Harless Tax Blog

Harless Tax Blog

In Bankruptcy, Inherited IRAs Are Up For Grabs

Friday, June 27, 2014



Are inherited IRAs protected from bankruptcy creditors? Earlier this month, the U.S. Supreme Court said no. (Clark v. Rameker, 6/12/14.) [Source: Investors Business Daily]

So IRA owners may want to reconsider their beneficiary designations. Despite the added cost and complexity, leaving your IRA to a trust can be a safe move.

To grasp the issue, consider a hypothetical Art Young, who has a sizable IRA. If Young files for bankruptcy, that account likely will be beyond creditors' reach.

"The bankruptcy act of 2005 said that retirement funds are protected from creditors," said Ed Slott, an IRA expert in Rockville Centre, N.Y.

Bankruptcy filers are allowed to keep certain assets to meet basic needs and make it less likely they'll need public support.

Now suppose that Young dies after naming his son Brad as his IRA beneficiary. If Brad subsequently files for bankruptcy, does the IRA he inherited from his father still qualify as a retirement fund, exempt from creditors?

The Supreme Court unanimously turned thumbs down. Three reasons were given for denying that beneficiaries hold protected retirement funds.

First, an IRA beneficiary who inherits can't make additional contributions to that account. Qualified individuals can put money into retirement accounts such as traditional IRAs and Roth IRAs. Tax breaks encourage such outlays.

But inherited IRAs are only for withdrawals.

Second, beneficiaries must take minimum distributions and pay any resulting tax, regardless of age. "Even a 5-year-old IRA beneficiary, who certainly isn't retired, must withdraw something," Slott said.

Third, the 10% early withdrawal penalty doesn't apply to inherited IRAs. Unless certain exceptions are met, withdrawals from traditional and Roth IRAs before age 59-1/2 will lead to fines.

"Nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete," the Supreme Court noted in its opinion.

Turning To A Trust

The bottom line is that the Supreme Court has ruled that inherited IRAs are much different than traditional or Roth IRAs. Thus, inherited IRAs don't qualify as retirement funds for a bankruptcy exemption.

What does this mean for IRA owners? You might want to evaluate your current IRA beneficiaries to see if they're likely to run into financial difficulties.

"Often, IRA beneficiaries are not as careful with the money as the people who earned it," Slott said.

If you think future financial problems could surface, one approach is to designate an irrevocable trust as your IRA beneficiary. The people for whom the money is intended can be named as trust beneficiaries.

Why A Partnership Loss May Not Be Deductible

Thursday, June 12, 2014

When an individual receives a Schedule K-1 from a partnership reflecting a loss, there are several things to consider before deciding if the loss can be deducted. In order to determine deductibility, a partner's basis and at risk limitations need to be evaluated. See original Article here from Accounting Today>

First and foremost, a partner must have adequate basis in the partnership in order to consider the deductibility of the partnership loss. A taxpayer's tax basis in a partnership interest (often called the partner's outside basis) represents the partner's cost for tax purposes and is used to measure the taxable gain or loss upon disposition of the partnership interest.

In addition, a partner's tax basis can (1) limit the partner's ability to deduct a partnership loss; (2) cause a cash distribution to be taxable instead of tax-free; and (3) affect the basis of property received as a distribution.

A partner's initial basis equals the amount of money contributed, plus the adjusted basis of property contributed, plus the partner's share of the partnership's liabilities.

All liabilities of the partnership are classified into three categories. First is recourse debt, which is debt that a partner would be responsible to pay back if there is an economic risk of loss on the debt, such as security deposits and loans made by partners to the partnership.

Next is nonrecourse debt, which is debt a partner is not liable to repay if the entity cannot. The last type of liability is qualified non-recourse debt, such as a mortgage held by a financial institution.

Typically, all three types of liabilities are allocated to the partners in the same proportion as the profit and loss allocation, except for recourse debt, which is allocated based on whoever bears the risk of economic loss.

Once a partner passes the basis test, the next test to be applied is that of the “at risk” rules of Section 465 of the Tax Code. The at-risk rules are applicable at the partner level, rather than the partnership level, and are designed to ensure that a taxpayer deducts losses only to the extent he or she is economically or actually at risk for the investment.

A partner is considered at risk with respect to an activity for (1) the amount of money and the adjusted basis of other property contributed to the activity; and (2) amounts borrowed for use in the activity if the partner is personally liable for repayment of the borrowed amount or has pledged property, other than property that is used in the activity, as security for the borrowed amount. The primary distinction between basis and at risk— thereby causing losses to be deductible for one while not the other—are the nonrecourse liabilities. A partner's share of the nonrecourse liabilities can increase their basis, but not the at risk limitation. In order to deduct these losses, partners may be tempted to guarantee partnership debt. Depending on the type of partnership, limited partnership (LP) or limited liability company (LLC), the impact on the at risk limitation can be different than the desired result.

In a recent IRS communication, the IRS distinguished the LLC guarantee from a debt guarantee in a limited partnership. Generally a limited partner in an LP who guarantees partnership debt is not at risk with respect to the guaranteed debt, because the limited partner has a right to seek reimbursement from the partnership and the general partner for any amounts that the limited partner is called upon to pay under the guarantee. However, in the case of an LLC, all members have limited liability with respect to LLC debt. In the absence of any co-guarantors or another similar arrangement, an LLC member who guarantees LLC debt becomes personally liable for the guaranteed debt and is therefore at risk in relation to the debt.

As you can probably tell, this is a very complex area, and navigating the rules should be done in coordinated consultations between the client’s attorney and tax advisor. We do recommend that clients consult with a tax advisor to discuss their liabilities to ensure their basis and at risk limitations are being properly reported.

Christie Butcher, CPA, MST, is a senior tax manager at Kessler Orlean Silver CPAs, in Deerfield, Ill. She can be contacted at cbutcher@koscpa.com.

Discrepancies Seen in Nearly Half of Alimony Deductions Reported to IRS

Thursday, May 15, 2014

Nearly half the tax returns on which individuals claimed tax deductions for alimony payments did not match up with their former spouse’s tax returns, showing a total “alimony gap” of over $2.3 billion in 2010, according to a new government report.  by J. Russell George  See Original Article here from Accounting Today >

The report, from the Treasury Inspector General for Tax Administration, found 266,190 tax returns for 2010 in which individuals claimed alimony deductions for which income was not reported on a corresponding recipient’s tax return, or the amount of alimony income that was reported did not agree with the amount of the deduction taken. The 266,190 returns represented approximately 47 percent of all tax returns on which alimony deductions were claimed. In tax year 2010, 567,887 taxpayers claimed alimony deductions totaling more than $10 billion.

TIGTA initiated the audit to evaluate whether there is an alimony reporting gap and to assess controls the Internal Revenue Service has in place to promote alimony reporting compliance. Apart from examining a small number of tax returns, the IRS generally has no processes or procedures to address this substantial compliance gap, TIGTA found.

IRS processes also do not ensure that individuals provide a valid recipient Taxpayer Identification Number, or TIN, when claiming an alimony deduction as required. TIGTA’s analysis of the 567,887 tax year 2010 returns that claimed an alimony deduction identified an estimated 6,500 tax returns claiming an alimony deduction for which the IRS did not identify that the recipient TIN was missing or invalid. In addition, because of errors in IRS processing instructions, the IRS did not assess penalties totaling $324,900 on individuals who did not provide a valid recipient TIN as required.

Individuals who pay alimony can deduct the amount paid from income on their tax return to reduce the amount of tax an individual must pay. Alimony recipients must, in turn, claim the amount received as income on their tax return. An alimony income reporting discrepancy occurs either when individuals claim deductions for alimony which they did not pay or individuals do not report alimony income they received.

“The number and size of the alimony reporting discrepancies on federal tax returns is a concern,” said TIGTA Inspector General J. Russell George in a statement. “The IRS should consider the use of less costly processes, including notifying taxpayers of apparent discrepancies, to expand its ability to address the issue.”

TIGTA recommended that the IRS evaluate its current examination filters to ensure that potentially high-risk tax returns are not inappropriately excluded from examination and develop a strategy to address the significant alimony compliance gap. TIGTA also recommended that the IRS revise processes and procedures to verify that all tax returns include a valid recipient TIN when claiming an alimony deduction and correct errors in IRS processing instructions to ensure that a penalty is accurately assessed on all tax returns on which a valid recipient TIN is not provided.The IRS agreed with three of TIGTA’s recommendations and disagreed with one recommendation. The IRS stated that it enhanced its examination filters and will continue to review and improve its strategy to reduce the compliance gap. In addition, the IRS revised procedures to ensure that penalties are assessed when appropriate. However, because the IRS does not have the authority to deny alimony deductions outside of deficiency processing, it believes verification of the deduction is more efficiently performed in its compliance function.“We have implemented a strategy to address this gap which includes usage of a number of examination filters which we have developed and refined to isolate the most egregious returns for compliance activity,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “... We continue to monitor these examination filters to ensure our strategy adequately addresses the alimony reporting compliance gap.”

However, Schiller disagreed with some of the outcome measures in the TIGTA report and pointed out that the Tax Code does not make the alimony deduction dependent on the provision of the recipient’s Taxpayer Identification Number, so the IRS does not have the authority to deny an alimony deduction during return processing when the payer fails to furnish a valid TIN for the recipient.

“We, therefore, are not able to revise our procedures to deny the alimony deduction if the TIN is not present,” she pointed out. “We have, however, revised our processing instructions to ensure the penalty for failure to provide the recipient TIN is assessed on all applicable returns.”

IRS Expects Millions of Amended Tax Returns

Wednesday, April 30, 2014


The Internal Revenue Service anticipates that nearly 5 million taxpayers will amend their returns by filing Form 1040X this year. [source: AccountingToday.com]

Nearly 46 million returns were electronically filed from home computers as of April 18, more than the total from home computers for all of 2013. The IRS said Friday that it has received more than 131 million tax returns, of which 88 percent were e-filed.

Taxpayers who need to amend their returns should file this form only after filing the original return, the IRS noted. Generally, for a tax credit or refund, taxpayers must file Form 1040X within three years, including extensions, after the date they filed their original return or within two years after the date they paid the tax, whichever is later. For most people, this means that returns for tax-year 2011 or later can still be amended. 

This year, many same-sex couples may want to consider filing amended returns. A same-sex couple, legally married in a state or foreign country that recognizes their marriage, is now considered married for tax purposes. This is true regardless of whether or not the couple lives in a jurisdiction that recognizes same-sex marriage.

For tax returns originally filed before Sept. 16, 2013, legally married same sex couples have the option of filing amended return to change their filing status to married filing separately or married filing jointly. But they are not required to change their filing status on a prior return, even if they amend that return for another reason. In either case, their amended return must be consistent with the filing status they have chosen. Further details are available on IRS.gov.

As all amended returns must be filed on paper, allow up to 12 weeks for Form 1040X to be processed.  Starting 3 weeks after filing their amended returns, taxpayers can use the “Where’s My Amended Tax Return?” tool on IRS.gov to check the status.

Harless & Associates Appoints Donna Holm Director of Tax

Tuesday, April 29, 2014

Harless & Associates is pleased to announce the appointment of Donna Holm, CPA, MST to Director of Tax for the West Palm Beach offices serving all of South Florida. Holm joined Harless & Associates less than one year ago as an Associate. 

“Donna has been a vital asset to our team at Harless & Associates and has been particularly active in reaching the community through lectures and articles,” said Managing Partner Steve Harless. “Her work assisting women and seniors with complicated tax matters has provided us with an important area of expertise. We are thrilled that Donna has accepted the position of Director of Tax and look forward to many future years serving the South Florida community.”   

Holm graduated with honors from St. Thomas University with a dual BS in Accounting and Business Management and with honors from Florida International University with an MS in Taxation. She has more than 30 years experience in both the public and private sectors, putting that knowledge to use as an Adjunct Professor at Florida Atlantic University, providing instruction in the taxation of individuals, corporations, partnerships, estates and trusts. She began her career with the Internal Revenue Service, moving on to public accounting firms and also owned a CPA practice for more than 10 years. With expertise in healthcare, she has a served as Chief Financial Officer for physician practices, receiving an award for Best Practices from the Medical Group Management Association. Additionally, Holm is a Certified Senior Advisor. Active in various chambers and community organizations, she has been involved in Palm Beach County for nearly 20 years. 

10 Tips for Taxpayers who Owe

Thursday, April 17, 2014

Owing money on your taxes is never fun, and if you've never owed anything before you may be left questioning exactly what to do. Where do you send the money? Sited from AccountingToday.com, here are 10 tips for taxpayers who owe taxes with their tax returns that were provided by the IRS.

  1. Taxpayers should never send cash.
  2. If taxpayers e-file, they can file and pay in a single step with an electronic funds withdrawal. If they e-file on their own, they can use their tax preparation software to make the withdrawal. If they use a tax preparer to e-file, they can ask the preparer to make their tax payment electronically.
  3. Taxpayers can pay taxes electronically 24/7 on IRS.gov. Just click on the ‘Payments’ tab near the top left of the home page for details.
  4. They can also pay by check or money order. They should make their check or money order payable to the “United States Treasury.”
  5. Whether they e-file their tax return or file on paper, taxpayers can also pay with a credit or debit card. The company that processes their payment will charge a processing fee.
  6. Taxpayers may be able to deduct the credit or debit card processing fee on next year’s return. It’s claimed on Schedule A, Itemized Deductions. The fee is a miscellaneous itemized deduction subject to the 2 percent limit.
  7. Taxpayers should be sure to write their name, address and daytime phone number on the front of their payment. Also, they should write the tax year, form number they are filing and their Social Security number.
  8. Taxpayers should complete Form 1040-V, Payment Voucher, and mail it with their tax return and payment to the IRS. They should make sure they send it to the address listed on the back of Form 1040-V. This will help the IRS process their payment and post it to their account. The form is available on IRS.gov.
  9. The IRS reminds taxpayers to enclose payment with their tax return but do not staple it to any tax form.
  10. For more information, call 800-829-4477 and select TeleTax Topic158, Ensuring Proper Credit of Payments. You can also get information in the instructions for Form 1040-V.

The Argot of Trusts, as Told in Acronyms

Monday, April 14, 2014

NING, Ding, Grat. Ilit, Crat, Crut, Qtip. And for those with short memories, Slats. [Source: NYTimes.com]

Is this code? The output of a broken keyboard? No, they’re acronyms that are commonly bandied about when discussing trusts. Always a rarefied space, the world of trusts is now awash in Washington-style shorthand. Unlike with that alphabet soup of government agency jargon, spelling out the names of these acronyms does not necessarily make it clear what the trust does. A Grat, for example, is a grantor-retained annuity trust, but it has nothing to do with annuities or insurance of any kind.

“I know a lot of very sophisticated people who are intimidated by these very same acronyms,” said Daniel D. Mielnicki, head of wealth preservation at Berger Singerman, a Florida law firm. And that feeling, Mr. Mielnicki said, prompts a flight response. “When in doubt,” he said, “their response is going to be no.”

Saying no won’t hurt most people. After all, most people do not have the kind of wealth or complicated assets that require a trust. On the other hand, the people who could benefit from a Ning or a Crat may not realize what the risks are or how much money and time need to be put into creating one to make it worthwhile.

“These complicated trust structures are not for everyone,” said Suzanne L. Shier, wealth planning practice executive and chief tax strategist at Northern Trust. “You don’t want to overplan for someone. They need to understand the amount of planning that is appropriate for their wealth levels and planning goals.”

Once a relatively straightforward legal structure to hold and transfer assets among the generations, trusts have grown in complexity along with the tax code they can shelter assets from and the financial instruments and investment vehicles they hold. Yet their very complexity means they carry the added risk of scrutiny from the Internal Revenue Service or of just not working as planned.

“If there is a risk of an audit of tax returns, the client has to be aware of that,” said Gail E. Cohen, vice chairwoman and general trust counsel at Fiduciary Trust. “You need a very skilled practitioner doing your gift tax return.”

So what are these oddly named trusts and what do people who need them need to know?

Grats are a way to transfer the appreciation of an asset, above a currently small interest rate, to a beneficiary tax-free. They are often used for closely held businesses or stock in a company that is about to go public. Their power comes in having a duration as short as two years.

“What you need to do is identify two to three assets that will pop in value,” said Daniel L. Kesten, a law partner at Davis & Gilbert. “The perfect Grat investment is a $10 Mega Millions ticket. The Grat has to pay you back $5 for two years. If it wins $100 million, all but $10 will pass to children free of gift tax.”

Read Full Story on NYTimes.com >>

What You Can Deduct on Your Taxes this Year

Tuesday, April 08, 2014

It's getting down to the wire and your taxes are due soon. You don't want to miss out on important tax credits and deductions that can save you money. Sharon Epperson talks to Elda Di Re, a partner and tax leader at Ernst & Young, about retirement plan contributions, job-relaxed expenses, charitable donations and other tax moves that can help filers save money, even in the 11th hour. This article and video from CNBC.com gives you eight way you can deduct and save money on your taxes.

With time running out to file your 2013 tax return, you want to make sure you're on top of the available deductions to maximize your tax savings.

Taxpayers may be aware of numerous tax breaks, but depending on your income, many deductions may no longer be as valuable—or you may be ineligible entirely.

Due to recent tax-law changes, anyone with an adjusted gross income above $250,000—for a married couple filing jointly, it's $300,000—will face a limit on itemized deductions that could thus limit their potential tax savings for the 2013 tax year. In addition, many upper-middle-income taxpayers who face the Alternative Minimum Tax—a higher tax than their regular income tax—will not be able to claim deductions that may be allowed on a regular tax return, according to tax analyst Mark Luscombe of CCH, part of Wolters Kluwer.

Still, there are money-saving tax deductions and other strategies that you may be able to take advantage of, no matter how much you make. Here are eight ways to save:

  1. Moving-expense deduction. If you moved to take a new job due to a change in your job or business location—and paid for the move out of pocket—you may be able to deduct your moving expenses.

    "Local moves don't apply. If you just moved to the other side of town, you won't be eligible" for this tax break, Luscombe said. If it's your first job, your new workplace must be at least 50 miles away from your old home to qualify. Other time and distance tests are required if you are moving to a new job.

  2. Capital loss deduction. The stock market had a very strong year in 2013, but some of your investments may not have fared as well. If your capital losses were more than your capital gains, you can claim a capital loss deduction of your total net loss up to $3,000, reducing your income dollar-for-dollar.

  3. Medical, dental expense deductions. Guidelines for tax-deductible medical expenses changed because of the Affordable Care Act. Your unreimbursed medical expenses must exceed 10 percent of your adjusted gross income to qualify for a deduction. That's up from 7.5 percent in the 2012 tax year.

    However, the lower 7.5 percent threshold still applies for people age 65 and older until the end of 2016. Typical expenses may include unreimbursed medical and dental bills, equipment costs and medical supplies and devices.

  4. Health savings account. If you're covered by a high-deductible health plan, you may be able to set up a health savings account by April 15 and contribute up to $3,250 if you're single and $6,450 for families to the account. Contributions to the HSA will lower your taxable income dollar-for-dollar. Plus, contributions, earnings and withdrawals are tax-free when used to pay for qualified medical expenses.

    If you have a small business or are self-employed, you have even more ways to reduce your tax bill.

  5. SEP IRA. If you're a sole proprietor, business owner or earn self-employment income, you also have until April 15 to set up and contribute to a SEP IRA for the 2013 tax year. You can contribute up to 25 percent of your compensation—or 20 percent of self-employment income—up to $51,000 in this account.

    Like a traditional IRA, "if the SEP-IRA contribution is made before the filing due date of your return, it is deductible on your 2013 tax return," said Elda Di Re, a tax expert for Ernst & Young.

  6. Home-office deduction. If you're self-employed and work out of your home, there's a new option for claiming a deduction for a home office. Your deduction is based on the size of your home office, using a simple calculation: Deduct $5 for every square foot of work space used—up to a maximum of 300 square feet. So the maximum deduction is $1,500.

    You can still calculate the home-office deduction the old way, figuring related expenses and how they may apply over the course of the year to a home office, but the new way is a lot simpler.

  7. Health insurance premium deductions for self-employed. Business owners and self-employed taxpayers may be able to deduct health insurance premiums, as long as they aren't already covered under their employer's or spouse's employer's plan.

  8. Business-expense tax deductions. If you're self-employed, a contractor or sole proprietor, you may be able to deduct qualified business expenses related to your work. Also, "if you are expending monies which are not reimbursed by the partnership, you can take those business expenses directly against your partnership income," Di Re said.

    The IRS requires eligible business expenses be "ordinary" (something common and acceptable in that particular business) as well as "necessary" (something appropriate and helpful to the business). But Luscombe noted that taxpayers should keep in mind that "business expense deductions can only be taken once, either on your individual income-tax return or a separate business tax return—but not on both."

Is it Time for Long Term Care Coverage?

Friday, March 07, 2014

By Caroline Harless and Wes Littlejohn, Peachtree Capital Corporation

Risk management is a key step in the financial planning process and protects your assets from being depleted in the event of an accident or decline in health. With proper planning, you can protect your assets and family from unforeseen events. One facet of risk management that many people overlook until it's too late is long-term care insurance.

Know the facts:

  • Currently, 70% of people who are age 65 and older will be unable to complete at least two activities of daily living over his or her lifetime.
  • The average national cost per month for an assisted living facility is $3,300.
  • The average national cost per month for a private room in a nursing facility is $7,000 while a semi-private room is $6,300.
  • Medicare does not currently pay for custodial care. It pays only for skilled care in very limited circumstances.

The long-term care (LTC) marketplace's reputation has been tainted by unstable pricing and carriers exiting the marketplace. Over the past two years, however, insurance companies have developed additional products that offer more stability and options for our clients, depending on their current circumstances and planning objectives. At Peachtree Capital Corporation, our job is to design a personalized solution that possesses flexibility while optimizing your costs/ benefits.

A quick glance of the products:

1. "Traditional"/ Stand Alone LTC

  • "Use it or lose it" policy
  • Annual premium structure
  • Most LTC coverage per dollar of premium
  • Policyholders have experienced substantial premium increases over the years and carriers exiting the market

2. Hybrid or "Linked Benefit" LTC

  • Combination of traditional LTC and life insurance
  • Most commonly funded with a single premium
  • Provides rate stability, principal protection, LTC benefit as well as supplemental life insurance coverage.

3. Life Insurance with LTC rider

  • LTC coverage equal to the death benefit
  • Flexible premium structures
  • Ability to turn LTC benefits "on" and "off" for multiple uses
  • Indemnity LTC rider allows benefits to be paid directly to policy owner

We are encouraged by the marketplace's recent developments, as they provide greater flexibility, higher plan certainty and more consumer-friendly features. We continue to objectively monitor the long-term care landscape for our clients and welcome the opportunity to do the same for you.

Caroline Harless is President of Peachtree Capital Corporation Wes Littlejohn is a Vice President of Peachtree Capital Corporation

FAQ: Conceirge Services

Thursday, February 13, 2014


  1. What if I need your concierge services after business hours?
    We are available 24/7/365 to meet your need.
  2.  
  3. How are you concierge services different from other concierge services?
    The State of Florida has mandated that we be Insured and Bonded. We also have a Fiduciary responsibility to you, and a strict code of Ethics we must follow or we could loose our ability to work in the state.
  4.  
  5. How do I know I will be getting the best service person to be doing work in my home?
    We solicit a minimum of 3 bids for every job and then sit down with you to help decide which is the best for the job at hand.
  6.  
  7. Will I get the best price available, no matter what my financial status (I am getting tired of being gouged due to my finances)?
    Not only do we solicit 3 bids, but the state of Florida prohibits us from receiving any compensation from those suppliers that we work with. Everything we do is 100% transparent.
  8.  
  9. While I do not have a yacht or airplane for you to help maintain, I do have an aging parent. How can your concierge services help me here?
    We work with the top Nursing Agencies in the area for in home services along with some of the best facilities for the aged, depending on your parent's needs. We also have on staff a State Certified Senior Advisor who is current on all the new laws protecting seniors.
  10.  
  11. What if my schedule is very full, and I really don't have time to wait for a roofer, electrician, plumber, etc. to come out to take care of my problem?
    EXACTLY, that is what we are for. Once we have a service contract, we will be on site to make sure the service is done correctly, on time, and on budget. No need for you to sit home and wait. we are here to make your life easier.

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