March 12, 2015 12 PM - 1 PM PST
Offshore Tax Return Preparation and Reporting Requirements
Avoiding Allegations of Aiding and Abetting
Avoiding Tax Penalties
Above–The-Line Tax Deductions
At this time of the year, chances are that you’re getting together information for preparing your 2014 income tax return or reviewing a return that’s already prepared. When you are doing so, it can pay to take a close look at the adjustments to income you can take on the bottom of page 1 of your Form 1040 or Form 1040A. These adjustments, which reduce the taxable income you’ll declare, are known as above-the-line deductions—you enter them just above the last line on the page, where you report your adjusted gross income (AGI).
Above-the-line deductions offer two key advantages. First, you are allowed to take the page 1 deductions regardless of whether you itemize deductions on Schedule A of your tax return.
Second, above-the-line deductions reduce your AGI and, in many situations, also reduce your modified adjusted gross income (MAGI). A lower AGI or MAGI, in turn, can provide tax savings on various tax return items. For instance, some taxpayers now can deduct medical expenses only to the extent they exceed 10% of AGI. With a lower AGI, you may qualify for a larger itemized medical deduction.
Looking at the lineup
There are more than a dozen categories of above-the-line deductions. They include:
IRAs. You can make contributions for 2014 until April 15 of 2015. Although many taxpayers won’t be able to deduct IRA contributions because of income and participation in an employer plan, some people might qualify for deductions.
Example: Alice Baker is a homemaker with no earned income in 2014; her husband, Carl, is employed and participates in his company’s retirement plan. The couple’s MAGI for 2014 is over $116,000, so Carl cannot make a deductible IRA contribution for that year. However, if the couple’s 2014 MAGI is less than $181,000, Alice can make a fully tax deductible contribution of up to $5,500 ($6,500 if she is 50 or older).
Other retirement accounts. Contributions to such accounts also reduce your AGI. Moreover, if you had self-employment income in 2014, you can contribute to a simplified employee pension (SEP) plan until the due date of your 2014 tax return. Thus, with a filing extension, the SEP deadline can be October 15, 2015. You generally can contribute nearly 20% of your self-employment income, with a SEP contribution cap of $52,000 for 2014.
Health Savings Accounts (HSAs). With certain high deductible health insurance plans, you can make tax-deductible contributions to an HSA; you can tap these accounts for health care costs without owing income tax. Again, if you qualify for a 2014 HSA contribution, the deadline is April 15, 2015. Contribution limits go up to $7,550 for someone age 55 or older with family coverage.
Self-employed health insurance. Self-employed individuals can deduct the premiums paid for any medical insurance, dental and long-term care insurance. Policies also can cover the worker’s spouse, dependents, and non-dependent children who were under age 27 at the end of last year. Medicare premiums paid by self-employed individuals can be taken as an above-the-line adjustment to income. There are some conditions that must be met to claim this deduction; our office can help you report the appropriate amount.
Spousal Support. Amounts you paid to your spouse or a former spouse under a divorce or separation decree that qualify as spousal support for tax purposes are deductible here.
Other above-the-line deductions include job-related moving expenses and interest payments on student loans. Our office can help you make the most of the various above-the-line adjustments to income on your 2014 tax return.
Turn Relatives Into Employees to Reduce Taxes
High-income business owners may be realizing the impact of new tax laws as they prepare their 2014 tax returns. Those laws can be especially painful if your company is structured as a S corporation or a limited liability company (LLC), with all income reported on your personal return. Besides the recently added 39.6% top income tax bracket, your income may be subject to the 3.8% Medicare surtax as well as the phase out of itemized deductions and personal exemptions. Including state taxes, you might be in a marginal tax bracket in excess of 50%.
You may receive some tax relief by hiring relatives. The money you pay will reduce business profits, so you might have less taxable income to report. That compensation will be taxable to the relatives you hire—or it might not. The standard deduction is $6,300 in 2015, so your children can each receive up to that much, tax-free. Just make sure that the payments are the fair value for services actually performed.
Example: Jennifer Boyd has a mail order clothing business that makes enough money to put her into a high tax bracket. She hires her two children and pays them $3,500 and $5,000 this year. Jennifer reduces her reported income by $8,500, saving her thousands of dollars a year in tax, while her children owe no income tax.
Jennifer also hires her widowed mother, who is in the 15% tax bracket. (That rate goes up to $37,450 of taxable income in 2015.) Again, Jennifer saves tax by reducing her income, while her mother owes relatively little in tax.
To justify the tax savings, family members on the payroll must be paid fairly for work they actually perform. Thus, tasks should be suited for each individual’s capabilities. Jennifer’s teenage son, for instance, might help with her company’s website and its IT operations; her daughter, who goes away to college, could generate market research reports that relate to Jennifer’s business and play a role in keeping the company’s social media activities up to date. Jennifer’s mother, a retired fashion designer, could provide advice on product trends and selection.
No matter what kind of work relatives perform, business owners should keep records showing their production. Compensation should be in line with the amounts paid to other employees.
Weighing the tradeoff
If your business is a partnership between spouses or a sole proprietorship or a certain type of LLC, you won’t be required to pay Social Security and Medicare taxes on the wages you pay to your children if they are under age 18. Similarly, with certain other forms of business, you won’t need to pay federal unemployment tax on wages paid to a son or daughter under age 21.
Generally, for example, unless your relatives are qualified independent contractors, the wages you pay relatives will be subject to payroll taxes. Those payments may reduce the family’s tax savings. Our office can help you calculate the net tax benefit of hiring family members and assist in setting up the required paperwork and offer advice as to how to set up the most advantageous situation.
Beyond tax savings, hiring relatives can be rewarding. Your children may gain valuable life lessons, and your retired parents can continue to perform worthwhile tasks. Also, if you were considering helping your relatives financially, this way enables you to do so, giving them the same benefit, while costing you less tax since the difference will be made up by your tax savings. Tax savings, while undoubtedly welcome, might turn out to be the icing on the cake.
Why a Tax Attorney's Advice is Important: Case Study - Cavallaro
Estate Planning, Gift Tax, Business Succession, and the Ability to Rely on Advice of Counsel
JD Supra Business Advisor recently published our case study on the Tax Court Opinion in the Cavallaro matters - a true rags to riches story involving taxation, and why a tax attorney's advice/representation is important. While the dollar amounts involved in this case may seem beyond reach for most individuals and businesses, the underlying issues are relatively common and demonstrate the importance of obtaining quality tax representation for business succession planning, estate tax planning and more.
You can check out the article here.
CRIMINAL TAX CORNER: IRS Warns of Telephone Scams
We have reported before and now again that we have received countless calls from frantic individuals that have been the victim of a scam.
Now, the IRS has issued the following warning:
The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities of victims. These phone calls include many variations, ranging from instances from where callers say that the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver's license revocation. Sometimes these calls are paired with follow up calls from people saying that they are from the local police department or the state motor vehicle department.
Characteristics of these scams can include:
- Scammers using fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim's Social Security Number.
- Scammers may intimidate the IRS toll free number on caller ID to make it appear that it is the IRS calling.
After threatening victims with jail time, scammers hang up and others soon call back pretending to be from the local police, and the caller ID supports their claim.
If you get a phone call from someone claiming to be from the IRS, here is what the IRS recommends: If you know you owe taxes call the IRS at 800-829-1040 (or call us). If you know you don't owe taxes or have no reason to think that you owe any tax, then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.