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House Espouses “ABLE” Accounts

Last week, the House passed the “Achieving a Better Life Experience (ABLE) Act of 2014,” which provides for a new type of tax-advantaged savings program which would allow folks with disabilities to work and save without losing access to Medicaid and Supplemental Security Income (SSI).

The ABLE Act would be effective for tax years beginning after December 31, 2014.  Contributions into an account could be made by any person and would not be tax deductible, though distributions used to pay qualified expenses, including distribution amounts attributable to investment earnings generated within the account, would not be taxable.

Eligible individuals must be blind or severely disabled, and must have become so before age 26.  Each disabled person would be limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account could be made up to the gift tax exclusion of $14,000, as adjusted annually for inflation.

IRS Reminders on Last-Minute Charitable Contributions

Check out IRS News Release 2014-110 for recent IRS words of wisdom regarding those charitable contributions which you may plan to make between now and year end, counting on a nice tax deduction.  Among other things:

  • Keep a “bank record” (related to your monetary donations) showing the name of the charity and the date and amount of the contribution. Bank records include cancelled checks, bank and credit card statements.
  • Get an acknowledgement letter from each charity for each deductible donation (either money or property) of $250 or more.

Also, it goes without saying that the recipient of your largesse must be a “qualified” charity, and not just anybody whom you want to help out.  Check out the IRS website (www.irs.gov) for a list of such qualified organizations, aside from churches, synagogues, temples, mosques and government agencies.

IRS Clarifies When IRA Can Invest in Gold

IRS has ruled that the acquisition of shares of a trust invested in gold by an IRA or an individually directed account under a qualified retirement plan won’t be considered the acquisition of a “collectible.”

IRC Section 408(m) says that acquisition by an IRA of any collectible is treated as a distribution, and therefore gives rise to taxable income.  A collectible is any work of art, metal or gem, stamp or coin, among other things.

See PLR 201446030 for the details on this potential investment opportunity for IRA holders.

IRS Mercy for Small Retirement Plan Late Filers

In June, IRS began a one year pilot program to help small businesses with retirement plans which haven’t been filing the retirement plan reports timely.

Plan administrators who don’t file the requisite Form 5500 can face significant penalties.  Those who have already been assessed late filing penalties are not eligible for this program, which is generally available to plans maintained by certain small businesses, such as those in an owner-spouse arrangement or eligible partnership.

If a retirement plan has not filed relevant returns for more than one plan year, penalty relief may be available for all of these returns.

Check out Revenue Procedure 2014-32 for the details.

IRA Once-Per-Year Rollover Rule Clarified

IRS announced a change, this week, in the application of the one-per-year rule applicable to IRA rollovers, occasioned by a recent decision of the Tax Court.

Starting January 1, 2015, an individual will be allowed one rollover per year, regardless of how many different IRAs he owns – the limitation will apply by forcing the taxpayer to aggregate all of his IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.  See IR-2014-107 for the details.

New IRS YouTube Video Warns of Scammers

The IRS continues to be worked up over the ongoing problem of aggressive telephone scammers who harass taxpayers.  In a recent release, IRS advises about five things which scammers often do, but which IRS will not do:

  • Telephone a taxpayer to demand immediate payment
  • Demand that a taxpayer pay without offering the opportunity to question or appeal the amount they say you owe
  • Require you to use a specific payment method
  • Ask for credit or debit card account numbers over the phone
  • Threaten arrest by local police or other law enforcement groups when taxes are not paid

Check out http://www.youtube.com/user/irsvideos.

Tax Not Always Discharged in Bankruptcy

In Vaughn (CA 10 8/26/14), the Tenth Circuit tells us that a taxpayer who entered into a tax shelter that created “artificial” losses willfully attempted to evade tax, and thus could not have his tax liability discharged in a Chapter 11 bankruptcy proceeding.

The taxpayer’s 1999 return, in this case, reported a large gain from the sale of his company, as well as a large loss arising from a strategy known as “Bond Linked Issue Premium Structure” (BLIPS), which had hit the IRS’ radar as one of several forms of transaction designed to give taxpayers an artificially high basis in partnership interests, thereby giving rise to deductible losses on disposition of those partnership interests.

Under Chapter 11, the law does not allow for discharge of any debt for a tax with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat the tax.

Quid Pro Quo Donations Scrutinized by IRS

The Tax Court recently issued a tough lesson to taxpayers in its Seventeen Seventy Sherman Street, LLC  (TC Memo 2014-124) decision, in ruling that a taxpayer received two items of property in return for its contribution of an easement, but failed to consider the value of all of the property received.  The result?  No deduction whatsoever with respect to the donated easement!  Failure to value all of the consideration received led to the conclusion that failure to prove the fair market value of the easements exceeded the value of the consideration received in return!

Capital Gains Rates

As the 2014 tax planning season comes upon us (just as the last extension date for filing 2013 returns comes and goes), folks should not lose sight of the advantageous way in which long-term capital gains are taxed.

  • 20% rate if the gains would otherwise be taxed at a rate of 39.6% if they were taxed as ordinary income
  • 15% rate if the gains would otherwise be taxed at between 15% and 39.6% if taxed as ordinary income
  • 0% rate if the gains would otherwise be taxed at a rate of 10% or 15%

Strict Substantiation Rules Govern Property Donations to Charity

Check the recent Tax Court decision in the Smith case (TC Memo 2014-203) before you get too cavalier with your tax documentation.

This chap donated about $27,000 (according to him) worth of household goods, clothing and electronic equipment in 2009 to a legitimate charity, the fact of which was not challenged.  The IRS and the Court, however, rendered none of the donations tax deductible because the taxpayer flunked the charitable contribution substantiation tests.

Despite the fact that the taxpayer had consulted a Salvation Army website which revealed estimated “low” and “high” values for used property, he nonetheless assigned values to his items which were considerably higher than the “high” values listed, and he did not take photographs of any of the items donated, nor did he introduce any evidence to establish their condition.

For noncash contributions in excess of $500, taxpayers are required to maintain written records with respect to each item of donated property, to include:

  • The approximate date the property was acquired and the manner of acquisition
  • A description of the property
  • The cost or other basis of the property
  • The fair market value of the property at the time it was contributed
  • The method used in determining the fair market value

No deduction is allowed for contributions of clothing or household goods unless such items are “in good used condition or better.”