• Don’t Miss Out on the Electric Vehicle Credit

    2 August 2016
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    Considering a new car? If you are considering purchasing a new car or light truck (less than 14,000 pounds), maybe you should consider one of the many electric vehicles currently being offered for sale and take advantage of a federal income tax credit worth as much as $7,500.

    The tax credit is actually made up of two parts: the basic amount of $2,500, which requires the electric vehicle to have a battery with at least 5 kilowatt-hours of capacity, and an additional $417 of credit for each kilowatt-hour of battery capacity in excess of 5 kilowatt-hours. The total amount of the credit allowed for any qualified vehicle is limited to $7,500.

    However, the credit begins to be phased out for a particular manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States.

    If you are not an electrical engineer, it may seem a little complicated to figure out which vehicles qualify for the credit and for how much. You can usually rely on the information provided by the dealer. However, to be on the safe side, you can verify which vehicles are qualified and the credit amount available, based on the vehicle’s kilowatt-hours and the reduction in credit due to the credit phase-out, by visiting the IRS website From the list on the linked page, click on the manufacturer of the vehicle you are interested in to find out if the model and year of that vehicle qualify for the credit and the amount of the credit.

    To be eligible for the credit, you must acquire the vehicle for use or lease and not for resale. Additionally, the original use of the vehicle must commence with you, and you must use the vehicle predominantly in the United States. The vehicle is not considered acquired prior to the time when its title passes to you under your state’s law. The credit is available whether you use the vehicle for business, personally or a combination of both. The prorated portion of the credit that applies to business use becomes part of the general business credit, and any amount not used on your return for the year when you purchase the vehicle can be carried back to the previous year and then carried forward until used up, but for no more than 20 years.

    What a Dealer May Not Tell You – The portion of the credit that is not treated as a general business credit (i.e., the personal use portion of the credit) is non-refundable. That means it can only be used to offset your tax liability for the year when you purchase the vehicle, and any excess credit is lost. Assuming you purchase the vehicle in 2016 and your 2016 tax return will be similar to your 2015 return, you can get an idea of how the credit will apply to you by comparing the amount on line 47 of your 2015 Form 1040 to the credit the vehicle provides. If line 47 is greater than the credit, then you will probably benefit from the entire amount of the credit on your 2016 return. If it is less, then you will only benefit from the amount on line 47 as it will be figured for your 2016 return.

    If your 2016 tax return will be significantly different from your 2015 return, or you simply want to verify your benefit from the credit, please give Dagley & Co. a call.

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  • Are You a Non-Filer? Ready to Escalate Problems with the IRS?

    15 July 2016
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    Millions of individuals do not file a tax return each year because their income is below the filing threshold for the year based upon their filing status.

    Still others simply procrastinate and risk forfeiting their rightful refunds, including earned income tax credits, child tax credits, tuition credits and excess withholding.

    Then there are others who believe they owe, whether they actually do or not, and don’t file because they think they can’t pay what they owe. Not filing on time and owing money can result in a 5% per month (maximum 25%) failure-to-file penalty, plus failure-to-pay penalties and statutory interest in addition to what is owed. It does not make sense to incur unnecessary penalties, especially when the IRS has payment options and, in certain hardship situations, compromise options that may apply.

    If you are in the situation just described and think the IRS is not aware of you, think again. The IRS information reporting system knows a lot more about you than you might imagine. Here is just a short list of items that get reported to the IRS’s computer and added to your file: W-2s for wages filed by employers, W-2Gs for wagering winnings from racetracks, casinos, poker parlors, etc., 1099-MISC forms from businesses you have contracted with, 1099-INT and 1099-DIV showing interest and dividends earned from financial accounts, 1099-B forms showing the gross proceeds from the sales of securities, 1099-K forms showing the credit card transactions for your business, 1099-S forms reporting the gross proceeds from sales of real estate, K-1s from businesses and trusts you are connected with, form 8300 transaction forms from banks showing large transactions. The list goes on and on.

    So what does the IRS do with all this information when you haven’t filed a return? Well, if the gross income is enough that they believe you have a filing requirement, the IRS will prepare a substitute return for you based upon the information they have.

    This is when things can get really nasty, because the substitute return is based solely on the income reported to the IRS without the benefit of exemptions, itemized deductions, any of the many credits to which you may be entitled, or cost basis for any property or assets sold. In addition, the substitute return will treat you as married filing separate (the filing status for which the higher tax rates kick in quicker).

    Along with the substitute return, you will generally receive a notice of statutory deficiency (commonly referred to as a 90-day letter), which will give you 90 days to file an appeal with the Tax Court. At this point things really get expensive because you will need a tax attorney to handle the appeal. If you ignore the 90-day letter or the 90 days run out, the tax assessment becomes final and the IRS can institute liens and levies. Then life really gets miserable. Your credit rating will take a nosedive, liens will be put on your property, and wages and refunds will be attached.

    Although there are further remedies, they are increasingly expensive in terms of legal costs. Don’t let things escalate to this point; give Dagley & Co. a call so we can get your past returns filed before you start receiving notices from the IRS. If you’ve already received notices and have been ignoring them, gather them up in chronological order and bring them to the office so we can figure out the next steps required. If you have lost or misplaced past years’ records, we can order a transcript from the IRS that includes the information reported from various sources for each unfiled year. There are even ways to get penalties waived.

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  • Combining a Vacation with a Foreign Business Trip? Here Are Some Tax Pointers

    9 July 2016
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    If an individual’s business trip is completely business and outside of the U.S., all of the ordinary and necessary business travel expenses are deductible, just as if the business trip were within the U.S.

    On the other hand, if the trip also incorporates a vacation, special rules determine the deductibility of the travel expenses to and from the destination; when the other business travel expenses, such as lodging, meals, local travel and incidentals, can be deducted; and when they must be allocated. So, whether you are just visiting one of our neighboring countries or traveling to Europe or even more exotic locales, here are some travel tax pointers:

    Primarily Vacation – If the travel is primarily for vacation and only a few hours are spent attending professional seminars or meeting with foreign business colleagues, none of the expenses incurred in traveling to and from the general business location are deductible. Other travel expenses must be allocated on a day-by-day basis, and only the business portion is deductible.

    Primarily BusinessIf the trip is primarily for business and meets one of the conditions listed below, the expenses incurred in traveling to and from the business destination are deductible in full (same as for travel within the U.S.). First, the travel outside the U.S. is for a period of one week or less (seven consecutive days, excluding the departure day but including the day of return). In addition, all other ordinary and necessary travel expenses are fully deductible. Second, less than 25% of the total time outside the U.S. is spent on non-business activities. In addition, all other ordinary and necessary travel expenses are fully deductible. (If 25% of more of the total time is spent on non-business activities, a day-by-day allocation of all travel expenses between personal and business activities is necessary and only the business portion is deductible.) Third, the individual incurring the travel expenses can establish that a personal vacation or holiday was not a major consideration. In addition, all other ordinary and necessary travel expenses are fully deductible. Fourth, the taxpayer did not have “substantial control” over arranging the trip. In addition, all other ordinary and necessary travel expenses are fully deductible.

    When determining what constitutes business and non-business time, business days include: days en route to or from the business destination by a reasonably direct route without interruption; days when actual business is transacted; weekends or standby days that fall between business days; and days when business was to have been transacted but was canceled due to unforeseen circumstances.

    Nonbusiness days are days spent on nonbusiness activities as well as weekends, holidays and other standby days that fall at the end of the business activity, if the taxpayer remains at the business destination for personal reasons.

    Foreign Conventions, Seminars or Meetings – Tax law does not permit a deduction for travel expenses to attend a convention, seminar or similar meeting held outside of the North American area unless the taxpayer establishes that: first, the meeting is directly related to the active conduct of the taxpayer’s trade or business, and second, it is “as reasonable” for the meeting to be held outside of the North American area as it is within the North American area.

    The IRS defines “North American area” quite broadly and includes not just the U.S., Canada and Mexico, as you would expect, but also Bermuda, several countries in the Caribbean basin, U.S. possessions such as American Samoa and other Pacific island nations, and some Central American countries as well.

    Cruise Ship Conventions – In order for a taxpayer to deduct the cost of attending a convention related to his or her trade or business on a cruise ship, the ship must be a U.S. flagship, and all the ports of call must be within the U.S. or its possessions. In addition, the maximum deduction is limited to $2,000 per attendee. Substantiation requirements include certain signed statements by the both the taxpayer and an officer of the convention sponsor.

    Spousal* Travel Expenses – Generally, deductions are denied for travel expenses for a spouse, dependent or employee of the taxpayer on a business trip unless: the spouse is an employee of the taxpayer, and the travel of the spouse, etc., is for a bona fide business purpose, and the expenses would otherwise be a deductible business travel expense for the spouse.

    *These rules also apply to a dependent or employee of the taxpayer.

    However, the law allows a deduction for the single rate for lodging on qualified business trips, and frequently, there is no rate difference between one and two occupants. Thus, virtually the entire lodging expense for an accompanying spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if traveling by vehicle, the entire cost of the business-related transportation would be deductible. This would generally also apply to taxis at the destination.

    As you can see, determining the tax deduction for a foreign business trip that is combined with a vacation can be complicated. If you need additional tax guidance or help planning such a trip, please give Dagley & Co. a call.

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  • Do You Need a Mid-Year Tax Checkup?

    17 June 2016
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    Do you need a mid-year tax checkup? What major has happened to you lately? If you are inclined to procrastinate until the end of the year or, even worse, until tax-filing season to worry about your taxes, you may be missing out on opportunities to reduce your tax and avoid certain penalties. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them.

    ->Did you get married, get divorced, or become widowed?

    ->Did you change jobs or has your spouse started working?

    ->Did you have a substantial increase or decrease in income?

    ->Did you have a substantial gain from the sale of stocks or bonds?

    ->Did you buy or sell a rental?

    ->Did you start, acquire, or sell a business?

    ->Did you buy or sell a home?

    ->Did you retire this year?

    ->Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?

    ->Are you taking advantage of the IRA-to-charity transfers (age 70.5 or older)?

    ->Did you refinance your home or take out a second home mortgage this year?

    ->Were you the beneficiary of an inheritance this year?

    ->Did you welcome a new child into your family? Time to consider a tax-advantaged savings plan!

    ->Are you taking advantage of tax-advantaged retirement savings?

    ->Have you made any significant equipment purchases for your business?

    ->Are you planning to purchase a new business vehicle and dispose of the old one? It makes a significant difference whether you sell or trade in the old vehicle.

    ->Are your cash and non-cash charitable contributions adequately documented?

    ->Did you, or are you planning to, make energy-efficiency improvements to your main home or install a solar system for your main or second home this year?

    ->Are you paying college tuition for yourself, your spouse or dependent(s)?

    ->Are you keeping up with your estimated tax payments or do they need adjusting?

    ->Did you purchase your health insurance through a government insurance marketplace and qualify for an insurance premium subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy.

    ->Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments.

    ->Did you make any unplanned withdrawals from an IRA or pension plan?

    ->Have you stayed abreast of every new tax law change?

    If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to schedule a mid-year tax checkup and consult with Dagley & Co.—preferably before any of the events listed, and definitely before the end of the year.

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  • Due Dates June 2016 – Individual and Business

    29 May 2016
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    June 2016 Individual Due Dates

    June 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    June 15 – Estimated Tax Payment Due

    It’s time to make your second quarter estimated tax installment payment for the 2016 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: payroll withholding for employees; pension withholding for retirees; and estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:  The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call Dagley & Co. for particular state safe harbor rules.

    June 15 – Taxpayers Living Abroad

    If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15 is the filing due date for your 2015 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 17. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).

    Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

    Combat Zone – For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or the last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area.

    In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation.

    It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months.

    Please contact Dagley & Co. for assistance with an extension request or an installment agreement.

    June 30 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2016 for 2015. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2015. Contact Dagley & Co. for additional information and assistance filing the form.

    June 2016 Business Due Dates

    June 15 – Employer’s Monthly Deposit Due

    If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2016. This is also the due date for the non-payroll withholding deposit for May 2016 if the monthly deposit rule applies.

    June 15 – Corporations

    Deposit the second installment of estimated income tax for 2016 for calendar year corporations.

    June 30 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2016 for 2015. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2015. Contact Dagley & Co. for additional information and assistance filing the form.

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  • Surviving Spouse Estate Tax Exclusion

    27 May 2016
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    An account of everything an individual owned or had interest in on the date of their death is included in the tax on the transfer of their property. This is called the estate tax. This includes cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. The tax is based on the fair market value of these assets (less certain exclusions), generally as of the day the decedent died.

    An inflation-adjusted lifetime exclusion prevents smaller estates from being taxed. This exclusion is $5,450,000 for 2016, but it is adjusted (reduced) by the value of untaxed gifts that the decedent gave in excess of the annual gift exemption (currently $14,000) over his or her lifetime. Thus, if the value of all the decedent’s property is less than the adjusted exclusion amount, there would be no estate tax and, generally, no need to file an estate tax return. However, filing an estate tax return when it otherwise wouldn’t be needed may be beneficial to the surviving spouse when the decedent was married.

    When a decedent is survived by a spouse and the decedent’s estate is worth less than the adjusted lifetime exclusion, the estate of the decedent may elect to pass any of the decedent’s unused lifetime exclusion to the surviving spouse. Considering that estate tax rates currently range from 18 to 40 percent, this can be very beneficial if the estate of the surviving spouse could exceed the adjusted lifetime exclusion when he or she subsequently passes.

    Example – A husband with an estate valued at $2 million died in 2014, having made prior taxable gifts of $1 million. Even though there was no estate tax return filing requirement, the decedent’s spouse filed one to claim the election to pass the decedent’s unused lifetime exclusion to his spouse. The husband’s unused exclusion amount was $2.34 million, which is the 2014 estate tax exemption of $5.34 million minus the $1 million in prior taxable gifts and the $2 million value of his estate. His spouse can then add his unused exclusion to her own. Assuming that the spouse has made no taxable gifts, if she passes in 2016, her estate’s exclusion amount for 2016 would be $7.79 million (her $5.45 million basic exclusion amount plus $2.34 million of her spouse’s unused exclusion amount).

    For the surviving spouse (or his or her estate) to claim the deceased spouse’s unused exclusion amount, the estate of the first spouse to die must make an election, referred to as the portability election, by filing a timely estate tax return. The estate tax return must include a computation of the unused exclusion amount. This is true even if the value of the estate is not enough to require an estate tax return to be filed.

    This presents a quandary for the executor (or other representative of the estate, often the surviving spouse), who must decide whether it is worth the cost of having an estate tax return prepared and filed when there is no requirement to do so outside of making the portability election (as estate tax returns are quite complicated and expensive).

    When making this decision, an executor needs to carefully consider the likelihood of the surviving spouse’s estate exceeding the adjusted lifetime exclusion amount. Another factor to consider is that Congress has changed both the lifetime exclusion amount and the estate tax rates in the past; as this topic seems to be a constant subject of discussion in Washington, there are no guarantees that the exemption will remain at its current level. If the executor is not the surviving spouse, he or she will ideally consult with the widow(er) on the decision, but this is not required. This could pose a problem if there is animosity between the executor and the surviving spouse. To avoid this situation, if someone other than the spouse is the executor of the estate for the first spouse to die, it is a good idea to include language in the couple’s wills or trusts that will require the executor to make the portability election.

    If you have questions related to this election, the lifetime exclusion, the annual gift tax exemption, or estate planning in general, please give Dagley & Co. a call.

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  • Oops, Did You Forget Something on a Tax Return?

    17 May 2016
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    It is not too late if you overlooked an item of income or forgot to claim a deduction or credit on your already filed tax return. An amended return can be filed to correct an already filed tax return. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year or more after the original return was filed and after the interest and penalties have built up. Therefore, it is best to file an amended return as soon as possible to avoid the headache of IRS correspondence and to minimize the interest and penalties on any additional tax you might owe.

    On the flip side, if you overlooked a significant deduction or tax credit and you have a refund coming, you certainly don’t want that to go by the wayside.

    The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit information from delayed K-1s, or anything else that should have been reported on the original return.

    If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complications once the IRS determines something is missing, so it is best to take care of the issue right away.

    Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.

    If any of the above applies to your situation, please give Dagley & Co. a call so we can prepare an amended tax return for you.

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  • Receiving Cash Tips? The IRS Is Watching

    13 May 2016
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    If you collect tips, you must include them in your taxable income. This requirement is not limited to waiters and waitresses; it applies to anyone who collects tips, including taxicab drivers, beauticians, porters, concierges, etc.

    Tips are amounts freely given by a customer to a person providing a service. They are generally given as cash, but they include tips made on a credit or debit card or as part of a tip-sharing arrangement. Tips can also be in the form of non-traditional gifts such as tickets to events, wine and other items of value. If you receive $20 or more in tips in any month, you should report all of your tips to your employer, with these exceptions:

    Tip-splitting Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement by you (the employee initially receiving them). You should report to your employer only the net tips you received.

    Service (cover) charges — These are charges arbitrarily added by the business establishment (employer) — for example, a specific percentage of the bill for parties exceeding X in number — and are excluded from the tip-reporting requirements. If your employer collects service charges from customers, your share of these charges, as determined by your employer, is taxable to you and should already be included as part of your wages.

    Keep a running daily log of tip income Tips are a frequently audited item, and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.

    Report tips to your employer If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes. If the tips received are less than $20 in any month, don’t think you are off the hook; although they need not be reported to the employer, these tips are still taxable and must be reported on your tax return, as they are subject to income, Medicare and Social Security taxes.

    Employer allocation of tips If you work for a large restaurant, you may find when you get your W-2 form that you got tips you didn’t know about. Restaurants with a large serving staff report a total called “allocated tips” to the IRS. Here is what allocated tips are all about:

    Tip allocation applies to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport,” which happens if an employee reports tips that are less than 8% of the employee’s share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8% amount.

    If this situation applies to you, the allocation amount will be noted in a separate box on your W-2, and these allocated tips won’t be included in the total wages shown on your W-2 form. You will need to report the allocated tip amount as additional income on your tax return unless you have adequate records to show that the amount is incorrect. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.

    Self-Employed Individuals – If you are self-employed, you don’t have an employer to report tips to, and you simply include the tips you’ve received in your self-employed income on your tax return for the year you received the tips.

    Because they are usually paid in cash, tips are a frequent audit item. If you are receiving tips and have any questions, please give Dagley & Co. a call.

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  • Most Overlooked Tax Deduction

    11 May 2016
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    The IRD deduction is one of the most overlooked tax deductions. IRD is the acronym for income in respect of a decedent. So what is IRD income? It is income that is taxable to the decedent’s estate and also taxable to the beneficiaries of the estate.

    Estate tax is a tax on property transfers. Thus, when an individual dies, the value of all of his property is added up and the amount that exceeds the lifetime estate tax exclusion (currently at $5.45 million) less any prior taxable gifts is subject to estate tax. In some cases the estate includes items that are taxable both to the estate and to the beneficiaries, such as a traditional IRA, uncollected business income, and accrued bond interest. To make up for this double taxation, the beneficiaries are allowed an itemized deduction for the portion of the estate tax attributable to the double-taxed income.

    The problem is that the beneficiaries do not receive anything from the estate to make them aware of an IRD deduction or the amount of the deduction, if one exists. A beneficiary must recognize when there is an IRD and a possibility of a deduction and make further inquiries.

    The first clue is, did you as a beneficiary of the estate receive a Form 1099-R or Schedule K-1 with taxable income from the estate? If so, you need to inquire whether a Form 706 Estate Tax Return was filed, and if so, whether it resulted in tax due. If there was a tax due, then there is a good chance you are entitled to an IRD deduction. Request a copy of the 706 Estate Tax Return and provide it to this office so we can determine whether you are entitled to a deduction and if so, how much it is worth.

    The deduction is generally the difference in the estate tax figured with and without the double-taxed income. Please call Dagley & Co. if you need additional information.

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  • What Are the Tax Implications of Paying or Receiving Alimony?

    24 April 2016
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    If you’re recently divorced, you may pay or receive alimony. Here are some tips for how to correctly treat the payments on your tax return.

    The first consideration is the definition of alimony. There are actually two definitions of alimony—one for payments made under divorce decrees and separation agreements established before 1985 and another for agreements established since that time. For the purposes of this article, only the rules for post-1984 decrees and agreements will be discussed.

    For post-1984 decrees and agreements, alimony has the following requirements: The payments must be in cash paid to a spouse, ex-spouse or third party on behalf of a spouse or ex-spouse, and the payments must be made after the divorce decree is finalized. If made under a separation agreement, the payments must be made after the execution of that agreement. The payments must be required by a decree or instrument incident to divorce, a written separation agreement, or a support decree. The payments cannot be designated as child support. Child support payments are neither income for the recipient nor a deduction for the payer. Payments made while spouses or ex-spouses share the same household don’t qualify as alimony. This is true even if the spouses live separately within a dwelling unit. The payments must end upon the death of the payee. The payments cannot be contingent on the status of a child. This is to prevent child support from being disguised as deductible alimony.

    If payments you receive from or make to a spouse or former spouse meet the definition of alimony, those payments are taxable for the recipient and deductible for the payer. There is one exception to this rule, however: A divorce decree or separation agreement can designate that alimony payments are neither deductible nor taxable. If this is the case, the payments are not reportable on either party’s tax return.

    Here are some additional issues that should be considered.

    The IRS requires that a taxpayer deducting alimony include the payee’s Social Security Number (SSN) on his or her tax return. Thus, the recipient must provide his or her SSN to the payer.

    The IRS has noted that a significant number of taxpayers incorrectly report their alimony by either understating the income or overstating the amount paid. As a result, the IRS computer compares the amounts listed on the payer’s and recipient’s tax returns, and it will initiate a correspondence audit where there is a discrepancy.

    The recipient of alimony payments may treat alimony payments as compensation even if those payments are that person’s only income. This allows alimony recipients to save for their retirement by making either Traditional or Roth IRA contributions, the rules for which require the contributor to have earned income or compensation. Alimony income satisfies this requirement.

    If a divorce decree or other written instrument or agreement calls for both alimony and child support, and the person making the payments pays less than the total required, the payments apply first to child support. Any remaining amount is then considered alimony.

    There is no income tax withholding from alimony payments, so the recipient may need to consider making estimated tax payments.

    Other complications can occur that are not addressed here. If you have such complications or wish to discuss alimony as it applies to your circumstances, please give Dagley & Co. a call.

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