Category Archives: Federal Income Taxes

Federal income tax issues including IRS tax problems, installment agreements, offers-in-compromise, ways to lower your income taxes.

Unclaimed Tax Refunds Total $1 Billion

Unclaimed Tax Refunds Total $1 Billion

The IRS reported Wednesday it has a total of $1 billion of unclaimed tax refunds related to unfiled 2013 income tax returns.

The IRS estimates the median tax refund is $763.  Taxpayers can claim their refunds by filing a 2013 federal income tax return by Tuesday, April 18, 2017.  That is the same day as the filing deadline for the 2016 tax year.

IRS Commissioner John Koskinen, in a statement to Tax Pro Today, said, “We’re trying to connect a million people with their share of 1 billion dollars in unclaimed refunds for the 2013 tax year.  People across the nation haven’t filed tax returns to claim these refunds, and their window of opportunity is closing soon. Students and many others may not realize they’re due a tax refund. Remember, there’s no penalty for filing a late return if you’re due a refund.”

The Internal Revenue Code gives taxpayers three years to claim refunds for income tax returns they have not yet filed. If they don’t file a return within that time, the refund expires and becomes the property of the U.S. Treasury. To claim a 2013 tax refund, taxpayers need to properly address, mail, and postmark their federal income tax return by April 18, 2017.

However, taxpayers may not receive the refund. The IRS warned it may still hold onto the 2013 federal income tax refund money if taxpayers have not yet filed their tax returns for 2014 and 2015. The IRS will also apply the tax refund to any amounts still owed to the IRS or a state tax authority.  Finally, the government may apply the tax refunds to unpaid child support or other past due federal debts, such as student loans.

Unclaimed Refunds by State

Visit Tax Pro Today to get the state-by-state breakdown of unclaimed tax refunds:  https://www.taxprotoday.com/news/irs-has-1-billion-in-unclaimed-tax-refunds-waiting

So, contact Chicago CPA and attorney Brian J. Thompson to file your unfiled tax returns and claim your income tax refund.

Home Office Deduction

Home Office Deduction

To claim the home office deduction, a taxpayer must meet 2 requirements: 1) Regular and exclusive use for business – you must use part of your home regularly and exclusively for conducting business; 2) Principal place of your business – you must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.

Both self-employed taxpayers and employees can claim the home office deduction. However, if the taxpayer is an employee, there is an additional requirement that the home office also must be for the convenience of the employer. This generally means the employer does not have a local office.

How to Report the Home Office Deduction

As an employee, you must itemize deductions on Schedule A (Form 1040) to claim a deduction for the business use of your home and any other employee business expenses. Self-employed tax filers who use part of their home in a trade or business and file Schedule C (Form 1040), report the deduction for business use of their home on line 30 of Schedule C (Form 1040).

Actual Method for Home Office Deduction

There are 2 options for calculating the dollar amount of the home office deduction.

The first option is based upon the actual percentage of your home used regularly and exclusively for business. This option requires the taxpayer to track expenses such as utilities, insurance, depreciation (or rent) for the entire house and then allocate those expenses based upon the percentage of the home used for regularly and exclusively for business purposes.

Simplified Home Office Deduction

Beginning in 2013, there is a second option. The new simplified method permits a $5 per square foot deduction for up to 300 square feet. Therefore, the maximum home office deduction is $1500 under this method. The new simplified home office deduction is electable on a year-by-year basis

 

IRS CP2000 Notice

IRS CP2000 Notice

Did you receive an IRS CP2000 Notice?  What is the purpose of the CP2000 Notice?  This notice means the income and/or payment information the IRS has on file (from a 1099 or W-2)  doesn’t match the information the taxpayer reported on his tax return. This could affect your tax return; it may cause an increase or decrease in your tax, or may not change it at all.

What should you do upon receipt of a CP2000 Notice?

  1. Read the notice carefully – it explains the info the IRS received and how it affects your tax return.
  2. Complete the notice response form whether you agree or disagree with the notice.
  3. If the info is wrong, contact the business or person who reported it to the IRS and ask them to correct it.  Then, provide this corrected info to the IRS.
  4. Consider whether the mistake may have affected other tax returns such as your state income tax return.
  5. Contact a CPA if you need professional help.

For further details on the IRS CP2000 Notice, visit the IRS website:  Understanding your CP2000 Notice.

Contact Chicago CPA and business lawyer Brian J. Thompson at Brian@BrianThompsonLaw.com if you need professional tax help.

Passive Activity Loss Rules

Passive Activity Loss Rules

Passive activity loss rules may limit use of rental real estate losses. Can I deduct losses related to rental real estate for federal income tax purposes?  Maybe.   Losses from rental real estate may or may not be deductible in the current taxable year.  It depends upon the application of the passive activity loss rules to the particular taxpayer’s situation.

General Passive Activity Loss Rule

Generally, the passive activity loss rules permit deduction of passive activity losses to the extent of passive activity gains.   “Passive activity” means any activity— (A) which involves the conduct of a trade or business, and (B) in which the taxpayer does not materially participate.  Material participation means involvement in the operations of the activity on a (A) regular, (B) continuous, and (C) substantial basis. Federal law provides that the term “passive activity” includes any rental activity, except as provided in Section 469(c)(7).

Material Participation Exception

Section 469(c)(7) of the Internal Revenue Code provides the material participation exception.  A taxpayer can materially participate in real estate as a real estate professional if a) more than 50 percent of the personal services performed by the taxpayer are performed in real property trades or businesses in which the taxpayer materially participates, and b) the taxpayer performs more than 750 hours of services within the real property trades or businesses in which the taxpayer materially participates.  The term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Rental real estate activity is not a passive activity if a taxpayer meets both of the foregoing tests of material participation.  Therefore, deductions for losses related to the rental real estate activity are not subject to the general rule disallowing losses in excess of income from passive activities.

Active Participation Exception

Finally, Section 469(i) of the Internal Revenue Code provides an additional exception to the general rule.  It allows deduction of up to $25,000 of rental real estate losses per tax year related to rental real estate activities if the taxpayer “actively participated” during such taxable year.  Active participation requires less participation than “material participation.”  Active participation may be shown by participating in management decisions such as approving new tenants, deciding on rental terms, approving capital or repair decisions, or similar decisions.

However, the $25,000 passive activity loss deduction phases out by 50 cents per dollar as Adjusted Gross Income exceeds $100,000.  The loss deduction allowance phases out completely at AGI of $150,000.  Carry forward disallowed passive activity losses to the next taxable year.

Report passive activity losses limitations on Form 8582.  Finally, click here for the full text of the section 469 rules.    Retain a Chicago CPA for further advice regarding passive activity loss rules.

Net Investment Income Tax

Net Investment Income Tax

High-income taxpayers could see their tax burdens rise beginning in 2013 due to the Net Investment Income Tax.  Here are some possible explanations:

Increased top marginal tax rate.  For 2013, the highest marginal tax rate increased back to 39.6%.  This applies to taxable income above $400,000 (single filers) and above $450,000 (joint filers).   That’s up from 35%.  The taxable income level at which the 39.6% rate kicks in is indexed to inflation in future years.

Higher rate on investment income.  The tax rate on long-term capital gains and qualified dividends increase to 20% for taxpayers in the top bracket.  Most other taxpayers pay 15% tax rate on this investment income.

Phase out of itemized deductions.  Higher-income taxpayers also face a potential phase out of itemized deductions and personal exemptions as their adjusted gross income (AGI) rises above $250,000 for singles or $300,000 for married couples.

Medicare surtax on net investment income.  Under the Affordable Care Act, this 3.8% tax on net investment income kicks in when a taxpayer’s modified AGI exceeds certain threshholds.  The 3.8% surtax applies to the net investment income of singles when modified adjusted gross income exceeds $200,000 and to the net investment income of married couples when modified adjusted gross income exceeds $250,000 if filing jointly (applies to married couples filing separately who individually earn more than $125,000).  Investment income includes interest, dividends, royalties, rents, capital gains and passive activity income.

Additional Medicare tax of 0.9%  Additional Medicare tax of 0.9% on income from wages and self-employment for single taxpayers earning more than $200,000 and joint taxpayers earning more than $250,000.

 

Illinois State Income Tax

Illinois State Income Tax

The Illinois state income tax is back up, it’s just a matter of when and how much it will rise.  Will Illinois implement a progressive state income tax like California?  Maybe so if Illinois House Speaker Michael Madigan has his way.  According to Crain’s Chicago Business, House Speaker Madigan plans to introduce legislation calling for a vote in November on a constitutional amendment to allow a progressive state income tax in Illinois.  Specifically, Madigan proposed a 3 percent surcharge on individual income above $1 million.  On the other hand, Senate President John Cullerton may be seeking a progressive state income tax on a lower income threshhold:

http://www.chicagobusiness.com/article/20140320/BLOGS02/140329980/madigan-moves-for-millionaire-surcharge?r=6778C2146356E5Z

 

Severance Pay Held Taxable

Severance Pay

The U.S. Supreme Court ruled severance pay is taxable income.  Lower courts issued divided rulings on the issue.  However, it should not come as a surprise that the Supreme Court recently ruled that severance payments to laid off workers are subject to Social Security, Medicare and federal income tax.  Therefore, recipients of severance pay should retain a CPA to understand the tax implications of severance pay.  Also, get full details of the ruling in U.S. v. Quality Stores:

http://www.accountingtoday.com/news/supreme-court-rules-severance-pay-taxable-income

Mortgage Forgiveness Debt Relief Act

Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act recently extended to cover tax years 2015 and 2016.  https://www.nar.realtor/news-releases/2015/12/national-association-of-realtors-applaud-passage-of-tax-extenders-package

Does the cancellation of a debt result in taxable income?  Yes, if you owe a debt  to someone and they cancel or forgive that debt, the canceled amount may be taxable income to you.   Some exceptions to this general rule were set forth in my earlier blog post on this subject. The taxpayer should receive a 1099-C Cancellation of Debt.  This cancellation of debt is also reported to the IRS.

However, there is some good news for homeowners who have gone through a mortgage foreclosure or short sale.  In December 2007, Congress enacted the The Mortgage  Forgiveness Debt Relief Act of 2007.   Generally, the Act allows taxpayers to exclude income from the discharge of debt on their principal residence as the result of a mortgage modification, mortgage foreclosure or short sale. The Act applies to  up to $2 million of mortgage debt ($1 million if married filing separately) forgiven in calendar years 2007 through 2013. Subsequently, Congress extended the Act to mortgage debt forgiven in tax year 2014.

Contact Chicago CPA and attorney Brian J. Thompson for legal advice re the Mortgage Forgiveness Debt Relief Act.

Form 1099-C Cancellation of Debt

IRS Form 1099-C

Did you receive a Form 1099-C this year?  Chicago CPA and business lawyer Brian J. Thompson wants you to know that Form 1099-C is used to report Income from Cancellation of Debt.

The general rule is if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable income.

There are some exceptions to the general rule.  The most common circumstances when cancellation of debt income is not taxable involve:

  1. Qualified principal residence indebtedness:  This is the exception created by the Mortgage Debt Relief Act of 2007; it applies to most homeowners.
  2. Bankruptcy:  Debts discharged through bankruptcy are not considered taxable income.
  3. Insolvency:  If you are insolvent (i.e., your total debts are more than the fair market value of your total assets) when the debt is canceled, some or all of the canceled debt may not be taxable income to you.
  4. Non-recourse loans:  A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.  In other words, the lender cannot pursue you personally in case of default.  Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
  5. Certain farm debts.