Local Lodging May Be Deductible. Tax Penalty for Not Having Insurance Increases in How Long Are You on the Hook for a Tax Assessment?

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1 Tax & Business Issues Newsletter Spring Summer 2015 Tax Penalty for Not Having Insurance Increases in 2015 The penalty for not having minimum essential health insurance for yourself and other members of your tax family made a substantial jump in For 2015, those amounts increased to $325 for each adult and $ for each child (but no more than $975) or 2% of household income minus the amount of your tax-filing threshold. Local Lodging May Be Deductible A business deduction is allowed for lodging when a taxpayer travels away from his or her tax home. This creates problems for individuals attending conferences and training sessions within a tax home that include extended-hour events. Saver s Credit Can Help You Save for Retirement Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. How Long Are You on the Hook for a Tax Assessment? A frequent question from taxpayers, whether for personal tax or unrelated business income tax of tax-exempt organizations, is: how long does the IRS have to question and assess additional tax on my tax returns? Higher-Income Taxpayers Subject to Exemption & Itemized Deductions Phase-outs Both the personal exemption allowances and itemized deductions are being phased out for higher-income taxpayers. Connect With Us Upcoming Events We have many educational events planned for the coming months. CapinCrouse Blogs Learn about nonprofit tax and higher education developments and issues.

2 Tax Penalty for Not Having Insurance Increases in 2015 The penalty for not having minimum essential health insurance for yourself and other members of your tax family made a substantial jump in For 2014, the penalty was the greater of the flat dollar amount ($95 for each adult plus $47.50 for each child under age 18, but no more than $285) or 1% of your household income minus your tax-filing threshold amount. For 2015, those amounts increased to $325 for each adult and $ for each child (but no more than $975) or 2% of household income minus the amount of your tax-filing threshold. Household income - Estimating the penalty requires you to project your household income for Household income includes the modified adjusted gross income (MAGI) for all members of your household for whom you claim a dependent exemption and who are required to file a tax return. As an example, say a parent has a teenage child who has a part-time job and earns $7,000 for the year. This $7,000 exceeds the child s filing threshold (standard deduction for a single individual plus exemption allowance, but since the parents are claiming the child as a dependent, the child cannot claim his or her own exemption). So the child would be required to file a tax return, and the parents would be required to include the child s MAGI when computing household income. Modified adjusted gross income - MAGI is your regular adjusted gross income with untaxed Social Security benefits, non-taxable interest and dividends, and the foreign earned income exclusion added back. Tax-filing threshold - A taxpayer s tax-filing threshold is the sum of the standard deduction and personal exemptions for the filer and spouse. Figuring the penalty - Take for example a family of three, including Dad, Mom and their teenage child. The household income for the family is $65,000, including the child s earnings of $7,000, and they are subject to the penalty for the entire year of The flat dollar amount (per person) penalty is: $ ($325 + $325 + $162.50) The percentage of income amount penalty equals household income less the family s filing threshold times 2%. In this example the tax-filing threshold for 2015 would be $20,600, which is the total of $12,600 (standard deduction for married joint) plus $4,000 each for the filer and spouse (personal exemptions). Note that although the dependent child s income is included in household income (because the child is required to file a return), the child s standard deduction and exemption allowance are not included in the filing threshold amount used in the calculation of the penalty. The percentage of income amount penalty is $888 (($65,000 - $20,600) x 2%). Thus, in this example, the annual penalty for not being insured for the entire year is $888, the greater of the flat dollar amount penalty or the percentage of income penalty. When a family is uninsured for less than a full year, the penalty would be applied on a monthly basis, which for the example would be $74 per month. Local Lodging May Be Deductible A business deduction is allowed for lodging when a taxpayer travels away from his or her tax home. A taxpayer s tax home is generally the location (such as a city or metropolitan area) of a taxpayer s main place of business (not necessarily the place where he or she lives). The traveling away from tax home condition creates problems for individuals attending conferences and training sessions within a tax home that include extended-hour events that preclude traveling back home between the days of the events. To alleviate this problem, the IRS proposed regulations, upon which taxpayers may rely, to permit certain nonaway-from-home lodging expenses to be treated as deductible business expenses by employers, and tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Under the proposed regulations, local lodging expenses are treated as ordinary and necessary business expenses if all of the following conditions are met: 1. The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function; 2. The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter; 3. If the individual is an employee, his or her employer requires him or her to remain at the activity or function overnight; and 4. The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit. Example: A business conducts business-related sales training sessions at a hotel and conference center near its main office. The employer requires both its field and in-house sales force to attend the training and stay at the hotel overnight for the bona fide purpose of facilitating the training. If the company pays the lodging costs Tax & Business Issues Newsletter Summer

3 directly to the hotel, the stay is a working condition fringe benefit to all attendees (even to employees who live in the area who are not on travel status) and the company may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by the company as an ordinary and necessary business expense. Example: If Warren, a locally based, self-employed consultant, were required by a company to attend the sessions and stay at the hotel, he could deduct the expense if he paid for it himself, or exclude the expense if he were reimbursed by the company after accounting for it in full for his costs. Generally, lodging expenses are deductible only if they are substantiated in full (record of time, place, amount, and business purpose, plus paid bills or receipts). The expenses can t be substantiated using the lodging component of the federal per-diem rate. Saver s Credit Can Help You Save for Retirement Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. The saver s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. The credit for 2015 is determined from the table illustrated below and is based upon both filing status and modified adjusted gross income (MAGI). The amount of a taxpayer s saver s credit is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs. Example - Eric and Heather are married and filing a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their MAGI for the year was $37,000. The credit is computed as follows: Eric s 401(k) contribution was $3,000, $2,000 but only the first $2,000 can be used Heather s IRA contribution was $500, +$500 so it can all be used Total qualifying contributions $2,500 Credit percentage for a joint return x.20 with MAGI of $37,000 from the table Saver s credit $500 This example illustrates how the credit phases out for higher-magi taxpayers. In this example, the couple s MAGI of $37,000 only allowed them a credit of 20% times their qualifying contributions. Had their MAGI been $36,500 or less, their credit percentage would have been 50% of their qualified contributions, for a credit of $1,250. The saver s credit supplements other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So in addition to the saver s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which will lower an individual s tax before the credit is applied. The credit itself can only be used to reduce the tax (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer s tax liability is lost. Modified Adjusted Gross Income (MAGI)* Applicable Joint return Head of household Others Percentage Over Not Over Over Not Over Over Not Over $0 $36,500 $0 $27,375 $0 $18, ,500 39,500 27,375 29,625 18,250 19, ,500 61,000 29,625 45,750 19,750 30, ,000 45,750 30,500 0 *MAGI is determined without regard to the foreign or possessions earned income exclusion and foreign housing exclusion or deduction. Tax & Business Issues Newsletter Summer

4 This example illustrates how the credit phases out for higher-magi taxpayers. In this example, the couple s MAGI of $37,000 only allowed them a credit of 20% times their qualifying contributions. Had their MAGI been $36,500 or less, their credit percentage would have been 50% of their qualified contributions, for a credit of $1,250. The saver s credit supplements other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So in addition to the saver s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which will lower an individual s tax before the credit is applied. The credit itself can only be used to reduce the tax (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer s tax liability is lost. Other special rules that apply to the saver s credit include the following: Eligible taxpayers must be at least 18 years of age. Anyone claimed as a dependent on someone else s return cannot take the credit. A full-time student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a fulltime student. As you can see, this credit involves a complicated set of rules, but it can help lower-income individuals save for retirement. How Long Are You on the Hook for a Tax Assessment? A frequent question from taxpayers, whether for personal tax or unrelated business income tax of tax-exempt organizations, is: how long does the IRS have to question and assess additional tax on my tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait - as in all things taxes, it is not that clean cut. Here are some complications: You file before the regular due date (April 15 for individuals; May 15 for calendar-year exempt organizations; or 4 ½ months after end of other fiscal years) - If you file before the regular due date, the threeyear statute of limitations still begins on the due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2014 return on February 15, 2015 or April 15, 2015, the statute did not start running until April 15, You file after the regular due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer s delinquency, or under a filing extension granted by the IRS. For example, say your 2014 return is on extension until October 15, 2015, and you actually file on September 1, The statute of limitations for further assessments by the IRS will end on September 2, So the earlier you file those extension returns, the sooner you start the running of the statute of limitations. If you want to be cautious, you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return. You file an amended tax return - If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax. You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three-year statute of limitations is increased to six years. In determining if more than 25% has been omitted, capital gains and losses aren t netted; only gains are taken into account. These omissions don t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business (or an unrelated business of an exempt organization), means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services. You file three years late - Suppose you procrastinate and file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $135 minimum late-filing penalty. No refunds are issued three years after the filing due date. Tax & Business Issues Newsletter Summer

5 10-year collection period - Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period. No tax return filed - Exempt organizations may not realize they had unrelated business income (UBI) until some period after the tax year in which the income should have been reported on Form 990-T. The statute of limitations does not start running until a return is filed. If a Form 990 disclosed sufficient facts to inform the IRS of the potential existence of UBI, the Form 990 may start the statute of limitations. If no Form 990-T or Form 990 is filed, the statute remains open. Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost. Higher-Income Taxpayers Subject to Exemption & Itemized Deductions Phase-outs Generally, taxpayers are allowed to deduct personal exemption allowances of $4,000 (2015) each for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large enough, itemized deductions. However, both the personal exemption allowances and itemized deductions are being phased out for higherincome taxpayers. The phase-out begins when a taxpayer s adjusted gross income (AGI) reaches a phase-out threshold amount that is annually adjusted for inflation. The phase-out threshold amounts for 2015 are based on taxpayers filing statuses, and they are: $258,250 for single filers, $284,050 for individuals filing as heads of households, $309,900 for married couples filing jointly and $154,950 for married individuals filing separately. Here is how the phase-outs work: Personal and Dependent Exemptions - The otherwise allowable exemption amounts are reduced by 2% for each $2,500 or part of $2,500 ($1,250 for a married taxpayer filing separately) that the taxpayer s AGI exceeds the threshold amount for the taxpayer s filing status. Example: Ralph and Louise have an AGI of $422,400 for 2015 and two children, for a total of four exemptions worth $16,000 (4 $4,000). The threshold for a married couple is $309,900; thus, their income exceeds the threshold by $112,500. Each $2,500 part of this amount reduces the exemption by 2%; there are 45 parts of this amount ($112,500 $2,500 = 45). Thus, 90% (45 2%) of their $16,000 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,600 ([100%-90%] $16,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $5,643 ($16,000 90% 33%). Itemized Deductions - The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer s AGI exceeds the threshold amount. The reduction is not to exceed 80% of the otherwise allowable itemized deductions. Not all itemized deductions are subject to the phase-out. The following deductions escape the phase-out: Medical and dental expenses Investment interest expenses Casualty and theft losses from personal-use property Casualty and theft losses from income-producing property Gambling losses Thus, a taxpayer who is subject to the full phase-out still gets to deduct 20% of the deductions subject to the phase-out - and 100% of the deductions listed above. Example: Ralph and Louise from the previous example, who had an AGI of $422,400 for 2015, exceed the threshold for a married couple by $112,500. Thus, they must reduce their itemized deductions subject to the phase-out by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions subject to the phase-out. For 2015, Ralph and Louise had the following itemized deductions: Subject to Phase-out Home mortgage interest: $10,000 Taxes: $8,000 Charitable $6,000 contributions: Not Subject to Phase-out Casualty loss: $12,000 Total: $24,000 $12,000 Tax & Business Issues Newsletter Summer

6 The phase-out is the lesser of $3,375 or $19,200 (80% of $24,000) which is $19,200. Therefore, Ralph and Louise s itemized deductions for 2015 will be $32,625 ($24,000 - $3,375 + $12,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phaseout will cost them an additional $1,114 ($3,375 33%). We hope this overview helps you understand these phase-outs. Atlanta Colorado Springs Denver Los Angeles San Francisco Boston Columbia Grand Rapids New York Tax Division Chicago Dallas Indianapolis San Diego CapinCrouse LLP capincrouse.com