Tax Planning

Since 2015, when the Fixing American’s Surface Transportation Act was passed by Congress, world travelers who owe the IRS money have found that it’s no fun to owe a tax debt. In fact, it can ground any and all international travel plans indefinitely.

As noted by Jim Buttonow of Accounting Today:

…FAST Act is Section 7345 of the Internal Revenue Code, which requires the IRS to provide information to the U.S. State Department about people who owe “seriously delinquent tax debt.” Then, the State Department can deny, revoke or limit the ability of these individuals to use their passports – until they are back in good standing with the IRS.

The following 10 Q & A points about the FAST Act, also from Buttonow’s report linked above, are quoted and summarized in a more abbreviated form so that you can quickly digest the main points of how the FAST Act could affect you if you owe taxes:

1. What is the new passport-restriction program (IRC Section 7345)?

IRC Section 7345 requires the IRS to identify and “certify” individuals who have “seriously delinquent tax debt,” and provide this certification to the State Department. In turn, the State Department can essentially limit or completely stop the individual’s travel plans outside the US until the would-be traveler gets into good standing with the IRS.

2. Why did Congress create passport restrictions?

In 2011, the Government Accountability Office issued a report that examined the potential for using passports to increase tax-debt collection. The report found that 224,000 people who owed collectively more $5.8 billion in unpaid federal taxes received passports in 2008.

The report recommended that Congress enable a more coordinated effort between the IRS and State Department to go after these unpaid taxes, using passports as leverage. The report received a lot of national press, and the link between federal tax debt collection and passports became law in 2015.

3. Who is Affected?

The passport restriction will affect people who travel internationally and owe seriously delinquent tax debt. This includes people with passports and those applying for or renewing passports.

Who is an individual with seriously delinquent tax debt? Section 7345 defines this person as owing a legally enforceable tax liability of more than $50,000 (unpaid taxes, penalties and interest combined), with:

• A lien filed, and all administrative remedies for lien relief have lapsed or been denied;
• or, a levy issued.

There are certain exceptions. The IRS won’t consider people in the following situations to be individuals with seriously delinquent tax debt, because these people are in good standing with the IRS:

• People who are in an IRS installment agreement to pay their taxes.
• People who have settled their debt through an offer in compromise or Justice Department agreement. 
• People who appeal a levy through an IRS collection due process hearing. 
• People who request innocent spouse relief (Form 8857). 

Based on this list of exceptions, the way to avoid being certified by the IRS as an individual with seriously delinquent tax debt is to get into an agreement with the IRS to pay the balance.

4. What will happen to the person who owes seriously delinquent tax debt?

Before the State Department revokes a passport, the State Department may limit the passport so that the individual can only travel back to the United States. It’s unclear how the State Department will use its discretion on limiting and revoking passports.

5. How can taxpayers get their passport restrictions lifted?

To get out of the passport restriction, individuals must get back into good standing with the IRS. For most taxpayers, that will mean paying the entire tax bill or, more likely, setting up an installment agreement with the IRS.

6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. 

7. Can taxpayers appeal their seriously delinquent tax debt certification?

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal. For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement.

8. What if taxpayers don’t think they owe the tax?

To get immediate relief, the only quick option is for taxpayers to pay the balance, or more likely, set up an installment agreement, and contest the tax later with the IRS.

9. Is there an expedited process to remove passport restrictions?

Right now, there’s no provision to expedite removal of passport restrictions after a taxpayer gets in good standing with the IRS. As the law is implemented, look for the IRS and the State Department to develop expedited procedures to relieve taxpayer burden.

10. What can a seriously delinquent tax debtor do to avoid passport restrictions?

Basically, taxpayers can avoid passport restrictions by meeting an exception outlined above – all of which mean getting into good standing with the IRS.

As Buttonow makes clear in his report: don’t assume it’s safe to make travel plans if you owe taxes. There are problematic ramifications of not being in good standing with the IRS when you intend to use your passport to travel outside the country.

For this reason, we highly recommend you meet with your CPA as part of your pre-trip planning process to put in place payment arrangements with the IRS sufficiently in advance of taking your trip.

It is crucial to understand your small business’s tax responsibilities, and there are real risks if you do not. Mismanagement of your tax obligations can ultimately lead to liens, bank levies, collections and wage garnishments, just to name a few of the potential risks. A tax lien, and the collection process it entails, can damage your credit and force you to work through many obstacles and headaches, including the task of requesting a certificate of release. It can also adversely affect your chances of obtaining financing for your business. Simply put, an I.R.S. tax lien means putting your business at the increased risk of failure.

Do Certain Types of Businesses Have More Risk?

Many wonder if certain types of businesses--i.e. specific industries, business structures, number of employees, revenues of business-- are more likely than others to be at greater risk because their tax liability is more complicated and difficult to decipher.

However, greater complication doesn’t always mean greater risk.

In general, the larger a business is in terms of revenue the more sophisticated it should be in terms of implementing policies, procedures, and internal accounting controls that should reduce the risk of not understanding its tax liability--but not always. The opposite would be expected to be true the smaller a business is in terms of revenue. Smaller businesses tend to be more fixated on developing more business and "surviving."

Some businesses even have different classes of employees. For example, an employee working the graveyard shift might be paid different rates than another employee performing the same task who is working a normal 8 to 5 shift. This risk can be managed in part, however, by engaging an outside service bureau specializing in processing the payroll of clients, as discussed below.

Important Federal Tax Exposures and the Question of Independent Contractors and Employees

The I.R.S. is responsible for collecting employment taxes, which includes federal income tax and unemployment insurance. The classification of independent contractor or employee has a significant impact on the amount of money concerning these types of taxes.

The I.R.S. periodically conduct audits of businesses to ensure that workers are properly classified as either independent contractors or employees. In the event of such an audit the burden of proving that a "worker" is an independent contractor, and not an employee, rests on the shoulders of the employer.

Over the years, courts have identified on a case-by-case basis various facts or factors that are relevant in determining whether an employer-employee relationship exists. In 1987, based on an examination of cases and rulings, the I.R.S. developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists.

Unfortunately, there's a lot of "wiggle room" involved with applying the 20-factor test, so it is advisable to seek the assistance of an experienced tax attorney in order to obtain a more objective viewpoint of the particular circumstances at hand.

Common Mistakes that Business Owners Make

The following issues outline some of the most common errors that business owners make as they attempt to manage their tax responsibilities:

• Income tax

Filing your tax return after the mandated filing due date: a penalty can be imposed for failing to file a tax return by the required due date. This penalty is imposed in addition to the penalty and interest imposed for failing to pay the taxes you owe.

• Estimated tax

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

• Self-employment tax

Being "self-employed" does not mean carrying a regular full-time business. A part-time business (for example fixing bicycles in your garage) in addition to your regular job or business may also qualify as being self-employed.

• Employment tax

Federal and State withholding taxes are employment taxes deducted from employees' gross pay to arrive at the employees' net pay. The withheld taxes are the property of and belong to the employee. In some cases, employers will "borrow" (for whatever purpose), rather than remit to the taxing authority, these Federal and State withholding taxes. Employers can be found personally liable for withholding taxes actually withheld from employees' paychecks that are not remitted to the taxing authority.

Final Thought: Establish a Routine and Plan Ahead with Projections

The businesses that successfully navigate their tax responsibilities are the ones that implement a routine of "tax planning." Get a head start on the process by doing income and expense projections so that you can budget for your inevitable income tax liability and avoid any unpleasant surprises.

Many people use the term “tax planning,” but it is often misunderstood. It is the art of learning how to manage your affairs in ways that postpone or avoid taxes. Skilled tax planning means more money to save and invest, and it can make the tax season more of a financial boost instead of a financial burden. As explained well by Wealth Plan: “tax planning means either deferring or avoiding taxes by taking full advantage of the beneficial tax-law provisions, increasing tax deductions and tax credits, and by making good use of all applicable breaks that are available under the Internal Revenue Code.”

Strategies are typically designed and employed to achieve goals--a series of steps undertaken to accomplish an intended end. Of course, strategies within the realm of tax planning are undertaken to achieve financial goals primarily, but they are also employed to achieve business goals. If your tax planning strategies are effective, they should successfully accomplish, or at least address, the following goals:  

1. Lower your amount of taxable income
2. Reduce the rate at which you are taxed
3. Empower you to control when taxes get paid
4. Ensure you get all credits available to you
5. Put you in charge of the Alternate Minimum Tax

Note the following sample of strategies intended to reduce one’s tax liability, as noted by Cash Cow:

1. Maximize Retirement Contributions: Deferral of taxation is one of the most common and useful tax strategies for individuals who are currently in a high tax bracket, but if you follow this path anticipate being in a lower tax bracket at some point in the future when withdrawals (distributions) are taken.

2. Harvest Investment Losses: You can offset unlimited investment gains, and up to $3,000 of ordinary income each year by selling your investments that have lost value. If your losses exceed your gains and the $3,000 of ordinary income, you can carry them over to be used in future tax years.

3. Consider Charitable Gifts: This strategy is only useful if you can itemize your tax deductions (most often due to mortgage interest deductions), and plan on making donations. Appreciated assets are some of the most tax-efficient charitable donations. Donating these assets will allow you to avoid paying capital gains on the appreciation.

4. Invest In Municipal Bonds: Some high income earners are now subject to the 3.8% Medicare surtax on all investment income. Municipal bonds avoid this additional tax, and typically avoid all Federal and State income taxes. That means the tax equivalent yield (the yield an investor would require from a taxable bond) has increased for those taxpayers, making muni-bonds more attractive.

There are other creative ways to achieve effective tax planning, including these two tips from My CPA Team:

1. Gifting Assets to Your Children: You can gradually take money out of your estate by giving it away. If your estate is larger than the normal exclusion amount, you can reduce its value by giving away $14,000 per year to each of your children, grandchildren, or anyone else without paying federal gift taxes. Your spouse can gift money as well, thus allowing a total $28,000 gifting capability between the two of you each year per recipient.

2. Deduct a Home-Based Office When Used for Your Employer: People who work for companies whose headquarters or branch offices are not located in the same city as the employee, or outside salespeople who often use their home office as a base, can often use these deductions. There are rules that must be followed in these cases, however, and it is wise to consult a professional before diving into the details.

In conclusion, you might be able to see that the tax planning process is not something that can be done in one day at the last minute. Time must be invested throughout the year to identify opportunities for savings as well as effective solutions to accomplish your tax planning goals.

Image courtesy of Tax Credits @ Flickr

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). These questions and answers reflect the policy outlined in Revenue Ruling 2013-17 in 2013-38 IRB 201.

Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex, even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

Q2. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

A2. Yes. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex, even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. 

Q3. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

A3. No. A taxpayer’s spouse cannot be a dependent of the taxpayer.

Q4. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

A4. If a child is a qualifying child under section 152(c) of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child.    

Q5. Can a taxpayer who is married to a person of the same sex claim the standard deduction if the taxpayer’s spouse itemized deductions?

A5. No. If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (section 63(c)(6)(A)).

Q6. Can a same-sex married couple elect to treat a jointly owned and operated unincorporated business as a Qualified Joint Venture?

A6. Yes. Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture.

Related Items:

• Forms and Publications

• IRS YouTube Video: Tax Information About Same-Sex Marriage in English / Spanish / ASL

• IR-2014-22, New IRS Video Helps Same-Sex Couples; Joins Extensive IRS Library Of Online Tax Tips

• IR-2013-72, Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples

• Frequently Asked Questions on Estate Taxes (estate tax marital deduction for same-sex couples)

• Frequently Asked Questions on Gift Taxes (gift tax marital deduction for same-sex couples)

The following 2016 information is an update of the “Preview Of Some Key 2016 Tax Figures” article originally published last October (2015). The October 2015 publication was presented using estimated figures for 2016.

However, the IRS has recently released official 2016 tax figures. This being the case, what better time is there to start thinking about implementing a tax planning initiative focused on tax year 2016 activity? The following up-to-date figures will assist you with that initiative:

Tax Brackets For Taxable Years Beginning in 2016 (Per Rev. Proc. 2015-53):

TABLE 1 - Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:                           The Tax Is:

Not over $18,550                                    10% of the taxable income

Over $18,550 but                                    $1,855 plus 15% of
not over $75,300                                     the excess over $18,550

Over $75,300 but                                    $10,367.50 plus 25% of
not over $151,900                                   the excess over $75,300

Over $151,900 but                                  $29,517.50 plus 28% of
not over $231,450                                   the excess over $151,900

Over $231,450 but                                  $51,791.50 plus 33% of
not over $413,350                                   the excess over $231,450

Over $413,350 but                                  $111,818.50 plus 35% of
not over $466,950                                   the excess over $413,350

Over $466,950                                        $130,578.50 plus 39.6% of
                                                                the excess over $466,950

TABLE 2 – Heads of Households

If Taxable Income Is:                            The Tax Is:

Not over $13,250                                    10% of the taxable income

Over $13,250 but                                    $1,325 plus 15% of
not over $50,400                                     the excess over $13,250

Over $50,400 but                                    $6,897.50 plus 25% of
not over $130,150                                   the excess over $50,400

Over $130,150 but                                  $26,835 plus 28% of
not over $210,800                                   the excess over $130,150

Over $210,800 but                                  $49,417 plus 33% of
not over $413,350                                   the excess over $210,800

Over $413,350 but                                  $116,258.50 plus 35% of
not over $441,000                                   the excess over $413,350

Over $441,000                                        $125,936 plus 39.6% of
                                                                the excess over $441,000

TABLE 3 – Unmarried Individuals (other than Surviving Spouses and Heads of Households)

If Taxable Income Is:                            The Tax Is:

Not over $9,275                                      10% of the taxable income

Over $9,275 but                                      $927.50 plus 15% of
not over $37,650                                     the excess over $9,275

Over $37,650 but                                    $5,183.75 plus 25% of
not over $91,150                                     the excess over $37,650

Over $91,150 but                                    $18,558.75 plus 28% of
not over $190,150                                   the excess over $91,150

Over $190,150 but                                  $46,278.75 plus 33% of
not over $413,350                                   the excess over $190,150

Over $413,350 but                                  $119,934.75 plus 35% of
not over $415,050                                   the excess over $413,350

Over $415,050                                        $120,529.75 plus 39.6% of
                                                                the excess over $415,050

TABLE 4 – Married Individuals Filing Separate Returns

If Taxable Income Is:                            The Tax Is:

Not over $9,275                                      10% of the taxable income

Over $9,275 but                                      $927.50 plus 15% of
not over $37,650                                     the excess over $9,275

Over $37,650 but                                    $5,183.75 plus 25% of
not over $75,950                                     the excess over $37,650

Over $75,950 but                                    $14,758.75 plus 28% of
not over $115,725                                   the excess over $75,950

Over $115,725 but                                  $25,895.75 plus 33% of
not over $206,675                                   the excess over $115,725

Over $206,675 but                                  $55,909.25 plus 35% of
not over $233,475                                   the excess over $206,675

Over $233,475                                        $65,289.25 plus 39.6% of
                                                                the excess over $233,475

TABLE 5 – Estates and Trusts

If Taxable Income Is:                            The Tax Is:

Not over $2,550                                      15% of the taxable income

Over $2,550 but                                      $382.50 plus 25% of
not over $5,950                                       the excess over $2,550

Over $5,950 but                                      $1,232.50 plus 28% of
not over $9,050                                       the excess over $5,950

Over $9,050 but                                      $2,100.50 plus 33% of
not over $12,400                                     the excess over $9,050

Over $12,400                                          $3,206 plus 39.6% of
                                                                the excess over $12,400

Personal Exemption:                            $4,050 in 2016 ($4,000 in 2015)

Standard Deductions:

Deduction                                                Tax Year 2016                  Tax Year 2015

Single                                                        $6,300                               $6,300
Head of Household                                   $9,300                               $9,250
Married Filing Joint                                   $12,600                             $12,600
Married Filing Separately                          $6,300                               $6,300

Dependents (claimed on                           $1,050                               $1,050
another’s return)

65 or Blind: Married or Single                   Add $1,250                        Add $1,250
                                                                  Add $1,550                        Add $1,550

Other Key figures:

Estate & Gift Tax Exclusion                      $5.45 Million                      $5.43 Million
Annual Gift Tax Exclusion                        $14,000                              $14,000
Roth and Traditional IRA Contribution      $5,550                               $5,500

LIMIT
Exclusion from tax on a gift to a spouse    $148,000                          $147,000
who is not a U.S. citizen

Foreign earned income exclusion              $101,300                          $100,800

Phase in limitation for itemized                  $311,300                          $309,900
deductions to be claimed on returns of
individuals - Married

The annual dollar limit on employee          $2,550                              $2,550
contributions to employer-sponsored
healthcare flexible spending
arrangements (FSA).

Refer to IRC.gov (various) and Rev. Proc. 2015-53 for additional details concerning 2016 rates.

Near the end of last year (December 2015), as PR News Wire notes, Congress passed and President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act, a broader bipartisan tax bill that extended (and in certain instances, made permanent) over 50 expiring provisions of the tax code.

A number of pro-business provisions, including the following examples, fall within the PATH Act’s legislation:

• The following examples of tax provisions are made permanent by the PATH Act, as detailed in the Spokane Journal and quoted as follows:

• Section 179 small-business expensing limit of $500,000 for qualified equipment:

• Jason Munn, a tax partner at the Spokane office of Seattle-based accounting firm Moss Adams, says the permanent Section 179 provision enables businesses to deduct up to $500,000 for qualifying business equipment purchases. Starting next year, the cap will be indexed to inflation. The deduction phases out dollar for dollar once equipment purchases top $2 million, meaning it’s eliminated for equipment exceeding $2.5 million in value.

• Research credit, which has been expanded to allow certain businesses to offset up to $250,000 in payroll taxes or alternative minimum tax:

• Munn says the R&D credit, which enables some businesses to write off a portion of their research-and-development expenses, had expired in 2015. The PATH Act makes the R&D credit retroactive to include 2015.

• Nick Dietzen, tax manager at the Spokane office of Minneapolis-based CliftonLarsonAllen LLP, says the R&D credit will benefit small startup companies, including software and app developers, during their first five years of operation because they can elect to apply some or all of the credit against the employer’s share of payroll taxes.

• Exclusion of certain small-business stock sales from capital gains taxes:

• This exclusion is meant to encourage investment in new ventures and small businesses. It applies to the sale or exchange of stock in small businesses with gross assets of less than $50 million acquired after Sept. 27, 2010, and held for at least five years.

• Fifteen-year cost recovery for leasehold improvements to qualified retail and restaurant properties:

• This provision allows for a 15-year recovery period for qualified interior improvements to nonresidential property that has been in service as retail or restaurant space for more than three years.

• Charitable distributions of up to $100,000 from IRA’s for people at least 70 ½ years of age:

• The provision enables individual tax filers age 70½ or older to make up to $100,000 in charitable distributions from their individual retirement accounts without having to declare the distributions as income.

• Option to claim itemized deduction for state and local sales tax:

• For individual filers, the PATH Act makes the deduction for state and local sales tax permanent.

• 5-year recognition period for S-corporation built-in gain

• Transit Benefits Parity

• Treatment of certain dividends of regulated investment companies (RICs)

Note that the following examples of tax provisions are extended by the PATH Act. But not all extensions in the PATH Act are permanent:

• Five Year Extenders of Expiring Tax Provisions (thru 2019)

• Work Opportunity/New Markets Tax Credits, as follows:

• The Work Opportunity Tax Credit (WOTC) is extended through 2019. The Act also enhances the WOTC for employers that hire certain long-term unemployed individuals.

• The Act authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.

• Look-through for controlled foreign corporations

• Two Year Extension (thru 2016)

• Film and television expensing

• Energy Extenders

• Wind Energy Credit (thru 2019 with phase-outs)

• Solar Investment Credit (thru 2021)

• The FY 2016 omnibus extends the solar investment tax credit and the credit for qualified residential solar property but subjects the credits to phase-down. Under the omnibus, both credits will not be available after 2021.

• Energy Efficient Commercial Building deduction (thru 2016)

• The Act extends through 2016 the deduction for energy-efficient commercial buildings. Additionally, the Act updates the energy-efficient standards.

As noted in the beginning of this article, the PATH Act extended (and in certain instances, made permanent) over 50 expiring provisions of the tax code. This foregoing write-up does not intend to address all 50+ provisions, but it is intended to provide a high level discussion of some of the extended provisions. There are additional affected provisions of the Act not included in the scope of this discussion.

It’s never too early to begin detailed planning for next year’s taxes -- especially as we head into the final stretch of 2015 and get a better look at what the coming tax season has in store.

While official numbers for 2016 are not yet released by the Internal Revenue Service (IRS), many figures are formulas set within the Internal Revenue Code (IRC) or are based on the Consumer Price Index (CPI) published by the Department of Labor.

Based on recently released CPI indices, the following tax basis figures are noted here strictly for your planning purposes and not for the preparation of your tax 2016 tax filings.

Tax Brackets: While the actual income brackets for tax rates are not yet set for 2016, the rate of inflation that impacts the income levels for each tax rate is anticipated to raise the income brackets by approximately 1.60 -2.00%.

Personal Exemption: $4,100 in 2016 ($4,000 in 2015)

Standard Deductions:

Other Key figures:

CPI - https://www.bls.gov/cpi/cpid1508.pdf ; IRC.gov (various)