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New law keeps payroll tax cut in place through February of 2012

Tuesday, December 27th, 2011 by Moore McLaughlin

On December 23, Congress passed H.R. 3765, the “Temporary Payroll Tax Cut Continuation Act of 2011” (the TTCA). The bill was signed into law by President Obama shortly thereafter. The tax provisions of the TTCA consist of a two-month temporary extension of the payroll tax cut that’s in place for 2011, plus a parallel extension of a lower Self Employment Contributions Act (SECA) tax rate on self-employment income.

Overview. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

Before passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312), the FICA tax rate for employees and employers was 7.65% each—6.2% for OASDI and 1.45% for HI. Under the SECA tax, self-employment income of self-employed taxpayers was subject to a tax of 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax (the wage base), but no maximum for HI. (The wage base is $106,800 for 2011 and $110,100 for 2012.) Similar rules apply under the Railroad Retirement Tax Act (RRTA).

Under pre-2010 Tax Relief Act law, for computing the income tax of an individual, Code Sec. 164(f) allowed an above-the-line deduction equal to 50% of the amount of the SECA tax imposed on the individual’s self-employment income for the tax year.

Under Code Sec. 1402(a)(12), a taxpayer is allowed a deduction in computing net earnings from self-employment equal to: (1) net earnings from self-employment as determined before taking the Code Sec. 1402(a)(12) deduction into account, multiplied by (2) one-half the sum of the OASDI tax rate and the HI tax rate. This deduction is allowed in computing net earnings from self-employment in lieu of the Code Sec. 164(f) above-the-line deduction of one-half of the self-employment tax. Thus, the Code Sec. 164(f) deduction can’t be taken in computing self-employment tax liability. The Code Sec. 1402(a)(12) deduction is designed to put the self-employed in the same position as employees in that they don’t have to pay self-employment tax on about half of the amount of the tax itself.

Temporary tax cut for 2011. For remuneration received during 2011, the 2010 Tax Relief Act reduced the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduced the OASDI tax rate under the SECA tax by two percentage points to 10.4% percent. As a result, for 2011, employees pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.

The 2010 Tax Relief Act provided rules for coordination with deductions for employment taxes, as follows.

The Code Sec. 164(f) income tax deduction allowed for tax years beginning in 2011 is computed at the rate of 59.6% of the OASDI tax paid, plus one half of the HI tax paid.

A new percentage (59.6%) replaces the rate of one half (50%) allowed under pre-2010 Tax Relief Act law for this portion of the deduction. The new percentage is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2%, while the employee portion falls to 4.2%. Thus, the employer share of total OASDI taxes is 6.2 divided by 10.4, or 59.6% of the OASDI portion of SECA taxes.

However, the two-percentage-point reduction is not taken into account in determining the Code Sec. 1402 SECA tax deduction allowed for determining the amount of the net earnings from self-employment for the tax year.

New law. Under the TTCA, the reduced employee OASDI tax rate of 4.2% under the FICA tax, and the equivalent employee portion of the RRTA tax, is extended to apply to covered wages paid in the first two months of 2012. (Sec. 601(c) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101)

The TTCA also provides for a recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate, and the equivalent employee portion of the RRTA tax, for remuneration received during the first two months of 2012 in excess of $18,350 (i.e., two-twelfths of the 2012 wage base of $110,100). (Sec. 601(g) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101) The recapture is accomplished by a tax equal to 2% of the amount of wages (and railroad compensation) received during the first two months of 2012 that exceed $18,350.

M&Q observation: A highlight of the TTCA issued by the House Ways & Means Committee on December 22, indicates that the recapture provision would apply only if the temporary payroll tax cut ends on Feb. 29, 2012. A House-Senate Conference will convene soon to consider extending the temporary payroll tax cut for the remainder of 2012.

For tax years beginning in 2012, the TTCA provides that the OASDI rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower OASDI rate for 2012). (Sec. 601(f) of the 2010 Tax Relief Act (P.L. 111-312), as amended by TTCA Sec. 101) Related rules for 2011 concerning coordination of a self-employed individual’s deductions in determining net earnings from self-employment and income tax also apply for 2012, except that the income tax deduction allowed for the OASDI portion of SECA tax paid for tax years beginning in 2012 is computed at the rate of 59.6% of the OASDI tax paid on self-employment income of up to $18,350. For self-employment income in excess of this amount, the deduction is equal to half of the OASDI portion of the SECA tax paid. The Joint Committee on Taxation explanation of the TTCA says that the 59.6% used for the first $18,350 of self-employment income is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2%, while the employee portion falls to a 4.2% rate for the first $18,350 of self-employment income. Thus, the employer share of total OASDI taxes is 6.2% divided by 10.4, or 59.6% of the OASDI portion of SECA taxes, for the first $18,350 of self-employment income.

Effective date. The above TTCA changes are effective for remuneration received during the months of January and February in 2012 and for self-employment income for tax years beginning in 2012. (TTCA Sec. 101(c)).

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Posted in Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

Top 10 Tax Developments of 2011

Thursday, December 22nd, 2011 by Moore McLaughlin

As 2011 draws to a close, many tax developments will likely continue to make headlines and influence tax planning in 2012. In the usual tradition, we present a “Top 10 ” list of tax developments that may prove useful to practitioners as 2012 begins.

1. Fate of Bush-era tax cuts unresolved

2011 ended without any resolution of the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) extended the Bush-era tax cuts through 2012. President Obama and House Speaker John Boehner, R-Ohio, reportedly came close to an agreement in August 2011 to extend some of the Bush-era tax cuts as part of a comprehensive deficit reduction package. When their agreement fell apart, many Washington observers predicted the Joint Select Committee on Deficit Reduction would address the Bush-era tax cuts in a deficit reduction package. The Deficit Reduction Committee announced in November that it failed to reach an agreement and disbanded.

Comment

The fate of the Bush-era tax cuts may ultimately be decided by the lame-duck Congress, which will meet after the November 2012 elections. The outcome of the presidential election and which party controls the House and Senate will undoubtedly influence whatever decision lawmakers take over the Bush-era tax cuts.

2. Rollback of tax legislation

Congress repealed three tax laws in 2011: expanded business information reporting, real property expense reporting and three percent government withholding.

Business information reporting. The Patient Protection and Affordable Care Act (PPACA) required businesses, charities and government entities to file information returns (Forms 1099) for all payments of $600 or more in a calendar year to a single vendor, other than a tax-exempt vendor. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The PPACA’s expansion of business information reporting proved universally unpopular. Congress passed the Comprehensive 1099 Taxpayer Protection Act in April 2011. The Comprehensive 1099 Taxpayer Protection Act repeals the expanded business information reporting provisions in the PPACA as if they have never been enacted.

Rental property expense reporting. The Small Business Jobs Act of 2010 required landlords to file a Form 1099 to report certain rental property expense payments of $600 or more. The Comprehensive 1099 Taxpayer Protection Act also repealed rental expense reporting as if it had never been enacted.

Government withholding. The Tax Increase Prevention and Reconciliation Act of 2007 imposed three percent withholding on payments for goods or services to contractors made by federal, state and local governments. In November 2011, President Obama signed the 3% Withholding Repeal and Job Creation Act, which repeals three percent government withholding as if it had never been enacted.

3. Foreign accounts

The Treasury Department and the IRS continued to focus on foreign account reporting in 2011. Three developments were interconnected: implementation of the Foreign Account Tax Compliance Act (FATCA), FBAR filings and the 2011 Offshore Voluntary Disclosure Initiative (OVDI).

FATCA. The IRS continued to implement the Foreign Account Tax Compliance Act (FATCA) in 2011. FATCA generally requires certain U.S. taxpayers holding specified foreign financial assets to report information about these assets on a new form to be attached to the taxpayer’s return. Additionally, foreign financial institutions must report certain information about accounts held by U.S. taxpayers. In July 2011, the IRS announced it intended to provide for a phased implementation of the FATCA requirements for foreign financial institutions. In December 2011, the IRS issued guidance about new Form 8938, Statement of Specified Foreign Financial Assets.

FBAR. The Treasury Department issued final rules on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) in February 2011. The final rules retain and clarify the requirement to report signature or other authority over a foreign financial account. The final rules also reserved the treatment of investment companies other than mutual funds or similar pooled funds. In related news, the Treasury Department announced that taxpayers may electronically file the FBAR; previously, electronic filing was not an option for the FBAR.

OVDI. The IRS launched a campaign in 2011 to encourage taxpayers to voluntarily disclose unreported offshore accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) rewarded taxpayers who came forward voluntarily with a reduced penalty framework (although not as generous as a similar program in 2009). The 2011 OVDI closed on September 9, 2011. In December, IRS Commissioner Douglas Shulman reported that the agency has received more than 33,000 voluntary disclosures since 2009.

4. IRS help for distressed taxpayers

The IRS announced in February 2011 a series of measures intended to help good-faith taxpayers who cannot meet their tax obligations. The IRS “Fresh Start” initiative generally allows lien withdrawals for taxpayers entering into direct debit installment agreements (and for taxpayers who convert from a regular installment agreement to a direct debit agreement). The IRS also announced it would make streamlined installment agreements available to more small businesses. Qualified small businesses with $25,000 or less in unpaid taxes can participate in the streamlined installment agreement program.

Comment

According to Commissioner Douglas Shulman and other top agency officials, IRS personnel have been instructed to be more flexible in helping distressed taxpayers.

5. Worker classification

The IRS launched a new program in September 2011 to enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty framework. The Voluntary Classification System Program (VCSP) is open to employers currently treating their workers as independent contractors or other nonemployees and who want to prospectively treat the workers as employees. The employer must not be under audit and satisfy other requirements. The IRS has not announced an end-date to the VCSP.

6. Basis overstatement regs

The Supreme Court agreed in September 2011 to resolve a split among the federal courts of appeal over IRS regs (TD 9515) that impose a six-year limitations period on assessments due to overstated basis (Home Concrete & Supply, LLC, 2011-1 ustc ¶50,207). The government asked the Supreme Court to decide, among other questions, whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the six-year assessment period.

Comment

In March 2011, the Court of Appeals for the Federal Circuit upheld the basis overstatement regs under Chevron-deference (Grapevine Imports, Ltd., 2011-1 ustc ¶50,264).

7. Mid-year mileage rate increase

For the third time in six years, the IRS announced a mid-year adjustment to the business standard mileage rate because of rising gasoline prices. The business standard mileage rate increased from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011. The medical/moving standard mileage rate increased from 19 cents-per-mile to 23.5 cents-per-mile for the second half of 2011. Congress did not make a mid-year adjustment to the charitable standard mileage rate, which remained at 14 cents-per-mile for the second half of 2011.

Comment

For 2012, the business standard mileage rate is 55.5 cents-per-mile and the medical/moving standard mileage rate is 23 cents-per-mile. The statutorily-determined charitable standard mileage rate remains at 14 cents-per-mile for 2012.

8. Return preparer oversight

The IRS moved forward with its return preparer oversight initiative in 2011, defining the new designation “registered tax return preparer” and launching the registered tax return preparer competency examination. In June, the IRS issued final Circular 230 regulations, which clarified professional standards for certified public accountants (CPAs), enrolled agents (EAs) and registered tax return preparers. The IRS also fine-tuned its online preparer tax identification number (PTIN) registration system. Additionally, the IRS announced it would revisit its proposal to fingerprint certain PTIN applicants; a proposal which many tax professionals criticized as duplicative of their own employee background checks and too costly.

9. Mandatory e-file for preparers

Beginning January 1, 2011, specified tax return preparers who reasonably expected to file 100 or more covered returns in calendar year 2011 were required to file those returns electronically. The e-filing requirement was put in place by Congress in 2009. The IRS phased-in the requirement over two years (2011 and 2012). For calendar year 2012 (and subsequent years), the threshold for mandatory e-filing by specified tax return preparers is 11 or more covered returns. Firms must compute the number of covered returns in the aggregate that they reasonably expect to file as a firm. If the number is 11 or more in calendar year 2012 and subsequent years, all members of the firm must electronically file covered returns.

10. Updated PAL rules

The IRS issued proposed regs in November 2011 updating the definition of an interest in a limited partnership as a limited partner for purposes of the Code Sec. 469 passive activity loss (PAL) rules. Under the proposed regs, an interest in a limited liability company is treated as a limited partnership interest for the PAL rules.

Comment

The proposed regs reflect the evolution of the rules for limited partners since passage of the Uniform Limited Partnership Act of 1916.

Honorable mention

  • Congress bans tax strategy patents;
  • IRS helps organizations regain tax-exempt status after automatic revocation;
  • IRS responds to Hurricane Irene and many other natural disasters in 2011;
  • FUTA surtax expires mid-year;
  • Congress expands Work Opportunity Tax Credit (WOTC) for veterans;
  • Supreme Court agrees to hear arguments on PPACA;
  • IRS issues final regs on Code Sec. 6707A penalty.
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Posted in Asset Protection Planning, Current Events, Tax Current Events and News, Tax planning

IRS Letters and Visits to Return Preparers – FAQs Filing Season 2012

Monday, November 28th, 2011 by Moore McLaughlin

On its website, the IRS has issued answers to frequently asked questions (FAQs) concerning IRS’s return preparer compliance campaign for the 2012 filing season. The FAQs discuss the 21,000 “reminder” letters that the IRS has sent nationwide to return preparers and the 2,100 in-person follow-up visits that will be conducted starting in November of 2011 and running through April 15, 2012. The FAQs also provide tax return preparers with general pointers on their due diligence requirements.

Who has received the letters? The FAQs indicate that the IRS letters were sent to a pool of paid preparers who completed a large volume of tax returns with Form 1040 Schedules A (Itemized Deductions), C (Profit and Loss From Business (Sole Proprietorship)) or E (Supplemental Income and Loss) during the 2011 filing season. IRS says that the selection of return preparers who received the letters was based on the returns prepared for clients during the most recent filing season having a high percentage of attributes that typically indicate errors on these schedules (i.e., inaccuracies and misinterpretations of tax law).

The IRS letters include an enclosure that describes the current responsibilities of tax return preparers. The letters remind return preparers that taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions for non-qualifying expenditures. The preparer may rely in good faith on information furnished by the client without verification, but can’t ignore the implications of information furnished to or actually known by him. He or she must make reasonable inquiries if the information, as furnished, appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. The preparer must make appropriate inquiries to determine the existence of facts and circumstances required as a condition for claiming a deduction or credit. The enclosure also outlines common issues that they should be aware of on Schedules A, C, and E.

Schedule A letter. The letter indicates that the most common issues for Schedule A deal with:

… Unreimbursed employee business expenses claimed on Form 2106 (Employee Business Expenses). It reminds prepares that taxpayers may only claim allowable unreimbursed expenses.

… Mileage claimed on Form 2106. IRS’s letter reminds preparers that taxpayers should have documentation to support business miles claimed;

… Travel, meals and entertainment expense. The letter reminds the preparer that taxpayers must have documentation of business purpose, as well as receipts to support expenses claimed; and

… Charitable contributions. The letter reminds the preparer that taxpayers must have receipts for all cash contributions and adequate documentation for all non-cash contributions

Schedule C letter. The letter indicates that the most common issues with Schedule C deal with:

… Gross receipts not being fully reported. IRS’s letter reminds preparers that books and records should be available for review to substantiate amounts reported;

… Expenses claimed must be ordinary and necessary for the type of business reported; and

… All expenses claimed are to be paid or incurred during the tax year and the allowable amount of the expense must be correctly computed.

Schedule E letter. The letter dealing with Schedule E indicates that the most common issues are:

… Rental income and expenses not being properly reported;

… Rental depreciation not being correctly calculated; and

… Limitations surrounding passive activities, basis, and at-risk rules not properly considered or calculated.

The FAQs contain the following general pointers on a return preparer’s due diligence requirements:

  • In general, return preparers should understand the underlying substantive law affecting an item of income or deduction. Return preparers must exercise due diligence in preparing or assisting in the preparation, approval, and filing of returns, documents, affidavits, or other papers relating to IRS matters.
  • Return preparers also must exercise due diligence in determining (1) the correctness of oral and written representations made by the return preparer to IRS; and (2) the correctness of representations made by the return preparer to the client with reference to any matter administered by IRS.
  • Return preparers who prepare returns for taxpayers who may be eligible for the earned income tax credit have additional due diligence requirements.
  • Return preparers aren’t required to audit, examine or review books and records, business operations, documents or other evidence to independently verify information provided by a taxpayer, advisor, other tax return preparer or other party. However, the preparer can’t ignore implications of information furnished to him or actually known by him and must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete.
  • A return preparers must make inquiries of a taxpayer to prepare an accurate tax return. For example, he must make general inquiries or have existing knowledge of the taxpayer’s sources of income (e.g., whether the taxpayer received alimony, a refund of state taxes in the previous year, or received interest or dividends), and for Schedule C taxpayers, have a more in-depth discussion including what accounting method the taxpayer uses. A tax return preparer also should ask for taxpayer records where appropriate (e.g., previous year’s tax return or copies of depreciation schedules for Schedule C or E taxpayers or stock basis for filers of Schedule D (Capital Gains And Losses)).

Visits from IRS. The FAQs also discuss the 2,100 compliance visits IRS revenue agents will make nationally with members of the return preparer community. These visit will take place at the return preparer’s place of business. IRS requests that the return preparer have available the tax forms that he prepared in 2011 and all relevant documents, including worksheets, interview notes, correspondence, and a copy of the returns prepared for clients. If the return preparer is an Electronic Return Originator, e-file transmission documents should also be made available.

The purpose of these visits is to confirm that return preparers are complying with current return preparer requirements, including the maintenance of records and signing and furnishing of preparer tax identification numbers (PTINs) on the tax returns that they prepare, and to provide information on new return preparer requirements effective for the 2012 filing season. If violations are found, the revenue agent may, with managerial approval, determine it is appropriate to propose penalties

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Posted in IRS and state tax collections, Tax Current Events and News, Tax planning

Using IRAs in Estate Planning

Monday, August 22nd, 2011 by Moore McLaughlin

Individual Retirement Accounts (IRAs) are a popular investment tool for retirement, but they also need to be taken into account when doing estate planning. Although IRAs can be used to provide for heirs either directly or through a trust, to what extent your heirs will benefit from the IRA and avoid unnecessary taxes depends on proper planning.

What Is an IRA?
IRAs are personal savings plans that allow you to set aside money for retirement and create tax savings. The advantage of IRAs is that you may be able to deduct some or all of your contributions to an IRA from your taxes and also be eligible for a tax credit equal to a percentage of your contribution. Earnings in a traditional IRA are generally are not taxed until distributed to you. At age 70 1/2 you have to start taking distributions from a traditional IRA. Earnings in a Roth IRA are not taxed nor do you have to start taking distributions at any point, but contributions to a Roth IRA are not tax deductible. Any amount remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

Rule Number One: Name Beneficiaries
From an estate planning perspective, the most important thing to remember with an IRA is to name a beneficiary. While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well. If you and your spouse died at the same time and there was no contingent beneficiary, then the IRA would go to your estate and be subject to probate (the legal process of administering the estate of a deceased person).

Stretching an IRA
If you don’t need the funds in your IRA for retirement and want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA. To do this, when you reach 70 1/2, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also stretch distributions out over his or her lifetime and then designate a second-generation beneficiary. It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution must be, which gives the funds in the IRA extra tax-deferred years to grow.

Trusts as Beneficiaries
In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if you have minor children, children with special needs, or a beneficiary with poor spending habits. But the trust must be properly drafted to avoid negative tax consequences. If the trust is a “see-through” trust or “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched out over the life expectancy of the oldest trust beneficiary. If you are planning to leave your IRA to a trust, you must consult with your attorney to ensure that the trust is properly drafted.

An IRA can be a valuable part of an estate plan, but the rules can be complicated. Consult with a qualified elder law or estate planning attorney, such as Jill E. Sugarman, Esq. to find out your options.  You may reach Attorney Sugarman at 401-421-5115 ext. 215 or by e-mail at JSugarman@McLaughlinQuinn.com.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Self-directed IRAs, Tax planning

Two Tax Court Decisions Clarify When Long-Term Care Expenses Are Deductible

Thursday, July 28th, 2011 by Moore McLaughlin

Long-term care can be very expensive, but many long-term care expenses can be deducted from your taxes. Two important recent decisions by the U.S. Tax Court provide guidance on when caregiving services are deductible. In one decision, the court ruled that payments to non-medical caregivers are still deductible as medical expenses; in the other, the court held that a written agreement is required in order for a deceased woman’s estate to deduct more than $1 million in care that her son allegedly provided her.

In the first case, Estate of Lillian Baral v. Commissioner, Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments to the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.

Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed 7.5 percent of adjusted gross income. (Note that this threshold will rise to 10 percent of adjusted gross income in 2012.) The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. “Chronically ill” means you need help with activities like eating, going to the bathroom, bathing, and dressing, or you require substantial supervision due to a severe cognitive impairment.

The Tax Court agreed with Ms. Baral that the payments to the caregivers for assisting and supervising Ms. Baral are deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personnel because a doctor had found that the services provided to Ms. Baral were necessary due to her dementia.

In the second case, Estate of Olivio v. Commissioner, New Jersey resident Anthony Olivo provided nearly full-time care to his mother from 1994 to 2003, during which time he largely abandoned his practice as an attorney. After his mother died, Mr. Olivo became administrator of her estate.

Mr. Olivo filed a tax return for the estate and claimed a deduction of $1.24 million as a debt he said the estate owed him for the care he had provided his mother over the years. He claimed he had an oral agreement with his mother that after she died she would compensate him for his services. The IRS disallowed the deduction and Mr. Olivo filed a petition with the Tax Court.

The U.S. Tax Court agreed with the IRS that the estate is not entitled to the deduction. Applying the law in New Jersey, which presumes that services to a family member living in the same household are given for free (many states have similar laws), the court ruled that without a written agreement between Ms. Olivo and her son, it must assume that Mr. Olivo provided the services without any expectation he would be repaid.

Check with your CPA to determine if your long-term care expenses are deductible.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Who Gets Copies of the Will After a Person Dies?

Monday, June 20th, 2011 by Moore McLaughlin

Many movies and television shows have a scene where a family gathers around a big table after a relative has died to listen to the reading of the will. While this is a great dramatic scene, it doesn’t usually happen like that in the real world. There is no requirement that a will be read out loud to anyone. So what does happen with the will?

Once the will is located, it should be given to the estate’s attorney. Instead of reading the will out loud, the estate’s attorney sends copies of the will to anyone who may have an interest in it. Obviously the person who is named as executor or personal representative is entitled to a copy of the will. He or she is in charge of applying for probate, managing the decedent’s property, and making sure the instructions in the will get carried out.

The estate attorney will also send a copy of the will to anyone who is named as a beneficiary. If any minor children or incapacitated individuals are named as beneficiaries, then their guardians should receive a copy of the will. In addition, if there is the possibility of a legal challenge to the will, the attorney may want to send a copy to any legal heirs, close family relatives, or previous beneficiaries who aren’t included in the will, so that they have notice. This will limit the time frame for them to file a will contest.

Another person who may be entitled to a copy of the will is the estate’s accountant, and if the estate is taxable, then the IRS may get a copy of the will as well. If the will funds a revocable trust, then the successor trustee of the trust is entitled to a copy of the will. Note that once a will is probated, it is available to the public and anyone can read it.

For more information on estate administration, contact Attorney Jill E. Sugarman at 401-421-5115 or by e-mail at JSugarman@McLaughlinQuinn.com.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax planning

Congress passes bill repealing expanded 1099 information reporting requirements

Wednesday, April 6th, 2011 by Moore McLaughlin

On April 5, the Senate by a vote of 87-12 approved H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.” The measure, which retroactively repeals expanded Form 1099 information reporting rules added by recent legislation, was passed by the House on March 3 by a vote of 314-112. Thus, H.R. 4 (the Act) is cleared for the President’s expected signature.

Here are highlights of the tax changes in the Act.

Original information reporting rules. Before amendment by the Small Business Jobs Act of 2010 (P.L. 111-240) and the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), Code Sec. 6041 generally required payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS. Reporting on Form 1099 was required only when the payor was considered to be engaged in a trade or business and has made the payment in connection with that trade or business. The type of payment that most commonly triggered the reporting requirement was payment for services.

There were a number of exemptions from Code Sec. 6041 ‘s reporting requirements under prior law, notably including payments to corporations (which were exempt under Reg. § 1.6041-3(p)(1)).

Pre-Act law—changes made by 2010 legislation. Beginning in 2012, Sec. 9006 of PPACA added payments of amounts in consideration for any type of property and gross proceeds—i.e., it added payments for goods or other property—to the list of payments subject to information reporting.

Sec. 9006 of PPACA further provided that, beginning in 2012, payments to non-tax-exempt corporations—which had previously been exempt from the reporting requirement—would be subject to information reporting.

Additionally, for payments made after 2010, the Small Business Jobs Act of 2010 provided that, subject to limited exceptions, a person receiving rental income from real estate would be treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider (for example, a painter or plumber) in the course of earning rental income would have to provide an information return to the service provider and IRS.

New law. For payments made after December 31, 2011, the Act repeals the provisions in Sec. 9006 that impose a reporting requirement for payments to corporations and payments for goods or other property. (Code Sec. 6041(a), Code Sec. 6041(i), and Code Sec. 6041(j), as amended by Act Sec. 2) And for payments made after December 31, 2010, the Act also repeals application of the information reporting requirements to recipients of rental income from real estate who are not otherwise considered to be engaged in the trade or business of renting property. (Code Sec. 6041(h), as repealed by Act Sec. 3)

In other words, under the Act, the information reporting rules effectively revert to the way they read before enactment of PPACA and the Small Business Jobs Act of 2010.

Revenue offset. The Act provides an offset for the lost revenue from repealing the new information reporting provisions, estimated at $21.9 billion. It increases the amount of “excess advance payments” of the premium assistance credit (enacted as part of the 2010 health care reform legislation to help lower-income individuals acquire affordable health insurance coverage) that a taxpayer must repay under Code Sec. 36B(f)(2) for tax years ending after December 31, 2013. The credit is available for a taxpayer who does not receive health insurance through his employer (or his spouse’s employer) and whose income falls between 100% and 400% of the federal poverty line (FPL), based on the most recently filed tax return.

Under pre-Act law, if the taxpayer’s income increases such that the credit exceeds that to which his current income level actually entitles him to, but his income is still under 500% of FPL, he had to repay some credit amounts. The limit on amounts he had to repay were capped and ranged from $600 to $3,500.

New law. Under the Act, for tax years ending after December 31, 2013, the repayment caps are increased for taxpayers with household income of at least 200% but less than 400% of FPL, and full repayment is required for taxpayers whose incomes exceed 400% of FPL. (Code Sec. 36B(f)(2)(B)(i), as amended by Act Sec. 4)

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Posted in Asset Protection Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

IRS explains how DC’s Emancipation Day can affect filing and payment deadlines

Monday, February 21st, 2011 by Moore McLaughlin

The IRS had earlier announced that because of the Emancipation Day holiday in the District of Columbia (DC), the due date of Form 1040 for 2010 is April 18, 2011, instead of April 15, 2011. Now, in Notice 2011-17, the IRS has explained the mechanics of this deferral, and how it may apply in other years.

Background. Under Code Sec. 6072(a), income tax returns must be filed on April 15. When April 15 falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday, defined as legal holiday in DC.

Under DC law, Emancipation Day, April 16, is a legal holiday. The twists and turns in DC law regarding this holiday produce the following results for filing deadlines for all tax forms and payments that must be filed or completed on or before April 15, including the Form 1040 series tax returns:

  • When April 16 falls on Saturday, then Friday, April 15, is the observed date for Emancipation Day and the filing deadline for all tax forms and payments required to be filed or completed on or before April 15, is Monday, April 18.

That’s the situation this year, when April 16 falls on a Saturday, which means Emancipation Day will be observed on Friday, Apr. 15, 2011. Thus, the filing deadline for all tax forms and payments required to be filed or completed on or before April 15 will be Monday, April 18, 2011.

  • When April 16 falls on Sunday, then Monday, April 17, is the observed date for Emancipation Day, and the filing deadline for all tax forms and payments required to be filed or completed on or before April 15 is Tuesday, April 18.
  • When April 16 falls on Monday, then that day is the observed date for Emancipation Day, and the filing deadline for all forms and payments required to be filed or completed on or before April 15 is Tuesday, April 17.

The last time this happened was in 2007.

IRS said it will widely publicize the Emancipation Day rules in affected years to remind the public that the filing deadline is extended.

In all likelihood, the new Notice was issued in response to a flood of questions about why the filing deadline was deferred to April 18, even though April 15 will fall on a Friday this year.

The deadline deferral to April 18, 2011, applies to a host of deadlines for filing and paying, including:

… Requests for an automatic six-month tax-filing extension on an individual return for calendar-year 2010.

… Tax-year 2010 balance-due payments.

… For calendar-year taxpayers, individual estimated tax payments for the first quarter of 2011.

… For calendar-year taxpayers, tax-year 2010 contributions to a Roth or traditional IRA.

… Corporation income tax returns, including S corporations, for a fiscal year ending on January 31, 2011, and any balance due.

… For calendar-year corporations, the estimated tax payment for the first quarter of 2011.

… Calendar-year estate and trust income tax returns (Form 1041) and any balance due.

… Calendar-year 2010 partnership returns (Form 1065).

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Posted in 1031 Exchanges, Current Events, IRS and state tax collections, Tax Current Events and News, Tax planning

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