludes from gross income any amount derived from “the discharge (in whole or in part) of indebtedness of the taxpayer” if the discharge occurs in a title 11 case. Under section 108(d)(1), “‘indebtedness of the taxpayer’ means any indebtedness (A) for which the taxpayer is liable, or (B) subject to which the taxpayer holds property.” IRC Section 108(d)(2) defines a “title 11 case” as “a case under title 11 of the United States Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court.” IRC Section 108(d)(6) provides that, in the case of a Partnership, subsection (a) and certain other parts of IRC Section 108 must be applied at the Partner level.

Under the Bankruptcy Code, the term “debtor” means a “person . . . concerning which a case under this title [title 11] has been commenced.” 11 U.S.C. 101(13).

In discussing the addition of IRC Section 108(d)(6), Congress explained that discharge of a Partnership debt is an item of income allocated separately to each Partner pursuant to IRC Section 702(a). Congress indicated its intent to limit the scope of section 108(a)(1) to bankrupt or insolvent Partners, and not to all Partners of a bankrupt partnership. “The tax treatment of the amount of discharged partnership debt which is allocated as an income item to a particular partner depends on whether that partner is in a bankruptcy case, is insolvent (but not in a bankruptcy case), or is solvent (and not in a bankruptcy case). . . . [I]f the particular partner is bankrupt, the debt discharge amount is excluded from gross income pursuant to amended section 108 . . . .” S. Rep. No. 96-1035, at 21, 1980-2 C.B. 620, 631.

The legislative history further explains that the income tax treatment of debt discharge in Bankruptcy is intended to preserve the debtor’s “fresh start” after Bankruptcy by excluding COD income from the debtor’s income so that “the debtor coming out of bankruptcy . . . is not burdened with an immediate tax liability.” S. Rep. No. 96-1035, supra, at 10, 1980-2 C.B. at 624.

IRC Section 108(a) applies at the Partner level. The exclusion in IRC Section 108(a)(1)(A) applies only to Partners who are debtors in Bankruptcy in their individual capacities and need a “fresh start.”