The Basics of Reporting Foreign Bank & Financial AccountsPosted on October 1st, 2018
There is so much misunderstanding of the foreign holding reporting requirements, let’s make some sense of it all: If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report
the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).
Note: Foreign Real Estate is not generally reportable HOWEVER, if the property is held in an offshore account or foreign corporation then you would be required to report your interest in the offshore account or foreign corp. As long as you hold the property as an individual there will be no special filing requirements to report the assets.
Who Must File
United States persons are required to file an FBAR if:
1) The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States, and
2) The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Exceptions to the Reporting Requirement
And, as usual, there are filing exceptions for the following United States persons or foreign financial accounts:
• Certain foreign financial accounts jointly owned by spouses.
• United States persons included in a consolidated FBAR.
• Correspondent/Nostro accounts.
• Foreign financial accounts owned by a governmental entity.
• Foreign financial accounts owned by an international financial institution.
• Owners and beneficiaries of U.S. IRAs.
• Participants in and beneficiaries of tax-qualified retirement plans.
• Certain individuals with signature authority over, but no financial interest in, a foreign financial account.
• Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust).
• Foreign financial accounts maintained on a United States military banking facility.
Reporting and Filing Information
A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.
The FBAR is a calendar year report and is due April 15 of the year following the calendar year being reported with a 6-month extension available. FinCEN will grant
filers failing to meet the FBAR due date of April 15 an automatic extension to October 15 each year. A specific extension request is not required.
The FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal income tax return.
Additional information about the FBAR can be found at: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-andFinancial-Accounts-FBAR
U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File Form 8938
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. Those foreign financial assets could include foreign accounts reported on an FBAR. The Form 8938 filing requirement is in addition to the FBAR filing requirement.
Form 8938 must be filed by specified individuals who include U.S. citizens, resident aliens, and certain nonresident aliens if reporting thresholds are met.
Specified individuals living in the U.S. must file if:
• Unmarried (or Married Filing Separately) with total foreign financial assets valued at more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year, or
• Married Filing Jointly with total foreign financial assets valued at more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.
Specified individuals living outside the U.S. must file if:
• Unmarried (or Married Filing Separately) with total foreign financial assets valued at more than $200,000
on the last day of the tax year, or more than $300,000 at any time during the year, or
• Married Filing Jointly with total foreign financial assets valued at more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year
Delinquent FBAR Submission Procedures
Taxpayers who have not filed a required FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about a delinquent FBAR, should file any delinquent FBARs and include a statement explaining why the filing is late. Select a reason for filing late on the cover page of the electronic form or enter a customized
explanation using the ‘Other’ option. If unable to file electronically you may contact FinCEN’s Regulatory Helpline at 800-949-2732 or 703-905-3975 (if calling from outside the United States) to determine acceptable alternatives to electronic filing.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
This is very general information, please contact your own tax professional for more information regarding your specific tax circumstances.
How the New Tax Laws for 2018 affect HomeownersPosted on September 24th, 2018
Itemized Deductions for Homeowners; The IRS defines a home as any house, condominium,cooperative, mobile home, boat, or similar property that has sleeping space, toilet facilities, and cooking facilities. Some homeowners qualify for these deductions.
Real Estate Taxes
You can deduct real estate taxes assessed on all the real estate you own. You are not limited to the tax on just one or two homes.
• Only the amount actually paid is deductible. Do not confuse this amount with deposits made to your mortgage escrow account.
• Charges for trash collection, sewer, etc., are sometimes added to real estate tax bills. These amounts are not deductible as real estate taxes.
• Special assessments are sometimes added to real estate tax bills. Assessments are not necessarily deductible as real estate taxes.
• The deduction for foreign property taxes is no longer allowed.
• The total deduction for all state and local taxes (including income taxes) is limited to $10,000 ($5,000 MFS).
If you borrow money to buy, build, or substantially improve your main or second home, the mortgage interest may be claimed as an itemized deduction on Schedule A. Form 1098 Your lender will generally give you Form 1098, Mortgage Interest Statement, to tell you how much interest you have paid.
• An explanation must be attached to your tax return if the amount shown on Form 1098 is different from the deducted amount or if more than one person paid deductible mortgage interest (other than a spouse filing jointly).
• If you did not receive Form 1098, you must provide the name, identifying number, and address of the interest recipient.
Home Mortgage: A home mortgage is any loan secured by your main or second home, including first and second mortgages, home equity loans, and refinanced loans. The loan must
be legally recorded, with the home as collateral for the debt. You must be legally liable to make the payments. For example, if you borrow money from your parents to make a down payment on your home, you cannot deduct the interest you pay them unless the loan is legally recorded with the home as collateral.
Limits: You may generally deduct the mortgage interest on your main home and a second home, up to the limits described below.
• A loan secured by a third home is a personal loan and the interest is not deductible. Interest on a third home used exclusively for business might be deductible as a business expense.
• Your mortgage interest deduction is limited, based on the type of debt you have. Note: Slightly different rules apply to mortgages taken out before October 14, 1987.
Debt that is refinanced generally retains its character as acquisition or home equity debt, up to the old loan balance.
• Debt used to substantially improve your home is acquisition debt, even if it is refinanced home equity debt.
• The $1,000,000 ($500,000 MFS) limitation continues to apply to any indebtedness incurred on or after December 15, 2017, to refinance qualified residence indebtedness incurred before that date to the extent the amount of the indebtedness resulting from the refinancing does not exceed the amount of the refinanced indebtedness. Accordingly, the maximum dollar amount that
may be treated as principal residence acquisition debt will not decrease due to a refinancing.
Terms such as points, loan discount, loan origination fees, etc., refer to certain charges you might pay in order to obtain a mortgage. If you pay points to borrow money, the points are deductible as prepaid interest.
• Points are deductible ratably over the life of your loan. Points you pay at the time of your home purchase are deductible in full.
• Points you pay to the lender in exchange for a lower interest rate are generally shown on your closing statement.
Each point charged to obtain a loan is 1% of the loan amount. For example, 2.5 points charged on a $100,000 loan equals $2,500 ($100,000 × 2.5%).
• Fees your lender charges for specific loan services are not deductible. Examples include appraisal, notary, and document fees.
Medical Expense Deductions
You may need to make home improvements in order to provide medical care for yourself, your spouse, or your dependent. Examples: (1) Lifts or elevators, (2) therapy pool for help with a specific medical condition, (3) bathroom or countertop modifications to accommodate a person who is disabled, (4) ramps, handrails, support or grab bars, (5) modifications to halls and doorways.
An expense may generate a medical deduction to the extent the expense does not result in an increase to the home’s value. Not every expense results in such an increase.
Operation and Upkeep
Amounts you pay to operate and maintain a medically related home improvement qualify as medical expenses, if the main reason is for medical care. This is true even if only part or none of the asset cost qualified for a deduction.
Casualty and Theft Losses
If your home is damaged or destroyed in a disaster area declared by the President, you may have a casualty loss.
Losses are calculated on Form 4684, Casualties and Thefts.
Mortgage Insurance Premiums
Premiums paid for acquisition indebtedness on a first or second home are treated as deductible mortgage interest.
The deduction begins to phase out when AGI exceeds $100,000 ($50,000 MFS). The deduction expired after December 31, 2017.
Veterans Owed Refunds for Overpayments Attributable to Disability SeverancePosted on September 22nd, 2018
The IRS is advising certain veterans who received disability severance payments after January 17, 1991, and included that payment as income that they should file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a credit or refund of the overpayment attributable to the disability severance payment. This is a result of the Combat-Injured Veterans Tax Fairness Act passed in 2016.
Most veterans who received a one-time lump-sum disability severance payment when they separated from their military service will receive a letter from the Department of Defense (DoD) with information explaining how to claim tax refunds they are entitled to. The letters include an explanation of a simplified method for making the claim. The IRS has worked closely with the
DoD to produce these letters, explaining how veterans should claim the related tax refunds. The amount of time for claiming these tax refunds is limited. However, the law grants veterans an alternative timeframe. The statute of limitations is extended to one year from the date of the letter from DoD. Veterans making these claims have the normal 3-year statute of limitations
period for claiming a refund or one year from the date of their letter from the DoD, whichever expires later.
This alternative time frame is provided for those who have claims for refund of taxes paid as far back as 1991. Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X. They also have the choice of using a simplified method. The simplified method is a standard refund amount based on the calendar year in which they
received the severance payment. Write “Disability Severance Payment” on line 15 of Form 1040X and enter on lines 15 and 22 the standard refund amount listed below that applies:
• $1,750 for tax years 1991 – 2005
• $2,400 for tax years 2006 – 2010
• $3,200 for tax years 2011 – 2016
Claiming the standard refund amount allows veterans to not have to access their original tax return for the year of their lump-sum disability severance payment. All veterans claiming refunds for overpayments attributable to their lump-sum disability severance payments should write either “Veteran Disability Severance” or “St. Clair Claim” across the top of the front page of the
Form 1040X. Mail the completed Form 1040X, with a copy of the DoD letter, to:
Internal Revenue Service
333 W. Pershing Street, Stop 6503, P5
Kansas City, MO 64108
Veterans eligible for a refund who did not receive a letter from DoD may still file Form 1040X to claim a refund but must include both of the following to verify the disability severance payment:
• A copy of documentation showing the exact amount of
and reason for the disability severance payment, such
as a letter from the Defense Finance and Accounting
Services (DFAS) explaining the severance payment at
the time of the payment or a Form DD-214, and
• A copy of either the VA determination letter confirming
the veteran’s disability or a determination that
the veteran’s injury or sickness was either incurred as
a direct result of armed conflict, while in extra-hazardous
service, or in simulated war exercises, or was
caused by an instrumentality of war.
Veterans who did not receive the DoD letter and who do not have the required documentation showing the exact amount of and reason for their disability severance payment will need to obtain the necessary proof by contacting the Defense Finance and Accounting Services (DFAS).
Reference: • IR-2018-148, July 11, 2018
Security at your Home OfficePosted on September 22nd, 2018
The FBI issued a Public Service Announcement (PSA) on May 25 recommending that any owner of small office and home office routers power cycle (reboot) their devices. Foreign cyber criminals have compromised hundreds of thousands of home and office routers and other networked devices worldwide. The criminals used VPN Filter malware to target small office and home office routers. The malware is able to perform multiple functions, including possible information collection, device exploitation, and blocking network traffic. The malware targets routers produced by several manufacturers and network-attached storage devices. The malware is able to render small office and home office routers inoperable. The malware can potentially collect information passing through the router. The FBI recommends rebooting the routers to temporarily disrupt the malware and aid the potential identification of infected devices. Owners are advised to consider disabling remote management settings on devices and secure with strong passwords and encryption when enabled. Network devices should also be upgraded to the latest available versions of firmware. Cross References â?¢ Alert No. I-052518-PSA,
Keep Your Mileage LogsPosted on September 22nd, 2018
A recent tax court case once again illustrates the point that written contemporaneous mileage logs are virtually a requirement to claim a deduction for business mileage. The taxpayer’s job required him to respond to emergencies, such as floods and hurricanes that could adversely affect the state’s transportation system. He was responsible for supervising communications and
for assigning personnel and equipment to disaster locations. For a second job, the taxpayer in his capacity as president of a local union was responsible for arranging meetings, conferences, and social events. He was required to travel to various locations throughout the state. He also traveled to national conventions. During an audit, the IRS allowed some, but not all of his claimed
mileage for business.
The court noted that IRC section 274(d) imposes relatively strict substantiation requirements for deductions claimed for listed property. Listed property includes any passenger automobile. No deduction is allowed without adequate records or by sufficient evidence corroborating the amount, time, place, and business purpose for each expenditure.
The taxpayer claimed 10,500 business miles out of 14,000 total miles driven for his vehicle (75% business use). He also claimed $800 in expenses for parking and tolls. The IRS allowed 1,088 business miles, and no expense for parking and tolls.
The court said to satisfy the substantiation requirements, the taxpayer must keep a contemporaneous mileage log or a similar record.
Note: Contemporaneous means reconstructed mileage logs after the IRS initiates an audit are not good enough. A mileage log or a similar record can include a diary or trip sheet that substantiates the extent to which the vehicle was actually used for business rather than personal purposes. Lacking contemporaneous records, the taxpayer must produce other credible evidence sufficient
to corroborate his own statements concerning business use.
The court said the taxpayer failed to submit any form of documentation, such as mileage logs, odometer readings, diaries, or trip sheets, to substantiate the extent to which the vehicle was actually used for business rather than personal purposes. The court ruled the taxpayer did not meet the substantiation requirements.
Note: In reality, any other credible evidence sufficient to corroborate a taxpayer’s claimed business mileage means some type of contemporaneous written record. Verbal statements and estimates, such as claiming that the vehicle is used a certain percentage for business is not good enough. Even though the regulations do not require a specific format for keeping a mileage log, some type of contemporaneous written record like a mileage log is required. Estimated business mileage is always rejected by the courts.
• Edwards, T.C. Memo. 2018-44
Do You Need to Fill out Schedules C & E?Posted on March 10th, 2018
Schedule C is a form that reports income for any self-employed individual. If you are the sole proprietor of your business (even if it is a single-member LLC) or an independent contractor, you need to fill this form out. Sadly, since you won’t have a boss that writes your own checks, you don’t have the opportunity to have taxes taken out for you; you have to pay the full taxes of your income. That being said, claiming any and all genuine business expenses on your Schedule C will reduce the amount of income that is taxable. Make sure that you gather as many receipts for your business expenses as you can.
Schedule E is the form for certain types of supplemental income: income from rental properties you own, any royalties you earn, and income reported on a Schedule K-1 (from partnerships or S corporations) are some of the more common examples. If, however, income from multiple rental properties is your primary form of income, you may have to use a Schedule C for your sole proprietorship instead. In addition to income, a Schedule E is also used to report business losses (paying for an apartment’s carpet replacement, for example) and helps prevent you from paying too much in taxes. This only applies to “at risk” situations, which is not necessarily the same thing as the total money lost.
When it comes to taxes, honesty is always the best policy; if you run your own business or rent a room to someone, and that income is at least the minimum taxable amount, you will need to fill out a Schedule C or E, respectively. Filling out these forms do not necessarily mean that you will be paying too much in taxes, nor does that mean that you won’t be able to make up for these taxes either. If you see yourself filling out either Schedule, feel free to contact your trusted tax preparer or accountant to discuss these forms. When tax day comes, being prepared for Schedules C and E can save you time and, possibly, money.
Why and How? Proactive Tax PlanningPosted on November 10th, 2017
Many business owners and taxpayers are accustomed to the idea of “reactive” taxes. In this style of filing, you make your various expenditures throughout the year, see your company’s sales and expenses, and determine how much you owe at the end of the year. However, this form of filing often leads to business owners owing more in taxes. As a result many accountants work with businesses to curb the amount you would owe during tax season.
Why engage in Proactive Planning?
Proactive tax planning allows a business owner to limit tax liability by working within the various state and federal tax laws. Not only does this approach save business owners money, but allows your accountant more time in finding the best deductions and tax credits each year.
The tax landscape is always changing, and implementing an effective tax plan can also help to ensure that your business’ books are kept up to date. This continuous knowledge of the state of your business and the developing tax laws can also help you find beneficial reductions to how much you need to pay.
Business owners looking to expand, incorporate, or otherwise change their business model during the year are especially well served by an adaptive tax plan. This way, you will be able to account for the change in your company and can have a strategy in place to mitigate the corresponding differences in the tax code.
How to start your Proactive Tax Plan
The first step in planning for the upcoming tax season is to find an experienced accountant or CPA. Hiring a professional will allow you to keep your attention on your business ventures, without needing to focus too much on current tax laws. Additionally when creating your tax plan, it is always beneficial to allow your tax professional to assess the current state of your company to strategize a savings plan.
If you have questions about tax planning or are looking for a strategy that is tailored to your specific income or business, contact our firm today.
Reducing Tax Liabilities for High Income EarnersPosted on August 10th, 2017
Preparing for end-of-the-year taxes can be daunting, but understanding good tax-planning practices can help to increase your chances of receiving higher returns on your investments. Income from investments can be one of the best places to look when searching for places to cut costs and increase your revenue. Creating a proactive tax-plan can prevent you from paying thousands of dollars in unnecessary taxes.
While high-income tax payers are required to pay the most income tax, there are a few practices these individuals can engage in to lower the amount they pay at the end of the year.
Purchasing stock for at least one year prevents you from paying additional costs from unnecessary taxes. Allowing your stock to become eligible for long-term treatment helps to reduce the amount you pay in taxes. Failing to hold stock for at least a year causes you to pay short-term capital gains on investments rather than just the 15 to 20 percent of normal capital gains tax, in short paying more.
Regular reviews of your taxable assets makes sure you’re aware of all the areas that may be costing you extra money. Routine checks develop good practices and habits that help to reduce what you pay.
Reduce the amount of taxable interest, which means reducing amount of money stored in low-profit areas. Banks give their clients close to nothing, while clients are still required to pay at least half of that interest in taxes. Utilizing high-profitable places to store you money will not only increase your dividends, but also reduce the amount of taxes you pay.
Give away assets, that is, giving or donating assets to charities and family members using appreciated stock, may reduce the amount of taxable income you own. Neither party associated in the exchange is required to pay capital-gains taxes when the stock is transferred. Additionally, family members may be qualify for a different tax bracket that are lower than your costs, in turn reducing the overall amount of gains lost through the process.
Helpful Tips for Any Small Business OwnerPosted on May 29th, 2017
People looking to start small businesses face a daunting task. With the dominance of larger companies, global competition provided by the internet, and the increasing number of competitors within other small businesses, you may feel overwhelmed. However, these simple yet effective tips should help keep you ahead of the curve and competitive in the modern market.
1) Make Yourself Known: A great way to get your name out is through community outreach efforts, or even sponsorships of local sports teams. These efforts go beyond regular marketing efforts in that they allow local communities to know you, as well as your business, and make purchasing your goods and services personal.
2) Have a Plan: Before even starting your business, have a strong business plan that acknowledges your company’s niche, market potential, and values your current assets. This can help you in deciding a direction for your venture, and can cut back on unnecessary expenditures in the future.
3) Quality over Price: With the constant presence of corporations like Walmart and Amazon, trying to price match competitors can lead to a loss of profit, as well as confidence. Instead of trying to compete fiscally, focus on honing your service in a way that these companies cannot. Not only will your product benefit from your drive for excellence, but patrons will overlook price differences for superior quality products and service.
4) Acknowledge Missteps: Nobody likes to be wrong, but being able to accept flaws in your business’ model or your product are essential in setting yourself apart from your competitor. Accept criticisms as opportunities to improve. Adaptability is essential in the modern marketplace.
5) Use Technology: With the internet and technologies focused on the management of small businesses, the barrier for marketing and sales in greater regions has more or less been lifted. Be sure to use all of the resources at your disposal, whether this means creating a web-based storefront, or managing your accounts with programs like QuickBooks.
While these strategies are just the tip of the iceberg in terms of establishing a successful business, they are helpful in getting your business a leg up over the competition.
Year Round Tax Planning for Reduced LiabilityPosted on April 19th, 2017
April 15 is a stressful day of the year, and especially when attempting to cram in months of tax preparation in a few days. If receipts and records are not well-organized, keeping track of deductible expenses grows increasingly difficult. This limits the size your return, or can even cause you to pay taxes incorrectly, which incurs liability that the IRS can penalize. A stressful tax season is entirely avoidable, but it requires time, effort, and planning.
Keeping Records for a Successful Tax Season
Detailed records, either physical or digital, is beneficial when it comes to successfully submitting your tax payments. Invest in organization for you receipts and records, either with a physical filing cabinet, or web-based resources. Online services such as QuickBooks are available to digitize all records and to make financial transactions accessible 24/7. Records are important for they keep individuals and small businesses aware of their cash flow and tax deductible items that will save money each April.
Stay Up-to-Date on Tax Code
Tax law changes frequently enough to affect how much an individual owes the state or federal government. It’s easy to stay on top of these changes by attending free classes in your community, doing online research, or speaking to a tax professional. Keep abreast of the changes to avoid surprising bumps in taxes owed, and doing so on a regular basis will ensure year-long tax prep success. Quarterly reviews of your taxes are recommended to make sure your information is accurate.
Hire Tax Professionals
The hardest part of preparing for taxes year-round is doing so while managing other areas of your life. Taking control of tax preparation ties up your time and energy that is needed elsewhere. Our affordable services will grant peace of mind, financial stability, and precise tax preparation for year-round success. The tax code is infamous for being complex and challenging for most individuals, but professional help can untangle your tax complexities and enable you to receive the return you deserve. This will keep your finances in check and ensure that the IRS doesn’t follow up with audits or penalties.