IRS to end Offshore Voluntary Disclosure Program (“OVDP”); Taxpayers with undisclosed foreign assets urged to come forward now

Posted by Sanket Shah | General | Wednesday 14 March 2018 4:39 pm

IR-2018-52, March 13, 2018

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Tax Enforcement

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”

Streamlined Procedures and Other Options

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:

  • IRS-Criminal Investigation Voluntary Disclosure Program;
  • Streamlined Filing Compliance Procedures;
  • Delinquent FBAR submission procedures; and
  • Delinquent international information return submission procedures.

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

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The Tax Cuts and Jobs Act is now law

Posted by Sanket Shah | General | Saturday 23 December 2017 12:36 pm

The Tax Cuts and Jobs Act is now law.

The House and Senate approved the bill on Dec. 19. It passed 227-203 in the House with no Democratic votes and 12 Republican “no” votes. The Senate then passed the bill 51-48 along strict party lines, with one Republican senator, John McCain, not voting.

Because of minor changes in the bill made by the Senate, the House was required to pass the bill again before sending it to the president. The House gave final approval on Dec. 20 by a 224 to 201 vote. Again, the bill received no Democratic support and was opposed by 12 Republicans. President Donald Trump signed it on Dec. 22.

Here we compare some of the major provisions of the new law with the previous tax code.

 

Individual Income Tax Rates

 

The bill maintains seven individual income tax brackets, but changes the tax rates and thresholds. See the charts below.

Previous law: These are the tax brackets that individual taxpayers will use when filing taxes in 2018 for the 2017 tax year.

Single Filers

Tax Bracket

Taxable Income 

10 percent

Up to $9,325

15 percent

$9,326-$37,950

25 percent

$37,951-$91,900

28 percent

$91,901-$191,650

33 percent

$191,651-$416,700

35 percent

$416,701-$418,400

39.6 percent

Over $418,400

 

Married, Filing Jointly

Tax Bracket

Taxable Income 

10 percent

Up to $18,650

15 percent

$18,651-$75,900

25 percent

$75,901-$153,100

28 percent

$153,101-$233,350

33 percent

$233,351-$416,700

35 percent

$416,701-$470,700

39.6 percent

Over $470,700

 

New law: These will be the brackets that individual taxpayers will use in 2019 for the 2018 tax year. This new rate structure is temporary. It takes effect with the 2018 tax year, but will not apply after 2025 — unless Congress takes further action.

Single Filers

Tax Bracket

Taxable Income 

10 percent

Up to $9,525

12 percent

$9,526-$38,700

22 percent

$38,701-$82,500

24 percent

$82,501-$157,500

32 percent

$157,501-$200,000

35 percent

$200,001-$500,000

37 percent

Over $500,000

 

Married, Filing Jointly

Tax Bracket

Taxable Income 

10 percent

Up to $19,050

12 percent

$19,051-$77,400

22 percent

$77,401-$165,000

24 percent

$165,001-$315,000

32 percent

$315,001-$400,000

35 percent

$400,001-$600,000

37 percent

Over $600,000

 

Individual Alternative Minimum Tax

The AMT is a parallel tax system with a separate set of rules that some taxpayers must follow when calculating their tax liability. As its name implies, the AMT is an alternative to the regular tax system and requires taxpayers earning above a certain amount to calculate their taxes twice and pay the highest amount.

Because it follows a separate set of rules, the AMT disallows some tax preferences – such as state and local tax deductions and dependent exemptions – but provides for a larger AMT exemption amount.

Previous law: For the 2017 tax year, the AMT exemption amount for single filers is $54,300 and begins to phase out at $120,700, and for joint filers, it is $84,500 and begins to phase out at $160,900, according to the IRS.

New law: The AMT exemption amounts will increase to $70,300 for single filers and $109,400 for joint filers and will phase out for those taxpayers at $500,000 and $1 million, respectively, according to the nonpartisan Tax Policy Center’s (“TPC”) analysis of the bill. These changes will end after 2025.

Standard Deduction

The standard deduction is the amount that you can deduct from your income before calculating your tax liability if you do not itemize your deductions.

Previous law: The standard deduction for married filing jointly is $12,700 for tax year 2017; $6,350 for single taxpayers; and $9,350 for heads of households, according to the IRS.

New law: The standard deduction for married filing jointly would increase to $24,000 for joint filers; $12,000 for single taxpayers; and $18,000 for heads of households, according to the TPC analysis. The increased deduction ends after 2025.

Personal Exemption

A personal exemption is the amount that you can deduct from your income for every taxpayer and most dependents claimed on your return.

Previous law: $4,050 per person, which means a married couple with two dependents would receive a personal exemption of $16,200.

New law: The personal exemption is eliminated. The exemption returns after 2025.

Child Tax Credit

Previous law: Married couples filing jointly who earn less than $110,000 can receive a tax credit of up to $1,000 for each child under 17 years old that they claim as dependents on their tax returns ($55,000 is the threshold for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers).

New law: The credit would increase to up to $2,000 per child, and the first $1,400 would be refundable according to the TPC analysis, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit would increase from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after 2025.

State and Local Tax Deductions

Previous law: Taxpayers who itemize their taxes can deduct state and local property and real estate taxes, and either state and local income or sales taxes.

New law: The SALT deduction will be capped at $10,000. The deduction limit ends after 2025.

Mortgage Deductions

Previous law: Taxpayers who itemize their taxes can deduct interest payments on mortgage debt of up to $1.1 million. That includes up to $100,000 of home equity debt.

New law: For current mortgage holders, there is no change. But the deductible limit drops to $750,000 for new debt incurred after Dec. 31, 2017. Also, homeowners may not claim a deduction for existing and new interest on home equity debt, beginning Jan. 1, 2018. The mortgage deduction changes expire after 2025.

Medical Expense Deduction

Previous law: Taxpayers who itemize their taxes can deduct medical expenses that exceed 10 percent of their adjusted gross income, or AGI, according to the IRS.

New law: Taxpayers can deduct medical expenses that exceed 7.5 percent of AGI in 2017 and 2018, but the new deduction level ends Jan. 1, 2019.

Limits on Itemized Deductions

Previous law: Itemized deductions may be limited, and total itemized deductions may be phased out (reduced), if your adjusted gross income for 2017 exceeds $313,800 for married couples filing jointly or qualifying widows ($261,500 for single filers, $287,650 for heads of household and $156,900 for married couples filing separately), according to the IRS.

New law: The itemized deduction limits are repealed through the 2025 tax year.

Inflation Rate Measure

Previous law: The IRS uses the Consumer Price Index for urban consumers to adjust tax bracket thresholds and other tax provisions for inflation. That includes such provisions as the standard deduction, the personal exemption, earned income tax credit and the alternative minimum tax, as the TPC explains.

New law: The IRS would switch to an inflation index known as the chained CPI. As we have written, chained CPI is considered a more accurate measure, but rises somewhat more slowly than the traditional CPI. That would mean bracket thresholds and tax credits, for example, would rise more slowly. That could have the effect over time of pushing more people into higher tax brackets and reducing the purchasing power of tax credits.

Capital Gains Tax Rate

Capital gains are the profits realized from the sale of assets such as stocks or real estate.

Previous law: The profits on the sale of assets held for more than one year are eligible for a tax break. The 2017 tax rates this way for the profits gained from the sale of such assets: “For 2017, the long-term capital gains tax rates are 0, 15, and 20 percent for most taxpayers. If your ordinary tax rate is already less than 15 percent, you could qualify for the zero percent long-term capital gains rate. For high-income taxpayers, the capital gains rate could save as much as 19.6 percent off the ordinary income rate.”

New law: No changes.

Estate Tax

Previous law: A top rate of 40 percent applies in 2017 to estates valued at more than $5.49 million (nearly $11 million for couples), according to the IRS.

New law: The top rate of 40 percent would apply to estates valued at more than $11.2 million ($22.4 million for couples). The increased levels expire after 2025.

Corporate Taxes

Previous law: The top corporate rate was 35 percent.

As with some high-income individual taxpayers, corporations are also required to calculate their tax liability using the corporate alternative minimum tax — a parallel system that reduces or eliminates some deductions and tax credits. After calculating tax liability using both the regular corporate income tax system and the corporate AMT, corporations pay the higher of the two amounts.

New law: The top rate would be 21 percent, and the corporate AMT would be repealed, to the final tax bill.

Pass-Through Business Taxes

Previous law: Businesses organized as sole proprietorships, LLCs and partnerships don’t pay corporate tax rates. Instead, the owners pay individual income taxes on their share of business income – they’re called pass-through business taxes. Those tax rates are the same as the individual income tax rates.

New law: Business owners can take a 20 percent deduction on their pass-through business income, with limits for those earning above $157,500 (single) and $315,000 (married, filing jointly).

 

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House vs. Senate: The Tax Changes Up for Debate

Posted by Sanket Shah | General | Monday 18 December 2017 4:24 pm

House and Senate Republicans have arrived at a broad agreement to resolve the differences between their tax overhaul bills. How the two versions vary, and details that have emerged about the final bill:

For Individuals


Both bills would lower individual tax rates over all. But to comply with Senate budget rules, the individual tax cuts in the Senate bill would expire after 2025. The final version of the bill will still have to comply with the rules, so it’s likely that the bill will also let major provisions expire.

Current

House

Senate

Number of tax brackets Seven Four Seven Expires after 2025
Top rate 39.6% 39.6% with a 45.6% “bubble rate” for some top income 38.5% Expires after 2025
Starts at: $426,700 / $480,050
(singles/couples)
$500,000 / $1 million $500,000 / $1 million Expires after 2025
Alternative Minimum Tax Alternative income tax calculation for high-income taxpayers Repeals Keeps, but increases exemption so fewer will pay it Expires after 2025

The cuts would shrink over time for everyone but the wealthiest in both bills. The highest earners would still receive a boost in after-tax income by 2027 because they would benefit more from the corporate tax cuts, which would not expire in either bill.

Change in after-tax income
in the House and Senate bills

Income

In 2018/2019

In 2027

Lowest quintile Less than $25,000 +0.4%

+0.3

+0.1%

–0.1

Second quintile $25,000 – 48,600 +0.9

+0.9

+0.1

0

Middle quintile $48,600 – 86,100 +1.4

+1.4

+0.5

+0.1

Fourth quintile $86,100 – 149,400 +1.7

+1.6

+0.7

+0.1

80th-90th percentile $149,400 – 216,800 +1.6

+1.6

+0.4

+0.2

90th-95th percentile $216,800 – 307,900 +1.3

+1.7

+0.2

+0.2

95th-99th percentile $307,900 – 732,800 +2.0

+3.1

+1.4

+0.4

Top 1 percent $732,800 and up +2.4

+1.8

+2.6

+1.1

Top 0.1 percent $3,439,000 and up +2.5

+0.8

+3.0

+1.7

Source: Tax Policy Center. Data for the Senate plan in 2018 is not available.

For Families

Both versions would repeal the personal exemption in favor of a higher standard deduction and expanded tax credits for families. While the child tax credit is slightly larger in the Senate bill, and people with higher incomes would be eligible, it expires after 2025. The new family tax credit in the House version would benefit more types of people, but it expires even sooner.

Current

House

Senate

Personal exemptions $4,150 per taxpayer and dependent Repeals Repeals Expires after 2025
Standard deduction $6,500 / $13,000
(singles/couples)
$12,200 / $24,400 $12,000 / $24,000 Expires after 2025
Child tax credit $1,000 $1,600 $2,000 Expires after 2025
Family tax credit None $300 for taxpayer, spouse, other dependents Expires after 2022 $500 for non-child dependents Expires after 2025
Credits phase out starting at: $75,000 / $110,000
(singles/couples)
$115,000 / $230,000 $500,000 Expires after 2025

Both bills include new restrictions for those claiming the child tax credit. Unde the House bill, children would be required to have a Social Security number to be eligible for the child tax credit, and parents would have to have one to receive the refundable portion of the credit. The Senate bill would require each child to have a Social Security number to claim the refundable portion.

For High-Tax States and Homeowners

The Senate initially included a full repeal of the state and local tax deduction in its bill but later changed it to match the House version, retaining a $10,000 limit for property tax deductions.

Current

House

Senate

State and local tax deduction Income or sales and property taxes are deductible Repeals all but the property tax deduction up to $10,000 Repeals all but the property tax deduction up to $10,000 Expires after 2025
Mortgage interest deduction Can deduct interest payments on up to $1 million of debt Limited to payments on $500,000 of debt, repeals for home equity debt Repeals for home equity debt Expires after 2025
Residences: Principal and one other residence Principal residence No change

The House bill would scale back the mortgage interest deduction, cutting it by up to half. Both bills would repeal the deduction for home equity loans.

For Wealthy Estates

Both bills would scale back the tax, so only larger estates would be affected. But that change expires under the Senate bill, bringing the threshold back to its current level after 2025. The House bill would fully repeal the estate tax after 2024.

Current

House

Senate

Estate tax Top rate of 40% on estates above $5.6 million Increase threshold to estates above $11.2 million, then repeal after 2024 Increase threshold to estates above $11.2 million Expires after 2025

For the Sick

The House bill would repeal the deduction for medical expenses, a tax break most important to low-income individuals with high out-of-pocket health care costs, though some House Republicans support retaining it in some form.

Current

House

Senate

Medical expenses deduction Can deduct out-of-pocket expenses in excess of 10% of adjusted gross income Repeals Expands by reducing threshold to 7.5% of income Applies to 2017 and 2018
Individual mandate Penalty for not having health insurance No change Repeals

But the Senate plan would repeal the Affordable Care Act’s individual mandate, a requirement that everyone must buy insurance or pay a tax penalty. The move could save lawmakers $338 billion, but it would be a significant blow to the Affordable Care Act, resulting in an estimated 13 million more people without insurance and higher average premiums. Lawmakers have said that it is likely that the repeal will be included in the final bill.

For Education

The Senate bill would leave in place several education tax breaks that are repealed or changed in the House bill. It also would double a deduction for teacher expenses that the House bill would repeal.

Current

House

Senate

Education credits American Opportunity Tax Credit, Lifetime Learning Credit and Hope credit Consolidates and slightly expands the A.O.T.C. No change
Student loan interest deduction Can deduct up to $2,500 Repeals No change
Graduate student tuition waivers Tuition waivers are not treated as taxable income Repeals No change
Deduction for classroom expenses $250 deduction Repeals $500 deduction Expires after 2025

Both bills would expand the use of 529 college savings plans to include private school tuition for elementary and high school students. The House plan would also allow an account to be opened for a child in advance of birth.

For Individual Business Owners

The two versions differ on how to tax “pass-through” business income that is currently taxed at the individual rate of the business’s owners. The House bill sets a lower top rate with an exception for professional service businesses like in law or accounting. The Senate bill creates a new deduction for pass-through income.

Current

House

Senate

Top pass-through rates Top rate of 39.6% Top rate of 25% with the exclusion of professional service income 23% deduction, phasing out for professional service income beginning at $250,000 Expires after 2025

For Businesses

The sprawling corporate changes would be permanent in the bills, which both include a top corporate tax rate of 20 percent.

Current

House

Senate

Top corporate tax rate 35% 20% 20% Delayed until 2019
New investment purchases Complex rules for deducting over many years Five years of full expensing Five years of full expensing, then phased out over five more years
Section 179 expensing Small business expensing limited to $500,000 Increases limit to $5 million Increases limit to $1 million
Business interest deduction Generally fully deductible Caps deduction at 30% of income (including depreciation) Caps deduction at 30% of income (excluding depreciation)
Alternative Minimum Tax Alternative income tax calculation for businesses Repeals No change

In a last-minute change to its bill, the Senate also maintained the corporate Alternative Minimum Tax, a decision that has resulted in blowback from several industries.

The Senate bill also makes fewer changes to corporate tax breaks like energy tax credits and private activity bonds.

Current

House

Senate

Orphan drug tax credit Credit for 50% of qualifed testing expenses Repeals Reduces credit rate to 27.5%
Renewable electricity tax credit Credit for wind power production, phasing out by 2020 Scales back the size of the credit No change
Private activity bonds Tax-exempt bonds used to fund low-income housing and other projects Repeals No change

For Multinational Corporations

Both bills would move from the current worldwide tax system, in which income earned abroad is taxed in the United States, to a territorial system in which only domestic profits would be taxed. They each would use different mechanisms to prevent companies from shifting profits abroad.

Current

House

Senate

Taxation of multinational companies Worldwide system with deferral and credit for taxes paid abroad Modified territorial system with new foreign payment excise tax Modified territorial system with new anti-abuse tax
One-time repatriation tax 7% (14% for cash) 7.5% (14.5% for cash)

 

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Due date for filing your FinCen Form 114 (FBAR)

Posted by nsglobal | General | Monday 12 June 2017 1:29 pm

October 15. The new annual due date for filing Reports of Foreign Bank and Financial Accounts (FBAR) for foreign financial accounts is April 15.  This date change was mandated by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Public Law 114-41 (the Act).  Specifically, section 2006(b)(11) of the Act changes the FBAR due date to April 15 to coincide with the Federal income tax filing season.  The Act also mandates a maximum six-month extension of the filing deadline.  To implement the statute with minimal burden to the public and FinCEN, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required.

https://www.fincen.gov/news/news-releases/new-due-date-fbars-0

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Due date for filing your Income Tax return and payment of your Tax Due

Posted by nsglobal | General | Sunday 11 June 2017 1:07 pm

April 15. If your “tax home” or “abode” is in the United States, your filing deadline is April 15. ​

June 15. For some Americans abroad, the IRS has given an automatic extension of time to file your income tax return–to June 15.

An extension of time for filing returns of income and for paying any tax shown on the return is hereby granted to and including the fifteenth day of the sixth month following the close of the taxable year in the case of . . . United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico.

In other words, if you are a U.S. citizen or resident alien, and your “tax home” and “abode” is outside the United States and Puerto Rico, then your income tax return filing deadline is June 15.

October 15. You can get an extension of time until October 15, using the traditional method of filing Form 4868.

You must file Form 4868 in a timely manner. This means you must file it before April 15 (if your tax home and abode is in the United States) or before June 15 (if your tax home and abode is outside the United States.)

However a small clarification, if the automatic extension expires on June 15 then the Form 4868 extension continues on for another four month, expiring on October 15.

December 15. If an extension to October 15 is not enough time for you to prepare and file your income tax return, you can apply for and receive one more extension of time – to December 15.

This is done by sending a letter to the IRS.

Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (2016) (PDF), at page 4, gives you the rules:

Taxpayers who are out of the country can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers). To request this extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months. Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:

        Department of the Treasury

        Internal Revenue Service Center

        Austin, TX 73301-0045

You will not receive any notification from the Internal Revenue Service unless your request is denied.

The Form 4868 instructions defines the phrase “out of the country” as living abroad:

You’re out of the country if:

You live outside the United States and Puerto Rico and your main place of work is outside the United States and Puerto Rico[.]

The words, “out of the country” has nothing to do with where you are. It means where you live.

Thus the people who are entitled to claim the additional extension of time to December 15 are people whose tax homes and abodes are outside the United States – not people who physically happen to be inside or outside the United States on a particular day.

Due date for payment of your Tax Due

April 15. The tax due on your tax return is payable on or before April 15.

June 15. If you qualify for the June 15 extended deadline to file your tax return, you can pay your tax without late payment penalties on or before June 15. However, you will owe interest on the tax due, from April 15 until the day you pay the tax. No further extension of the payment due date is possible.

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Seven Facts about Dependents and Exemptions

Posted by Sanket Shah | General | Friday 19 May 2017 2:46 pm

There are a few tax rules that affect everyone who files a federal income tax return. This includes the rules for dependents and exemptions. The IRS has seven facts on these rules to help you file your taxes.

1. Exemptions cut income. There are two types of exemptions: personal exemptions and exemptions for dependents. You can usually deduct $3,900 for each exemption you claim on your 2013 tax return.

2. Personal exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return you can also claim one for your spouse. If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer.

3. Exemptions for dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative that meets certain tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for rules that apply to people who don’t have an SSN.

4. Some people don’t qualify. You generally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

5. Dependents may have to file. People that you can claim as your dependent may have to file their own federal tax return. This depends on many things, including the amount of their income, their marital status and if they owe certain taxes.

6. No exemption on dependent’s return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person as a dependent on your tax return. The rule applies because you have to right to claim that person.

7. Exemption phase-­out. The $3,900 per exemption is subject to income limits. This rule may reduce or eliminate the amount depending on your income. See Publication 501 for details.

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You may face higher taxes this year

Posted by Sanket Shah | General | Friday 19 May 2017 2:41 pm

Some people filing their 2013 US tax returns are probably in for a nasty surprise. Here are some tax changes that could have a significant impact on what you will owe when you file your 2013 tax return:

Phase-­out of the personal and dependent exemptions:

Starting with 2013 tax returns, more folks will see a reduction in the personal and dependent exemptions they could claim in past years. Taxpayers with Adjusted Gross Income (AGI) levels of $250,000 for singles, $300,000 for married, $275,000 for head of household and married filing separately of $150,000, will see the loss of some or all of their previously allowed personal and dependent exemption deductions.

That means a couple with two dependent children with AGI over $500,000 could pay an additional tax of $6,200, or more.

Higher tax rates for long-­term capital gains and dividend income:

For people in the higher­-income groups below, the rate on capital gains and dividend income increases from 15 percent to 20.

A married taxpayer with a taxable income of $500,000, along with $30,000 in capital gains and $30,000 in dividend income, would pay an additional $3,000 of income tax.

Phase­-out of itemized deductions:

Taxpayers with higher incomes will also lose a portion of the deductions they claim for things like mortgage interest, real estate taxes and charitable gifts. Taxpayers with the same AGI levels as above — singles at $250,000, married jointly at $300,000, head of household at $275,000 and marries filing separately at $150,000 — will see their deductions reduced by an amount equal to 3 percent of their adjusted gross income that is above these thresholds. This can wipe out up to 80 percent of the deductions some taxpayers would have been allowed to claim in 2012.

A couple with about $40,000 in itemized deductions with AGI about $500,000 could pay an additional tax of $2,376.

Higher tax rates on ordinary taxable income:

For workers with higher incomes, the higher tax rate of 39.6 percent will replace the 35 percent rate. That new higher rate applies to single filers with taxable income above $400,000; married filers with income over $450,000; married filing separately over $225,000; and heads of household with taxable income over $425,000.

For instance, due to this tax hike a married couple with a taxable income of $500,000 will owe an additional $2,300.

Medicare surtax on self-­employment income:

Beginning in 2013, an additional 0.9 percent was levied on people whose combined salary and income from self-employment is above $200,000 for singles and $250,000 for married. This was another tax increase aimed at raising revenue to offset the cost of the new health care laws.

If you are married, and have net income from self-employment of $500,000 in 2013, this additional tax will cost you $2,250 this year.

Medicare surtax on investment income:

A part of Obamacare, this tax is designed to raise federal revenue to offset the cost of things like the government subsidies provided to lower income people who buy health insurance on the new health exchanges.

The Medicare surtax amounts to an additional 3.8 percent on net investment income (Like interest, dividends, tax exempt bond interest, royalties, rents, capital gains, etc.). This tax applies to taxpayers with modified adjusted gross income that exceeds $250,000 for married filers and $200,000 for singles. In total, high­income people must pay a tax rate of 23.8 percent on capital gains and dividends.

So for the married taxpayer mentioned above — with $20,000 in capital gains, $20,000 in dividend income and $10,000 in interest — would pay an additional $1,900 of income tax due to this change.

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Deducting Medical and Dental Expenses

Posted by Sanket Shah | General | Friday 19 May 2017 2:39 pm

If you plan to claim a deduction for your medical expenses, there are some new rules this year that may affect your tax return. Here are eight things you should know about the medical and dental expense deduction:

1. AGI threshold increase. Starting in 2013, the amount of allowable medical expenses you must exceed before you can claim a deduction is 10 percent of your adjusted gross income. The threshold was 7.5 percent of AGI in prior years.

2. Temporary exception for age 65. The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through Dec. 31, 2016.

3. You must itemize. You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction.

4. Paid in 2013. You can include only the expenses you paid in 2013. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment.

5. Costs to include. You can include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Any costs reimbursed by insurance or other sources don’t qualify for a deduction.

6. Expenses that qualify. You can include the costs of diagnosing, treating, easing or preventing disease. The cost of insurance premiums that you pay for policies that cover medical care qualifies, as does the cost of some long­-term care insurance. The cost of prescription drugs and insulin also qualify. For more examples of costs you can deduct, see IRS Publication 502, Medical and Dental Expenses.

7. Travel costs count. You may be able to claim the cost of travel for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 24 cents per mile for 2013.

8. No double benefit. You can’t claim a tax deduction for medical and dental expenses you paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax­-free.

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IRS will soon examine U.S. taxpayers with undeclared Indian bank accounts.

Posted by Sanket Shah | General | Friday 19 May 2017 2:38 pm

Reporting on a California State Bar Tax Section Meeting, Tax Notes reports that the IRS will soon (as early as the week of 11/11/13) ) begin examining U.S. taxpayers suspected of holding undeclared accounts in Indian banks, according to Nicholas Connors, a supervisory revenue agent with SEP.

Read the full Tax Notes here.

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New standard mileage rates beginning January 1, 2015

Posted by Sanket Shah | General | Friday 19 May 2017 2:36 pm

The Internal Revenue Service on December 10, 2014 issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

57.5 cents per mile for business miles driven, up from 56 cents in 2014

23 cents per mile driven for medical or moving purposes, down half a cent from 2014

14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously).

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