Marital actions. As a general rule, attorney’s fees in marital and custody actions are not deductible. This is so even if marital assets include a business or investment property. If legal fees are for tax advice, they are deductible. Also, legal fees paid to protect a certain asset may be added to basis. It is important for the attorney to separately bill for such services. Child support and property settlements incident to a divorce are non-taxable, so related attorney’s fees are nondeductible. Loophole: In the case of a spouse who pays attorney’s fees to secure alimony, the fees are deductible, since the alimony is taxable.
Social security claims. Attorney’s fees to establish a claim to Social Security benefits, (e.g., to qualify for disability payments) are deductible to the extent that the benefits are taxable. Depending on income, up to 85% of benefits may be taxable – so that portion of the fees may be deductible as a miscellaneous itemized deduction.
Criminal actions. Generally, attorney’s fees to defend oneself in a criminal matter are not deductible. For example, fees to mount a Racketeer Influenced and Corrupt Organizations (RICO) Act defense are not deductible even if an adverse determination results in forfeiture of property under the law. However, if the case arises in a business context, the fees may be deductible.
Wednesday, November 21, 2012
How To Compare After-Tax Bond Yields
When you are deciding whether to buy tax-exempt municipal bonds or taxable corporate bonds, your tax bracket will tell you whether the lower interest on tax-free bonds makes them a better investment. Here’s a simple way to help you make the right decision.
1. Divide the tax-free yield by the taxable yield.
2. Subtract the result from 100%. This will give you the tax bracket at which each of the investments will result in the same yield.
3. If you are in a higher tax bracket than the bracket you calculated in step two, the tax-free bond will give you a higher after-tax yield. If you are in a lower tax-bracket, the taxable bond will give you a better after-tax yield.
For example, assume that you are considering a tax-free bond that yields 6% and a taxable bond that yields 8%.
1. 6% divided by 8% equals 75%.
2. 100% less 75% equals 25%.
3. If your tax bracket is higher than 25%, the tax-free bond will give you a greater return. If your tax bracket is less than 25%, the taxable bond will give you a better return.
1. Divide the tax-free yield by the taxable yield.
2. Subtract the result from 100%. This will give you the tax bracket at which each of the investments will result in the same yield.
3. If you are in a higher tax bracket than the bracket you calculated in step two, the tax-free bond will give you a higher after-tax yield. If you are in a lower tax-bracket, the taxable bond will give you a better after-tax yield.
For example, assume that you are considering a tax-free bond that yields 6% and a taxable bond that yields 8%.
1. 6% divided by 8% equals 75%.
2. 100% less 75% equals 25%.
3. If your tax bracket is higher than 25%, the tax-free bond will give you a greater return. If your tax bracket is less than 25%, the taxable bond will give you a better return.
Tax Points
Succession planning loophole. Sell your business on an installment plan. This freezes the value at the current price. The seller reports capital gain on the installment basis, delaying taxes because gain is recognized only when and to the extent that installment payments are received. Interest must be added to the payments. The purchaser’s note will be included in the seller’s estate and the unpaid balance (the remaining portion of the capital gain), even though not yet received will be subject to income tax upon death.
Bonus depreciation. Under the law, businesses are entitled to claim 50% bonus depreciation for eligible new property placed in service in 2012. This means that half the cost of the property can be deducted in the first year, along with any additional depreciation on the other half of the property’s cost, as well as any first-year expensing.
Business use of personal cars. If you drive your personal car, truck or van for business, you can deduct the operating expenses related to business use. There are two ways to do this…Actual expense method. You can deduct your actual expenses related to business use of the vehicle – gasoline, oil, tires, repairs, insurance, etc. – plus an allowance for depreciation. Standard mileage rate. Deduct business driving in 2012 at the IRS rate of 55.5¢ per mile. This cents-per-mile allowance takes the place of actual expenses.
Bonus depreciation. Under the law, businesses are entitled to claim 50% bonus depreciation for eligible new property placed in service in 2012. This means that half the cost of the property can be deducted in the first year, along with any additional depreciation on the other half of the property’s cost, as well as any first-year expensing.
Business use of personal cars. If you drive your personal car, truck or van for business, you can deduct the operating expenses related to business use. There are two ways to do this…Actual expense method. You can deduct your actual expenses related to business use of the vehicle – gasoline, oil, tires, repairs, insurance, etc. – plus an allowance for depreciation. Standard mileage rate. Deduct business driving in 2012 at the IRS rate of 55.5¢ per mile. This cents-per-mile allowance takes the place of actual expenses.
Tax Tips
Credit card settlements
People with large credit card debt sometimes are able to settle for less than the full amount owed. If someone owes $25,000 and settles the debt in full for, say $8,000, the $17,000 difference is taxable income.
Loophole: This income is not recognized for tax purposes if the debt relief is part of a personal bankruptcy settlement or if the debtor is insolvent immediately before the debt cancellation.
Even in those situations, the lender will send a Form 1099-C, Cancellation of Debt, to the IRS reporting the cancellation of debt as income. To avoid tax, you must complete and attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to your tax return.
Long-term-disability insurance payments
Some employees who become disabled receive payment under an employer-provided disability policy.
These policies are often included in compensation packages as a tax-free fringe benefit. Other companies have cafeteria plans offering an array of benefits, including disability insurance, that employees must choose from. The tax treatment of these benefits depends entirely on who paid the premiums…
If the employer paid, benefits are taxable.
If the employee paid, benefits are tax free.
People with large credit card debt sometimes are able to settle for less than the full amount owed. If someone owes $25,000 and settles the debt in full for, say $8,000, the $17,000 difference is taxable income.
Loophole: This income is not recognized for tax purposes if the debt relief is part of a personal bankruptcy settlement or if the debtor is insolvent immediately before the debt cancellation.
Even in those situations, the lender will send a Form 1099-C, Cancellation of Debt, to the IRS reporting the cancellation of debt as income. To avoid tax, you must complete and attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to your tax return.
Long-term-disability insurance payments
Some employees who become disabled receive payment under an employer-provided disability policy.
These policies are often included in compensation packages as a tax-free fringe benefit. Other companies have cafeteria plans offering an array of benefits, including disability insurance, that employees must choose from. The tax treatment of these benefits depends entirely on who paid the premiums…
If the employer paid, benefits are taxable.
If the employee paid, benefits are tax free.
Tax Tip - Inherited Property
If you sell inherited property at a loss, you can deduct the loss on your tax return.
Example: Your parents leave you a house with an original purchase price of $100,000, and a market value of $300,000. You inherit the house estate tax free, receive a “stepped-up” basis of $300,000, and hold it as an investment (you do not live in it). When you sell the house for, say, $260,000, you
can deduct $40,000, subject to annual loss deduction limits. (As mentioned earlier capital losses are deductible dollar for dollar against capital gains and can offset up to $3,000 of ordinary income each year. Excess losses are carried forward to subsequent tax years.)
Added benefit: The loss is deductible even if it is created by brokerage commission payments.
Example: Your parents leave you a house with an original purchase price of $100,000, and a market value of $300,000. You inherit the house estate tax free, receive a “stepped-up” basis of $300,000, and hold it as an investment (you do not live in it). When you sell the house for, say, $260,000, you
can deduct $40,000, subject to annual loss deduction limits. (As mentioned earlier capital losses are deductible dollar for dollar against capital gains and can offset up to $3,000 of ordinary income each year. Excess losses are carried forward to subsequent tax years.)
Added benefit: The loss is deductible even if it is created by brokerage commission payments.
2012 Year End Tax Savers
College savings. Some states allow state income tax deductions for contributions to Section 529 college savings plans. If your state does, and you’re planning to send a child to college, consider making one.
Individual retirement accounts. Convert a traditional IRA to a Roth IRA to obtain future tax-free investment returns from the Roth IRA while escaping minimum annual distribution requirements. Added benefit: You can reconsider and reverse the conversion if you later decide it is not in your best interest or that you can make the conversion at a lower tax cost later if the value of your account had dropped – as late as October 15, 2013. You may reverse a conversion only once in a single year.
Capital losses. Take capital losses to end up with a $3,000 net loss for the year. A loss of up to that amount is deductible against ordinary income.
Individual retirement accounts. Convert a traditional IRA to a Roth IRA to obtain future tax-free investment returns from the Roth IRA while escaping minimum annual distribution requirements. Added benefit: You can reconsider and reverse the conversion if you later decide it is not in your best interest or that you can make the conversion at a lower tax cost later if the value of your account had dropped – as late as October 15, 2013. You may reverse a conversion only once in a single year.
Capital losses. Take capital losses to end up with a $3,000 net loss for the year. A loss of up to that amount is deductible against ordinary income.
Combined Payrolls Can Produce Tax Savings
It’s not unusual for closely-held corporations to operate through more than one division and for key employees to be on the payroll of both. If an employee’s combined salary from each corporation totals more than $110,100 excess Social Security taxes might be incurred.
There’s a way, however, to avoid this problem. Instead of each corporation issuing its own payroll check, designate one company in the group as a common paymaster, which can issue one check to the employee on behalf of all the companies involved. To do this, you must meet one of these three criteria:
• The corporations involved must have at least 50% common ownership.
• Half or more of the officers of one corporation must also be officers of another.
• The corporations must share at least 30% of their employees.
The result? Let’s say an employee is drawing a $100,000 annual salary from each of two corporations. Since the maximum Social Security tax is owed on the first $110,100 paid by each employer, the company will have to pay taxes on $200,000 in total. If a single check from the common paymaster company is issued, $89,900 of the total amount will be exempt from excess Social Security taxes.
There’s a way, however, to avoid this problem. Instead of each corporation issuing its own payroll check, designate one company in the group as a common paymaster, which can issue one check to the employee on behalf of all the companies involved. To do this, you must meet one of these three criteria:
• The corporations involved must have at least 50% common ownership.
• Half or more of the officers of one corporation must also be officers of another.
• The corporations must share at least 30% of their employees.
The result? Let’s say an employee is drawing a $100,000 annual salary from each of two corporations. Since the maximum Social Security tax is owed on the first $110,100 paid by each employer, the company will have to pay taxes on $200,000 in total. If a single check from the common paymaster company is issued, $89,900 of the total amount will be exempt from excess Social Security taxes.
Wednesday, August 29, 2012
The Taxpayer Advocate Service: Helping You Resolve Tax Problems
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers who are experiencing unresolved federal tax problems. Here are 10 things every taxpayer should know about TAS:
1. The Taxpayer Advocate Service is your voice at the IRS.
2. TAS assistance is free and tailored to meet your needs.
3. You may be eligible for TAS help if you’ve tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or if you are facing (or your business is facing) an immediate action from the IRS that will adversely affect you.
4. The worst thing you can do is nothing at all!
5. TAS helps individual and business taxpayers whose tax problems are causing financial difficulty, which could include the cost of hiring professional representation, such as a tax attorney.
6. If you qualify for TAS help, you’ll be assigned one advocate who will do everything possible to get your problem resolved.
7. There is at least one local Taxpayer Advocate office in every state, the District of Columbia, and Puerto Rico. You can obtain the number of your local Taxpayer Advocate from your local phone book, in Pub. 1546, Taxpayer Advocate Service – Your Voice at the IRS and on the IRS website at IRS.gov/advocate. You can also call TAS toll-free at 1-877-777-4778.
8. As a taxpayer, you have rights that the IRS must abide by when working with you. Our tax toolkit website at www.TaxpayerAdvocate.irs.gov can help you understand these rights.
9. TAS also handles tax problems that may have a broad impact on more than just one taxpayer. You can report these "systemic" issues to TAS through the Systemic Advocacy Management System at IRS.gov/advocate.
10. You can get updates on hot tax topics by visiting the TAS YouTube channel at www.youtube.com/TASNTA and the TAS Facebook page at www.facebook.com/YourVoiceAtIRS, or by following TAS tweets at www.twitter.com/YourVoiceatIRS.
Eleven Tips for Taxpayers Who Owe Money to the IRS
Most taxpayers get a refund from the Internal Revenue Service when they file their tax returns. For those who don’t get a refund, the IRS offers several options to pay their tax bill.
Here are eleven tips for taxpayers who owe money to the IRS.
1. Tax bill payments If you get a bill from the IRS this summer that shows you owe late taxes, you are expected to promptly pay the tax owed including any penalties and interest. If you are unable to pay the amount due, it may be better for you to get a loan to pay the bill in full rather than to make installment payments to the IRS. That's because the interest rate and penalties the IRS must charge by law are often higher than what lending institutions may be offering.
2. Electronic Funds Transfer You can pay your tax bill by electronic funds transfer, check, money order, cashier’s check or cash. To pay using electronic funds transfer, use the Electronic Federal Tax Payment System by either calling 800-555-4477 or using the online access at www.eftps.gov.
3. Credit card payments You can pay your bill with a credit card. Again, the interest rate on a credit card may be lower than the combination of interest and penalties the IRS must charge. To pay by credit card contact one of the following processing companies:
– WorldPay US, Inc. at 888-9PAY-TAX (or www.payUSAtax.com),
– Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed), or
– Link2Gov Corporation at 888-PAY-1040 (or www.pay1040.com).
4. Additional time to pay Based on your circumstances, you may be granted a short additional time to pay your tax in full. A brief additional amount of time to pay can be requested through the Online Payment Agreement application at IRS.gov or by calling 800-829-1040. There generally is no set up fee for a short-term agreement.
5. Installment Agreement You may request an installment agreement if you cannot pay the total tax you owe in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments.
6. Apply Using Form 9465 You can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill using the envelope you received from the IRS. The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.
7. Apply Using Online Payment Agreement If you owe $50,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at IRS.gov. You may still qualify for an installment agreement if you owe more than $50,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement.
8. User fees If an installment agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with lower incomes, the fee can be reduced to $43.
9. Offer in Compromise IRS is now offering more flexible terms with its Offer-in-Compromise (OIC) Program. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed. An OIC is generally accepted only if the IRS believes, after assessing the taxpayer's financial situation, that the tax debt can't be paid in full as a lump sum or through a payment agreement.
10. Check withholding Taxpayers who have a balance due may want to consider changing their Form W-4, Employee’s Withholding Allowance Certificate, with their employer.
11. Fresh Start The IRS has a program to help struggling taxpayers get a fresh start. Through the Fresh Start program, individuals and small businesses may be able to pay the taxes they owe without facing additional or unnecessary burden.
For more information about payment options or IRS's Fresh Start program, visit IRS.gov. IRS Publications 594, The IRS Collection Process, and 966, Electronic Choices to Pay All Your Federal Taxes, also provide additional information regarding your payment options. These publications and Forms 9465 and W-4 can be obtained from IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Ten Tax Tips for Individuals Selling Their Home
The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.
Here are 10 tips from the IRS to keep in mind when selling your home.
1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with
this calculation.
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at IRS.gov or by calling 800-TAX-FORM
(800-829-3676).
Organizing Tax Records This Summer Can Help You Keep Your Cool
If the sweltering dog days of summer aren’t incentive enough to get out of the sun for awhile, the IRS suggests another reason to head indoors: organizing your tax records. Devoting some time mid-year to putting your tax-related documents in order may not only keep you out of the sun, but it should also make it easier for you to prepare your tax return when the filing season arrives.
Here are some things the IRS wants individuals and small business owners to know about recordkeeping.
- What to keep – Individuals. In most cases, keep records that support items on your tax return for at least three years after that tax return has been filed. Examples include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment and any other records to support deductions or credits claimed. You should typically keep records relating to property at least three years after you’ve sold or otherwise disposed of the property. Examples include a home purchase or improvement, stocks and other investments, Individual Retirement Account transactions and rental property records.
- What to keep – Small Business Owners. Typically, keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Also, keep records documenting gross receipts, proof of purchases, expenses and assets. Examples include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices, credit card charges and sales slips, Forms 1099-MISC, canceled checks, account statements, petty cash slips and real estate closing statements. Electronic records can include databases, saved files, e-mails, instant messages, faxes and voice messages.
- How to keep them - Although the IRS generally does not require you to keep your records in any special manner, having a designated place for tax documents and receipts is a good idea. It will make preparing your return easier, and it may also remind you of relevant transactions. Good recordkeeping will also help you prepare a response if you receive an IRS notice or need to substantiate items on your return if you are selected for an audit.
Don’t Overlook the Benefits of Miscellaneous Deductions
If you are able to itemize your deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay.
Here are some things you should know about miscellaneous tax deductions:
Deductions Subject to the 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:
- Unreimbursed employee expenses such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation.
- Tax preparation fees.
- Other expenses that you pay to:
– Manage, conserve, or maintain property held to produce taxable income, or
– Determine, contest, pay, or claim a refund of any tax.
Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.
Deductions Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:
- Casualty and theft losses from income-producing property such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
- Gambling losses up to the amount of gambling winnings.
- Impairment-related work expenses of persons with disabilities.
- Losses from Ponzi-type investment schemes.
There are also many expenses that you cannot deduct such as personal living or family expenses. You can find more information and examples in IRS Publication 529, Miscellaneous Deductions, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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