Tax Rules for Children with Investment Income

Children who receive investment income are subject to special tax rules that affect how parents must report a child’s investment income. Some parents can include their child’s investment income on their tax return while other children may have to file their own tax return. If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.

Here’s what you need to know about tax liability and your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child’s total investment income in 2015 is more than $2,100 ($2,000 in 2014). The parent’s tax rate may apply to a part of that income instead of the child’s tax rate.

3. If your child’s total interest and dividend income are less than $10,500 ($10,000 in 2014), then you may be able to include the income on your tax return. If you make this choice, the child does not file a return. Instead, you file Form 8814, Parents’ Election to Report Child’s Interest and Dividends, with your tax return.

4. If your child received investment income of $10,500 or more in 2015 ($10,000 in 2014), then he or she will be required to file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,100, with the child’s federal tax return for tax year 2015.

In addition, starting in 2013, a child whose tax is figured on Form 8615, Tax for Certain Children Who Have Unearned Income, may be subject to the Net Investment Income Tax. NIIT is a 3.8 percent tax on the lesser of either net investment income or the excess of the child’s modified adjusted gross income that is over a threshold amount.

If you have any questions about tax rules for your child’s investment income in 2015, don’t hesitate to call our office.

How Annual Bonuses Are Taxed — 7 Common Questions Answered

Everybody loves an annual bonus. Not everyone understands how bonuses affect their tax returns, however, or even what is considered to be a bonus by the Internal Revenue Service (IRS).

Sometimes, when people receives an annual bonus from their employer, they are surprised at how small it is after tax. They may even wonder if their employer correctly calculated the withholding tax.

Following are some common questions about bonuses and the IRS, along with the answers you need to know.

Why does my employer withhold more from my bonus than from regular pay?

If you receive a bonus or other supplemental income separate from your regular pay, your employer must use an IRS-approved method to determine how much tax should be withheld.

Your employer calculates the withholding amount based on your pay, the time period, and the information on the IRS Form W-4 you filled out.

Alternatively, your employer has the option of withholding a flat 25 percent income tax from your bonus amount.

Are bonuses subject to payroll taxes?

Yes, you and your employer must pay payroll taxes on bonuses, just as you do with your regular pay.

Could my employer have made a mistake?

It happens. If your payroll department calculates withholding tax by hand, they could inadvertently read the wrong column or look at an incorrect form.

Even companies that use payroll software or services can accidentally enter the wrong information.

Most of the time, however, the withholding tax on bonuses is calculated according to IRS rules. If you have questions about the amount withheld from your bonus, the best first step is to talk to your payroll department.

I’m sure they withheld more tax than necessary. What can I do?

Assuming your employer calculated the bonus withholding correctly, you cannot get the withheld tax back from the IRS until you file next year’s tax return.

An easy way to even out the amount you have withheld is to file a new Form W-4. Adjusting your withholdings can reduce the amount of tax withheld from your pay for the rest of the year. Be sure to file another Form W-4 next year or whenever you need to adjust it again.

How can I prevent overwithholding from my bonus next year?

The easiest way to have less tax withheld from your bonus and your regular pay is to claim additional withholding allowances on Form W-4. Ask for a new form from your payroll department or get one from the IRS website.

Keep in mind that you can claim as many allowances as you need to in order to have the correct amount withheld from your pay.

You are not limited to the number of dependents you have or to the amount you calculate on the IRS worksheet.

Ask your payroll department how long it takes for a new Form W-4 to take effect, and submit the new form before you expect a bonus check. Do not send the form to the IRS.

You can file another Form W-4 after you receive your bonus, or at any time during the year when you need to change your withholding amount.

What counts as a bonus for tax purposes?

A bonus, according to the IRS, is any payment made from an employer to an employee that is in addition to regular compensation.

It can be cash or non-cash. A holiday bonus is taxable, even if it is presented as a gift. If you receive a small non-cash holiday gift from your employer, such as a ham or popcorn tin, you don’t have to claim it as a bonus, however.

The IRS specifically excludes such “de minimus fringe benefits” from taxation.

Can getting a bonus bump me into a higher tax bracket?

It’s possible that a bonus, or an increase in pay, can put you in a higher tax bracket. That means you will pay a higher tax rate on each additional dollar you earn.

Some people think they may actually have less after-tax income because of a bonus, but this is not true.

Being in a higher tax bracket does not change the rate you pay on everything you earn – only the rate you pay on taxable income that exceeds a certain amount.

So, relax and enjoy your bonus!

If You Get an IRS Notice, Here’s What to Do

Each year the IRS mails millions of notices and letters to taxpayers. If you receive a notice from the IRS, here is what you should do:

• Don’t Ignore It. You can respond to most IRS notices quickly and easily. It is important that you reply right away.

• Focus on the Issue. IRS notices usually deal with a specific issue about your tax return or tax account. Understanding the reason for your notice is important before you can comply.

• Follow Instructions. Read the notice carefully. It will tell you if you need to take any action to resolve the matter. You should follow the instructions.

• Correction Notice. If it says that the IRS corrected your tax return, you should review the information provided and compare it to your tax return.

  If you agree, you don’t need to reply unless a payment is due.

  If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.

• Premium Tax Credit. The IRS may send you a letter asking you to clarify or verify your premium tax credit information. The letter may ask for a copy of your Form 1095-A, Health Insurance Marketplace Statement. You should follow the instructions on the letter that you receive. This will help the IRS verify information and issue the appropriate refund.

• No Need to Visit IRS. You can handle most notices without calling or visiting the IRS. If you do have questions, call the phone number in the upper right corner of the notice. You should have a copy of your tax return and the notice with you when you call.

• Keep the Notice. Keep a copy of the notice you get from the IRS with your tax records.

Watch Out for Scams. Don’t fall for phone and phishing email scams that use the IRS as a lure. The IRS first contacts people about unpaid taxes by mail – not by phone. The IRS does not initiate contact with taxpayers by email, text or social media.

If you have received a letter in the mail from the IRS and you have questions, please feel free to contact our office. We would be glad to help you get your taxes sorted out.

Source: IRS

 

Reporting Gambling Income and Losses on Your Tax Return

If you play the ponies, play cards or pull the slots, your gambling winnings are taxable. You must report them on your tax return. If you gamble, these IRS tax tips can help you at tax time next year:

1. Gambling income.  Income from gambling includes winnings from the lottery, horse racing and casinos. It also includes cash and non-cash prizes. You must report the fair market value of non-cash prizes like cars and trips.

2. Payer tax form.  If you win, the payer may give you a Form W-2G, Certain Gambling Winnings. The payer also sends a copy of the W-2G to the IRS. The payer must issue the form based on the type of gambling, the amount you win and other factors. You’ll also get a form W-2G if the payer must withhold income tax from what you win.

3. How to report winnings.  You normally report your winnings for the year on your tax return as “Other Income.” You must report all your gambling winnings as income. This is true even if you don’t receive a Form W-2G.

4. How to deduct losses. You can deduct your gambling losses on Schedule A, Itemized Deductions. The amount you can deduct is limited to the amount of the gambling income you report on your return.

5. Keep gambling receipts.  You should keep track of your wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets.

If you have any questions about your gambling winnings, please feel free to contact our office.

Get to Know the Small Business Health Care Tax Credit

If you are a small employer, you might be eligible for the Small Business Health Care Tax Credit, which can make a difference for your business.   To be eligible for the credit, you must:

• have purchased coverage through the Small Business Health Options Program – also known as the SHOP marketplace
• have fewer than 25 full-time equivalent employees
• pay an average wage of less than $50,000 a year
• pay at least half of employee health insurance premiums

For tax years beginning in 2014:

• The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
• To be eligible for the credit, you must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program  Marketplace or qualify for an exception to this requirement.
• The credit is available to eligible employers for two consecutive taxable years.   Even if you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

There is good news for small tax-exempt employers, too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. Refund payments issued to small tax-exempt employers claiming the refundable portion of credit are subject to sequestration.

Finally, if you can benefit from the credit even if you forgot to claim it on your 2014 tax return; there’s still time to file an amended return. Generally, a claim for refund must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires later. For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid for small business employers and 25 percent of premiums paid for small tax-exempt employers such as charities.

You must use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see the Instructions for Form 8941. If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.

If you have any questions about the Small Business Health Care Credit, please feel free to contact our office.

Source: IRS

Tax Rules For Gamblers

If you’ve done some gambling, you may need to know about the applicable federal income tax rules.
They can be summarized as follows.

You must report 100% of your wagering winnings as taxable income on your Form 1040. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income
because comps are considered gambling winnings. These amounts are subject to your regular federal income tax
rate, which can be as high as 39.6%.

If you itemize deductions, you can write off wagering losses on Schedule A of Form 1040. However, allowable
wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging, and so forth do not count as gambling losses and, therefore, cannot be written off at all.

If you qualify as a professional gambler, your wagering winnings and losses are reported on Schedule C of Form 1040. However, deductions for wagering losses are limited to your winnings, and any excess wagering losses cannot be
carried over to future years (same as for amateurs). The good news here is that you can also deduct travel expenses and other out-of-pocket costs of being a professional gambler.

In any case, you must adequately document wagering losses (and out-of-pocket nonwagering expenses if you are a professional) to claim a deduction. The government says you must compile the following information in a log or similar record:

1. The date and type of specific wager or wagering activity.

2. The name and address or location of the gambling establishment.

3. The names of other persons (if any) present with you at the gambling establishment (obviously this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor).

4. The amount won or lost.

For example, the IRS says you can document income and losses from wagering on table games by recording the number of the table that you played and by keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.

Last but not least, be aware that amounts you win may have to be reported to you on IRS Form W-2G(Certain Gambling Winnings). In some cases, federal income tax may have to be withheld, too. Anytime a Form W-2G is issued to you, the IRS gets a copy. So the government will expect to see the winnings show up on your tax return.

Please contact us if you have questions or want more information on the tax rules for gambling activities.

Taxpayers with Foreign Assets May Have FBAR and FATCA Filing Requirements in June

The Internal Revenue Service today reminded all taxpayers with an FBAR filing requirement to report their foreign assets by the June 30 deadline. FBAR filings have risen dramatically in recent years as FATCA phases in and other international compliance efforts have raised awareness among taxpayers with offshore assets.

The IRS encourages taxpayers with foreign assets, even relatively small amounts, to check if they have a filing requirement. Separately, certain taxpayers living abroad may also have to file the FATCA-related Form 8938 with their tax returns by the June 15 deadline. (Domestic filers may also be required to file Form 8938, which would have been due by April 15 with their tax returns.)

“The vast majority of taxpayers pay their fair share. The FBAR and FATCA filing requirements make it tougher for that relatively small number of taxpayers trying to hide assets and income offshore,” said IRS Commissioner John Koskinen. “Taxpayers are encouraged to review the rules and disclose their offshore assets.”

FBAR Requirements

FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts, that must be filed with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department. The form must be filed electronically and is only available online through the BSA E-Filing System website.

Who needs to file an FBAR? Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2014 generally must file. For more on filing requirements, see Current FBAR Guidance on IRS.gov. Also see the one-hour webinar explaining the FBAR requirement.
The FBAR filing requirement is not part of filing a tax return. The FBAR Form 114 is filed separately and directly with FinCEN.

FBAR filings have surged in recent years, according to data from FinCEN. FBAR filings exceeded 1 million for the first time in calendar year 2014 and rose nine of the last 10 years from about 280,000 back in 2005.

FATCA Requirements

FATCA refers to the Foreign Account Tax Compliance Act. The law addresses tax non-compliance by U.S. taxpayers with foreign accounts by focusing on reporting by U.S. taxpayers and foreign financial institutions.
In general, federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and generally requires U.S. citizens to report the country in which each account is located.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938 Statement of Special Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions of this form for details.

The FATCA Form 8938 requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR Form 114. A brief comparison of the two filing requirements is available on IRS.gov.

U.S. Income Tax Obligations

U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2014, may have a U.S. tax liability and a filing requirement in 2015.

A filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit, that substantially reduce or eliminate their U.S. tax liability. These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.
The filing deadline is Monday, June 15, 2015, for U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, and for those serving in the military outside the U.S. and Puerto Rico, on the regular due date of their tax return. To use this automatic two-month extension, taxpayers must attach a statement to their returns explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for details.

Nonresident aliens who received income from U.S. sources in 2014 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 15 depending on sources of income. See Taxation of Nonresident Aliens on IRS.gov.

More Information Available

Any U.S. taxpayer here or abroad with tax questions can refer to the International Taxpayers landing page and use the online IRS Tax Map and the International Tax Topic Index to get answers. These online tools assemble or group IRS forms, publications and web pages by subject and provide users with a single entry point to find tax information.
Taxpayers who are looking for return preparers abroad should visit the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

To help avoid delays with tax refunds, taxpayers living abroad should visit the Helpful Tips for Effectively Receiving a Tax Refund for Taxpayers Living Abroad page.

More information on the tax rules that apply to U.S. citizens and resident aliens living abroad can be found in, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, available on IRS.gov.

The IRS has launched new online videos and has expanded other online resources to help taxpayers, especially those living abroad, meet their U.S. tax obligations. For details see IR-2015-85 issued on June 4, 2015.

If you have any questions, please feel free to contact our office.

Source: IRS

Ten Facts about Capital Gains and Losses

When you sell a ‘capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are ten facts you should know about capital gains and losses:

1. Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.

2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income. You may be subject to the Net Investment Income Tax, which went into effect in 2013. The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts.

4. You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.

5. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’

7. The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.

8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.

10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.

If you have any questions about capital gains and losses, please contact our office.

Setting your salary: What’s the right amount for a small business owner?

One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. You can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation.

While there’s not a one-size-fits-all formula for determining how much to pay yourself as a business owner, here are three factors to consider:

• Personal expenses. Determine how much you’re willing to draw from personal savings to keep your household afloat as the company grows. For a start-up company, owner compensation may be minimal. Beware, however, of going too long without paying yourself a reasonable salary. Be sure to document that you’re in business to make a profit; otherwise the IRS may view your perpetually unprofitable business as a hobby aimed at avoiding taxes.
• The market. If you were working for someone else, what would they pay for your skills and knowledge? Start by answering that question; then discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites. In the early stages of your business, you probably won’t draw a salary that’s commensurate with the higher range of salaries, but at least you’ll learn what’s reasonable.
• Affordability. Review and continually update your firm’s cash flow projections to determine the salary level you can reasonably sustain while keeping the business profitable. As the company grows, that level can be adjusted upward.

For assistance with this issue or other business concerns, contact our office.