Transcript Tax Update_MACE_Jan 2015

Federal Income Tax Update:
2014 and Then What?
Tony Curatola
Joseph F. Ford Professor
Of Accounting and Tax
Drexel University
http://home.comcast.net/~acuratola
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Part 1
Basic Individual Taxpayers
Issues
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Individual Tax Provisions
2014 & 2015 Tax Rates

Increase income tax rates for individuals
 from 10, 15, 25, 28, 33 & 35% for 2012
 to 10, 15, 25, 28, 33, 35, and
 39.6% for excess taxable income in 2014 & 2015
 $457,600 for MJ, $432,200 for HofH & $406,750 for S
 $464,850 for MJ, $439,000 for HofH & $413,200 for S

The tax rate bracket are doubled for only MJ filing at 10% & 15%
 Marriage penalty returns
 What is the impact of the DOMA ruling?
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Individual Tax Deductions in 2014 (2015)

Standard Deduction
 $6,200 ($6,300) for single and
 $12,400 ($12,600) for MJ filing

No marriage penalty (theoretically)
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Individual Tax Deductions in 2014 (2015)

Standard Deduction
 $6,200 ($6,300) for single & $12,400 ($12,600) for MJ filing

Itemized Deductions
 3% phase-out provision returns to those with excess AGI
 MJ - $305,050 ($309,900),
 HofH - $279,650 ($284,050), &
 S - $254,200 ($258,250)
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Individual Tax Deductions in 2014 (2015)

Personal & Dependent Exemption – $3,950 ($4,000)

Phased-out ratably for AGI in excess of
 MJ - $305,050 ($309,900),
 HofH - $279,650 ($284,050), &
 S - $254,200 ($258,250)

Note: Phase-outs are the same for itemized deductions and
personal & dependent exemptions.
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Tax Extender Bill Status Pre Election


Senate Bill:

Expiring Provisions Improvement Reform and Efficiency
(EXPIRE) Act

Tabled until November
House Bill:


Passed Without Revenue Offsets
Bills withdrawn after November elections
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Tax Extender Bill Post Election

Passage and signing of H.R. 5771:

Act: To amend the Internal Revenue Code of 1986 to extend
certain expiring provisions and make technical corrections, to
amend the Internal Revenue Code of 1986 to provide for the tax
treatment of ABLE accounts established under State programs for
the care of family members with disabilities, and for other purposes.

Division A: Tax Increase Prevention Act of 2014 (TIPA)

Division B: Achieving a Better Life Experience Act of 2014
(ABLE)
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TIPA Provisions


State & Local General Taxes
 Deduct in lieu of State income taxes
Teacher’s Classroom Deductions
 Above the line deduction of up to $250 extended through 2013

Mortgage Insurance Premiums
 Deductible as mortgage interest extended through 2013

Discharged of indebtedness
 General (includible)
 Principal residence (excludable through 2013)
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TIPA Provisions

The new Act contains approximately:

8 extensions for individuals,

31 extensions for business,

11 extensions for energy,

2 extenders for multiemployer DB plans, and of course

Some technical corrections
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Individual Tax Provisions - Education

Employee Education Assistance

Exclude up to $5,250 of qualified employer sponsored
assistance, including graduate courses leading to professional
degrees;

Include amounts received from an employer of nonqualified
education plans. But may be eligible for lifetime learning credit.

Note: This provision is made permanent by ATRA of 2012
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Individual Tax Provisions - Education

Student Loan Interest (made permanent by TRA of 2012)

Up to $2,500 of student loan interest deductible (not prepaid
interest) above the line

Phased out for 2014 & 2015 begins when MAGI exceeds
 $65k-$80k for singles and $130k-$160k for MJ.

Note: 60-month limitation is not reinstated .
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Individual Tax Provisions - Education

Qualified Tuition and Related Expenses

Above the line deduction extended through 2015

Phase-out provision
 $4,000 where AGI is < $65,000 ($130,000 for MJ filing)


$2,000 where AGI is between $65,000 and $80,000
($130,000 and $160,000 when filing married joint)
$0 for all others
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Individual Tax Provisions - Education

American Opportunity Tax Credit (old Hope Credit)
 For 2014-2017, maximum of $2,500 / year for first 4 years of
post-secondary education, and is calculated as
st $2,000, and 25% on next $2,000
 100% on 1

The credit is phased out where MAGI is
 Between $160,000 and $180,000 for married filing jointly,
 Between $80,000 and $90,000 for all other taxpayers

The credit is applicable to qualified tuition, fees, and course
material (was tuition and fees) and may be partially refundable.
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Individual Tax Provisions
AMT Exemption

Tax Year
AMT Exemption Amount
Estate &
Unmarried
MFS
Trusts
51,900
40,400
22,500

For 2013
MFJ &
SS
80,800

For 2014
82,100
52,800
41,050
22,500

For 2015
83,400
53,600
41,700
22,500


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Individual Tax Provisions
Gift Tax Exclusion in 2014 (2015)

Gift tax exclusion

$14,000 ($14,000) per person per year



And
$145,000 ($147,000) for gifts to a non-US citizen spouse
Estate tax exclusion - $5,340,000 ($5,430,000)
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2014 & 2015 Retirement Planning

Contribution to IRA and Roth IRAs - $5,500 / spouse
 AGI limitations for deductible IRAs & nondeductible Roth IRAs
 Limitation is avoidable by converting nondeductible IRA

Conversion of Traditional IRA to Roth IRA by including entire taxable
convertible amount in gross income


Be careful: The 39.6% tax rates & 3.8% tax requires some tax
planning
Small business owners - convert SEP & SIMPLE plans to Roth IRA
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2015 (2014) Retirement Planning

SEPs qualifying compensation limit increased to $600 ($550)

Sec 402(g) increased to $18,000 ($17,500)

IRAs: Catch up limit remains at $1,000

SIMPLE: Contribution increased to $12,500 ($12,000) & Catch up
increased to $3,000 ($2,500)

Non-SIMPLE: Catch up increased to $6,000 (5,500)
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2015 Inflation Adjustments

See, Revenue Procedure 2014-61, October 30, 2014 for Estate, gift
and income tax inflation adjustment figures for calendar year 2015

See Information Release 2014-99 for Retirement plan inflation
adjustment figures for calendar year 2015
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Part 2
Health Care Issues
Individual Taxpayers
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Flexible Spending Account


Maximum deductible contribution

$2,500 in 2014 ($2,550 In 2015)

Options for plan administrators
 $500 carryover, or
 75 day grace period, or
 Do not adopt either option
$500 carryover limits will be indexed in $50 increments after 2013
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Medicare Tax on Earned Income

Additional 0.9% Medicare Tax on wages, compensation and selfemployment income
 Over $250,000 filing MJ;
 Over $125,000 filing MS; or
 Over $200,000 for all others

Notes:
 Marriage penalty exists here & withholdings can be an issue
 Underpayment penalty applies
 Thresholds are not indexed for inflation
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Medicare Tax on Investment Income

Additional 3.8% Medicare Tax on excess net investment income
 Over $250,000 filing MJ;
 Over $125,000 filing MS; or
 Over $200,000 for all others

Notes:
 Marriage penalty exists here and withholdings can be an issue
 Underpayment penalty applies
 Thresholds are not indexed
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Medicare Tax Calculation

Example: Taxpayer A has wages $190,000 and self-employment
income of $40,000.

Result: Taxpayer A has an additional tax of $270

Calculation: $270 = ($230,000 - $200,000) x 0.9%.

Note: The $270 Medicare tax is part of estimate tax payments.
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Medicare Tax Calculation

Example: Taxpayer B has wages and self-employment income of
$240,000 and net investment income of $40,000.

Result: Taxpayer A has an additional tax of $1,880

Calculation: $1,880, which is the sum of
 $360 = ($240,000 - $200,000) x 0.9% and
 $1,520 = ($280,000 - $240,000) x 3.8%.
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Part 3
Hot Button Issues
Individual Taxpayers
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Annual Federal Tax Refresher Course
AFTR Program

Treasury introduces voluntary certification program after RTRP mess

Effective for 2015 tax filing season

18 Hours of CE

Must consent to Circular 230 practice requirements & a valid PTIN

AICPA challenge to this program failed
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RTRP

Is RTRP Dead or in a Coma?

Senators Wyden (D-OR) and Cardin (D-MD) introduced legislation on
January 7th providing Treasury & IRS explicit authority to regulate paid
tax preparers
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ABLE Act of 2014

Purpose:

To encourage and assist individuals and families in saving private
funds for the purpose of supporting individuals with disabilities to
maintain health, independence, and quality of life.

To provide secure funding for disability-related expenses on behalf
of designated beneficiaries with disabilities that will supplement,
but not supplant, benefits provided through private insurance, the
Medicaid program under title XIX of the Social Security Act, the
supplemental security income program under title XVI of such Act,
the beneficiary's employment, and other sources.
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ABLE Act of 2014

New IRC Section 529A

Limited to annual gift tax amount (i.e., $14,000 in 2015)

Account accumulates on a tax free basis

Qualified distribution amounts are excluded in gross income

Non-qualified distribution amounts are included in gross income
 As determined by IRC Section 72, and
 10% excise tax applies unless made after the death of the
beneficiary
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New IRC Section 529A

Example from Committee Report

Assume a qualified ABLE account with a balance of $100,000 (of
which $50,000 consists of contributions) distributes $10,000 to a
beneficiary who has incurred $6,000 of qualified disability expenses.
Under section 72, one-half of the distribution ($5,000) is includible in
gross income. Under the bill, the $5,000 amount otherwise includible
in gross income is reduced by $3,000 ($6,000/$10,000 multiplied by
$5,000) to $2,000. An additional tax of $200 (10% of $2,000) is
imposed on the distribution.

Problem: When is the balance determined?
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Tax Legislation

Business Tax Overhaul Proposal

Drop tax rates to 25% for ALL businesses

No change in individual tax rates
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Earned Income Tax Credit

Due Diligence (see Reg. Sec. 1.6695-2):
 Completion & submission of Form 8867 (checklist);
 EIC worksheet (or other such form);
 Preparer must not know, or have reason to know, that any
information is incorrect; and
 Retain copy of Form 8867, EIC worksheet

Penalty: $500 per incident

The IRS is currently sending due diligence warning letters to
preparers “who appear not to be complying”
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On-Line Gambling

Hom, DC-Calif, 2014-1 USTC, Para. 50,307

Online poker companies outside the US (even if they have
branches in the US) are treated as “banks, securities, or other
financial accounts” located in a foreign country

Hence, taxpayer’s accounts are reportable on FBAR

See Hom, USDC, N.D. Calif, 2014-1 USTC ¶ 50,307

Humor: Internal Rev Manual is not a citable source (Really!)
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Safe Harbor Rules Home Office Expense

Rev. Proc. 2013-13 provides a safe harbor rule
 Deduct $5 per sq. ft. of the home office up to 300 sq. ft.
 No carryover for any unused expense

More than one business operating at home
 Each spouse may elect the safe harbor rule
 Home office space must be unique to each spouse; no double
counting
 Each spouse is limited to the 300 sq. ft. rule.

Taxpayer can switch between cost and safe harbor methods.
Carryover permitted under cost method only
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Estimated Tax Payments

Chambers & Curatola (2012) show less underpayment penalties
incurred when taxpayers pay monthly instead of quarterly

How do you pay monthly? Really!
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Non-Away-From-Home Lodging


1.
2.
3.
4.
TD 9696 (09/30/2014), Reg. §1.262-1
Tax free working condition fringe benefit if all facts & circumstances
tests are passed:
Lodging is necessary to participate fully in or be available for a bona
fide business meeting, training, conference, etc.
Lodging is for a period not to exceed 5 days in any given quarter,
Employer requires employee to remain at the activity or function
overnight,
Lodging is not lavish or extravagant & doesn’t provide any significant
element of personal pleasure, recreation, or benefit.
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Home Office Ruling (Odd Result)

Miller (TC Summary Opinion 2014-74)
 Taxpayer has a studio apartment (NY) that is split into 3 pieces:
 Personal (entryway, bathroom & kitchen area),
 Office space (desk, shelving units, bookcase and sofa), and
 Bedroom area

Taxpayer meets with clients & performs work for company (CA) in the
office space

Office space is occasionally used for personal use.
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Home Office Ruling

Court Decision states, in part that this evidence persuaded it that the
Taxpayer's apartment was her principal place of business, that she
was obliged to use the space as an office for the convenience and
benefit of her employer, and that the employer (BIW) was not able or
willing to reimburse her for any of her apartment-related expenses.
Although the Taxpayer admitted that she used portions of the office
space for nonbusiness purposes, the Court found that her personal
use of the space was de minimis and wholly attributable to the
practicalities of living in a studio apartment of modest dimensions. It
therefore allowed her to deduct one-third of her rent and cleaning
service charges for the year.

Court Decision: Non business use was de minimis
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Innocent Spouse

Notice 2012-8 – Equitable Relief under IRC Sec. 6015(f)
 Satisfy 3 safe harbor factors



OR
Satisfy 8 factor balancing test
De novo standard and scope of review to the Tax Court granted
th
th
 Wilson (9 cir. , 111 AFTR 2d 2013-522) and Neal (11 cir., 103
AFTR 2d 2009-8)
 The de novo scope of review provides the petitioner the ability to
introduce new evidence.
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1 Year IRA Rollover Rule

Pre 2015 Rule
 1 Rollover per IRA per 365 days
 IRS Publication 590 (2013)

Bobrow Case (TC Memo 2014-21)
 1 Rollover per Taxpayer per 365 days
 Service did not appeal case

Post 2014
 IRS will follow Bobrow ruling (Announcement 2014-15)
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1 Year IRA Rollover Rule

Impact of Rule

Applies to SEPs and SIMPLEs
 IRA based plans
 IRA rules are unique for RMD rules

Does not apply to other types of Retirement Plans
 Generally, these are separate plans (see RMD rules)
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Rollover from designated Roth

Prop Reg (REG-105739-11) and Notice 2014-54

Allocation of after-tax amounts applicable to pre-January 1, 2015
distributions (or Sept 18, 2014 if chosen by taxpayer)

Pre 2015 distributions follow Sec. 72 allocation rule for pre & post
contributions.

Direction of multiple destinations of distributions is discretion of
taxpayer
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Proposed Reg on Rollover to Roth Example
Employee participates in a qualified plan with a $250,000 account
balance ($200,000 pretax & $50,000 after-tax). Employee leaves
company and requests a distribution of $100,000.

Under §72(e)(8), the pretax amount of distribution is $80,000
($100,000 x $200,000 / $250,000).

Employee requests $70,000 to be directly rolled over to qualified plan
of his new employer and $30,000 to be distributed to him.

Result:


The $70,000 is treated as consisting entirely of pretax.

The $30,000 is treated as $10,000 in pretax & $20,000 in after-tax.
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Proposed Reg on Rollover to Roth Example
(continued)
Employee participates in a designated Roth IRA plan with a $250,000
account balance ($200,000 pretax & $50,000 after-tax). Employee leaves
company and requests a distribution of $100,000.

Under §72(e)(8), the pretax amount of distribution is $80,000
($100,000 x $200,000 / $250,000).

Employee requests $82,000 to be directly rolled over to qualified plan
of his new employer and $18,000 to be distributed to him.

Result assuming new plan separately accounts for after-tax contrib.:


The $82,000 is treated as consisting of $80,000 in pretax & $2,000 in
after-tax.

The $18,000 is treated as consisting of $18,000 in after-tax.
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myRA

New Government Backed Retirement Plan

President Obama signs presidential memo (1/29/2014)

Treasury directed to create the myRA

Same properties of Roth IRA
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myRA

Targeted for millions of low- & middle-income wageearners without access to an employer-sponsored plan

myRA




Open for as little as $25, and
Contribute $5 or more every payday
Earn interest at G Fund variable rate (same as 30 year bond rate)
Backed by US Treasury
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myRA

Income limits same as Roth IRA

Transfer to the private sector Roth IRA:



Anytime, but must be transferred
After 30 years or account reaches $15,000
Info available at


www.treasury.gov or
www.treasurydirect.gov/readysavegrow
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TD 9673 - Qualifying Longevity Annuity
Contracts

Modify RMD rules:
 Purchase of deferred longevity annuity to start at age 80-85

Maximum Annuity Investment is the lesser of:
 25% of retirement plan account balance, or
 $125,000 (was $100,000 under proposed regs)

Issue Raised:
 401(k) plan purchase: gender neutral tables used
 IRA plan purchase: sex-based mortality tables used
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TD 9673 - Qualifying Longevity Annuity
Contracts

$125,000 is inflation adjusted at $10,000 increments ($25,000 under
proposed regs)

QLAC may contain a return of premium feature that is payable by
12/31 of following year of death.

QLAC cannot consist of variable contract, an equity-indexed contract,
or a similar contract.

A failed QLAC due to excess premium limits may return excess
premium to non-QLAC portion of employee’s plan by 12/31 of
following year.
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Small Business Owners


SEP Plan for 2014:
 Establish by April 15, 2015 (including extensions)
 Employer plan contributions due by April 15, 2015 (including
extensions)
SIMPLE Plan for 2014:
 Establish by October 1, 2014
 Employer plan contributions due by April 15, 2015 (including
extensions)
 Employee plan contributions due by January 30, 2015
 Note: Sole proprietor contribution on behalf of themselves as
an employee is due by January 1st.
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Installment Sale &
Repossessed Residence

DeBough (142 T.C. No. 17, May 19,2014)
 Issue: Installment Sale, IRC Sec. 121 Exclusion & Repossession

Installment Sale Rules apply to Recognizable Gain

IRC Section 121 exclusion applies to principal residence only
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Installment Sale &
Repossessed Residence

Rub: Interplay of Sections 1038 & 121

Non-principal residence:


Principal residence:


Recognized as long term capital gain any money or property received prior to
reacquisition that was not taxed (i.e., return of property’s adjusted basis)
Recognized as long term capital gain any money or property received prior to
reacquisition that was not taxed (i.e., return of property’s adjusted basis AND any
121 exclusions)
Real Issue: Seller’s basis after reacquisition
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Virtual Currency & Bitcoins

Notice 2014-21: Treat virtual currency (VC) as property, not currency

TX CPA Society requesting IRS guidance because they content that
not all VC transactions should be treated as property. Specifically,

Business owners accepting VC in their ordinary course of
business should treat the transaction as a currency transaction

Investors should treat VC transactions as property transactions
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New IRC Section 529A

Amounts in an ABLE account may be rolled over without income tax
liability to


another ABLE account for the same beneficiary (e.g., moving to
another state), or
another ABLE account for the designated beneficiary’s brother,
sister, stepbrother or stepsister who is also an eligible individual.
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.
Question and Answers
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Anthony “Tony” P. Curatola, Ph.D.
Joseph F. Ford Professor of Accounting
Drexel University

Tony Curatola is the Joseph F. Ford Professor of Accounting at Drexel
University. He holds an MA degree in accounting (1979) from the Wharton
Graduate School of the University of Pennsylvania and a Ph.D. degree in
accounting (1981) from Texas A&M University. Tony joined the faculty of
Drexel University in 1989 by accepting the appointment to the Joseph F.
Ford Professor of Accounting Chair.

Tony has been called on to provide information to the House Judiciary
Committee concerning the source tax law. He is a regular contributor to
numerous journals, such as The Tax Adviser, TAXES, Oil and Gas Tax
Quarterly, National Public Accountant, Benefits Quarterly, Tax Executive,
Journal of Pension Planning and Compliance, Tax Notes, and State Tax
Notes. Tony’s findings have appeared in media such as Forbes,
Washington Post, Money Magazine, Wall Street Journal and The New
York Times to name a few. He is currently the Editor of the Tax Column
for Strategic Finance, Journal of Legal Tax Research, and is an author of
several MicroMash Interactive education courses in the employee benefit
area and the Enrolled Agent’s Review Course of ExamMatrix.
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