Harless Tax Blog

Harless Tax Blog

Tax Credits For Back to School

Wednesday, September 03, 2014

 
Are you, your spouse or a dependent heading off to college? If so, here’s a quick tip from the IRS: some of the costs you pay for higher education can save you money at tax time. Here are several important facts you should know about education tax credits:

  • American Opportunity Tax Credit. The AOTC can be up to $2,500 annually for an eligible student. This credit applies for the first four years of higher education. Forty percent of the AOTC is refundable. That means that you may be able to get up to $1,000 of the credit as a refund, even if you don’t owe any taxes.
  • Lifetime Learning Credit. With the LLC, you may be able to claim a tax credit of up to $2,000 on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.
  • One credit per student. You can claim only one type of education credit per student on your federal tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For example, you can claim the AOTC for one student and claim the LLC for the other student.
  • Qualified expenses. You may include qualified expenses to figure your credit. This may include amounts you pay for tuition, fees and other related expenses for an eligible student. Refer to IRS.gov for more about the additional rules that apply to each credit.
  • Eligible educational institutions. Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.
  • Form 1098-T. In most cases, you should receive Form 1098-T, Tuition Statement, from your school. This form reports your qualified expenses to the IRS and to you. You may notice that the amount shown on the form is different than the amount you actually paid. That’s because some of your related costs may not appear on Form 1098-T. For example, the cost of your textbooks may not appear on the form, but you still may be able to claim your textbook costs as part of the credit. Remember, you can only claim an education credit for the qualified expenses that you paid in that same tax year.
  • Nonresident alien. If you are in the U.S. on an F-1 student visa, you usually file your federal tax return as a nonresident alien. You can’t claim an education credit if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. To learn more about these rules see Publication 519, U.S. Tax Guide for Aliens.
  • Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.

For more information, visit the Tax Benefits for Education Information Center on IRS.gov. Also, check Publication 970, Tax Benefits for Education. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

IRS Updates Phone Scams Warning

Friday, August 29, 2014

The IRS is again warning the public about phone scams that continue to claim victims all across the country. In these scams, thieves make unsolicited phone calls to their intended victims. Callers fraudulently claim to be from the IRS and demand immediate payment of taxes by a prepaid debit card or wire transfer. The callers are often hostile and abusive.

The Treasury Inspector General for Tax Administration has received 90,000 complaints about these scams. TIGTA estimates that thieves have stolen an estimated $5 million from about 1,100 victims. To avoid becoming a victim of these scams, you should know:

  • The IRS will first contact you by mail if you owe taxes, not by phone.
  • The IRS never asks for credit, debit or prepaid card information over the phone.
  • The IRS never insists that you use a specific payment method to pay your tax.
  • The IRS never requests immediate payment over the telephone.
  • The IRS will always treat you professionally and courteously.

Scammers may tell would-be victims that they owe money and that they must pay what they owe immediately. They may also tell them that they are entitled to a large refund. Other characteristics of these scams include:

  • Scammers use fake names and IRS badge numbers to identify themselves.
  • Scammers may know the last four digits of your Social Security number.
  • Scammers spoof caller ID to make the phone number appear as if the IRS is calling.
  • Scammers may send bogus IRS emails to victims to support their bogus calls.
  • Victims hear background noise of other calls to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up. Others soon call back pretending to be from the local police or DMV, and caller ID again supports their claim.
  • If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

    • If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. IRS employees can help you with a payment issue if you owe taxes.
    • If you know you don’t owe taxes or don’t think that you owe any taxes, then call and report the incident to TIGTA at 800-366-4484.
    • If scammers have tried this scam on you, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.

    The IRS encourages you to be vigilant against phone and email scams that use the IRS as a lure. Visit the genuine IRS website, IRS.gov, to learn how to report tax fraud and for more information on what you can do to avoid becoming a victim.

Six Tips For People Who Owe Taxes

Tuesday, August 26, 2014

While most people get a refund from the IRS when they file their taxes, some do not. If you owe federal taxes, the IRS has several ways for you to pay. Here are six tips for people who owe taxes:

  1. Pay your tax bill. If you get a bill from the IRS, you’ll save money by paying it as soon as you can. If you can’t pay it in full, you should pay as much as you can. That will reduce the interest and penalties charged for late payment. You should think about using a credit card or getting a loan to pay the amount you owe.
  2. Use IRS Direct Pay. The best way to pay your taxes is with the IRS Direct Pay tool. It’s the safe, easy and free way to pay from your checking or savings account. The tool walks you through five simple steps to pay your tax in one online session. Just click on the ‘Pay Your Tax Bill’ icon on the IRS home page.
  3. Get a short-term extension to pay. You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at IRS.gov. If you received a bill from the IRS you can also call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help. There is usually no set-up fee for a short-term extension.
  4. Apply for a monthly payment plan. If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on IRS.gov. A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply. For more about payment plan options visit IRS.gov.
  5. Consider an Offer in Compromise. An Offer in Compromise lets you settle your tax debt for less than the full amount that you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. You can use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.
  6. Change your withholding or estimated tax. You may be able to avoid owing the IRS in the future by having more taxes withheld from your pay. Do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator on IRS.gov can help you fill out a new W-4. If you have income that’s not subject to withholding you may need to make estimated tax payments. See Form 1040-ES, Estimated Tax for Individuals for more on this topic.

Miscellaneous Deductions Can Cut Taxes

Friday, August 22, 2014

You may be able to deduct certain miscellaneous costs you pay during the year. Examples include employee expenses and fees you pay for tax advice. If you itemize, these deductions could lower your tax bill.

Here are some things the IRS wants you to know about miscellaneous deductions:

Deductions Subject to the Two Percent Limit. You can deduct most miscellaneous costs only if their total is more than two percent of your adjusted gross income. These include expenses such as:

  • Unreimbursed employee expenses.
  • Expenses related to searching for a new job in the same line of work.
  • Certain work clothes and uniforms.
  • Tools needed for your job.
  • Union dues.
  • Work-related travel and transportation.

Deductions Not Subject to the Two Percent Limit. Some deductions are not subject to the two percent limit. They include:

  • Certain casualty and theft losses. Generally, this applies to damaged or stolen property that you held for investment. This includes items such as stocks, bonds and works of art.
  • Gambling losses up to the amount of your gambling winnings.
  • Losses from Ponzi-type investment schemes.
  • There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions.

Special Tax Benefits for Members of the Armed Forces

Friday, August 08, 2014


Special tax benefits apply to members of the U. S. Armed Forces. For example, some types of pay are not taxable. And special rules may apply to some tax deductions, credits and deadlines. Here are ten of those benefits:

Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.

Combat Pay Exclusion.  If you serve in a combat zone, certain combat pay you get is not taxable. You won’t need to show the pay on your tax return because combat pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Service in support of a combat zone may qualify for this exclusion.

Earned Income Tax Credit.  If you get nontaxable combat pay, you may choose to include it to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay stays nontaxable.

Moving Expense Deduction. You may be able to deduct some of your unreimbursed moving costs. This applies if the move is due to a permanent change of station.

Uniform Deduction. You can deduct the costs of certain uniforms that regulations prohibit you from wearing while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.

Signing Joint Returns. Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse. In other cases when your spouse is absent, you may need a power of attorney to file a joint return.

Reservists’ Travel Deduction. If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain costs of travel on your tax return. This applies to the unreimbursed costs of travel to perform your reserve duties that are more than 100 miles away from home.

Nontaxable ROTC Allowances. Active duty ROTC pay, such as pay for summer advanced camp, is taxable. But some amounts paid to ROTC students in advanced training are not taxable. This applies to educational and subsistence allowances.

Civilian Life. If you leave the military and look for work, you may be able to deduct some job hunting expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.

Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.

Selling Your Home? Here are 10 tax facts to consider first.

Wednesday, August 06, 2014

Do you know that if you sell your home and make a profit, the gain may not be taxable? That’s just one key tax rule that you should know. Here are ten facts to keep in mind if you sell your home this year.

  1. If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale.
  2. There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For details see Publication 523, Selling Your Home.
  3. The most gain you can exclude is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
  4. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
  5. You must report the sale on your tax return if you can’t exclude all or part of the gain. And you must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.
  6. Generally, you can exclude the gain from the sale of your main home only once every two years.
  7. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
  8. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules see Publication 523.
  9. If you sell your main home at a loss, you can’t deduct it.
  10. After you sell your home and move, be sure to give your new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.

Important note about the Premium Tax Credit. If you receive advance payment of the Premium Tax Credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

Is Your Business A Hobby in the Eyes of the IRS?

Thursday, July 31, 2014

Investing in a “side business” when the main source of your net worth is derived from other businesses may result in a target on your back from the IRS. The Service continues to audit specific activities at a very high rate that have elements of pleasure, recreation or a hobby. Activities such as aviation, boat chartering, equine activities and vacation rentals are typically scrutinized under IRC Section 183, otherwise known as the hobby loss rules. 

Typically, an activity will be reviewed over a period of years. In general, Section 183 of the Internal Revenue Code, enacted in 1969, provides that if a business engaged in by an individual, partnership or subchapter S corporation shows a profit in two years within a five year period (beginning with the first profit year), it will be presumed to be engaged in for profit, with a separate special election available for a new enterprise. If the activity is one engaged in for profit, then losses resulting from the business may be deducted from other income. Note that this period is extended to seven years in an agricultural business such as a farm or horse breeding operation.

Fortunately, we are not dealing in absolutes. Basically, without profits, the burden of proof shifts to the taxpayer in an audit situation to show that this is a business with a profit motive. The IRS regulations provide nine objective factors which have been used in the Courts to determine whether or not an activity is engaged in for profit.

1. THE MANNER IN WHICH THE TAXPAYER CARRIES ON THE ACTIVITY.

2. THE EXPERTISE OF THE TAXPAYER OR HIS ADVISORS.

3. THE TIME AND EFFORT EXPENDED BY THE TAXPAYER IN CARRYING ON THE ACTIVITY.

4. EXPECTATION THAT THE ASSETS USED IN ACTIVITY WILL INCREASE IN VALUE.

5. THE SUCCESS OF THE TAXPAYER IN OTHER ACTIVITIES.

6. THE TAXPAYER'S HISTORY OF INCOME OR LOSSES IN THIS ACTIVITY.

7. THE AMOUNT OF OCCASIONAL PROFITS, IF ANY, WHICH ARE EARNED.

8. THE FINANCIAL STATUS OF THE TAXPAYER.

9. ELEMENTS OF PERSONAL PLEASURE OR RECREATION.

The IRS does not add up positive and negative factors. Court cases have typically focused on the manner in which the taxpayer carries on the activity. Therefore, it is important to create a business plan, maintain accurate books and records, track time and effort, and make appropriate adjustments each year with a profit motive in mind. Devote considerable time to the business, even withdraw or reduce your time in other businesses, to demonstrate your commitment to the activity. If there is a legitimate reason for losses, document these reasons, such as accidents, economic downturns, and other setbacks.

It is important to note that experts, such as a Certified Public Accountant, should be engaged from the outset to establish a good defense should there be an audit. This is typically not a “do-it-yourself project.” Trusted advisors can assist with a business plan so that solid financial projections are developed, a marketing plan is established, accounting software is used, and a separation of business and personal income and expenses. An advisor can also assist with the timing of income and deductions to aid in developing profit years.

If you do receive the dreaded audit notice, all is not lost. At the agent/manager level, the process tends to be very robotic, a review of the factors above, a checklist of sorts. The Service has become very aggressive and economic substance is very real. For this reason, settlement at this level may not be recommended. To be successful, the accountant can perform an economic study for the industry and can minimize weaknesses in the specific situation. Engage experts who have expertise in the audit and appeals process. In a strong case, legal counsel can be retained specifically trained in the Tax Court arena. 

In summary, establish your purpose for starting this business, form a business plan, and be flexible enough to adjust operations with a goal towards a profitable business.

Tips on Travel While Giving to Charity

Monday, July 21, 2014


Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are five tax tips you should know if you travel while giving your services to charity.

1. You can’t deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel. All out-of pocket costs must be:

• unreimbursed,

• directly connected with the services,

• expenses you had only because of the services you gave, and

• not personal, living or family expenses.

2. Your volunteer work must be for a qualified charity. Most groups other than churches and governments must apply to the IRS to become qualified. Ask the group about its IRS status before you donate. You can also use the Select Check tool on IRS.gov to check the group’s status.

3. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or a vacation. For more on these rules see Publication 526, Charitable Contributions.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• air, rail and bus transportation,

• car expenses,

• lodging costs,

• the cost of meals, and

• taxi or other transportation costs between the airport or station and your hotel.

For more see Publication 526, Charitable Contributions. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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LTC Options

Wednesday, July 16, 2014

[source: FA-Mag.com]
Annuities
For those who cannot qualify for insurance, an annuity with an attached LTC or “confinement care” rider might make the most sense. The latter is similar to the chronic-care option. A fixed indexed annuity with an income rider that can also be used for confinement care will double the contractual income guarantee when the confinement care is triggered. That happens whenever the insured person can no longer do two of six activities done in daily living—bathing, dressing, toileting, continence, feeding and transferring out of or into bed.

“Only by spending some quality time with one’s professional advisor can a decision be made,” says W. Allen Johnson, executive vice president at iTrust Advisors in Syracuse, N.Y. “If an annuity is recommended as part of the financial plan, then the withdrawal features for a chronic illness should be explored.”

In general, these annuities function much like their life-insurance counterparts. They don’t require a physical exam but do require a large up-front investment. On the other hand, premiums never increase. “Generally, the LTC component is two or three times the face value of the annuity,” says Melchiorre. “If you don’t use that component, you can redeem the accumulated value of the annuity down the road or annuitize it to get income for other purposes.”

This option has swelled in popularity since a 2010 ruling that classified withdrawals for qualifying LTC expenses as tax free—unlike confinement-care benefits, which are taxable. Either way, the distributions reduce the annuity’s accumulated value.

Deciding among all these options depends on where your clients are coming from. “Let’s say they have held an annuity they bought at 55 for 10 years, which now has a death benefit of $100,000,” says Steve Williams, vice president of Financial Planning Strategy at BMO Private Bank in Chicago. “And now that they are age 65, they start to worry about [an] LTC event. By doing a 1035 [tax-free] exchange to an annuity with LTC rider, they can typically get anywhere from $300,000 to $400,000 LTC coverage. If it is new money, then the permanent policy [universal or whole] with [an] LTC rider is typically a better option.”

Leveraging Life Insurance Cash Value
Even if you reject these hybrid options, life insurance can still be used to help fund LTC expenses. First, accelerated death benefits—usually available at an additional cost—allow you to take “a tax-free advance on your death benefit while you’re still alive,” says Melchiorre, “but you must be terminally ill or severely cognitively impaired.” In most cases, eligibility must be recertified annually. (“Terminally ill” is typically defined as having less than two years to live.)

Generally capped at 50% of the total death benefit, the distributions usually go for an immediate need, though at times they can be used for monthly LTC services. There are “limitations on what is considered covered or qualified care,” says Celeste Moya, vice president of product analysis at NFP International Insurance Solutions in Austin, Texas. “Qualified care generally includes care within a facility—nursing home, hospice care, etc.—and expenses related to room and board at any one of these facilities. However, there is no standard across the industry.”

Another option for the chronically or terminally ill is a viatical settlement or, for those with a less urgent need, a life settlement. Both are ways of selling a life policy to a third party. They are solutions of last resort. Many desperate senior citizens have been swindled. “The amount of the sale must be greater than the cash surrender value of the insurance policy, but less than the death benefit,” Melchiorre says. With viatical settlements, you may receive between 60% and 90% of the policy’s face value. If you are terminally ill, the proceeds are not subject to tax. If you’re chronically ill but not deemed terminal, the proceeds are only tax-free if used to pay for LTC needs that aren’t covered by other insurance.

LTC Benefit Accounts
Life policies with a cash value can also be converted to an LTC benefit account—a “privately funded irrevocable account funded by the sale of a life insurance policy,” says Chris Orestis, CEO of Life Care Funding, a senior care advocacy group in Portland, Maine.

The account is held by a professional administrator, who makes monthly tax-free payments on your behalf directly to LTC providers you designate. All levels of care and health conditions are eligible. Even funeral expenses are included. There are no premiums, and most types of insurance qualify for conversion, including group and term plans. It’s an allowed method for spending down assets to qualify for Medicaid, too, unlike other uses of a life policy’s cash value.

But your need for care must be imminent, if not immediate.

Treasury: Retirement Accounts Can Include Longevity Annuities To Limit Drawdowns

Friday, July 11, 2014

Retirees with 401(k) plans and individual retirement accounts will have more flexibility to purchase annuities that don’t start paying out until age 80 or 85, under final rules from the U.S. Treasury Department. {Source: Financial Advisor}

The rules announced today provide a new way for retirees to limit the drawdowns of their account balances that are now required starting after age 70 1/2. Instead, under the rules, they could use as much as 25 percent of their account balances up to $125,000 to purchase deferred annuities.

“As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live,” Mark Iwry, deputy assistant Treasury secretary for retirement policy, said in a statement.

The Treasury Department’s final rules give the government’s blessing to the concept of longevity insurance, which hasn’t taken hold in the market, in part because of the required distribution rules and because of relatively high fees that deter potential purchasers.

About one in five 401(k) plans offers annuities as a choice, according to the Treasury Department.

Longevity annuities carry some risk, primarily that the retiree will die before receiving a payout. The final rules, first proposed in 2012, allow for return of premiums as a death benefit.

New York Life Insurance Co. was the largest seller of deferred-income annuities last year, followed by Massachusetts Mutual Life Insurance Co. and Northwestern Mutual Life Insurance Co., according to data from the Limra Secure Retirement Institute.

Those three companies account for 90 percent of the market, according to Limra.

Iwry announced the final rule at a conference of the Insured Retirement Institute, whose members include MetLife Inc. and American International Group Inc.


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