New Law Sets Jan. 31 W-2 Filing Deadline; Some Refunds Delayed Until Feb. 15

w2

A new federal law moves up the W-2 filing deadline for employers and small businesses to Jan. 31. The new law makes it easier for the IRS to find and stop refund fraud. It also delays some taxpayer refunds. Those taxpayers claiming the Earned Income Tax Credit or the Additional Child Tax Credit won’t see refunds until Feb.15, at the earliest.

Here are some key points to keep in mind:

  • Protecting Americans from Tax Hikes (PATH) Act. Enacted last December, the new law means employers need to file their copies of Forms W-2  by Jan. 31. These forms also go to the Social Security Administration. The new deadline also applies to certain Forms 1099. Those reporting nonemployee compensation such as payments to independent contractors submitted to the IRS are due Jan. 31. Employers have long faced a Jan. 31 deadline in providing copies of these forms to their employees. That date won’t change.
  • Different from past deadline. Employers normally had until the end of February, if filing on paper, or the end of March, if filing electronically, to send in copies of these forms. The IRS is working with the payroll community and other partners to spread the word.
  • Helps stop fraud or errors. The new Jan. 31 deadline will help the IRS to spot errors on returns filed by taxpayers. Having these W-2s and 1099s sooner will make it easier for the IRS to verify legitimate tax returns and get refunds to taxpayers eligible to receive them. The changes will allow the IRS to send some tax refunds faster.
  • Some refunds delayed. Certain taxpayers will get their refunds a bit later. By law, the IRS must hold refunds for any tax return claiming either the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) until Feb. 15. This means the whole refund, not just the part related to the EITC or ACTC.
  • File tax returns normally. Taxpayers should file their returns as they normally do. The IRS issues more than nine out of 10 refunds in less than 21 days. However, some returns may need further review. Whether or not claiming EITC or ACTC, the IRS cautions taxpayers not to count on getting a refund by a certain date. Consider this fact when making major purchases or paying debts.
  • Use IRS.gov online tools. Starting Feb. 15, the best way to check the status of a refund is with the Where’s My Refund? tool on IRS.gov.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers may need their Adjusted Gross Income amount from a prior tax return to verify their identity. They can get a transcript of their return at www.irs.gov/transcript.

If you have any questions please do not hesitate to give us a call at our office, 314-993-4285.

This information was received from IRS Special Edition Tax Tip Issue Number: 2016-16.

Rental Losses Not Automatically Nonpassive Due To Status As Real Estate Professional

rent

HKA has always believed that you must materially participate in a rental activity even if you hold a realtor license.  Court affirms the stance.

The Court of Appeals for the Ninth Circuit has found that a taxpayer’s rental losses were not automatically nonpassive because of her status as a real estate professional. The court rejected the taxpayer’s argument that she did not need to show material participation in the rental property.

Take away. The Ninth Circuit noted that the Tax Court has held that caselaw clearly requires that a taxpayer claiming deductions for rental real estate losses must meet the material participation’ requirement.

Background

The taxpayer worked as a licensed real estate agent. The taxpayer deducted losses from rental properties she owned on her 2006 and 2007 returns. The IRS disallowed the rental losses. The IRS determined that the taxpayer had failed to show she materially participated in the rental properties. The taxpayer countered that her status as a real estate professional made her rental losses per se nonpassive. A federal district court ruled against the taxpayer and she appealed to the Ninth Circuit.

Court’s analysis

The court first found that Code Sec. 469(c)(1) provides the general rule that any activity in which a taxpayer does not materially participate is passive. The term “passive activity” means any activity which involves the conduct of any trade or business, and in which the taxpayer does not materially participate. Further, Code Sec. 469(c)(2) establishes that rental activity is per se passive, regardless of whether the taxpayer materially participates; however, Code Sec. 469(c)(7) provides an exception for real estate professionals. Reg. §1.469-9(e)(1) provides that a real estate professional can treat rental losses as nonpassive, but only so long as he or she materially participates.

A taxpayer performs qualifying services in real property businesses if: (1) More than half of the personal services performed in a trade or business by the taxpayer are performed in real property businesses in which the taxpayer materially participates; and (2) The taxpayer performs more than 750 hours of services during the tax year in real property businesses in which the taxpayer materially participates. A taxpayer who meets the preceding requirements is commonly referred to as a real estate professional for purposes of the passive loss rules.

Compliance Alert

The court noted that the exception to the passive loss rules for rental activities of taxpayers who are involved in a real property business applies for tax years beginning after December 31, 1993.

The court found that even taxpayers who establish real estate professional status must separately show material participation in rental activities (as opposed to other real estate activities) before claiming any rental losses as nonpassive. Only the participation of the taxpayer with respect to the rental real estate may be used to determine if the taxpayer materially participates in the rental real estate activity under the material participation safe harbor provisions. Taxpayers who qualify as real estate professionals still must show material participation in rental activities before deducting rental losses, the court concluded.

Compliance Pointer

The court declined to address the taxpayer’s new argument that undated notes estimating the total hours spent on rental properties satisfied the burden of showing material participation.

If you have any questions or would like to discuss this further, please do not hesitate to give us a call at our office, 314-993-4285.

This information was received from CCH Federal Tax Weekly, Issue No. 33.

Tax Breaks for the Military

Military

If you are in the U. S. Armed Forces, there are special tax breaks for you. For example, some types of pay are not taxable. Certain rules apply to deductions or credits that you may be able to claim that can lower your tax. In some cases, you may get more time to file your tax return. You may also get more time to pay your income tax. Here are some tips to keep in mind:

  1. Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.
  2. Combat Pay Exclusion.  If you serve in a combat zone, your combat pay is partially or fully tax-free. If you serve in support of a combat zone, you may also qualify for this exclusion.
  3. Moving Expense Deduction.  You may be able to deduct some of your unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
  4. Earned Income Tax Credit or EITC.  If you get nontaxable combat pay, you may choose to include it in your taxable income. Including it may boost your EITC, meaning you may owe less tax and could get a larger refund. In 2015, the maximum credit for taxpayers was $6,242. The average amount of EITC claimed was more than $2,400. Figure it both ways and choose the option that best benefits you.
  5. Signing Joint Returns.  Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse.  You may need a power of attorney to file a joint return. Your installation’s legal office may be able to help you.
  6. Reservists’ Travel Deduction.  Reservists whose reserve-related duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions.
  7. Uniform Deduction.  You can deduct the costs of certain uniforms that you can’t wear while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.
  8. ROTC Allowances.  Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
  9. Civilian Life.  If you leave the military and look for work, you may be able to deduct some job search expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.
  10. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline.

If you have any questions please do not hesitate to give us a call at our office, 314-993-4285.

This information was received from IRS Tax Tips Issue “IRS Summertime Tax Tip 2016-06”

Child and Dependent Care Summer Credits

child care tax credit

We’ve been talking about Dependent Care for several years. During summer months, many parents enroll their children in a day camp or pay for day care so they can work or look for work. If this applies to you, your costs may qualify for a federal tax credit. Here is more information directly from the IRS.

10 things to know about the Child and Dependent Care Credit:

  1. Care for Qualifying Persons.  Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 generally qualify.
  2. Work-related Expenses. Your expenses for care must be work-related. In other words, you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they are physically or mentally incapable of self-care.
  3. Earned Income Required. You must have earned income. Earned income includes wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care.
  4. Joint Return if Married. Generally, married couples must file a joint return. You can still take the credit, however, if you are legally separated or living apart from your spouse.
  5. Type of Care. You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.
  6. Credit Amount. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.
  7. Expense Limits. The total expense that you can use in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
  8. Certain Care Does Not Qualify. You may not include the cost of certain types of care for the tax credit, including:
  • Overnight camps or summer school tutoring costs.
  • Care provided by your spouse or your child who is under age 19 at the end of the year.
  • Care given by a person you can claim as your dependent.
  1. Keep Records and Receipts. Keep all your receipts and records for when you file taxes next year. You will need the name, address and taxpayer identification number of the care provider. You must report this information when you claim the credit on Form 2441, Child and Dependent Care Expenses.
  2. Dependent Care Benefits. Special rules apply if you get dependent care benefits from your employer.

Keep in mind this credit is not just a summer tax benefit. You may be able to claim it at any time during the year for qualifying care. If you have any questions, please call our office, 314-993-4285.

What Does it Mean to be a Limited Partner?

The rules associated with the nature of investments and the income generated have always been complex.  Subsequent to 2013 and the activation of the provision of the Affordable Care Act following those rules became more important.  The ACA put significance to the nature of income.  Passive income, such as interest, dividend, capital gain, and some business earned income, is now subject to a 3.8% tax (if you meet certain AGI targets).  The classification of income, passive or active, and its incumbent importance to the issuance of this new tax has now given the Internal Revenue Service a new reason to turn their computers and auditors loose on our returns.

There is a difference between passive and active income.  There is also a difference between types of active income.  The importance for the investor today is knowing up front what type of investment you’ve made and how it should be treated.

Limited Partnership:  In general, if you’ve made an investment in a partnership, and the most you can lose as a result of the failure of the partnership is the original investment, then you are a Limited Partner.  If that same investment has a guaranteed return on your investment, then the part of earnings, normally referred to as a Guaranteed Payment, is treated as passive income, or interest, and is taxed under the ACA for the additional 3.8% tax.  It is also important to note that these investments have only one type of expense that is deductible against the income from the investment-interest expense.

  1. Interest expenses as Investment Interest Expense-if you borrow money to purchase the investment the interest expense is Investment Interest Expense.
  2. Interest expense as a direct reduction of the earnings from the investment may be allowable, especially if your employer has arranged for an internally financed loan for you to acquire the investment.
  3. In most cases a down payment is still required, but if the down payment is funded by the company as well, then this amount of income to you is considered earned income and subject to social security and ordinary income tax.
  4. If you work for the partnership and in the ordinary course of your job you have expenses which are not reimbursed by the partnership, in no instance are these expenses deductible against the limited partnership earnings.These expenses must be deducted as an out of pocket business expense on Schedule A and are subject to a 2% of AGI threshold.
  5. Losses associated with the investment may not be deducted currently unless you have earnings from other passive investments.You do not lose the ability to take a deduction for the loss, it is tracked via Form 8582.  These losses may be deducted against certain other passive income.
  6. Losses in excess of basis are not allowed, but suspended until basis is restored regardless of losses from other investments.

General Partnership:  In general, if you’ve made an investment in a partnership and you may also have to guarantee loans of the partnership, then you are a General Partner. None of these earnings are subject to the ACA’s additional passive income because the investment is considered subject to self-employment tax.

  1. Interest expense associated with indebtedness to acquire the investment will normally be deductible against the ordinary income of the investment.Interest expense in excess of the earnings could result in a deductible loss for the year.
  2. If you receive the down payment to make the purchase from the entity either through a direct investment or through a reduction in the purchase price versus the fair value of the investment, this down payment is ordinary income to you and will also be subject to Self Employment Tax.
  3. You may deduct any annual loss created by the investment against other sources of income.The deduction may not exceed your basis in the investment, but you may now include the amount of recourse debt you’ve guaranteed as a portion of your overall basis.  Because it is possible that the loss from the business may still exceed the sum of your original investment and the amount of recourse debt, it is important to know the excess loss is suspended until your basis is restored.
  4. If you incur expense personally on behalf of the partnership, you may deduct any out of pocket expense against this type of partnership income, but the operating agreement should have provisions which explain and give a general outline that these would be considered ordinary and normal business expenses the partnership would have deducted had they paid for the expenditure.

General and Limited Partner:  It is possible to be a general and a limited partner.  In this instance you are considered a general partner for tax purposes.  Your earned income from the partnership is considered subject to self employment, even that earned from the limited partnership, because you are considered under the Internal Revenue Code to have influence over the recognition of income.  The rules of being a general partner therefore apply.

If you have any questions, do not hesitate to give us a call at the office, 314-993-4285.

Tax News for Georgia

Georgia Conservation Tax Credit Extended

Legislation has been enacted that extends the conservation tax credit available against Georgia corporate and personal income tax liabilities from December 31, 2016 to December 31, 2021. (Effective April 28, 2016).

Savings Trust Account Deduction Increased

Legislation has been enacted that increases the Georgia personal income tax deduction for contributions to savings trust accounts to $4,000 per beneficiary for contributors filing a joint return (previously $2,000), for taxable years beginning on or after January 1, 2016.

Property Tax: Bona Fide Conservation Use Property Provisions Amended

Legislation has been enacted relating to bona fide conservation use property for purposes of Georgia ad valorem taxes. Amendments provide clarification of an existing exception to a breach of covenant for bona fide conservation use property. Amendments provide for a new exception, for certain not for profit rodeo events, to a breach of covenant. (Effective April 28, 2016).

Property Tax: Exemption for All-Terrain Vehicles Enacted

Enacted legislation provides an exemption from Georgia ad valorem taxation for certain watercraft and all-terrain vehicles held in inventory for sale or resale. Previously the exemption applied to certain watercraft only. An all-terrain vehicle is any motorized vehicle designed for off-road use which is equipped with four low-pressure tires, a seat designed to be straddled by the operator, and handlebars for steering. (Effective May 3, 2016, applicable to all taxable years beginning on and after January 1, 2017).

If you have any questions, don’t hesitate to call us at the office, 314-993-4285.

*This information was received from CCH Federal Tax Weekly.*

Tax News for Arizona

Charitable Contribution Credit Amounts Increased

The amounts that may be claimed as Arizona personal income tax credits for voluntary cash contributions to qualifying charitable organizations and qualifying foster care charitable organizations are increased, applicable to taxable years beginning after December 31, 2015. The credit cap for contributions to qualifying charitable organizations is increased from $200 to $400 for individuals and from $400 to $800 for married couples. The credit cap for contributions to qualifying foster care charitable organizations is increased from $400 to $500 for individuals and from $800 to $1000 for married couples. A taxpayer may receive separate tax credits for voluntary cash contributions to a qualifying charitable organization and to a qualifying foster care charitable organization during the same taxable year.

Arizona House Approves IRC Conformity Date Update and Partnership Return Changes

The Arizona House of Representatives has approved a bill that would update the state’s conformity to the Internal Revenue Code (IRC) for corporate and personal income tax purposes for taxable years beginning after 2015. The Senate also approved the bill. References to the IRC would be updated to mean the IRC as in effect on January 1, 2016, including those provisions that became effective during 2015, with the specific adoption of all federal retroactive effective dates. The bill would clarify some of the federal provisions that are effective for prior taxable years.

For taxpayers that qualify for the federal exclusion from gross income for civil damages, restitution, or other monetary award for wrongful incarceration, the bill would specify a deadline for filing an amended state return claiming a refund due to the exclusion and a deadline for the Department of Revenue to review the amended return. The bill would also change the partnership return filing due date from the 15th day of the fourth month following the close of the tax year to the 15th day of the third month following the close of the tax year.

In addition, the bill would specify reporting and payment requirements for when a partnership is audited by the Internal Revenue Service and is assessed an imputed underpayment pursuant to IRC §6225, or when a partnership makes the election under IRC §6226 with respect to an imputed underpayment. (As passed by the Arizona House of Representatives on May 7, 2016).

If you have any questions, don’t hesitate to call us at the office, 314-993-4285.

*This information was received from CCH Federal Tax Weekly.*

Why Are We Afraid of Gift Tax Returns?

gift-taxGift tax returns are required when your gifts to family members, friends, and other non-qualified charities exceed your annual gift exclusion.  The annual exclusion for both 2014 and 2015 is $14,000.  There are a number of ways to give more by combining spousal gifts and making gifts within a family unit.  Beginning with 2015, the tax on a gift tax is not triggered until your combined lifetime gifts exceed $5.43 million.

So why are people reticent to file the return?  There are three primary reasons:

  1. Alerting the IRS to a gift
  2. A confusion about a penalty or tax if the annual exclusion is greater than the limit
  3. Filing another form.

Let’s consider each of these individually:

  1. Better to alert them now while you know exactly what and how much you gave than shift this to your heirs upon your death.
  2. There is no tax or penalty just because you gave more than $14,000 unless you hit the lifetime limit.  We should all aspire to hit the lifetime limit!
  3. The form can be detailed, but is normally not complex to complete.

So, lets get these filed and make sure the IRS doesn’t make your heirs do so!  Waiting until then could cause problems with your estate planning and cost lots of money.

If you have any questions or concerns regarding gift tax returns, please don’t hesitate to give us a call at 314-993-4285 or email us at office@hkaglobal.com

How To Calculate Your Taxes Owed in 2014

calculateWe know that taxes can be complicated. When it comes to items like Medicare surtax, Roth contributions, and the like, it can be confusing where your taxes fall. Below are the rules for calculating your taxes owed in 2014 in regards to some of the most complicated items:

The Tax Extenders Bill has been extended!

The Senate finally passed the Tax Extenders Act for 2014…. so you have 13 days left to do it.

Although President Obama has yet to sign it into law, he is expected to by the end of this week.

Here are some of the provisions the team at Hauk Kruse & Associates believe may be important to you:

  1. Tax-free distributions from individual retirement plan for charitable purposes: IRA owners age 70-1/2 or older may exclude up to $100,000 per year from gross income if IRA funds were paid directly to most public charities.
  2. Tax deduction for state and local general sales taxes in lieu of state and local income taxes: Taxpayers may deduct state and local general sales taxes paid rather than state and local income taxes paid.
  3. Section 179 expense increase: Small and mid-size business owners can immediately deduct up to $500,000 of qualifying assets rather than over time according to depreciation schedules.
  4. Bonus depreciation: The depreciation expense on new business equipment is 50% in the first year, plus regular depreciation on the other 50%.
  5. Mortgage debt forgiveness: If the bank forgives all or a portion of your qualified personal residence, you do not have to claim it as income through the end of 2014.
  6. Tax credit for residential energy efficiency improvements (including certain appliances): Homeowners can claim a one-time only energy-efficient home improvement tax credit of up to $500 for the installation of qualified insulation, windows, doors, roofs, water heaters, and heating and air conditioning systems.
  7. Tuition and fees deduction: Qualifying taxpayers are allowed to claim up to $4,000 in education expenses (tuition, enrollment expenses, attendance expenses, student-activity fees, and books/supplies fees).
  8. Research and Development credit: The R&D credit has been extended through the end of 2014.
  9. Deduction for mortgage insurance premiums: Congress allows for a tax deduction for the cost of PMI for homes and vacation homes through the end of 2014.
  10. Educator expense: Eligible educators will receive a deduction of up to $250 for unreimbursed expenses paid for supplies and equipment used in the classroom.

While the passing of this bill is excellent, it should be noted that this could once again mean a delayed tax season.

For a full list, read the full bill summary at Congress.gov.

If you have any questions, feel free to call us at 314-993-4285 or e-mail us at office@hkaglobal.com