Federal Tax Posts

What’s best for you, taking the standard deduction or claiming itemized deductions? The standard deduction changes yearly and is based on age and filing status. The Tax Cuts and Jobs Act raised the standard deduction so that more people could benefit from its simplicity. Itemizing deductions requires more work, but taxpayers can save taxes if the total exceeds the standard deduction. Eligible taxpayers may prefer to itemize if they: pay state and local income tax, mortgage interest, mortgage insurance, real estate or personal property tax; suffered a large eligible casualty loss; make significant charitable donations; and/or have high medical deductions. We can help choose your best path.

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Taxpayers have fundamental rights when dealing with the IRS. Among them is the right to only pay what’s legally owed. You also have the right to: receive a refund if you overpay: be in contact with the IRS if you believe you’re being billed unfairly; and amend a tax return if you discover an error. In addition, you can ask to have an “amount owed” removed if it’s incorrect and request that interest be removed from your account if the IRS causes unreasonable delays or errors. And delinquent taxpayers may submit an offer in compromise, requesting the IRS to accept less than they owe (which the IRS may or may not accept). Here’s more about the “Taxpayer Bill of Rights”: https://bit.ly/3baKlYq

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The IRS clarifies how recent changes affect an insured person’s basis in a life insurance contracts. Generally, the adjusted basis for determining gain or loss from the sale or exchange of property is its adjusted cost, as provided in the U.S. tax code. In Revenue Ruling 2020-5, the IRS clarifies how amendments to the code, made by the Tax Cuts and Jobs Act, apply when determining basis. Under them, when determining the basis of a life insurance or annuity contract, no adjustment is made for mortality, expense or other reasonable charges incurred. The ruling provides examples that apply the changes in various situations. It’s effective for transactions made on or after Aug. 26, 2009.

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IRS field revenue officers (ROs) have begun knocking on the doors of taxpayers with ongoing tax compliance issues. According to the IRS, these home visits (starting in AK, TX and WI) are made if numerous mail contacts have proven unsuccessful. ROs are trained IRS civil enforcement employees who work to resolve issues, such as missing returns or unpaid taxes. They can ask for payment of a federal tax debt. In a new “Tax Tip” the IRS explains how to confirm the identity of an RO, who should display two forms of official identification. Taxpayers also can verify an RO’s identity by calling a dedicated IRS phone number, which the RO should provide. To read the Tax Tip: https://bit.ly/37kaFfr.

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More Puerto Rican earthquake disaster victims now qualify for tax relief. The IRS has announced that victims living in designated federal disaster areas as a result of the Dec. 28, 2019, Puerto Rico earthquakes have additional time to make tax payments and file returns. For affected Puerto Rico municipalities, the extended filing date is April 30, 2020. In other news, the U.S. House passed a disaster relief bill that would affect several tax provisions for Puerto Rico residents, including the child tax credit, earned income tax credit, low-income housing credit, the new markets tax credit and the employee retention credit. However, the White House has announced its intent to veto the bill.

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The IRS has posted instructions for how exempt organizations can claim a refund or credit of the unrelated business income tax they paid with respect to qualified transportation fringe benefits. This is the so-called “church parking tax.” In December 2019, legislation retroactively repealed the tax. Before being repealed, a provision required the unrelated business taxation income (UBTI) of tax-exempt organizations to be increased by expenses related to qualified transportation fringe benefits. The provision applied to amounts paid or incurred after December 2017. For more information: http://bit.ly/2tODG5w

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What if you file your federal tax return and then realize you made a mistake? According to the IRS, the answer depends on the mistake. If the error is mathematical, there’s a good chance it will be caught during the processing and corrected by the IRS. But if you chose the wrong filing status, need to change your income, or forgot deductions or credits, you should file an amended return, using Form 1040X (Amended U.S. Individual Income Tax Return). Allow up to 16 weeks for processing an amended return. Contact us for help preparing the return. The IRS answers questions about filing an amended return and other topics here: https://bit.ly/2OxQK6s

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Generally, amounts withdrawn from an IRA before age 59 ½ are subject to an additional 10% penalty tax. Exceptions exist, including when a distribution is related to the taxpayer’s disability. In one case, a man who was under age 59 ½ took an early distribution from his IRA. He didn’t pay the 10% tax on his joint tax return because his wife was disabled and he relied on the disability exception. The IRS sent the couple a notice of deficiency. All parties agreed that the account owner himself wasn’t disabled. The U.S. Tax Court noted that the disability exception didn’t apply because it wasn’t the IRA owner that was disabled, but his wife. (TC Summary Op 2020-5)

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A new Government Accountability Office report looks at campaign finance law. It identifies impermissible levels of political campaign intervention by tax-exempt organizations and the outcomes of IRS enforcement efforts. In fiscal years 2010 through 2017, the IRS conducted and closed 226 examinations related to organizations’ non-compliant political campaign intervention. More than half of the examinations didn’t result in the IRS revoking an organization’s exempt status or imposing an excise tax for its political campaign intervention, the report said. For example, out of the 226 examinations, 127 organizations were only issued a written advisory. Read the report: https://bit.ly/2twIvjC.

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How do dependents affect federal income taxes? The Congressional Budget Office recently issued a report (https://bit.ly/3bbJarM ) on this topic. It analyzed tax return data under 2019 tax rules and compared it with the rules that are scheduled to be in place for 2026. It estimated that the average tax benefit per dependent for 2019 is $2,300 ($3,800 per family). Under the 2026 tax rules, that benefit will be $1,700 per dependent ($2,800 per family), on average. Under current rules put in place by the Tax Cuts and Jobs Act, the tax benefit of children younger than 17 is generally greater than the tax benefit of older children or other relatives. Those rules are set to expire after 2025.

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If you’re making charitable contributions specifically for disaster relief efforts in 2018 and 2019, they must be made by Feb. 18, 2020, to qualify under special disaster area charitable gift rules. A new law temporarily suspends certain limits on charitable contribution deductions. For example, cash charitable contribution deductions are generally limited to 60% of adjusted gross income (AGI). But this limit doesn’t apply to qualified disaster contributions for a limited time. In other words, cash contribution deductions up to 100% of AGI can be claimed if certain requirements are met. Contact us for more details.

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It’s tax season and with it comes the risk of identity theft. As taxpayers focus on filing their returns, cybercriminals are focused on stealing their personal identifying information. That’s why the IRS just launched Identity Theft Central, with online access to information about identity theft and data security for taxpayers, tax pros, and businesses. This resource helps you to spot identity theft and protect against phishing and other scams. It also provides specific information about what to do if you’re a victim and how businesses can recognize the signs of identity theft. Visit Identity Theft Central here: https://bit.ly/2RSCS8M or contact us with questions.

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The application for tax-exempt organizational status goes fully electronic. Starting January 31, but with a grace period until April 30, the IRS will require applicants to file electronically “Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” The required fee for Form 1023 will remain $600 for 2020.

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The IRS continues its crackdown on abusive “micro-captive transactions.” The tax agency is establishing 12 new examination teams that are expected to open audits related to large numbers of taxpayers in coming months. A micro-captive transaction is one in which a related group of taxpayers attempt to reduce their aggregate taxable income using insurance contracts. Each insured entity under the contracts claims deductions for premiums for insurance coverage, and the captive insurance company elects to be taxed only on investment income, which results in the premium payments being excluded from its taxable income. Abusive micro-captives have been a concern to the IRS for several years.

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The Congressional Budget Office (CBO) has published a report titled “Projected Changes in the Distribution of Household Income, 2016 to 2021.” The report presents the CBO’s projections of the distribution of household income, means-tested transfers and federal taxes in 2021 and compares them with the actual distributions in 2016. (2016 is the most recent year for which data was available when this analysis was conducted.) Regarding federal taxes, in the projections, “all income groups’ average federal tax rates are lower in 2021 than they were in 2016; the largest percentage-point decreases are in the highest-income households’ rates,” CBO said. Read the report here//bit.ly/2tFp489

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