Archive for the ‘Individual Taxes’ Category

New Federal and California Developments on Cancellation of Indebtedness from Short Sales

January 15, 2014

On September 19, 2013, the IRS issued a Chief Council Letter where it stated that the short sale of a California principal residence converts the mortgage to a nonrecourse loan and is treated as a sale, not Cancellation of Indebtedness.  Under California law, when agreeing to a short sale, the bank may not go after the borrower for any shortfall on the debt.  The letter stated that, under the anti-deficiency provision of Code of Civ. Proc. §580e, the debt would be a nonrecourse obligation, and for federal income tax purposes the homeowner will not have COD income. Instead, the full amount of the nonrecourse indebtedness is treated as the sales price.

The California Franchise Tax Board has just updated their website to include information about mortgage debt relief for taxpayers who sold their principal residences through a short sale in 2013.  The FTB guidance confirms that California will follow this treatment.  The FTB clearly states that the IRS guidance is limited to California short sales only, and that the IRS guidance did not specifically address other types of real estate transactions, such as non-judicial foreclosures and mortgage loan modifications.

The information posted by the FTB can be found here.

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No California Principle Residence COD Exclusion for 2013

September 18, 2013

Via Spidell Publishing

The California Legislature did not extend the COD exclusion for canceled qualified principal residence debt when SB 416 was defeated.  This means that a homeowner who loses a home to foreclosure in 2013 may not use the principal residence exclusion to exclude COD income on his or her California return.

An individual who has COD income in this situation should:

  • See if the insolvency exclusion will exclude income; or
  • Plan for a California tax liability in 2013.

Federal law extended the exclusion through 2013.

Installment Sale Basics

August 20, 2013

By Darren Morrow, CPA

Ever heard of an installment sale?  This article will help you understand the basics of installment sales, including what you need to know to help you make the best decisions when selling property.

An installment sale is the sale of a property where both parties have agreed to terms where the payments will be made over a number of years instead of receiving the entire purchase price at the time of sale. For instance, a person may choose to sell their home to someone and receive payments over a ten year period. The technical definition of an installment sale for tax purposes requires that payments must be made in at least two separate tax years.

Calculating the taxable income to be recognized under an installment sale is quite simple. The first step is to calculate the gain on sale as you normally would (sales price less tax basis). Then a percentage is calculated taking the principal portion of payments received in the current year divided that by the total sales price.  Taxable income for the current year must include this percentage of the overall gain on the sale of the property.

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There are some benefits to taxation under the installment sale rules.  One of the most obvious benefits is the deferral of capital gains taxes. Since you are only recognizing a portion of the gain in the current year you are only taxed on that amount.  The additional tax due from the sale is deferred to future years. Another benefit that is not quite as obvious is that you could possibly be in a lower tax bracket each year since you are not recognizing a large amount of income in one year. Additionally, an often overlooked benefit of the transaction is the additional interest income that can be structured into the sale. Generally sellers will receive a higher rate of interest on the deferred funds than can be realized elsewhere, and the note receivable is secured by the real property. 

Installment sales are not always an option for every transaction. Installment sales cannot be used (for tax calculation purposes) if your sale results in a loss (sales price exceeds your basis), or if it is a sale of inventory, stocks, or securities traded on an established securities market. Additionally, if you choose to do an installment sale and defer your capital gains into future years and the tax rate on capital gains goes up, you could potentially pay a higher amount of tax in the future.

Knowing how installment sales work and how to use them to your advantage is a great tool when negotiating a sale. It will let you have more control over your income and may even earn you a little extra interest income along the way. For more information about installment sales please contact us at http://www.ntcpas.com or contact our office at (714) 836-8300.

Details of The Individual Mandate Under the Affordable Care Act

May 7, 2013

Introduction

Beginning January 1, 2014, the Affordable Care Act will require most individuals to have “minimum essential (health) coverage” for themselves and their dependents or pay a penalty.  The coverage requirement and penalty are collectively known as the “Individual Mandate.” Some individuals and their dependents may qualify for an exemption to the mandate, and therefore not have to carry minimum essential coverage or pay a penalty.

The Internal Revenue Service and Department of Health and Human Services recently issued proposed regulations regarding:

●   Coverage that will qualify as minimum essential coverage

●   When and how penalties will be determined and paid

●   Individuals exempt from the penalty for not carrying minimum essential coverage

●   How individuals can apply for an exemption

Background

1.  Coverage that will Qualify as Minimum Essential Coverage

An individual will be considered to have minimum essential coverage for any month in which he or she is enrolled in any of the following plans for at least one day during that month:

●   Employer group health plan

●   Individual health insurance policy

●   Student health coverage

●   State high risk pool coverage

●   Medicare Advantage Plan

●   Government plan such as Medicare, Medicaid, TRICARE or veterans coverage

●   Coverage for non-U.S. citizens provided by another country

●   Refugee medical assistance provided by the ‘Administration for Children and Families’

●   Coverage for AmeriCorps volunteers

2.  When and How Penalties will be Determined and Paid

The first penalties will be due with 2014 tax returns filed in 2015, and be determined by calculating the greater of a flat dollar amount or a set percentage of income. The annual penalties for 2014 through 2016 are outlined below.  Beginning in 2017, penalties will increase each year by a cost-of-living adjustment.

●   2014: The greater of $95 per adult and $47.50 per child under age 18 (maximum of $285 per family) or 1% of income over the tax-filing threshold.

●   2015: The greater of $325 per adult and $162.50 per child under age 18 (maximum of $975 per family) or 2% of income over the tax-filing threshold.

●   2016: The greater of $695 per adult and $347.50 per child under age 18 (maximum of $2,085 per family) or 2.5% of income over the tax-filing threshold.

3.  Individuals Exempt from the Penalty for Not Carrying Minimum Essential Coverage

The following individuals will be exempt from paying a penalty if they do not carry minimum essential coverage:

●   Individuals who cannot afford coverage. Coverage is considered unaffordable if an individual’s contribution toward minimum essential coverage is more than 8% of his or her annual household income. Monthly contributions are calculated at 1/12 the annual household income to determine if they exceed 8%.

●   Taxpayers with income below the tax-filing threshold.

●   Individuals who qualify for a hardship exemption. A hardship exemption is available to individuals who would otherwise be eligible for Medicaid under the expanded eligibility of provisions of ACA, but who are not eligible because their state chose not to expand Medicaid.  Also eligible for exemption will be individuals with a personal or financial hardship that prevents them from being able to afford coverage.

●   Individuals who have a gap in minimum essential coverage of less than three consecutive months in a calendar year.

●   Member of religious groups who object to coverage on religious principles.

●   Members of health care sharing ministries, i.e., non-profit religious organizations whose members share medical costs.

●   Individuals in prison.

●   Individuals who are not U.S. citizens.

●   Members of Native American tribes.

U.S. citizens living in a foreign country will be exempt if they meet certain requirements, such as residing abroad for an entire calendar year.  Residents of the U.S. territories of Guam, American Samoa, Northern Mariana Islands, Puerto Rico, and the Virgin Islands will automatically be deemed to have minimum essential coverage, and therefore be exempt from penalties.

4.  How Individuals Can Apply for an Exemption

Depending on the type of exemption, individuals can apply to their state’s Health Care Exchange or to the IRS when filing their tax return. If an application to an Exchange is approved, the Exchange will issue a certificate of exemption and notify the IRS.

●   Religious and hardship exemptions are only available by applying to an Exchange.

●   Individuals who cannot afford coverage, who experience short-term coverage gaps, who are not U.S. citizens, or who have household income below the tax-filing threshold may apply for an exemption through the IRS when filing their federal tax return.

●   Members of a health care sharing ministry, individuals in prison, and members of Native American Tribes may apply for an exemption through an Exchange or through the IRS when filing their federal tax return.

Economic Forecast – 2013

January 29, 2013

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This morning, several members of Nienow & Tierney, LLP had the opportunity to attend the 14th Annual Economic Forecast Breakfast sponsored by the OC Chapter of California Society of CPA’s.  The speaker for the morning was Dr. Esmael Adibi from the Anderson Center for Economic Research at Chapman University.

Dr. Adibi presented a forecast of cautious and slow growth for 2013.  He expects the GDP for the United States to increase by 2.1% in 2013.  This was following a 2.4% increase in 2012.

Dr Adibi also indicated that he expects consumer spending to increase by 1.8% in the United States for 2013.

In California, Dr. Adibi projects about 225,000 new jobs being produced and with 25,000 of those occurring in Orange County.   He also estimated that housing prices will increase by 6.8% in California.

It was a pleasure to hear Dr. Adibi’s forecast and we hope for an above average increase to our clients in 2013.

CPA Day at the Capital

January 27, 2013

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On January 23rd, CPA’s from all around the State of California converged on our state capital in Sacramento as a part of the annual CPA Day at the Capital.

Meetings were scheduled with each state Senator and Assemblymen/women.  It was an opportunity for the CPA profession to voice a united opinion on the topics which affect our profession and also the taxpayers for whom we prepare tax returns and financial statements.

This year, Stephen Tierney took part in this opportunity to share with our state legislature the issues which we feel are important to clients such as yourself.

We specifically called upon the legislature to forego any effort to impose sales tax on service organizations.  As a profession, we feel that this tax would provide an unfair advantage to service based business owners located outside of the state.  This additional tax would also cause increased costs to our clients for tax preparation services.

As we met with the state representatives, we also promoted a financial literacy program which is sponsored by the California Society of CPA’s.  This program is designed to educate individuals on basic financial issues such as maintaining a budget and how to save for future expenses.  These programs are provided free of charge by CPA’s around the State of California.

Stephen loved the opportunity to meet with our state representatives and participate in helping promote issues for our clients and our profession.  He looks forward to participating in this event in future years.

FTB Installment Payment Error

January 18, 2013

On December 28, the Franchise Tax Board (FTB) computer system failed to post around 25,000 installment agreement payments.  This error only relates to payments that were made by automatic withdrawal for installment agreements that taxpayers had with the FTB.  This computer error did not impact payments made through the web payment system for estimated tax or prior liabilities.

If you are currently set up for automatic withdrawal, you should check to see if the funds have been withdrawn from your account for December.  The FTB has sent a letter to the taxpayers who would have been impacted by this error.  The FTB is requesting that the taxpayers impacted resubmit the payment.  If the payment is received within 10 days of the letter, then the payment will be applied effective December 28, 2012.

As always, please contact us if you have any questions.

Simplified Home Office Deduction Calculations

January 18, 2013

The IRS has introduced a new simplified system for calculating the home office deduction.  Beginning with the filing of the 2013 tax returns (in 2014), taxpayers will be able to claim $5 per square foot for a home office deduction.  This simplified method is limited to a maximum deduction of 300 feet or $1,500.    If taxpayers decide to take advantage of this new method, they will be able to complete a much simpler form from the current 43 line Form 8829.

The new simplified method does not reduce the eligibility requirements for determining if taxpayers qualify to take a home office deduction.  This change just simplifies the record keeping requirements and calculations for deducting a home office.

With the new option, taxpayers will not have to break out the mortgage interest or property tax portion of their home office.  They will still be allowed to take 100% of these deductions on Schedule A.  The new simplified system does not permit the taxpayer to claim any depreciation for the use of a home office.

If you have any questions, please contact our office.

 

Charitable Deduction Substantiation Requirements

January 3, 2013

Recently, the United States Tax Court denied charitable contributions in full in two different cases.  The donations were denied for failure to obtain proper substantiation in a timely manner.  The IRS has provided a list of the substantiation and documentation required for various contributions.  These rules apply to individuals making qualified contributions to IRC §501(c)(3) organizations.  Additional rules apply when gifting a partial or restricted interest, gifts via trusts, and gifts with remainder interest.

We have included a schedule prepared by Spidell Publishing, Inc. for your easy reference:

Amount

Documentation

Substantiation

Cash donations of less than $250

Bank record

Includes canceled check; bank, credit union or credit card statement showing name; and transaction posting date (credit card)

Written communication from charity

Name of charity, date and amount of contribution

Payroll deduction

Pledge card and pay stub, W-2 wage statement, or other document furnished by employer, including total amount withheld for charity

Cash donations of $250 or more

Written acknowledgment from the charity for each donation

Name of charity, date, amount paid, description, and estimate of value of goods or services provided by the charity

Noncash contributions of less than $250

Receipt from donee or reliable records

Property donations greater than $250 and not more than $500

Contemporaneous written acknowledgment

Name of charity, date, amount paid, and description (but not value) of goods or services provided by the charity

Property donations greater than $500 and not more than $5,000

Written acknowledgment

All of the above, plus: (1) how you got the property; (2) date you got the property; and (3) cost or other basis.

Must file Form 8283, Noncash Charitable Contributions

Donations of $5,000 or more excluding stock, certain works of art, and autos

Qualified appraisal

Attach appraisal to return and complete page 2 of Form 8283

Donations of art valued at $20,000 or more

Signed appraisal and photograph

Attach signed appraisal to return and provide photograph of sufficient quality and size to fully show object if requested by the IRS

Stock of publicly traded corporation

No appraisal required if as of date of the contribution market quotations are readily available on an established securities market

Attach Form 8283 to return

Nonpublicly traded stock

Contributions greater than $5,000 and less than or equal to $10,000

A partially completed appraisal summary; complete Form 8283, Part I

Contributions greater than $10,000

Attach qualified appraisal to return

Vehicle, boat and airplane with value of more than $500

Value is the lesser of the gross sales proceeds or the FMV of the vehicle if no “significant use or material improvement”

Taxpayer needs contemporaneous written acknowledgment  from donee organization; donee organization must use Form 1098-C to report value of vehicle donations, if vehicle is sold; this can be used to provide acknowledgment to the donor

If you have any questions or require further information, please contact our office at (714) 836-8300.

Effects of Proposition 30

December 7, 2012

The Californian’s have spoken and they have decided on higher taxes. Proposition 30 has officially passed and higher taxes are on the way. What most people do not know about proposition 30 is that most of the laws do not start in 2013 but are actually retroactive to begin January 1, 2012.

Proposition 30 increased state taxes in 2 ways. The first increase is the 0.25% increase in the state sales tax rate. This state sales tax rate is effective for four years beginning January 1 ,2013. The second increase is in the income tax rate on taxpayers making more than $250,000 a year. This increase is retroactive to January 1, 2012. See the table below for the new rates.

10.3% (1% increase) on income of:
$250,001–$300,000 for Single
$340,001–$408,000 for Head of Household
$500,001–$600,000 for Married Filing Joint

11.3% (2% increase) on income of:
$300,001–$500,000 for Single
$408,001–$680,000 for Head of Household
$600,001–$1,000,000 for Married Filing Joint

12.3% (3% increase) on income of:
More than $500,000 for Single
More than $680,000 for Head of Household
More than $1,000,000 for Married Filing Joint

These rates do not include the income in excess of $1 million that is subject to an additional 1% mental health surcharge.

This raises the question of estimated tax payments. Many taxpayers have made their estimated state tax payments according the their estimated liability at the old taxes rates for 2012. Now that the law is retroactive to January 1, 2012 are they are worried that they are going to get penalized for an underpayment penalty. Fortunately proposition 30 provides that affected taxpayers who are underpaid will be held harmless from the underpayment penalty (California Constitution, Article XIII, Section 36(f)(2)(C)(i)). To obtain relief, taxpayers must pay any balance due by April 15, 2013 (calendar-year taxpayers), and complete form FTB 5805, "Underpayment of Estimated Tax by Individuals and Fiduciaries." The FTB will not provide automatic penalty relief.