Author: Eric Buechler

The Internal Revenue says it will begin accepting 2014 tax returns on Jan. 20 – despite extensions of dozens of federal tax breaks by Congress last month.

Those extensions were enacted on Dec. 19, less than a month ago. However, IRS Commissioner John Koskinen said the agency didn’t see a reason why the changes would interfere with a timely start-up to the new tax filing season.

Minnesota’s Department of Revenue quickly followed the fed’s lead, announcing that  state taxpayers also can send in their income tax returns on Jan. 20.

However, Revenue Commissioner Myron Frans wasn’t as confident about a smooth filing season.  He publicly asked the Legislature to square up state tax breaks with the new federal extensions right away. “If we do not conform quickly, Minnesotans may need to pay millions more in taxes and file additional forms with this year’s taxes,” he said.

Processing actually was slowed last year, when state legislators failed to coordinate state deductions with federal tax breaks until March. The delay forced Minnesota Revenue to revise tax forms and to review 1.4 million tax returns that already had been filed with prior forms.

Should we call it” holiday spirit” or “political procrastination”?  Whichever you choose, the result will benefit many taxpayers.

On Dec. 19, Congress and the President reactivated more than 50 tax breaks that had expired about 50 weeks earlier on Jan. 1, 2014. That’s good news.

But the revival also is short-lived. The “Tax Increase Prevention Act of 2014” extended them only for one year, until Dec. 31, 2014. That means we taxpayers might have to hustle to capture them on 2014 returns. Of course, we’ll also be wondering again on Jan. 1, 2015, whether they’ll survive next year.

Here are some noteworthy tax provisions that are back from the brink, as selected by the National Association of Tax Professionals.

Individual taxpayers:

o  State and local sales tax deduction.

o  Deduction for tuition and fees for education.

o  Deduction for mortgage insurance premiums.

o  Tax credit for non-business energy property.

o  Tax credit for energy-efficient new homes.

o  Tax-free distributions from IRAs for charitable purposes

o  Real estate contributions for conservation purposes.

 Business taxpayers

o  Employer wage credit for employees on active duty in the military.

o  Expansion of Section 179 deduction to $500,000 for expenses of property, including machinery and off-the-shelf computer software. Also covers certain “qualified” real property to $250,000 within the cap.

o  50 percent bonus depreciation on new property (with specific caps for vehicles).

o  Work Opportunity tax credit.

o  Basis adjustment to stock of S corporations donating property to charities.

o   Enhanced deduction for food donations.

o   New markets tax credit.

The new Tax Increase Prevention Act (now Public Law 113-295)  also created a new, tax-exempt account to assist people with disabilities, including blindness. The account is called an ABLE account after the law that enabled it, the “Achieving a Better Life Experience Act.”

We at EricJohn Ltd. are ready to guide clients through the extensions and other intricacies of tax reporting.

Here’s a once-in-a-lifetime offer that’s been waiting in the federal tax codes for your right moment.

Retired workers can move money from their Individual Retirement Accounts to their Health Savings Accounts and the distribution is tax-free.  In fact, those taxpayers can transfer as much as an entire year’s contributions to an HSA.

What’s really happening is that you can use your traditional or Roth IRA to pay the normal contributions you would place in your HSA for that year.  Each dollar transferred from the IRA reduces the amount you can contribute from other sources. The Internal Revenue Service calls this tactic a “qualified HSA funding distribution.”

As handy as it might be, remember it’s a one-time move from a single IRA for each taxpayer. In fact, if you want to draw from multiple IRAs, you’ll have to collect the money into one IRA to make the shift.

There are some limits. This tax-free distribution works for traditional and Roth IRAs, but not for SEP IRAs or SIMPLE IRAs.

You also have to make sure it’s a direct transfer from the IRA custodian to the HSA’s trustee. Don’t take possession of the money – even briefly – along the way, or it becomes taxable.

Also, you must make the move before the end of the tax year involved. The special rule allowing contributions to HSAs up until the tax-filing deadline (normally April 15) does not apply, the IRS says.

There is a line for reporting this one-time-only transfer on IRS Form 8889, which deals with HSAs.

EricJohn Ltd. can guide you through those details, as well as any effects on your IRAs.  Let us know!

Our Indiana clients can jump into their pre-season tax planning right away, using the actual forms that will be filed with their upcoming tax returns.

The Indiana Department of Revenue announced its 2014 income tax forms and schedules for individual returns early this month.

Of course, the tax deadline still is four months away, as Indiana Revenue’s Tax Talk Blog noted with a smattering of humor. “Now we’re not saying you need to start thinking about filing your taxes when they aren’t even due until April 15, 2015,” the official blog said.

Revenue figured giving a preview might help the planners and number crunchers among Indiana taxpayers. Perhaps some might want to look at December investment shifts or to try a few tax-year scenarios. They’ve got the real forms now for brainstorming.

So, navigate to www.in.gov/dor/5174.htm to find all those individual forms and instruction booklets online.

Then, check in with us at EricJohn Ltd. to help you plan now and to fill out your forms in a month or so!

The Minnesota Department of Revenue is calling a time-out for its computer systems this weekend.

The tax-collecting agency has announced that its e-Services and other online systems will be down for “scheduled maintenance” from 8 a.m. Saturday (12/6) to noon on Sunday (12/7).

So, if you were planning to work online with Revenue, you might want to just log off and take a rest from all those numbers.

Just so you know, DOR says the downtime does not affect any deadlines for filing and paying taxes. They all still apply.

Of course, feel free to browse at the EricJohn Ltd. website this weekend.

We’ve entered December and the season for filing 2014 taxes looms just ahead.

But what if you have dawdled too long with your 2013 income tax return? Can you still file by computer?

Well, that depends on your type of return.

Before Nov. 23, an individual taxpayer still could have submitted a federal 1040 electronically – although he/she probably would have to pay a late penalty along with any taxes owed.  Now, the IRS has closed the e-filing window for those 2013 returns.

However, businesses, partnerships, etc., still can catch up. They can e-file 2013 income tax returns before Dec. 26.

Why the deadlines?  The Internal Revenue Service needs to update its computers to process 2014 tax forms, which will start arriving in January.

Check with us at EricJohn Ltd. or your tax advisor for more details about filing times, future or past!

On Veterans Day, we remember that many thousands of soldiers, sailors, Marines and Air Force and Coast Guard members are drawing pensions and disability payments following their service to our country.

Eric recently helped a veteran sort out the tax issues involved in that military-related pay. We thought we’d pass this guidance along to others who might be thinking ahead to their 2014 tax returns.  It’s a summary of benefits and taxability from the U.S. Army’s Web site.

Our client had retired from the regular Army. But this site also offers fact sheets for Army reservists and for Army National Guard members in active status, as well. You can find them at http://myarmybenefits.us.army.mil/Home/Benefit_Library/Federal_Benefits_Page/Federal_Taxes_on_Veterans_Disability_or_Military_Retirement_Pensions.html.

Like so many other Americans, we also thank any military veterans who might be reading this for their service and sacrifices!

Here’s the U.S. Army’s fact sheet about retirement and disability pay.

Federal Taxes on Veterans Disability or Military Retirement Pensions

Summary:

Military retirement pay based on age or length of service is considered taxable income for federal income taxes. However, military disability retirement pay and veterans benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income.

Eligibility:

Soldiers with service-connected disabilities may be eligible for Federal income tax exclusions of veterans’ benefits and disability pension payments.

Benefit Highlights:

Military Retirement Pay

Military retirement pay based on age or length of service is taxable and must be included as income for federal income taxes. The amount a retiree pays to participate in the Survivors Benefit Plan (SBP) is excluded from taxable income. For Social Security tax purposes, military retirement pay is not considered earned income and no Social Security payroll taxes (also known as Federal Insurance Contributions Act (FICA) taxes) are withheld from military retirement pay.

Military Disability Retirement Pay received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces should not be included in taxable income if any of the following conditions apply:

1.    You were entitled to receive a disability payment before September 25, 1975;

2.    You were a member of the military (active or reserves) or were under a binding written commitment to become a member on September 24, 1975;

3.    You receive disability payments for a combat-related injury. This is a personal injury or sickness that:

• Resulted directly from armed conflict,
• Took place while you were engaged in extra-hazardous service,
• Took place under conditions simulating, including training exercises such as maneuvers, or
• Was caused by an instrumentality of war.

4.    You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it (the exclusion under this condition equals the amount you would be entitled to from the VA).

Veterans Benefits

Veterans benefits are also excluded from federal taxable income. The following amounts paid to veterans or their families are not taxable:

• Education, training, and subsistence allowances.
• Disability compensation and pension payments for disabilities paid either to veterans or their Families.
• Grants for homes designed for wheelchair living.
• Grants for motor vehicles for veterans who lose their sight or use of their limbs.
• Veterans insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran’s endowment policy paid before death.
• Interest on insurance dividends left on deposit with the VA.
• Benefits under a dependent-care assistance program.
• The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001.
• Payments made under the compensated work therapy program.
• Any bonus payment by a state or political subdivision because of service in a combat zone.

Retroactive VA disability determination

If you retire from the Army based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay is excluded from income up to the amount of the VA disability benefits you would have been entitled to receive. You can claim a refund on any taxes paid on the excludable amount by filling an amended return on Form 1040x for each previous year during the retroactive period (subject to statute of limitations).

You may exclude 100% of any severance benefit from your income if you receive a lump-sum disability severance payment and are later awarded VA disability benefits. However, any lump-sum readjustment or other non-disability severance payment you receive upon your release from active duty must be included in your income even if you are later given a retroactive disability rating by the VA.

The statute of limitations for claims of retroactive disability is generally within 3 years of when a tax return was filed. However, in cases where a retroactive service-connected disability rating determination is received, the statute of limitations is extended by a 1-year period from the date of determination for claims for credit or refund that are filed after June 17, 2008. This special statute does not apply to any tax year that began more than 5 years prior to the date of determination.

Additional Information:

For more information, please visit Internal Revenue Servuce Publication 525, “Taxable and Nontaxable Income,” Special Rules for Certain Employees/Military regarding fderal taxes on military retirement pay or veterans benefits maintained by the Internal Revenue Service. See http://www.irs.gov/publications/p525/index.html

RV really does mean “recreational vehicle” to the Internal Revenue Service. An RV probably can’t make the grade as a business office – at least not if it’s lived in.

The owners of Dell Jackson Insurance Services of California tried to persuade the IRS that their business dealings at motor home rallies qualified them for tens of thousands of dollars in deductions on their RVs in both 2006 and 2007. The write-offs included more than $60,000 for depreciation of a new Winnebago in 2007.

The couple clearly was doing business. Dellward and Judith Jackson strung up a Dell Jackson Insurance banner on the RV, set up a table at the weekend events,   gathered sales leads and eventually generated insurance policies from contacts. In fact, the U.S. Tax Court (which decided their case in August) actually figured that the insurance-selling couple spent about two-thirds of their time on business during the rallies.

BUT, they also lived in their RV while at the rallies. Their stays were longer than 14-day limit allowed for business use in federal tax code, making the RV a personal dwelling. In fact, “Any personal use, including watching TV in the RV, makes the entire day a personal day,” the Tax Court’s ruling said. In tax terms, that means no deductions allowed.

Of course, if an RV qualifies as a dwelling, there still might be an exception for a home office, the rule that allows a taxpayer to carve out part of a dwelling for business use. But, the area must be “exclusively used” for business, and the insurance entrepreneurs clearly couldn’t make that argument, according to the decision.

The Tax Court did give some perspective in its ruling.  “Section 280A (the law) casts a wide net in this regard and sometimes catches taxpayers, like petitioners, who in addition to their personal use had genuine business purposes.”

But the decision was straightforward. The RV may have been helpful, but it wasn’t deductible. And, by the way, the couple also owed accuracy-related penalties to the IRS as well as the late taxes.

The case, which was reported by tax information provider Western CPE, is Dellward R. Jackson and Judith N. Jackson v. Comm., T.C. Memo 2014-60.

Whether it’s business on the road or an office at home, we at EricJohn Ltd. can help creative businesses sort out what’s appropriate, tax-wise. Owner Eric Buechler is an enrolled agent recognized by the IRS in tax matters.