Tag Archives: 1040

Prohibited Transactions of Self-Directed IRA

Self-directed IRA have reached popularity in recent years that allows flexibility and choice of investments.  However, the IRS has strict rules on prohibited transactions (IRC 4795).  Keep in mind that IRAs are a completely separate entity and not following these rules can result in losing the IRA status.

Prohibited Transactions

  • sale or exchange, or leasing, of any property between a plan and a disqualified person
  • lending of money or other extension of credit between a plan and a disqualified person
  • furnishing of goods, services, or facilities between a plan and a disqualified person
  • transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan
  • act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account
  • receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan

Disqualified Persons

A disqualified person is defined as the account holder and spouse, lineal descendants (children, grandchildren, parents, grandparents, etc.), fiduciaries, trustees, investment managers and advisers; and any corporate entity in which the account holder has at least a 50 percent ownership.

An example of a prohibited transaction is when IRA purchases a rental home and your spouse is the real estate agent who receives a commission for the sale.  Another example of a prohibited transaction is having your grandson mow the lawn for compensation.

Prohibited Investments

The following are investments or assets that the IRA is not allowed to own.  For a complete list see IRS Publication 590.

  • Work of Art
  • Stamps
  • Coins (exception US Minted Gold or Silver Eagle)
  • Alcoholic Beverages (wine, Scotch)
  • Antiques
  • Rugs
  • Insurance Contracts
  • S-Corporation Stock

Are Club Dues Tax Deductible

Like many other enterprises, your business may pay club dues to one or several types of organizations. These dues may or may not be deductible, depending on the type of organization and its purpose.

Your business generally cannot deduct dues paid to a club organized for business, pleasure, recreation or other social purposes. This disallowance rule takes in country clubs, golf clubs, business luncheon clubs, athletic clubs, and even airline and hotel clubs. However, you can deduct 50% of the cost of otherwise allowable business entertainment at a club, even if the dues you pay to the club are nondeductible. For example, if you have dinner with a client at your country club after a substantial and bona fide business discussion, 50% of the cost of the dinner is deductible as a business expense.

The club-dues disallowance rule generally doesn’t affect dues paid to professional organizations including bar associations and medical associations, or civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs. The dues paid to local business leagues, chambers of commerce and boards of trade also aren’t affected. However, an organization isn’t exempt from the disallowance rule if its principal purpose is to provide entertainment facilities to its members, or to conduct entertainment activities for them.

Finally, keep in mind that even if the general club-dues disallowance rule doesn’t apply, there’s no deduction for dues unless you can show that the amount you pay is an ordinary and necessary business expense.

Steve Eubanks, EA


Basic Tax Reporting of Oil and Gas Interest

The most common types of oil and gas interests are royalty interest and working interests. The royalty interest entitles you to receive a royalty from any oil and gas production. The royalty interest participates in the production revenue revenue without incurring an obligation to pay the costs of developing and operating the interest. The working interest generally bears all costs of developing and operating the property and receives revenue similar to royalty interest. We will discuss the how to report income from these oil and gas interests.

Royalty income is reported to you on Form 1099-MISC, Box 2. The oil and gas company will generally also report related expenses including production tax. This should be reported on Schedule E page 1 as royalty income and also the expenses and depletion that is normally 15% of the income amount. This income is not subject to self-employment income.

Lease bonus and rental payments are generally reported to you on Form 1099-MISC, Box 1, Rents. You should report this income on Schedule E, page 1 as ordinary income not subject to self-employment tax.

This two types above are consider royalty interest which makes them subject to the Net Investment Income surtax of 3.8% of the net amount.

Working interest would not be subject to the Net Investment Income surtax, however, it would be subject to the self-employment tax (social security and medicare). The working interest interest would be reported on a Schedule C for the gross receipts, expenses, and depletion.

Steve Eubanks, EA
Strategic Tax Group

Tax Developments During the First Quarter of 2014

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

IRA rollovers to be limited. A law limits the number of IRA rollovers that can be made in any 1-year period to one. Recently, the Tax Court held that the limit applies not to each separate IRA an individual may own, but to all of his or her IRAs. It reached this result even though the IRS had indicated in proposed regulations and tax publications that the limit applies to each IRA. Thus, an individual with three IRAs could make three rollovers in a 1-year period under the IRS guidance but only one under the Tax Court decision. After considering the matter, the IRS has announced that it will adopt the more restrictive view of the Tax Court. However, the new rule won’t apply to any rollover that involves a distribution occurring before 2015. The IRS emphasized that an IRA owner will continue to be able to transfer funds from one IRA trustee directly to another as frequently as desired. Such transfers are not rollovers and thus are not subject to the limit.

Popular expired tax breaks may be revived. A number of popular tax breaks expired at the end of 2013. For individuals, these expired items include, among others, the deduction for state and local sales taxes, the deduction for qualified tuition and related expenses, tax-free distributions from IRAs for charitable purposes, the deduction for mortgage insurance premiums, the exclusion for discharged principal residence debt, and the provision allowing a higher exclusion for employer-provided transit benefits. Work has begun in Congress to revive these provisions and extend them through 2015. Some key business breaks might also be brought back, including the research credit, higher expensing, bonus depreciation, employer wage credit for activated military reservists, work opportunity tax credit, and 15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements, among other items.

Severance payments are subject to social security taxes. In a unanimous decision (with one justice not participating), the Supreme Court, reversing the Sixth Circuit Court of Appeals, has held that severance payments that were made to involuntarily terminated employees, and that weren’t tied to the receipt of State unemployment insurance, are subject to tax under the Federal Insurance Contributions Act (social security taxes). The Court concluded that the severance payments at issue fell within the law’s broad definition of “wages” for social security tax purposes.

Luxury auto depreciation limits for 2014. Under special “luxury automobile” rules, a taxpayer’s otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2014. The depreciation deduction limits for 2014 are the same as in 2013 for a passenger auto, while the limits are $100 higher for a light truck or van for the first three years and the same for years after the third year. The first-year depreciation limit is $3,160 for autos and $3,460 for light trucks or vans first placed in service in 2014. The bonus depreciation rules for additional first-year depreciation for autos, light trucks and vans, under which the regular first-year dollar limit for eligible vehicles was increased by $8,000, only applied to vehicles placed in service before Jan. 1, 2014. But there is a chance that Congress may retroactively revive bonus depreciation to the beginning of 2014 and extend it through 2015.

Maximum auto/truck values for cents-per-mile valuation. The IRS has released the 2014 maximum fair market values for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate. An employer must treat an employee’s personal use of an employer-provided auto as fringe benefit income and value it using one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56¢ per mile for 2014). However, this method may be used only if the auto’s fair market value does not exceed $12,800, as adjusted for inflation. The inflation-adjusted figures for vehicles first made available to employees for personal use in 2014 are $16,000 for autos (same as for 2013) and $17,300 for trucks and vans (up from $17,000 for 2013).

Relief from individual mandate for certain limited health coverage. The health care law contains an “individual mandate”—a requirement that most U.S. citizens and legal residents maintain minimum essential health insurance coverage (i.e., government-sponsored programs such as Medicare, Medicaid, Children’s Health Insurance Program; eligible employer-sponsored plans; plans in the individual market; certain grandfathered group health plans; and other coverage as recognized by Health and Human Services) or be subject to a tax penalty for 2014 and later years. The IRS has provided relief from the penalty for months in 2014 in which individuals have, under Medicaid and chapter 55 of Title 10, U.S.C. (medical and dental care for members and certain former members of the uniformed services, and for their dependents), limited-benefit health coverage that is not minimum essential coverage.

Proposed regulations on the individual mandate. The IRS has issued proposed regulations on the individual mandate to carry health insurance. The regulations include additions to the list of government-provided health plans that don’t provide minimum essential coverage and a liberalization of the hardship exemption rules under which an individual who fails to carry coverage can escape the penalty.

Guidance on the employer mandate to provide health insurance. The IRS has issued final regulations and guidance in the form of frequently asked questions (FAQs) on the health care law’s so-called employer mandate imposed on a large employer (one that employed on average at least 50 full-time employees on business days during the preceding calendar year). The mandate or employer shared responsibility provisions, as they are called, essentially impose a penalty on such employers if one or more of their full-time employees obtains a premium tax credit through the insurance exchange. The mandate was supposed to begin in 2014 but it has been delayed until 2015. The final regulations further delay the applicability of the employer mandate to mid-sized employers (i.e., those with between 50 and 99 full-time employees) until 2016, provided that the employer meets certain requirements. In addition, they provide a phased-in coverage requirement for large employers. The FAQs cover a variety of topics including how to determine whether an employer is subject to the mandate, how to properly identify full-time employees, and how to calculate the shared responsibility payment.

Small estates get more time to transfer unused exclusion to surviving spouse. The estate of a decedent who is survived by a spouse may make a portability election. It allows the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. In general, the election must be made within nine months of the decedent’s death on the estate tax return, even if the estate is below the exclusion amount so that a return normally would not be required. Because many estates below the threshold did not file, the IRS provided a simplified method to obtain an extension of time to elect portability. This method only applies for an estate of decedent who died after Dec. 31, 2010 and on or before Dec. 31, 2013. The decedent must have been a U.S. citizen or resident on the date of death. In addition, an estate tax return must not have been required because the size of the estate was below the filing threshold. If these and other requirements are met, the IRS will grant an automatic extension to make the election on an estate tax return filed on or before Dec. 31, 2014. Taxpayers failing to qualify for this relief may request an extension of time to make the election by requesting a letter ruling.

New IRS guidance on virtual currency. The IRS has provided guidance in the form of frequently asked questions (FAQs) on the tax treatment of virtual currency, such as Bitcoin. This guidance treats virtual currency as property for U.S. federal tax purposes. Thus, the general tax principles that apply to property transactions apply to transactions using virtual currency.

Steve Eubanks, EA
Strategic Tax Group

71 Ways to Cut Your Tax Bill-Kiplinger

If you managed to claim every possible tax break that you deserved when you filed your return this spring, pat yourself on the back. But don’t stop there. Those tax-filing maneuvers are certainly valuable, but you may be able to rack up even bigger savings through thoughtful tax planning all year round. The following ideas could really pay off in the months ahead.

Tax Savings for Young People
Tax Savings for Single People
Tax Savings for Young Families
Tax Savings for Older Families
Tax Savings for Affluent Families
Tax Savings for Older Affluent Families
Tax Savings for Empty Nesters

Read more at 71 Ways to Cut Your Tax Bill-Kiplinger.

Steve Eubanks
Strategic Tax Group

Tis the Season to be GIVING

Face it, you’ve been putting it off all year. Maybe you have to turn sideways to get in the storage room or have given up on parking your car in the garage. Well, it’s the end of the year and now you have a big incentive to clean out all that stuff! You could get a tax deduction for it.

If you itemize your deductions (use Schedule A), Uncle Sam will give you a bonus – a deduction on your tax return for donating all that stuff to a charity. This could result in a larger refund for you, but there are a few simple rules you must follow to benefit from this tax break.

First, the charity must be recognized as an exempt charitable entity. Qualifying are churches, schools, Red Cross, Amvets, Scouts, Salvation Army, Disabled American Vets, public libraries, etc. If in doubt, ask the organization or check the IRS website at IRS.gov.

Second, make sure you get a receipt from the charity for the donation. You’ll need it as proof of your donation. If your total non-cash donations are less than $500, you can list the amount on Schedule A. If more than $500, you are required to attach Form 8283 with the following information:

Make a list of the items you are donating to attach to your receipt. (Keep this receipt with your records – do not send in). Form 8283 asks for date of purchase (can be various) and the date of the gift, the name of the charity and a list of the items donated. Additionally, you must indicate how you determined fair market value. Cost is what you originally paid for the items and value is what you could have sold it for at a thrift shop or garage sale.

Think of all those kitchen appliances no longer used; old toys the kids have outgrown; clothes that don’t fit or are out of date; books, tools, games, furniture and anything else you no longer want. It is fairly easy to rack up $1000 in fair market value resulting in an additional refund of $250 if you are in the 25% tax bracket. Remember that clothing must be in above average condition – no old socks, underwear and soiled clothes you used for painting! So, get busy – get rid of the extra stuff, simplify your life and enjoy that larger refund!

Steve Eubanks, EA
Strategic Tax Group


Kiddie Tax

A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent’s highest marginal tax rate. This is referred to as the “kiddie tax,” and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.

Does the kiddie tax apply to my situation?

The kiddie tax applies if:

  • The child has investment income greater than the annual inflation-adjusted amount ($1,900 for 2013; $2,000 for 2014);
  • At least one of the child’s parents was alive at the end of the tax year;
  • The child is required to file a tax return for the tax year;
  • The child does not file a joint return for the tax year; and
  • The child meets one of the following requirements relating to age and income:

  • The child was under age 18 at the end of the tax year; or
  • The child was age 18 at the end of the tax year and the child’s earned income does not exceed one-half of the child’s own support for the year; or
  • The child was a full-time student who was under age 24 at the end of the tax year and the child’s earned income does not exceed one half of the child’s own support for the year (This does not include scholarships.)
  • Computing the kiddie tax

    If the kiddie tax applies to a child, the child’s tax is calculated as the greater of one of two items:

    The tax on all of the child’s income, calculated at the rates applicable to single individuals; or
    The sum of two things:

  • The tax that would be imposed on a single individual if the child’s taxable income were reduced by net unearned income, plus
  • The child’s share of the allocable parental tax.
  • The allocable parent tax is the amount of the increase in the parent’s tax liability that results from adding to the parent’s taxable income the net unearned income of the parent’s children who are subject to the kiddie tax. If a parent has more than one child with unearned income subject to the kiddie tax, then each child’s share of the allocable parental tax would be assigned pro rata according to the ratio that its net unearned income bears to the aggregate net unearned income subject to the kiddie tax.

    Which tax form should I use?

    A parent with a child or children whose unearned income is subject to the kiddie tax must generally complete and file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, along with his or her tax return. However, if the child’s interest and dividend income (including capital gain distributions) total less than $9,500 for 2013 ($10,000 for 2014), the parent may be able to elect to include that income on the parent’s return rather than file a separate return for the child. In this case, the parents should complete Form 8814, Parents Election To Report Child’s Interest and Dividends. However, the IRS cautions that the federal income tax owed on a child’s income may be lower if the parent files a separate tax return for the child, which would enable him or her to take certain tax benefits that cannot be taken on the parents’ return.

    Divorced, separated, or unmarried parents

    The kiddie tax is based on a parent’s tax return, but what happens when parents do not file joint returns? Several special rules determine what should happen. If the parents are married, but file separate returns, then the child should use the return of the parent with the largest taxable income to figure the kiddie tax.

    If the parents are married, but do not live together, and the custodial parent is considered unmarried then generally the custodial parent’s return would be used. However, if the custodial parent is not considered unmarried, the child should use the return of the parent with the largest amount of taxable income.

    If the child’s parents are divorced or legally separated, and the custodial parent has not remarried, the child should use the custodial parent’s return. If the custodial parent has remarried, the child’s stepparent, rather than the noncustodial parent, is treated as the child’s other parent. Similarly, if the child’s parent is a widow or widower who has remarried, the new spouse is treated as the child’s other parent.

    If the child’s parents never married each other, but lived together all year, the child should use the return of the parent with the greater taxable income. If the parents were never married and did not live together all year, the rules are the same as the rules for parents who are divorced.

    Calculating the kiddie tax can become confusing as a taxpayer attempts to sort through the numerous rules governing who is subject to the tax, which income is subject to the tax, and how to report it properly. Please do not hesitate to contact our offices with any questions.

    Steve Eubanks, EA