Immigrants and Tax Return Filing

On November 20, 2014 President Obama announced an executive action on immigration which could extend relief from deportation to an estimated 5 million undocumented immigrants.

 

The administration has not said which documents it will accept, however, we believe that the Citizenship and Immigration Services which vets applications under Homeland Security may require 5 years of accurately prepared tax returns as additional proof of residence if applicants claim to have worked in the United States since their arrival.

 

 

Those who have filed accurate tax returns with their Individual Tax Identification Numbers (ITIN) and have retained their records will be light years ahead of those who have not. We recommend that you and your tax preparers get ready to answer tax questions for those applying for this new program.

Make sure you have tax preparation software setup for at least the past 5 years.

  1. Understand what documentation your clients need for a W-7
  2. Paystubs
  3. W-2s
  4. 1099 Miscellaneous forms
  5. Paid baby sitter receipts
  6. Traffic tickets
  7. Receipt books
  8. Expense receipts
  9. Amending prior year returns (filing status, dependents, earnings, etc.)
  10. Searching the Internet may help find documentation

House Passes $42 Billion Plan to Revive U.S. Tax Breaks for 2014

The House of Representatives voted to revive dozens of lapsed U.S. tax breaks for this year and set them to expire again on Dec. 31.

The 378-46 vote today would provide $42 billion in temporary relief to taxpayers, including companies that rely on the research tax credit and the production tax credit for wind energy. It provides no certainty for 2015, though lawmakers said the one-year extension was the best available option after a broader deal collapsed.

“This is a short-term fix when Congress needs to work toward a long-term solution,” second-ranking House Democrat Steny Hoyer of Maryland said during floor debate. Hoyer said he was voting for the measure although “it isn’t what I hoped for.”

The bill now heads to the Senate, where Finance Committee Chairman Ron Wyden has complained that it excludes tax breaks for the health care of laid-off workers and the purchase of plug-in electric motorcycles. Wyden also would prefer a bill that would continue breaks through 2015.

Lindsey Held, a spokeswoman for Wyden, said Republicans rejected a “reasonable, balanced” proposal Nov. 30.

Wyden ’Disappointed’
“We are disappointed that at this point there doesn’t appear to be a procedural path forward,” she said.

President Barack Obama said today that the administration is open to a short-term extension. He hasn’t said whether he would sign the House bill.

The tax breaks, which ended Dec. 31, 2013, aid businesses and individuals. Corporations including Citigroup Inc. and General Electric Co. would benefit from the ability to defer U.S. taxes on overseas financing income. Companies making capital purchases would have faster writeoffs.

Individuals who sold their homes for less than what they owed would be able to exclude the forgiven debt from income.

Abandoned Deal
The House vote came about a week after lawmakers abandoned efforts to reach a larger deal on reviving tax breaks that would have exceeded $400 billion over a decade.

That bipartisan plan, which was being negotiated by Senate Majority Leader Harry Reid and House Ways and Means Chairman Dave Camp, would have locked in some benefits including the research tax credit by removing their expiration dates.

Most of the other breaks would have been extended through 2015.

The talks fell apart when Democrats, including Obama and Treasury Secretary Jacob J. Lew, objected to the lawmakers’ plan not to revive an extension of tax credits for low-income and middle-income families.

Obama threatened to veto the emerging proposal.

The tax-break bill, H.R. 5771, will be combined with a Senate bill, H.R. 647, to create tax-advantaged accounts for disabled people.

Such accounts “will give those individuals a chance to realize their hopes and their dreams, to be able to be part of the American dream,” said Representative Ander Crenshaw, a Florida Republican, during floor debate.

2014 Tax Provisions for Individuals: A Review

From tax credits and educational expenses to the AMT, many of the tax changes affecting individuals for 2014 were related to the signing of the American Taxpayer Relief Act (ATRA) in 2013–tax provisions that were modified, made permanent, or extended. With that in mind, here’s what individuals and families need to know about tax provisions for 2014.

Personal Exemptions
The personal and dependent exemption for tax year 2014 is $3,950.

Standard Deductions
The standard deduction for married couples filing a joint return in 2014 is $12,400. For singles and married individuals filing separately, it is $6,200, and for heads of household the deduction is $9,100.

The additional standard deduction for blind people and senior citizens in 2014 is $1,200 for married individuals and $1,550 for singles and heads of household.

Income Tax Rates
In 2014 the top tax rate of 39.6 percent affects individuals whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return). Marginal tax rates for 2014–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.

 

Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $73,800 for a married couple filing a joint return.

Estate and Gift Taxes
In 2014 there is an exemption of $5.34 million per individual for estate, gift and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $14,000.

Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT.

For 2014, exemption amounts are $52,800 for single and head of household filers, $82,100 for married people filing jointly and for qualifying widows or widowers, and $41,700 for married people filing separately.

Marriage Penalty Relief
The basic standard deduction for a married couple filing jointly in 2014 is $12,400.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA (indexed for inflation) and affect taxpayers with income at or above $254,200 (single filers) and $305,050 for married filing jointly in tax year 2014.

Flexible Spending Accounts (FSA)
Flexible Spending Accounts are limited to $2,500 per year in 2014 and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.

Long Term Capital Gains
In 2014 taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is at or above $406,750 ($457,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.

Getting Married Can Affect Your Premium Tax Credit

The IRS reminds newlyweds to add a health insurance review to their to-do list. This is particularly important if you receive premium assistance through advance payments of the premium tax credit through a Health Insurance Marketplace.

If you, your spouse or a dependent gets health insurance coverage through the Marketplace, you need to let the Marketplace know you got married. Informing the Marketplace about changes in circumstances, such as marriage or divorce, allows the Marketplace to help make sure you have the right coverage for you and your family and adjust the amount of advance credit payments that the government sends to your health insurer.

Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing out on monthly premium assistance that you deserve. You should also check whether getting married affects your, your spouse’s, or your dependents’ eligibility for coverage through your employer or your spouse’s employer, because that will affect your eligibility for the premium tax credit.

Other changes in circumstances that you should report to the Marketplace include:

  • the birth or adoption of a child,
  • divorce,
  • getting or losing a job,
  • moving to a new address, gaining or losing eligibility for employer or government sponsored health care coverage, and
  • any other changes that might affect family composition, family size, income or your enrollment.

In addition, certain life events – like marriage – give you and your spouse the opportunity to sign up for health care during a special enrollment period. That means that if one or both of you is uninsured, you may be able to get coverage now.  In most cases, the special enrollment period for Marketplace coverage is open for 60 days from the date of the life event.

5 Social Security changes coming in 2015

Social Security recipients will receive 1.7 percent bigger checks in 2015, the Social Security Administration announced last week. And some groups of workers will begin receiving benefit statements in the mail with a list of taxes paid and an estimate of their future retirement benefit. Here’s a look at the new Social Security benefits, taxes and services workers and retirees will experience in 2015:

Bigger payments. The 1.7 percent cost-of-living adjustment is expected to result in the typical retiree getting about $22 more per month. This change will increase the average monthly benefit for retired workers in January 2015 from $1,306 before the cost-of-living adjustment to $1,328 after. The average benefit for retired couples who are both receiving benefits is projected to increase by $36 to $2,176 per month.

Social Security payments are automatically adjusted each year to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Previous cost-of-living adjustments have ranged from zero in 2010 and 2011 to 14.3 percent in 1980. The 1.7 percent increase retirees will receive in January is similar to the 1.5 percent adjustment for 2014 and 1.7 percent increase in 2013.

Higher tax cap. Most workers pay 6.2 percent of every paycheck into the Social Security system until their earnings exceed the tax cap. The maximum taxable earnings will increase next year from $117,000 in 2014 to $118,500 in 2015. About 10 million of the 168 million workers who pay into Social Security are expected to face higher taxes as a result of this change. People who earn more than the taxable maximum do not pay Social Security taxes on that amount or have those earnings factored into their future Social Security payments.

Larger earnings limits. Social Security beneficiaries who are under age 66 can earn as much as $15,720 in 2015, before $1 in benefits will be withheld for every $2 earned above the limit. Retirees who will turn 66 in 2015 and have signed up for Social Security can earn up to $41,880 before every $3 earned above the limit will result in one benefit dollar being withheld. However, once a retiree turns age 66 there is no limit on earnings and Social Security payments are recalculated to give the retiree credit for the withheld benefits.

Your statement might be in the mail. If you will turn age 25, 30, 35, 40, 45, 50, 55 or 60 next year and don’t have a Social Security online account, you can expect to receive a paper Social Security statement that lists your earnings history, taxes paid and expected benefit about 3 months before your birthday. And after age 60 workers will receive a statement annually. The SSA expects to send nearly 48 million Social Security statements each year. These mailings, which were sent annually to all workers age 25 and older between 1999 and 2011, were suspended in April 2011 to save money. Statements are also available online at any time via socialsecurity.gov/myaccount, and 14 million people have created personalized accounts using this service.

The maximum benefit increases. The maximum possible Social Security payment for a worker who signs up at full retirement age will be $2,663 per month in 2015, up $21 from $2,642 in 2014.

Residential Energy Efficient Property Credits

The Residential Energy Efficient Property Credit is available to individual taxpayers to help pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and residential wind turbines. In addition, taxpayers are allowed to take the credit against the alternative minimum tax (AMT), subject to certain limitations.

Qualifying equipment must have been installed on or in connection with your home located in the United States.

Geothermal pumps, solar energy systems, and residential wind turbines can be installed in both principal residences and second homes (existing homes and new construction), but not rentals. Fuel cell property qualifies for the tax credit only when it is installed in your principal residence (new construction or existing home). Rentals and second homes do not qualify.

The tax credit is 30 percent of the cost of the qualified property, with no cap on the amount of credit available, except for fuel cell property.

Generally, labor costs can be included when figuring the credit. Any unused portions of this credit can be carried forward. Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

What’s included in this tax credit?

    • Geothermal Heat Pumps. Must meet the requirements of the ENERGY STAR program that are in effect at the time of the expenditure.
    • Small Residential Wind Turbines. Must have a nameplate capacity of no more than 100 kilowatts (kW).
    • Solar Water Heaters. At least half of the energy generated by the “qualifying property” must come from the sun. The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. Photovoltaic systems must provide electricity for the residence and must meet applicable fire and electrical code requirement.

 

  • Solar Panels (Photovoltaic Systems). Photovoltaic systems must provide electricity for the residence and must meet applicable fire and electrical code requirement.
  • Fuel Cell (Residential Fuel Cell and Microturbine System.) Efficiency of at least 30 percent and must have a capacity of at least 0.5 kW.

Charitable Contributions

Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.

Keep in mind that a written record of your charitable contributions is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.

Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.

Accelerating Income and Deductions

Accelerating income into 2014 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare tax or Net Investment Income Tax (see below).

Here are several examples of what a taxpayer might do to accelerate deductions:

  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2015, by year-end. This does not apply to mortgage escrow accounts.
  • It may be beneficial to pay 2015 tuition in 2014 to take full advantage of the American Opportunity Tax Credit, an above the line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
  • Try to bunch “threshold” expenses, such as medical and dental expenses (10 percent of AGI starting in 2013) and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

    Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2014, depending on your situation.

The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.

Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.

Tip: On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

Year-End Tax Planning for Individuals

Once again, tax planning for the year ahead presents more challenges than usual, this time due to the numerous tax extenders that expired at the end of 2013.

These tax extenders, which include nonbusiness energy credits and the sales tax deduction that allows taxpayers to deduct state and local general sales taxes instead of state and local income taxes, may or may not be reauthorized by Congress and made retroactive to the beginning of the year.

More significant however, is taxable income in relation to threshold amounts that might bump a taxpayer into a higher or lower tax bracket, thus, subjecting taxpayers to additional taxes such as the Net Investment Income Tax (NIIT) or an additional Medicare tax.

In the meantime, let’s take a look at some of the tax strategies that you can use right now, given the current tax situation.

Tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning. General tax planning strategies that taxpayers might consider include the following:

  • Sell any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
  • If you anticipate an increase in taxable income in 2015 and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2015.
  • Prepay deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid. For example, if you charge a medical expense in December, but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2014 tax return.
  • If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2015. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
  • If you’re self-employed, send invoices or bills to clients or customers this year in order to be paid in full by the end of December.

Caution: Keep an eye on the estimated tax requirements.

IRS: Tax refunds could be delayed next year

The IRS could be forced to delay tax refunds next year if Congress doesn’t strike a deal on dozens of expired tax provisions by the end of next month, the agency’s commissioner said this week.

IRS chief John Koskinen said the agency might have to postpone the 2015 filing season if lawmakers don’t act any sooner on the expired tax provisions known as extenders.

The uncertainty over the fate of the extenders, Koskinen said, has already raised “serious operational and compliance risks.” The IRS is currently upgrading technology systems, offering new instructions to customer service staff and revising forms in preparation for the next filing season, Koskinen added.

“Continued uncertainty would impose even more stress not only on the IRS, but also on the entire tax community, including tax professionals, software providers, and tax volunteers, who are all critical to the successful operation of our nation’s tax system,” Koskinen wrote in a letter dated Monday.

The Senate Finance Committee cleared a bipartisan bill this year that would revive most of the temporary tax breaks that expired at the end of last year through 2015 — including incentives with broad support such as the credit for business research, and more narrow provisions that help NASCAR track owners and Puerto Rican rum distillers.

Senate Republicans blocked that bill this spring as part of their broader fight with Democrats over floor procedure, but GOP senators predicted that a deal on the provisions would likely materialize in the lame-duck session after November’s elections.

House Republicans, on the other hand, have been trying to extend some of the provisions permanently, in particular the research credit and other tax breaks for business write-offs.

Senate Finance Chairman Ron Wyden (D-Ore.), who received Koskinen’s letter, said the IRS warning should prod lawmakers to quickly renew the expired provisions when they return to Washington just over a week after the elections.

“As the economy begins to show signs of strength, uncertainty from the federal tax code is the last thing American businesses and families need as they look to grow and invest,” Wyden said in a statement.

This is far from the first time the IRS has warned Congress about pushing back tax refunds. The agency delayed the 2014 tax season because of the previous year’s government shutdown, after pushing back the 2013 season to deal with the late passage of the fiscal cliff deal.

The problems for the filing season would be even more severe if Congress doesn’t reach an extenders deal before the end of 2014, Koskinen warned — “likely resulting in service disruptions, millions of taxpayers needing to file amended returns, and substantially delayed refunds.”

IRS Repeats Warning about Phone Scams

The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS.

Based on the 90,000 complaints that TIGTA has received through its telephone hotline, to date, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams.

“There are clear warning signs about these scams, which continue at high levels throughout the nation,” said IRS Commissioner John Koskinen. “Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. This is not how we operate. People should hang up immediately and contact TIGTA or the IRS.”

Additionally, it is important for taxpayers to know that the IRS:

  • Never asks for credit card, debit card or prepaid card information over the telephone.
  • Never insists that taxpayers use a specific payment method to pay tax obligations.
  • Never requests immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies.

Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Other characteristics of these scams include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.

Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to phishing@irs.gov.

To report a scam directly to the IRS, go to www.irs.gov and type “scam” in the search box.

If you think you’ve been a victim of a scam or need more information on how to report phishing scams involving the IRS, don’t hesitate to contact us immediately.