Tax Update Fall 2016
Fall is the time to start thinking about year-end tax planning and strategies. What can be done now to control your tax liability, or plan for the inevitable tax bill to come. What changes have occurred in 2016 that will impact the tax planning that had been discussed when your tax returns were prepared earlier this year?
This time of year the holidays seem to come tumbling one right after the other—Halloween, Thanksgiving, Hanukah, Christmas, New Year’s Eve—and then the start to a new tax season. Contact the office to review your tax status and any changes that will be occurring later this year.
So let’s look at some mid-year items that may affect your taxes that should be brought to my attention.
DIVORCE: Tax Issues to Consider
Here are six tax-related topics a couple considering divorce and their attorneys need to discuss, along with their tax professional:
1. Child custody - This definitely is a tax concern that separating parents must decide on whether one parent will have primary custody or whether it will be shared relatively equally. That will affect which parent will get to claim the many child-related tax breaks such as the child tax credit, earned income tax credit, or the head of household filing status. Many divorcing parents elect to alternate the years in which they are able to claim the child(ren) as a dependent on their income tax return. The non-custodial parent has additional filing requirements in the year in which they take the child(ren) as a dependent. These issues should be discussed as part of the child support agreement. IRS is not bound by state law on the definition of a custodial parent and has their own set of rules and requirements.
2. Alimony and child support - Alimony generally counts as taxable income to the person receiving it. It also can be deducted by the person paying it. Child support, however, is not taxable, either to the spouse receiving it or the children for whom it is supposed to be spent. And child support payments can’t be deducted by the paying parent.
3. Timing and ﬁling status - The Internal Revenue Code deems whether you are married or not based on your legal status on the final day of the tax year. So the dissolution of a marriage that drags on could mean you will end a year still married in the Internal Revenue Service’s eyes even though you’re trying to become single again. While in some situations it may seem appropriate to file the Form 1040 as married filing separately there is a loss of tax benefits. So even though things are rocky, a joint return could be better for both parties. In some situations, one parent may be eligible to file as head of household. However, there are strict guidelines in this situation. Contact the office to see if you would qualify.
Again, look at your situation and talk with your professional advisers as to how your two filing options affect your income, exemptions, credits and deductions. And couples in community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—have additional considerations when dealing with their tax filing status.
4. When to sell the house - A married couple gets to exclude up to $500,000 in home sale profit from taxable income. A single homeowner only gets half that tax-sheltered savings. So if there’s a likelihood that neither spouse wants to keep the house long-term, look into selling it before the split or making compensatory arrangements for the spouse who will keep it and get the smaller tax break when finally selling.
5. Assets and their tax costs - Many divorces do not end amicably. Sometimes one partner, particularly the one who’s been contemplating divorce longer, tries to hide income and assets before the process of breaking up begins. Particularly if the spouse is self-employed and has not been reporting all income on the joint tax return there may be an issue of incorrectly prepared tax returns. In these cases you—more appropriately, your lawyer and forensic accountant—might need to play detective and use tax returns to uncover hidden divorce assets.
Even when the property to be divided is clear, you need to carefully weigh the tax implications. Take, for example, a couple that has a tax-deferred retirement account and a regular investment account, both worth $100,000 each; Spouse A gets the retirement money; Spouse B keeps the regular account.
When A starts taking money from the retirement account, taxes will be due at ordinary tax rates on the earnings that have been accruing tax-deferred for years. B, however, will be able to pay generally lower long-term capital gains tax on that account’s withdrawals. So pay close attention to assets’ eventual tax costs when deciding who gets what.
6. Don’t forget state taxes - In the 50 states, plus the District of Columbia, those jurisdictions will have final say over the end of a mar-riage. They also could have some tax matters that a divorcing couples needs to consider. Make sure your attorney is aware of your state’s tax laws and how they could affect your divorce decisions.
I know taxes are even more fraught when they’re tied to a divorce, but they need to be part of the discussions during the split so that both partners can go their own ways without also worrying about the IRS.
Signs Of A Charity Scam
These days, charities and fundraisers (groups that solicit funds on behalf of organizations) use the phone, face-to-face contact, email, the internet (including social networking sites), and mobile devices to solicit and obtain donations. Naturally, scammers use these same methods to take advantage of your goodwill. Regardless of how they reach you, avoid any charity or fundraiser that:
Charities and the Do Not Call Registry
The National Do Not Call Registry gives you a way to reduce telemarketing calls, but it exempts charities and political groups. However, if a fundraiser is calling on behalf of a charity, you may ask not to get any more calls from, or on behalf of, that specific charity. If those calls continue, the fundraiser may be subject to a fine.
Report Charity Scams
If you think you’ve been the victim of a charity scam or if a fundraiser has violated Do Not Call rules, file a complaint with the Federal Trade Commission. Your complaints can help detect patterns of wrong-doing and lead to investigations and prosecutions.
When donations aren’t deductible: While it’s very low on your consideration list after a national tragedy, not every donation to help victims is tax deductible.
Among the rules for charitable giving is that itemized donations only can be claimed if they’re made to organizations that receive 501(c)(3) tax-exempt status from the IRS. The Internal Revenue Code specifically disallows a tax deduction for gifts to individuals.
That means if you give to a fund created to help an individual, it might help that person and his or her family, but you get no tax benefit for your gift. It doesn’t matter how valid, trustworthy and worthwhile the effort for the needy person(s).
If you still want to give to such an assistance effort and are satisfied that a fund created for the benefit of a single person (or his or her family) is worthwhile, great.
But, just to be sure, do not give money directly to the person soliciting your financial aid. Make sure that your gift goes into a bank account established for the folks who need it.
Take the following precautions to make sure your donation benefits the people and organizations you want to help.
Exceptions to the Tax on Early Withdrawals
There may be times it is necessary to pull funds out of your retirement accounts.
Most retirement plan distributions are generally subject to income tax and may be subject to an additional 10% tax penalty. The amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called “early” or “premature” distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.
Your withdrawal from a pension plan or IRA may affect the premium tax credit you may be receiving with your insurance plan through the marketplace. The IRS warns that many taxpayers are unpleasantly surprised when they learn that their premium tax credit needs to be repaid when they have withdrawn these funds. Not only is the taxpayer being assessed the additional tax liability and the 10% early distribution penalty, but in addition they now have a requirement to repay the advanced premium tax credit.
If you have had a need to withdraw funds from a retirement plan, contact our office to have a tax assessment of the potential effect on your 2016 income tax return. The best surprise is no surprise and it is best to find out now if you have a tax liability that needs to be addressed.
Following is a chart that reviews the various circumstances that the penalty would not apply.
How to Register for Certain Online Self-Help Tools
To better protect taxpayers, the IRS recently upgraded its identity verification process for certain online self-help tools. The purpose is to prevent taxpayer impersonations and account takeovers by identity thieves. The IRS has experienced a high incidence of identity theft and refund fraud. In an effort to combat tax fraud and protect taxpayers the IRS has instituted several new security measures. One of these initiatives is to make the Secure Access Authentication process more rigorous. Following is the process necessary to sign up for an online account with the IRS. This process involves several levels of authentication and not all taxpayers will be able to set up online account access.
Currently, the Secure Access Authentication process applies to the Get Transcript Online and Get an IP PIN tools.
Here’s what new users need to get started:
Because this process involves verification using financial records, there may be a “soft inquiry” placed on your credit report. This notice does not affect your credit score. The IRS does not retain your financial account information.
Note: If you have a pay-as-you-go mobile phone or a business/family plan mobile phone not associated with your name, you may request the IRS mail an activation code to the address that is on file for you. You still must have a text-enabled, U.S.-based phone to receive a security code text that completes the validation process and allows returning users to access their accounts.
First-time users of any Secure Access-supported tool must:
First-time users who opt for an Activation Code by Mail must:
Returning users with existing credentials but new to Secure Access must:
Returning users who previously completed the Secure Access process must:
While this process may seem somewhat onerous, the intent is to protect all taxpayers from unauthorized access to their IRS account. By obtaining your power of attorney we are able to access your tax account through a service available for tax professionals. Contact the office if you need access to your IRS tax account in order to obtain transcripts or other information on file with the IRS.
For more information, please contact me.
Contact the office if you have any questions regarding these issues or any changes in your household that may have an impact on your tax filing requirements.
As your tax professional, I assure you that I will be keeping a watchful eye on Congress and on IRS actions which may affect your business and your tax filings in the New Year. I will be happy to address any concerns and answer questions you have about any of the issues covered in this newsletter. Thank you for the opportunity and privilege of allowing me to serve as your tax professional this past year.
Stephen W. McKown
Did you ever notice that when you put
the words “The” and “IRS” together, it spells
-- Author Unknown