The federal government permits an unlimited marital deduction so you can transfer all of your assets, if you wish, to your spouse. Sometimes in planning it is better to use a marital deduction trust in part and use the equivalent exemption in part so that you can transfer it not only to the spouse tax free, but on to the children tax free.
The United States Tax Court has recently released a decision in Frank Aragona Trust v. Commissioner that will affect tax planning for many trusts that own businesses or hold real estate. In that case, a trust operated rental real estate properties and developed other real estate properties. It incurred losses from these activities, which it deducted as non-passive losses.
Under prior law, rental real estate losses were automatically passive losses unless incurred by a “real estate professional.” The IRS’s position in Frank Aragona Trust was that a trust could never qualify as a real estate professional. However, the Tax Court found for the taxpayer. It stated that a trust could qualify as a real estate professional if the rental real estate activities of its trustees were regular, continuous, and substantial. It did not, however, address whether trusts could count the activities of employees who were not trustees. The decision will also have a significant impact on planning for the Net Investment Income Tax.
The Nebraska legislature recently passed a bill which will allow more Nebraska homeowners to use the homestead exemption for real property taxes. The Nebraska homestead exemption phases out as a taxpayer’s income increases. Under prior law, only taxpayers with household income under $28,501 (if married) or $24,201 (if single) could take advantage of the homestead exemption. Under the new law, these limits increase to $46,901 and $39,501, indexed for inflation.
The new law also provides a special rule for homeowners with developmental disabilities. Under prior law, homeowners with certain physical disabilities could take advantage of the homestead exemption at higher income levels. The new law applies the same rule to taxpayers with developmental disabilities. This expansion may be useful for families planning for adults with special needs.
That’s going to depend on what type of dispute you have. If the dispute is based on a previously-filed tax return, the first thing I would recommend is to go back to the person who prepared your return. A lot of times if they produced an error that caused the IRS inquiry, they will either do the work for free or at a lower charge to help correct the issue. They may pay the penalties and interest that are imposed.
If you are not able to get the result you want from them, I recommend that you consult a qualified tax professional, either a tax attorney or CPA that is able to help with tax disputes. From that point, the professional can help coordinate with the IRS to resolve the dispute and if there is an amount due, can assist you in trying to resolve that debt either through installment agreements, offering compromise, or get a status determination that the debt is currently uncollectible and what that will do is help prevent IRS levies, IRS liens, and garnishments from your bank accounts and wages.
If you are a U.S. citizen living abroad, the U.S. income tax requirements are generally the same as if you lived in the United States. All gross income, whether made in the United States or abroad is subject to U.S. income taxes. Your return must be filed if your income meets certain thresholds, which for single filers is around $10,000 and for married filing jointly filers is around $20,000, both indexed for inflation.
The due date for filing these returns is the same as if you lived in the United States; however, you are automatically granted a two-month exemption if you are living abroad on the due date. To get this exemption, you simply have to attach a statement to your return saying that you were living abroad on your due date.
All U.S. tax returns must be filed in U.S. currency; therefore, to the extent that you have earned income in foreign currency, you must convert it to U.S. dollars using the yearly average exchange rate which can be found on the IRS’s website.
Finally, to the extent that you own an interest in a foreign bank account and the value exceeds $10,000 the federal government generally requires you to disclose this by June 30th every year.
The IRS has issued Announcement 2014-16 indicating that employers sponsoring preapproved defined contribution qualified retirement plans, such as 401(k) and profit sharing plans, will have until April 30, 2016 to restate their plans in their entirety.
The IRS was expected to begin providing approval letters to firms preparing proposed plan documents on or about March 31, 2014. Each employer seeking to rely on those preapproved documents will then have until April 30, 2016 to adopt a restated version of the employer’s plan integrating the specific provisions it elects to have included in the plan. The 2016 deadline marks the end of the current 6-year restatement cycle used by the IRS to make sure plan documents are regularly restated by plan sponsors to comply with changes in law. Preapproved plans have been reviewed by the IRS based on the 2010 Cumulative List of Changes containing updates in the law since the prior restatement period. The current changes will include updates required by the Pension Protection Act (PPA) and Heroes Earning Assistance and Relief Tax Act (HEART).
April 30, 2016 also marks the deadline for employers to submit requests for determination letter for the restated plans, if desired, to confirm that the restatement as drafted based on the options elect is in compliance with law.
The IRS has historically argued that trusts are categorically excluded from obtaining an exception to the passive activity rules for rental real estate activities. A recent Tax Court ruling has contradicted this position and indicated that a complex trust engaged in rental real estate activities can qualify for an exception to the passive activity rules. In determining that the exception was available, the court looked to the activities of the individual trustees and determined that the material participation trust was satisfied. This is an important ruling in the trust income tax regime and creates the opportunity to limit trust exposure to the tax on investment income.
The IRS has released Announcement 2014-15 indicating it will withdraw proposed regulations and will revise Publication 590 to limit tax-free IRA rollovers to one-per-year on an aggregate basis under Code Section 408(d)(3)(B).
Code Section 408(d)(3)(B) provides generally that any amount distributed from an IRA will not be included in the gross income of the distributee to the extent the amount is paid into an IRA for the benefit of the distributee no later than 60 days after the distributee receives the distribution. Prior guidance interpreted Code Section 408(d)(3)(B) to limit IRA rollovers to one-per-year on an IRA-by-IRA basis.
The Announcement follows the Tax Court’s opinion in Bobrow v. Commissioner, T.C. Memo 2014-21 which held that the one-per-year limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period. However, in order to allow IRA trustees to make changes in the processing of IRA rollovers, the IRS will not apply the new interpretation until January 1, 2015. The Announcement will also not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another as such a transfer is not a rollover.
The U.S. Supreme Court has reversed a Sixth Circuit Court of Appeals decision by finding that severance payments unrelated to state unemployment insurance that are made to terminated employees are subject to tax under the Federal Insurance Contributions Act (FICA).
The underlying case involved an employer, Quality Stores, Inc., that entered bankruptcy proceedings in 2001. Prior to and following the bankruptcy petition being filed, the employer made payments to terminated employees pursuant to two employee severance plans. When payments were made, the employer withheld federal income tax and the employee portion of the FICA tax and also paid the employer portion of the FICA tax on the payments. In 2002, the employer filed a claim for refund for the employer and employee FICA taxes paid on the severance payments. The IRS failed to either approve or deny the refund request, so the employer filed an adversary action in the bankruptcy proceeding. The bankruptcy court, district court and Sixth Circuit Court of Appeals all found that the severance payments were not subject to FICA.
The Supreme Court reversed the rulings of the lower courts based on FICA’s broad definition of “wages” which was found to include the severance payments. Following the Supreme Court decision, unemployment benefits other than those provided through state unemployment insurance are now “wages” subject to FICA tax. The Court noted that the IRS has taken the position that state unemployment benefits are not subject to FICA, but the Court reserved its opinion on whether that position is supported by FICA’s broad definition of “wages”.
One of the best benefits for business owners to consider is to adopt a retirement plan. There is a whole array of different retirement planning options that can be considered. The one that’s best for your particular business is going to depend on the demographics of your business: the compensation of the different employees, the number of employees and how much everybody makes. Other things that should be considered include a variety of other benefits plans. There’s a whole broad area called section 125 that allows you to set up plans that allow for deduction of various types of medical expenses or premiums. There are also flex-spending accounts and health savings accounts to consider. Other areas to look at are different types of executive compensation plans.