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Monthly Archives: January 2019

IRS Waives Penalties for Underpayments of 2018 Federal Tax Liabilities by Jeffrey M. Mutnik, CPA/PFS

Posted on January 30, 2019 by Jeffrey Mutnik

The IRS is providing penalty relief to the millions of taxpayers it says may have fallen short of their total tax liabilities for 2018 due to the revamp of the U.S. tax code under the Tax Cuts and Jobs Act (TCJA).

Thanks, in part, to the efforts of the accounting profession, including of the American Institute of CPAs (AICPA), the IRS recognizes that many individual taxpayers may not have properly adjusted their withholding and estimated tax payments to reflect the provisions of the new law. As a result, taxpayers who paid at least 85 percent of their total tax liabilities for last year through withholding and/or estimated tax payments can avoid underpayment penalties. Typically, a penalty waiver requires taxpayers to have paid 90 percent of their tax liabilities during the tax year.

U.S. taxes are based on a pay-as-you-go system for which individual taxpayers are required by law to pay most of their tax obligations during the year, either by having federal taxes withheld from their paychecks or by making quarterly estimated tax payments directly to the IRS. While the federal tax withholding tables released by the IRS in early 2018 reflected the lower tax rates and higher standard deductions under the TCJA law, they did not consider all of the changes brought about the new law. Despite efforts by the IRS and CPAs to encourage taxpayers to get a paycheck checkup and confirm that they had enough taxes withheld from their paychecks, many taxpayers did not submit revised W-4 withholding forms to their employers or increase their estimated tax payments.

According to the IRS, many taxpayers filing their 2018 will be surprised to learn they owe additional taxes to the federal government. To avoid an unexpected tax bill in future years, taxpayers should meet with their advisors and accountants during the first half of 2019 to confirm the accuracy of their estimated tax payments and to check the withholding on their most recent paychecks to ensure they are having enough tax withheld from their wages based on their filing status, number of dependents and other factors.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

New York Issues Guidance on State Sales Tax Nexus by Michael Hirsch, JD, LLM

Posted on January 28, 2019 by Michael Hirsch,

On Jan. 15, 2019, the New York Department of Taxation and Finance finally issued its response to the Supreme Court’s June 2018 decision in South Dakota v. Wayfair, which expands states’ abilities to impose sale tax reporting and collection responsibilities on out-of-state vendors regardless of whether or not the sellers have a substantial physical presence in their jurisdiction.

The court’s decision in Wayfair represents a significant shift in state sales tax administration, moving from a purely physical presence test to one that considers the number of transactions and sales volume that a vendor makes in a particular state. While most states were quick to enact economic nexus legislation based on South Dakota’s 200 transactions or $100,000 in sales threshold as established in Wayfair, a handful, including New York, took their time.

According to New York’s recent guidance, businesses without a physical presence in the state are required to register as New York sales tax vendors and collect and remit sales tax when they met the following criteria during the immediately preceding four sale quarters:

  • the vendor conducted more than 100 sales of tangible personal property for delivery, and
  • the vendor made more than $300,000 of tangible personal property sales into the state.

New York’s imposition of economic nexus is effective immediately. Businesses that meet the law’s sales threshold tests should register with the state if they have not done so already.

It is important for businesses to recognize that New York’s sales tax economic nexus law differs in many ways from the standard established by Wayfair. For example, New York’s test considers both the number of sales into the state and the dollar value of those transactions. Therefore, an out-of-state vendor that makes a mere 15 sales totaling more than $1 million during the year to customers in the state may not be required to collect and remit state sales tax. Even though sales volume exceeds the $300,000 threshold, the vendor does not meet the number of transactions test.

In addition, although the language of New York’s tax law refers specifically to sales of tangible personal property, businesses that sell services to customers in the state may not be entirely free from state sales tax administration responsibilities. For example, because New York considers software to be taxable tangible property, sales of services that are tied to the use of that software may also be subject to sales tax but the vendor may not be required to register with the states.

Finally, sellers should recognize that New York’s economic nexus test is not based on a calendar year. Rather, sellers must measure their sales during the state’s sales specific tax quarters, which are March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 29.

The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice help with individuals and businesses across the globe maintain tax efficiency while complying with often conflicting federal, state and local tax laws.

 

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

How Does the New Tax Law Treat Rental Vacation Property? by Angie Adames, CPA

Posted on January 21, 2019 by Angie Adames

The prospect of having a vacation property that you can use as your own personal retreat for part of the year and lease to others in return for rental income during other times is appealing to many individuals. However, it is important to understand the tax implications of renting your residential property, whether it be a house, an apartment, a room or a boat, to ensure that you maximize the potential benefits without incurring unexpected tax liabilities.

In general, rental income is taxable unless you rent out a residential property 14 days or less during a calendar year. Once you hit the 15-day mark, you must report and pay taxes on any and all payments you receive for renting out the property during the year. However, under U.S. tax laws, you may be able to offset the rental income and reduce your tax liabilities if you qualify to deduct the expenses incurred for renting the property, including advertising, cleaning and maintenance, mortgage interest, property insurance and taxes. Your eligibility to take those deductions depends on the amount of time you spend renting the property as a business as compared to the amount of time you spend enjoying the property for personal use.

Personal-Use Residence vs. Rental-Use Business Property

The IRS classifies vacation homes as either personal residences used by you or your family members or rental business property.

A property is considered a personal residence when:

  • You rent out the property to others for more than 14 days during the year; and
  • You enjoy the property for personal use during a period of time that exceeds 14 days or 10 percent of the days you rent out the home at fair market price.

Conversely, the IRS will consider a vacation home to be rental income property for which you may be able to claim tax deductions for eligible business expenses when:

  • You rent out the property to others for more than 14 days during the year; and
  • You enjoy the property for personal use during a period of time that does NOT exceed the greater of 14 days of the year, or 10 percent of the days you rent out the home at fair market process.

When calculating the number of days your home is used for personal vs. rental use, you must disregard any days in which the property was vacant or was undergoing maintenance and repairs. In addition, careful attention should be paid to the days in which you rent the property for less than the fair market rate, perhaps to a family owner or friend, which the IRS considers to be personal use.

Tax Treatment of Multi-Use Vacation Property

When a vacation home qualifies as rental property, you must allocate property taxes, costs for repairs and improvements and other potentially deductible business expenses between the actual days you rent out the property and the days you use it for personal enjoyment. As a rule, you may only deduct amounts that are proportional to the actual number of days you rent the property to non-family members. In addition, when you operate a property as a rental business, you may qualify to deduct up to $25,000 in losses per year from the rental income you earn. While you may not deduct rental expense in excess of the gross rental income limitation ( less the rental portion of mortgage interest, real estate taxes, and casualty losses, and rental expenses like realtors’ fees and advertising costs), you may be able to carry forward some of these rental expenses to the next year.

Due to the new tax law’s significant increase in the standard deduction, fewer taxpayers will take the time and effort to itemize many of the deductions they previously relied on to reduce their taxable income in prior years. Moreover, the tax law places significant restrictions on deductions for mortgage interest and property taxes, thereby limiting the potential tax savings that rental property owners can yield. For example, the mortgage interest apportioned to the personal use of a rental property may not be considered as an itemized deduction if the taxpayers did not use the property for more than 14 days.

Other Rules, Limitations and Exceptions to the Rules

Vacation homes classified as rental property may generate deductible losses for taxpayers whose rental expenses exceed their rental income. However, under the passive activity loss (PAL) rules, taxpayers may deduct losses from passive activities, including renting real estate, only from income that they generate from similarly passive activities. You may not, for example, deduct the losses from passive rental activities from the income you earn as wages from your full-time job. Any losses that do not qualify for a deduction under the PAL rules in the current year may be carried over into future years to be deducted when you have additional passive income or when you sell the rental property that created the passive losses.

There is an exception to the PAL rules that allows “certain” taxpayers who actively participate in rental activities and have adjusted gross income (AGI) of less than $100,000 to potentially deduct up to $25,000 of annual passive rental real estate losses from current year income. In addition, depending on the number of hours you spend materially participating in the delivery of real estate services, you may qualify as a real estate professional which means, the rule treating rental activities as automatically passive would no longer apply.

On a final note, if your property is located near the site of a major, multi-day event that attracts out-of-state visitors, such as the Miami International Boat Show, Art Basel or the South Beach Food and Wine Festival, you may be able to generate tax-free rental income as long as you do not rent out your property for 15 days or more during the year. This is especially beneficial in today’s economy, for which homeowners can quickly and easily market their properties, often, at unusually high short-term rates via services such as Airbnb and VRBO. In these circumstances, however, the property owner will not qualify as a business operator and will not be able to deduct any portion of expenses for repairs, maintenance, cleaning or rental agency fees.

Before handing over the keys to your vacation home, seek the guidance of professional accountants and advisors to help you navigate the complexity of the tax laws and maximize your earnings without increasing your tax liabilities.

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

 

 

How Businesses Must Treat Certain Employee Fringe Benefits by Dustin Grizzle

Posted on January 18, 2019 by Dustin Grizzle

Companies must be prepared for how the new tax law affects their bottom lines and the tax liabilities of their businesses and their employees. For example, tax reform changed the treatment of many of the benefits that businesses extend to their workers. As a result, businesses should evaluate whether or not the value of providing these fringe benefits to employees outweigh the costs they incur for doing so, especially when it could result in the loss of a tax deduction and/or the addition of a new tax liability.

Meals and Entertainment

While the new tax law eliminated the availability of deductions for entertaining clients and employees, businesses can continue to deduct 50 percent of the costs they incur for meals they enjoy with current or potential clients, consultants or other business contacts at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. Doing so requires businesses to retain receipts demonstrating that the food costs were separate from and independent of any amounts they paid for “entertainment,” such as tickets to a sporting event.

Reimbursements for Employees’ Qualified Moving Expenses

Under prior law, payments businesses made to reimburse their employees for qualified moving expenses were provided to those workers tax-free. With the new tax laws, however, businesses must generally treat those payments as employee wages subject to federal income and employment taxes unless they qualify for one of the following exceptions:

  • The employee is an active duty member of the U.S. Armed Forces whose move is a result of a military order and he or she would have qualified to treat moving expenses as a tax deduction had he or she not received reimbursements from his or her employer;
  • The reimbursement paid in 2018 is for costs related to a move that an employee made in 2017 or prior years; and
  • The employer paid a moving company directly in 2018 for qualified moving services provided to an employee before 2018.

These are the only situations in which workers may exclude from their taxable income the amounts they received as employer reimbursements of moving expenses beginning in tax year 2018. In addition, employees must not have deducted those expenses on the tax returns they filed for 2017. If an employer mistakenly treated reimbursed moving expenses covered by these exceptions as taxable employee income in 2018, it must take steps to correct those employee’ taxable wages and employment taxes.

Reimbursements for Employees’ Bicycle Commuting

While businesses may continue to deduct as business expense the amounts they reimburse workers for qualified bicycle commuting, they must now include all of those amounts as taxable wages to employees for tax years 2018 through 2025. In other words, employees will no longer receive the same tax-free benefits for commuting to work on bicycle as they did in prior years.

Deductions for Qualified Commuter Transportation

Beginning in 2018, businesses and non-profit organizations may no longer deduct the expenses they incur for providing workers with transportation fringe benefits, including employee parking and the costs associated with transporting workers for commuting purposes. The one exception to this rule applies to transportation that is necessary for employee safety, such as a car service to take the employee home after a late night meeting or event.

Employee Awards

Businesses may claim deductions for plaques, watches and other awards of tangible personal property that they award to employees, subject to annual deduction limits; awards of cash, gift certificates, vacations or event tickets are not deductible business expenses. Similarly, employees may exclude from their taxable income the value of awards that are considered tangible personal property.

 

The new tax law made a number of changes to how employers and employees may treat certain work-related benefits in 2018 through 2025. Businesses should meet with experienced advisors and accountants to navigate the new law and implement smart strategies that may help them use fringe benefits to attract and retain workers without incurring additional costs.

 

About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

How do Flexible Health Care Spending Arrangements Work in 2019? by Adam Cohen, CPA

Posted on January 17, 2019 by Adam Cohen

Eligible employees who enrolled to participate in their employers’ health care flexible spending arrangements (FSAs) for 2019 will be able to contribute and use up to a maximum of $2,700 tax-free dollars to pay for certain medical expenses not covered by their health insurance plans this year. That’s a $50 increase from the 2018 FSA contribution limits.

FSA contributions are typically made via payroll deductions and are not subject to federal income tax, Social Security tax or Medicare tax. Throughout the year, employees can use these funds to pay for qualified medical expenses, including certain prescription and over-the-counter medications, co-pays for doctor visits and out-of-pocket costs that go toward their health insurance deductibles. In addition, participants may use FSA money to pay for a broad range of medical, dental and vision products and services, including eyeglasses, hearing aids, first-aid kits, weight-loss and smoking-cessation programs and even child care, some of which may not be covered by workers’ health insurance plans.

FSAs generally operate under the principle of use-it-or-lose-it, meaning that workers risk losing any amounts of money they failed to use by the end of the last day of the calendar year. However, many employers choose to offer their employees the flexibility of either carrying over up to $500 of unused funds into the following year or granting employees a grace period of up to two-and-a-half months into the following year (until March 15) to spend FSA savings left over from the prior year. By law, employers may offer one or none of these options, but not both. Therefore, it is critical for workers to check with their employers to determine if either of these options are available to them and act accordingly. Every year, more than $400 million of earned money is forfeited because employees either miss or forget the FSA spending deadline.

About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

Florida Reduces State Sales Tax on Commercial Real Estate Leases for 2019 by Karen A. Lake, CPA

Posted on January 15, 2019 by Karen Lake

Effective Jan. 1, 2019, Florida’s sales tax rate on the total rent that commercial real estate owners charge and receive from tenants is 5.7 percent, a decrease from 5.8 percent in 2018, and 6.0 percent in 2017.  Real property rentals subject to the reduced rate include commercial office space, retail, warehouses and certain self-storage units, excluding storage for motor vehicles, boats and aircraft.

It is important for commercial real estate owners to recognize that the applicable sales tax rate is based on the timing of when the tenant occupies or has a right to occupy the property and not the month or year in which the tenant pays the rent. Therefore, the 5.7 percent tax rate applies only to rental charges a tenant pays for occupancy on or after Jan. 1, 2019.  Should a tenant pay rent after Jan. 1, 2019, for a rental period prior to the New Year, the applicable sales tax rate would be 5.8 percent plus any applicable discretionary sales surtax. Similarly, rent a tenant paid in December 2018 for occupancy in 2019 would be subject to the new, reduced rate of 5.7 percent.

Real property leases are taxed on base rent as well as other payments tenants must make as a condition of their occupancy. This includes common-area maintenance fees, property taxes and utilities that a lease agreement specifies are the responsibility of the tenants.  In addition, it is the responsibility of the property owner to collect from tenants any County imposed local-option sales surtax on the total rent charged. Depending on the County where the property is located, landlords may be subject to higher surtaxes in 2019 as detailed in the graph below:

Property owners who send invoices to tenants for rental periods after Jan 1, 2019, must account for both the 0.1 percent reduction in state tax rates state tax rate as well as any changes in local option tax rates for 2019.

The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice work with individuals and businesses to understand and comply with tax policy and sales tax compliance.

About the Author: Karen A. Lake, CPA, is state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

Business Identity Theft and W-2 Scams are on the Rise by Joseph L. Saka, CPA/PFS

Posted on January 14, 2019 by Joseph Saka

With the start of the 2019 tax season, businesses must educate employees, implement controls and take other steps to avoid falling victim to a growing wave of identity theft and W-2 scams.

Identity thieves have been targeting small businesses at an alarming rate. Not only are criminals stealing business data to open credit card accounts and file fraudulent tax returns looking for bogus refunds, but they are also gaining access to employees’ personal information found on W-2 forms. Too often, businesses are tricked into willingly handing over this sensitive information to cybercriminals simply because their employees fail to pick up the phone to confirm the identities of email senders who request such data.

In a typical W-2 scam, an employee will receive an email that appears to come from an executive or another leader in the organization. It may start with a simple, “Hey, you in today?” and, by the end of the exchange, all of an organization’s Forms W-2 for their employees may be in the hands of cybercriminals. This puts workers at risk for tax-related identity theft.

Because employees perceive that they are communicating with a company executive, it may take weeks for someone to realize a data theft has occurred. Generally, the criminals are trying to quickly take advantage of their theft, sometimes filing fraudulent tax returns within a day or two.

In order to avoid falling victim to these traps, employers must put steps and protocols in place for the sharing of sensitive employee information such as Forms W-2. For example, a business may require employees to receive verbal confirmation before emailing W-2 data and/or have two people within the organizations review any distribution of sensitive W-2 data or wire transfers. In addition, it is the responsibility of businesses to educate their workers about the telltale signs of phishing emails and how employees can protect themselves and the organization from cyber fraud.

The advisors and accountants with Berkowitz Pollack Brant work businesses to assess their cyber-security risks and implement strong internal controls to build trust and protect themselves against identity theft.

About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax and business consulting and compliance services, and financial planning expertise to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

 

IRS Sets Inflation Adjustments for 2019 by Tony Gutierrez, CPA

Posted on January 10, 2019 by Anthony Gutierrez

The IRS announced the annual inflation adjustments to various provisions of the tax code for 2019. You should consider each of these changes very carefully as you plan for tax efficiency this year and when you prepare your 2019 tax returns in 2020.

Tax Rates

The top tax rate of 37 percent applies to individual taxpayers whose income exceeds $510,300 in 2019, or $612,350 for married taxpayers filing joint returns. The other six tax rates break down as follows:

  • 35 percent for income over $204,100 ($408,200 for married couples filing jointly);
  • 32 percent for income over $160,725 ($321,450 for married couples filing jointly);
  • 24 percent for income over $84,200 ($168,400 for married couples filing jointly);
  • 22 percent for income over $39,475 ($78,950 for married couples filing jointly);
  • 12 percent for income over $9,700 ($19,400 for married couples filing jointly);
  • 10 percent for income of $9,700 or less ($19,400 for married couples filing jointly).

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax exemption amount for tax year 2019 increases to $71,700 for individuals and begins to phase out when taxpayer income reaches $510,300. For married couples filing joint returns, the AMT exemption rises to $111,700 and begins to phase when income reaches $1,020,600.

Deductions

The standard deduction available to all taxpayers increases slightly from the prior year to $12,200 for individuals and for those married filing separately, and $24,400 for married couples filing jointly. Taxpayers whose expenses exceed these amounts may opt instead to itemize their deductions for the year without being subject to income limitations which the Tax Cuts and Jobs Act (TCJA) eliminated in 2018. However, taxpayers should be mindful that the new tax law repeals and restricts many of the miscellaneous itemized deductions they may have enjoyed prior to 2018.

Estate and Gift Tax Exemptions

The maximum amount excludible from the taxable estate of a decedent in 2019 is $11.4 million in assets, up from $11.18 million for 2018. The maximum amount an individual may gift (other than gifts of future interests in property) to other persons in 2019 without incurring gift tax remains at $15,000. Married spouses, however, can continue to make an unlimited number of tax-free gifts to each other as long as both are U.S. citizens.

 Retirement Plan Contributions

For 2019, individual taxpayers may contribute up to $19,000 in annual salary deferrals to an employer-sponsored 401(k), 403(b) and most 457 plans, up from $18,500 in 2018. Catch-up contributions for retirement savers age 50 and older remains at $6,000.

The contribution limit to IRAs and Roth IRAs increases $500 from the prior year to $6,000, plus an additional $1,000 for savers age 50 and older. However, the IRS will increase the income eligibility thresholds for taxpayers to contribute to traditional IRAs and Roth IRAs.

Foreign Earned Income Exclusion

The foreign earned income exclusion for 2019 is $105,900, up from $103,900 for the prior tax year.

Health Care

Taxpayers may for the first time go without health insurance during any and all months of 2019 without being subject to an individual shared responsibility penalty.

The dollar amount that employees may contribute to health flexible savings accounts via salary deferrals rises $50 in 2019 to $2,700. In addition, Medical Savings Account plans with self-only coverage in 2019 must have an annual deductible that is not less than $2,350, but not more than $3,500. The maximum out-of-pocket expenses for self-only coverage increases to $4,650, or $8,550 for family coverage.

To learn more about how you may leverage these inflation adjustments and implement planning strategies to maximize savings while minimizing your tax liabilities in 2019, please contact the advisors and accountants with Berkowitz Pollack Brant.

About the Author: Tony Gutierrez, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he focuses on income and estate tax planning for high-net-worth individuals, family offices, and closely held businesses in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

Do I Qualify for a Child Tax Credit? by Nancy M. Valdes, CPA

Posted on January 08, 2019 by

Raising children is expensive. To help families offset some of their child-rearing costs, the U.S. tax code offers a tax credit for each child under the age of 17 who lives with a taxpaying parent or guardian for more than half of the year. Effective Jan. 1, 2018, more families qualify for the Child Tax Credit, which the new tax law doubled and made partially refundable.

The Tax Cuts and Jobs Act (TCJA) increased the Child Tax Credit in 2018 and 2019 to $2,000 per qualifying child who meets the following criteria:

  • He or she is a U.S. citizen or U.S. resident alien and 16 years old or younger on the last day of the tax year;
  • He or she is claimed as a dependent of the taxpayer’s federal income tax return and does not pay for more than half of his or her living expenses; and
  • He or she lived with the taxpayer for more than half of the tax year and is either the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of those family members.

Unlike a tax deduction that reduces the amount of income subject to tax, a tax credit provides taxpayers with a dollar-for-dollar reduction in the amount of money they owe to the IRS. In addition, because the Child Tax Credit is partially refundable, taxpayers who do not have tax liabilities after filing their federal income tax returns in April 2019 may receive a credit of up to $1,400 for each eligible child, depending on the taxpayers’ adjusted gross income (AGI) for the year. The refundable portion of the Child Tax Credit remains at $1,400 for tax-year 2019 and is set to be adjusted upward for inflation in subsequent years.

The TCJA also makes it easier for more families with young children to qualify for the full amount of the Child Tax Credit by lowering the income threshold to $2,500 per family while also increasing the income level at which the credit begins to phase out. For 2018, the Child Tax Credit begins to phase out when a taxpayer’s adjusted gross income (AGI) reaches $200,000, or $400,000 for married couples filing jointly. The credit completely disappears when a taxpayer’s income reaches $240,000, or $440,000 for married couples filing jointly.

Taxpayers who do not qualify to claim Child Tax Credits may be eligible to claim a new, $500 nonrefundable Credit for Other Dependents. Introduced by the TCJA, this family credit is available to taxpayers who provide support to a dependent over the age of 17, including aging parents or disabled adult family members.

 

About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with U.S. and foreign-based entrepreneurs and closely held businesses to manage cash flow, protect assets and maintain tax efficiency.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

Voluntary Disclosure of Previously Unreported Offshore Assets Just Got More Expensive by Andrew Leonard, CPA

Posted on January 04, 2019 by Andrew Leonard

Sept. 28, 2018, marked the end of the IRS’s Voluntary Offshore Disclosure Program (OVDP), which provided reticent taxpayers with protection from criminal prosecution and an opportunity to pay reduced penalties when they came forward to report and pay taxes on unreported foreign income and assets. As a result, the IRS has put into place new, more expensive processes and procedures for taxpayers to come clean with the caveat that amnesty from criminal investigations and civil penalties will now be assessed by the IRS on a case-by-case basis.

Background

U.S. tax law requires U.S. citizens, resident aliens, trusts, estates and domestic entities to annually report to the IRS information about any and all foreign bank and financial accounts (FBAR) with an aggregate value of more than $10,000 in which they have an ownership interest.

Taxpayers who unwillingly forget to file an FBAR by the April 15 federal income tax filing deadline have an opportunity to correct the mistake by filing amended or delinquent tax returns or availing themselves of the IRS’s Streamlined Compliance Filing Procedures. Conversely, those taxpayers who willingly fail to file an FBAR will be exposed to criminal prosecutions and significant penalties of up to $100,000 or half of the highest account balance during the unreported year.

Current Options for Voluntary Disclosure

Despite the elimination of the OVDP, taxpayers still have an opportunity to voluntarily disclose those assets that they willingly failed to report avoid criminal prosecution and potentially minimize fraud and FBAR penalties.

Under the IRS’s new framework, taxpayers wishing to make a voluntary disclosure must first submit a timely pre-clearance request to the agency’s criminal investigation unit (CI), which, in turn, will determine if the taxpayer is eligible for the program. If CI grants clearance, taxpayers must submit all required voluntary disclosure documents and a narrative describing the facts and circumstances of their previous noncompliance, including details about assets, entities and related parties involved in the failure to report.

CI examiners will then gather information and build a case to determine the appropriate tax liabilities and applicable penalties, much in the same way that the IRS will audit taxpayers’ prior year returns. It is important for taxpayers to recognize that this new investigation and resolution framework involves many

  • The IRS has the discretion to expand the scope of their investigation to taxpayer’s domestic assets and income.
  • The disclosure period will now require examinations of the taxpayer’s returns for the most recent six years
  • Fraud and FBAR penalties, which are now referred to as civil fraud penalties, will be applied to the one tax year over the six-year disclosure period in which the taxpayer would have incurred the highest tax liability. However, based on the facts and circumstances of each individual case, examiners have the ability to apply these penalties to each of the six years, or more when taxpayers do not cooperate with investigations.
  • Taxpayers retain the right to appeal the IRS’s findings after an examination, but they also carry the burden of proof to present convincing evidence to justify an appeal.

While there is little doubt that the new framework for voluntary disclosure will result in higher penalties, taxpayers should discuss this option with their tax advisors in order to avoid criminal prosecution and related penalties.

About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

Reconstructing Records Following a Disaster Event by Adam Cohen, CPA

Posted on January 03, 2019 by Adam Cohen

Taxpayers affected by disasters, such as fires, floods or hurricanes, may need to reconstruct their records to prove they suffered losses for tax purposes and to qualify for federal assistance and insurance reimbursement. Following are some resources to help individual obtain copies of documentation that they may have lost as a result of a disaster event.

Proof of Loss. Losses sustained in certain disaster situations may qualify for insurance reimbursement when an active policy is in place. Alternatively, taxpayers may qualify to deduct unreimbursed losses on their federal income tax returns. As soon as possible after a disaster strikes, taxpayers should take photographs and narrate a video recording the extent of the damages to their property.

In an ideal world, individuals will already have a cloud or digital back-up of receipts as well as a photographic and video inventory of all of the assets they own, from highly valued jewelry to common household appliances. Such digital documentation is critical for proving ownership and demonstrating the fair market value of property at the time of the loss. If taxpayers did not keep these records in a safe place, they may be able to find photographic evidence of the assets on their phones. Purchases taxpayers made by credit or debit card may be available online or by contacting their financial institutions directly.

Property Records. Taxpayers must demonstrate that they own property and provide some evidence of the property’s value before it sustained damage. When a loss involves a car, taxpayers can obtain the auto’s fair market value by going online and looking it up on Edmunds or Kelly’s Blue Book.

For real estate, taxpayers may contact the title company, escrow company or bank that handled the purchase of their home to get copies of appropriate documents. If the taxpayer received the property as a part of an inheritance, he or she can check court records for probate values or contact the attorney who handled the decedent’s estate. When no other records are available, taxpayers can check the county assessor’s office to find records that address the property’s value.

If taxpayers made improvements to their homes, which in turn improved the property’s value, they may contact the contractors they worked with in order to obtain statements verifying the cost of the work. As a last resort, taxpayers can request that their friends and relatives provide written statements describing the home before and after the improvements were made.

Prior Year Tax Returns

It is recommended that taxpayers hold onto their tax returns for a minimum of seven years since the IRS can go back six years to audit a return in which the agency presumes a taxpayer omitted income. However, there is no statute of limitations when the IRS proves that a taxpayer filed a fraudulent return.

While individuals can often receive copies of their most recently filed returns by contacting their tax accountants, a better option may be to visit the IRS website or call the agency at 800-908-9946 to can get free copies of their tax return transcripts.

About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.

 

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