Changing World and the Tax Implications

  1. MyRA

This is a new retirement plan for taxpayers without employer-sponsored retirement plans, but they need direct deposit. The contributions are post-tax (like a Roth IRA). The contributions are taken directly from the taxpayer’s paycheck by the employer but the employers are not paying into the program. The Treasury has also set up a system where workers can open an account through Comerica (a TX bank) as long as the employer can direct money to it.

  1. For 2015, income limits are <$131k for single and <$193k for MFJ and the income phase outs begin at $116,000 for single and $183,000 for MFJ
  2. Accounts can be opened with $25 or more.
  3. Contributions must be at least $5 per paycheck and made via automatic payroll deduction
  4. Contributions can be withdrawn without penalty or tax implications
  5. Earnings withdrawn before 59.5 years will result in tax and possible 10% penalty (penalties and exceptions are expected to match IRAs)
  6. Earnings can be withdrawn after 5 years and when the taxpayer is at least 59.5 yrs
  7. Invested solely in gov’t savings bonds, fee free, guaranteed principal
  8. 2015 contribution limits are $5,500 max per year, $6,500 if 55 or older
  9. Can switch to Roth IRA at any time
  10. Must switch to Roth IRA after 30 years or when it reaches $15,000, whichever comes first
  11. Interest rate will be the same as the Thrift Savings Plan’s Gov’t Securities Investment Fund
  1. Qualified Longevity Annuity Contracts (QLAC)
  1. Available for traditional IRA, 401K, 403(b), and 457(b) plans only, e.g., funded plans only.
  2. Max premium paid is the lesser of $125k or 25%of the value (last valuation date preceding the date the premium is paid) for each taxpayer. There is a provision to adjust this amount in increments of $10,000 the same manner as section 415(d).
  3. Value of QLAC is then excluded from balance used to determine RMD
  4. If excess premiums are paid, the mistake can be corrected if excess premium is returned to the non-QLAC portion of the account by the end of the calendar year following the calendar year that the excess premium was paid.
  5. QLAC disbursements must start by the 1st of the month after the employee turns 85. The IRS can adjust this age based on changes in mortality.
  6. Form 5498-A will be used to notify the IRS and the participant of the QLAC (note that 5498 is the contribution form for IRA’s)
  7. The QLAC can provide a return of premium (ROP) or a life annuity payable to a designated beneficiary.
  8. If the taxpayer dies after the RMD starts, then the ROP is treated as a RMD and is not eligible for rollover.
  9. QLAC are fixed annuities with no annual fees and cannot be variable annuities or equity-indexed contracts nor can they offer cash surrender values. They can provide cost-of-living adjustments.
  10. If purchasing a QLAC in a traditional IRA account, the $125,000 and 25% limits can be based on the value of all traditional IRAs. Just as you can withdraw RMD from one IRA to cover all IRAs.
  11. The 25% limit for 403(b) plans requires that the limit be determined for each section of the 403(b) plan.
  1. Medical Marijuana
  1. For an individual user, medical marijuana cannot be deducted as a medical expense on Schedule A. Therefore, it cannot be deducted for purposes of Massachusetts (via line 2e) even though it is legal in MA.
  2. IRC Section 280E states that illegal drug (Schedule I & II) dealers and producers cannot deduct their business expenses on their return. Income from selling drugs is taxable and the cost of the drugs themselves are deductible as CoGS. Rent, payroll, and other expenses cannot be taken. Medical marijuana dispensaries can deduct expenses for caregiving if they provide medical marijuana and caregiving in the facility.
  3. Due to 280E, many dispensaries have tax bills higher than their profit.
  4. Canna Care court case will be heard on March 16, 2015

**** The Massachusetts follows the federal code as of January 1, 2005 (unless legislation was enacted otherwise). Therefore,the MA Schedule C will match the federal Schedule C. ****

  1. Federal banking laws prohibit these dispensaries from having bank accounts. Without bank accounts, dispensaries can’t pay their payroll taxes electronically, creating an added 10% penalty.
  2. Allgreens LLC in Colorado is suing on this issue.
  3. Can EA’s represent dispensaries or even file their taxes?
  4. Well, according to Circular 230:

(13) Giving a false opinion, knowingly, recklessly, or through gross incompetence, including an opinion which is intentionally or recklessly misleading, or engaging in a pattern of providing incompetent opinions on questions arising under the Federal tax laws. False opinions described in this paragraph (a)(l3) include those which reflect or result from a knowing misstatement of fact or law, from an assertion of a position known to be unwarranted under existing law, from counseling or assisting in conduct known to be illegal or fraudulent, from concealing matters required by law to be revealed, or from consciously disregarding information indicating that material facts expressed in the opinion or offering material are false or misleading. For purposes of this paragraph (a)(13), reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances. A pattern of conduct is a factor that will be taken into account in determining whether a practitioner acted knowingly, recklessly, or through gross incompetence. Gross incompetence includes conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client.

  1. Given that the law requires a tax payer file and pay taxes even on illegal activity and Circular 230 does not state that EA’s cannot represent tax payers that engage in illegal activity (except illegal tax filing), then it should be fine. But . . .
  1. BitCoin and other crypto-currencies (aka, digital currencies or virtual currencies)
  1. Cryptocurrencies defined and explained:
  2. The government is concerned with decentralized digital currencies. These are currencies that are not controlled by a government or other organization.
  3. Computer calculations verify and record transactions on these “currencies”
  4. The people processing those computer calculations are paid in the currency. This is called “mining.” New currency is added to the system through “mining.”
  5. While additional currency is created through mining, the IRS treats these acquired assets differently than mined material. Bitcoins received through mining are taxable upon receipt and should be included in gross income.
  6. “Miners” can be sole proprietors or work for a mining company. This will determine if the income is W-2 or requires a 1099-MISC (from whom?) and belongs on a Schedule C. Taxes and backup withholding is also required and must be paid in US dollars.
  7. IRS released Notice 2014-21 stating that cryptocurrencies are property for tax purposes. All exchanges of cryptocurrencies are property transactions. Since most currencies have volatile prices, most transactions will trigger capital gains/losses.
  8. Recording of all transactions can be onerous.
  9. There have been no rulings on FIFO, LIFO, or other methods of tracking which “coins” have been exchanged.
  10. If property, does buying/selling trigger sales tax? Not in WI, MO, or NE. No other states have commented. But purchasing products with Bitcoin triggers sales tax in most states and CA, WI, and KY have specifically stated this.
  11. What about like-kind exchanges? Even the BitCoin community thinks it will be difficult to claim the rights and characteristics of two different cryptocurrencies are the same for this.
  12. FinCEN (another branch of the Dept of Treasury) states that trading cryptocurrencies meets the definition of money transfer.
  13. Rules on FBAR and Statement of Specified Foreign Financial Assets (SFFA) Form 8938 filings have not been decided. IRS has requested comments on handling virtual currency. The latest FFIEC Bank Secrecy Act/Anti-Money Laundering (BSA/AML) examination manual considers companies that administer or exchange virtual currency to be money service businesses for definition of non-financial institutions.
  14. Cryptocurrency can be held in “paper wallets” (basically, on a person), exchanges, or e-wallets. The latter two are essential held by a company for the owner. Some practitioners are saying to report the cryptocurrency if it is held in an exchange or in an e-walletwhere the company is a custodian of the account.
  15. My person suggestion is to report itregardless of how it is held – better safe than sorry.
  16. There are other virtual currencies with a centralized controlling entity. Second Life, a video game, has such a currency. Some on-line gambling sites also do. Because these currencies can be exchanged for cash, the income must be reported. For currency controlled outside the US, FBAR and SFFA reporting is required. (Note: Second Life is in CA so their currency is not foreign but playing it can generate income.)
  1. ABLE Act
  1. Allows parents of disabled child to establish tax-free savings account to cover long term care by amending Section 529. The new section is called 529A although the current lingo is to call the accounts 529-ABLE.
  1. For individuals whose blindness or disability occurred before the age of 26 and have been certified.
  2. Rollovers are allowed but limited to “family members” who meet the disability criteria.
  3. Annual contributions to an account is limited to the gift-tax exemption ($14,000 for 2014).
  4. Limited to 1 ABLE account per individual.
  5. Funds to be used for certain expenses for the disabled beneficiary including education, housing, transportation, employment support, health & wellness, assistive technology, financial management and legal fees, funeral and burial expenses, etc.
  6. 10% penalty for distributions not used for qualified expenses.
  7. Withdrawals for legitimate expenses will not disqualify the individual from most state or Federal aid like Medicaid and Supplemental Security Income (SSI).
  8. Withdrawals for housing expenses will reduce SSI.
  9. The first $100,000 in the account is not counted when looking at assets which can reduce SSI benefits. If assets exceed the $2,000 limit due a 529-A account, SSI benefits are suspended until the assets falls below $2,000 (excluding the first $100,000 of the 529-A). Medicaid is not affected regardless of account balance.
  10. The state shall inform the SSA of the distributions and account balance monthly.
  11. Upon the beneficiary’s death, the balance (after expenses paid) shall be paid to the state’s Medicaid Buy-In program.
  12. 529A plans will be set up by each state and residents can only invest in their states plan.
  13. Allows for some limited investment direction by the beneficiary no more than twice per year.
  14. The bankruptcy code has been amended to exclude funds placed in an account of a qualified ABLE program from a bankruptcy estate, but only if: (1) the designated beneficiary of such account was a child, stepchild, grandchild, or step grandchild of the debtor; (2) such funds are not pledged or promised to any entity in connection with any extension of credit and are not excess contributions to an ABLE account; (3) such funds were not placed into the account with 365 days of bankruptcy filing; and (4) do not exceed $6,225 contributed between 720 days and 365 days of bankruptcy filing.
  15. The IRS has 6 months to develop regulations and guidance. Open issues that will need to be addressed include:
  16. Can existing 529 be moved to a 529-A?
  17. What happens if a family moves to a new state?
  18. Note on Supplemental Needs Trusts (Special needs trusts are different): Funds that go toward food, clothing, shelter, or medical bills covered by Medicaid will reduce SSI. Funds given to beneficiary count toward assets owned ($2000 limit). Excess funds do not go to the state of Medicaid. Funds are taxable with an exemption equal to the personal exemption.
  1. Minister housing
  1. After a court case and an appeal, the minister housing allowance exemption holds on an issue of standing (not an actual ruling on the law). The organization that sued is likely to continue the battle.
  2. Freedom from Religion Foundation (FFRF) sued on the grounds that housing allowance for clergy violates the separation of church and state; and asked why other tax-exempt groups can’t have the same benefit. Also asked was why they get the income tax-free and then get to claim the mortgage and real estate tax as an exemption on the Sch A. US District Court Judge Barbara Crabb agreed but stayed the ruling.
  3. Currently (thanks to an issue with a mega church claiming $70,000 in housing allowance), the housing allowances are only for 1 house, and are limited by either fair market rental value or actual money spent on housing although they can still be very high for some megachurches.
  4. The exclusion is only for income tax – it is included for self-employment tax purposes.
  5. Another ruling – IRS & Ricky Williams – the church must designate the amount of the housing allowance through a contract and/or official meeting minutes of the governing body before any allowance is paid. If the contract has an end date, then a new contract or extension is necessary for the allowance to continue as income tax exempt.
  6. Side note – FFRF is also suing to have the gov’t enforce the rules banning pastors from giving political endorsements and to require churches to file the same Form 990 tax returns as other tax-exempt organizations.
  1. Capitalization vs repair
  1. For small businesses (<$10M gross receipts averaged over last 3 years) or landlord with buildings worth less than $1M, improvements that are less than $10k can be expensed. (If more than $10k, all the improvements must be capitalized.) The amount ($10,000) is also limited to 2% of the unadjusted basis of the building.
  2. For leased buildings, the unadjusted basis is the total amount expected to be paid over the entire lease.
  3. This is true for buildings and building systems. The latter are:
  4. Heating
  5. Plumbing
  6. Electrical systems
  7. Escalators
  8. Elevators
  9. Fire protection and alarms
  10. Security systems
  11. Gas distribution systems
  12. The improvements cannot be expensed if they change the use of the property (building and/or building systems), it prolongs the life of the property, or it adds value to the property.
  13. This is a yearly election by attaching a statement to the return.
  14. Tax payers can amend 2012 and 2013 returns to use this election.
  1. Capitalization rules and expensing – the de minimis rule

See bulletin 2013-43:

Essentially, expenses for tangible property that previously were considered capital expenses requiring depreciation can be expensed if their value is small compared to gross receipts and total depreciation, a written accounting procedure exists, and the financial statement treats the amounts as expense.

  1. The de minimis rule was initially for taxpayers with written accounting procedures and if the total payments are less than or equal to the greater of 0.1% of gross receipts shown on IRS return or 2% of total depreciation and amortization expense shown on applicable financial statement (AFS). The amount must not exceed $5000 (this amount can be changed by Dept of Treasury)
  2. If no AFS, then “A taxpayer without an applicable financial statement may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item as substantiated by the invoice.” (This includes cost of delivery, installation, etc. if on the same invoice.) But you must be able to show that there was no abuse. The taxpayer must have something in writing before the start of the taxable year treating the amounts paid for property costing less than a certain dollar amount as an expense for financial accounting purposes. Otherwise it is $200. The taxpayer must elected this procedure each year on the original tax return and it cannot be revoked once elected.