Obama Creates myRA Accounts

As announced in the recent State of the Union address, Obama has taken executive action and instructed the Treasury Department to create a new form of retirement account:  the “myRA.”  Not a whole lot to get excited about here, but an overview is of some interest:

  • Savers will benefit from “principal protection,” such that the account balance will never go down in value.
  • Contributions can be withdrawn tax free at any time.
  • Savers can keep the account balance when they change jobs (“portability”).
  • Workers can start an account with as little as $25.
  • The account will earn interest at the same variable interest rate that federal employees receive through the Thrift Savings Plan (TSP) Government Securities Investment Fund.
  • Taxpayers in low and middle income households earning up to $191,000 per year will be able to create a myRA account.
  • Participants can save up to $15,000, or for a maximum of 30 years, in their myRA account before transferring the balance to a private sector Roth IRA.

Let the Filing Begin!

IRS says the 2014 filing season begins January 31 – the first date, more or less, on which they will accept returns for processing.

And to help folks prepare their returns, IRS will make available a special series of daily “Tax Tips” beginning January 28.  More than 60 such “Tips” will be available through a free email subscription and cover a broad array of subjects, including:

  • Availability of free volunteer tax help
  • Fastest and safest way to get your refund
  • Tax return errors that slow down your refund
  • The home office deduction

To sign up, go to www.irs.gov and follow the instructions on the subscriptions page.

‘Zeroed Out’ GRATs Heading for Extinction?

A grantor retained annuity trust (GRAT) is a type of trust into which an individual transfers property while retaining an annuity interest for a specified term.  At the term’s end, the property passes to the child or beneficiary.  And if the present value of the remainder interest is virtually nothing, there is no gift tax consequence.

A Treasury explanation of the President’s fiscal year 2014 budget (which would crack down on such “zeroed out” GRATS) observes that “taxpayers have become adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to two years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.”

Present low interest rates and the recent surge in investment market returns have made GRATS particularly attractive, but if Obama has his way, things might change.

New Form 8960: Not as Simple as It May Seem

We have known about the new “net investment income tax” for a while now, anticipating its impact for the 2013 tax year.  IRS has just released a draft of the form on which this new tax will be calculated (Form 8960) and related draft instructions.  While the one page form appears innocuous enough, folks had better start familiarizing themselves with the nineteen pages of instructions (which include, by the way, five complex worksheets) and the concepts associated with just what is and what is not gross investment income, not to mention just what are the appropriate deductions in measuring the net taxable amount.  On the surface, many are probably thinking it’s just a simple matter of multiplying the taxpayer’s interest, dividends and gains by 3.8% and adding the result to the tax liability.

As usual, nothing which stems from the Internal Revenue Code and the related IRS regulations is ever that simple.

Check IRS You Tube Videos as Tax Season Commencement Nears

IRS has announced they will start accepting 2013 returns on January 31, and is doing what they can to help folks get in line for their refunds as early as possible.  Among others, consider these specific videos which taxpayers may access (http://www.youtube.com/user/irsvideos) to help them get their returns in order:

  • Assistance in finding free help from certified volunteers conversant with the electronic tax return filing process
  • Information regarding the requirements for filing tax returns, including income limits and age, and reasons why taxpayers may want to file even if they don’t have to
  • Tips on how to protect personal information and avoid becoming a tax scam victim
  • Information regarding which financial and tax files to keep and for how long

IRS Simplifies Home Office Deduction

The home office deduction has been a subject of controversy over the years, but in 2013, IRS issued Rev Proc 2013-13, which simplifies the issue, providing a “safe harbor” for taxpayers.

In lieu of calculating and substantiating actual expenses, you may simply determine your deduction by multiplying the “allowable square footage” by the “prescribed rate.”

The former is the portion of your home which is used in a qualified business manner, but not more than 300 square feet.  The latter is $5, thus allowing for a maximum deduction of $1,500.

And you can use this method in a particular year, switching to the “actual” expense method in the next.  It’s your choice from one year to another.

IRS Continues Leniency for Blown Timely IRA Rollovers

In a recent private letter ruling (PLR 201351031), IRS waived the 60 day rollover requirement in a case where the taxpayer’s failure to timely accomplish the task was due to her mental condition which impaired her ability to make decisions following her husband’s sudden death.  Consequently, the taxpayer was granted a 60 day extension from the date of the PLR to complete the rollover.

Noting that earlier pronouncements provided similar guidance, the Service observed that it will consider all relevant facts and circumstances including:  (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, or hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed; and (4) the time elapsed since the distribution occurred.

Reminder: No Deduction for Paying Someone Else’s Debts

In Lourdes Puentes, TC Memo 2013-277, the taxpayer’s brother purchased a home, later allowing the taxpayer to live in the property.  When her brother lost his job in 2009, the taxpayer “paid certain amounts owing under the mortgage loan, including interest.”  The taxpayer recognized that she was not the owner of the property, but thought she should still be entitled to a deduction for the mortgage interest which she paid because she was an equitable owner.

“No dice,” said the Court, because the taxpayer offered no evidence that she had any agreement with her brother entitling her to an ownership interest or any beneficial rights, such as the right to rents, the right to profits, the right to possession, the right to improve, or the right to purchase the property.

Stolen EINs Used to Report False Income and Deductions

That’s what the Treasury Inspector General for Tax Administration (TIGTA) says, anyway.

In a report issued in September, TIGTA estimates that IRS could issue almost $2.3 billion in potentially fraudulent tax refunds based on these EINs yearly (about $11.4 billion over the next five years).

TIGTA identified 767,071 tax year 2011 electronically filed individual income tax returns with refunds based on falsely reported income and withholding.  Of the some 285,000 EINs used on these tax returns, 277,624 were stolen EINs used to report false income and withholding with potentially fraudulent refunds issued totaling more than $2.2 billion.

TIGTA recommended that IRS update fraud filters to identify potentially fraudulent tax returns.

IRS Advisory Council Makes Recommendations

The IRS Advisory Council (IRSAC) exists to provide an organized public forum for senior IRS executives and representatives of the public to discuss relevant tax issues.  In its recently released annual report, IRSAC made several recommendations, including:

  • IRS needs sufficient funding to operate efficiently, provide timely and useful guidance to taxpayers, and enforce current law, so that respect for our voluntary tax system is maintained.
  • IRS should continue to expand voluntary correction programs to facilitate taxpayers’ self-reporting of prior year noncompliance.
  • IRS should engage in “risk assessing” large taxpayers.