Vernoia, Enterline + Brewer, CPA LLC

Archive for January, 2015

60-days for strict IRA rollover deadline counts calendar, not business days

A taxpayer was not entitled to a waiver of the Code Sec. 408(d)(3) requirement that an IRA rollover be made within 60 days. The taxpayer’s explanation—that she had believed the 60-day period applied to business days rather than calendar days—failed to persuade the IRS to grant her a waiver.

Rollovers: Tax Code and guidance

IRA Rollover VEBCPA.comAn individual may withdraw all or part of the assets of one traditional IRA and exclude the withdrawal from income if the individual either transfers it to another traditional IRA or returns it to the same IRA. This is commonly called a “rollover.” The rollover or return must generally be accomplished within 60 days after the withdrawal. It is not necessary that the entire amount withdrawn be transferred, but only the amount that is transferred during the 60-day period will be excludable from income.

Generally an amount paid or distributed out of an IRA is includible in a taxpayer’s gross income unless it falls under an exception. Code Sec. 408(d)(3)provides one such exception for an amount that qualifies as a tax-free rollover from an IRA into an IRA or other qualified retirement account made within 60 calendar days.

Code Sec. 408(d)(3)(I) authorizes the IRS to waive the 60-day requirement where the facts and circumstances of a case indicate that failure to waive the requirement would be inequitable. In other words, the IRS has the authority to grant a waiver of the 60-day rule in situations involving equity, good conscience, or for situations that were beyond the control of the individual. In exercise of that authority, Rev. Proc. 2003-16 enumerates factors that the IRS will consider when making this determination. These include:

  • Errors by a financial institution;
  • Death, disability, hospitalization, incarceration, restrictions imposed by a foreign nation, or postal error;
  • The use of the amount distributed; and
  • The time elapsed since the distribution occurred.

Factual background

On August 2 the taxpayer took a distribution from her IRA to pay off the mortgage on her home with the intention of returning the funds to her IRA within 60 business days. The 60-day period for making a rollover ended on October 1. After the cut-off date, but within the first two weeks of October, the taxpayer made two deposits into her IRA. The total amount redeposited was less than the amount of the August distribution.

IRS analysis

The IRS denied the taxpayer’s request for a waiver of the 60-day requirement. The IRS noted that the taxpayer had not cited any of the factors enumerated in Rev. Proc. 2003-16 to explain her reason for failing to accomplish a rollover within the requisite period.

LTR 201449009

NJ – Taxability of breast radiation treatment catheters, other matters discussed

The New Jersey Division of Taxation quarterly newsletter provides guidance regarding various sales and use tax issues. Specifically, it provides that sales of breast radiation treatment catheter devices to hospitals and physicians are exempt from sales tax as sales of a prosthetic device. The breast radiation treatment catheter device is considered to be an exempt prosthetic device because it is worn in the body and is part of the radiation treatment used to correct a physical deformity or malfunction.

In addition, the charge for activation of a new cellular phone is subject to sales and use tax. Because activation of the phone is necessary to complete the sale of the phone, it is taxable as part of the sales price of the phone. Also, the charge to troubleshoot and resolve issues associated with the phone is taxable as the servicing of tangible personal property. However, charges to assist customers in changing a phone number and to transfer data from one phone to another are not subject to tax.

NJ postage tax vebcpa.comFurther, postage charged to a customer as part of the sales price for printed advertising material and processing services where the material is delivered to a location in New Jersey is subject to sales and use tax. The postage expense is part of the taxable sales price whether or not separately stated to the customer. However, postage charged to a customer as part of the sales price for printed advertising material and processing services where the material is delivered out-of-state is not taxable. Delivery charges only refer to charges made by the seller of goods and services. The purchase of postage directly from the USPS is not taxable. Starting with the premise that the charges for the printed advertising material are taxable, the prepayment deposit is taxable because the taxpayer is purchasing the postage and the postage expense is part of the sales price of the printed advertising material and processing services. The charge for the customer using its own postal permit is not taxable since the postage is purchased directly from the USPS. The charge for the customer using its own postal permit and allowing the USPS to direct-debit the cost of the postage from the customer’s account is not taxable because the customer makes payment directly to the USPS. State Tax News, New Jersey Division of Taxation, Vol. 43, No. 3, December 31, 2014

IRS releases 2015 inflation adjustments to retirement-related amounts; SSA publishes 2015 wage base

The IRS recently issued a long list of cost of living adjustments (COLAs) for various Tax Code provisions related to retirement savings. These COLAs are for the 2015 tax year and are dependent upon the CPI-U index average from September 2013 through August 2014. The Tax Code requires that federal income tax brackets and certain other figures be adjusted annually for inflation. Because of inflation and rounding conventions, many provisions increase for 2015.

Benefit plans

Among the many adjustments published by the IRS are these (this is not an exclusive list):

Elective deferrals. The limits on elective deferrals for employees who participate in 401(k)s, 403(b)s, certain 457s, and Thrift Savings Plans increase to $18,000, up from $17,500 for 2014.

Catch-up contributions. Eligible individuals age 50 and above may make catch-up contributions to IRAs, 401(k)s and other savings arrangements. The catch-up amount for 401(k)s, 457s, 403(b)s, and SEPs, increase to $6,000 for 2015. The additional catch-up contribution amount to IRAs remains at $1,000 since it is a non-inflation-adjusted flat amount set by the Tax Code.

Defined contribution plans. The limitation for Code Sec. 415(c)(1)(A) defined contribution plans will increase from $52,000 for 2014 to $53,000 for 2015.

Traditional IRAs. For 2015, the maximum deductible amount under Code Sec. 219(b)(5)(A) for an individual making qualified retirement contributions to traditional IRAs and similar plans will remain $5,500. The allowable IRA deduction will phase out when modified AGI is between $61,000 and $71,000 for single taxpayers who are active participants in an employer-sponsored retirement plan (up from $60,000 and $70,000 in 2014). For married couples filing a joint return, where the spouse making the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $98,000 to $118,000 (up from $96,000 to $116,000 for 2014).

The IRS announcement also included the following figures:

  • The Code Sec. 414(q)(1)(B) limit used in the definition of a “highly-compensated employee” is set for 2015 at $120,000, an increase from $115,000 for 2014 and 2013.
  • The dollar limit used within the definition of “key employee” in a top heavy plan remains $170,000 for 2015.
  • The compensation amounts relevant to the definition of “control employee” for fringe benefit valuation purposes remains $105,000 for 2015. The compensation amount under Reg. §1.61-21(f)(5)(iii) is $215,000 for 2015, up from $210,000 for 2014.

Social Security wage base

At the same time the IRS issued the qualified retirement plan COLAs, the Social Security Administration (SSA) announced that the maximum amount of earnings subject to OASDI Social Security tax will also increase. The 2015 wage base will increase to $118,500, up from $117,000 for 2014. (The $1,500 increase reflects an overall rise in average total wages.)

The SSA figures also included the 2015 domestic employee coverage threshold, which is often called the “nanny tax.” Adjusted for inflation, the amount is $1,900, which is unchanged from the previous year. If a taxpayer pays a domestic household employee more than $1,900 during the year, he or she is responsible for withholding and paying FICA taxes on the employee’s behalf.

FAQ: What is the business standard mileage rate for 2015?

The IRS has announced an increase in the optional business standard mileage reimbursement rate for 2015. The business standard mileage rate increased by one and a half cents, to 57.5 cents (up from 56 cents for 2014). The 2015 standard mileage rate for medical and moving expenses decreased slightly to 23 cents (down from 23.5 cents for 2014). The charitable mileage rate, however, is set by statute at a flat 14 cents per mile without inflation adjustment each year. The revised rates apply to deductible transportation expenses paid or incurred for business or medical/moving expenditures, or qualified charitable miles driven, on or after January 1, 2015.

The IRS works with an independent contractor to establish the business, medical and moving expense standard rates. The IRS and the independent contractor take into account the fixed and variable costs of operating an automobile, such as fuel costs and maintenance expenses. The decline in fuel prices during 2014, however, was not reflected in the business standard mileage rate for 2015. Some practitioners have speculated this could indicate that the IRS does not expect the low gas prices to last. Alternatively, if prices continue to decline, the IRS could issue a mid-year adjustment of the rate during 2015.

Some background

mileage rate vebcpa.comThe standard mileage rates for business use, medical and moving expenses, and charitable usage, may be used by an employee or self-employed taxpayer to compute the allowable deduction attributable to his or her business use of a car. Taxpayers also have the option of calculating the actual cost of operating a vehicle for business and deducting that amount, but using the standard mileage rate is the simplest method of computing automobile expenses because it simplifies the amount of required recordkeeping. This is because business standard mileage rate is designed to take into account costs such as maintenance and repairs, gas and oil, depreciation, insurance, and license and registration fees. For example, the depreciation component of the business standard mileage rate for 2015 will be 24 cents-per-mile, a two-cent increase from the 22-cents-per-mile rate that was effective for 2014.

Because depreciation and other costs are already factored into the standard rate, taxpayers using the standard mileage rate may not deduct depreciation, maintenance and fees, gasoline, insurance, or vehicle registration costs. The plus side is that standard mileage rate taxpayers do not need to maintain detailed records on these costs.

The taxpayer using the standard mileage rate need only keep a log of his or her business miles. To calculate the deduction, the taxpayer will multiply the standard mileage rate by the number of business miles traveled. Taxpayers using the standard rate may also deduct any business-related parking fees and tolls.

Requirements

Taxpayers must meet several requirements before they may use the business standard mileage rate. First, they must be either self-employed or an employee who has incurred automobile costs for business that were not reimbursed by the employer. The taxpayer must either own or lease the car. Additional requirements are listed in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Certain types of travel are not considered deductible, however. For example the cost of commuting from the taxpayer’s home to his or her place of business is considered nondeductible. In general, deductible transportation expenses are deemed ordinary and necessary costs of:

  • Traveling from one workplace to another in the course of your business;
  • Visiting clients or customers;
  • Attending a business meeting away from your regular workplace; or
  • Traveling from your home to a temporary workplace when a taxpayer has one or more regular places of work.

Fixed and variable rate (FAVR) allowance

Taxpayers may also use the fixed and variable rate allowance to substantiate automobile expenses. Under the FAVR method, an employer reimburses the employee’s expenses with a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable payments.

For purposes of computing the allowance under a FAVR plan, the standard automobile cost may not exceed $28,200 for automobiles; but the rate increases to $30,800 for trucks and vans (up from $30,400 for 2014).

Please contact this office if you have any questions regarding how your business or how you as an employee can qualify for use of the standard mileage rate (and whether you might be better off using the actual cost method for claiming a deduction for vehicle use).

IR-2014-114, Notice 2014-79

How do I? Comply with the Affordable Care Act’s individual mandate?

Beginning January 1, 2014, the Affordable Care Act (ACA) required individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will report on their 2014 federal income tax return if they had minimum essential health coverage for all or part of the year. Individuals who file Form 1040, U.S. Individual Income Tax Return, will indicate on Line 61 if they were covered by minimum essential health coverage for 2014, if they are exempt from the requirement to carry minimum essential health coverage or if they are making an individual shared responsibility payment.

Minimum essential coverage

affordable care act vebcpa.comMinimum essential coverage is a term used to describe the type of coverage an individual needs to have to meet the individual responsibility requirement under the ACA. Nearly all individuals covered by employer-sponsored health insurance are treated under the ACA as carrying minimum essential coverage. Coverage obtained through the ACA Marketplace as well as Medicare, TRICARE and the Children’s Health Insurance Program (CHIP) qualifies as minimum essential coverage. An important exception to minimum essential coverage is coverage that provides limited benefits, such as stand-alone dental insurance, accident or disability income insurance and workers’ compensation insurance. If you have any questions whether your health coverage is minimum essential coverage requirement, please contact our office.

Exemptions     

The ACA sets out a number of categories of individuals exempt from the individual shared responsibility requirement:

  • Members of Certain Religious Sects
  • Short Coverage Gap
  • Certain Noncitizens
  • Coverage is Considered Unaffordable
  • Household Income below the Return Filing Threshold
  • Members of Federally-Recognized Native American Nations
  • Members of Health Care Sharing Ministries
  • Incarcerated individuals
  • Hardships

Many of these exemptions are quite technical and have various sub-categories of exemptions. Some exemptions are available only through the ACA Marketplace, others only from the IRS and others from either the ACA Marketplace or the IRS. Please contact our office for more information about a particular exemption and how to apply for an exemption.

Shared responsibility payment

For 2014, the individual shared responsibility payment is the greater of:

  • One percent of household income that is above the tax return filing threshold for the individual’s filing status; or
  • The individual’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.

For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members).

Here’s an example from the IRS:

Emma and Noah are married and have two children under 18. The couple did not have minimum essential coverage for any family member for any month during 2014 and no one in the family qualified for an exemption from the individual shared responsibility requirement. For 2014, their household income is $70,000 and their filing threshold is $20,300. The IRS explained that to determine their individual shared responsibility payment using the income formula, the couple would subtract $20,300 (filing threshold) from $70,000 (2014 household income). The result is $49,700. One percent of $49,700 equals $497. The couple’s flat dollar amount is $285, or $95 per adult and $47.50 per child. The total of $285 is the flat dollar amount in 2014. The family’s annual national average premium for bronze level coverage through the Marketplace for 2014 is $9,792 ($2,448 x 4). Because $497 is greater than $285 and is less than $9,792, their shared responsibility payment is $497 for 2014, or $41.41 per month for each month the family is uninsured (1/12 of $497 equals $41.41).

Please contact our office for more information about the ACA’s individual shared responsibility requirement.

IRS enters filing season with reduced enforcement and service due to budget cuts

The IRS is expected to shortly open the 2015 filing season and both the agency and taxpayers are preparing for some turbulence. The IRS is going into the filing season with a reduced budget, which could translate into fewer audits. Legislation passed by Congress in late 2014 could delay the start of the filing season, although to date, the IRS has not announced a delay. Taxpayers and the IRS are on alert for identity theft, a pervasive problem during filing season. Additionally, new requirements under the Patient Protection and Affordable Care Act kick-in.

Budget cuts impact audits and service

IRS budget cuts vebcpa.comThe IRS must do more with less after Congress voted in December to cut the agency’s budget by some $345 million. In fact, the IRS has been doing more with less for the past several years as its budget has been reduced nearly every year. In December, IRS Commissioner John Koskinen told the agency’s employees that he was instituting a hiring freeze, with only a few mission-critical exceptions.

Koskinen also acknowledged that the number of taxpayer audits will likely decline because of staffing cutbacks and budgetary pressures. The audit coverage rate for individuals hovers around one percent and that rate could go down. Between 2012 and 2013, the audit rate experienced a decline, largely due to budgetary constraints at that time, according to the IRS.

Going into the filing season, the IRS has cautioned that its customer service functions will be challenged by the budget cuts. With limited budgetary resources, the agency will likely need to shift personnel from other functions to customer service during the filing season. This could slow the processing of refunds, Koskinen said. As a last resort, Koskinen indicated that the agency could consider furloughing employees for one or more days. Koskinen said the IRS spends $29 million every day to keep operating.

Late legislation

When Congress make changes to the Tax Code late in the year, the IRS must scramble to incorporate these changes into its return processing systems. This year is no different. The Tax Increase Prevention Act of 2014, signed into law by President Obama in December, makes some 500 changes to the Tax Code through language extending the tax extenders, technical corrections and the removal of so-called “deadwood.”

The IRS has been upgrading its return processing systems for the new law. At this time, the agency has not delayed the start of the filing season. In past years, the IRS has opened the filing system generally but asked filers of certain returns and schedules, impacted by legislation, to hold off. Our office will keep you posted of developments.

Identity theft

Tax return identity theft is a growing problem. Identity thieves gather information financial information through phishing scams, discarded tax returns, and other records containing personal and financial information. Identity thieves typically file false returns early in the filing season with hopes to get a refund. Often, taxpayers discover for the first time that they are victims of identity theft when they file their returns.

The IRS has devoted significant resources to identifying false returns. The agency has developed special filters for its return processing systems. Special identity protection numbers have been assigned to victims of identity theft. The IRS receives some 150 million individual returns and issues around 110 million refunds, so the challenge is daunting.

Affordable Care Act

Unless exempt, taxpayers will need to report on their 2014 returns if they are covered by minimum essential health coverage. Individuals without minimum essential coverage – unless exempt – will make a shared responsibility payment. The IRS is bracing for a flood of questions about what is minimum essential coverage, how to calculate the shared responsibility payment and who is exempt. The IRS has revised Form 1040, U.S. Individual Income Tax Return, and created new forms, such as Form 8965, Health Coverage Exemptions.

Individuals who obtained health insurance through the ACA Marketplace in 2014 may be eligible for the Code Sec. 36B premium assistance tax credit. If they are, they will need to file a new form, Form 8962, Premium Tax Credit, with their 2014 return. If taxpayers received advance payments of the credit, they will need to reconcile the difference between the advance credit payments and the allowable amount of the credit. Taxpayers could discover that their advance payments exceeded their allowable amount. In that case, they will need to repay the excess, subject to certain limitations.

Please contact our office if you have any questions about the filing season.

Top 10 tax developments of 2014 with impact on 2015

2014 was a notable year for tax developments on a number of fronts. Selecting the”top ten” tax developments for 2014 necessarily requires judgment calls based upon uniqueness, taxpayers affected, and forward-looking impact on 2015 and beyond. The following “top ten” list of 2014 tax developments is such a prioritization. Nevertheless, other 2014 developments may prove more significant to any particular client, depending upon circumstances. Please feel free to contact this office for a more customized look at the impact of 2014 developments upon your unique tax situation.

Passage of the Extenders Package

2014 was not a year for major tax legislation in Congress. In fact, Congress even failed to pass its usual two-year Extenders package, instead settling on a one-year retroactive extension to January 1, 2014. As one Senator put it, “This tax bill doesn’t have the shelf life of a carton of eggs,” referring to the fact that the 50-plus extenders provisions, signed by the President on December 19, 2014, expired again on January 1, 2015. Instead, it has been left to the 114th Congress to debate the extension of these tax breaks in 2015 and beyond, and for taxpayers to guess what expenses in 2015 will again be entitled to a tax break.

Affordable Care Act

In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far-reaching requirements, the individual shared responsibility provision, took effect on January 1, 2014. Another key provision, the employer shared responsibility, was delayed (in 2013) to 2015. However, employer reporting under Code Sec. 6605 was not delayed. The IRS also issued guidance on the Code Sec. 36B premium assistance tax credit and other provisions of the Affordable Care Act. Meanwhile, the Supreme Court announced it would review a decision by the Fourth Circuit Court of Appeals upholding IRS regulations on the Code Sec. 36B premium assistance tax credit, a critical component to making the Affordable Care Act viable nationwide.

International Compliance

The IRS and Treasury increased their focus on requirements that U.S. taxpayers report foreign income and assets. The government took the final steps to implement the requirements for U.S. taxpayers and foreign financial institutions to report foreign assets under the Foreign Account Tax Compliance Act (FATCA). The government also tweaked its programs to induce U.S. taxpayers to report undisclosed income and assets from prior past years. At the same time, the IRS and the Department of Justice went to court to seek civil and criminal penalties, including jail time, against willful tax evaders.

Repair Regulations

In 2014, the IRS finished issuing the necessary guidance on the treatment of costs for tangible property under the sweeping so-called “repair” regulations, which impact most businesses. The most important development was the issuance of final regulations on the treatment of dispositions of tangible property under MACRS and under Code Sec. 168, including the identification of assets, the treatment of dispositions, and the computation of gain and loss, particularly in the context of general asset accounts (TD 9689). The IRS also issued several revenue procedures that granted automatic consent for taxpayers to change to the accounting methods allowed by the final regulations (including Rev. Proc. 2014-16 & 54).

IRS Operations

IRS Commissioner John Koskinen predicted a complex and challenging filing season due to cuts in the Service’s funding. Koskinen highlighted the Service’s having to do more with less because of reduced funding. In addition, the IRS is funded at $10.9 billion for FY 2015, which is $1.5 billion below the amount requested by the White House. The FY 2015 budget reduction “undercuts our ability to enforce the Tax Code,” Koskinen said. “We will do everything we can to protect the integrity of the filing season.” More budget cuts could cause “the wheels to start to fall off,” he noted.

Net Investment Income (NII) Tax

Many higher-income individuals were surprised to learn the full impact of the net investment income (NII) tax on their overall tax liability only during the 2014 filing season when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent net investment income (NII) tax. The threshold amounts for the NII tax are: $250,000 in the case of joint returns or a surviving spouse, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. Recent run ups in the financial markets, and the fact that the NII thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax. Issues persist that reduce certainty surrounding NII tax liability, in particular determining how a taxpayer “materially participates” in an activity to the extent it is exempt from the NII tax.

Retirement Planning

A number of changes have been made during 2014 affecting IRAs and other qualified plans which, cumulatively, rise to the level of a “top tax development” for 2014:

  • Notice 2014-54 now permits a distribution from a 401(k), 403(b) or 457(b) account to have the taxable and non-taxable portions of the distribution directed to separate accounts.
  • TD 9673 now permits IRA holders and defined contribution plan participants to obtain a “longevity” annuity to help insure that they will not outlive their required minimum distributions (RMDs).
  • Notice 2014-66 now permits 401(k) plans to offer deferred annuities through target date funds (TDFs).
  • Bobrow, TC Memo. 2014-21, held that, in contrast to the IRS guidance in Publication 590, a taxpayer is limited to one 60-day rollover per year for all IRA accounts under the tax code rather than one 60-day rollover per year for each IRA account. The IRS in Announcement 2014-32 stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
  • Clark v. Rameker, a 2014 Supreme Court decision, found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.

Identity Theft

Although clearly not confined to the area of federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax-related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft. “We rejected 5.7 million suspicious returns last year that may have been tied to identity theft,” IRS Commissioner Koskinen said. Nevertheless, few believe that the IRS has yet turned the tide.

Same-sex Marriage

After the Supreme Court struck down Section 3 of the Defense of Marriage Act in Windsor, the IRS issued guidance in 2013 adopting a place of celebration approach to recognizing same-sex marriage. The IRS followed-up with additional guidance in 2014 that required employers to take note of Windsor with regard to workplace tax benefits. Notably, the IRS focused on what changes needed to be made to retirement plan benefits in light of Windsor.

Tax Reform

Although 2014 was clearly not the year for tax reform (despite some 2013 forecasts that it would be), the foundations for serious tax reform discussions were laid in 2013 and 2014, when Congressional hearings and studies took place. Looking ahead to 2015 and beyond, there is optimism that Congress will complete some form of tax reform in 2015 or 2016.

The major difference of opinion, however, surrounds whether or not the reform would only address corporate tax provisions or also include individual provisions. Corporate reform has been pushed into the spotlight lately both by the controversy surrounding corporate inversions in changing foreign headquarters and by the general concern that American international business competitiveness is lessened by high U.S. corporate tax rates. House Ways and Means Committee Chairman Dave Camp, R-Mich., on the other hand has called for tackling comprehensive tax reform on both the business and individual side. His Tax Reform Bill of 2014 (HR 1) would make the Code “more effective and efficient,”according to Camp, by getting rid of narrowly targeted provisions to lower tax rates across the board. “This will enable small and large businesses alike to expand operations, hire new workers, and increase benefits and take-home pay,” he said.