Home Office Deduction

The IRS has announced a safe harbor method of calculating the home office deduction.  Taxpayers may now multiply the square footage of the home office by $5 with a maximum deduction of $1,500.  All other requirements for a home office deduction remain in place.  The election is simply made on a timely filed income tax return beginning with this year, 2013.

New Employer Mandate for Health Insurance

Generally, under health care reform an employer can be taxed up to $2,000 per full time employee (with the first 30 exempt) if it carries insufficient or no health insurance for its employees. This tax does not start until 2014 and it only applies to “applicable large employers”, which are those employers who have, on average, at least 50 full time equivalent employees during 2013.  Begin planning for this now as steps taken during 2013 may help to greatly lessen or even void the effects of this new insurance requirement beginning 12 months from now.

Self-Employed May Be Able to Amend

The IRS has clarified that all Medicare premiums (Part A, B, C and D) are insurance constituting medical care and therefore may be deducted as an above-the-line deduction for self-employed individuals.  For purpose of this deduction, self-employed includes partners and greater than 2% shareholders in S-Corps.  Such deduction is taken on line 29 of Form 1040 just like other health insurance premiums.  Taxpayers who failed to claim this deduction may file an amended return to claim a refund for all open years.

S.C. Tax Base is Hacked

The South Carolina Department of Revenue is providing affected taxpayers a year of credit monitoring after a hacker stole information including 3.6 million Social Security numbers and 387,000 credit and debit card numbers from its computer systems.

State revenue officials announced Friday that the S.C. Division of Information Technology learned of the electronic intrusion on Oct. 10. State officials were first alerted to it by a U.S. Secret Service electronic crimes task force.

An initial attempt to enter the system came from a foreign internet address in late August. The Department of Revenue said in a news release that several more attempts occurred in September, when a hacker gained access to the data from tax returns going back to 1998. Officials finally secured the system on Oct. 20.

Officials said they have beefed up data security and are continuing an investigation. As of Wednesday, no further breaches were known, and no one had been charged or publicly identified as behind the attack.

Officials said they knew of no thefts from individuals whose data was compromised and said most of the data from credit and debit cards were encrypted—cards recorded since 2003, representing 371,000 of the 387,000 total. The Social Security numbers, however, were not encrypted. Investigators were still trying to determine what other information might have been stolen and from what types of returns, said Samantha Cheek, public information director with the Department of Revenue. Besides personal income tax returns, South Carolina returns potentially affected could include those for sales taxes and state income tax withholding, she said. Cheek said she did not believe corporate tax filings were known to have been affected but that some business information on other returns may have been compromised.

South Carolina is offering free credit monitoring and identity protection to all affected taxpayers. Anyone who filed a South Carolina tax return since 1998 can call 1-866-578-5422 to learn whether they are affected and, if so, enroll in the protection. On the web, taxpayers can go to protectmyid.com/scdor and use the authorization code scdor123. The service includes a free credit report; daily monitoring of all three major credit bureaus, with alerts of any suspicious activity; and $1 million in insurance against identity theft.

 

 

Be Careful of Capital Gains Treatment

A taxpayer bought over 200 unimproved lots over an 8 year period.  He did not improve or subdivide the lots.  His strategy was to buy at a bargain, hold and make money reselling them.  42 lots were sold over a two year period and he claimed his profit as capital gains.  The Court held however that with so many sales, he was a dealer in realty and his profit was taxed as ordinary income and he also owed self-employment tax on the profits earned.  Please call our office if this situation may pertain to you…there are ways to structure these transactions to ensure capital gain treatment.

Caring for Elderly Individuals

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

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

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

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

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.