Fairfield Accountant | Tax Information CT

The Internal Revenue Service is still working on the details of how it is going to help taxpayers that may have fallen for deceptive marketing that led them to improperly receive employee retention tax credits.

Internal Revenue Service Commissioner Daniel Werfel said that the agency is still working to figure out the process of how to help those who have already received their ERC "and now realize they believe they received it inappropriately," including how to come forward preemptively before the IRS takes collection action against them, as well as "on settlement terms for paying back in a way we hope works out for those companies economically."

He also noted the agency is working on updating its procedures "for how we review credits, how we communicate with stakeholders to make sure there’s exact clarity, and we’re even stronger in our outreach in terms of what are the issues that we see companies in thinking they’re eligible when they are not." Werfel made his comments November 14, 2023, at the AICPA & CIMA National Tax & Sophisticated Tax Conference.

The IRS already has issued procedures on how taxpayers can withdraw claims for the employee retention credit if the claim has not been processed, as well as placed a moratorium on processing claims until at least the end of year.

Werfel also used his speech to reiterate previously highlighted improvements in customer service and compliance and enforcement following the supplemental funding provided by the Inflation Reduction Act.

National Taxpayer Advocate Erin Collins also acknowledged the improvement in the wake of the issues that arose during the COVID-19 pandemic.

"The good news is the IRS is in a much better place than it was over the last three years," Collins said during the conference. "The not-so-good news is we still have a long way to go."

In particular, she targeted the continued filing of paper returns as a key contributor to delays in processing returns and other correspondence. The IRS has been working to improve the abilities to filing tax returns and other correspondence electronically as a means of speeding up the processing, and she noted that what has been accomplished thus far "is a good thing."

However, she noted that another challenge is that even if they are electronically filed, they are still manually processed and more work needs to be done to improve the technology to help get them electronically processed.

By Gregory Twachtman, Washington News Editor

Close

The IRS has announced that calendar year 2023 would continue to be regarded as a transition period for enforcement and administration of the de minimis exception for reporting by third party settlement organizations (TPSO) under Code Sec. 6050W(e).

The IRS has announced that calendar year 2023 would continue to be regarded as a transition period for enforcement and administration of the de minimis exception for reporting by third party settlement organizations (TPSO) under Code Sec. 6050W(e). The IRS has also planned for a threshold of $5,000 for tax year 2024 to phase in implementation. Previously, in Notice 2023-10, the IRS announced that 2022 would be regarded as a transition period for the same issue. Specifically, the transition period focuses on the implementation of the amendment to Code Sec. 6050W(e) by the American Rescue Plan Act of 2021 (P.L. 117-2) that lowered the de minimis exception for TPSOs to $600.

Background

Code Sec. 6050W requires a TPSO to file an information return (Form 1099-K) each calendar year to report the annual gross amount of reportable payment transactions to the IRS and provide a copy of the return to the participating payee. A de minimis exception to this reporting requirement is provided in Code Sec. 6050W(e). Prior to the amendment by the American Rescue Plan Act, a TPSO was exempt from the reporting requirement if the gross amount that would otherwise be reported did not exceed $20,000 and the number of such transactions with that participating payee did not exceed 200. Section 9674(a) of the American Rescue Plan Act amended the de minimis exception to require a TPSO to file an information return if the gross amount of total reportable payment transactions exceeds $600, effective for tax years beginning after December 31, 2021.

Transition Period

Notice 2023-74 extends the transition period issued under Notice 2023-10 to the 2023 calendar tax year. Under the transition period, a TPSO would not be required to file Form 1099-K to report payments in settlement of third-party network transactions unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. Further, a TPSO exempt from reporting due to the transition period would not be subject to penalties under Code Secs. 6721 or 6722 for the failure to file or furnish Form 1099-K.

The transition period is limited to the amendments made by the American Rescue Plan Act to Code Sec. 6050W(e) and does not apply to other requirements under Code Sec. 6050W. In addition, the transition period does not apply to backup withholdings under Code Sec. 3406(a). TPSOs that have performed backup withholding for a payee during calendar year 2023 must file a Form 945 and a Form 1099-K with the IRS provide copies to the participating payee if total reportable payments to the payee exceeded $600.

Close

The IRS has released the annual inflation adjustments for 2024 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2024 Income Tax Brackets

For 2024, the highest income tax bracket of 37 percent applies when taxable income hits:

$731,200 for married individuals filing jointly and surviving spouses,
$609,350 for single individuals and heads of households,
$365,600 for married individuals filing separately, and
$15,200 for estates and trusts.

2024 Standard Deduction

The standard deduction for 2024 is:

$29,200 for married individuals filing jointly and surviving spouses,
$21,900 for heads of households, and
$14,600 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

$1,300 or
the sum of $450, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

$1,550 for married taxpayers and surviving spouses, or
$1,950 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2024

The AMT exemption for 2024 is:

$133,300 for married individuals filing jointly and surviving spouses,
$85,700 for single individuals and heads of households,
$66,650 for married individuals filing separately, and
$29,900 for estates and trusts.

The exemption amounts phase out in 2024 when AMTI exceeds:

$1,218,700 for married individuals filing jointly and surviving spouses,
$609,350 for single individuals, heads of households, and married individuals filing separately, and
$99,700 for estates and trusts.

Expensing Code Sec. 179 Property in 2024

For tax years beginning in 2024, taxpayers can expense up to $1,220,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $3,050,000.

Estate and Gift Tax Adjustments for 2024

The following inflation adjustments apply to federal estate and gift taxes in 2024:

the gift tax exclusion is $18,000 per donee, or $185,000 for gifts to spouses who are not U.S. citizens;
the federal estate tax exclusion is $13,610,000; and
the maximum reduction for real property under the special valuation method is $1,390,000.

2024 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2024 is $126,500.

The IRS also provided inflation-adjusted amounts for the:

adoption credit,
earned income credit,
excludable interest on U.S. savings bonds used for education,
various penalties, and
many other provisions.

Effective Date of 2024 Adjustments

These inflation adjustments generally apply to tax years beginning in 2024, so they affect most returns that will be filed in 2025. However, some specified figures apply to transactions or events in calendar year 2024.

Close

The 2024 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2023 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The SECURE 2.0 Act (P.L. 117-328) made some retirement-related amounts adjustable for inflation beginning in 2024. These amounts, as adjusted for 2024, include:

The catch up contribution amount for IRA owners who are 50 or older remains $1,000.
The amount of qualified charitable distributions from IRAs that are not includible in gross income is increased from $100,000 to $105,000.
The limit on one-time qualified charitable distributions made directly to a split-interest entity is increased from $50,000 to $53,000.
The dollar limit on premiums paid for a qualifying longevity annuity contract (QLAC) remains $200,000

Highlights of Changes for 2024

The contribution limit has increased from $22,500 to $23,000 for employees who take part in:

-401(k),
-403(b),
-most 457 plans, and
-the federal government’s Thrift Savings Plan

The annual limit on contributions to an IRA increased from $6,500 to $7,000.

The catch-up contribution limit for individuals aged 50 and over is subject to an annual cost-of-living adjustment beginning in 2024 but remains $1,000.

The income ranges increased for determining eligibility to make deductible contributions to:

-IRAs,
-Roth IRAs, and
-to claim the Saver's Credit.

Phase-Out Ranges

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

-For single taxpayers covered by a workplace retirement plan, the phase-out range is $77,000 to $87,000, up from between $73,000 and $83,000.
-For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $123,000 to $143,000, up from between $116,000 and $136,000.
-For an IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $230,000 and $240,000, up from between $218,000 and $228,000.
-For a married individual covered by a workplace plan filing a separate return, the phase-out range remains between $0 and $10,000.
The phase-out ranges for Roth IRA contributions are:
-$146,000 and $161,000, for singles and heads of household,
-$230,000 and $240,000, for joint filers, and
-$0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

-76,500 for joint filers,
-$57,375 for heads of household, and
-$38,250 for singles and married separate filers.

Close

The IRS reminded taxpayers who may be entitled to claim Recovery Rebate Credit (RRC) to file a tax return to claim their credit before the April-May, 2024 deadlines. It has been estimated that certain individuals are still eligible to claim RRC for years 2020 and 2021. The deadlines to file a return and claim the 2020 and 2021 credits are May 17, 2024, and April 15, 2025, respectively. Additionally, the IRS reminded that taxpayers must first file a tax return to make their RRC claims irrespective of income slab and source of income.

The Recovery Rebate Credit, is a refundable credit for those who missed out on one or more Economic Impact Payments such as stimulus payments which were issued in 2020 and 2021. The persons eligible to claim the 2020 and 2021 RRC must:

have been a U.S citizen or U.S resident alien in the respective year;
not have been a dependent of another taxpayer for the respective year;
have a social security number issued before the due date of the tax return which is valid for employment in the U.S;
for 2021 RRC- have a valid social security number as above or claim a dependent who has a Social Security number issued by the due date of the tax return, or claim a dependent with an Adoption Taxpayer Identification Number.

For qualified taxpayers who require one-on-one tax preparation help, they can avail the same through the Free tax return preparation assistance available on the IRS website. The IRS urges people to look into possible benefits available to them under the tax law. People can make use of their IRS Online Account also to keep track of payments due to them.

Close

The Internal Revenue Service is looking to improve its customer service metrics as well as improve its technology offerings in the coming tax filing season.

Building on the supplemental funding from the Inflation Reduction Act, the IRS has already seen improvements to its phone service and is now looking to improve on it.

"Massive investments in customer service mean taxpayers will get the information and support they deserve," Department of the Treasury Secretary Janet Yellen said November 7, 2023, during an event at IRS headquarters.

For the 2024 tax filing season, the IRS is committed to maintaining the 85 percent level of service it achieved in the 2023 filing season on the agency’s main taxpayer help line. It also is targeting a hold time of five minutes or less while offering 95 percent call back availability when projected wait times are expected to exceed 15 minutes.

IRS Commissioner Daniel Werfel, speaking at the event, also highlighted a trust target.

"This past filingseason, 84 percent of taxpayers who interacted with our phone assisters stated that this interaction increased their trust in the IRS," Werfel said. "That’s up from 70 percent two years ago. In the coming filingseason, we want to continue to again [the Office of Management and Budget’s] trust goal of 75 percent."

Yellen also highlighted how the "Where’s My Refund?" tool will be improved for the coming season, including incorporating "conversational voice-bot technology to help taxpayers get answers more quickly, and it will provide clearer and more detailed information so taxpayers can address barriers to processing their returns and receive their refunds quickly."

She also said that Taxpayer Assistance Centers increase the hours of face-to-face assistance provided by more than 8,000 hours compared to what was provided in the 2023 filing season.

Yellen also stated that the IRS has met a technology goal and in the 2024 filing season, taxpayers will be able to "digitally upload all correspondence and responses to notices instead of mailing them. … The impact will be significant and far reaching. Taxpayers will save time and effort. The IRS will reduce errors and storage costs and will speed up processing time for the system as a whole."

Additionally, there will be 20 more forms that taxpayers can electronically file in the 2024 filing season.

Yellen and Werfel also reiterated recent announcements on compliance and enforcement efforts and committed to continuing to ensure everyone is paying their fair share of taxes owed.

By Gregory Twachtman, Washington News Editor

Close

The Internal Revenue Service announced the launch of the first phase of rolling out business taxpayer accounts, as well as enable taxpayers to respond to notices online.

In an October 20, 2023, statement, the agency announced that the first phase will allow "unincorporated sole proprietors who have an active Employer Identification Number to set up a business tax account, where they can view their business profits and manage authorized users."

The IRS noted that the business tax accounts will expand to allow taxpayers "to view letters or notices, request transcripts, add third parties for power of attorney or tax information authorizations, schedule or cancel tax payments, and store bank account information."

The business tax accounts were enabled by the agency’s receiving of supplemental funding from the Inflation Reduction Act.

Another technology improvement announced allowing taxpayers to respond online to notices, something that previously required responses via mail.

"During the filing season 2023, taxpayers were able to respond to 10 of the most common notices for credits like the Earned Income and Health Insurance Tax Credits online, saving them time and money," the agency reported, adding that as of September 29, 2023, it has received more than 32,000 responses to notices via the online tool.

Additionally, the IRS will now accept electronic submissions for three forms via a mobile device-friendly forms. Those forms include:

Form 15109, Request for Tax Deferment;
Form 14039, Identity Theft Affidavit; and
Form 14242, Reporting Abusive Tax Promotions and/or Preparers

The next form expected to have a mobile-friendly option later this fall is Form 13909, Tax-Exempt Organization Complaint, and at least 20 more of the most-used tax forms will have mobile device availability in early 2024, the IRS stated.

"An estimated 15 percent of Americans rely solely on mobile phones for their internet access – they do not have broadband at home – so it is important to make forms available in mobile-friendly formats," the agency sad.

For tax professionals, their online accounts also received enhancements, including helping practitioners manage their active client authorizations on file with the Centralized Authorization File database as well as the ability to view their client’s tax information, including balance due.

By Gregory Twachtman, Washington News Editor

Close

Lawmakers have departed Washington to campaign before the November 6 elections and left undone is a long list of unfinished tax business. In many ways, the last quarter of 2012 is similar to 2010, when Congress and the White House waited until the eleventh hour to extend expiring tax cuts. Like 2010, a host of individual and business tax incentives are scheduled to expire. Unlike 2010, lawmakers are confronted with massive across-the-board spending cuts scheduled to take effect in 2013.

Unfinished business

Since the start of 2012, the list of tax measures waiting for Congressional action has remained unchanged. Among the individual tax provisions scheduled to expire after 2012 are:

Reduced individual income tax rates
Reduced capital gains and dividend tax rates
Temporary repeal of the limitation on itemized deductions and the personal exemption phaseout for higher income taxpayers
Reduced estate, gift and generation-skipping transfer tax rates
Enhancements to many education tax incentives, such as the American Opportunity Tax Credit, Coverdell education savings accounts, and more.

Also scheduled to expire at the end of 2012 is the payroll tax holiday. The employee share of Social Security taxes is 4.2 percent rather than 6.2 percent, up to the Social Security earnings cap of $110,100 for 2012. Self-employed individuals benefit from a similar reduction.

Additionally, many so-called tax extenders for individuals expired after 2011. They include the state and local sales tax deduction, the teachers' classroom expense deduction, and more. The most recent alternative minimum tax (AMT) "patch" expired after 2011.

The list of expiring or expired tax incentives for businesses is just as long. They include:

Enhanced Code Sec. 179 expensing (after 2012)
100 percent bonus depreciation (generally after 2011)
50 percent bonus depreciation (generally after 2012)
Research tax credit (after 2011)
Production tax credit for wind energy (after 2012)
Enhanced Work Opportunity Tax Credit (WOTC) for veterans (after 2012)
Regular WOTC (after 2011)
A lengthy laundry list of business tax extenders, such as special expensing rules for television and film productions, the Indian employment credit, and more (after 2011).

Along with all of the expiring provisions are even more pending proposals. They include proposals by the White House to enact tax incentives to encourage employers to hire long-term unemployed individuals, impose a minimum tax on overseas profits and more. The likelihood of any of these proposals being enacted before year-end is slim, but they could be revisited in 2013 depending on the outcome of the November elections. Comprehensive tax reform, including any reduction in the individual tax rates below their 2012 levels and a reduction in the corporate tax rate, is also expected to wait until 2013 or beyond.

Behind the scenes talks

The lame-duck Congress, which will meet after the November elections, may tackle some or all of the expiring tax incentives, or it could do nothing and punt them to the next Congress. Behind the scenes, some Democrats and Republicans in Congress are reportedly talking about a short-term extension of the expiring/expired provisions, for six months or one year, which would give lawmakers and the White House more time to reach an overall agreement. However, the dynamic could and likely will change if the GOP takes the White House and wins control of the Senate.

In the Senate, Sen. Kent Conrad, D-ND, has told reporters that he and several other senators from both parties have been discussing whether or not to extend the expiring tax cuts. Conrad, who is retiring at the end of 2012, has acknowledged that Democrats and Republicans are far apart on revenue raisers and spending cuts. Reports of informal talks among the members of the House Ways and Means Committee have also circulated but no concrete proposals have so far been revealed.

Sequestration

The imminent spending cuts (called sequestration) are the result of the Budget Control Act of 2011. The 2011 Act imposes approximately $110 billion in spending cuts, impacting defense and non-defense spending, for 2013. Almost every area of federal spending, including tax enforcement, will be affected.

In recent months, some lawmakers have proposed to mitigate the spending cuts by raising revenues elsewhere. One area targeted for tax increases is the oil and gas industry. However, several attempts to repeal tax preferences for the oil and gas industry failed in Congress in 2012.

Any extension of the expiring tax breaks will have to take into account the looming across-the-board spending cuts. Tax reform and debt reduction will go hand-in-hand. However, it is unclear if debt reduction will drive tax reform or vice-versa. Our office will keep you posted of developments.

Please contact our office if you have any questions about pending federal tax legislation.

Close

In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.

Specified thresholds

For an individual, the tax will apply to the lesser of the taxpayer's NII, or the amount of "modified" adjusted gross income (AGI with foreign income added back) above a specified threshold, which is:

$250,000 for married taxpayers filing jointly and a surviving spouse;
$125,000 for married taxpayers filing separately;
$200,000 for single and head of household taxpayers.

Examples. A single taxpayer has modified AGI of $220,000, including NII of $30,000. The tax applies to the lesser of $30,000 or ($220,000 minus $200,000), the specified threshold for single taxpayers. Thus, the tax applies to $20,000.

A single taxpayer has modified AGI of $150,000, including $60,000 of NII. Because the taxpayer's income is below the $200,000 threshold, the taxpayer does not owe the tax, despite having substantial NII.

For an estate or trust, the tax applies to the lesser of undistributed net income, or the excess of AGI over the dollar amount for the highest tax rate bracket for estates and trusts ($11,950 for 2013). Thus, the tax applies to a much lower amount for trusts and estates.

Application of tax

The tax applies to interest, dividends, annuities, royalties, and rents, and capital gains, unless derived from a trade or business. The tax also applies to income and gains from a passive trade or business.

Other items are excluded from NII and from the tax: distributions from IRAs, pensions, 401(k) plans, tax-sheltered annuities, and eligible 457 plans, for example. Items that are totally excluded from gross income, such as distributions from a Roth IRA and interest on tax-exempt bonds, are excluded both from NII and from modified AGI.

The tax does not apply to nonresident aliens, charitable trusts, or corporations.

Tax planning techniques

Taxpayers are concerned about having to pay the tax. One technique for avoiding the tax is to sell off capital gain property in 2012, before the tax applies. This can be particularly useful if the taxpayer is facing a large capital gain from the sale of a principal residence (after taking the $250,000/$500,000 exclusion from income). Older taxpayers who do not want to sell their property may want to consider holding on to appreciated property until death, when the property gets a fair market value basis without being subject to income tax.

The technique of "gain harvesting" may be even more attractive if tax rates increase on dividends, capital gains, and AGI in 2013, with the potential expiration of the Bush-era tax cuts. However, the status of these tax rates will not be determined until after the election, potentially in a lame-duck Congressional session. It is also possible that Congress will simply extend existing tax rates for another year and "punt" the decision until 2013, as tax reform discussions heat up.

Taxpayers may also want to change the source of their income. Investing in tax-exempt bonds will be more attractive, since the interest income does not enter into AGI or NII. Converting a 401(k) account or traditional IRA to a Roth IRA will accomplish the same purpose. Income from a Roth conversion is not net investment income, although the income will increase modified AGI, which may put other income in danger of being subject to the 3.8 percent tax. Increasing deductible or pre-tax contributions to existing retirement plans can also lower income and help the taxpayer stay below the applicable threshold.

Trusts and estates should make a point of distributing their income to their beneficiaries. A trust's NII will be taxed at a low threshold (less than $12,000), while the income received by a beneficiary is taxed only if the much higher $200,000/$250,000 thresholds are exceeded.

Uncertainty

There was some uncertainty about the tax taking effect because of litigation challenging the health care law providing the tax, but a June 2012 Supreme Court decision upheld the law. The application of the tax is also uncertain because the Republican leadership has vowed to pursue repeal of the health care law if the Republicans win the presidency and take control of both houses of Congress in the November 2012 elections. But this is speculative. In the meantime, the Supreme Court decision guarantees that the tax will take effect on January 1, 2013.

These can be difficult decisions. While economic considerations for managing assets and income are important, it also makes sense for a taxpayer to look at the tax impact if the certain asset sales or shifts in investment portfolios are otherwise being considered.

Close

When disaster strikes, a casualty tax loss may provide some comfort. A casualty is the damage or destruction of property resulting from an identifiable event that is sudden, unexpected, or unusual. Damage resulting from the progressive deterioration of property through a steadily operating cause would not be a casualty loss. A deductible loss can result from a number of events, such as fire, flood, storm (including hurricanes and tornadoes), or earthquake. Storm losses can involve damage from flooding or wind, for example. Other “sudden and unexpected events,” such as an automobile accident, also qualify as a casualty for tax purposes.

According to the most recent reading of the U.S. Drought Monitor and other indicators, moderate to exceptional drought covered approximately 60 percent of the contiguous U.S. as of the end of August and is being compared to the droughts of the 1930’s, 1950’s and the summer of 1988. Unless a loss attributable to drought occurs in a trade or business or a for-profit transaction, however, it is generally not deductible. A loss must occur within a short period of time, for it to be deductible as a casualty loss. The IRS has said that most droughts lack the suddenness necessary for a casualty loss deduction. The conventional tax wisdom has been that, as a practical matter, a casualty loss should not be claimed unless there has been an officially declared water emergency or some general drought designation by the IRS. For example, a casualty loss deduction was allowed for structural damage to a house because of subsoil shrinkage in a 1977 Missouri drought that was declared a federal disaster. So far, the IRS has not spoken to the drought of 2012 but some guidance is expected to be announced in the near future.

Taxpayer has burden of proof

To deduct a casualty loss, the taxpayer must be able to show that there was a casualty loss and to justify the amount taken as a deduction. A taxpayer should be able to show: the type of casualty and its date of occurrence; that the loss was a direct result of the casualty; that the taxpayer owned the property (or was liable for the damage to the owner of the property); and whether there is a claim for reimbursement with a reasonable expectation of recovery.

Business property

The allowable deduction for business property destroyed in a casualty is usually different from the loss of personal property. If the property is used in a trade or business or other activity conducted for profit, the allowable deduction is the lesser of the property’s adjusted basis (before the casualty) or its decline in value because of the casualty. If business property is completely destroyed, the deduction is the full amount of the property’s adjusted basis, reduced by any insurance recovery, even if the basis exceeded the property’s value before the casualty.

Personal-use property

If property owned outside of the business or investment setting, like a personal residence, is damaged, the loss is the lesser of the property’s decline in value or its adjusted basis, reduced by insurance proceeds or other reimbursement. Unlike business property, if personal property is completely destroyed, the loss cannot exceed the decline in value from the casualty, even if this is less than the basis. Furthermore, the loss must be reduced by $100 per casualty, and is deductible only to the extent that net casualty and theft losses exceed 10 percent of the taxpayer’s adjusted gross income. Unlike businesses, however, individuals have the option of treating a casualty loss as occurring in the immediately prior year, thereby often allowing for a quick refund through filing an amended return.

“Timely” insurance claim

To deduct a personal casualty loss, the taxpayer must have filed a timely insurance claim. The loss may be disallowed if the taxpayer fails to file a claim. Any portion of the loss that is not covered by insurance is not subject to this rule.

A recent court case discusses the requirement to file a timely insurance claim. A homeowner suffered loss of his home from fire. The homeowner immediately notified his insurance company of the loss, was assigned a claim number, and had the insurance company inspect the damage. However, the insurance company denied the claim. One reason it gave was that the homeowner failed to provide a statement as to proof of loss within 60 days, as required under the policy. After the insurance company denied the claim, the homeowner took a casualty loss deduction on his amended tax return.

Taxpayer deduction upheld

The IRS denied the casualty loss deduction, claiming that the taxpayer had failed to file a “timely insurance claim” as required by the tax code. The Federal Court of Claims rejected the IRS’s action and allowed the claim. The court said it was clear that the homeowner had filed a claim with the insurance company and that this was sufficient to comply with the tax code. The company’s ultimate denial of the claim under the terms of the policy was not relevant.

If you have suffered a casualty, it is important that you claim the full amount of the tax deduction to which you are entitled. If you have any questions about casualty losses, please contact our office.

Close

The IRS has unveiled the IRS Data Retrieval Tool (DTR), a time-saving tool designed to minimize the time required for college-bound students and their parents to complete the Department of Education’s Free Application for Federal Student Aid (FAFSA). The new IRS DTR is available through the website www.fafsa.gov.

The FAFSA form is necessary for college-bound students and their parents who are applying for numerous federal government education programs or subsidies, such as the Pell Grant, low-interest federal student loans, and the Federal Work Study Program. Eligible taxpayers may use the tool for either the initial or the renewal FAFSA.

Completion of the FAFSA requires certain federal tax information such as the student and parents’ adjusted gross income, tax, and exemptions. The free IRS DTR tool enables applicants to automatically transfer their tax return information onto the FAFSA form. The tool will also increase the accuracy of the income information reported on the FAFSA form and minimize processing delays. Taxpayers who are eligible to use the DRT can access it one to two weeks after the federal income tax return is filed if the return is filed electronically. In the cases of a paper tax return, taxpayers may access the tool approximately six to eight weeks after filing.

Who can use the DRT?

To use the DRT to complete the 2012–2013 FAFSA, taxpayers must meet several prerequisites:

They must have filed a federal 2011 tax return;
Have a valid SSN;
Have a valid Federal Student Aid PIN; and
Have not changed marital status since December 31, 2011.

What if I don’t have a PIN?

If an individual does not have a Federal Student Aid PIN, he or she may apply for one beforehand through the FAFSA application process. An online application is available at www.pin.ed.gov.

What if I can’t use the DRT?

In some cases the IRS DRT is unavailable. The tool is not accessible for completion of the 2012-2013 FAFSA if either the student or parents:

Filed an amended 2011 tax return or did not file a 2011 tax return;
Filed their 2011 tax return as married, filing separately; or
Filed a foreign tax return or Puerto Rican tax return.

If a student cannot or chooses not to use the IRS DRT, that student, his or her parents or spouse can verify income information submitted to the Financial Aid Office through a tax transcript from the IRS. Applicants may request a transcript on IRS Form 4506-T, Request for Transcript of Tax Return. Transcripts may be requested online through www.irs.gov or by phone at 1-800-908-9946.

Close

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. The IRS will refund the overpayment when you file your return, but it will not pay interest on it. In other words, by overpaying tax to the IRS, you are in essence choosing to give the government an interest-free loan rather than invest your money somewhere else and make a profit.

When do I make estimated tax payments?

Individual estimated tax payments are generally made in four installments accompanying a completed Form 1040-ES, Estimated Tax for Individuals. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

Am I required to make estimated tax payments?

Generally, you must pay estimated taxes in 2012 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return. There are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year's tax liability or 90 percent of your current year's tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of Social Security taxes for the self-employed.

Suppose I owe only a relatively small amount of tax?

There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if I realize I have miscalculated my tax before the year ends?

An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can I do?

If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

Determining estimated taxes can be complicated, but the penalty can be avoided with proper attention. This office stands ready to assist you with this determination. Please contact us if we can help you determine whether you owe estimated taxes.

Close

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

Close

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

Dependents

One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.

The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.

Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.

A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.

Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.

Alimony

Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.

Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.

There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.

Property

Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.

Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.

Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.

Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.

Retirement

When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.

Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.

Tax Prepayment and Joint Refunds

When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.

Legal and Other Expenses

To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.

Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.

Close

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Keeping it all in the family

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

"Reasonable compensation"

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

Close

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The Electronic Federal Tax Payment System (EFTPS) is a simple way for businesses to make their federal tax payments. It is easy to use, fast, convenient, secure and accurate. It also saves business owners time and money in making federal tax payments because there are no last minute trips to the bank, no waiting lines, no envelopes, stamps, couriers, etc. And best of all, tax payments are initiated right from your office!

What is the EFTPS?

EFTPS is an electronic tax payment system through which businesses can make all of their federal tax deposits or payments. The system is available 24 hours a day, seven days a week for businesses to make their tax payments either through the use of their own PC, by telephone, or through a program offered by a financial institution.

What federal tax payments are covered by EFTPS?

Some taxpayers mistakenly assume that EFTPS applies only to the deposit of employment taxes. EFTPS has much broader reach. It can be used to make tax payments electronically for a long list of payment obligations:

Form 720, Quarterly Federal Excise Tax Return;
Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return;
Form 941, Employer's Quarterly Federal Tax Return;
Form 943, Employer's Annual Tax Return For Agricultural Employees;
Form 945, Annual Return of Withheld Federal Income Tax;
Form 990-C, Farmer's Cooperative Association Income Tax Return;
Form 990-PF, Return of Private Foundation;
Form 990-T, Exempt Organization Business Income Tax Return Section 4947(a)(1) Charitable Trust Treated as Private Foundation;
Form 1041, Fiduciary Income Tax Return;
Form 1042, Annual Withholding Tax Return for U.S. Sources of Income for Foreign Persons;
Form 1120, U.S. Corporation Income Tax Return; and
Form CT-1, Employer's Annual Railroad Retirement Tax Return.

How can I get started using EFTPS?

To enroll in EFTPS, the taxpayer must complete IRS Form 9779, Business Enrollment Form, and mailing it to the EFTPS Enrollment Center. To obtain a copy of IRS Form 9779 a taxpayer or practitioner can call EFTPS Customer Service at 1-800-945-8400 or 1-800-555-4477. The enrollment form may also be requested from the IRS Forms Distribution Center at1-800-829-3676.

After you complete and mail the enrollment form, EFTPS processes the enrollment and sends you a Confirmation Packet, which includes a step-by-step Payment Instruction Booklet. You will also receive a PIN under separate cover. Once the Confirmation Packet and the PIN are received, you can begin to make tax payments electronically.

What flexibility is available within the EFTPS for payment options?

There are two primary ways to make payment under EFTPS - directly to EFTPS or through a financial institution. If you wish to make payments directly to EFTPS, the "ACH debit method" should be selected on the enrollment form. Deposits and payments are made using this method by instructing EFTPS to move funds from the business bank account to the Treasury's account on a date you designate. You can instruct EFTPS by either calling a toll-free number, and using the automated telephone system, or by using a PC to initiate the payment.

If you instead elect to make payments through a financial institution, the "ACH credit method" should be chosen on the enrollment form. This method works by using a payment system offered by the financial institution through which you instruct the institution to electronically move funds from your account to a Treasury account.

Although the ACH debit and the ACH credit methods are the primary payment methods for EFTPS, a taxpayer may also choose the Same Day Payment Method. You should contact your financial institution to determine if it can make a same day payment.

If I provide the IRS with access to my bank account, can it access my account for any other purposes?

It is important to note you retain total control of when a payment is made under EFTPS because you initiate the process in all instances. In addition, at no time does the government or any other party have access to your account from which the deposits are made. The only way to authorize deposits or payments from your account is through use of the PIN that is given to you upon enrollment.

Many businesses have recognized the convenience of voluntary participation in the IRS's EFTPS program. If you are interested in discussing whether your business would also benefit from this program, please contact the office for a consultation.

Close

Q. Since our children are grown and now out on their own, my husband and I are considering selling our large home and purchasing a small townhouse. We have owned our home for years and have quite a lot of equity built up. How do we figure out how much our potential capital gain would be? Will we pay more in taxes because we are moving to a less expensive home?

If you are considering selling a home you've owned for years and have a lot of equity in - for example, you would like to move to a smaller place - you will want to figure out how much your potential capital gain will be on the sale. Moreover, perhaps you'd also like to know if you'll pay more taxes because you are moving to a less expensive home.

The homesale exclusion

First, you will not be penalized (in the form of recognizable capital gains) for buying a less expensive home that doesn't require that you reinvest all of your gain. Under Code Sec. 121, $500,000($250,000 for single individuals and married taxpayers filing separately) in gain from the sale of a principal residence is generally excluded from income. Remember, however, that under the Economic Recovery Act of 2008, periods of "nonqualifying use" will reduce the amount of gain you can exclude from income.

Determining basis

In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence. The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

Attorney's fees,
Abstract fees,
Charges for installing utility service,
Transfer and stamp taxes,
Title search fees,
Surveys,
Owner's title insurance, and
Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be added to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

Insurance reimbursements for casualty losses.
Deductible casualty losses that aren't covered by insurance.
Payments received for easement or right-of-way granted.
Deferred gain(s) on previous home sales.
Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)

If you are considering selling your home, it pays to know in advance what the tax ramifications may be. If you need assistance determining the basis of your personal residence, please contact the office for more guidance.

Close

Fairfield CT Tax Information

IRS Regulations

Background

Transition Period

2024 Income Tax Brackets

2024 Standard Deduction

Alternative Minimum Tax (AMT) Exemption for 2024

Expensing Code Sec. 179 Property in 2024

Estate and Gift Tax Adjustments for 2024

2024 Inflation Adjustments for Other Tax Items

Effective Date of 2024 Adjustments

Highlights of Changes for 2024

Phase-Out Ranges