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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.”

Don’t Forget IRA-Required Distribution as Year End Approaches

The last quarter of the year is just around the corner, and those of you age 70-1/2 and older should be sure to withdraw from your IRA the “required minimum distribution” (RMD) lest you be subjected to the onerous 50% penalty if you don’t.

Taxpayers must begin RMD withdrawals no later than April 1 following the year in which they reach age 70-1/2, and by December 31 of each calendar year thereafter.

The amount of each RMD is computed separately for each IRA, if you have more than one account, though the aggregate total may be paid out from any one or more of your IRAs.

Section 83 Governs Tax on Property Received for Services

Section 83 provides that any person who performs services in connection with which he receives property may elect to include in gross income for the taxable year of the transfer the excess of the fair market value of the property over the amount paid for it, even in a case in which the property is subject to a substantial risk of forfeiture.

The election is made by filing one copy of a written statement with the IRS office with which the taxpayer files his return within a stipulated period of time, and, in addition, a copy of the statement is supposed to be submitted with the income tax return itself for the year of the transfer.

Recent PLR 201438006, however, provides a bit of leniency regarding the requirement to include a copy of the election with the tax return, noting that failure to submit another copy won’t affect the election’s validity.

IRS Provides YouTube Tips on New Health Care Law

The recently-released videos are part of a series on the IRS YouTube channel, featuring IRS Commissioner Koskinen discussing the premium tax credit and the individual shared responsibility provision, which folks will want to know all about before filing their 2014 tax returns.

“For most people, filing their returns in the spring of 2015 is going to be fairly simple….and that is they’ll simply check a box indicating that they have qualifying insurance or they’ll indicate that they’re eligible for an exemption.  Otherwise, they’ll calculate their shared responsibility payment and add it to their tax return,” says Koskinen.

Go to www.irs.gov for the videos and www.irs.gov/aca for Health Care Tax Tips.

Multiple Businesses Require Separate Schedule C for Each

And that wasn’t the only lesson the Tax Court recently taught taxpayer Zierdt (Douglas Zierdt v. Commissioner, TC Summary Opinion 2014-78).

This taxpayer worked part time as a stock broker, while also considering himself a professional gambler.  In preparing his own returns, he combined (i.e.-netted) his gambling losses) against his income from stock brokering.  The Court noted that “He did not file separate Schedules C with his returns, and instead he claimed deductions for gambling expenses on Schedules C that identified the business activity as ‘stockbroker’.  Such inaccurate and misleading income tax reporting does not reflect a reasonable attempt to comply with the Code.”

Moreover, the Court found that the gambling activity was not a true “trade or business” at all,  but a hobby instead and thus disallowed the gambling losses.  The facts that the taxpayer had net gambling losses for each of the years 2006 through 2010, combined with the fact that he did not maintain complete and accurate records were the main reasons for the Court’s conclusions.

And by the way, the bad reporting and lack of documentation led the Court to the additional conclusion that no “reasonable cause” existed to excuse Mr. Zierdt from imposition of the accuracy-related penalties for several of the years.

IRS Clipped for Taxpayer’s Legal Fees — For Once!

It doesn’t happen very often, but in the case of Michael Swiggart (TC Memo 2014-172), not only did the taxpayer “win,”  his argument, but IRS got stuck with his legal fees to boot!

The argument was over whether or not the taxpayer qualified as a head of household.  He did, and proved it at his “collection due process hearing.”  Nonetheless, it wasn’t until the taxpayer filed a petition with the Tax court did the IRS concede, though they stubbornly refused to pay his expenses.  The Court agreed with Swiggart because he was the prevailing party, exhausted all administrative remedies, and did not unreasonably delay the proceedings.

So there.

Reminder: No Profit Motive = No Deduction

In McElroy, TC Memo 2014-163, the court reminds us of the above maxim.

The taxpayer in this case invested in three partnerships, established to acquire cemetery sites for later contribution to qualified charitable organizations.  McElroy thought he could deduct losses for his investments in the three partnerships on the basis that his ownership interests in each were worthless as of the end of the years in which the partnerships operated, and that he therefore had abandoned them.  He argued he invested to derive a profit and in furtherance of a legislative intent to encourage charitable contributions.

But the court, in agreeing with IRS, found that the taxpayer lacked the requisite profit motive, and concluded that the partnerships were designed to generate tax benefits from the making of charitable contributions and not to make any profit independent of tax benefits.  Indeed, the partnerships were established not to realize any income or economic profit whatsoever!

Vacation Home Rentals

You may be renting out that mountain cabin or beach house during this vacation season.  When it comes time to prepare your 2014 tax returns, don’t forget the implications of such vacation home rentals to your tax liabilities, some of which considerations are:

  • Required reporting of rental income and expenses on Schedule E of your Federal tax return.
  • Use by you as a “home” of the property, during non-rental periods, may cause your rental deductions to be limited in various ways.
  • And “personal” use includes not only your own use of the property, but use by your family members or others who pay less than the full fair market rental value for the time spent in the property.
  • A “freebie” offered by Uncle Sam can kick in when the property is rented out fewer than 15 days per year, in which case you don’t have to report the rental income at all.

Check out IRS Publication 527, “Residential Rental Property (Including Rental of Vacation Homes”) for more details.

IRS Encourages Review of Premium Tax Credit Status

Folks with health insurance procured through the Health Insurance Marketplace may be receiving advance payments of the premium tax credit.  These are paid to your insurance company with a goal of lowering your monthly premium.

Changes in circumstances can alter the amount of these advance payments, including:

  • An increase or decrease in your income
  • Marriage or divorce
  • Birth or adoption of a child

Changed conditions such as these can result in the credit ending up too much or too little, which can result in an unpleasant surprise at tax time.

Folks are supposed to report changes in their situation to the Marketplace as they occur.  Check out IRS Health Care Tax Tip 2014-15 for more info.