Phantom Income

Tax time can be full of surprises, few of them pleasant. Every so often, even a taxpayer reporting absolutely no incoming funds can find that he or she is expected to pay on taxable income. Such phantom income will often come in one of three forms, as follows:

Cancellation of Debt

If you were, at any time over the tax year, forgiven of the obligation to repay a debt, this is called cancellation of debt (COD) income. The sum of the debt forgiven can be taxable, unless it was forgiven due to bankruptcy or insolvency. In many cases, your lender will be indicating the amount of debt you were forgiven on a Form 1099-C, which is submitted to the IRS to assure that it is not omitted on your return.

Partnerships, LLC’s, and S Corporations

These kinds of businesses are known as pass-through entities, which means that their owners are the ones expected to pay taxes on their income even in the event that the income is not distributed to them. If you are an owner in such an entity, you should receive a Form K-1 that lists your share of the loss or income.

Constructive Receipt

If you are legally entitled to a payment, but choose not to collect on it, the IRS may still tax you on the money you are turning down. This includes payments that you attempt to delay, and then collect on a later date so that it applies to a different tax year; you will be expected to pay taxes on it for the year that you first had the right to the money.

Should you require any assistance in avoiding the IRS’s nastier surprises, please contact Seattle CPA Alisa Na during normal business hours.

Tips for Reporting Your Foreign Income

If you are a US citizen or resident who earned income in another country in 2014, you will have to report this income on your tax return this year. This includes money earned from working abroad, foreign trusts, and foreign bank and securities accounts. When it comes time to report this income, consider the following tips:

  • Compile the Necessary Forms: Depending on your particular circumstances, you may need Schedule B, Form-8938, and Form 114.
  • Look Over the Foreign Earned Income Inclusion: If you were living and working abroad, you may qualify for an exclusion for all or part of the income you earned. This can apply to as much as $99,200 worth of wages and other foreign income. See Form 2555 and Form 2555-EZ for further details.
  • Look for Credits and Deductions: If you paid income taxes to a foreign country, you may be able to claim a credit or deduction on your US taxes if both countries are taxing the same income.
  • Get Help: You can find many useful resources on the IRS website. Should you require any additional help, please contact Seattle CPA Alisa Na during normal business hours.

When Children Receive Investment Income

Some children receive incomes from investments, which may include interest payments, dividends, capital gains, and unearned income from a trust. This income may be subject to special tax rules. If you don’t know how to treat your child’s investment income, consider the following tips:

  • If the total investment income that your child earns exceeds $2,000, part of this income may be subject to your own tax rate rather than that of your child. You can learn more by reading Form 8615 on the IRS website.
  • If your child’s investment income for the year was less than $10,000, you may be albe to include this income on your own tax return so that he or she will not be required to file a separate return. See Form 8814 for more.
  • Should your child’s investment income reach or exceed $10,000, he or she must file his or her own return. For this purpose, you will need Form 8615. Note that, when filing this form, your child may be subject to the Net Investment Income Tax.

If you or your child require any further assistance with tax filing or other financial concerns, please contact Seattle CPA Alisa Na during normal business hours.

Does the Net Investment Income Tax Apply to You?

The Net Investment Income Tax is something that may come into play if you receive income from investments. This generally includes any interest payments, dividends, capital gains, rental income, royalties, and non-qualified annuities. Should you be required to pay this tax, you will be expected to submit 3.8% of the lesser of either your net investment income or the difference between your modified adjusted gross income and the threshold listed for your filing status.

Whether or not the Net Investment Income Tax applies to you depends on your filing status and your total income for the past year. To determine whether or not you will be expected to pay this tax, find your status on the following list and compare your income to the appropriate threshold; if your modified adjusted gross income is greater than the threshold, you may be expected to pay:

  • Single or Head of Household: $200,000
  • Married Filing Jointly: $250,000
  • Married Filing Separately: $125,000
  • Qualifying Widow or Widower with a Child: $250,000

To report this tax, you must file Form 8960 with your tax return. Should you require any further information or assistance on your taxes, please contact Seattle CPA Alisa Na during normal business hours.

How to Claim a Health Coverage Exemption

According to the Affordable Care Act, taxpayers and every member of their family needs to somehow account for their health coverage. This can be accomplished by purchasing at least minimum essential coverage, making an individual shared responsibility payment at the time that you file your income tax return, or demonstrating that you qualify for an exemption. You may be exempt if you meet any of the following requirements:

  • The minimum amount you would be required to pay for your annual premiums exceeds eight percent of your household’s income.
  • The time you spent without proper coverage last year was less than three consecutive months.
  • You suffer from a hardship that prevents you from acquiring coverage.
  • You are incarcerated.
  • You belong to a group that is explicitly exempt from this requirement, like a Federally-recognized Indian tribe or certain religious sects.

Should you qualify, you can claim or report any coverage exemptions on Form 8965, Health Coverage Exemptions, and submit it with Form 1040, 1040A, or 1040EZ. If you spent any time over the past year wherein you did not have coverage, you will need to make a shared responsibility payment for every month wherein you do not qualify for an exemption.

If you require additional help in filing your 2014 taxes, please contact Seattle CPA Alisa Na during normal business hours.

Year End Tax Tip

**Washington’s minimum wage will increase to $9.47 per hour beginning Jan. 1, 2015

** Seattle’s New minimum Wage Ordinance – For employer with less than 500 employees, minimum wage will increase to $11.00 beginning April 1, 2015- Dec31, 2015. If employees do receive tips and/or payments to a medical benefits plan, the employer can pay $10.00/hour as minimum wage, plus $1.00/hour made up of tips and/or contributions to a medical benefits plan.  http://murray.seattle.gov/minimumwage/#sthash.9poqOzOM.dpbs

INDIVIDUAL-  Updates in 2014

  1. Beginning in 2014- Obama Care- Health insurance mandate for Individual- Please let your tax preparer know whether you and your family had health insurance during 2014.
  2. Marketplace Open Enrollment for 2015 ends Feb 15, 2015. wahealthplanfinder.org
  • Reminder : (FBAR) Reporting of foreign asset for aggregate values that exceeds $10,000 by June 30, 2015 to Dept of Treasury.
  1. Reminder: (FATCA)- Reporting of Foreign financial asset for aggregate values that exceeds$50,000 to the IRS when filing your 1040.

 **Civil penalties for a non-willful violation can range up to $10,000 per violation for above informational returns.**

BUSINESS- Updates in 2014

  1. Starting January 1, 2015, employers with 100 or more full-time equivalents employees are required to provide minimum essential health insurance coverage to full time employees.
  2. Starting January 1, 2016, the employer mandate will apply to employer with 50 to 99 full-time equivalent employees.
  • 1099 filing requirement – Please let your tax preparer know if you paid $600 or more for independent contractors.
  1. 2014/2015: IRA contribution Limit: $5,500

 IRA Catch up Contribution Limit for  those age 50 or over: $6,500

**Can contribute 2014 IRA by April 15, 2015**

 

  1. Auto Expense: Standard Mileage Rate for Business

-2014:  56 cents per mile

-2015:  57.5 cents per mile

**** Maximum penalty for failure to file Form 1099 could be up to $500 per 1099.    

          **** Remember to obtain W-9 form from your service provider

Watching Out for Fraudulent IRS Messages

As we enter into another tax season, it pays to be mindful of the various scams that may target you. You may have already received some suspicious emails or calls, ones claiming to be from the IRS and demanding payments. Based on a large number of complaints, the Treasury Inspector General for Tax Administration has identified roughly 1,100 victims of such fraudulent emails, adding up to losses of about $5 million.

Fortunately, there are easy ways to protect yourself from such scam emails or phone calls. Simply be on the lookout for the red flags that go along with false IRS communications, including the following:

  • The communication is unexpected. If the IRS has an issue to discuss with you, they will not call or email you out of the blue; you should expect official correspondence sent through the mail.
  • Your contact requests sensitive payment information. The IRS will never ask for credit card or debit card numbers over the phone.
  • You are expected to use a specific payment method to settle your alleged debt.
  • You are expected to make immediate payment. The IRS will usually give you prior notification before enforcement action is required.

Remember that scammers will often come prepared to deceive you. They may be able to recite the last four digits of your Social Security number. After your first call, you may receive a follow-up email or a second call from a fraudulent local authority to support the ruse. Be mindful of these tactics, and don’t let them fool you.

If you receive a call or an email from someone claiming to be from the IRS, there are several actions you can take. If you think you might, in fact, owe money, you can call the IRS at 1-800-829-1040 to settle up. If you know that you do not owe money, you can report the scam by calling TIGTA at 1-800-366-4484.

Remain vigilant this tax season, and please contact Seattle CPA Alisa Na for all of your financial needs.

IRS Announces New Standard Mileage Rates

The Internal Revenue Services has issued the new optional standard mileage rates for 2015. These are the rates that are to be used to calculate deductible costs associated with the operation of a vehicle.

These standard mileage rates for business purposes are based on an annual study that is conducted to assess the fixed and variable costs of operating a vehicle. This study takes into account gas, maintenance, oil, insurance, tires, and depreciation of the vehicle’s value. The rates for medical or moving purposes are based only on variable costs like gas and oil. The rate for charitable uses is set by law.

As of January 1st, 2015, the standard mileage rates for cars, vans, pickups, or panel trucks will be as follows:

  • 57.5 cents per mile driven for business purposes, up from the 56 cents in 2014
  • 23 cents per mile driven for moving or medical-related purposes, down .5 cents from 2014’s rate
  • 14 cents per mile driven for the purposes of a charitable organization

Taxpayers can choose to claim a deduction based on the actual costs of operating their vehicle, rather than taking a deduction based on standard mileage rates.

Taxpayers who use the business standard mileage rate for a vehicle after claiming accelerated depreciation on the same vehicle. The standard rate cannot be used by fleet owners who operate more than four vehicles at the same time. You can learn more by visiting the IRS website. Should you require any further information, or should you need any help on your taxes, please contact Seattle CPA Alisa Na during normal business hours.

Tax Deductions for Moving Expenses

Have you moved this year, or do you plan to move before the year is up? If you are doing so because of a job, you may be able to deduct some of your expenses on your upcoming tax return. Seattle CPA Alisa Na has all the information you need to get the most out of your move when tax season rolls around again.

There are many expenses related to travel that can be deducted on your taxes. Among these are expenses related to transportation and lodging, packing and shipping your belongings, connecting and disconnecting utilities, and insuring shipped items. You will not be able to deduct the cost of meals consumed in transit, the cost of your new home, expenses associated with selling an old home, or the cost of breaking a lease. If you are reimbursed for any moving expenses by your employer after having deducted them on your taxes, you may need to report this as income on your next return.

For a moving-related expense to qualify for a deduction, it must meet all three of the following requirements:

  • The time of the move must be close to the time you start work. In general, any moving expenses you incur within a year of the date you are meant to start in your new job can be considered for tax deductions.
  • Your new job must be significantly further away than your old job. The rule here is that the location of your new job must be at least fifty miles further from your old home than your old job was. So, for example, if your old job was a ten mile drive, your new job will need to be at least sixty miles away from your old home in order to justify the move.
  • You must work at your new job for a certain amount of time. Following your move, you will need to work at least 39 weeks, full time, at your new job. If you are self-employed, you must work at least 78 weeks during the first two years at the new job site, full time. You can take a deduction on your taxes if you have not yet had time to complete this requirement, so long as you expect to complete it.

Should you require any further assistance with your taxes, please contact Alisa Na during normal business hours.

The Individual Shared Responsibility Payment

Are you failing to maintain a minimum level of health care coverage without qualifying for an exemption from this requirement? If this is the case, you may be required to submit an individual shared responsibility payment when you file your federal income tax return next year. In case you don’t know what this means, Seattle CPA Alisa Na has compiled all the information you need on this new provision so that you’re not hit with additional penalties when tax time comes around again.

Minimum essential health care coverage can come in several forms. There are government-sponsored programs, health coverage provided by your employer, and coverage that you yourself purchased in the Health Insurance Marketplace or other market. So long as you maintain this coverage for yourself and your dependents throughout the year, you will not need to make the individual shared responsibility payment. Simply check the appropriate box on your federal income tax return to indicate that you met this requirement.

However, if there is a period of three months or more throughout 2014 wherein you or your dependents are not covered, you will need to either make the payment or qualify for an exemption. Generally, your payment will be the greater of the following:

  • One percent of your household income over the income filing threshold for your filing status
  • A flat amount of $95 per adult and $47.50 per child under the age of eighteen in your household, capped at a total of $285

Additionally, this payment is capped at the national average premium for bronze level health plans available in the Marketplace that would cover all non-covered members of your household.

Remember that, if you elect to make an individual shared responsibility payment in lieu of maintaining minimum essential coverage, you are lacking the proper health insurance you need to cover you in the case of a medical emergency. You are encouraged to purchase a proper health plan for you and your family.