News Archive June 2014
Tax & Business Alert
Welcome to this month's edition of the Tax & Business Alert. Our goal is to provide you with current articles on various tax & business topics. The articles are intended to keep you up to date on trends and issues that may impact your business and personal financial affairs. Please contact us if you have questions about any of the issues discussed.
IRA rollovers are a popular way of obtaining a short-term tax-free loan from an IRA. To receive tax-free treatment, the amount withdrawn from the IRA must be redeposited into the same or another IRA no later than 60 days after the taxpayer received the distribution (the 60-day requirement). In addition, the tax-free rollover privilege is limited to one rollover within any one-year period. The one-year period starts on the date the amount rolled over was received — not the date it was rolled over.
For years, the IRS has held that the one-year waiting period between IRAs applies separately to each IRA. This taxpayer-friendly interpretation allowed taxpayers with multiple IRA accounts to roll over two or more distributions during a 12-month period, provided each was from a different account.
However, the IRS has adopted the Tax Courts recent unfavorable interpretation of the one-IRA-rollover-per-year rule, which considers all the taxpayers IRAs together for the limitation. To ease the pain, they have provided some transitional relief and will not apply the new, stricter interpretation to any rollover involving a distribution that occurs before January 1, 2015. So there is still a little time to take advantage of the current, more liberal, rules.
Example: Transitional relief for the one-IRA-rollover-per-year rule.
Stella desperately needs cash, but only for a relatively short time. She wants to temporarily use the funds held in her three traditional IRAs (IRA-1, IRA-2, and IRA-3). In 2014, Stella takes $75,000 out of IRA-1. Fifty-nine days later (still in 2014), she withdraws $75,000 from IRA-2 and deposits that amount back into IRA-1. Fifty-nine days after that (still in 2014), she withdraws $75,000 from IRA-3 and deposits the amount back into IRA-2. Fifty-nine days after that, her cash crunch is over, and Stella deposits $75,000 back into IRA-3.
Under the transitional rule, Stella is effectively able to borrow $75,000 from her IRAs for almost half a year without any tax consequences via three tax-free rollover transactions because all the IRA distributions rolled over were withdrawn before January 1, 2015.
Variation: If Stella withdraws the $75,000 from IRA-3 in January of 2015, she will fall outside the transitional relief (because it only applies to distributions occurring before January 1, 2015). Therefore, the distribution from IRA-3 cannot be rolled over because she already used up her one-IRA-rollover-per-year privilege with the earlier rollovers in 2014.
Please contact us to discuss this IRA law change and the beneficial aspects of IRAs that have not changed.
Working parents can find summer child care solutions challenging. However, a nonrefundable credit is available if the qualifying child care expense is incurred so that you (and your spouse, if married) can work. The maximum credit is 20%–35% (depending on your adjusted gross income) of the lesser of (1) your qualifying child care expenses up to $3,000 for one and $6,000 for two qualifying individuals or (2) your earned income (or your spouse's, if less).
Qualified child care expenses provide for the well-being and protection of a dependent child under age 13 and must be reduced by the amount of any employer-provided dependent care benefits. Amounts paid for food and education generally are not considered work-related expenses; however, services that are incidental to and cannot be separated from the costs of caring for a child are not excluded from the credit. Therefore, expenses paid to a day care center are usually eligible for the credit, whereas summer school or tutoring expenses are not. The cost of day camp should qualify for the credit; however, overnight camps are not considered work-related and don't qualify.
If you pay someone to come to your home and care for your dependent child, you may be a household employer required to withhold and pay Social Security and Medicare tax and pay federal unemployment taxes. Keep these rules in mind as you plan summer child care.
Tax planning is a year-round process, so now is a good time to think about the following:
Are you considering making a cash gift to a relative? If so, consider making the gift in conjunction with the overall revamping of your stocks and mutual funds held in taxable brokerage accounts to achieve better tax results. Don't gift loser shares (currently worth less than you paid for them). Instead, sell these shares, recognize the capital loss on your tax return, and then gift the cash proceeds to a relative. However, do gift winner shares to lower tax bracket relatives (unless they are under age 24 and subject to the Kiddie Tax). The 2014 annual gift tax exclusion is $14,000.
Are you considering making a contribution to a favorite charity? The previous strategies will also work well for contributions to qualified charities. Sell loser shares, recognize the loss on your tax return, and then give the cash proceeds to the charity and claim the resulting charitable contribution (if you itemize). Donate winner shares to the charity and deduct the full current fair market value at the time of the gift (without being taxed on the capital gain). The tax-exempt organization can sell your donated shares without owing tax.
Are you self-employed? Consider employing your child in the business (but pay a reasonable wage for their age and work skills). This practice can shift income (which is not subject to the Kiddie Tax) to the child who is normally in a lower tax bracket, decrease payroll taxes, and enable the child to contribute to an IRA.
Is your estate plan current? If you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. For 2014, the unified federal gift and estate tax exemption is a generous $5.34 million, and the rate is 40%. Furthermore, the impact of the Supreme Courts Windsor decision and resulting IRS changes in the federal definition of marriage mean that legally married same-sex couples need to revise their estate plan. Plus, there may be non-tax reasons to update your estate plan.
Please contact us to discuss any tax planning strategies you are interested in implementing.
Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents (often referred to as service bureaus). Reputable payroll service bureaus can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer's behalf and filing required payroll tax returns with state and federal authorities.
Though most payroll service bureaus provide very good service, there are, unfortunately, some who do not have their clients' best interests at heart. Over the past year, a number of these companies have been prosecuted for stealing funds intended for the payment of payroll taxes. So, a thorough background investigation is essential.
There are several different types of payroll service bureaus. Regardless of the type your business uses, it's important to understand that the service bureau is only acting as an agent. This means state and federal tax authorities will hold you — the employer — responsible for the service bureau's errors or omissions.
Like employers who handle their own payroll duties, employers who outsource payroll duties are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee's share of Social Security and Medicare taxes. This is true even if the employer forwards tax amounts to the service bureau to make the required deposits or payments.
If you use a service bureau to process some or all of your payroll functions, here are some steps you can take to protect the company from unscrupulous service bureaus.
- Be familiar with your payroll tax due dates. Require the payroll service provider to provide timely proof that it has actually performed the requested services.
- Consider performing some payroll activities yourself. For example, you could ask the service bureau to prepare the withholding reports and send them to you for review. After reviewing the reports, you can make the deposit directly.
- Investigate the service bureau's financial condition and credit standing, both initially and on a periodic basis thereafter. How are the company's funds isolated from financial problems from which the bureau or its other clients may suffer, and what coverage and conditions apply to fiduciary bonds for service bureau employees? This is important because little protection or recourse is available to employers whose service bureau misuses funds intended for payroll tax payments and then goes bankrupt. Having the funds held in trust will also protect the funds from an IRS levy of the service bureau's bank account.
- Document clearly in the contract the service bureau's policy on indemnifying the company for interest and penalties that the service bureau's errors cause.
- Make sure your service bureau uses the Electronic Federal Tax Payment System (EFTPS) to make tax deposits. Then, enroll in and use EFTPS to check your company's payment history to ensure the service bureau is properly carrying out its tax deposit responsibilities.
- Use your company's address (not the service bureau's) as the address on record with the IRS. Doing so ensures that the company will continue to receive bills, notices, and other account-related correspondence from the IRS. It also provides a way to monitor the service bureau and easily spot any improper diversion of funds.
- Contact the IRS about any bills or notices as soon as possible. This is especially important if it involves a payment that the service bureau should have made. Call the number on the bill, write to the IRS office that sent the bill, or contact the IRS business tax hotline at 800-829-4933.
If you have any questions, please give us a call.
Phishing is a scam typically carried out by unsolicited e-mail and/or bogus websites posing as legitimate sites luring unsuspecting victims to provide personal and financial information. The IRS has recently warned consumers to watch for e-mails appearing to be from the Taxpayer Advocate Service (TAS) that include a bogus case number. The e-mail may include the following message: Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance. The e-mail may contain links appearing to provide information about the advocate assigned to the recipients case but actually lead to Web pages soliciting personal information.
If you receive an e-mail claiming to be from the IRS that contains a request for personal information, do not reply to the e-mail, open any attachments, or click on any links. Instead, forward the e-mail to the IRS at firstname.lastname@example.org. After forwarding the e-mail to the IRS, delete the original e-mail you received.
Remember — the IRS, including the TAS, does not initiate contact with taxpayers by e-mail, text, or any social media.
If you receive a phone call from an individual claiming to be from the IRS but you suspect they are not an IRS employee: (1) Ask for a call-back number and employee badge number, and (2) contact the IRS to determine if the caller is an IRS employee with a legitimate need to contact you. If you determine it is a legitimate call, then call the IRS employee back or call us to handle it for you. If you receive a notice or letter via paper mail, contact us to help you determine if it is a legitimate IRS letter. If it is a legitimate IRS letter, we can help you reply if needed. For information on how to contact the IRS, see http://www.irs.gov/uac/How-to-Contact-the-IRS-1. If either the caller or letter is not legitimate, report the incident to the Treasury Inspector General for Tax Administration at http://www.treasury.gov/tigta/contact_report.shtml.
Tax & Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax-related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax-related matter addressed herein. Tax & Business Alert is a trademark used herein under license.