Newsletters
The IRS has reminded taxpayers to report digital asset income on 2023 federal tax returns, with an updated question now on Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return...
For purposes of the new clean vehicle credit and the used clean vehicle credit, the IRS has extended the deadlines for submitting seller reports for vehicles placed in service in 2023 and ea...
For purposes of the low-income housing credit, the IRS concluded that additional housing credit dollar amounts (HCDAs) for 2021 and 2022 that are returned to a state housing agency may be realloca...
The IRS has underscored the vital importance of selecting a tax professional carefully to safeguard personal and financial information. Taxpayers bear legal responsibility for their income tax...
The Financial Crimes Enforcement Network (FinCEN) issued guidance on inflation adjustments to its civil monetary penalties as mandated by the Federal Civil Penalties Inflation AdjustmentÂ...
The interest rates on the underpayment and overpayment of Massachusetts taxes are unchanged for the period April 1, 2024, through June 30, 2024.The rate for overpayments is 7%.The rate for underpaymen...
Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.
Following what was described as a successful launch of beneficial ownership information reporting requirements, officials from the Department of the Treasury found themselves before the House Financial Services Committee defending the regulations.
"The beneficial ownership registry successfully launched on January 1 this year," Andrea Gacki, director of the Financial Crimes Enforcement Network, said during a February 14 oversight hearing of the committee. "In the first week alone, more than 100,000 companies successfully filed their beneficial ownership information. And I am pleased to report that today, so far, FinCEN has received more than half a million reports successfully filed."
Brian Nelson, Treasury undersecretary for Terrorism and Financial Intelligence, told the committee that there are 32 million companies that are expected to file a BOI report.
Gacki continued: "The now ongoing better collection of beneficial ownership information, paired with the forthcoming phased provision of access to the database by law enforcement and other authorized users will close what is long been identified as a gap in the United States anti-money laundering and countering the financing of terrorism regime."
Gacki and Nelson were put on the defensive during the hearing as committee members challenged them on the effect of the reporting requirements on small businesses.
She noted that FinCEN took steps to make sure the filing system is "workable for small businesses," including making it simple with the ability to complete in 20 minutes without the need to seek professional help that could end up costing a small business more money.
Nelson also emphasized that Treasury is using all available tools to spread the word of the filing requirements and offer guides on how to file.
"We recognize that a number of these small businesses have never heard of FinCEN, so there’s a big educational campaign," he said, adding that the agency is working on a solution for those unable to file BOI electronically, such as businesses in Amish communities.
Gacki also stressed that if there are issues related to filing, FinCEN is not looking to take action against those who are simply having trouble filing their BOI report.
"I want to stress that, when it comes to enforcement, the statute is clear," she said. "We can only take enforcement action for willful violations. We are not out to take ‘gotcha’ enforcement actions. We want to educate about the requirement."
AICPA Calls For Suspension Of BOI Reporting Requirement
Despite the efforts FinCEN and the broader Treasury department are making to educate the public on the BOI reporting requirements, the American Institute of CPAs is calling for the suspension of BOI reporting requirements.
In a February 13, 2024, letter to the leadership of the House Financial Services Committee and the Senate Banking Committee, AICPA stated the BOI reporting rule "should be suspended until the small business community is considered well-informed of their requirement to report BOI information to FinCEN and the outstanding questions by the financial professionals who serve this community have been answered."
AICPA stated that small businesses "should have a reasonable chance at compliance" in addition to a timeframe to gain awareness of the requirements. "To comply and provide the information necessary, small businesses need additional time to work through these and other questions that have not been answered in the six weeks this rule has been in effect. We urge you to suspend the rule and give small entities the time necessary to work through this requirement so we can best support the small business community."
By Gregory Twachtman, Washington News Editor
The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny.Â
The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny. The ERC Voluntary Disclosure Program allows businesses to rectify incorrect claims by repaying just 80% of the amount claimed. Taxpayers who realize their claims are ineligible are urged to quickly pursue the claim withdrawal process.
The IRS has highlighted seven suspicious signs indicating potential inaccuracies in ERC claims. These include:
- Too many quarters being claimed: Employers should ensure they meet eligibilitycriteria for each quarter claimed.
- Government orders that dont qualify: Employers should have clear documentation demonstrating how and when government orders related to COVID-19 impacted their operations.The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Also, employers should avoid a promoter that supplies a generic narrative about a government order.
- Too many employees and wrong calculations : Employers should accurately calculate the credit based on changes in the law and avoid overclaiming. For details about credit amounts, see the Employee Retention Credit - 2020 vs 2021 Comparison Chart.
- Business citing supply chain issues :Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
- Business claiming ERC for too much of a tax period: Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
- Business didn’t pay wages or didn’t exist during eligibility period: Employers can only claim ERC for tax periods when they paid wages to employees.
- Promoter says there’s nothing to lose: Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they have nothing to lose.
The Employee Retention Credit (ERC) is available to eligible employers who paid qualified wages to some or all employees between March 12, 2020, and January 1, 2022. Eligibility varies based on the time period:
- For 2020 and the first two quarters of 2021: Eligibility is based on trade or business operations being fully or partially suspended due to a COVID-19-related government order or experiencing a decline in gross receipts.
- For the third quarter of 2021: Eligibility includes suspension of trade or business operations, a decline in gross receipts, or being classified as a recovery startup business.
- For the fourth quarter of 2021: Only recovery startup businesses are eligible.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.
The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2024 and the lease inclusion amounts for business vehicles first leased in 2024.
Luxury Passenger Car Depreciation Caps
The luxury car depreciation caps for a passenger car placed in service in 2024 limit annual depreciation deductions to:
- $12,400 for the first year without bonus depreciation
- $20,400 for the first year with bonus depreciation
- $19,800 for the second year
- $11,900 for the third year
- $7,160 for the fourth through sixth year
Depreciation Caps for SUVs, Trucks and Vans
The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2024 are:
- $12,400 for the first year without bonus depreciation
- $20,400 for the first year with bonus depreciation
- $19,800 for the second year
- $11,900 for the third year
- $7,160 for the fourth through sixth year
Excess Depreciation on Luxury Vehicles
If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.
The annual cap for this excess depreciation is:
- $7,160 for passenger cars and
- $7,160 for SUVS, trucks, and vans.
Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans
If a vehicle is first leased in 2024, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:
- $62,000 for a passenger car, or
- $64,000 for an SUV, truck or van.
The 2024 lease inclusion tables provide the lease inclusion amounts for each year of the lease.
The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.
Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts
The depreciation caps and lease inclusion amounts do not apply to:
- cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
- SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.
So taxpayers who want to avoid these limits should "think big."
The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.
This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.
The Internal Revenue Service has reviewed, redesigned and deployed 31 notices for the 2024 tax filing season in an effort to simplify the notices and improve their clarity.
This is a part of a broader effort to simplify up to 90 percent of the notices the agency sends out to taxpayers on an annual basis.
Included in the first wave of redesigned notices are notices to taxpayers who served in combat that may be eligible for tax deferment, notices that remind a taxpayer that they may have an unfiled return, and notices that remind a taxpayer about their balance due and where they can go for assistance.
"The IRS has a large number of these letters as well as other standard correspondence,"IRS Commissioner Daniel Werfel said during a January 23, 2024, teleconference with reporters."And as we’ve heard from tax professionals as well as taxpayers, these notices can be confusing. They cover complex topics. They can include a lot of legal language, and with our current systems and machines, the letters can be a mishmash of looks that do not always have a consistent familiar look you might get from a credit card company or a bank."
Werfel said that these issues made it clear the agency management that they need to redesign the notices to utilize clearer, plain language that a taxpayer can act upon without potentially needing to consult with a tax professional to help understand the information being sent and potentially requested. About 20 million of these 31 notices were sent to taxpayers in calendar year 2022, he said.
He highlighted the potential that the redesigned notices will have by discussing the pilot program that redesigned Notice 5071C, which asks questions about possible identity theft. The IRS made the language clearer and included a QR code to direct taxpayers to the appropriate web page to allow them to respond to the notice.
"In all, 60,000 taxpayers received this pilot letter compared to taxpayers who received the original letter,"Werfel said."There was a 16 percent reduction in taxpayers who called the IRS as their first action and a 6 percent increase in taxpayers who used the online option. The IRS will apply the lessons learned from this pilot to a larger redesign initiative."
By the 2025 tax filing season, Werfel said the IRS is hoping to have redesigned up to 200 notices, which make up about 90 percent of the notices sent out to individual taxpayers in 2022.
By Gregory Twachtman, Washington News Editor
The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims.Â
The IRS, with its Criminal Investigation (CI) arm, has urged businesses to review eligibility for the Employee Retention Credit (ERC). To combat fraud, they intensified compliance efforts related to this pandemic-era credit. Businesses wrongly claiming the ERC are advised to consider applying for the Voluntary Disclosure Program before the March 22 deadline. A special withdrawal program is also available for those with eligibility concerns on pending claims. Both programs aimed to help employers to avoid penalties and interest on incorrect claims. CI special agents plan to conduct nationwide educational sessions in February for tax professionals, focusing on the ERC. These sessions, part of a broader initiative, will be held in at least 23 U.S. states and the District of Columbia. The IRS has implemented several initiatives to address inappropriate claims by businesses. Some key points are listed below.
ERC Voluntary Disclosure Program (Open until March 22, 2024):
- businesses with erroneous claims and received payments can participate;and
- the program runs until March 22, 2024.
Withdrawal Program for Pending ERC Claims:
- the IRS continues to accept and process requests to withdraw an employer's full ERC claim under a special withdrawal process.
ERC Eligibility Information:
- special information is available to help businesses understand Employee Retention Tax Credit guidelines; and
- resources include ERC FAQs and the ERC Eligibility Checklist, offered as an interactive toolor a printable guide.
Increased IRS Compliance Activity:
- letters notifying taxpayers of disallowed ERC claims have been sent;
- letters related to claiming an erroneous or excessive credit are planned; and
- ongoing compliance efforts include Audits, Civil Investigations, and Criminal Investigations.
The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN.Â
The Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide (Guide) to provide an overview of the Beneficial Ownership Information Access and Safeguards Rule (Access Rule) requirements for small entities that obtain beneficial ownership information (BOI) from FinCEN. Under the Access Rule, issued in December 2023, BOI reported to FinCEN is confidential, must be protected and may be disclosed only to certain authorized federal agencies; state, local, tribal and foreign governments; and financial institutions. The guide includes sections summarizing the Access Rule’s requirements that pertain to small financial institutions’ access to BOI.
Further, FinCEN intends to provide access to certain categories of financial institutions with obligations under the current Customer Due Diligence (CDD) Rule. Therefore, this Guide includes sections summarizing the Access Rule’s requirements that pertain to these small financial institutions only
The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.
The Department of the Treasury and the Internal Revenue Service have released new analysis that shows the additional funding provided to the IRS under the Inflation Reduction Act can increase revenues by"as much as" $561 billion.
"This analysis provides a more comprehensive assessment of the revenue effects of the transformational enforcement and modernization efforts enabled by the IRA" Greg Leiserson, Treasury deputy assistant secretary for tax analysis, said February 6, 2024, during a press teleconference."The IRS estimates that the IRA, as enacted, would increase revenue by as much as $561billion through fiscal year 2034, substantially more than earlier estimates. If IRA funding is renewed with it runs out, as the administration has proposed, estimated revenue would be as much as $851 billion."
A previous estimate had the IRA generating an additional $390 billion over the next 10 years based primarily on enforcement hires as the key revenue driver and assuming a diminished return over time.
Leiserson noted that previous estimates"were limited to revenues generated by direct enforcement activities resulting from higher enforcement staffing. This narrow focus does not consider the significant impact of the technology, data, and service improvements made possible by the IRA or any deterrent effect the greater enforcement capabilities and activities would have in order to better assess the revenue raised by this transformation."
The new analysis is broken down into five categories:
- Direct Revenue: payments received related to enforcement actions
- Revenue Protected: stopping illegitimate refund claims before the refund is issued
- Impact of Service on Compliance: making it easier for taxpayers to pay what they owe
- Compliance Assurance: increasing transparency and tax certainty for complex tax situations
- Efficiency Gains: including from IT investments and improvements to data analytics
The IRS has traditionally made estimates in the first two categories listed.
IRS Chief Data and Analytics Officer Melanie Krause during the call highlighted that in addition to the heightened compliance and enforcement efforts going on against the wealthy individuals that may not be paying taxes they legitimately owe, the improvements to things such as customer service and to improving access to Taxpayer Assistance Centers also helps.
"For example, whether we have the resources to serve taxpayers by being available to answer the phone"Â when they have question is important for voluntary compliance, she said, adding that the same is true for when people use TACs.
She noted that the analysis being published"is a pioneering step forward for developing a more exhaustive and accurate estimates of the return on investment for IRS funding, which will enrich our understanding of how these investments yield tangible outcomes,"she said.
Taking into consideration everything and not just enforcement gains "illustrate the bottom-line importance of investing in our nation’s tax system really can’t be overstated," Krause said."And the resulting changes will ripple out and create benefits for taxpayers and the nation in many ways."
By Gregory Twachtman, Washington News Editor
The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.
The American Institute of CPAs offered a series of guidance recommendations to the Department of the Treasury and the Internal Revenue Service to help provide clarity on a notice issued by the IRS on changes to the regulation for Roth IRA catch-up contributions made by SECURE 2.0.
In a January 17, 2024, letter to the agencies, AICPA recommend that guidance be issued across areas.
First, the organization recommended that Treasury and the IRS "ssue guidance stated that federal income tax withholding with respect to a participant’s mandatory Roth IRAcatch-up contribution is not required before February 1 of the year in which the amount is contributed," the letter stated.
Second, AICPA called for guidance "allowing an elective deferral which is treated as a Roth catch-up contribution due to being recharacterized based on the failure of the ADP [actual deferral percentage] test, to be taxable to the participant in the year of recharacterization."
Third, it was recommended that future guidance issued in relation to Section V.3 of the Notice 2023-62"clarifies that for purposes of determining if an employee’s participating wages exceeds $145,000 (as adjusted0, only wages from the employee’s specific common law employer in the previous year are included, and only if it is a participating employer in the plan."
Finally, AICPA recommends the agencies "issueguidance stating that an individual who had deferrals characterized as Roth contributions as a result of not contributing deferrals equal to the regular limit be permitted to have them designated as regular deferrals."
The organization characterized these guidance recommendations as helping to bring more simplicity to the tax system.
"Due to the mandate in SECURE 2.0 requiring certain catch-up contributions be made on a Roth IRA basis, the IRS issued notice 2023-62 to help implement the provision," Kristin Esposito, AICPA director of tax policy and advocacy, said in a statement. "AICPA want to highlight certain administrability issues noticed in the guidance that we believe will make for a smoother transition."
By Gregory Twachtman, Washington News Editor
As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use.Â
As part of the ongoing efforts to improve tax compliance in high income categories, the IRS will begin dozens of audits on business aircraft involving personal use. The audits will be focused on large corporations, large partnerships and other high income taxpayers, and will scrutinize whether the use of jets is being properly allocated between business and personal reasons. "During tax season, millions of people are doing the right thing by filing and paying their taxes, and they should have confidence that everyone is also following the law," said IRS Commissioner Danny Werfel, "These aircraftaudits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities."
These audits of corporate jet usage is part of the IRS Large Business and International division’s "campaign" program and includes issue-focused examinations, taxpayer outreach and education, tax form changes and focusing on particular issues that present a high risk of noncompliance. "The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act," Werfel said. In addition to the work on corporate jets,the IRS has a variety of efforts underway to improve tax compliance in complex, overlooked high-dollar areas where the agency did not have adequate resources prior to Inflation Reduction Act funding.
With the subprime mortgage mess wreaking havoc across the country, many homeowners who over-extended themselves with creative financing arrangements and exotic loan terms are now faced with some grim tax realities. Not only are they confronted with the overwhelming possibility of losing their homes either voluntarily through selling at a loss or involuntarily through foreclosure, but they must accept certain tax consequences for which they are totally unprepared.
Many homeowners - whether in connection with their principal residence or a vacation property - may not anticipate that foreclosure and a home sale that produces a loss can trigger significant and unexpected income tax liabilities, especially when the sale does not produce enough gain to pay off outstanding mortgage debt.
Selling at a loss
Homeowners may be unpleasantly surprised to learn that they can not write-off losses incurred from the sale of their home. When a homeowner is forced to sell their personal residence for less than the price they paid, the loss incurred on the sale is considered to be a non-deductible personal expense for federal income tax purposes. What's more, if the homeowner eventually buys another home that is sold down the road at a taxable profit, previous losses cannot be used to offset that gain.
Faced with such a situation, the technique of renting out the home, rather than selling it, might help some homeowner buy time until better times. If renting eventually stops making financial sense, the homeowner who sells at a loss might then succeed in establishing a deductible business loss from the business of renting property. However, only losses incurred after the property is converted may be deducted.
Debt forgiveness
Homeowners who sell their property when their mortgage debt exceeds the net sale price of the home (a so-called "short sale") may find that they owe taxes to the IRS. For example, assume you paid $500,000 for a home that you sell for a net sale price of $400,000, but you have a mortgage of $550,000 on the property. For tax purposes, you have incurred a $100,000 loss on the sale because the sale price is lower than your tax basis in the property ($400,000 sale price - $500,000 basis = $100,000 loss). Moreover, you still owe $150,000 to your mortgage lender since a mortgage note is a personal liability in addition to being an encumbrance on the house itself. If the lender refuses to discharge the remaining debt, you'll have to pay off the loan and there is no tax break or write-off for doing so.
On the other hand, if the mortgage lender forgives part or all of the remaining $150,000 debt, the amount discharged is considered taxable income. With few exceptions, discharged debt of all types is treated as income, taxable at ordinary rates just like a salary. It is irrelevant to the IRS that no tangible income was actually received on the sale of the home or forgiveness of debt by the lender. You will owe taxes on the amount of mortgage debt that the lender discharges. What's more, there is no offset from your $100,000 loss on the sale of the property; nor is this income covered by the $250,000 exclusion on taxable gain on the sale of a principal residence ($500,000 for joint filers).
A lender who discharges any part or all of a homeowner's debt must report the forgiven debt on Form 1099-C (Cancellation of Debt) to you and to the IRS. You must report the amount of discharged debt as income on your tax return in the year the mortgage debt is forgiven.
Foreclosure
Foreclosure also produces tax consequences that may be wholly unanticipated by the homeowner. Taxable gains and income from mortgage debt forgiveness also occur in foreclosure. Tax liability upon foreclosure depends on whether you have a nonrecourse or recourse loan. A recourse loan permits the lender to sue the borrower for any outstanding debt. When a foreclosure occurs on the property of a homeowner with a nonrecourse loan, however, the lender is only entitled to collect the amount that the home is sold for, and the borrower has no further liability.
Example. Your tax basis in your home is $400,000. You have a recourse loan and your mortgage debt totals $350,000. But at the time of foreclosure the fair market value of your home has decreased to $325,000. However, the lender forgives the remaining unpaid mortgage debt of $25,000 (usually because the lender sees that the former homeowner has little assets left, the remaining debt would be hard to collect, and an immediate write off gives the lender an immediate tax deduction). Tax law treats you as having received ordinary income from the cancellation of the debt in the amount of $25,000.
Alternatively, if you had a nonrecourse loan in the amount of $350,000 and your home sold at auction for $325,000, you would have no further liability to the lender since it cannot pursue you for the lost $25,000. Therefore, since your mortgage lender cannot legally pursue you for the remaining $25,000, there will be no debt for them to discharge. Such nonrecourse loans, however, are very rare in personal, non-business settings.
Moreover, if property is foreclosed and sold at auction for more than the home's tax basis, the sale produces taxable gain. In this case, however, the gain from a foreclosure sale of an individual's principal residence may be excluded to the extent of up to $250,000 ($500,000 for married homeowners filing jointly), depending on the length of homeownership. No exclusion, however, is given on vacation property that is not a principal residence.
Future relief for homeowners?
In mid-April, Reps. Robert E. Andrews (D-New Jersey) and Ron Lewis (R-Kentucky), introduced the Mortgage Cancellation Relief Act of 2007 (H.R. 1876), a bill that would assist many homeowners affected by the loss of their home through foreclosure or short sale. The legislation would exempt discharged debt on primary home mortgages from treatment as income subject to income taxation. Currently, the bill is before the House Ways and Means Committee.
If you would like more information on the tax consequences of foreclosure or the potential implications of taking a loss on the sale of your home or vacation property, please call our office and we can discuss your options for minimizing your tax liabilities.
These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.
Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.
There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online. Â While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.
Electronic Funds Withdrawal
Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.
Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.
The following are some of the tax liabilities you can pay with EFW:
- Individual income tax returns (Form 1040)
- Trust and estate income tax returns (Form 1041)
- Partnership income tax returns (Forms 1065 and 1065-B)
- Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
- Estimated tax for individuals (Form 1040)
- Unemployment taxes (Form 940)
- Quarterly employment taxes (Form 941)
- Employers annual federal tax return (Form 944)
- Private foundation returns (Form 990-PF)
- Heavy highway vehicle use returns (Form 2290)
- Quarterly federal excise tax returns (Form 720)
For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.
EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."
Credit Card Payments
Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.
Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.
However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.
The following are some tax payments that can be made with a credit card:
- Individual income tax returns (Form 1040)
- Estimated income taxes for individuals (Form 1040-ES)
- Unemployment taxes (Form 940)
- Quarterly employment taxes (Form 941)
- Employers annual federal tax returns (Form 944)
- Corporate income tax returns (Form 1120)
- S-corporation returns (Form 1120S)
- Extension for corporate returns (Form 7004)
- Income tax returns for private foundations (Form 990-PF)
However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.
Electronic Federal Tax Payment System
EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.
EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.
EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.
We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.
If you own a vacation home, you may be considering whether renting the property for some of the time could come with big tax breaks. More and more vacation homeowners are renting their property. But while renting your vacation home can help defray costs and provide certain tax benefits, it also may raise some complex tax issues.
Determining whether to use your vacation home as a rental property, maintain it for your own personal use, or both means different tax consequences. How often will you rent your home? How often will you and your family use it? How long will it sit empty? Depending on your situation, renting your vacation home may not be the most lucrative approach for you.
Generally, the tax benefits of renting your vacation home depend on how often you and your family use the home and how often you rent it. Essentially, there are three vacation home ownership situations for tax purposes. We will go over each, and their tax implications.
Tax-free rental income
If you rent your vacation home for fewer than 15 days during the year, the rental income you receive is tax-free; you don't even have to report it on your income tax return. You can also claim basic deductions for property taxes and mortgage interest just as you would with your primary residence.
You won't, however, be able to deduct any rental-related expenses (such as property management or maintenance fees). And, if your rental-related expenses exceed the income you receive from renting your vacation home for that brief time, you can't take a loss. Nevertheless, this is an incredibly lucrative tax break, especially if your vacation home is located in a popular destination spot or near a major event and you don't want, or need, to rent it out for a longer period. If you fit in this category of vacation homeowners and would like more information on this significant tax benefit, call our office.
Pure rental property
Do you plan on renting your vacation home for more than 14 days a year? If so, the tax rules can become complicated. If you and your family don't use the property for more than 14 days a year, or 10% of the total number of days it is rented (whichever is greater), your vacation home will qualify as rental property, not as a personal residence.
If you rent your vacation home for more than 14 days, you must report all rental income you receive. However, now you can deduct certain rental-related expenses, including depreciation, condominium association fees, property management fees, utilities, repairs, and portions of your homeowner's insurance. How much you can deduct will depend on how often you and your family use the property. But, as the owner of investment property, you can take a loss on the ultimate sale of your rental homes, which second-homeowners can't do.
Income and deductions generated by rental property are treated as passive in nature and subject to passive activity loss rules. As passive activity losses, rental property losses can't be used to offset income or gains from non-passive activities (such as wages, salaries, interest, dividends, and gains from the sale of stocks and bonds). They can only be used to offset income or gains from other passive type activities. Passive activity losses that you can't use one year, however, can be carried forward to future years.
However, an owner of rental property who "actively participates" in managing the rental activities of his or her vacation home, and has an adjusted gross income that doesn't exceed $100,000, can deduct up to $25,000 in rental losses against other non-passive income, such as wages, salaries, and dividends. It's not all that difficult to meet the "active participation" test if you try.
Personal use for more than 14 days
If you plan on using your vacation home a lot, as well as renting it often, your vacation home will be treated as a personal residence. Specifically, if you rent your home for more than 14 days a year, but you and your family also use the home for more than 14 days, or 10% of the rental days (whichever is greater), your vacation home will qualify as a personal residence, not a rental property, and complex tax issues arise.
All expenses must be apportioned between rental and personal use, based on the total number of days the home is used. For example, you must allocate interest and property taxes between rental and personal use so that a portion of your mortgage interest payments and property taxes will be reported as itemized deductions on Schedule A (the standard form for itemized deductions) and a portion as deductions against rental income on Schedule E (the form for rental income and expenses.) You will only be able to deduct your rental expense up to the total amount of rental income. Â Excess losses can be carried forward to future years though.
Proper planning
With proper planning and professional advice, you can maximize tax benefits of your vacation home. Please call our office if you have, or are planning to buy, a vacation home and would like to discuss the tax consequences of renting your property.
There are tax benefits for which you may be eligible if you are paying education expenses for yourself or an immediate member of your family. In the rush to claim one of two education tax credits or the higher-education expense deduction, IRS statistics indicate that a more modest yet still significant tax break is often being overlooked: the higher education student-loan interest deduction.
The student loan interest deduction for 2006 was the smaller of $2,500 or the amount of interest paid. The deduction amount may be gradually reduced or eliminated based on your filing status and modified adjusted gross income (MAGI).
Form 1098-E
Form 1098-E will help you calculate your student loan interest deduction. An institution that received interest payments of $600 or more during a calendar year on one or more qualified student loans must send Form 1098-E to each borrower.
Modified adjusted gross income
For 2007, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out ratably for taxpayers with modified adjusted gross income in excess of $55,000 ($110,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $70,000 or more ($140,000 or more for joint returns).
Reduced deduction
If your credit must be reduced because of your MAGI, you must calculate your reduced deduction. To calculate your reduced amount, multiply your interest deduction (before the reduction) by a fraction. The numerator is your MAGI minus $55,000 ($110,000 for joint return filers). The denominator is $15,000 ($30,000 for joint return filers). Subtract the result from your deduction (before the reduction). This result is the amount you can deduct.
Example A. During 2007 Ed pays $800 interest on a qualified student loan. Ed's 2007 MAGI is $130,000 and he files a joint return. $800 X ($130,000-$110,000Â / $30,000) =$533. Ed must reduce his deduction by $533. His reduced student loan interest deduction is $267 ($800 - $533).
Example B. During 2007 Bea, who is single, pays $2,750 interest on a qualified student loan. Bea's maximum deduction for 2007 is $2,500. However, Bea must further limit her maximum deduction since her MAGI is $60,000. Her required reduction is $2,500 x ($60,000 - $55,000Â / $15,000) or $833.33 Her reduced student loan interest deduction is $2,500 - $833.33 or $1,666.67.
If you are unsure of your eligibility for the student loan interest deduction, please give our office a call and we will be happy to assist you.