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US worker in Afghanistan not eligible for foreign earned income exclusion

Posted by Admin Posted on July 24 2019

Haskins, TC Memo 2019-87

The Tax Court determined that a US citizen, living and working on a US military base in Afghanistan, was not eligible for the foreign earned income exclusion because her tax home was still in the US. With reference to a Code Sec. 6662 understatement penalty, the court also found that she did not have reasonable cause or act in good faith when she took the exclusion.

Background. A qualified individual may elect to exclude foreign earned income from gross income (the foreign earned income exclusion). (Code Sec. 911(a))

One requirement for an individual to be a qualified individual is that he has a tax home is in a foreign country. (Code Sec. 911(d)(1)) Another requirement is that the individual, during any period of 12 consecutive months, be present in a foreign country or countries during at least 330 full days in that period (330-day test). (Code Sec. 911(d)(1)(B))

An individual is not treated as having a tax home in a foreign country for any period for which his abode is within the US. (Code Sec. 911(d)(3))

In Code Sec. 911 cases, the Tax Court has compared a person's domestic ties (i.e., his or her familial, economic, and personal ties to the US) with his or her ties to the foreign country in which he or she claims a tax home in order to determine whether his or her abode was in the US during a particular period. Even though a person may have some limited ties to a foreign country during a particular period, if the person's ties to the US remain strong, the Tax Court has held that his or her abode remained in the US, especially when his or her ties to the foreign country were transitory or limited during that period. (Harrington, (1989) 93 TC 297)

A 20% penalty is imposed on the portion of an underpayment of tax attributable to a substantial understatement of income tax. (Code Sec. 6662(a) and Code Sec. 6662(b)(1))

Code Sec. 6664(c)(1) provides that the Code Sec. 6662(a) penalty does not apply to any portion of the underpayment to the extent that the taxpayer had reasonable cause for that portion of the underpayment and acted in good faith with respect to that portion.

Facts. In September 2011, Ms. Haskins retired from the U.S. Army. Immediately before her retirement she had been stationed in Afghanistan working in Army intelligence.

When Ms. Haskins retired from the Army, her husband, Mr. Haskins, and the Haskinses's two children, were living in the family home in Arizona. After retiring, Ms. Haskins traveled from Afghanistan to Arizona.

On September 26, 2011, Ms. Haskins began working for Science Applications International Corp. (SAIC). Initially she had a short training assignment in the Washington, DC area. During this training she attended a tax briefing by SAIC. One of the subjects of the tax briefing was the foreign earned income exclusion. She said SAIC mentioned that if she met the 330-day test then she would qualify for the exclusion.

On October 29, 2011, still a SAIC employee, Ms. Haskins began working in Afghanistan again. While in Afghanistan, Ms. Haskins lived and worked on U.S. military bases. She spent all of her time on the bases, as required by SAIC, because of the danger in leaving the bases.

She kept her US bank account while in Afghanistan. Her SAIC paychecks were deposited into this account.

While in Afghanistan, she remained registered to vote in Arizona. Ms. Haskins's family did not have the option of moving to Afghanistan with her.

When she heard that her mother was diagnosed with cancer, she returned to the US to visit her.

On June 10, 2012, while in Afghanistan, Ms. Haskins wrote an email to SAIC employee asking about the foreign earned income exclusion. The response back merely said, "You are not eligible for tax free status until you hit the 330-day mark in country". The response did not mention the tax home requirement.

On November 6, 2012, Ms. Haskins left her job at SAIC. She traveled from Afghanistan to Arizona, where the Haskinses's son was, then to Florida to live in the family home where her husband and other child lived.

On both her 2011 and 2012 joint tax returns, which she prepared, she claimed the foreign earned income exclusion. For both years, on Form 2555, "Foreign Earned Income", she left blank line 9, which asks, "List your tax home(s) during the tax year and date(s) established" was left blank.

While IRS conceded that Ms. Haskins met the 330-day test, it contended that she did not qualify for the foreign earned income exclusion because her abode was in the US and hence her tax home was not in a foreign country.

After IRS found that Ms. Haskins was not eligible for the foreign earned income exclusion, it also found that she had a substantial understatement of tax and imposed a penalty under Code Sec. 6662(a). Ms. Haskins conceded that, if she was not eligible for the foreign earned income exclusion, her understatement of tax would be substantial. But she argued that the penalty should not apply because she had reasonable cause and acted in good faith with respect to that portion because of the information she received by SAIC at the tax briefing and in the email.

Decision on foreign earned income exclusion. The Tax Court, using the comparison in Harrington, found that Ms. Haskins had strong ties to the United States during the relevant period.

Her husband and two children lived in the family home, which was in Arizona until August 2012 and in Florida after that.

Though Ms. Haskins had lived in Afghanistan during a portion of her time with the Army and then from October 2011 through November 2012 while working for SAIC, she did not have strong nonwork ties to Afghanistan. When she was with SAIC in Afghanistan, she worked and lived on forward operating bases. These bases were often under attack by rocket-propelled grenades and suicide bombers. She could not leave the bases.

When her mother was diagnosed with cancer, Ms. Haskins returned to the US.

Therefore, the Tax Court agreed with the IRS that Ms. Haskins's abode was in the US and that she did not qualify for the foreign earned income exclusion in either 2011 or 2012.

Decision on substantial understatement of tax. Regarding the September 2011 SAIC tax briefing, the Tax Court found that Ms. Haskins did not prove that her participation in the briefing justified the conclusion that she made a reasonable attempt to comply with the provisions of Code Sec. 911. The record left unanswered several important questions about the SAIC tax briefing. Were the persons who gave the tax briefing knowledgeable enough to give tax advice to Ms. Haskins? Did they know facts specific to Ms. Haskins? What exactly did they tell Ms. Haskins?

Second, Haskins contended that the June 11, 2012 email from a SAIC employee confirmed that she was entitled to the foreign earned income exclusion. The Tax Court found that, although the email discussed the 330-day test, the email did not say this was the only requirement for claiming the exclusion. There was no reason to think that the employee was qualified to give tax advice anyway. Haskins did not prove that the exchange of emails in June 2012 justified the conclusion that she made a reasonable attempt to comply with the provisions of Code Sec. 911.

The Tax Court found that Ms. Haskins did not have reasonable cause for taking the foreign earned income exclusion and, hence, the Code Sec. 6662(a) penalty applied. 

IRS confirms tax filing season to begin January 28

Posted by Admin Posted on Jan 15 2019

Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled. “We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig.

Congress directed the payment of all tax refunds through a permanent, indefinite appropriation (31 U.S.C. 1324), and the IRS has consistently been of the view that it has authority to pay refunds despite a lapse in annual appropriations. Although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury's request and concluded that IRS may pay tax refunds during a lapse.

The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work. Additional details for the IRS filing season will be included in an updated FY2019 Lapsed Appropriations Contingency Plan to be released publicly in the coming days. “IRS employees have been hard at work over the past year to implement the biggest tax law changes the nation has seen in more than 30 years,” said Rettig.

As in past years, the IRS will begin accepting and processing individual tax returns once the filing season begins. For taxpayers who usually file early in the year and have all of the needed documentation, there is no need to wait to file. They should file when they are ready to submit a complete and accurate tax return.

The filing deadline to submit 2018 tax returns is Monday, April 15, 2019 for most taxpayers. Because of the Patriots' Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns.

Software companies and tax professionals will be accepting and preparing tax returns before Jan. 28 and then will submit the returns when the IRS systems open later this month. The IRS strongly encourages people to file their tax returns electronically to minimize errors and for faster refunds.

Prohibition on cash, gift cards, and other non-tangible personal property as employee achievement awards

Posted by Admin Posted on Dec 10 2018

Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. 

The new law clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities, and other similar items.

 

Cost-of-living Adjustments Increases for Dollar Limitations on Benefits and Contributions

Posted by Admin Posted on Nov 02 2018
  2019 2018 2017
IRAs
IRA Contribution Limit $6,000 $5,500 $5,500
IRA Catch-Up Contributions $1,000 $1,000 $1,000
IRA AGI Deduction Phase-out Starting at
Joint Return $103,000 $101,000 $99,000
Single or Head of Household $64,000 $63,000 $62,000
SEP
SEP Minimum Compensation $600 $600 $600
SEP Maximum Contribution $56,000 $55,000 $54,000
SEP Maximum Compensation $280,000 $275,000 $270,000
SIMPLE Plans
SIMPLE Maximum Contributions $13,000 $12,500 $12,500
Catch-up Contributions $3,000 $3,000 $3,000
401(k), 403(b), Profit-Sharing Plans, etc.
Annual Compensation $280,000 $275,000 $270,000
Elective Deferrals $19,000 $18,500 $18,000
Catch-up Contributions $6,000 $6,000 $6,000
Defined Contribution Limits $56,000 $55,000 $54,000
Employee Stock Ownership Plan Limits $1,130,000 $1,105,000 $1,080,000
  $225,000 $220,000 $215,000
Other
High Compensated Employee Threshold $125,000 $120,000 $120,000
Defined Benefit Limits $225,000 $220,000 $215,000
Key Employee $180,000 $175,000 $175,000
457 Elective Deferrals $19,000 $18,500 $18,000
Control Employee (board member or officer) $110,000 $110,000 $105,000
Control Employee (compensation-based) $225,000 $220,000 $215,000
Taxable Wage Base $132,900 $128,400 $127,200

IRS guidance on the deductibility of meals purchased in an entertainment context

Posted by Admin Posted on Oct 04 2018

In a Notice and accompanying information release, IRS has provided transitional guidance on the deductibility of expenses for business meals that are purchased in an entertainment context.

The Tax Cuts and Jobs Act did not address the circumstances in which the provision of food and beverages might constitute entertainment. However, the legislative history of the Tax Cuts and Jobs Act clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.

The Notice provides that taxpayers may deduct 50% of an otherwise allowable business meal expense if:

1. The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;

2. The expense is not lavish or extravagant under the circumstances;

3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;

4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and

5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

Example 1. Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

The baseball game is entertainment and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to disallowance.

Therefore, A may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2. Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

The basketball game is entertainment and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to disallowance.

Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3. Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

As in Example 2, the basketball game is entertainment and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to disallowance.

Therefore, C may deduct 50% of the expenses associated with the food and beverages provided at the game.

Additional future guidance.

IRS intends to publish proposed regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance for the business meals described in the Notice.

IRS intends to issue separate guidance addressing the treatment of expenses for food and beverages furnished primarily to employees on the employer's business premises. 

Simplified per-diem rates increase for post-Sept. 30, 2018 business travel

Posted by Admin Posted on Sept 27 2018

IRS has issued a new notice carrying the "high-low" simplified per-diem rates for post-Sept. 30, 2018 travel. The high-cost area per-diem increases $3, and the low-cost area per-diem increases $4, from the prior simplified per-diems.

Background. An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn't exceed IRS-approved maximums, and the employee provides simplified substantiation (time, place and business purpose), the reimbursement is treated as made under an accountable plan—it isn't subject to income- or payroll-tax withholding and isn't reported on the employee's Form W-2. Receipts of expenses aren't required.

In general, the IRS-approved per-diem maximum is the General Services Administration (GSA) per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. These rates in effect for the federal government's fiscal year period beginning Oct. 1, 2018, may be found at gsa.gov. However, in applying the per-diem, M&IE, and incidental-expenses-only allowances, an employer may continue using the CONUS (continental U.S.) rates that were in effect for the first nine months of 2018 for CONUS expenses in all of 2018, instead of using the GSA rates that are effective Oct. 1, 2018, provided that the employer consistently uses those prior rates for the last three months of 2018. (Rev Proc 2011-47, Sec. 4.06; Notice 2018-77, Sec. 6)

Definition of incidental expenses. Rev Proc 2011-47, Sec. 3.02(3) provided that the term "incidental expenses" has the same meaning as in the Federal Travel Regulations, 41 C.F.R. 300-3.1, and that future changes to the definition of incidental expenses in the Federal Travel Regulations would be announced in the annual per-diem notice. On Oct. 22, 2012, the GSA published final regs revising the definition of incidental expenses under the Federal Travel Regulations to include only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. Accordingly, taxpayers using per-diem rates may separately deduct, if permitted (see below), or be reimbursed for, transportation and mailing expenses. (Notice 2018-77, Sec. 2)

Observation: Employee business expenses, such as unreimbursed transportation costs, are miscellaneous itemized deductions that are disallowed for tax years 2018 through 2025.

High-low rates. A payor that pays a per-diem allowance in lieu of reimbursing actual expenses an employee pays or incurs or will pay or incur for travel away from home may use the high-low substantiation method in lieu of the per-diem substantiation method or the M&IE-only method. (Rev Proc 2011-47, Sec. 5.01)

Under the high-low substantiation method, there is one uniform per-diem rate for all "high-cost" areas within CONUS, and another per-diem rate for all other areas within CONUS. Under the optional high-low method for post-Sept. 30, 2018 travel, the high-cost-area per diem is $287 (up from $284), consisting of $216 for lodging and $71 for M&IE. The per-diem for all other localities is $195 (up from $191), consisting of $135 for lodging and $60 for M&IE. (Notice 2018-77, Sec. 5.01)

Changes in high-low per-diem localities. The following changes have been made to the list of high-cost localities:

 

  • The following localities have been added to the list of high-cost localities: Sedona, Arizona; Los Angeles, California; San Diego, California; Vero Beach, Florida; Jekyll Island/Brunswick, Georgia; Duluth, Minnesota; Pecos, Texas; Moab, Utah; Cody, Wyoming. (Notice 2018-77, Sec. 5.03(a))
  • The following localities have changed the portion of the year in which they are high-cost localities: Oakland, California; Aspen, Colorado; Boca Raton/Delray Beach/Jupiter, Florida; Naples, Florida; Bar Harbor/Rockport, Maine; Boston/Cambridge, Massachusetts; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina; Vancouver, Washington; Jackson/Pinedale, Wyoming. (Notice 2018-77, Sec. 5.03(b))
  • The following localities have been removed from the list of high-cost localities: Mill Valley/San Rafael/Novato, California; Steamboat Springs, Colorado; Petoskey, Michigan; Saratoga Springs/Schenectady, New York. (Notice 2018-77, Sec. 5.03(c))
  • The following localities have been redefined: Traverse City, Michigan no longer includes Leland; Bar Harbor, Maine now includes Rockport. (Notice 2018-77, Sec. 5.03(d))

Limitation. A payor that uses the high-low substantiation method for an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. The payor may use any permissible method (actual expenses, the per-diem substantiation method, or the M&IE-only per-diem substantiation method) to reimburse that employee for any CONUS travel away from home. (Rev Proc 2011-47, Sec. 5.03)

Transition rules. For travel in the last three months of a calendar year:

  1. A payor must continue to use the same method (per-diem method, or high-low method) for an employee as the payor used during the first nine months of the calendar year; and
  2. A payor may use either the rates and high-cost localities in effect for the first nine months of the calendar year or the updated rates and high-cost localities in effect for the last three months of the calendar year if the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method. (Rev Proc 2011-47, Sec. 5.04; Notice 2018-77, Sec. 6)

Employer's deduction for high-low per-diem. A payor must treat M&IE allowances as a food and beverage expense that is subject to the 50% deduction limit on meal expenses. (Rev Proc 2011-47, Sec. 6.05) The percentage is 80% for food and beverage expenses of certain individuals (e.g., air transport workers, interstate truckers, bus drivers) during or incident to a period of duty subject to the hours-of-service limits of the Department of Transportation. (Code Sec. 274(n)(3))

Observation: Where the 50% deduction limit applies to food and beverages, an employer's deduction for a high-cost-area per-diem is equal to $251.50 ($216 for lodging plus $35.50 (half of $71 M&IE)). For non-high-cost areas, the payor deducts $165 ($135 for lodging, plus $30 (half of $60 M&IE)).

Optional method for incidental-expenses-only deduction. Instead of using actual expenses in computing deductions for ordinary and necessary incidental expenses of away-from-home business travel, employees and self-employed individuals who don't pay or incur meal expenses for a calendar day (or partial day) of travel away from home may, for post-Sept. 30, 2018 travel, deduct $5 per day (same as previous rate) for each calendar day (or partial day) the taxpayer is away from home. (Notice 2018-77, Sec. 4)This amount is deemed substantiated if the taxpayer substantiates the time, place, and business purpose of the travel for that day (or partial day). The incidental-expenses-only per-diem can't be used by payors that use a per-diem or M&IE-only per-diem method (see below), or by employees or self-employed individuals who use the M&IE-only per-diem method. The incidental-expenses-only per-diem is not subject to the 50% deduction limit on business meals. (Rev Proc 2011-47,Sec.4.05; Rev Proc 2011-47, Sec. 6.05(5))

M&IE-only per-diem. Under some circumstances, an employee may receive a per-diem reimbursement only for his or her M&IE for travel away from home. If simplified substantiation is supplied (time, place, business purpose), and one of several conditions is met (e.g., payor provides lodging in kind or pays the service provider directly for lodging), the amount paid is deemed paid under an accountable plan as long as the rate does not exceed the federal M&IE rate for the locality of travel for the period when the employee is away from home. Similar rules apply to self-employed individuals who pay or incur meal expenses. (Rev Proc 2011-47, Sec. 4.03)

Transportation industry per diem. Effective Oct. 1, 2018, taxpayers in the transportation industry paying (or deducting) a per-diem only for M&IE may treat $66 (up from $63) as the M&IE rate for all localities within CONUS and $71 (up from $68) as the M&IE rate for all localities outside of CONUS (same as previously). (Notice 2018-77, Sec. 3) A transition rule provides that taxpayers that used the federal M&IE rates or the special transportation industry rates during the first nine months of 2018 for an individual can't switch to the other method for that individual until 2019. (Rev Proc 2011-47, Sec. 4.06(2)) 

Email phishing scams

Posted by Admin Posted on Aug 03 2018

If a taxpayer receives an unsolicited email that appears to be from either the IRS or a program closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov. Learn more by going to the Report Phishing and Online Scams page.

The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However, there are special circumstances in which the IRS will call or come to a home or business, such as when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or during criminal investigations.

IRS correspondence exams for last year jump to close to 6%

Posted by Admin Posted on July 17 2018

Last year’s audit rate of 0.6% for individuals was the lowest in years. So does this mean it’s open season for cheating on your taxes? Not really. The annual examination rate doesn’t tell the full story. When calculating the figure, IRS counts only in-person exams and correspondence audits done by service centers. Of these two types, correspondence exams by mail make up the bulk of the audits.

The agency questions many more taxpayers. It doesn’t count as audits computer-generated CP2000 notices about mismatches between income and deductions reported on tax returns and data on third-party information returns, such as W-2s, 1099s and 1098s. Also, not included are math error corrections and other programs that may require taxpayers to send in documents or other information to the Service and may feel like an audit for many individuals. If these corrective procedures are factored in, the agency’s coverage rate for last year jumps to close to 6%.

Dependent care credit

Posted by Admin Posted on July 17 2018

Expenses for the care of children under age 13 and qualifying relatives must be incurred so you can work or look for employment, and you must report the provider’s tax ID number. Use Form 2441 to claim the credit. If taking the credit for costs to help care for a relative who is not a qualifying child, such as an aging parent or grandparent, that person needs to have lived with you for more than six months during the year and be unable to care for him- or herself. The credit is worth 20% to 35% of up to $3,000 in eligible child care expenses, depending on your income…$6,000 if you have two or more children needing care.

Don’t miss out on this tax break if you use a flex plan for child care costs: You can still claim the dependent care credit to the extent your expenses are more than the amount you pay through your workplace flexible spending account. The maximum dependent care costs that can be funded through an FSA are $5,000, but the credit taken on your return applies to as much as $6,000 of eligible expenses for filers with two or more kids. You’d run the first $5,000 of dependent care costs through the FSA, and the next $1,000 would be eligible for the credit on Form 2441.

Remember that summer day camp costs qualify for the dependent care credit. If you send your child to any special day camps this summer, such as those for sports, computers, math or theater, don’t forget about the tax break. The same goes for camps that your child is attending this summer to help improve reading or study skills. But expenses for summer school, tutoring programs and overnight camps don’t qualify. Before- and after-school care programs are also eligible for the credit.

Tip for college grads who are starting a full-time job

Posted by Admin Posted on July 17 2018

Use part-year withholding to boost your paycheck and have less tax withheld. The standard federal tax withholding tables assume you’ll earn a full year’s income when figuring how much income tax to take out. The part-year method sets withholding according to what you’ll actually earn during the part of the year you’re on the job. Individuals expecting to work 245 or fewer days in a year can ask their employers in writing to use this method. If your employer agrees, you’ll have less tax withheld from your paychecks. It’s better to have the cash now than to wait for a refund in 2019.

Foreclose on a jointly owned home

Posted by Admin Posted on July 17 2018

IRS can foreclose on a jointly owned home to pay tax owed by one spouse. But the other spouse must receive his or her share of the sales proceeds. And the Service must first get federal court approval before selling the property.

What if the innocent spouse has only a homestead interest in the property? The same rules can apply, as shown here. A couple lives in a home in S.D. The husband holds legal title to it, and he is the one with the federal tax debt. The wife has a possessory homestead interest under S.D. law, which, in IRS’s view, doesn’t amount to a vested interest. IRS claims it needn’t pay her any proceeds from the forced sale. A federal court disagreed, saying that the S.D. homestead law essentially gives the wife an independent interest in the property. Upon foreclosure of the home, she must be justly compensated for her loss (Nelson, D.C., S.D.).

2017 Tax Reform: tax treatment of alimony under the new law

Posted by Admin Posted on Feb 21 2018

Under the current rules, an individual who pays alimony or separate maintenance may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an "above-the-line" deduction. (An "above-the-line" deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is generally more valuable for the taxpayer than an itemized deduction.) And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse's gross income).

However, new rules are coming soon. Under the Tax Cuts and Jobs Act rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won't be able to deduct the payments, and the alimony-receiving spouse won't include them in gross income or pay federal income tax on them.

These new rules don't apply to existing divorces and separations. It's important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as to divorces and separations that are executed before 2019.

Some taxpayers may want the Tax Cuts and Jobs Act rules to apply to their existing divorce or separation. Under a special provision, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified after Dec. 31, 2018, the new rules apply to that modified decree if the modification expressly so provides. There may be situations where applying these new rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.

Business Meals and Entertainment Changes Under New Tax Rules

Posted by Admin Posted on Jan 18 2018

In general, the new tax Act provides for stricter limits on the deductibility of business meals and entertainment expenses. Under the Act entertainment expenses incurred or paid after December 31, 2017 are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees”. (i.e. office holiday parties are still deductible). Business meals provided for the convenience of the employer are now only 50% deductible whereas before the Act they were fully deductible. Barring further action by Congress those meals will be nondeductible after 2025.

Businesses should keep the new rules in mind as they plan their 2018 meals and entertainment budgets. See below for a chart comparing the rules before and after the Act.

 

 

 

2017 Expenses (Old Rules)

2018 Expenses (New Rules)

Office Holiday Parties

100% deductible

100% deductible

 

 

 

 

2017 Expenses (Old Rules)

2018 Expenses (New Rules)

Entertaining Clients

50% deductible

No deduction for entertainment expenses

Event tickets, 50% deductible for face value of ticket; anything above face value is non-deductible

Tickets to qualified charitable events are 100% deductible

 

 

 

 

2017 Expenses (Old Rules)

2018 Expenses (New Rules)

Business Meals e.g. Employee Travel Meals

50% deductible

50% deductible

 

 

 

 

2017 Expenses (Old Rules)

2018 Expenses (New Rules)

Meals Provided for Convenience
Of Employer

100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise, 50% deductible

50% deductible
(nondeductible after 2025)

Welcome to Our Blog!

Posted by Admin Posted on Nov 30 2017
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