Face Mask - It's Not Just About You

Everyone is tried of wearing a face mask, they're no fun.  They do save lives and help keep the spread of Covid down.  Until enough people not only in the US are fully vacinated, Covid will continue to flare up.  Please do your part for your family, friends, neighbors, co-workers and all thoses you don't know.

For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2022, the wage base is $147,000. Thus, OASDI tax applies only to the taxpayer’s first $147,000 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $147,000.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2022
For workers who earn $147,000 or more in 2022:

• an employee will pay a total of $9,114 in social security tax ($147,000 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $18,228 in social security tax ($147,000 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the additional Medicare tax.

Benefit Increase for 2022
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2022 by 5.9 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The Court of Appeals for the Second Circuit affirmed the district court's judgment that the cap on the federal income tax deduction for money paid in state and local taxes (SALT) is constitutional.

The Court of Appeals for the Second Circuit affirmed the district court's judgment that the cap on the federal income tax deduction for money paid in state and local taxes (SALT) is constitutional. Four states brought a claim against the government alleging that the $10,000 cap on the federal income tax deduction for money paid in state and local taxes, enacted as part of the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA), violated the Constitution. The states argued that the state and local tax deduction was constitutionally mandated, or alternatively that the cap violated the Tenth Amendment because it coerced them to abandon their preferred fiscal policies. The district court held that the states had standing and that their claims were not barred by the Anti-Injunction Act (AIA). However, the district court concluded that the claims lacked merit. The states' allegations that the cap decreases the frequency and price at which taxable real estate transactions occur by measurably increasing the cost of those transactions reflect specific lost tax revenues and suffice to support standing. Moreover, the exception in South Carolina v. Regan, 84-1 USTC ¶9241, 465 U.S. 367, 373 (1984), applied to the facts of this case, therefore, the court held that the AIA did not foreclose its review of the states' claim.

Background
The federal tax code’s state and local tax (SALT) deduction permitted taxpayers to deduct from their taxable income all the money they paid in state and local income and property taxes. However, in 2017, Congress passed the TCJA which imposed a cap on the SALT deduction. The immediate impact of this cap was felt most acutely in states where the state and local tax liability of residents often exceeded the $10,000 maximum. Four of the most affected states, namely, New York, Connecticut, New Jersey, and Maryland, sued the government asserting that the cap on the SALT deduction was unconstitutional on its face and unconstitutionally coerced them to abandon their preferred fiscal policies. The government responded by stating that the district court lacked subject matter jurisdiction to consider the states' claims and also defended the cap on the merits. The district court rejected the government's jurisdictional defense but dismissed the complaint for failure to state a claim. On appeal, the states argued that the district court erred on the merits.

Affirming an unpublished District Court opinion.

The IRS has reminded employers to check the Work Opportunity Tax Credit available for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment.

The IRS has reminded employers to check the Work Opportunity Tax Credit available for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment.

Cash contributions made either to supporting organizations or to establish or maintain a donor advised fund do not qualify. Also, cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.

Subject to certain limits, taxpayers who itemize could generally claim a deduction for charitable contributions made to qualifying charitable organizations. These range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The law now permits electing individuals to apply an increased limit of up to 100 percent of their AGI, for qualified contributions made during 2021. More information can be found at https://www.irs.gov/forms-pubs/about-publication-526.

The Work Opportunity Tax Credit encourages employers to hire workers certified as members of any of the following targeted groups facing barriers to employment:

• temporary Assistance for Needy Families (TANF) recipients;
• unemployed veterans, including disabled veterans;
• formerly incarcerated individuals;
• designated community residents living in Empowerment Zones or Rural Renewal Counties;
• vocational rehabilitation referrals;
• supplemental Nutrition Assistance Program (SNAP) recipients;
• supplemental Security Income (SSI) recipients;
• long-term family assistance recipients; and
• long-term unemployment recipients.

An employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit to their state workforce agency (SWA) to qualify for the credit within 28 days after the eligible worker commences work. However, under a special relief provision, a submission deadline on November 8, 2021, applies to qualified summer youth employees residing in Empowerment Zones and designated community residents residing in Empowerment Zones.

Eligible employees must commence work on or after January 1, 2021, and before October 9, 2021, to qualify for the submission deadline. The Work Opportunity Tax Credit is claimed on eligible businesses' federal income tax returns and is usually based on wages paid to qualified workers during the first year of employment. The credit is first figured on Form 5884, Work Opportunity Credit, and then is claimed on Form 3800, General Business Credit.

Under a special rule, employers are permitted to claim the Work Opportunity Tax Credit for hiring qualified veterans, although the credit is not available to tax-exempt organizations for most groups of new hires. Such organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.

The IRS highlighted how expanded tax benefits help both individuals and businesses give to charity before the end of this year.

The IRS highlighted how expanded tax benefits help both individuals and businesses give to charity before the end of this year. The law now permits these taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married taxpayers filing joint returns. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify to claim a limited deduction for cash contributions.

Cash contributions made either to supporting organizations or to establish or maintain a donor advised fund do not qualify. Also, cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.

Subject to certain limits, taxpayers who itemize could generally claim a deduction for charitable contributions made to qualifying charitable organizations. These range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The law now permits electing individuals to apply an increased limit (Increased Individual Limit), up to 100 percent of their AGI, for qualified contributions made during 2021. More information can be found at https://www.irs.gov/forms-pubs/about-publication-526.

The IRS issued a notice clarifying the application of certain extensions granted under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the election of COBRA coverage and payment of COBRA premiums due to the COVID-19 emergency.

The IRS issued a notice clarifying the application of certain extensions granted under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the election of COBRA coverage and payment of COBRA premiums due to the COVID-19 emergency. The IRS also addressed the interaction of COBRA continuation coverage under the Emergency Relief Notices with the COBRA premium assistance available for certain individuals under the American Rescue Plan Act of 2021 (the ARP).

Guidance and Application of Extensions
COBRA permits qualified beneficiaries who lose coverage under a group health plan to elect continuation health coverage for a 60-day period after receipt of a COBRA election notice. The initial premium can not be due earlier than 45 days after that election.

Certain extensions were granted due to the COVID-19 (Coronavirus) emergency, and issued in the Joint Notification of Extensions of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak. Additional guidance was provided by Employee Benefits Security Administration (EBSA) Disaster Relief Notice 2021-01. Under the Emergency Relief Notices, up to one year must be disregarded in determining the due dates for individuals to elect COBRA continuation coverage and pay COBRA premiums during the Outbreak Period. This notice clarifies that the disregarded period for an individual to elect COBRA continuation coverage and the disregarded period for the individual to make initial and subsequent COBRA premium payments generally run concurrently.

For example, if an individual elected COBRA continuation coverage outside of the initial 60-day COBRA election timeframe, that individual generally will have one year and 105 days (60 days plus 45 days) after the date the COBRA notice was provided to make the initial COBRA premium payment. If an individual elected COBRA continuation coverage within the initial 60-day COBRA election timeframe, that individual will only have one year and 45 days after the date of the COBRA election to make the initial COBRA premium payment.

Applying the disregarded periods in this way means that individuals who delay electing COBRA may not have more than one year of total disregarded time for the COBRA election and initial COBRA payment. For example, a taxpayer cannot delay electing COBRA continuation coverage for 6 months and then add another full year to the disregarded period for purposes of determining the deadline for making the initial COBRA premium payment (resulting in a total of 18 months of disregarded time for both the COBRA election and initial COBRA payment).

Transition Relief
To avoid inequitable outcomes, in no event will an individual be required to make the initial premium payment before November 1, 2021, even if November 1, 2021 is more than one year and 105 days after the date the election notice was received, provided that the individual makes the initial premium payment within one year and 45 days after the date of the election.

ARP COBRA Premium Assistance
On March 11, 2021, the American Rescue Plan Act of 2021 (ARP) was enacted, providing for temporary COBRA premium assistance for certain “Assistance Eligible Individuals” for periods of coverage beginning on or after April 1, 2021, through periods of coverage beginning on or before September 30, 2021. The extensions of the timeframes under the Emergency Relief Notices do not apply to the periods for providing the required notice of the ARP extended election period or for electing COBRA continuation coverage with COBRA premium assistance under the ARP.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions
Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather
Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be poultry.

Second, the taxpayer must have held the converted livestock for:

• draft;
• breeding; or
• dairy purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought
The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

• ends on August 31 in or after the last year of the four-year replacement period; and
• does not include any weekly period of drought.

What Areas are Suffering from Drought
The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/

However, the IRS also provided a list of areas where the year ending on August 31, 2021, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

An individual was allowed to deduct the amount of premiums paid to provide health insurance coverage for his ex-spouse as alimony.

An individual was allowed to deduct the amount of premiums paid to provide health insurance coverage for his ex-spouse as alimony. The taxpayer had agreed to pay his then spouse’s health insurance premiums, incident to a separation agreement pending divorce, through a cafeteria plan provided by the taxpayer’s employer. Subsequently, the taxpayer had excluded the amount equal to the health insurance premiums pursuant to Code Secs. 106 and 125 from his gross income and also claimed an alimony deduction pursuant to Code Secs. 62 and 215 for the portion of the premiums covering his then spouse.

Double Deduction
There was no dispute that the taxpayer was entitled to exclude the health insurance compensation from his gross income. However, the IRS had challenged the taxpayer’s attempt to also deduct the alimony payments and argued that permitting the alimony deduction would create a windfall to the taxpayer by granting him the practical equivalent of multiple deductions for the same economic outlay. The tax court held that disallowing the alimony deduction would leave the taxpayer with a greater tax burden that would counter the intended purpose and operation of the general alimony regime. Therefore, the taxpayer undisputably qualified for both the exclusion and the alimony deduction, and no double tax benefit outcome could arise when considering the alimony regime as a whole. By asking to disallow the alimony deduction where the law plainly permits the taxpayer this right, the IRS attempted to disrupt the uniformity of the general alimony regime under the guise of the double deduction rules when no such threat was present.

Deduction for Wholly Tax-Exempt Income
In addition, the IRS contended that Code Sec. 265(a) disallowed the taxpayer’s alimony deduction because it provides that an amount may not be deducted if it is allocable to wholly tax-exempt income (other than interest). The tax court, however, had never applied Code Sec. 265(a)(1) to disallow an alimony deduction, or, in any instance where the supposed exempt item of income at issue was actually included in gross income by a different taxpayer. Moreover, the alimony payments were not considered allocable to wholly tax-exempt income for Code Sec. 265 purposes as the taxpayer was required to include it in her income.

The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding.

The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding. The IRS’s convenient Tax Withholding Estimator (https://www.irs.gov/individuals/tax-withholding-estimator), will help taxpayers determine if they have too much withheld and how to make an adjustment to put more cash into their own pocket now. About 70 percent of taxpayers over withhold their taxes every year, which typically results in a refund. Alternatively, it will help taxpayers see that they should withhold more or make an estimated tax payment to avoid a tax bill when they file their tax return next year.

The following things need to be considered when adjusting withholding for 2021:

• Coronavirus tax relief - Tax help for taxpayers, businesses, tax-exempt organizations, and others, including health plans, affected by coronavirus (COVID-19).
• Disasters such as wildfires and hurricanes – Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.
• Job loss – 4128, Tax Impact of Job Loss, explained how this unfortunate circumstance can create new tax issues.
• Workers moving into the gig economy due to the pandemic – The IRS advised people earning income in the gig economy to consider estimated tax payments to avoid a balance or penalties when they file.
• Life changes such as marriage or childbirth – Getting married or having a child are just a couple of life events that can affect your refund or how much you owe.

Taxes are generally paid throughout the year whether from salary withholding, quarterly estimated tax payments, or a combination of both. Taxpayers can pay online, by phone, or from the IRS2Go app. Finally, taxpayers can schedule payments for future dates, which can be useful during filing season, for payment plan payments or for estimated tax payments.

The IRS released standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Code Secs. 501(a)(1) and 501(c)(3). This does not affect the status of organizations currently recognized under Code Sec. 501(c)(3).

The IRS released standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Code Secs. 501(a)(1) and 501(c)(3). This does not affect the status of organizations currently recognized under Code Sec. 501(c)(3).

Required Provisions
The IRS would issue said letter only if an LLC’s articles of organization and its operating agreement each include:

• provisions requiring that each member of the LLC be either (1) recognized as aforementioned; (2) a governmental unit under Code Sec. 170(c)(1); or (3) wholly-owned instrumentality of such, a governmental unit;
• express charitable purposes and charitable dissolution provisions;
• express chapter 42 compliance provisions under Code Sec. 508(e)(1), if the LLC is a private foundation; and
• an acceptable contingency plan (such as suspension of membership rights) in the event that one or more members cease to be except organizations or governmental units or wholly-owned instrumentalities.

Finally, comments could be made electronically via the Federal eRulemaking Portal at www.regulations.gov (type IRS-2020-0042 in the search field on regulations.gov to find this Notice and submit comments). Alternatively, send comments by mail: Internal Revenue Service, CC:PA:LPD:PR (Notice 2021-56), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Final regulations under Code Sec. 301 update the existing regulations under this provision to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988 ( P.L. 100-647) (the 1988 Act).

Final regulations under Code Sec. 301 update the existing regulations under this provision to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988 ( P.L. 100-647) (the 1988 Act). These changes generally provide that the amount of a Section 301 distribution of property made by a corporation to its shareholder is the fair market value of the distributed property. The final Section 301 regulations adopt prior proposed regulations ( NPRM REG-121694-16), without substantive changes, and apply generally to distributions made after September 22, 2021.

Code Sec. 301 and Amendments by the Technical and Miscellaneous Revenue Act of 1988
Code Sec. 301 provides rules for the treatment of a distribution of property, including money, made by a corporation to its shareholder with respect to that shareholder’s stock ownership in that corporation (a Section 301 distribution).

The 1988 Act amended Code Sec. 301(b)(1) to provide that the amount of any Section 301 distribution is the amount of money received plus the fair market value of the other property received. The 1988 Act also amended Code Sec. 301(d) to provide that the basis of property received in a Section 301 distribution is the fair market value of such property (both amendments, collectively, are referred to as the 1988 amendments).

The current Section 301 regulations reflect the rules of these two provisions as they existed prior to the 1988 amendments. Accordingly, to the extent preempted by statute, the current regulations have no application.

2019 Proposed Regulations
In 2019, the IRS issued proposed regulations under Code Sec. 301 ( NPRM REG-121694-16) to reflect the 1988 amendments (2019 proposed regulations). The scope of the 2019 proposed regulations was limited to:

• deleting provisions made obsolete by statutory changes;
• making minor additions and revisions to reflect current statutory text;
• making certain non-substantive changes for purposes of clarity and readability, including reordering and redesignating paragraphs; and
• amending cross-references in regulations under other provisions to reflect the proposed reordering and redesignating of paragraphs in the Section 301 regulations.

Final Regulations
The final Section 301 regulations adopt the 2019 proposed regulations with no substantive changes and with certain non-substantive changes for purposes of clarity and readability. The final regulations apply to Section 301 distributions made after September 22, 2021. However, these regulations update the previous regulations under Code Sec. 301 to reflect the statutory changes made by the 1988 Act, which apply to distributions made in tax years beginning after December 31, 1986.

The Treasury and IRS have issued final regulations addressing the calculation of qualified business asset investment for qualified improvement property, under the alternative depreciation system (ADS), for purposes of the Code Sec. 250 deduction (for foreign-derived intangible income and Code Sec. 951A global intangible low-taxed income (GILTI)) and for purposes of determining GILTI.

The Treasury and IRS have issued final regulations addressing the calculation of qualified business asset investment for qualified improvement property, under the alternative depreciation system (ADS), for purposes of the Code Sec. 250 deduction (for foreign-derived intangible income and Code Sec. 951A global intangible low-taxed income (GILTI)) and for purposes of determining GILTI.

The regulations also contain transition rules relating to the impact of loss accounts on net operating loss carrybacks allowed under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (the "CARES Act”").

Treatment of Qualified Improvement Property Under Code Secs. 250 and 951A
The regulations clarify that the technical amendments to Code Sec. 168 made by section 2307(a) of the CARES Act apply to determine the adjusted basis of property under Code Sec. 250 and Code Sec. 951A. The CARES Act classified qualified improvement property as 15-year property with a 20-year recovery period, for purposes of ADS. The rule is treated as effective December 22, 2017. The ADS rules used for determining qualified business asset investments are the rules in effect on December 22, 2017.

NOL Carrybacks
The CARES Act allowed taxpayers to carryback for five years, NOLs incurred in 2018 through 2020. The regulations provide rules analogous to the existing transition rules in Reg. §1.904(f)-12(j) to situations involving an NOL arising in a post-2017 tax year that is carried back to a pre-2018 tax year. The rules of Reg. §1.904(g)-3(b) apply to the NOL carryback, and income in a pre-2018 separate category in the tax year to which the NOL is carried back is generally treated as if it included only income that would be assigned to the same separate category in post-2017 tax years.

Therefore, any separate limitation loss created by reason of a passive category component of a post-2017 NOL that is carried back to offset pre-2018 general category income will be recaptured in post-2017 tax years as general category income, and not as a combination of post-2017 general, foreign branch, or Code Sec. 951A category income. Losses will first ratably offset a taxpayer’s general category income in the carryback year, to the extent thereof, and that no separate limitation loss account will be created as a result of that offset. The amount of income in the general category available to be offset under this rule is determined after first offsetting the general category income in the carryback year by a post-2017 NOL component in the general category that is carried back to the same year.

PFIC Rules
Proposed regulations under Code Sec. 1297 and Code Sec. 1298, for determining whether a foreign corporation is treated as a passive foreign investment company (PFIC) and the treatment of income and assets of a qualifying insurance corporation that is engaged in the active conduct of an insurance business, were not finalized.

The Treasury and IRS intends to finalize the regulations separately.

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A Ways and Means spokesperson told Wolters Kluwer on March 15 that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings."Confirmation that House GOP tax writers are mulling additional tax changes to the tax code comes just days after President Trump announced that he and House Republicans are very serious about working on a “phase-two” of tax reform. Trump quipped that Brady is the "king of tax cuts."

Individual Tax Cuts
Among expected changes, in particular, the temporary individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) could be made permanent, a Ways and Means spokesperson told Wolters Kluwer. For budgetary reasons, the cuts to individual tax rates and benefits were not made permanent under the new law. "While the tax cuts for families were long-term, they are not yet permanent, so we’re going to address issues like that," Brady said.

Criticism
Democratic lawmakers remain largely united in their criticisms of the TCJA. House Minority Leader Nancy Pelosi, D-Calif., criticized the new tax law in a March 15 news conference for "giving 83 percent of the benefits to the top 1 percent, ultimately raising taxes for 86 million middle-class families while contending that it's a middle-class tax cut."

To that end, across the U.S. Capitol, Senate Minority Leader Charles E. Schumer has said Democrats would be reluctant to work with Republicans in making any fixes to the new tax law unless Republicans would be willing to address Democrats’ concerns with the law, as well. "We don't have much of an inclination, unless they want to open up other parts of the tax bill that we think need changes, to just help them clean up the mess they made," Schumer said.

Looking Forward
"Mainstream optimism is at record levels, our economy is really gaining momentum and booming in a big way," Brady said. "We’re always looking to improve the tax code," he said, adding that lawmakers are currently considering new ideas for tax reform. "We think there are some good ones." Lawmakers will not combine additional tax reform measures with technical corrections to the existing TCJA, according to Brady, emphasizing that any significant changes to come will be new ideas.

The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.

The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.

Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.

Initiating an ID theft case

A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer's name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.

For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.

The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.

Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer's Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.

IDVerify.irs.gov

The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.

Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.

Resolving the case

After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent "Identity Theft Case Review Report" on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.

After resolution

The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead

The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.

Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.

Latest breach

The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS's online "Get Transcript" application and illegally download these taxpayers' tax transcripts. The IRS is concerned that the criminals intend to use taxpayers' past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS's filters for finding suspicious returns. 

Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS's expense, Koskinen stated.

Sometimes in a rush to file your income tax return, you may unintentionally overlook some income that had to be reported, or a deduction that you should or should not have taken.  Now what?  The solution is usually straightforward: you should file what is called an amended return.

Taxable income is measured on an annual basis so you cannot generally wait on correcting a mistake by “making up the difference” on the return that you file next year.  You need to make the correction(s) directly on a revised return for the same tax year.  Form 1040X, Amended U.S. Individual Income Tax Return, is used to amend any individual income tax return.  Income tax returns other than individual income tax returns or returns filed on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-A, U.S. Corporation Short Form Income Tax Return, are amended by filing the same form originally used to file the return.  Partnerships may use Form 1065X.  Amended returns should clearly be marked as such.  Some return forms such as Form 1041, U.S. Income Tax Return for Estates and Trusts, contain a box to be checked if it is being filed as an amended return.  For returns other than income tax returns, Form 843, Claim for Refund and Request for Abatement, is used to claim a refund.

To amend a non-income tax return other than to claim a refund, the same form originally used to file the return generally should be used.  Estate tax returns cannot be amended after they are due.  However, supplemental information may be filed that can change the amount of estate tax due from the amount shown on the return.

When to file an amended return.  A taxpayer must file an amended return and pay the additional tax due if the taxpayer omitted an item of income or incorrectly claimed a deduction for a tax year for which the limitation period is still open.  A tax year ordinarily remains open for three years from the filing of a return.  The three-year period starts running the day after the return is filed.  A return that is filed early is treated as filed on the due date of the return.  The limitations period on assessment for which a return remains open does not start over if an amended return is filed. 

If you realize that you made a mistake on your return that is not in IRS’s favor, it is best to correct it through filing an amended return as soon as possible.  If the IRS starts to audit you and finds the mistake first before you file your amended return, it can assess penalties on the original amount and treat you as if you had not come forward voluntarily on your own.

Special disaster loss option.  Not all amended returns are filed to correct a mistake.  One in particular –claiming a disaster loss—may be filed to effectively accelerate a casualty-loss deduction.  A taxpayer may elect to deduct a disaster loss in the year of occurrence or the immediately preceding year.  To qualify for the election, the loss must occur in a federally-declared disaster area.  The election is made on a return (if you have not filed your return yet for the preceding tax year), an amended return or a refund claim.  The amount of the deduction is determined using the casualty loss limitations.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, brothers, sisters (including step-brothers, and -sisters), half-siblings, nieces, and nephews;

 -- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

 -- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

 -- The child receives more than one-half of his or her support from you; and

 -- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; -- The individual's gross income for the year is less than $3,650; -- You provide more than one-half of the individual's total support for the year; -- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.

Correctly calculating your estimated tax payments and/or withholding is even more important as the year end approaches. Accurate calculations are especially important as third and fourth quarter payments become due, and your income and expenses for the rest of the year can be more accurately projected.

Estimated tax payments

You are required to pay estimated tax if you receive income from which tax is not withheld, including income from self-employment, dividends and interest, capital gains and losses, rental income, and alimony, and your tax is expected to be $1,000 or more (after subtracting credits and withholding). Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability throughout the year.

Higher-income taxpayers. For higher-income taxpayers whose adjusted gross income (AGI) shown on the preceding year's tax return exceeds $150,000 ($75,000 for married individuals filing separately), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Estimated tax payments are due quarterly. For most individuals, the due dates for the 2010 tax year are: April 15, June 15, and September 15 of 2010, and January 15, 2011. Failing to pay enough estimated tax on each installment date may result in a penalty for underpayment of estimated tax, even if you are due a refund. Therefore, properly calculating your payments is vital to avoid the penalties, including calculating adjustments needed in remaining quarters (including as soon as September 15, 2010 for the third quarter).

Third quarter payments are around the corner – September 15, 2010 – for the period June 1 through August 31. Fourth quarter payments will be due January 15, 2011 for the period September 1, 2010 through December 31, 2010. If your total estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty.

Withholding

With the third and fourth quarter payments becoming due, ensure you are properly withholding and paying enough in estimated tax. Look at your projected year-end tax payments as compared with your expected tax liability to determine if your estimated tax payments need some tweaking. If your payments are expected to be less than 90 percent of current-year tax, you will generally need to increase your withholding or make estimated tax payments.

You may want to file a new W-4 with your employer adjusting your withholding to withhold more from your final paychecks for the year if you are currently underwithholding. This will help avoid being subject to a penalty when you file your return.

Adjusting estimated tax payments

A change in your business's income, deductions, credits, and exemptions may also make it necessary to refigure your estimated payments for the remainder of the year. To avoid either a penalty from the IRS or overpaying the IRS interest-free, consider increasing or decreasing the amount of your remaining estimated payments.

If, during the quarter, you learn that a change in your business's anticipated income, deductions, credits, exemptions, or other adjustments will either increase or decrease your business's tax liability, and therefore affecting your required annual payment for the remainder of the year, you should adjust your remaining quarterly payments accordingly.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

Dependents

One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.

The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.

Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.

A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.

Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.

Alimony

Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.

Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.

There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.

Property

Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.

Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.

Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.

Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.

Retirement

When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.

Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.

Tax Prepayment and Joint Refunds

When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.

Legal and Other Expenses

To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.

Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.