Doeren Mayhew
Countdown to Supreme Court's health care decision
After three days of oral arguments in March, the Supreme Court is deciding the fate of the Pension Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). Not only do the new laws impact health care, they contain numerous tax provisions, many of which have yet to take effect. The Supreme Court may uphold the laws, strike them down in whole or in part, or decide that the case is premature. The Supreme Court is expected to render its decision in June. In the meantime, a quick checklist of the tax provisions in the two laws reveals how extensively they impact individuals, businesses and taxpayers of all types.
Challenges
Congress passed, and President Obama signed, the PPACA and HCERA in 2010. Almost immediately, several states and taxpayers challenged the laws in court. The lawsuits generally argued that Congress had exceeded its authority by requiring individuals to obtain health insurance.
The cases made their way from federal district courts to the various federal courts of appeal, which reached different conclusions. One circuit court invalidated the individual mandate; two circuit courts upheld the individual mandate and another circuit court dismissed the challenge on procedural grounds.
Supreme Court grants review
On November 14, 2011, the United States Supreme Court agreed to review the Eleventh Circuit Court's decision in Florida v. U.S. Department of Health and Human Services. The Supreme Court stated it would examine four issues: (1) the Constitutionality of the individual mandate; (2) whether the individual mandate is severable from the PPACA; (3) whether the challenge to the individual mandate is barred by the Anti-Injunction Act; and (4) whether PPACA's expansion of Medicaid exceeded Congress's authority. The Supreme Court heard oral arguments in the case on March 26-28 in Washington, D.C.
Individual mandate and penalty
The individual mandate generally requires individuals to maintain minimum essential coverage for themselves and their dependents after 2013. Individuals will be required to pay a penalty for each month of noncompliance, unless they are exempt (such as individuals covered by Medicaid and Medicare). The PPACA also provides tax incentives to help individuals obtain minimum essential coverage. Beginning in 2014, individuals with incomes within certain federal poverty thresholds may qualify for a refundable health insurance premium assistance tax credit. The PPACA also provides for advance payment of the credit.
In Florida v. HHS, the Eleventh Circuit struck down the individual health insurance mandate but did not declare the entire PPACA unconstitutional. In contrast, the Sixth Circuit held that the individual mandate was a valid exercise of Congress' power to regulate commerce (Thomas More Law Center v. Obama). The Court of Appeals for the District of Columbia Circuit also upheld the individual mandate (Mead v. Holder). The Supreme Court could find the entire PPACA unconstitutional or could find that the individual mandate is severable, thereby preserving other parts of the statute, including various tax provisions.
Tax provisions
While much attention has focused on the individual mandate, the Supreme Court may also decide the fate of many tax provisions in the PPACA and the HCERA. Among the tax provisions potentially affected by the Supreme Court's decision are:
Code Sec. 45R small employer health insurance tax credit;
3.8 percent Medicare contribution tax on unearned income for higher income taxpayers after 2012;
Additional 0.9 percent Medicare tax on wages and self-employment income of higher income taxpayers after 2012;
Increased itemized deduction for unreimbursed medical expenses after 2012;
Prohibition on over-the-counter medicines being eligible for health flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), and Archer Medical Savings Account (MSA) dollars.
Additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses;
Excise tax on high-dollar health plans after 2017;
Tax credit for therapeutic discovery projects;
Annual fees on manufacturers and importers of branded prescription drugs;
Reporting of employer-provided health coverage on Form W-2;
Codification of the economic substance doctrine.
Anti-Injunction Act
The Supreme Court could decide that the challenge to the PPACA is premature. Under the Anti-Injunction Act, a taxpayer must wait to oppose a tax until after it is collected. The PPACA's individual mandate and its related penalty do not take effect until 2014. The Fourth Circuit Court of Appeals found that the penalty amounted to a tax and taxpayers could not challenge the tax until it took effect (Liberty University v. Geithner).
If you have any questions about the tax provisions in the health care reform laws, please contact Doeren Mayhew, a Michigan Audit Firm, for more information. We will be following developments as they ensue after the Supreme Court issues its decision in June.
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.
Wednesday, May 2, 2012
Congress eyes retirement savings plans in push toward tax reform
Doeren Mayhew
Congress eyes retirement savings plans in push toward tax reform
Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee. Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers. Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general "tax reform." While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.
Testimony
The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. "This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.
An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.
Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.
JCT report
In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, "Present Law and Background Relating to the Tax Treatment of Retirement Savings" (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:
Automatic enrollment payroll deduction IRA. President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs. An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.
Expand the saver's credit. The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver's credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.
Consolidate plans. The JCT also reviewed two retirement proposals from the Bush administration: Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).
The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. "Consolidating all types of defined-contribution type plans into one type of plan would not be simplification," the ASPPA cautioned. "It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures."
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.
Contact Doeren Mayhew, a Michigan CPA Firm, for more information.
Congress eyes retirement savings plans in push toward tax reform
Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee. Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers. Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general "tax reform." While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.
Testimony
The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. "This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.
An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.
Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.
JCT report
In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, "Present Law and Background Relating to the Tax Treatment of Retirement Savings" (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:
Automatic enrollment payroll deduction IRA. President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs. An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.
Expand the saver's credit. The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver's credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.
Consolidate plans. The JCT also reviewed two retirement proposals from the Bush administration: Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).
The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. "Consolidating all types of defined-contribution type plans into one type of plan would not be simplification," the ASPPA cautioned. "It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures."
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.
Contact Doeren Mayhew, a Michigan CPA Firm, for more information.
How do I: Compute Code Sec. 1231 gains and losses?
Doeren Mayhew
How do I: Compute Code Sec. 1231 gains and losses?
Code Sec. 1231 applies to gains and losses from property used in the trade or business and from involuntary conversions. Normally, you have to determine whether property is a capital asset or is ordinary income property. Property generally can't be both. However, Code Sec. 1231 allows you to "have it" both ways. Any gains are taxed at low capital gains rates (generally 15 percent for 2012), and any losses are treated as ordinary losses, taxable at more favorable ordinary loss rates, and available (without limit) to offset other ordinary income.
Who qualifies?
Code Sec. 1231 gains include:
--Recognized gains on the sale or exchange of property used in the trade or business; and
--Recognized gains from the involuntary or compulsory conversion (into money or other property) of property used in a trade or business, or of property held for more than one year and either used in the trade or business or used in a transaction entered into for profit.
Property used in a trade or business is property that is subject to depreciation and held by the taxpayer for more than one year.
Code Sec. 1231 losses are any recognized loss from a sale, exchange, or conversion of the same categories of property.
A win-win equation
Gains and losses from these transactions are referred to as Code Sec. 1231 gains and Code Sec. 1231 losses. The character of the gain or loss depends on whether Code Sec. 1231 gains exceed Code Sec. 1231 losses for the tax year. If the Code Sec. 1231 gains exceed the Code Sec. 1231 losses, then all of the Code Sec. 1231 gains and losses are treated as long-term capital gains and losses. The result is a net long-term capital gain. This amount can then be netted with other capital gains and losses.
Code Sec. 1231 does not apply to depreciation that must be recaptured as ordinary income under either Code Sec. 1245 (depreciable personal property and certain real property) or Code Sec. 1250 (depreciable real property that is not Code Sec. 1245 property).
If, however, the Code Sec. 1231 losses equal or exceed the Code Sec. 1231 gains, then all of the Code Sec. 1231 gains and losses are treated as ordinary income and losses. The net result is an ordinary loss, which can offset other ordinary income.
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.
Contact Doeren Mayhew, a Michigan Tax firm, for more information.
How do I: Compute Code Sec. 1231 gains and losses?
Code Sec. 1231 applies to gains and losses from property used in the trade or business and from involuntary conversions. Normally, you have to determine whether property is a capital asset or is ordinary income property. Property generally can't be both. However, Code Sec. 1231 allows you to "have it" both ways. Any gains are taxed at low capital gains rates (generally 15 percent for 2012), and any losses are treated as ordinary losses, taxable at more favorable ordinary loss rates, and available (without limit) to offset other ordinary income.
Who qualifies?
Code Sec. 1231 gains include:
--Recognized gains on the sale or exchange of property used in the trade or business; and
--Recognized gains from the involuntary or compulsory conversion (into money or other property) of property used in a trade or business, or of property held for more than one year and either used in the trade or business or used in a transaction entered into for profit.
Property used in a trade or business is property that is subject to depreciation and held by the taxpayer for more than one year.
Code Sec. 1231 losses are any recognized loss from a sale, exchange, or conversion of the same categories of property.
A win-win equation
Gains and losses from these transactions are referred to as Code Sec. 1231 gains and Code Sec. 1231 losses. The character of the gain or loss depends on whether Code Sec. 1231 gains exceed Code Sec. 1231 losses for the tax year. If the Code Sec. 1231 gains exceed the Code Sec. 1231 losses, then all of the Code Sec. 1231 gains and losses are treated as long-term capital gains and losses. The result is a net long-term capital gain. This amount can then be netted with other capital gains and losses.
Code Sec. 1231 does not apply to depreciation that must be recaptured as ordinary income under either Code Sec. 1245 (depreciable personal property and certain real property) or Code Sec. 1250 (depreciable real property that is not Code Sec. 1245 property).
If, however, the Code Sec. 1231 losses equal or exceed the Code Sec. 1231 gains, then all of the Code Sec. 1231 gains and losses are treated as ordinary income and losses. The net result is an ordinary loss, which can offset other ordinary income.
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.
Contact Doeren Mayhew, a Michigan Tax firm, for more information.
FAQ: What is a family partnership?
Doeren Mayhew
FAQ: What is a family partnership?
The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.
Interfamily gifts
Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.
Capital or services
The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.
If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.
Investment partnerships
The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).
If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.
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.
Contact Doeren Mayhew, a Michigan CPA firm located in Troy, for more information.
FAQ: What is a family partnership?
The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.
Interfamily gifts
Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.
Capital or services
The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.
If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.
Investment partnerships
The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).
If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.
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.
Contact Doeren Mayhew, a Michigan CPA firm located in Troy, for more information.
May 2012 tax compliance calendar
Doeren Mayhew
May 2012 tax compliance calendar
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 May 2012.
May 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 25-27.
May 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 28-May 1.
May 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 2-4.
May 10
Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070.
May 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 5-8.
May 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 9-11.
May 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 12-15.
May 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 16-18.
May 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 19-22.
May 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 23-25.
June 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26-29.
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.
Contact Doeren Mayhew, a Michigan Tax Firm located in Troy, for more information.
May 2012 tax compliance calendar
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 May 2012.
May 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 25-27.
May 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 28-May 1.
May 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 2-4.
May 10
Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070.
May 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 5-8.
May 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 9-11.
May 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 12-15.
May 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 16-18.
May 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 19-22.
May 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 23-25.
June 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26-29.
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.
Contact Doeren Mayhew, a Michigan Tax Firm located in Troy, for more information.
Wednesday, April 18, 2012
Wednesday, April 11, 2012
Transfer of winning lottery ticket to S Corp is taxable gift
| Doeren Mayhew | |
Transfer of winning lottery ticket to S Corp is taxable gift
A lottery winner recently tried to get lucky twice by beating the IRS on taxes owed on the winnings. Unfortunately, she lost that round with lady luck, with the Tax Court ruling that she was liable for gift tax on a maneuver with an S corporation designed to spread some of the winnings out to certain family members. An Alabama waitress had received the lottery ticket as a tip, as she had regularly received from a particular patron on a regular basis. The state courts after protracted litigation ruled in her favor that the winning ticket belonged to her rather than either the patron or her fellow employees under a claimed sharing agreement. While those matters were still in the courts, however, she took steps to spread some of her new-found wealth to family members, assuming she would win in state court. She did so by forming an S corporation under the Tax Code with herself as the president and several family members listed as shareholders. What she didn't count on by that maneuver was the IRS issuing a deficiency notice for $771,000 for gift tax owed (income tax liability was not a part of this case). The taxpayer appealed to the Tax Court for relief. Gift tax due, with a discount The Tax Court eventually determined that the taxpayer's transfer of a winning lottery ticket to a family-controlled S corp was a gift. The court found there was no enforceable contract among family members to transfer the lottery ticket to the S corp. Code Sec. 2501(a)(1) generally imposes a tax irrespective of whether the gift is direct or indirect. A transfer of property to a corporation for less than adequate consideration represents gifts to the other individual shareholders of the corporation to the extent of their proportionate interests. The court rejected the taxpayer's argument that there was no gift because a family contract required transfer of the ticket. The court found that there was no pooling of money. There were no predetermined sharing percentages. There was no implied partnership. At most, the family had an unenforceable "agreement to agree." Although the court found for the IRS, the decision was not a total loss for the taxpayer. At the time the gift was made to the S corp, there was that competing claim to the lottery prize made by her co-workers. The court found that a hypothetical buyer would not have paid full value for the ticket. The court concluded that an appropriate discount for the portion of the ticket subject to the competing claim would be 67 percent, which resulted in a $1.1 million gift to the S corp and not the $2.4 million gift determined by the IRS. Doeren Mayhew is a Michigan Financial Firm located in Troy, MI.
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Unmarried co-owners must apply single mortgage interest limit
| Doeren Mayhew | |
Unmarried co-owners must apply single mortgage interest limit
The Tax Court has found that two unmarried co-owners of two California properties cannot each individually deduct the interest paid on their personal residence indebtedness. The debt limitations are based on the number of residences, rather than the number of taxpayers. The Internal Revenue Code provides that for married individuals filing separate returns, the debt limits are $550,000 per taxpayer. The court viewed this treatment as also applying to two unmarried homeowners. As a result, the two unmarried taxpayers before the Tax Court together were allowed only a total of $1.1 million of debt on which mortgage interest payments for the year would be properly claimed itemized deductions ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness). Court sides with IRS Siding with the IRS, the court found that the debt limits (totaling $1.1 million) applied based collectively per residence. The court rejected the taxpayers claim that, for unmarried taxpayers, the debt limits applied per taxpayer. Relying on what it found to be the plain language of the statute, Code Sec. 163(h)(3), the court noted that the references to acquisition debt or home equity debt applied with respect to any qualified residence of the taxpayer (emphasis added). The references to indebtedness were not qualified by references to individual taxpayers. Thus, it appeared that Congress intended to apply the debt limits to the indebtedness on a residence, not to each taxpayer liable for debt on the residence. The Tax Court's decision may negatively impact domestic couples and partners who jointly own property. The court was adamant that the debt limits applied per residence, and rejected the taxpayers' claims that they could deduct interest on $2.2 million of debt because they were unmarried. Doeren Mayhew is a Michigan Financial Firm located in Troy, MI.
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Individual adjusted gross income rebounds
| Doeren Mayhew | |
Individual adjusted gross income rebounds
In the IRS's just-released Winter 2012 Statistics of Income bulletin, the agency reported that individual adjusted gross income (AGI) had increased in 2010 after a decline in 2009. The recession peaked in 2009, a year which saw the lowest percentage of taxable returns in more than 20 years. Based upon the latest IRS taxpayer data, consensus is that the recession ended and recovery began in June 2009, which the income statistics for the following year ostensibly support. Individual income In compiling its report, the IRS relied on data from 142.9 million individual income tax returns filed by U.S. taxpayers for the 2010 tax year. This represented a 1.7 percent increase from the 140.5 million returns filed for 2009. Significantly, individual AGI increased from $7.6 trillion in 2009 to $8 trillion for 2010, bringing it to levels comparable with the pre-recession 2007 tax year. The greatest component of 2010 AGI was wages and salaries, which increased 2.1 percent from nearly $5.8 billion in 2009 to $5.9 billion in 2010. Taxable income for the 2010 tax year also increased 6.9 percent to $5.5 trillion and total income tax increased by 8.8 percent to $0.9 trillion ($900 billion). The 2010 alternative minimum tax increased by 20.3 percent to $24.3 billion, the IRS reported. Notable income items that contributed to the 2010 AGI increase included net capital gains, ordinary dividends, and IRA distributions. Other adjustments Statutory adjustments to total 2010 tax year income increased 5.7 percent to $115.2 billion, with 20 percent of that total representing the deduction for one-half of self-employment tax ($22.5 billion) despite a larger increase in self-employment income. The student loan interest deduction increased 10.7 percent to $9.3 billion, and the Code Sec. 199 domestic production activities deduction increased by 43 percent to $8.2 billion. Doeren Mayhew is a Michigan Financial Firm located in Troy, MI.
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