For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.
For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.
Wage Cap for Social Security Tax
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:
- a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
- a 1.45 percent Medicare tax, also known as hospital insurance (HI).
For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:
- a 12.4 percent OASDI tax; and
- a 2.9 percent HI tax.
OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.
For 2022, the wage base is $147,000. Thus, OASDI tax applies only to the taxpayer’s first $147,000 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $147,000.
There is no wage cap for HI tax.
Maximum Social Security Tax for 2022
For workers who earn $147,000 or more in 2022:
- an employee will pay a total of $9,114 in social security tax ($147,000 x 6.2 percent);
- the employer will pay the same amount; and
- a self-employed worker will pay a total of $18,228 in social security tax ($147,000 x 12.4 percent).
Additional Medicare Tax
Higher-income workers may have to pay an additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:
- $250,000 for married taxpayers who file a joint return;
- $125,000 for married taxpayers who file separate returns; and
- $200,000 for other taxpayers.
The annual wage cap does not affect the additional Medicare tax.
Benefit Increase for 2022
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2022 by 5.9 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.
The Court of Appeals for the Second Circuit affirmed the district court's judgment that the cap on the federal income tax deduction for money paid in state and local taxes (SALT) is constitutional.
The Court of Appeals for the Second Circuit affirmed the district court's judgment that the cap on the federal income tax deduction for money paid in state and local taxes (SALT) is constitutional. Four states brought a claim against the government alleging that the $10,000 cap on the federal income tax deduction for money paid in state and local taxes, enacted as part of the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA), violated the Constitution. The states argued that the state and local tax deduction was constitutionally mandated, or alternatively that the cap violated the Tenth Amendment because it coerced them to abandon their preferred fiscal policies. The district court held that the states had standing and that their claims were not barred by the Anti-Injunction Act (AIA). However, the district court concluded that the claims lacked merit. The states' allegations that the cap decreases the frequency and price at which taxable real estate transactions occur by measurably increasing the cost of those transactions reflect specific lost tax revenues and suffice to support standing. Moreover, the exception in South Carolina v. Regan, 84-1 USTC ¶9241, 465 U.S. 367, 373 (1984), applied to the facts of this case, therefore, the court held that the AIA did not foreclose its review of the states' claim.
Background
The federal tax code’s state and local tax (SALT) deduction permitted taxpayers to deduct from their taxable income all the money they paid in state and local income and property taxes. However, in 2017, Congress passed the TCJA which imposed a cap on the SALT deduction. The immediate impact of this cap was felt most acutely in states where the state and local tax liability of residents often exceeded the $10,000 maximum. Four of the most affected states, namely, New York, Connecticut, New Jersey, and Maryland, sued the government asserting that the cap on the SALT deduction was unconstitutional on its face and unconstitutionally coerced them to abandon their preferred fiscal policies. The government responded by stating that the district court lacked subject matter jurisdiction to consider the states' claims and also defended the cap on the merits. The district court rejected the government's jurisdictional defense but dismissed the complaint for failure to state a claim. On appeal, the states argued that the district court erred on the merits.
Affirming an unpublished District Court opinion.
The IRS has reminded employers to check the Work Opportunity Tax Credit available for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment.
The IRS has reminded employers to check the Work Opportunity Tax Credit available for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment.
Cash contributions made either to supporting organizations or to establish or maintain a donor advised fund do not qualify. Also, cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.
Subject to certain limits, taxpayers who itemize could generally claim a deduction for charitable contributions made to qualifying charitable organizations. These range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The law now permits electing individuals to apply an increased limit of up to 100 percent of their AGI, for qualified contributions made during 2021. More information can be found at https://www.irs.gov/forms-pubs/about-publication-526.
The Work Opportunity Tax Credit encourages employers to hire workers certified as members of any of the following targeted groups facing barriers to employment:
- temporary Assistance for Needy Families (TANF) recipients;
- unemployed veterans, including disabled veterans;
- formerly incarcerated individuals;
- designated community residents living in Empowerment Zones or Rural Renewal Counties;
- vocational rehabilitation referrals;
- supplemental Nutrition Assistance Program (SNAP) recipients;
- supplemental Security Income (SSI) recipients;
- long-term family assistance recipients; and
- long-term unemployment recipients.
An employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit to their state workforce agency (SWA) to qualify for the credit within 28 days after the eligible worker commences work. However, under a special relief provision, a submission deadline on November 8, 2021, applies to qualified summer youth employees residing in Empowerment Zones and designated community residents residing in Empowerment Zones.
Eligible employees must commence work on or after January 1, 2021, and before October 9, 2021, to qualify for the submission deadline. The Work Opportunity Tax Credit is claimed on eligible businesses' federal income tax returns and is usually based on wages paid to qualified workers during the first year of employment. The credit is first figured on Form 5884, Work Opportunity Credit, and then is claimed on Form 3800, General Business Credit.
Under a special rule, employers are permitted to claim the Work Opportunity Tax Credit for hiring qualified veterans, although the credit is not available to tax-exempt organizations for most groups of new hires. Such organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.
The IRS highlighted how expanded tax benefits help both individuals and businesses give to charity before the end of this year.
The IRS highlighted how expanded tax benefits help both individuals and businesses give to charity before the end of this year. The law now permits these taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married taxpayers filing joint returns. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify to claim a limited deduction for cash contributions.
Cash contributions made either to supporting organizations or to establish or maintain a donor advised fund do not qualify. Also, cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.
Subject to certain limits, taxpayers who itemize could generally claim a deduction for charitable contributions made to qualifying charitable organizations. These range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The law now permits electing individuals to apply an increased limit (Increased Individual Limit), up to 100 percent of their AGI, for qualified contributions made during 2021. More information can be found at https://www.irs.gov/forms-pubs/about-publication-526.
The IRS issued a notice clarifying the application of certain extensions granted under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the election of COBRA coverage and payment of COBRA premiums due to the COVID-19 emergency.
The IRS issued a notice clarifying the application of certain extensions granted under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the election of COBRA coverage and payment of COBRA premiums due to the COVID-19 emergency. The IRS also addressed the interaction of COBRA continuation coverage under the Emergency Relief Notices with the COBRA premium assistance available for certain individuals under the American Rescue Plan Act of 2021 (the ARP).
Guidance and Application of Extensions
COBRA permits qualified beneficiaries who lose coverage under a group health plan to elect continuation health coverage for a 60-day period after receipt of a COBRA election notice. The initial premium can not be due earlier than 45 days after that election.
Certain extensions were granted due to the COVID-19 (Coronavirus) emergency, and issued in the Joint Notification of Extensions of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak. Additional guidance was provided by Employee Benefits Security Administration (EBSA) Disaster Relief Notice 2021-01. Under the Emergency Relief Notices, up to one year must be disregarded in determining the due dates for individuals to elect COBRA continuation coverage and pay COBRA premiums during the Outbreak Period. This notice clarifies that the disregarded period for an individual to elect COBRA continuation coverage and the disregarded period for the individual to make initial and subsequent COBRA premium payments generally run concurrently.
For example, if an individual elected COBRA continuation coverage outside of the initial 60-day COBRA election timeframe, that individual generally will have one year and 105 days (60 days plus 45 days) after the date the COBRA notice was provided to make the initial COBRA premium payment. If an individual elected COBRA continuation coverage within the initial 60-day COBRA election timeframe, that individual will only have one year and 45 days after the date of the COBRA election to make the initial COBRA premium payment.
Applying the disregarded periods in this way means that individuals who delay electing COBRA may not have more than one year of total disregarded time for the COBRA election and initial COBRA payment. For example, a taxpayer cannot delay electing COBRA continuation coverage for 6 months and then add another full year to the disregarded period for purposes of determining the deadline for making the initial COBRA premium payment (resulting in a total of 18 months of disregarded time for both the COBRA election and initial COBRA payment).
Transition Relief
To avoid inequitable outcomes, in no event will an individual be required to make the initial premium payment before November 1, 2021, even if November 1, 2021 is more than one year and 105 days after the date the election notice was received, provided that the individual makes the initial premium payment within one year and 45 days after the date of the election.
ARP COBRA Premium Assistance
On March 11, 2021, the American Rescue Plan Act of 2021 (ARP) was enacted, providing for temporary COBRA premium assistance for certain “Assistance Eligible Individuals” for periods of coverage beginning on or after April 1, 2021, through periods of coverage beginning on or before September 30, 2021. The extensions of the timeframes under the Emergency Relief Notices do not apply to the periods for providing the required notice of the ARP extended election period or for electing COBRA continuation coverage with COBRA premium assistance under the ARP.
The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought.
The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.
When Sales of Livestock are Involuntary Conversions
Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.
Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.
Livestock Sold Because of Weather
Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.
First, the livestock cannot be poultry.
Second, the taxpayer must have held the converted livestock for:
- draft;
- breeding; or
- dairy purposes.
Third, the weather condition must make the area eligible for federal assistance.
Persistent Drought
The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.
The first drought-free year is the first 12-month period that:
- ends on August 31 in or after the last year of the four-year replacement period; and
- does not include any weekly period of drought.
What Areas are Suffering from Drought
The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at
https://droughtmonitor.unl.edu/
However, the IRS also provided a list of areas where the year ending on August 31, 2021, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.
An individual was allowed to deduct the amount of premiums paid to provide health insurance coverage for his ex-spouse as alimony.
An individual was allowed to deduct the amount of premiums paid to provide health insurance coverage for his ex-spouse as alimony. The taxpayer had agreed to pay his then spouse’s health insurance premiums, incident to a separation agreement pending divorce, through a cafeteria plan provided by the taxpayer’s employer. Subsequently, the taxpayer had excluded the amount equal to the health insurance premiums pursuant to Code Secs. 106 and 125 from his gross income and also claimed an alimony deduction pursuant to Code Secs. 62 and 215 for the portion of the premiums covering his then spouse.
Double Deduction
There was no dispute that the taxpayer was entitled to exclude the health insurance compensation from his gross income. However, the IRS had challenged the taxpayer’s attempt to also deduct the alimony payments and argued that permitting the alimony deduction would create a windfall to the taxpayer by granting him the practical equivalent of multiple deductions for the same economic outlay. The tax court held that disallowing the alimony deduction would leave the taxpayer with a greater tax burden that would counter the intended purpose and operation of the general alimony regime. Therefore, the taxpayer undisputably qualified for both the exclusion and the alimony deduction, and no double tax benefit outcome could arise when considering the alimony regime as a whole. By asking to disallow the alimony deduction where the law plainly permits the taxpayer this right, the IRS attempted to disrupt the uniformity of the general alimony regime under the guise of the double deduction rules when no such threat was present.
Deduction for Wholly Tax-Exempt Income
In addition, the IRS contended that Code Sec. 265(a) disallowed the taxpayer’s alimony deduction because it provides that an amount may not be deducted if it is allocable to wholly tax-exempt income (other than interest). The tax court, however, had never applied Code Sec. 265(a)(1) to disallow an alimony deduction, or, in any instance where the supposed exempt item of income at issue was actually included in gross income by a different taxpayer. Moreover, the alimony payments were not considered allocable to wholly tax-exempt income for Code Sec. 265 purposes as the taxpayer was required to include it in her income.
The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding.
The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding. The IRS’s convenient Tax Withholding Estimator (https://www.irs.gov/individuals/tax-withholding-estimator), will help taxpayers determine if they have too much withheld and how to make an adjustment to put more cash into their own pocket now. About 70 percent of taxpayers over withhold their taxes every year, which typically results in a refund. Alternatively, it will help taxpayers see that they should withhold more or make an estimated tax payment to avoid a tax bill when they file their tax return next year.
The following things need to be considered when adjusting withholding for 2021:
- Coronavirus tax relief - Tax help for taxpayers, businesses, tax-exempt organizations, and others, including health plans, affected by coronavirus (COVID-19).
- Disasters such as wildfires and hurricanes – Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.
- Job loss – 4128, Tax Impact of Job Loss, explained how this unfortunate circumstance can create new tax issues.
- Workers moving into the gig economy due to the pandemic – The IRS advised people earning income in the gig economy to consider estimated tax payments to avoid a balance or penalties when they file.
- Life changes such as marriage or childbirth – Getting married or having a child are just a couple of life events that can affect your refund or how much you owe.
Taxes are generally paid throughout the year whether from salary withholding, quarterly estimated tax payments, or a combination of both. Taxpayers can pay online, by phone, or from the IRS2Go app. Finally, taxpayers can schedule payments for future dates, which can be useful during filing season, for payment plan payments or for estimated tax payments.
The IRS released standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Code Secs. 501(a)(1) and 501(c)(3). This does not affect the status of organizations currently recognized under Code Sec. 501(c)(3).
The IRS released standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Code Secs. 501(a)(1) and 501(c)(3). This does not affect the status of organizations currently recognized under Code Sec. 501(c)(3).
Required Provisions
The IRS would issue said letter only if an LLC’s articles of organization and its operating agreement each include:
- provisions requiring that each member of the LLC be either (1) recognized as aforementioned; (2) a governmental unit under Code Sec. 170(c)(1); or (3) wholly-owned instrumentality of such, a governmental unit;
- express charitable purposes and charitable dissolution provisions;
- express chapter 42 compliance provisions under Code Sec. 508(e)(1), if the LLC is a private foundation; and
- an acceptable contingency plan (such as suspension of membership rights) in the event that one or more members cease to be except organizations or governmental units or wholly-owned instrumentalities.
Finally, comments could be made electronically via the Federal eRulemaking Portal at www.regulations.gov (type IRS-2020-0042 in the search field on regulations.gov to find this Notice and submit comments). Alternatively, send comments by mail: Internal Revenue Service, CC:PA:LPD:PR (Notice 2021-56), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
Final regulations under Code Sec. 301 update the existing regulations under this provision to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988 ( P.L. 100-647) (the 1988 Act).
Final regulations under Code Sec. 301 update the existing regulations under this provision to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988 ( P.L. 100-647) (the 1988 Act). These changes generally provide that the amount of a Section 301 distribution of property made by a corporation to its shareholder is the fair market value of the distributed property. The final Section 301 regulations adopt prior proposed regulations ( NPRM REG-121694-16), without substantive changes, and apply generally to distributions made after September 22, 2021.
Code Sec. 301 and Amendments by the Technical and Miscellaneous Revenue Act of 1988
Code Sec. 301 provides rules for the treatment of a distribution of property, including money, made by a corporation to its shareholder with respect to that shareholder’s stock ownership in that corporation (a Section 301 distribution).
The 1988 Act amended Code Sec. 301(b)(1) to provide that the amount of any Section 301 distribution is the amount of money received plus the fair market value of the other property received. The 1988 Act also amended Code Sec. 301(d) to provide that the basis of property received in a Section 301 distribution is the fair market value of such property (both amendments, collectively, are referred to as the 1988 amendments).
The current Section 301 regulations reflect the rules of these two provisions as they existed prior to the 1988 amendments. Accordingly, to the extent preempted by statute, the current regulations have no application.
2019 Proposed Regulations
In 2019, the IRS issued proposed regulations under Code Sec. 301 ( NPRM REG-121694-16) to reflect the 1988 amendments (2019 proposed regulations). The scope of the 2019 proposed regulations was limited to:
- deleting provisions made obsolete by statutory changes;
- making minor additions and revisions to reflect current statutory text;
- making certain non-substantive changes for purposes of clarity and readability, including reordering and redesignating paragraphs; and
- amending cross-references in regulations under other provisions to reflect the proposed reordering and redesignating of paragraphs in the Section 301 regulations.
Final Regulations
The final Section 301 regulations adopt the 2019 proposed regulations with no substantive changes and with certain non-substantive changes for purposes of clarity and readability. The final regulations apply to Section 301 distributions made after September 22, 2021. However, these regulations update the previous regulations under Code Sec. 301 to reflect the statutory changes made by the 1988 Act, which apply to distributions made in tax years beginning after December 31, 1986.
The Treasury and IRS have issued final regulations addressing the calculation of qualified business asset investment for qualified improvement property, under the alternative depreciation system (ADS), for purposes of the Code Sec. 250 deduction (for foreign-derived intangible income and Code Sec. 951A global intangible low-taxed income (GILTI)) and for purposes of determining GILTI.
The Treasury and IRS have issued final regulations addressing the calculation of qualified business asset investment for qualified improvement property, under the alternative depreciation system (ADS), for purposes of the Code Sec. 250 deduction (for foreign-derived intangible income and Code Sec. 951A global intangible low-taxed income (GILTI)) and for purposes of determining GILTI.
The regulations also contain transition rules relating to the impact of loss accounts on net operating loss carrybacks allowed under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (the "CARES Act”").
Treatment of Qualified Improvement Property Under Code Secs. 250 and 951A
The regulations clarify that the technical amendments to Code Sec. 168 made by section 2307(a) of the CARES Act apply to determine the adjusted basis of property under Code Sec. 250 and Code Sec. 951A. The CARES Act classified qualified improvement property as 15-year property with a 20-year recovery period, for purposes of ADS. The rule is treated as effective December 22, 2017. The ADS rules used for determining qualified business asset investments are the rules in effect on December 22, 2017.
NOL Carrybacks
The CARES Act allowed taxpayers to carryback for five years, NOLs incurred in 2018 through 2020. The regulations provide rules analogous to the existing transition rules in Reg. §1.904(f)-12(j) to situations involving an NOL arising in a post-2017 tax year that is carried back to a pre-2018 tax year. The rules of Reg. §1.904(g)-3(b) apply to the NOL carryback, and income in a pre-2018 separate category in the tax year to which the NOL is carried back is generally treated as if it included only income that would be assigned to the same separate category in post-2017 tax years.
Therefore, any separate limitation loss created by reason of a passive category component of a post-2017 NOL that is carried back to offset pre-2018 general category income will be recaptured in post-2017 tax years as general category income, and not as a combination of post-2017 general, foreign branch, or Code Sec. 951A category income. Losses will first ratably offset a taxpayer’s general category income in the carryback year, to the extent thereof, and that no separate limitation loss account will be created as a result of that offset. The amount of income in the general category available to be offset under this rule is determined after first offsetting the general category income in the carryback year by a post-2017 NOL component in the general category that is carried back to the same year.
PFIC Rules
Proposed regulations under Code Sec. 1297 and Code Sec. 1298, for determining whether a foreign corporation is treated as a passive foreign investment company (PFIC) and the treatment of income and assets of a qualifying insurance corporation that is engaged in the active conduct of an insurance business, were not finalized.
The Treasury and IRS intends to finalize the regulations separately.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.
Initiating an ID theft case
A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer's name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.
For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.
The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.
Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer's Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.
IDVerify.irs.gov
The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.
Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.
Resolving the case
After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent "Identity Theft Case Review Report" on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.
After resolution
The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead
The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.
Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.
Latest breach
The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS's online "Get Transcript" application and illegally download these taxpayers' tax transcripts. The IRS is concerned that the criminals intend to use taxpayers' past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS's filters for finding suspicious returns.
Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS's expense, Koskinen stated.
Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.
Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.
Payments and Withholding
As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. For 2017, the domestic employee coverage threshold, as adjusted for a slightly different inflation factor and subject to rounding, will be $2,000, which is the same as for 2016 after rising from $1,900 in 2015. Earnings of any domestic employee are not subject to Social Security taxes if they do not exceed that threshold for the year. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer's Tax Guide, has more information about withholding and paying employment taxes.
If the amount paid is more than the threshold, the parent must withhold the employee's share of Social Security and Medicare taxes unless the parent chooses to pay both the employee's and the employer's share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).
The parent is not required to withhold income tax from the nanny's wages. However, the parent and the nanny may agree to withholding income tax from the nanny's wages. The nanny must provide a filled-out Form W-4, Employee's Withholding Allowance Certificate, to the employer.
The employment taxes amounts are part of the parent's tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.
Forms to File
If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent's Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.
Please do not hesitate to contact this office if you have any questions regarding your “nanny tax” responsibilities.
The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.
The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.
Tax-related identity theft
Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.
Being proactive
However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.
Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.
Impersonators
Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.
The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.
Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.
The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.
The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.
Substantiation
One way to understand the IRS's requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.
- To deduct a contribution of cash, check, or other monetary gift (of less than $250), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
- To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
- If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
- Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.
The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.
Tax Court sheds light
In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.
In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers' residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).
The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.
This article is a very high level overview of the IRS's substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.
Small employers
Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.
The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.
To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.
Other requirements
Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.
In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.
Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.
If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.
