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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 89, No. 10
Dear Client:
Readers have tax questions on their minds,
based on the inquiries we have been receiving lately.
We are being asked for our opinion on many issues,
so we will share the ones we are hearing the most.
Washington, May 9, 2014
HIGHLIGHTS
Summer Tax Tips Student jobs
Filing Reminders Foreign accounts
Are the expired tax breaks safe for 2014?
Business Taxes Executive pay
Yes. All of the key provisions that lapsed
Penalties Incorrect IRS publications
after 2013 will be revived retroactively to Jan. 1,
including the election to write off state sales taxes
Enforcement Summons procedures
in lieu of income taxes, the $2-million exclusion
Tax Debts Some words of caution
of forgiven debt on a primary home, the $500,000 cap
on expensing business assets and the ability of folks
age 70½ and older to transfer up to $100,000 from their IRAs directly to charity.
This last easing, if not revived, has implications for the 3.8% Medicare surtax
on net investment income. Although the payout wouldn’t be subject to the surtax,
it would cause the donor’s adjusted gross income to go up, which has the potential
to trigger or increase the donor’s liability for the surtax on other investment income.
When will lawmakers reinstate the provisions? After the Nov. elections,
most likely. Although the Senate is currently on track to hold a vote next week
to restore nearly all of the breaks, the House is proceeding at a more deliberate pace.
This past week, it approved legislation to permanently extend the R&D tax credit
and will take up individual bills to extend other business tax breaks. As a result,
the likely scenario is that a final agreement won’t be reached until late in the year.
Will Congress give IRS the power to regulate unenrolled preparers? No.
Now that an Appeals Court voided IRS’ rules requiring preparers who aren’t CPAs,
lawyers or enrolled agents to pass an exam and take continuing education courses
before they could prepare returns, the ball is in Congress’ court. House taxwriters
will not agree to amend the law to allow the agency to reinstate the program.
But IRS has another idea: A voluntary credential for unenrolled preparers.
To qualify, preparers would have to take around 15 hours of tax-related courses,
similar to the rule the Service had in place before the Court’s ruling. In addition,
they’d have to pass a quiz to get credit for the courses. However, the requirement
to pass a competency test on basic tax rules and procedures would not be revived.
The Service hopes to implement this proposal in time for the next filing season.
Can taxpayers rely on the current higher estate and gift tax exemption?
Definitely. For 2014, it is set at $5.34 million, and it’s scheduled to rise
with inflation in the coming years. President Obama wants to cut the exemption
to $3.5 million and raise the top rate back to 45%...a five-percentage-point hike...
but the GOP says that proposal is a nonstarter. So folks shouldn’t worry about it.
What are the odds for a bill making online retailers collect state sales tax?
Less than 50-50. Last year, the Senate passed a bill requiring businesses
having Web sales of over $1 million to collect sales taxes from buyers living in states
with sales taxes. But legislation in the House has been stalled for months in committee,
and we expect any bill that emerges will be hard to reconcile with the Senate bill.
The Kiplinger Tax Letter (ISSN 0023-1762) is published biweekly for $147/one year, $249/two years, $331/three years
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page 2
May 9, 2014
SUMMER Some reminders about taxes for students who have summer jobs:
TAX TIPS They can escape federal income tax withholding from their paychecks
if they did not owe any tax last year and do not expect to owe any this year.
So students who can be claimed as dependents can avoid income tax withholding
if their unearned income is $350 or less and their total income won’t exceed $6,200.
But if their investment income is more than $350, total income cannot top $1,000.
W-4s claiming complete exemption from withholding in 2013 have expired.
Employees must refile them for 2014, or employers face penalties for not withholding.
Hiring your children can lower your tax bill as well. No FICA tax is due
if sole proprietors or husband-wife partnerships hire their kids who are under 18.
The same goes if they work for a parent’s one-person LLC that elects to be disregarded
for tax purposes. Payments to kids also cut the parents’ income and SECA tax bills.
And federal unemployment tax is not owed on their salaries until they hit age 21.
Here’s a thought if your child or grandchild will be toiling at a summer job:
Consider contributing to a Roth IRA for him or her this year. You can put in
up to $5,500, but not more than what the child makes. However, the payin counts
toward the $14,000 annual gift tax exclusion ($28,000 if your spouse agrees).
Your generosity can help provide a nice nest egg. A $5,500 contribution
to a 16-year-old’s Roth that earns 7% each year will grow to $151,000 at age 65
and $212,000 at age 70. If the child works for a few summers and contributions
are made each year, the future balance in the account will be significantly larger.
There are key tax advantages to Roths. All withdrawals made after age 59½
are tax free. Contributions can be pulled out free of tax at any time. And if the child
is purchasing a first home, up to $10,000 of earnings can be taken out tax free.
FILING
U.S. citizens who live abroad have until June 16 to file their tax returns
REMINDERS with the Service or request a four-month filing extension. Citizens residing
in foreign countries automatically get two additional months to file their returns.
But this year, June 15 falls on a Sunday, so the due date is extended an extra day.
An important deadline is nearing for owners of foreign accounts.
U.S. citizens with foreign accounts whose total value exceeded $10,000 at any time
in 2013 are required to electronically file FinCEN Form 114 no later than June 30.
See bsaefiling.fincen.treas.gov/main.html for the form, which is available only online.
Also go to www.kiplinger.com/letterlinks/accountguide to view a reference guide
that IRS released to assist holders of foreign accounts with their filing obligations.
This is in addition to the requirement that those with lots of financial assets abroad
attach IRS Form 8938 to their timely filed tax returns, so one or both of the forms
may have to be filed by a taxpayer, depending on his or her particular circumstances.
BENEFIT The annual ceilings on deductible contributions to HSAs will increase in 2015.
PLANS
The caps will go up slightly to $6,650 for account owners with family coverage
and to $3,350 for self-only coverage. Folks born before 1961 can put in $1,000 more.
The limits on out-of-pocket costs, such as deductibles and copayments, will inch up
to $12,900 for people with family coverage and to $6,450 for individual coverage.
Minimum policy deductibles will rise to $2,600 for families and to $1,300 for singles.
Plan beneficiaries don’t get extra time to start taking required distributions,
IRS says privately. A father who participated in two pension plans named his daughters
as beneficiaries. He died before he was required to take any minimum distributions,
and his daughters weren’t timely informed that they were his designated beneficiaries.
They learned this after the date they had to start taking withdrawals from the plans.
The Service said it wouldn’t extend the time period for them to begin withdrawals,
but it did say they could seek a waiver of the 50% excise tax on any missed payouts.
Your subscription includes The Tax Letter online. Go to KiplingerTax.com
page 3
May 9, 2014
BUSINESS A corporation can’t deduct amounts paid to settle a shareholder lawsuit,
TAXES
an Appeals Court says. A minority shareholder of a firm sued the company
after it reorganized, claiming that the corporate restructuring constituted self-dealing
by the majority owners and diluted his interest in the firm. The case was later settled.
The corporation must capitalize the settlement payments plus the related legal fees
because they were connected to the reorganization (Ash Grove Cement, 10th Cir.).
Deducting over $1 million of executive pay requires shareholder approval.
This company’s plan passes muster, a court rules. A publicly traded firm
sought to sweeten its bonus incentive plan for execs. In a statement to shareholders,
the firm said that if they rejected the proposal, the original bonus plan would remain
in effect, which would make it harder for the firm to attract and retain key employees.
A shareholder sued, claiming that the language was coercive and would bar the firm
from deducting compensation in excess of $1 million, but a district court disagreed.
The corporation’s deduction is not endangered (Kaufman v. Alexander, D.C., Del.).
TAX
Good news for a filer who beat IRS and got interest abated on her tax bill:
DISPUTES She can recover costs and fees incurred in connection with the proceedings,
the Tax Court says. This includes a portion of the fees charged by her accountant.
And although her attorney represented her without charge, the agency is required
to pay the lawyer a reasonable sum for the services. IRS agreed to abate the interest
because of delays by the agent who audited the 1040 (Carpentier, TC Memo. 2014-75).
Invalid elections to pay estate taxes in installments have one small benefit:
The IRS’ 10-year collection period isn’t extended, a district court decides.
If an estate makes the payment deferral election, the time IRS has to collect the tax
is extended by an equivalent period. Here, an executor filed the estate’s tax return
and made a protective election to pay the tax in installments. However, the election
was never finalized. For some reason, the IRS let the 10-year statute of limitations
for collecting tax deficiencies lapse, but argued that the estate’s protective election
lengthened the statute of limitations period. The court disagreed (Baileys, D.C., Calif.).
Delinquent taxpayers can’t call the shots on what assets the IRS levies,
the Tax Court rules. After receiving a levy notice from the Service on a tax debt,
a taxpayer got a hearing with an appeals officer and asked that IRS levy property
owned by a trust instead of income paid to him by the trust. The Service nixed his plea,
and the Tax Court concurred with the agency’s decision (Kraft, 142 TC No. 14).
SCHOLAR- A graduate student is partially taxed on a fellowship grant that he received
SHIPS
while pursuing a doctorate in biophysics at Harvard, the Tax Court says.
The grant paid all of his tuition and school fees and provided him with a cash stipend
of over $18,000, which he claimed he used to pay off student loans and other expenses
related to his studies. But student loan repayments aren’t treated as qualified expenses,
and he didn’t prove that the other costs were course related, so the stipend is taxed.
The balance of the fellowship is tax free. Although the IRS audited him in a prior year
on the same issue and made no changes, that doesn’t bar the agency from asserting
in this case that a portion of the stipend is taxable (Wang, TC Summ. Op. 2014-39).
PENALTIES Think you can rely on an IRS publication to beat a penalty? You can’t.
We previously told you the Tax Court held that for a filer with multiple IRAs,
the rule of one rollover every 12 months applies on an aggregate basis to all IRAs,
not on an IRA-by-IRA basis. This decision conflicts with an IRS proposed regulation
and Publication 590, both of which say the rule applies on an IRA-by-IRA basis. Still,
the Tax Court says that the IRA owner owes a 20% accuracy-related penalty (Bobrow).
In its view, IRS publications aren’t substantial authority for positions taken on returns.
Many source documents are available in the online edition of The Kiplinger Tax Letter
page 4
May 9, 2014
ENFORCE- The Service is doing a poor job of auditing large partnerships. A recent report
MENT
by the Government Accountability Office said that IRS conducts field exams
of less than 1% of all large partnerships…those with at least 100 direct partners
and assets valued at $100 million or greater. This includes private equity funds,
hedge funds, master limited partnerships and the like. And to make matters worse
for IRS, about 45% of the audits resulted in no change to taxes. Compare these figures
with the agency’s 15.84% audit rate of corporations with assets of $10 million or more.
The dismal audit rate of large partnerships is caused in part by the Service’s difficulty
in complying with a law requiring it to compute adjustments at the partner level.
With firms having up to thousands of partners, this isn’t an easy task for the agency.
An Appeals Court makes it harder for the Service to enforce a summons.
The agency issued summonses to four banks, requesting a taxpayer’s account records.
But IRS violated the rule that the taxpayer must get notice of a third-party summons
at least 23 days before the agency examines the records. Violating the 23-day rule
automatically invalidates the summonses, in the Court’s opinion (Jewell, 10th Cir.).
Expect the Supreme Court to eventually weigh in on this issue. This decision
conflicts with the rulings of five other Appeals Courts. And the government is serious
about protecting its summons rights. Later this spring, the Supreme Court will rule
on whether taxpayers who claimed that IRS issued a summons for improper purposes
can have a pre-enforcement hearing without first having to substantiate the claim.
EXCISE
Importers of high-end sports cars can get hit with the gas-guzzler tax,
TAXES
as this case shows. A collector purchased a rare McLaren F1 sports car
from a German seller and imported it to the U.S. He then transferred the title
to his father to satisfy an outstanding debt. Soon after the transfer, he passed away.
IRS slapped his estate with the gas-guzzler tax, which applies to a manufacturer’s sale
or an importer’s use of an automobile with low fuel economy. The estate claimed
that the McLaren escaped the excise tax because it wasn’t primarily manufactured
for use on public streets, but the court disagreed (Gonzales, Ct. of Fed. Claims).
TAX
If your small business owes delinquent payroll taxes, consider this option:
DEBTS
Apply for an In-Business Trust Fund Express Installment Agreement.
Firms that owe $25,000 or less in payroll taxes can enter into this installment plan
to pay their debt over 24 months without having to give financial information to IRS.
Businesses that owe more can pay down their tax debt to $25,000 and then apply.
Firms owing between $10,000 and $25,000 must let IRS debit their bank accounts
each month for the funds. While the agreement is in place, all required tax returns
must be filed and firms must remain compliant with their payroll tax obligations.
To apply, call 800-829-4933 or the number listed on the bill sent by the Service.
Promises to settle your IRS tax debts for pennies on the dollar are just that:
Promises. IRS will look at your income and assets and will accept an offer
to compromise a tax debt only if paying it in full would create major financial hardship.
The Federal Trade Comm. warns that many people have reported problems with firms
that hawk tax-debt-relief plans. Some companies charge big up-front fees and then fail
to send IRS the paperwork. While tax debts may be settled cheaply if the money owed
is large and the filer has few assets, that isn’t the typical situation with back taxes.
Remember the adage that if something sounds too good to be true, it usually isn’t true.
Yours very truly,
May 9, 2014
THE KIPLINGER WASHINGTON EDITORS
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