The Honeycutt Group : Myrtle Beach CPA

Caring for Elderly Individuals

myrtlebeachcpa — Thu, 17 May 2012 14:57:48 +0000

The purpose of this letter is to discuss the tax aspects of taking on the care of an elderly or incapacitated individual.

1. Dependency exemption. You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify, (a) you must provide more than 50% of the individual’s support costs, (b) he must either live with you or be related, (c) he must not have gross income in excess of the exemption amount, which is $3,800 for 2012 ($3,700 for 2011), (d) he must not himself file a joint return for the year, and (e) he must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. If the support test ((a), above) can only be met by a group (several children, for example, combining to support a parent), a “multiple support” form can be filed to grant one of the group the exemption, subject to certain conditions.

2. Medical expenses. If the individual qualifies as your dependent, you can include any medical expenses you incur for him along with your own when determining your medical deduction. If he doesn’t qualify as your dependent only because of the gross income or joint return test ((c) and (d), above), you can still include these medical costs with your own. The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There’s an annual cap on the amount of premiums that can be deducted. The cap is based on age, going as high as $4,370 for 2012 ($4,240 for 2011) for an individual over 70.

3. Filing status. If you aren’t married, you may qualify for “head of household” status by virtue of the individual you’re caring for. If the person you’re caring for (a) lives in your household, (b) you cover more than half the household costs, (c) he qualifies as your dependent, and (d) he is a relative, you can claim head of household filing status. If the person you’re caring for is your parent, he need not live with you, as long as you provide more than half of his household costs and he qualifies as your dependent.

4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of himself, you may qualify for the dependent care credit for costs you incur for his care to enable you and your spouse to go to work.

5. Exclusion for payments under life insurance contracts. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.

If your situation qualifies you for any of the above tax benefits, or you wish to discuss your situation further, please call.

Statute of Limitations

myrtlebeachcpa — Fri, 24 Feb 2012 13:46:36 +0000

You have 3 years to claim a tax refund.

This is measured from the original deadline of the tax return, plus three years. For example, your 2010 tax return is due on April 15th, 2011. Add three years to this filing deadline, and you have until April 15th, 2014, to file your 2010 tax return and still get a tax refund. If you file your 2010 return after April 15th, 2014, then your refund “expires.” It goes away forever because the statute of limitations for claiming a refund has closed.

If you already filed a tax return, you have three years from the date you filed your return to claim any additional refunds by sending in corrections with an amended return. If you filed your return before April 15th, the three-year period begins from April 15th.

Filing an extension may extend the period for claiming refunds. Under code section 6511(b)(2)(A), the IRS can issue refunds for a particular year if you requested an extension and subsequently file a tax return within three years from the extended deadline.

The IRS has 3 years to audit your tax return or to assess any additional tax liabilities.

This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. We could utilize the same example as in the refund situation: the IRS has until April 15, 2014, to audit a 2010 tax return filed on or before April 15, 2011. After the three-year audit time period has expired, the IRS cannot initiate an audit of your tax return unless there is a suspicion of tax fraud. Most state tax agencies follow the federal three-year period for auditing tax returns; however some states have a longer statute of limitations.

The IRS has 10 years to collect outstanding tax liabilities.

This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn’t collect the full amount in the 10-year period, then the remaining balance on the account disappears forever because the statute of limitations on collecting the tax has expired.

Selecting IRA Accounts

myrtlebeachcpa — Tue, 07 Feb 2012 00:40:22 +0000

IRA’s still remain one of the few ways the majority of taxpayers can use to shelter income from taxation. Selecting the appropriate IRA given the taxpayer’s tax related goals will be an important step in building wealth. The traditional IRA allows a current year income tax deduction, making the funding to the IRA less expensive after tax. When money is withdrawn from the traditional IRA, the distribution is included in income and taxes may be due. A taxpayer who funds a ROTH IRA gets no current tax deduction, but the money will come out free of tax if certain parameters are met on the distribution. Planners have differing views on which IRA is best long term. We like to get the upfront tax deduction with a traditional IRA and believe that the tax law could potentially change regarding ROTH distributions as it did with Social Seurity benefits. Such benefits used to be tax free, now 85% of Social Security benefits is often taxed. With Washington DC out of money, it would not surprise us to see the ROTH benefits tax free advantage change. As always, it is best to run long term projections before deciding on your retirement plan of action regarding IRA’s.

Foreign Assets

myrtlebeachcpa — Fri, 06 Jan 2012 14:29:14 +0000

Beginning with tax returns filed in 2012, married people who file joint returns must attach Form 8938 to their personal income tax returns if foreign financial assets are greater than $100,000 at the end of 2011 or exceeds $150,000 at any time during the year. These amounts are halved for single taxpayers. Foreign financial assets include bank accounts, interests in foreign business and foreign investment assets. Please note – the penalties for failing to file Form 8938 are steep, $10,000 to $50,000.

Charitable Donations of Appreciated Stock

myrtlebeachcpa — Mon, 28 Nov 2011 16:59:12 +0000

If you are considering making a charitable donation of cash to a charity, college, etc., you may want to consider donating appreciated stock from your investment account rather than that cash. Your deduction for tax purposes will be the fair market value of the stock. You will then avoid paying tax on the gain you have realized on that stock.

Example: You hold a stock you have had for years that is worth $12,000 that you originally paid $3,000 for more than a year ago. If you sell the stock and donate the cash, you will have to report a capital gain of $9,000 and a charitable deduction of $12,000. However, if you donate the stock you will have no capital gain yet still a charitable deduction of $12,000. The charity will sell the stock and get its $12,000.

Note that this only works for stock you have held for more than one year. Please call or email should you have any questions on how this strategy may work for you.

S Corp Shareholder Compensation

myrtlebeachcpa — Wed, 16 Nov 2011 15:42:39 +0000

In almost all cases the S Corp. shareholder-employee prefers to minimze W-2 compensation in favor of distributions from the corporation. As payroll taxes are not due on such distributions this will lower the tax and increase cash flow. This tax advantage has only increased over the years as the employment tax obligation on compensation has climbed. This is becoming an issue of importance as the Internal Revenue Service is paying closer attention to the spread between low wages and high distributions. Recent court cases have shown that the Service is looking at all of the following…the shareholder-employee’s responsibilities, time and effort devoted to business, compensation of non owners, what comparable businesses pay for similar services, compensation as a percentage of profits and the total compensation to distributions for the year. As Washington is out of money, this could become a red flag issue that may need to be addressed.

Beneficiary Designations

myrtlebeachcpa — Tue, 15 Nov 2011 18:23:15 +0000

Yes, we are all busy and have more than enough to do. Often regarding a financial decision, we put it off until tomorrow. However, tomorrow may be to late with certain retirement accounts or life insurance policies. Due to divorce or some other life changing event, beneficiary designations made years ago can very easily become outdated. A person who has been divorced may never “get around” to changing the beneficiary of certain assets from their old spouse to their children or new spouse. This could lead to a tragic outcome as the assets will pass according to the beneficiary designation and not the will. Please take the time to verify your benefciary designations, both primary and secondary beneficiaries. Should you have any questions, please contact our office on how to maximize tax deferral benefits for certain retirement accounts.

Health Savings Accounts (HSAs)

myrtlebeachcpa — Tue, 15 Nov 2011 14:58:23 +0000

Health Savings Accounts (HSAs) have become increasingly popular over the last few years. Opening one up is the ultimate expression of taking responsibility for your own healthcare costs instead of relying on an employer or the government.

Plus, HSAs have tax advantages. For 2011, you can make a deductible HSA contribution of up to $3,050 if you have qualifying self-only high-deductible health coverage or up to $6,150 if you have qualifying family high-deductible coverage. The contribution ceiling is increased by $1,000 if you are age 55 or older as of year-end. However, no contribution is allowed after you reach the Medicare eligibility age—currently age 65.

Deductions are not phased out for those with high incomes, and you don’t have to itemize to benefit. However, you must have a qualifying high-deductible health insurance policy (and no other general health coverage) to be eligible for the tax-saving HSA contribution privilege. For 2011, a high-deductible policy is defined as one with a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage. For 2011, qualifying policies can have out-of-pocket limits of up to $5,950 for self-only coverage of $11,900 for family coverage.

The HSA earnings are allowed to build up federal-income-tax-free. You can then take federal-income-tax-free HSA withdrawals to cover most out-of-pocket medical costs, even after you reach the Medicare eligibility age. However, if you can afford it, it is better to leave the HSA balance untouched. That way, you can build up a substantial tax-free reserve for future medical expenses.

If you take money out of your HSA for any reason other than to cover qualified medical expenses, you will generally owe federal income tax plus a 20% nonqualified withdrawal penalty tax. However, the 20% penalty tax does not apply after you reach the Medicare eligibility age.

Please contact us if you have questions or want more information about tax-saving HSAs.