PILLA TALKS TAXES - Featured Article
_________________________________________ 

END OF YEAR TAX PLANNING

9 Simple Steps That Can Cut Taxes and Pain

With the end of the year fast approaching, you’re probably wondering what you might do to cut your taxes. If you wait until April to start thinking about this, it’s just too late. Here are some ideas to get you moving in the right direction now. 

1. Pay state income taxes before December 31.

Many people wait until April 15 to pay their state income taxes, since that’s when they file their state tax returns. However, if you pay your state income taxes in 2018, you can’t claim the deduction for those taxes until you file your 2018 income tax return in 2019. Thus, you have to wait an entire year before getting the tax benefit of the expense. By paying your state taxes now, you get a deduction for those taxes in 2017, one year sooner than you’d otherwise realize. 

2. Review your wage withholding or estimated payments.

Eighty-five percent of all taxpayers get a tax refund when they file their tax returns. The average refund is about $3,000. If you get a tax refund, it doesn’t mean the government got religion and decided to give you free money. It means you paid more than you owe. If you got a refund in 2017, you need to examine your withholding situation going into 2018 to make sure you don’t overpay. 

Whether you’re an employee or a self-employed person, sit down now and do some preliminary calculations on your tax liability. Figure out if you’ve overpaid. If so, you need to adjust Form W-4 (for wage earners) or your estimated payments (for self-employed people). 

Keep in mind that no law requires you to pay more taxes than you owe. For withholding purposes, you avoid under-withholding penalties if you pay either 100 of last year’s tax (2016) or 90 percent of this year’s tax (2017), whichever is less. Use that yardstick to guide you in adjusting your withholding for 2018. 

3. Count your money now.

Each year, millions of people are blindsided come April 15 with surprise tax liabilities they can’t pay. Don’t wait until March or April to start figuring your tax, especially if 2017 was a particularly good year. 

It is important to sit down now and examine your 2017 financial situation. If there were substantial changes to your economic condition, that may increase your tax burden. If you don’t have the money to cover the tax, you’ll wind up as one of the millions facing enforced tax collection. 

Get a good handle on what you’re going to owe. If you figure it out now, you have four and a half months to put a plan together to pay the tax. If you don’t, you could be hit over the head in April. In my experience, it’s that kind of shock that causes people to start making critical mistakes in how they handle their tax burdens. Often, it leads to years of hassle and harassment from the IRS. 

4. Review your financial portfolio.

One of the biggest problems with our tax system is the unfair treatment it affords to investment gains and losses. If you win with your investment, the IRS stands next to you with its hand out to get its “share” of your success. If you lose, you are, for the most part, on your own. 

The reason is that capital gains are subject to tax in their entirety in the year realized. However, capital losses are subject to a $3,000 cap in a given year. For example, if you lose $15,000 in an investment, you can only deduct $3,000 at time. At that, it takes five years to fully write off your loss. 

This is true unless you have both capital gains and capital losses in the same year. In that case, you offset your gains against your losses, plus you can take an extra $3,000 of loss. Suppose you have $10,000 of capital gains and $12,000 of losses. The first $10,000 of losses are offset against the gains. Then, you get the additional $2,000 of losses as a deduction that can offset other income. 

In order to best utilize this rule, you should consider selling investments that are down in 2017 so that you can offset the loss against any investments that made money during 2017. This allows you to effectively increase the allowable capital loss deduction, thereby recovering your losses much faster than you otherwise would. Talk to your investment advisor about the merits of this strategy in your case. 

5. Consider making equipment purchases.

If you own a small business, now is the time to consider purchasing any equipment you might need. A special tax code section creates an advantage for such investments. 

Code §179 allows you to claim a full deduction for the cost of business tools and equipment placed in service in the year purchased. Ordinarily, such cost must be depreciated over its useful life. For example, if you purchase a copier for $5,000, you would have to depreciate it over three years. In that case, you get a deduction of $1,667 for each of three years. But under §179, you can fully expense up to $510,000 of equipment in 2017. 

Now is the time to take advantage of this deduction, especially if your income was unusually high in 2017. The best way to offset that income for tax purposes but still get the benefit of the money is buy equipment you need for your business. 

6. Fund a Health Savings Account.

One of the best-kept secrets in tax planning is the Health Savings Account. This allows you to set aside money earmarked to pay medical expenses not covered by insurance (other than the insurance policy itself). By placing the money in a specially designated savings account, the contribution to the account is tax deductible, up to certain limits. 

It works much like an IRA or 401(k), except that you don’t have to pay taxes on the money when it’s distributed, provided you use it for medical expenses that are not covered by insurance. You can fund this account right up to December 31, 2017, and get a deduction for the money you put in, even if it’s not used for medical expenses in 2017. What’s more, any amounts left in the account at the end of the year carryover to 2018 and remain in your account, under your control. You don’t lose the money. It’s always available to you. 

7. Fund a retirement account.

An IRA, 401(k) or other retirement account can be funded anytime during 2017, and you get a deduction for the contribution (within limits) in 2017. In fact, for most retirement accounts, you have up to April 15 of the following year to contribute. You can get a deduction for the prior year simply by designating the contribution to apply to the prior year. That means a contribution made in 2018 can still apply to and be deductible in 2017. 

8. Consider restructuring your business.

There are millions of people operating small businesses in the form of sole proprietorships. And while this is probably the best way to start a new business, it may not be the best way to continue an existing business. Various forms of business entities are available, including a small business corporation or partnership. Depending on the nature of your business and non-tax considerations, one or more of the available entities might be a better idea than continuing as a sole proprietorship. January 1 is generally the most convenient time to change the structure of an existing business.

 9. Catch up on your charitable contributions.

If you make it a practice to give generously, make another contribution before December 31. This gives you further opportunity to cut taxable income and help those in need at the same time. 

Note that you must have a contemporaneous acknowledgement from the donee organization for contributions of $250 or more. This applies to one-time contributions, not a total of contributions to a given organization over the year. If you don’t have the proper acknowledgement in hand by the time you file your tax return, the deduction is not allowed, even if you have your canceled check and even you get the statement later. That’s why they call it a “contemporaneous acknowledgement.”

 

How to Get More Help 

 

If you need more help with end-of-the-year tax planning, you must consult one of the professional members of my Tax Freedom Institute. Click Here for a list of the current consulting members.

 

This is  an article taken from November December 2017  issue of "Pilla Talks Taxes."  
Newsletter subscribers can read and download the entire issues by logging in at 
http://taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

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ARTICLES FOUND IN THIS

PILLA TALKS TAXES ISSUE:

 

TAX REFORM UPDATE
       Senate Passes the Tax Bill 

 

END OF YEAR TAX PLANNING
       9 Simple Steps That Can Cut Taxes and Pain

 

THE HOME OFFICE DEDUCTION
      Understanding the Basic Rules
-by MacKenzie C. Hesselroth,EA 

  

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

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PILLA TALKS TAXES - Featured Article
_________________________________________ 

TRAVEL, MEAL AND ENTERTAINMENT EXPENSES

How to Maximize Travel Expenses

Business travel has been a fact of life since dawn of civilization. Just as an example, for centuries, caravans brought silk, spices and trade goods from Asia across the Silk Road to the Middle East, where they eventually found their way to Italy. In turn, Italian mariners based chiefly in Genoa brought those goods to the world. While the business travel of the typical small business owner is not quite as exotic as traveling the Silk Road, it is just as necessary to the life of that business. 

Though your business travel might not be exotic, the IRS’s requirement to make and keep records is. That’s why so many business owners lose the benefit of their travel expenses when they are audited. But if you understand the rules, you’ll ensure that your legitimate business expenses are allowed as deductions. And by carefully planning your trips, you can get a legitimate business deduction for just about all your travel expenses. The key is to know in advance how to prove your case. 

The Rule for Deducting Business Travel 

Let’s carefully examine the rules for deducting business travel. 

There must be a business purpose for the trip. Code section 162(a)(2) allows a deduction for “traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.” The first rule is that your expenses must be related to the conduct of your business. You have to prove a direct link between the travel in question and the successful operation of your business. 

How do you accomplish this? Code section 274(a)(1)(A) provides guidance. This statute provides for a deduction when the trip was directly related to the “active conduct” of your trade or business. Travel to meet with existing or prospective customers, clients or patients is directly related to the active conduct of your business when your personal contact with these people is necessary to the success of your business. An example is traveling to a city to meet with a customer or supplier in his office expressly for the purpose of conducting existing business or attempting to establish new business that will have a positive economic impact on your operations. 

Section 274(d) adds an important substantiation requirement that must be observed. To meet the “active conduct” burden of proof, you have to establish through adequate records or by other evidence corroborating your own statement, the following items: 

·  The amount of each expense,

·  The time and place of the travel,

·   The business purpose of the expense, and

·   The business relationship to you of persons you met with during your travel. 

A log of your business travel should include all of these items. In describing the business relationship of the persons you met with, a simple statement showing the nature of your relationship and the purpose of your meeting is sufficient. For example, if you met with Mr. Jones of the ABC Company, who is a re-seller of the products you manufacture (or sell), a statement indicating that he is a prospective (or current) buyer of your products, meets this requirement. See chapter (TBA when book is out) for recordkeeping details and a sample log is included in the appendix to this manual. 

Your expenses cannot be lavish or extravagant. Whether a given expense is excessive is determined on a case-by-case basis. The IRS must look to the nature of your business, the type of clientele you deal with and the expectations of the market you’re in to determine this issue. What is lavish for one person may not be for another. 

For example, a high-end jewelry wholesaler may arrange meetings with retailers at posh hotels, may serve elaborate lunches or dinners to his prospects, and may incur high costs for security at his functions. Given the high cost of his products, this would not be considered lavish or extravagant. On the other hand, a clothing salesman who meets with prospective customers in their own stores could not likely justify the cost of a posh hotel setting. 

The expenses must be “reasonable and necessary” to the conduct of your business and the expenses must be “directly attributable” to your business. Treas. Reg. §1.162-2(a). 

Here you must show a direct link between the expense incurred and the conduct of your business. This includes travel expenses to and from the city in question, overnight lodging expenses, meals, entertainment expenses (discussed below) directly related to your business, and other costs incurred in carrying out your activities on the road. 

Treasury Regulation section 1.274-2(c)(3) lists four requirements that you must to show to make this connection. An expense is directly related to, or associated with, the active conduct of your business if: 

·        You had more than a general expectation of deriving income or some other specific trade or business benefit. Your expectations of business activity from the travel must be specific and tangible, not merely related to “good will” or other “blue sky” expectations. 

·        You actively engaged in a business meeting, negotiation, discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining income or some other specific business benefit. Merely hobnobbing with potential customers is not sufficient to meet this rule. You must have met with existing or prospective business associates in a business environment. This does not mean that you must have actually made a deal with prospective customers. 

·        In light of all the facts and circumstances of the case, the principle character of the meeting was the active conduct of your trade or business. It is not necessary that more time be devoted to business than to entertainment to meet this requirement. It is only necessary to prove that the overarching theme of the meeting was to carry out business. For example, suppose you travel to Los Angeles to meet with three customers who portend substantial sales for your business. You meet in a local hotel conference room for two hours, discuss your business affairs, then take the customers to a baseball game and dinner, where you spend a combined five hours. The fact that the meeting only lasted two hours does not change the character of the business meeting. The costs are deductible. 

·        The expenditures were for you and persons with whom you engaged in the active conduct of your trade or business. Expenditures attributable to a person not related to your business are not deductible. 

Business and personal travel may be mixed. Treasury Regulation section 1.162-2(b)(1) makes it clear that where personal and business travel are mixed, travel expenses may nevertheless be deducted “if the trip is related primarily” to your trade or business. Suppose you travel to New York City for the primary purpose of meeting with prospective clients. While there, you meet with college friends, go to dinner and a Broadway show. 

The fact that you engaged in personal activities while in New York does not change the character of the travel as being primarily for business. However, because the meeting with friends was purely personal in nature, you get no deduction for expenses attributable to that dinner and the show. Still, your travel expenses, hotel, cab fares, etc., are fully deductible since the primary purpose of the trip was business in nature. 

Even if your trip is not primarily business-related, expenses that “are properly allocable” to your trade or business are still deducted. Suppose you’re on the same trip to New York. But instead of a business purpose, you take the family there for a family reunion. While in New York, you set aside one day to meet with prospective clients. All costs incurred in connection with that activity, such as cab fares, meals or entertainment with the clients, are deductible. This is true even though your travel expenses to and from New York and your hotel costs are not.   

 

 

This is a portion of an article taken from September 2017  issue of "Pilla Talks Taxes."  
Newsletter subscribers can read and download the entire article by logging in at 
http://taxhelponline.com/subscriber-login.html

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

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ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:

 

TRAVEL, MEAL AND ENTERTAINMENT EXPENSES
      How to Maximize Travel Expenses

FILING A TIMELY CDP LIEN APPEAL
      Pay Attention to the Filing Address on Letter 3172

ID THEFT MARCHES ON
      Another Reason the IRS Can’t Stop the Crimes 

EQUIFAX DATA BREACH AFFECTS MILLIONS OF AMERICANS
      Here’s What You Can Do Now

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

HOW LONG DO I KEEP TAX RECORDS?

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

Looking for a specific issue or article? 
Single Issues available for download, $15.95 per issue.

Contact us to order. 1-800-553-6458

 

 

 

PILLA TALKS TAXES - Prior Featured Article
_________________________________________ 

AVOIDING PENALTIES UNDER OBAMACARE

 Exceptions and Exemptions to the "Individual Mandate"

by Daniel J Pilla  


Article originally found in Feb 2014 issue of Pilla Talks Taxes Newsletter*

 

As we all know by now, federal law requires all persons in the United States to maintain “minimum essential health care coverage” for themselves and their dependents beginning this year. See code §5000A. Failure to purchase such care will subject the individual to an annual penalty, which the statute refers to as a “shared responsibility payment.” Code §5000A(b). 

This provision of the Patient Protection and Affordable Care Act (Obamacare) is referred to as the “individual mandate” in that Congress has mandated that individual citizens purchase an insurance product that meets federal guidelines. Such a mandate is unprecedented in American law. There is no other example in U.S. history where the government required a person, as a matter of law, to purchase a specific product or service or risk civil penalties. 

The penalty is equal to the greater of:
     • $695 per person per year, up to a maximum of $2,085 per family, or

 

     • 2.5 percent of “household income.” Code §5000A(c). 

The percentage increase is phased-in over three years. Beginning in 2014, the percentage is 1 percent. Beginning in 2015, the percentage is 2 percent. For years after 2015, the percentage jumps to 2.5 percent. The gross applicable penalty is pro rated to apply on a monthly basis “for any month during which any failure” to have adequate coverage exists. Code §5000A(c)(2). The penalty amount must be computed by the taxpayer and reported on his tax return. 

In my Special Report I published on Obamacare, entitled “IMPLEMENTING NATIONAL HEALTH CARE: Taxpayers and IRS to be Challenged as Never Before,” (PTT, July 2012), I discussed this penalty and explained that the law contains both “exceptions” and “exemptions” to the penalty. Now that the IRS has issued regulations on this element of the law, it is time to elaborate on the “exceptions” and “exemptions” that allow one to avoid the penalty. Let’s us discuss each of them individually. 

1. Religious conscience exemption – §5000A(d)(2)(A). This provision holds that any member of a recognized religious group that has historically been exempt from Social Security taxes may also be exempt under Obamacare. Tax code §1402(g)(1) defines who is exempt for purposes of Social Security taxes and that definition applies to the penalty under Obamacare. 

Code §1402(g)(1) provides that a person can be exempted from Social Security taxes if he: 

a. Is a member of a recognized religious sect or organization, 

b. Is an adherent to the established tenets, teachings or beliefs of that sect or organization, and 

c. By reason of those beliefs, he is conscientiously opposed to accepting benefits under any private or public insurance policy that would make payments in the event of death, disability, old-age or retirement or makes payments toward the cost of, or provides services for, medical care. 

The exemption is honored only if it is established that the organization to which the person belongs actually has established teachings or tenets regarding the provision of insurance, that the organization has a long standing practice of providing for the needs of their members, and that the religious organization has been in existence at all times since December 31, 1950. Code §1402(g)(1)(C)-(E). 

To establish this exemption, you must provide a certification to the health care Exchange that proves you meet all of the above elements. See: Rev. Reg. §1.5000A-3(a)(2). The Exchange is then required to issue the certificate of exemption. For more on the Exchanges, see my report, “IMPLEMENTING NATIONAL HEALTH CARE.” 

A family with minor children that meets the requirements for exemption may also exempt their minor children. However, once a child turns age twenty-one, to maintain the religious conscience exemption, the child must reapply for the exemption and attest to membership individually. See: Treasury Decision 9632, §III.A.

 

2. Persons involved in a “health care sharing ministry” – §5000A(d)(2)(B). A health care sharing ministry (HCSM) provides a health care cost sharing arrangement among persons of similar and sincerely held beliefs. An HCSM is founded on the Biblical mandate of believers to share each other’s needs. The goal is to share the health care needs of others in order to meet the rising costs of health care. 

HCSMs are non-profit religious organizations acting as a clearinghouse for those who have medical expenses and those who wish to share the burden of those medical expenses. HCSMs receive no funding or grants from government sources. HCSMs are not insurance companies. HCSM do not assume any risk or guarantee the payment of any medical bill. Twenty-five states have explicitly recognized this structure and specifically exempt HCSMs from their insurance codes. According to the Alliance of Health Care Sharing Ministries, there are now over 210,000 people participating in these ministries in all fifty states.
Examples: See  www.healthcaresharing.org   or  Medi-Share    

Section 5000A(d)(2)(B)(ii) provides that an HCSM: 

a. Must be an established 501(c)(3) tax-exempt organization,  

b. Members must share a common set of “ethical or religious beliefs” and “share medical expenses among members” in accordance with those beliefs and without regard to where the member lives or works, 

c. Must have been in existence since at least December 31, 1999, 

d. The medical expenses of its members must have been shared “continuously and without interruption” since December 31, 1999, and 

e. Must undergo an annual audit by “an independent public accounting firm” and the results of the audit must be “made available to the public upon request.” 

The regulations require that a person establish his eligibility for the exemption on a monthly basis. That is, this appears not to be an annual exemption, but must be verified “for every month of that taxable year for which they seek exemption.” See: Treasury Decision 9632, §III.B; Rev. Reg. §5000A-3(b)(2).  

It seems that the IRS has put provisions in place to make the process for achieving exemption under this provision as arduous as possible. 

3. Persons not lawfully present in the United States – §5000A(d)(3). A person who does not have lawful immigration status is not obligated to have health insurance under the law. A person falls under this exemption if he either is: a) a nonresident alien, or b) is not lawfully present in the U.S. See: Rev. Reg. §1.5000A-3(c)(2). Thus, all the illegal aliens currently in the country have no duty under the law to have insurance. But how do they claim the exemption? The regulations provide no mechanism for doing so. I suppose they will do so that the same way they currently file their tax returns: not at all. Further IRS guidance will be issued on the topic in the future. 

4. Persons who are incarcerated – §5000A(d)(4). This section provides that an individual is exempt for a month when the individual is incarcerated (other than incarceration pending the disposition of charges). The regulations provide that an individual confined for at least one day in a jail, prison, or similar penal institution or correctional facility after the disposition of charges is exempt for the month that includes the day of confinement. 

5. Those who cannot afford coverage – §5000A(e)(1). The law exempts those who cannot afford minimum essential coverage. The exemption applies only on a month-to-month basis. That is, if a person cannot afford coverage for two of twelve months, his exemption applies only to those two months. 

Insurance is considered unafforable if the premium exceeds 8 percent of “household income.” Rev. Reg. §1.5000A-3(e)(2). This amount is indexed for inflation so is likely to increase annually after 2014. The amount of increase is determined by the Department of Health and Human Services based upon a ratio between income growth and insurance costs. 

In determining the “household income” for purposes of the 8 percent cap, you are required to include in your income any amounts withheld under a salary reduction agreement, or cafeteria plan provided by an employer. While these benefits are considered not taxable for federal income tax purposes, they are included in the calculation of “household income” for purposes of determining whether your insurance coverage is “affordable.” 

What is “household income?” The phrase “household income” is defined by Rev. Reg. §1.36B-1(e)(1). Generally, the phrase means the sum of: 

a. The taxpayer’s modified adjusted gross income (discussed below); plus 

b. The aggregate modified adjusted gross income of all other individuals who— 

1. Are included in the taxpayer’s family (as discussed below), and 

2. Are required by law to file a federal income tax return under code §6012. Generally, the requirement to file a tax return is tripped by the receipt of income in excess of the filing requirements expressed in §6012. 

 Now we have to define “modified adjusted gross income.” That phrase is held to constitute adjusted gross income plus: 

            a. Tax exempt interest the taxpayer “receives or accrues” during the tax year, 

            b. Any foreign earned income that otherwise would be excluded under code §911, and 

            c. Social Security benefits that were not otherwise includable in income under code §86. 

Finally, we have to define “family” for purposes of this discussion. The term “family” is defined in Rev. Reg. §1.36B-1(d) as follows: 

A taxpayer’s family means the individuals for whom a taxpayer properly claims a deduction for a personal exemption under section 151 for the taxable year. Family size means the number of individuals in the family. Family and family size may include individuals who are not subject to or are exempt from the penalty under section 5000A for failing to maintain minimum essential coverage. 

Thus, “household income” includes not only the taxpayer’s wage or business income, but it includes his tax-exempt interest, non-taxable Social Security benefits and non-taxable foreign earned income, plus all of the same income items of every person in his household for whom he claims a dependent exemption. That can include all children up to 24 years of age or a disabled child of any age, any relative that lives with you such as a parent or grandparent, brother, sister, etc., provided they qualify as your dependent exemption on your tax return. 

The 8 percent premium cap is figured on the basis of this “household income.” In many cases, it will be substantially more than the income reported on your tax return for the period in question. My question is who made the decision that the income of other persons is available to you to pay medical expenses? The 8 percent cap is based upon all the income of the household while it is probably the case that the income of third parties is just not available to cover medical bills. For example, if your seventeen year old son makes $4,800, that will raise your “household income.” However, none of his money is available to you because he spent it all on his car and girlfriend. 

6. Those with incomes below the tax return filing requirement – §5000A(e)(2). This section provides that a person is exempt if his “household income” for the year is less than the return filing requirement under code §6012(a). The problem here is that the filing thresholds under §6012 have nothing to do with “household income.” The filing thresholds are based solely (as they most certainly should be) on individual income, since the liability for return filing and tax payment is based solely on one’s individual income. 

Even in the case of a husband and wife, the requirement to file a tax return (assuming both had income) is an individual responsibility. Married couples have the option to file a joint income tax return, but that is a voluntary election that must be made by both spouses on the return itself. Only then can one spouse be held liable for the tax owed by the other spouse. Under no circumstances can the IRS force a married couple to file a joint income tax return. 

The regulations shed no light on how this discrepancy is to be reconciled. Rev. Reg. §1.5000A-3(f)(2)(ii) simply states: 

The applicable filing threshold for an individual who is properly claimed as a dependent by another taxpayer is equal to the other taxpayer’s applicable filing threshold. 

I’m sorry to say I don’t know what that means. As near as I can tell, the determination of a filing requirement is based upon the income of all family members, added together, then applied to the code §6012 threshold amounts. Thus, a person may not have a filing requirement based solely on his personal income. But he may have a “filing requirement” when his “household income” is calculated. And while that “household income” may not then actually trip a tax return filing requirement, it would kick that person out of the exemption provision of this section. Anyway, that’s my guess. God help us. 

7. Members of an Indian tribe – sec 5000A(e)(3). Any person who is a member of an Indian tribe is exempt during the period of his membership.     

8. Those with “short coverage gaps” – sec 5000A(e)(4). A “short coverage gap” is defined as: 

…a continuous period of less than three months in which the individual is not covered under minimum essential coverage. If the individual does not have minimum essential coverage for a continuous period of three or more months, none of the months included in the continuous period are treated as included in a short coverage gap. Rev. Reg. §1.5000A-3(j)(2)(i). 

Thus, your coverage gap must be less than three months during the year. There is no partial exemption if your coverage gap exceeds two months. Moreover, the coverage gap “is determined without regard to a calendar year in which months included in that gap occur.” Rev. Reg. §1.5000A-3(j)(2)(iii). Thus, if you have a coverage cap in December of 2014 and January – February of 2015, you have three months of gap in coverage and may be subject to the penalty. 

9. Those with a hardship waiver – §5000A(e)(5). A “hardship” waiver certificate is issued by the Exchange to the individual and certifies that the person “has suffered a hardship affecting the capability to obtain minimum essential coverage.” Rev. Reg. §1.5000A-3(h)(2). The term “hardship” for this purpose is not defined in the Internal Revenue Code. Rather, it’s in the heath care regulations, at 45 CFR §155.605(g). 

The application for a hardship waiver must be made to the Exchange based upon the forms and procedures offered by the Exchange. The hardship waiver applies if the Exchange determines that the individual: 

a. Experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he had a significant, unexpected increase in essential expenses that prevented purchasing coverage under a qualified health plan, 

b. Would have experienced serious deprivation of food, shelter, clothing or other necessities due to the expense of purchasing a qualified health plan, or 

c. Experienced other circumstances that prevented purchasing coverage under a qualified health plan. 45 CFR §155.105(g)(1)(i) - (iii).

 The hardship waiver is determined by the Exchange based upon the individual’s “projected annual household income.” Moreover, the individual’s eligibility for an employer-sponsored plan is also considered. Ibid, at §(g)(2). 

As discussed in more detail in the following article, there have been many delays in implementing and enforcing Obamacare. Both the employer mandate and individual mandates have been pushed back. Thus, the penalties are not currently being enforced. Because this issue continues to be in a state of massive flux, I will stay on top of it as necessary.

 

-------------------------------------------------------------------------------------------------

 March 2017 Update:

            Link to Affrodable Care Act Instructions for  Form 8965 (2016)  

Article taken from February 2014 T  issue of "Pilla Talks Taxes."  

*Portions modified  March 2017

      

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PILLA TALKS TAXES - Featured Article
_________________________________________ 

HOW LONG MUST YOU KEEP YOUR TAX RECORDS?

or - "When Can I Clean Out My Garage?

Most people believe that the IRS can chase you until your dead. That is to say, if you owe money, they can go after you forever. And with regard to an audit, you can be examined at any time for any year. Neither belief is true. The IRS is governed by a statute of limitations in all its actions, including the power to audit a return. Understanding this statute of limitations in the contexts of tax audits tells us how long you must keep your records for a particular tax year. 

According to code section 6501, the IRS must make a tax assessment within three years of the date the return is filed. The IRS is generally precluded from examining a tax return after three years from the date of filing. For example, suppose you filed your 2011 return on time on April 15, 2012. The IRS had until April 15, 2015, to examine it and make an assessment of additional taxes. After April 15, 2012, the 2011 return is considered a “closed year.” It can be examined only under especially extenuating circumstances, addressed below. 

What Starts the Clock? 

First I examine important rules that apply when determining the starting point of the three-year limitations period. 

1. The return must be complete. The return must disclose gross income, deductions and taxable income in such a manner as to enable the IRS to determine its correctness. A return that does not disclose information from which a tax can be computed is not a return. That does not mean the return must be perfect, if that is even possible. The return need only evidence an honest and genuine attempt to comply with the law. Inadvertent omissions or inaccuracies do not suspend the statute of limitations. 

2. Returns filed early. Code section 6501(b)(1) provides that returns filed before the April 15 filing deadline do not trigger the three-year period on the date filed. Rather, the limitations period begins to run on the due date of the return. So for example, if you filed your 2010 return on January 31, 2011, the statute of limitations began to tick on April 15, 2011.

 3. Returns filed late. Conversely, for late-filed returns, the statute of limitations starts on date the IRS receives the return. Thus, if the IRS received your 2010 return on July 15, 2011 (without a valid filing extension), the statute of limitations expires on July 15, 2014.

 

Exceptions to the General Three-year Period

Let’s now turn our attention to the various exceptions to the general three-year limitations period. In some circumstances, the period is merely extended. In other situations, the period of limitations is suspended. 

    This section of this article is found in the August issue of Pilla Talks Taxes.  There are eight exceptions discussed in detail.

 Win Tax Audit 400px
     

 


    More information on audits can be found in Dan's book "How to Win Your Tax Audit".   

 

 

 

 

 

So, What’s the Answer?! 

 

After this discussion, you might find yourself saying, “okay, fine. I still don’t know how long I need to keep my records.” The short answer is that given the three-year and six-year rules discussed above, I recommend keeping your records for six years from the date your return is filed, or seven calendar years from the year in question. Thus, your records for tax year 2010 can probably be destroyed after December 31, 2017. 

That said, you need to keep in mind the exceptions discussed above, most notably, the exception for carrybacks. A given year will remain open longer because of carrybacks that might otherwise be the case. 

In addition, I recommend you keep a signed copy of your Form 1040 along with proof of mailing or e-filing indefinitely. Remember that the IRS can audit a tax year at any time if you return was filed. If challenged by the IRS, you would have to prove you filed a return, thus starting the clock on the application statute of limitations. 

 

This is a portion of an article taken from August 2017  issue of "Pilla Talks Taxes."  
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ARTICLES FOUND IN THIS 

PILLA TALKS TAXES ISSUE:

 

THE IRS's FUTURE STATE PLAN
     "Get Out of the Business of Talking with Taxpayers"

HOW LONG MUST YOU KEEP TAX RECORDS?
     OR - "When Can I Clean Out my Garage?

 

 

 

Missed a prior featured article?

Here are links to some of the favorites:

FIVE THINGS EVERY CITIZEN
NEEDS TO KNOW ABOUT IRS CONTACTS

 

LEVY OF SOCIAL SECURITY BENEFITS

 

CHANGE IN POLICY ON
ENFORCEMENT OF STRUCTURING LAW

Laws Pertaining to Moving Your Money
from Account to Account

 

WHAT EVERY CITIZEN NEEDS TO KNOW 
ABOUT RETIREMENT FUND DISTRIBUTIONS

The Tax Consequences of Taking Your 401(k) or IRA  

 

"I'M FROM THE IRS... -And You're Going to Jail!"

 

PASSPORTS AND THE IRS
  They Have More in Common Than You Might Think

 

AVOIDING PENALTIES UNDER OBAMACARE

 



MASTER INDEX OF PILLA TALKS TAXES

RESEARCH REPORTS, ARTICLES

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PILLA TALKS TAXES - Featured Article
_________________________________________ 

FIVE THINGS EVERY CITIZEN NEEDS TO KNOW ABOUT IRS CONTACTS

 Simple Signs That You May be Targeted by Scammers 

It is for your defense and protection that I offer the Five Things Every Citizen Needs to Know About IRS Contacts. If you know and understand these five rules about how the IRS deals with the public, you will never be victimized by a phone call, e-mail or text message scam. Pay close attention to what I say here. 

In its interactions with the public, the IRS will NEVER  

1. Use e-mail or text messages for any reason. This is true whether the IRS is gathering needed information to process your return, to notify you of a tax audit, or to follow through with the collection of a delinquent tax. Even in cases where you have an ongoing relationship with a given IRS official, such as occurs in tax audit cases that might take many months to resolve, they will not do business through e-mail or text messages. The IRS will allow you to fax information to them (in which case a fax number will be provided either in writing or verbally from the agent personally) but the IRS will not interact through e-mails and text messages. If you think you owe the IRS money but are not sure, obtain your IRS transcripts directly from the agency. You can call the IRS’s Automated Collection Service directly at 800-829-1040 to do so, or consult counsel who can do so. That way, you’ll know precisely what you owe, if anything, and for which years. 

2. Call a person in the first instance while in the act of collecting taxes. In most cases, the calls made by scammers purporting to collect taxes are the first form of contact or notice that a person allegedly owes taxes. This will NEVER happen. If the IRS decides that you owe taxes without first conducting an audit (which is very possible and happens often), the agency will notify you in writing in the form of some kind of correction notice. See: The IRS Problem Solver. You have the right to respond and object to any such notice. If you are engaged in an audit, the case must be finalized before theres any assessment of tax liability. In that situation, you will discuss the matter with the auditor and potentially his manager and even an Appeals Officer if you decide to challenge the preliminary decision. See: How to Win Your Tax Audit. All of this happens well before any demand for payment is ever made. It is possible to deal with a tax collector, known as a Revenue Officer, via the phone. But even in that situation, such phone contact occurs only after a series of written notices and letters have been sent. Any letter sent by a Revenue Officer will give you his name and contact information, including a fax phone number. And the Revenue Officer will be based in a local IRS office, not some place in Washington because “the case was transferred.” In NO CASE will you be contacted by phone in the first instance by an actual IRS employee demanding payment in forceful and intimidating terms. 

3. Threaten to file a lawsuit if taxes arent paid today. If you have been delinquent on your taxes for more than a decade, AND if you have failed to respond to all the IRSs collection notices, AND if youve been working with specific tax collectors for years but have failed to pay, make arrangements to pay, or otherwise manage your tax delinquency, AND you have substantial equity in assets, it is POSSIBLE (though not LIKELY) that the IRS will sue you to obtain a judgment. This is a so-called section 7403 action, which I discuss in my book, TaxpayersDefense Manual. In such a suit, the IRS seeks to reduce its assessment to a judgment and then execute that judgment against your property. Chiefly, the IRS uses this tool to reach the equity in your personal residence because the agency is not allowed to seize your main home through administrative collection action. See: How to Get Tax Amnesty for my discussion of all assets and income that are exempt from IRS levy. Having said that, the IRS will NEVER call you on the phone (especially in the first instance; see point 2 above) to threaten a lawsuit. Even in cases where you have done one or more of the things I list in the first sentence of this paragraph, the IRS will NEVER call you to say that unless you pay x amount today, they will file a suit. Such discussions may possibly (but not likely) come up in your conversations with the Revenue Officer, but again, this will NEVER come in the form of a phone call from somebody youve never had contact with in the past. 

4. Demand that taxes be paid in a certain way. Even if you do owe taxes, and even if you are dealing with a Revenue Officer, and even if youve been interacting with that officer for some time, the IRS will NEVER demand that you pay taxes in a certain manner or by using a specific procedure—and most certainly will not take payment in the form of gift cards or PayPal credits! Moreover, the IRS will NEVER ask for debit or credit card numbers over the phone. For example, the IRS will not state that you must pay by debit card or wire transfer, and then ask you for the debit card number. You have the right to pay your taxes in any manner that you want, and at any IRS office thats convenient to you, including using the IRSs electronic payment system (EFTPS) on its web site. A sure sign of an absolute scam is a demand that you go to your bank “right now” to wire-transfer money, or to purchase a gift card. In fact, the IRS cant even take a payment via credit or debit card over the phone. To make a payment in such a fashion, you must go online to the agencys EFTPS system. Even in the case of a Direct Debit Installment Agreement (where the money is taken in monthly payments automatically from your bank account), this must be set up either with a Revenue Officer, Appeals settlement officer (through a Collection Due Process appeal), or the IRSs ACS toll-free phone numbers. The very fact that youre being asked to pay in a certain way right now—today—over the phone—is absolute proof of a scam. 

5. Threaten to arrest you if dont pay taxes today. People are naturally frightened by the IRS and are quite frightened by the idea of going to jail. And while it is certainly true that some people will end up in jail over their dealings with the IRS, the fact is, you have a better chance of being eaten by a shark than you do of going to jail for a tax crime. Thats why I have an entire chapter in my book, How to Get Tax Amnesty, entitled, “Am I Going to Jail?” In that chapter I make it perfectly clear exactly what kind of person runs the risk of going to jail and why. And even if you fit the profile described there of a person at risk of going to jail, the IRS will NEVER call you on the phone (especially in the first instance) and tell you that if you do not pay a certain amount of taxes right now, using a certain method of payment (see paragraphs 2 and 4 above), they will send a sheriff or the police out to arrest you immediately. If you are targeted for a criminal investigation, the IRS will contact you in person, in the form of a visit from two (not one) Special Agents. These are the IRSs criminal investigators. They will read you your “Miranda” rights, explaining that you have the right to counsel and that anything you say will be used against you. That is absolutely not going to happen over the phone. 

 

Keep these five rules in mind, and you will never be robbed by IRS impersonators. 

Article taken from February 2017 THE TAX SCAM Special Report  issue of "Pilla Talks Taxes."

      

LOOKING TO STAY CURRENT ON THE LATEST TAX CHANGES?

Dan Pilla' monthly newsletter, Pilla Talks Taxes, features news stories and developments in federal taxes that effect your pocket book. Each information packed issue shows you how to use little known strategies to cut your taxes, protect yourself from the IRS, exercise important taxpayers' rights and keeps you up to date on the latest trends in Washington on the important subjects of taxes and your rights. You can't afford to miss a single issue!

An email address is needed to recieve this newsletter.  MORE INFO

10 issues per year. $99.00 per yr Order Now!

ARTICLES FOUND IN THE
February 2017 PILLA TALKS TAXES ISSUE: 

 

SPECIAL REPORT: THE TAX SCAM ISSUE 

 

IRS RELEASES NEW FORM FOR ID THEFT VICTIMS

Procedure May Help Clean Up the Mess

 

TAX PROS TARGETED BY E-MAIL SCHEMES

The Latest Wave of Cyber-theft Pointed at Accountants and Tax Preparers

 

IDENTIFYING CURRENT TAX SCAMS

Summary of the Most Recent Schemes Afoot

 

FIVE THINGS EVERY CITIZEN NEEDS TO KNOW ABOUT IRS CONTACTS

Simple Signs That You May be Targeted by Scammers

 

 

 

 

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