Marietta Financial Services | CPA Indianapolis

What should you do if you think you might be one of the people for whom the tax cost of employer-provided group term life insurance is undesirably high? First, you should determine if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2, that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid (for example, through withholding). You are responsible for any and all Federal, State, and City taxes on the amount in Box 12, and for the FICA tax (Social Security and Medicare) as well. But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return.

If you then decide that this cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: life insurance, taxable income

Does your employer provide you with group term life insurance? If so, and if your salary is higher than $50,000, this employee “benefit” may be creating undesirable income tax consequences for you. Here’s why.

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you even though you never actually receive it (i.e., it is “phantom income”). What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under this table, the amount of taxable phantom income attributed to an older employee will often be higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his compensation increases.

In our next blog post, we will discuss what to do if you think you fall into the category of someone whom the tax cost of
employer-provided group term life insurance is undesirably high.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: life insurance, taxable income

Each of your employers is obligated to withhold social security taxes from their wages, even if the total they withhold exceeds the maximum amount of tax that can be imposed for the year—$6,622 in 2010 (equal to 6.20% of the $106,800 wage base); $4,486 in 2011 (4.20%, the reduced rate in effect for 2011 only, of the $106,800 wage base). If they do withhold in total more than the maximum, you can recover the excess by claiming a credit for a payment of taxes on your tax return for the year.

Although you can (and should) recover the excess amount withheld when you file your tax return for the year as described above, you won’t get the benefit of the credit until you file that return, probably in April of the next year. IRS isn’t required to pay you interest on this amount, so you will lose out on any earnings you might have had on the excess amount withheld. In effect you will have made an interest-free loan to the IRS. If you are separately making estimated tax payments for the year, you may be able to avoid this loss by reducing your estimated payments to reflect the overwithholding. Essentially, you may be able to turn the overwithholding into an estimated payment.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: social security taxes, tax return

If you dispose of the property, or stop using it in a trade or business, before the end of the cost recovery period that would have applied to the property had you not made the election for the property, all or part of the amount of the deduction you claimed under the election must be taken back into income (“recaptured”). Exactly how much will depend on the type of property and how long you used the property in a trade or business.

The information in the past few blog posts covers the essential elements of the Code Section 179 election. Clearly,
many considerations go into each decision to acquire business assets, and many involve non- tax factors. However, the election should play a role; accelerated tax benefits may enable you to obtain the property you need earlier and at reduced after-tax costs.

Tags: tax deductions, tax return

If your taxable income from all of your trades or businesses is less than the dollar limit for that year, the amount for which you can make the IRS Code Section 179 election is limited to that taxable income. However, for most types of property, any amount you can’t immediately deduct because of the taxable income limitation is carried forward and can be deducted in later years (to the extent that the applicable dollar limit, the phaseout rule, and the taxable income limit permit).

Just a note of interest to anyone who has money in a bank account in a foreign country:

… Foreign financial accounts must be reported on Form TD F 90-22.1 (FBAR) by any person with a financial interest in or signature authority over the account, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. FBAR is due by June 30 of the year following the year that the account holder meets the $10,000 threshold.

In other words; if you had more than $10,000.00 in a foreign bank account at any time during 2010.  You must file a Form TD F 90-22 by June 30, 2011.  Please feel free to contact our office if you have any questions.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: tax deductions, tax return

The dollar limit doesn’t mean the IRS Code Section 179 election can’t be made for property costing more than that amount. For example, if you buy a machine for $600,000 and place it in service in a business in a tax year beginning in 2011, you can elect to immediately deduct $500,000 of its cost for that year. The remainder of the cost ($100,000) qualifies for 100% bonus depreciation. Also, you can make the election for two or more separate assets, as long as the total cost covered by the election doesn’t exceed the dollar limit for that year.

As mentioned above, if the total cost of qualifying property that you place in service during a tax year beginning in 2011 is over $2,000,000 (over $500,000, as adjusted for post-2006 inflation, for a tax year beginning in 2012) (i.e., the phaseout amount), the immediate deduction limit is reduced by that extra amount. For example, if you place in service $2,200,000 of qualifying property in a tax year beginning in 2011, you can make the election for no more than $300,000 of property ($500,000 minus $200,000 [excess of $2,200,000 over $2,000,000]).

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: tax deductions, tax return

To qualify for the IRS Code Section 179 election, the property must be tangible personal property. This means that real estate (buildings and their structural components) does not qualify, nor do intangibles such as patent rights. However, the following types of property also qualify:

• For a tax year beginning in 2011, up to $250,000 of real property consisting of certain leasehold improvements, retail improvements or restaurant property, and
• For tax years beginning before 2013, off-the-shelf computer software.

Also, to qualify, property must be purchased. Thus, if, for example, you acquired the property in a tax-free exchange, by gift or inheritance, or from an individual or entity to which you bear a close relationship specified in the Code, the property does not qualify.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: tax deductions, tax return

Generally, the cost of property placed in service in a trade or business can’t be deducted in the year it’s placed in service if the property will be useful beyond the year. Instead, the cost is capitalized and depreciation deductions are allowed for most property (other than land), but are spread out over a period of years. Capitalization delays the tax benefits of business expenditures.

The expense election is made available, on a tax year by tax year basis, under Section 179 of the Internal Revenue Code (the Code), and is often referred to as the Section 179 election or the Code Section 179 election.

Subject to a dollar limit, the election allows you to deduct, in the tax year for which the election is made, the cost of qualifying property (described below) placed in service during the tax year. The immediate deductions allowed are in lieu of capitalization and later depreciation deductions. The deduction limit is $500,000 for a tax year beginning in 2011 ($125,000, as adjusted for post-2006 inflation, for a tax year beginning in 2012). As will be discussed in future blog posts, the deduction is phased out (i.e., gradually reduced) if:

• More than $2,000,000 of qualifying property is placed in service during a tax year beginning in 2011 or
• More than $500,000 (as adjusted for post-2006 inflation) of qualifying property is placed in service during a tax year beginning in 2012.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: tax deductions, tax return

There are many differences to be considered in determining which of administrative appeal to use. One of the most important differences concerns the right of review. A determination in a CDP hearing may be appealed to the Tax Court, but there is no right to judicial review in the CAP or TAO process.

An important disadvantage of the CDP is that the taxpayer must request a hearing within the 30-day period beginning on the day after the date he receives notice of his right to a hearing. This time limit cannot be waived, however, a written request submitted within the 30-day period that does not satisfy content requirements is considered timely if the request is perfected within a reasonable period of time. If the request for a CDP hearing is untimely, either because the request was not submitted within the 30-day period or not perfected within the reasonable period provided, the taxpayer will be notified of the untimeliness of the request and offered an “equivalent hearing.” But an equivalent hearing does not suspend any collection action against the taxpayer and no judicial review of the hearing determination is available.

In contrast, both the TAO and CAP are not subject to a time limit tied to the notice of levy and are available both before and after a levy is imposed on property. Both the TAO and CAP are also generally quicker procedures than the CDP.

There are also significant differences in the types of problems that can be considered under each process. Under the CDP process, a taxpayer may contest the underlying tax liability if certain conditions are met, while such a contest is not possible in the CAP or the TAO. On the other hand, the CDP process is not available to nominees of, persons holding property of, or
persons holding property with respect to, the taxpayer, but such persons may use the TAO or CAP. Another distinction is that IRS will not consider trust fund recovery penalties, offers in compromise, or other penalty appeals under CAP procedures.

A $5,000 penalty is imposed on any person who submits a request for a CDP hearing or an application for a TAO (or submits any one of certain other types of specified submissions) if any portion of the submission is either based on a position which IRS has identified as frivolous, or reflects a desire to delay or impede the administration of federal tax laws. However, the penaltyis clearly aimed at those who abuse the process and should not deter taxpayers with legitimate disputes from using the CDP or TAO process.

© 2011 Thomson Reuters/RIA. All rights reserved.

Tags: appealing a levy

Filing an application with the office of the Taxpayer Advocate is a third method of administrative appeal of a proposed levy. The Taxpayer Advocate or his designee can issue a Taxpayer Assistance Order (TAO) based on a determination that the taxpayer is suffering or is about to suffer a significant hardship as a result of the way in which the tax laws are being administered by IRS. Relief can include suspension of collection actions and release of a levy.

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Tags: appealing a levy, Office of the Taxpayer Advocate