Foreign Financial Accounts must be reported

Tax Tip

Do you need to file an FBAR?

So you included Form 8938, Statement of Specified Foreign Financial Assets, with your 2013 federal income tax return to report your interests in certain foreign financial accounts. Do you also need to file a separate Treasury Department report known as the FBAR? This report is easy to overlook, since it's not an IRS form and has special filing requirements.

Here's an overview.

What's an FBAR? FBAR is the short name for Form 114, "Report of Foreign Bank and Financial Accounts." You use the FBAR to report your individual or joint financial interest in, or signature authority over, a financial account in a foreign country — in some cases even if you have included Form 8938 with your federal income tax return.

Filing an FBAR is generally required when the aggregate value of your foreign accounts exceeds $10,000 at any time during the calendar year. Because the account value triggers the filing requirement, you may need to file an FBAR even if your foreign account generates no taxable income.

Note: Form 114 is new for 2013. It replaces Form 90-22.1, which was used in prior years.

What are foreign financial accounts? Financial accounts include deposit and custodial accounts, such as stocks, securities, and mutual funds you hold at foreign financial institutions or foreign branches of U.S. financial institutions. You don't have to include financial accounts held at a U.S. branch of a foreign financial institution, or foreign real estate or personal property you own directly.

When is the FBAR due? Form 114, which you and your spouse can file jointly to report your 2013 foreign accounts and assets, must be submitted electronically by June 30, 2014. No extension of time is available, though you can amend an incorrect return after the initial filing.

While there's no tax due with the FBAR, failure to file can lead to penalties. If you overlooked the filing requirement in prior years, please contact our office. We'll help you get caught up.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Rental Property requires proper documentation

Tax Tip

Renting your home calls for tax planning

Internet sites linking travelers to property owners with space to spare continue to grow in popularity. Whether you travel or not, you might be considering the possibility of signing up and offering for rent all or part of your main home. If so, establishing sound recordkeeping procedures from day one is a good idea.

In addition to a bookkeeping system to keep track of the income and expenses related to your rental, a calendar detailing the days your home was rented will be useful at tax time. The reason? Deductible expenses may be limited when rented property is also your personal residence. Having a written record helps determine which tax reporting rules apply.

For example, say you rent your primary home to a vacationer for 15 days or more during a year. All of the rental income is taxable. However, expenses such as interest, property taxes, utility costs, and depreciation are split between the time your property was rented for a fair rental price and the days you used it personally. The portion related to the rental is deductible up to the amount of your rental income.

What if you have rental expenses in excess of your rental income? You may be able to carry them forward to next year.

Different rules apply when your home is rented for less than 15 days, and when the property you offer for rent is your vacation home or timeshare. Please give us a call. We'll help you plan a tax-efficient rental program.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Alimony is Taxable

Tax Tip

Alimony can affect your tax return

Did you receive alimony in 2013?

You're probably aware that alimony you receive is taxable income. However, determining what's considered alimony may not be as simple as it appears at first glance, because you can receive several types of payments when you divorce or separate from your spouse.

For example, say your agreement includes a noncash settlement such as a house. That's not alimony, and generally is not taxable to you. Voluntary payments made in addition to, or without benefit of, a written court document are generally not alimony, either.

So what is alimony? Alimony is broadly defined as payments you receive in cash from your former spouse under a divorce decree or separation agreement. The payments can't be treated as child support or property settlements in the terms of the legal document, and they must stop at death. Other requirements include living in separate households and not filing a joint federal income tax return.

When you're sure the payments you receive are alimony, you'll need to report them in the year of receipt, using the standard Form 1040. You're also required to provide your social security number to your ex-spouse, and you could have to pay a penalty if you refuse.

Please give us a call to discuss the effect of alimony on your tax situation. We can help you plan your financial future.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Tax Publications are not Binding

Tax Tip

IRS Tax Publications Are Not Binding Precedent

If you are a taxpayer who thinks the answers you receive when calling the IRS help line are always accurate and binding upon the IRS in a subsequent challenge, think again. The IRS will be the first to tell you that the information provided by its help line is not binding on the agency. In other words, even if you follow the advice provided by the IRS, you will not be protected from subsequently being challenged by the IRS and hit with additional taxes, penalties, and interest. The IRS does not stand behind the advice provided by their employees.

The same holds true for IRS publications. In a recent tax court case (Bobrow, TC Memo 2014-21) involving a prominent tax attorney, the court reiterated and emphasized its long-standing position that IRS published guidance is not binding precedent and that taxpayers "rely on IRS guidance at their own peril."

In the Bobrow case, the tax court ruled against the taxpayer, and even imposed a substantial accuracy-related understatement penalty against the taxpayer in spite of an IRS publication that supported his position.

The IRS does not make tax laws; Congress does through the Internal Revenue Code (IRC). The IRS only interprets how the IRC applies in various situations. The advice provided in IRS publications is far more reliable than the opinion provided by a single IRS employee on the phone. However, neither provides binding precedent that can be cited in audit, appeal, or tax court.

The moral of this story is to be cautious in interpreting how the tax laws apply to your particular situation and to seek professional assistance when needed. The IRC is huge and complicated. Please contact this office for assistance.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Finding lost money

Find Lost Money

Unclaimed property refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for a period of one year or longer (depending upon state law). Common forms of unclaimed property include savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, traveler’s checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds and life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes.

Financial institutions and companies will turn these funds over to a state unclaimed property department where the funds are held until claimed by the owner. This typically occurs when you relocate, close a business address, misplace a check, etc. It can also occur if you are the beneficiary of an estate and the trustee is unable to locate you.

There are various ways to locate these assets. There are commercial firms that may seek you out. However, you can perform a search for free in a number of ways. For instance, each state has a website for its unclaimed property department, allowing you to search state by state. Generally, one would only search the state that he or she has been a resident of.

There is also a website developed by the National Association of Unclaimed Property Administrators (NAUPA) that provides links from a map to each individual’s state’s search site. NAUPA is also currently developing a search site that will locate unclaimed money in all states called missingmoney.com. However, that site is currently under development and does not include all states, so it is wise to check both it and all states in which you have been a resident.

What are your odds of finding some lost money? Well, the author, while researching this article, found three accounts in his name totaling over $1,200. A nice bonus for writing the article! Who knows what you will find, but it only takes a few minutes to check and could yield some pleasant surprises. On its website, NAUPA indicated that the average claim was $892. 

If you have any questions, please give this office a call.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Renting your home

Tax Tip

Renting your home calls for tax planning

Internet sites linking travelers to property owners with space to spare continue to grow in popularity. Whether you travel or not, you might be considering the possibility of signing up and offering for rent all or part of your main home. If so, establishing sound recordkeeping procedures from day one is a good idea.

In addition to a bookkeeping system to keep track of the income and expenses related to your rental, a calendar detailing the days your home was rented will be useful at tax time. The reason? Deductible expenses may be limited when rented property is also your personal residence. Having a written record helps determine which tax reporting rules apply.

For example, say you rent your primary home to a vacationer for 15 days or more during a year. All of the rental income is taxable. However, expenses such as interest, property taxes, utility costs, and depreciation are split between the time your property was rented for a fair rental price and the days you used it personally. The portion related to the rental is deductible up to the amount of your rental income.

What if you have rental expenses in excess of your rental income? You may be able to carry them forward to next year.

Different rules apply when your home is rented for less than 15 days, and when the property you offer for rent is your vacation home or timeshare. Please give us a call. We'll help you plan a tax-efficient rental program.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Bartering for Services and Products are Taxable

Bartering for Services and Products Is Taxable

Tax Tip

Bartering is the trading of one product or service for another. Often there is no exchange of cash. In addition to individuals, small businesses sometimes barter to get the products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Bartering may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third-party basis through a modern barter exchange company.

Some individuals and small businesses believe that bartering avoids taxable income because there is no exchange of money. This is not true, however; barter exchanges are considered taxable income by the IRS. The fair market value of goods and services exchanged must be included in the income of both parties to the exchange. 

Business Owners – If you are the owner of a business, you may sometimes find it to your advantage to barter for goods and services rather than pay in cash. You should be aware, however, that the fair market value of the goods that you receive through bartering is taxable income, just as if you had received a cash payment.

Exchanges of services result in taxable income for both parties. Say, for example, that a computer consultant agrees to an exchange of services with an advertising agency. Both parties to the transaction are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, this will be considered the fair market value, unless there is contrary evidence.

Income is also realized when services are exchanged for property. For example, if an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Barter Exchanges – Individuals and business owners sometimes join barter clubs that facilitate barter exchanges. Some exchanges operate out of an office and others over the Internet. Unlike one-on-one bartering, members of exchanges are not obligated to barter or purchase directly from a seller. Instead, when a barter exchange member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase. These clubs generally use a system of “credit units” that are awarded to members who provide goods and services and can be redeemed for goods and services from other members.

If you participate in a barter club, you’ll be taxed on the value of credit units at the time they are added to your account, even if you don’t redeem the units for actual goods and services until a later year. For example, say that in Year 1, you earn 2,000 credit units and each unit is redeemable for one dollar in goods and services. In Year 1, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units in Year 2, since you will already have been taxed once on that income.

When you join a barter club, you’ll be asked to give the club your social security number or employer identification number and to certify that you aren’t subject to backup withholding. Unless you make this certification, the club must withhold tax from your bartering income at a 28% rate.

By January 31st of each year, the barter club will send you a Form 1099-B, which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

If you have questions related to bartering income, please give this office a call.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

IRA ONE TIME ROLLOVER

Tax Tip

IRS Reinterprets the Once-Per-Year IRA Rollover Limitation

There is a tax rule that allows taxpayers to take money out of their IRA and avoid paying income tax and the 10% early distribution penalty so long as they return that money to their IRA account within 60 days.

However, tax law limits the number of rollovers to one per year. In the past, the IRS has taken a liberal view toward the one-per-year limitation by allowing one rollover per IRA account each year. In other words, if you have three separate IRA accounts, you can apply the 60-day rollover rule to each IRA account.

However, a recent Tax Court Case ruled that the once-per-year rollover applied to the aggregate of all of the taxpayer’s IRA accounts, meaning all of a taxpayer’s IRAs are treated as one for the purposes of applying the once-per-year rollover limitation. 

The IRS has announced it will adopt the Tax Court’s ruling, meaning that an individual cannot make an IRA-to-IRA rollover if he or she made such a rollover involving any of individual IRAs in the preceding one-year period.

Since both the IRS’s proposed regulations and Publication 590 currently permit one rollover per account, the IRS is extending transitional relief and will not apply the Tax Court’s interpretation to the rollover rule to any rollover that involves an IRA distribution occurring before January 1, 2015.

These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another because such a transfer is not a rollover and, therefore, is not subject to the one rollover-per-year limitation.

Taxpayers considering utilizing the 60-day rollover rule should be cautious about possibly violating the once-per-year rollover rule. Please call this office if you have any concerns.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Changes In Gift Tax

Tax Tip

Changes in Gift Tax

If you are fortunate enough financially to be able to make significant gifts to family members and others, you may want to pay attention to the changes in gift tax law being proposed by the President. 

For a number of years, the amount of tax-free gifts one could make was limited to an annual per-recipient amount of $14,000 in 2014 and an additional lifetime amount of $1 million dollars. 

Those rules were liberalized beginning in 2010, when the gift and estate tax limits were unified so that the estate tax exclusion could be used for a combination of taxable gifts and estate tax exclusions. This currently permits gifts up to the estate tax exemption limit of $5.34 million for 2014 without incurring any gift tax. But gifts in excess of the annual $14,000 limit are not without future estate tax implications because a gift that exceeds the annual per-recipient exclusion reduces the estate tax exemption by the excess amount of that gift. Thus, current gifts could cause the taxable estate of the gift giver to be higher and taxed at rates substantially higher than normal income tax rates when he or she passes away.

The President’s estate and gift tax proposal would, beginning in 2018, return the estate, generation-skipping transfer (GST), and gift tax exemption and rates to 2009 levels. Thus, the top tax rate would be 45%, up from the current 40%, and the exclusion amount would be $3.5 million for estate and GST taxes, nearly $2 million less than the current exclusion amount. In addition, the lifetime exclusion for gifts would return to $1 million. The proposal makes no changes to the amount of the annual gifting limit.

Although 2018 is over three years away and there are no assurances that the President’s proposal will actually become law, its potential impact on gift giving should be considered in one’s long-term gift planning.

If you need assistance with long-term gift and estate tax planning, please give this office a call.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Virtual Currency

Tax Tip

Virtual Currency & Taxes

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  In some environments, it operates like “real” currency of any country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance.  However virtual currency does not have legal tender status in any jurisdiction.

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency.  Bitcoin is one example of a convertible virtual currency.  It can be digitally traded between users and purchased for, or exchanged into, U.S. dollars, euros, and other real or virtual currencies.

  

Virtual currency is treated as property, not currency, for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

•  A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the virtual currency’s fair market value.

•  Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

•  Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.

•  The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

•  A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

•  When a virtual currency is sold, it is treated as property.

o  If the property is a capital asset like stocks or bonds or other investment property, gains or losses are realized as capital gains or losses.

o  If the property is inventory or other property mainly for sale to customers in a trade or business, then ordinary gains or losses are generally incurred.

Virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.

For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, reasonably and consistently.

If you have transactions using virtual currency and have questions on how that might affect your taxes, please give this office a call.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com

Premium Assistance Credit

  

Tax Tip

Changes in Circumstances Can Affect Your Premium Assistance Credit

If you are signed up for health insurance through a health insurance marketplace, you may have qualified for the premium assistance tax credit. This credit provides financial assistance to help you pay for your health insurance premiums. Individuals and families that qualify for the credit are given the choice to receive the credit in advance to reduce the insurance premiums during the year, or they can pay the full insurance premiums and get the credit when they file their tax return next year.

If you chose to take the advance credit (premium subsidy), you should be aware that the credit on which the subsidy is based was determined using estimated household income and family size for the year.

If your estimated household income and family size are different from the actual amounts reported when you file your 2014 return next year, the following will happen:

•  Overstated Income and Family Size: If your household income and family size was overestimated and you received premium subsidies based on an advanced credit that was less than you were entitled to, you will receive credit for the difference on your 2014 tax return.

•  Understated Income and Family Size: If your household income or family size was underestimated and you received premium subsidies based on an advanced credit that was more than you were entitled to, you will have to pay back some or all of the difference on your 2014 tax return.

A taxpayer’s family size is the number of individuals for whom the taxpayer is allowed an exemption deduction for the tax year. For example, if you are married and filing jointly with two dependent children, your family size would be four.

The term “household income” includes the modified adjusted gross income (MAGI) of the taxpayer plus the sum of MAGIs of all individuals taken into account when determining the taxpayer’s family size and who had to file a tax return. MAGI is generally the same as your income unless you have certain adjustments. For example, say you are filing jointly with your spouse and only you work and make $40,000 per year. You also claim your two children as dependents and one of them has a part-time job and made $9,000 for the year. You have no adjustments to your income, so your household income would be $49,000 ($40,000 + $9,000). Your child’s income is included in your household income because making $9,000 would have required the child to file a tax return.

If you had not included your child’s income in your projected household income, the advance credit, and the corresponding premium subsidy would be more than you were entitled to and you may have to pay part of it back.

That is why, if you decided to get the credit in advance, it’s important to report any changes in your income or family size to the marketplace throughout the year. Reporting these changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

If you have questions related to the premium assistance credit, please give this office a call.

Joseph C Becker, CPB, MBA, CQP
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com