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Tax Tip of the Week | No. 378 | You Do Not Want to be on the Radar of the IRS Wealth Squad October 26, 2016

Posted by bradstreetblogger in : General, Tax Planning Tips, Tax Tip, Taxes , add a comment

Tax Tip of the Week | October 26, 2016 | No. 378 | You Do Not Want to be on the Radar of the IRS Wealth Squad

Here is a recent article from Accounting Today:

The very rich are different from you and me. They even have their own IRS audit squad.

We are now in the beginning of the fourth quarter, a time of financial reckoning, of crashing toward quotas and scrambling to reach year-end targets. Corporations and individuals alike rush to cut the income tax they’ll need to pay next year. Some go too far (or just miss things, or misunderstand what and how they need to report). The IRS collected $6.3 billion last year assessing taxpayers for underreported income. Among them are the big fish, honored with the IRS equivalent of a SWAT team.

It’s called the Global High Wealth Industry Group, and it falls under the Internal Revenue Service’s Large Business and International Division. It’s also been called “The Wealth Squad.” The unit, launched in 2010, aims to “take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control” according to a description in an IRS revenue manual. The unit’s cases involve an individual’s tax return “and related income tax returns where the individual has a controlling interest and significant compliance risk is deemed to exist.” Things that can get sucked into these cases include “interests in partnerships, trusts, subchapter S corporations, C corporations, private foundations, gifts, and the like.”

Any audit of Donald Trump’s tax returns, for example, would be by the Wealth Squad, said Charles Rettig, a principal with Hochman, Salkin, Rettig, Toscher & Perez, of Beverly Hills, and past chairman of the IRS Advisory Council. What are these examinations like? Rettig once described them as “the audits from hell that your grandfather warned you about.” The teams involve “highly capable, experienced examination specialists, which include technical advisers to provide industry or issue-specialized tax expertise, specialists regarding flow-through entities (such as trusts, partnerships, LLCs), international examiners, economists to identify economic trends within returns, valuation experts and others,” he said.

As of 2013, almost 25 percent of taxpayers whose adjusted gross income topped $10 million were audited. They are super focused on the top 50 percent of the 1 percent-ers.

One area the Wealth Squad is always interested in is aircraft and whether it is “being adjusted for correctly,” There are ways of accounting for personal use whether you’re an employee or not.  Airplanes generate very large deductions in terms of depreciation and expenses relative to the income that taxpayers would have to pick up if they are using simple computations.

One way the IRS investigates is by looking at the logs of corporate aircraft. The unit also “wants to see where the taxpayer sits with respect to all the entities that he or she controls, and there is always a focus on maintaining the integrity of that structure,” he said.

Fall: time to dig out the cozy sweaters, get antifreeze for the Subaru, and take a good hard look at your Learjet logs, not to mention the integrity of your structure. When it comes to the IRS Wealth Squad, it’s best to be prepared.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 377 | IRS Offers New Procedure for Those Who Miss IRA Rollover Deadline October 19, 2016

Posted by bradstreetblogger in : General, Tax Planning Tips, Tax Tip, Taxes , add a comment

Tax Tip of the Week | October 19, 2016 | No. 377 | IRS Offers New Procedure for Those Who Miss IRA Rollover Deadline

The Internal Revenue Service unveiled a new procedure recently to help people who accidentally miss the 60-day time limit for rolling over their retirement plan distributions into another qualified retirement plan or individual retirement account.

In Revenue Procedure 2016-47, the IRS details how eligible taxpayers can qualify for a waiver of the 60-day time limit and avoid possible taxes and penalties on early distributions, if they meet certain circumstances. The revenue procedure includes a sample self-certification letter that a taxpayer can use to notify an administrator or trustee of the retirement plan or IRA receiving the rollover that the taxpayer qualifies for the waiver.

Typically, an eligible distribution from an IRA or workplace retirement plan can only qualify for a tax-free rollover if it’s contributed to another IRA or workplace plan by the 60th day after it’s received. In most cases, taxpayers who don’t meet that 60-day time limit can only obtain a waiver by asking for a private letter ruling from the IRS.

A taxpayer who misses the two-month time limit will now be able to ordinarily qualify for a waiver if one or more of the 11 circumstances listed in the revenue procedure apply to them. The mitigating circumstances might be, for example, if a distribution check was misplaced and never cashed, or if the taxpayer’s home was severely damaged, or a family member died, or the taxpayer or a family member was seriously ill, or the taxpayer was incarcerated or restrictions were imposed by a foreign country.

Ordinarily, the IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Even if a taxpayer does not self-certify, the IRS will now have the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.

The IRS is encouraging eligible taxpayers who wish to transfer their retirement plan or IRA distributions to another retirement plan or IRA to consider requesting that the administrator or trustee make a direct trustee-to-trustee transfer, rather than doing a rollover. Doing so can avoid some of the delays and restrictions that often arise during the rollover process, the IRS pointed out. For more information, visit the “Can You Move Retirement Plan Assets?” section in Publication 590-A or the Rollovers of Retirement Plan IRA Distributions page on IRS.gov.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 376 | Nine Ways to Receive Tax-Free Income October 12, 2016

Posted by bradstreetblogger in : Deductions, General, Tax Preparation, Tax Tip, Taxes , add a comment

Tax Tip of the Week | October 12, 2016 | No. 376 | Nine Ways to Receive Tax-Free Income

Don’t overlook these nine tax-free sources of income:

1.    Roth IRAs and Health Saving Accounts:  Any money contributed to either of these accounts is not tax deductible.  However, if you meet the holding requirements (Five years) and age requirements (age 59.5) all distributions from a Roth IRA (including earnings) is tax-free.  HSA accounts can also earn income, and all distributions from the HSA are tax-free if spent on qualified medical expenses.

2.    Selling your primary residence:  Selling your home (if you have lived in it for at least two years) will not trigger a capital gains tax if you don’t exceed the $250,000 exclusion for singles or $500,000 exclusion for joint filers.  This means, if you are married, you would not be taxed unless you sold it for more than $500,000 over what you paid for it.  (This doesn’t happen often in the greater Dayton area!)

3.    Receive a cash gift:  Any “Gift Tax” consequences are the responsibility of the giver, not the recipient.

4.    Ohio Municipal Bonds:  All earnings from Ohio municipal bonds, or Ohio municipal bond mutual funds are tax-free at the federal and state level.

5.    Compensatory damages awarded in court for a physical injury or physical sickness or emotional distress related to a personal injury.

6.    Disability Payments:  Only if you paid the disability insurance premiums.

7.    Zero % Tax Rate:  For those in the 10% or 15% tax bracket (up to $37,450 taxable income for single filers/$74,900 taxable income for joint filers) there is no tax on qualified dividend income or on long-term capital gain income.

8.    Rental income from personal property and personal residence.  If you are not engaged in the business of renting equipment, any occasional income would generally be tax-free.  For example, if you are a retired farmer and a friend asks to rent your idle tractor for a couple of weeks, this would not be considered business income.

You can also rent your personal residence for 14 days or less without incurring any taxable income.  For example, if you owned a home that backs up to Muirfield Village Golf Club in Dublin, Ohio, you could rent your home tax-free during the Memorial Tournament. (If you have ever been to this golf tournament you have seen quite a few of the residents doing this—like they need it!)

9.    Death benefits from a life insurance policy.  Any benefits you receive as a beneficiary from a life insurance policy are generally tax-free.

Please note:  This is a very simplified list and should not be relied upon without consulting with us first.  As always:  “Call us BEFORE you do something, NOT after!”

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 375 | How to Assess the Impact of a Child’s Investment Income October 5, 2016

Posted by bradstreetblogger in : General, tax changes, Tax Planning Tips, Tax Tip, Taxes , 1 comment so far

Tax Tip of the Week | October 5, 2016 | No. 375 | How to Assess the Impact of a Child’s Investment Income

When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.

Potential danger

For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.

Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.

But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)

Simplified approach

In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.

Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.

Many lessons

Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.