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You rarely read anything in my newsletters concerning scholarships. The reason is not because I believe they are unimportant. Rather, it is because they are not something that can be obtained as a result of prudent college financial planning, which is the topic I ordinarily get involved with.
Happy Holidays!!
You rarely read anything in my newsletters concerning scholarships. The reason is not because I believe they are unimportant. Rather, it is because they are not something that can be obtained as a result of prudent college financial planning, which is the topic I ordinarily get involved with.
Scholarships usually happen as the result of merit-based aid. And merit aid is based on factors usually out of the family’s control by the time January of senior year rolls around.
SAT/ ACT scores. High GPAs. Sports talent. These are the things most merit aid comes from.
But some also come as a result of an application which asks the student to write an essay on a broad range of topics such as a life changing experience, who most influenced their development as a student, etc., etc.
I don’t know about your student, but most students I know would rather do anything from changing the cat litter box to giving up their cell phones for a month than write an essay.
But that’s not because they do not have anything to write about. I believe it’s because they do not know how to write that essay.
Understanding the above, what follows is a summary of ideas concerning essay writing that might be useful.
Give it the Personal Touch
While a general question may be asked, judges are looking for ways to get a better sense of who you are. Relate the essay question to your unique personal experience. For example, suppose the essay question dealt in some way with the topic of homelessness. While many college bound students are not homeless, many have performed community services such as working in local food banks or raising funds for food bank purchases. By combining whatever general comments one has about homelessness with one’s own personal experience in that area, it provides the student with the opportunity to share their personal feelings and perspectives with the judges. That, in turn, will add credibility and believability to your essay.
Show, Don’t Tell
Judges are always looking for a winner who is exceptional. They look for winners who are unusually responsible and trustworthy and who have demonstrated personal qualities indicative of high moral character. Instead of telling them you have those qualities, show them. Describe an activity or event you took part in that demonstrates how you have those qualities. Properly written, you won’t have to tell judges anything. They will come to that conclusion by themselves after reading your personal story.
Be Organized
Tell them what you are going to say. Say it. Then tell them what you have told them. This is formally known as an introduction, main body, and a conclusion. Most effective essays or speeches follow that pattern. Unless you are an extremely gifted writer, I suggest following that proven methodology. Remember, judges are reading a ton of essays. Unless you provide them a way to navigate through the key points of your essay, you will lose them. Keeping in mind what was said above about giving essays the personal touch and showing vs. telling, think about this: in the intro you state the topic of the essay and relate a personal experience of yours that involves the topic. In the main body, you discuss that topic in detail and lace it with events from your personal experience. You finish it by then connecting your story to the topic to demonstrate whatever vision you are trying to project.
Don’t Waste Words
A co-worker once said to me, “Why would I use two sentences to say what I could with a paragraph instead?” Ugh!!! Even if they had something useful to say, it was clear they were more interested in just hearing themselves talk rather than conveying any ideas. Keep that in mind when you write your essay. Make each sentence count. Make your point and move on.
And Finally…Make your Essay Unique and Memorable
Picture yourself as an essay judge. Hundreds of applications are coming across your desk. Does your essay say something that will make it stick in your mind and not seem like all the rest? Try to come up with your own original, unconventional, or thought-provoking idea on the topic. Perhaps you do this by redefining the question in an interesting way. For instance, if the question asks you the importance of music in our society, maybe you turn it around and address a world completely without music. And you weave it into a personal experience where you did volunteer work with hearing impaired or deaf children and how that effected you. Remember to make use of metaphors to take traditional or complex ideas and express them in a novel way. The goal is simple: to quickly establish an attention grabbing atmosphere which will keep the judges reading and not skimming your essay. You need to be sure that you set your work apart from all the others.
Choosing The Right Career Path Before You Pick A College Can Save You Thousands Of Dollars!
Halloween Greetings!!
Choosing The Right Career Path Before You Pick A College Can Save You Thousands Of Dollars!
Choosing a career path is one of the most important decisions that students face today. Lack of planning can force students into a 5 or 6 year college degree. Students who do not plan their career path may end up receiving degrees in declining-growth fields or fields with a surplus of applicants, resulting in their inability to find employment after graduation. A wise choice can lead to a rewarding occupational experience and the security of an adequate income.
The difficulty in choosing a career is that it often requires making a considerable commitment in education and training to prepare for that career prior to working in the field. We all know students who have paid for four years of college only to find that their career choice was a mistake. However, having made the investment in time and money, they feel obligated to continue. Some students decide to change their major or career interest after one or two years of college. Since many of their college credits cannot be applied to their new major they must then spend five or six years to achieve a four-year degree.
Given today’s high college cost environment, students cannot get too much information or spend too much time researching and planning to prepare for their career field. Students should consider discussing their prospective interests with their high school guidance counselor. They should also read business publications or trade and professional journals associated with their career interest to learn about the latest news and trends within that field or industry. They should look for indications as to whether the field is expanding or experiencing a decline.
Asking the Right Questions About Your Potential Career Interest
An excellent way to learn more about an occupation is to talk with various people in that field of interest. You can secure interviews with experienced professionals by calling them, introducing yourself, and then explaining that you wish to seek a first hand opinion of the benefits of their job or profession. Many professionals would welcome a student’s interest in their field.
Here is a list of suggested questions to ask these professionals:
How long have you been in this field?
Why did you decide to work in this field?
How did you get your first job in this field?
How has this field changed since your first job?
Do you know what the future outlook is for this field?
How competitive is this field?
What do you like about your occupation?
What do you dislike about your occupation?
What are your primary duties during a typical day?
What kinds of education or training are required in this occupation?
What are the entry-level salary and benefits in this occupation?
What are the expected salary and benefits in this occupation after ten years?
What are the chances for advancement in this occupation?
What additional training or education is needed for advancement?
Where else can I look for information pertaining to this occupation?
Here’s another idea: Many employers visit college campuses each spring looking for potential job applicants. Suppose you want to work as an engineer at a major company, a nurse at a local hospital, or an accountant at a large CPA firm. Call that company. Ask them what schools they go to for placement services and what degree designations they look for. Then use that information to zero in on potential colleges and programs of study to follow in order to seek that type of employment.
The message should be clear: Before you begin looking at colleges this fall, it’s critical that you take a serious look at your choice of career/major first. A good "Career Plan" could save you thousands of dollars in time and money.
College vs. Retirement – Tough Choices during Tough Times
The current economic raise the following question for college bound families - how can you pay for college and still continue to fund your retirement?
The current economy raises the following question for college bound families - how can you pay for college and still continue to fund your retirement?
Most colleges continue to raise their tuition because there is less money being given to support higher education from the state and federal governments. As a result, more families must turn to loans as a major source of funding for college. (A discussion on loans follows.) Yet, taking on the responsibility of an $80,000 or $150,000 loan is very difficult for most lower– to middle– class families who are already strapped for cash.
However, if you are the parent of a college bound student, the cost of college may not be the biggest financial issue you face today. You could be missing the big picture! Consider these facts:
The youngest baby boomer is now 47
The oldest baby boomer is now 65
The average age of parents with college bound kids is 40-45 years old
Now fast-forward 20 years down the road when today’s parents with college bound kids are 60-65 and they want to retire. At that time the majority of Boomers will be 70-80 years old. Consider this:
Will you still be paying off education loans over the next 20 years?
Will college costs keep you from adequately funding your retirement?
Will Uncle Sam need to tax your IRA and/or 401(k) at higher rates to cover the older Boomer’s old age benefits?
Will you have enough money to outlast inflation if you live to age 90?
These are all tough questions to face in this tough economy. If you are a parent facing the college vs. retirement dilemma, you really should take the time to put some simple numbers together - to see if college costs will force you into a lower standard of living during those retirement years. If these numbers don’t add up because your current retirement fund has not recovered from the last market downswing, then you need to seriously think about building a new retirement plan now, with college expenses built into it.
Think Seriously Before Using Your Retirement Account To Pay For College!
As the cost of college heads up and student loans become more difficult to qualify for, many families may find themselves a bit cash-strapped and begin to look at their retirement fund (401k, 403b, TSP, IRA) to cover their children’s education expenses. While it’s a natural tendency to want to do all you can financially to make sure your kids get the best education possible, you need to think long and hard before tapping your nest egg to pay for your children’s education. Why? Consider this:
As stated above, the average age of parents with college bound kids is 40-45. These parents are at the back-end of the Baby Boomer wave. Twenty years from now when these current college bound parents are approaching 65 years of age, the majority of baby boomers will be 70-80 years of age!
This huge number of older Boomers may end up draining the government's Social Security and Medicare/Medicaid coffers. Will the government have to raise YOUR taxes to offset these older Boomer's old age costs?
Remember: Except for Roth’s, Your Retirement Plan Is Fully Taxable
Since your 401k/403b/IRA is fully taxable at ordinary income tax rates, raising taxes to support these older Boomers at the time of your retirement could dramatically reduce the amount of money you’ll have to live on... when you need it the most!
Furthermore, if you do borrow money from your 401k to pay college expenses and then switch jobs, be aware that the loan must be paid back right away, typically within 60 days of the time you leave. Furthermore, if you don't have the cash to pay off the 401k loan, then the loan balance may be considered a taxable distribution, which means you would owe ordinary income tax plus a 10 percent penalty if you're under the age of 59½.
Nobody can predict whether the government will raise taxes to offset the aging costs of baby boomers. However, as a parent with college bound children, you need to look at the bigger picture. You need to plan for college by addressing your retirement first. Before you ever consider taking money from your retirement account to finance your children’s education, be sure to “run the numbers” to get an idea of where you will stand. Every family’s situation is different and keep in mind that there may be alternative strategies that can help you pay your college expenses without raiding your retirement accounts.
Loans: The Alternative to Using Your Retirement Account
Keeping the above in mind, here is a summary of how loans work in the event that is the direction you are thinking about going.
Federal Loans and Private Loans
Federal student loans are guaranteed by the government and feature lower-fixed interest rates. They can be used to cover the major costs of education, such as tuition, room and board, and text books. It’s recommended that you use federal loans first as they offer the lowest cost option and a greater selection of repayment choices.
Private student loans are education loans offered by banks and other private lenders. They allow you to borrow up to the full cost of your education when federal loans do not cover the balance. Private student loans are credit based and can be used to cover additional expenses, such as travel, lab costs, and computers.
Certified Private Student Loans and Non-Certified Private Student Loans
A certified private loan is a loan that your school verifies your eligibility for the requested loan amount. This insures that you borrow only what you need.
Non-certified loans typically have higher borrowing limits and higher interest rates than the certified loans. In addition, while the interest on certified private loans is generally tax deductible, interest paid on non-certified private loans is not tax deductible.
FEDERAL STAFFORD LOANS
The main federal loan for students is called the Stafford loan. These loans are provided by the U.S. government directly to students and are administered through the Direct Lending process. There are two versions of the Stafford loan:
Subsidized Stafford Loans: The government pays the interest on subsidized stafford loans while you're in school
Unsubsidized Stafford Loans: You pay all the interest on unsubsidized stafford loans, although you can have the payments deferred until after graduation
Basic Eligibility: You must be a U.S. citizen, a foreign-national, or eligible non-citizen and enrolled as a full or half-time undergraduate student
Interest Rates: 3.4% for a subsidized Federal Stafford loan: 6.8% for an unsubsidized loan
Loan Benefits: Some loans have a 0.25% interest rate reduction when you use automatic debit payments and receive electronic statements.
The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money up to the full cost of attendance to cover any costs not already covered by the student's financial aid package. Parent PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan, but fails to make timely payments, the parents will be held responsible for the loan.
If a dependent student's parents are denied a PLUS loan, or the college financial aid administrator determines that the parents are likely to be denied a PLUS loan, the student becomes eligible for increased unsubsidized Stafford Loan limits. In this case, only one parent needs to apply for and be denied a PLUS loan. However, if one parent is denied a PLUS loan and the other is approved for a PLUS loan, the student is not eligible for increased Stafford Loan limits.
Basic Eligibility: You must be a parent of a full or half-time dependent undergraduate student and a U.S. citizen, a foreign-national, or eligible non-citizen, with a satisfactory credit history
Interest Rate: 7.9%
Loan Benefits: Some loans have a 0.25% interest rate reduction when you use automatic debit payments and receive electronic statements.
Fees: 3.00% origination fee:1.00% federal default fee
Borrowing Limits: You can borrow up to the total cost of education less any other financial aid awarded
The Stafford and PLUS loans do not depend on your credit score. Stafford loans are available without regard to your credit history, but the PLUS loan does require that the borrower not have an adverse credit history. An adverse credit history is defined as being more than 90 days late on any debt.
PRIVATE STUDENT LOANS
Private student loans (also called "alternative loans") are used expressly for paying for college costs when other loans are unavailable. They are taken out from banks, lending companies or other private entities, in the student's name. The loan payments can be deferred while the student is enrolled in school. You may apply for a private loan on your own, but today, most require a co-signer. Since private loans are credit-based, applying with a creditworthy co-signer may increase the likelihood of your approval and may help you get a lower interest rate.
Basic Eligibility: You must be at least 18 years of age and enrolled at least part-time as an undergraduate student in an accredited college or university in the U.S.
Interest Rates: Generally between 6% and 12% depending on credit score
Loan Benefits: Some loans have a 0.25% interest rate reduction when you use automatic debit payments and receive electronic statements. Some also offer a 0.50% interest rate reduction after 48 on-time, consecutive monthly payments.
Fees: 0.00% to 5.00%
Borrowing Limits: You can borrow up to the total cost of education, less any other financial aid awarded. A $1,000 minimum loan amount may apply.
By now your head is probably hurting thinking about all this. Like I said in the beginning of this newsletter: Tough times are now bringing on tough choices.
If you have questions or feel you need help figuring all this out, please do not hesitate to call….
It would be really nice to send you a newsletter with information that was still current by the time you received it. The problem is that it seems nearly impossible to print and mail information before our friends in the otherWashingtonpropose new legislation or enact new laws making that information useless or incorrect.
Greetings from Taxland:
It would be really nice to send you a newsletter with information that was still current by the time you received it. The problem is that it seems nearly impossible to print and mail information before our friends in the otherWashingtonpropose new legislation or enact new laws making that information useless or incorrect.
For example, our last NQQN went out to you in July. On August 5th, the budget deficit issue was resolved which resulted in the creation of a new 12 member panel who’s job will be to create new tax laws (supposedly by November 30th) to deal with that problem. Meanwhile, on September 8th the President gave a speech concerning his ideas for job creation and asked Congress to immediately pass his proposed legislation. That 155 page bill is currently being reviewed and contains many tax increases. What will pass and what will not is anyone’s guess. My point is that between the debt panel commission and the jobs bill legislation, there are now two major tax law potentials lurking out there waiting to impact your financial life.
And if that is not confusing enough, there are currently over 60 provisions in the current law that are set to expire at the end of 2011 unless Congress votes to extend them. Examples of those are the provisions allowing the deduction for state sales taxes, mortgage insurance premiums, teacher’s deductions, deductions for college tuition and education related expenses, and residential energy credits.
Now you know why we call this the Not Quite Quarterly Newsletter!
Even with the above, we still recommend some tax planning this fall especially if:
Your marital status has changed
Your number of dependents have changed
Some of the deductions and/or credits on your 2010 return will not apply to 2011
You did a Roth conversion in 2010 and will be reporting that on your 2011 and 2012 returns
You won the lottery
You sold your spouse and kids and do not want to report that income.
With the passing of summer we are no longer closed on Fridays and are open each weekday from 9 to 4 and will continue to do so until our extended hours begin at tax season. Call if you have questions…
Coming from out of town? Here are directions to our office...
FROM BAINBRIDGE ISLAND... Follow Highway 305 through Poulsbo until you see signs for the Hwy 3 interchange (signs will say Bremerton/Silverdale). Head south on Hwy 3 watching for the Silverdale/East Bremerton exit. Take this exit. Turn right at the stoplight - Kitsap Mall Blvd. Follow that road, continuing past the mall, across the Silverdale Way intersection, when Kitsap Mall Blvd becomes Ridgetop Blvd. From there take the second right, onto Levin Road. Our building is the second one on the right, called the Clear Creek Office Building. Our office is right at the top of the stairs on the second floor, suite 204.
FROM THE BREMERTON FERRY TERMINAL... Follow the traffic as you drive off the ferry, through the downtown tunnel. Turn right onto Warren Ave. Turn left onto 11th Street. Continue driving on 11th past Bremerton High School, past Safeway until you must take a right onto Kitsap Way. After passing QFC, and right after Dairy Queen and Denny's, get into the right hand turn lane and get on Hwy 3 heading north to Silverdale/Poulsbo. Take the Clear Creek/Silverdale exit, turn right at the light onto Kitsap Mall Blvd. Follow that road, continuing past the mall, through the Silverdale Way intersection, when the road you're on becomes Ridgetop Blvd. Take the second right, onto Levin Road. Our building is the second one on the right, named the Clear Creek Office Building. Our office is right at the top of the stairs on the second floor, suite 204. If you get lost and need to call us our number is 360-692-1040.
Need a ferry schedule? You will find a link to the Washington State Ferries on our "links" page.
The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.
The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.
These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.
The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.
Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.
The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.
The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.
Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.
To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.
The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.
Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.
The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.
Payroll tax cut
The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.
Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.
Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.
House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.
One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.
Extenders
The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.
President Obama’s FY 2013 proposals
President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.
Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.
On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.
If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
Previous disclosure programs
The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.
Reopened program
The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.
The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.
In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.
The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).
The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.
Quiet disclosures
One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.
Critics
The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.
If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Dependency Exemption
In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.
Child Tax Credit
Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.
Child and Dependent Care Credit
If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.
Adoption Credit
Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.
Higher Education Credits
There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.
Extended Health Care Coverage
Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.
Child Care Assistance Credit (for businesses)
Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.
If you have any questions about these provisions and how they may benefit you, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.
The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.
Offset
If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.
A taxpayer’s refund may be reduced by FMS and offset to pay:
Past-due child support
Federal agency non-tax debts
State income tax obligations, or
Certain unemployment compensation debts owed a state.
FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.
Form 8379
If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.
The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.
The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.
February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.
February 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.
February 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.
February 10
Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.
February 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.
Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.
February 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.
February 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.
February 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.
February 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.
March 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.
March 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.
Q. I spend 20 hours every week cooking meals and delivering them to an organization that feeds the hungry and homeless. Am I entitled to a deduction for my time and the food I pay for out of my own money?
A. Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.
Qualifying expenses
If the amounts that you pay for food and other supplies used in the preparation and packaging of the meals are not reimbursed by the charity, generally you may deduct these expenses as contributions to the charity.
In addition, if the amounts that you pay to travel by car or other means to deliver the meals are not reimbursed by the charity, and you derive no personal benefit from the travel, the expenses are deductible. Qualifying expenses include gasoline for your car and fares for taxis or public transportation.
Special mileage rate
If you drive your own vehicle to deliver the meals, you can use a special IRS mileage rate to calculate charitable contribution deductions involving use of your car. The standard mileage rate for charitable purposes, which is statutorily set, is 14 cents per mile.
Other expenses
Other out-of-pocket expenses incurred in connection with services you provide to a charity that are deductible include costs related to uniforms, travel, meals, and lodging. Sometimes, expenses incurred while serving as a charity's delegate to a convention may be deducted.
Keep receipts
If you take a deduction for out-of-pocket expenses you incurred incident to your performance of services for a charity, it is important to have receipts to document expenses. It is also a good idea to get a written acknowledgement from the charity for the services you provide.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Q: What tax deductions am I entitled to as an investor?
A: Certain investment-related expenses are deductible, others are specifically restricted. Still others won't get you a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.
Certain investment-related expenses are deductible, while others are specifically restricted. Still other expenses likely will not provide you with a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.
Investor expenses
Investment counsel fees, custodian fees, fees for clerical help, office rent, state and local transfer taxes, and similar expenses that you pay in connection with your investments are deductible as an itemized deduction on Schedule A of Form 1040, subject to the 2% floor for all such itemized deductions.
Travel expenses related to the production or collection of income are deductible if you provide proof both of the expenses and the necessity for incurring them. Deductions for travel expenses related to attending investment seminars, however, are specifically prohibited. Travel expenses to attend stockholder meetings are permissible deductions only if travel is not for personal reasons and expenses are reasonable in relation to value of the investment.
Interest expenses
If you take out a loan to carry investment property, you are entitled to an itemized deduction for the interest you pay, reported on Form 4952, which is limited to your net investment income (dividends, interest, rents, etc.) Margin interest paid connected with your stock portfolio qualifies. The investment interest deduction is not subject to the 2% floor - you can start with deducting the first dollar of interest paid. Any disallowed interest over the net investment income limit can be carried over to a succeeding tax year.
Caution. Net capital gain from the disposition of investment property is not considered investment income. However, you may elect to treat all or any portion of such net capital gain as investment income by paying tax on the elected amounts at their ordinary income rates. This is usually not advisable.
Brokerage commissions
Brokerage commissions related to a particular stock purchase or sell, on the other hand, are considered a cost of the sale itself. As such, any commissions paid to buy a stock are added to your tax basis in the shares, which will later determine the amount of taxable gain you have when the property is sold. Any commission on the sale of the shares is netted from the amount you will be considered to realize on that sale.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years. You could realize some significant tax savings.
Once you retire or reach age 70 ½ (depending on your retirement plan), the law requires that you start making -at a minimum-some periodic withdrawals. These withdrawals are called required minimum distributions.
Why required minimum distributions?
First, the tax policy behind letting you save in a tax-deferred account was to allow you to use those funds in your retirement, rather than to use them as just another way to build up your estate for your heirs. Second, because those accounts are usually tax-deferred, withdrawals after retirement are taxed to you as ordinary income. As a result, the IRS wants you to withdraw at least a minimum amount from those accounts each year so that it can be taxed.
New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years.
Good tax news
Good news for taxpayers who are interested in retaining funds in their IRAs and their tax-qualified plans because it means deferring income tax on the funds even longer.
If you are alive in the year in which you must begin required minimum distributions, your new MRD is calculated each year by dividing the account balance
by your life expectancy, as determined by the uniform distribution period table (the "Uniform Table") in the new IRS rules.
Example. At the time his required beginning date is reached (usually retirement or 70 ½), John Smith had a balance of $1 million in his IRA, as of the previous December 31. He previously named a beneficiary, who is age 67.
The difference in the computation of the RMD under the new rules is dramatic.
Under pre-2001 rules, he checks the joint and last survivor table and finds that his divisor for his $1 million account is 22.
Under revised rules in effect in 2001, his divisor is 26.2.
Under the new Uniform Lifetime Tables now in effect, his divisor is 27.4.
The difference in required distributions is significant.
Under pre-2001 rules, John must withdraw at least $45,454 this year
.
Under the 2001 rules, John must withdraw at least $38,168 this year.
Under the new tables, John must withdraw at least $36,496 this year.
Because of the new regulations, John has an extra $8,958 in his IRA at the end of the year over what he could have kept under the rules only a few years ago. This amount can then continue to accumulate earnings. This savings can be realized-and compounded-every subsequent year for the next 27 years. As a bonus, John's federal income tax (assuming a marginal rate of 35 percent) is more than $3,135 less ($12,773 instead of $15,908).
If you die before reaching your retirement having designated your spouse as beneficiary, distributions must begin by December 31 of the year following your death or the year that you would have turned 70½, whichever is later. At that time, RMD is computed over your spouse's life expectancy.
Caution!
The new rules-although more flexible-leave little room for mistakes in timing. Failure to take the minimum required distribution by the RBD will result in a 50 percent excise tax equal to half of the amount that should have been paid out but wasn't. Although early versions of proposed legislation included a decrease in the penalty from 50 percent to 10 percent, that provision is not the law.
If you'd like more specific advice on how the new Minimum Required Distribution rules apply to your retirement strategies, please contact this office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.
No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.
Average wait time
The IRS suggests that you allow for "the normal processing time" before inquiring about your refund. The IRS's "normal processing time" is approximately:
Paper returns: 6 weeks
E-filed returns: 3 weeks
Amended returns: 12 weeks
Business returns: 6 weeks
IRS website "Where's my refund?" tool
The IRS now has a tool on its website called "Where's my refund?" which generally allows you to access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. The "Where's my refund?" tool can be accessed at www.irs.gov.
To get out information about your refund on the IRS's website, you will need to provide the following information from your return:
Your Social Security Number (or Individual Taxpayer Identification Number);
Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
The exact whole dollar amount of your refund.
Start a refund trace
If you have not received your refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online.
Getting a replacement check
If you or your representative contacts the IRS, the IRS will determine if your refund check has been cashed. If the original check has not been cashed, a replacement check will be issued. If it has been cashed, get ready for a long wait as the IRS processes a replacement check.
The IRS will send you a photocopy of the cashed check and endorsement with a claim form. After you send it back, the IRS will investigate. Sometimes, it takes the IRS as long as one year to complete its investigation, before it cuts you a replacement check.
A bigger problem
Another problem may come to the fore when the IRS is contacted about the refund. It might tell you that it never received your tax return in the first place. Here's where some quick action is important.
First, you are required to show that you filed your return on time. That's a situation when a post-office or express mail receipt really comes in handy. Second, get another, signed copy off to the IRS as quickly as possible to prevent additional penalties and interest in case the IRS really can prove that you didn't file in the first place.
Minimize the risks
When filing your return, you can choose to have your refund directly deposited into a bank account. If you file a paper return, you can request direct deposit by giving your bank account and routing numbers on your return. If you e-file, you could also request direct deposit. All these alternatives to receiving a paper check minimize the chances of your refund getting lost or misplaced.
If you've moved since filing your return, it's possible that the IRS sent your refund check to the wrong address. If it is returned to the IRS, a refund will not be reissued until you notify the IRS of your new address. You have to use a special IRS form.
IRS may have a reason
You may not have received your refund because the IRS believes that you aren't entitled to one. Refund claims are reviewed -usually only in a cursory manner-- by an IRS service center or district office. Odds are, however, that unless your refund is completely out of line with your income and payments, the IRS will send you a check unless it spots a mathematical error through its data-entry processing. It will only be later, if and when you are audited, that the IRS might challenge the size of your refund on its merits.
IRS liability
If the IRS sends the refund check to the wrong address, it is still liable for the refund because it has not paid "the claimant." It is also still liable for the refund if it pays the check on a forged endorsement. Direct deposit refunds that are misdirected to the wrong account through no fault of your own are treated the same as lost or stolen refund checks.
The IRS can take back refunds that were paid by mistake. In an erroneous refund action, the IRS generally has the burden of proving that the refund was a mistake. Nevertheless, although you may be in the right and eventually get your refund, it may take you up to a year to collect. One consolation: if payment of a refund takes more than 45 days, the IRS must pay interest on it.
If you are still worrying about your refund check, please give this office a call. We can track down your refund and seek to resolve any problem that the IRS may believe has developed.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
Dependents
One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.
The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.
Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.
A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332,Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.
Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.
Alimony
Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.
Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.
There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.
Property
Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.
Example:Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.
Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.
Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.
Retirement
When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.
Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.
Tax Prepayment and Joint Refunds
When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.
Legal and Other Expenses
To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.
Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
