Title:            New Filing Rules for 1099s and W-2s

Subtitle:       Penalties!

Form W-2 and Form 1099-MISC.

When a business pays nonemployee compensation aggregating to $600 or more to certain single payees in the tax year, the business must file an information return using Form 1099-MISC (Miscellaneous Income) to report the payments. Similarly, employers must report wages paid to employees on Form W-2 (Wage and Tax Statement).

There are new filing deadlines!

Old Rules

Before the PATH Act, these forms were required to be supplied to payees and employees by January 31 of the following year, and copies were required to be filed with the IRS and the Social Security Administration (SSA) by the last day of February, or by March 31 if filed electronically.

New Rules

The PATH Act accelerated the due dates for filings with the IRS and the SSA. Starting with returns relating to calendar-year 2016 (which will be filed in 2017), the due date for IRS and SSA filings has moved up to January 31 of the following year, and the later March 31 due date for electronic filings is no longer available. (See IRC Secs. 6071 and 6402.) So, 2016 Form 1099-MISC and Form W-2 will need to be filed 1/31/17—the same date that the forms must be provided to payees and employees.

Penalties

It is important to make sure you are aware of and comply with these new filing dates.

Failure to do so can result in significant penalties.

Penalty amounts are based on the duration of the delinquency, whether the delinquency was intentional, and the size of the offending taxpayer. However, for 2016, penalties begin at $50 per return, with a maximum of $532,000 per year or $186,000 for small employers, when the delinquency is corrected within 30 days after the information return due date and they go up from there. A small business is one with average annual gross receipts for the most recent three tax years that don’t exceed $5 million. (See IRC Sec. 6721 and Rev. Proc. 2015-53.)

A new IRS tactic!

In recent years, not only with the IRS, but with ICE, DOL and others, the government is increasingly relying on “penalties” as federal revenue sources.

Penalties are no longer merely tools to encourage compliance, they represent significant new sources of federal revenues – i.e., taxes by whatever name.

What does this mean?

The Obama Administration sent a clear message to the IRS to be less forgiving in granting penalty waivers.  Heretofore, the IRS would, on occasion, be generous in waiving penalties once the compliance issues were resolved.  No more.

In the future, penalty waivers will be much more difficult to obtain.

Dear Client and Friends:

Boring Stuff

I hate writing boring stuff and, I hate to say it, this letter is boring; Boring stuff is sometimes important stuff; boring though it may be, this is an important letter.

Last Minute Tax Law Changes!

This year, the last minute extender legislation passed as part of the Consolidated Appropriations Act, 2016 (the Act) contains good news for just about everyone. It makes many of the long-favored tax breaks (so-called extenders) permanent and retroactively extends (some for five years, others for two years) the rest of them, and, for the cherry on top, it throws in a few new tax breaks as well. In fact, about the only downside is that the retroactive extension for 2015 leaves precious little time to take advantage of the tax breaks for this year, but not for future years.  Taxpayers will finally be able to determine with relative certainty (as much as there is certainty with taxes) the impact of these tax provisions on their long-term financial and business planning decisions. Here is a quick summary of the most important tax changes.

My question is this: why at the last minute?  Makes no sense to me.

 

Family and Individual Tax Breaks

Tax Breaks Made Permanent. The Act makes a whole slew of favored individual provisions permanent, including the following:

• Deduction of State and Local General Sales Taxes. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local sales taxes. The sales tax deduction option expired at the end of 2014, but the Act makes this option permanent starting in 2015, so that itemizers can elect to deduct state and local sales taxes instead of state and local income taxes for tax years beginning in 2015 and beyond.
• IRA Qualified Charitable Contributions. For 2006–2014, IRA owners who had reached age 70½ were allowed to make tax-free charitable contributions of up to $100,000 directly out of their IRAs. Such contributions were called Qualified Charitable Distributions (QCDs), and they counted as IRA Required Minimum Distributions (RMDs). Charitably inclined seniors with more IRA money than they needed could reduce their income tax bills by arranging for tax-free QCDs to take the place of taxable RMDs. This break expired at the end of 2014. The Act makes this tax break permanent so that it’s available for QCDs made in tax years 2015 and beyond.
• $250 Deduction for K-12 Educators. For the last few years, teachers and other eligible personnel at K-12 schools could deduct up to $250 of school-related expenses paid out of their own pockets—whether they itemized or not. This break expired at the end of 2014. The Act makes this deduction permanent so that it is allowed for 2015 and beyond. Also, beginning in 2016, the $250 cap will be indexed for inflation and professional development expenses will be deductible under this provision.
• Qualified Conservation Contribution Breaks. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. Liberalized deduction rules applied through 2014 that increased the maximum write-off for these contributions. The Act makes these liberalized rules permanent.
• 100% Gain Exclusion for Qualified Small Business Corporation (QSBC) Stock. The Act retroactively restores and makes permanent the 100% gain exclusion (within limits) and the exception from alternative minimum tax preference treatment for sales of QSBC stock that expired at the end of 2014. Note that you must hold QSBC shares for more than five years to be eligible for the 100% gain exclusion. This is the legendary Section 1244 Stock; this Section of the Code is complicated and is not to be attempted by amateurs!
• American Opportunity Tax Credit (AOTC). The AOTC is a credit of $2,500 for various tuition and related expenses for the first four years of post-secondary education. It phases out for AGI starting at $80,000 (if single) and $160,000 (if married filing jointly). This break was set to expire after 2017. The Act makes the AOTC permanent. One of my favorite new laws! (I believe in education.)
• Parity for Employer-provided Transit and Parking Benefits. The Act retroactively restores and makes permanent the parity provision that requires the tax exclusion for transit benefits to be the same as the exclusion for parking benefits. Thus, for 2015, employees can receive tax-free transit benefits of up to $250 a month—the same as for tax-free parking benefits.
• Favorable Rule for S Corporation Donations of Appreciated Assets. The Act retroactively restores and makes permanent the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets. For such donations, each shareholder’s tax basis in the S corporation’s stock is only reduced by the shareholder’s prorata percentage of the company’s tax basis in the donated assets. Without this tax break, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount). The provision is taxpayer-friendly because it leaves shareholders with higher tax basis in their S corporation shares.

Credits for Qualified Solar Electric and Water Heating Property Extended through 2021. The 30% credit for qualified solar water heating property and solar electric property expenditures was scheduled to expire for property placed in service after 2016. The Act extends this credit through 2021. For property placed in service in calendar-years 2017—2019, the credit remains at 30%. The credit is reduced to 26% or property placed in service in calendar-year 2020 and 22% for property placed in service in calendar-year 2021.

Tax Breaks Extended through 2016. Individual tax breaks that weren’t made permanent or extended through 2021 by the Act, were extended for two years through 2016, including the following:

• Tax-free Treatment for Forgiven Principal Residence Mortgage Debt. For federal income tax purposes, a forgiven debt generally counts as taxable Cancellation of Debt (COD) income. However, a temporary exception applied to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that was cancelled in 2007–2014 was treated as a tax-free item. The Act retroactively extends this break to cover eligible debt cancellations that occur before 2017 or are pursuant to a written agreement entered into before 2017. This is important! I know too many good people in trouble related to the mortgage meltdown of 2008 – through – 2010 that need this relief.
• Mortgage Insurance Premium Deduction. Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income taxpayers. Before the Act, this break wasn’t available for premiums paid after 2014. The Act retroactively extends the break for premiums paid before 2017.
• Qualified Tuition Deduction. This write-off, which can be as much as $4,000 or $2,000 for higher-income folks, expired at the end of 2014. The Act retroactively extends it through 2016. Another of my favorite new laws!
• $500 Energy-efficient Home Improvement Credit. In past years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The credit equals 10% of eligible costs for energy-efficient insulation, windows, doors, and roof, plus 100% of eligible costs for energy-efficient heating and cooling equipment, subject to a $500 lifetime cap. This break expired at the end of 2014, but the Act retroactively extends it for two years, to apply to property placed in service before 2017.

New Tax Breaks. The Act also includes a number of new individual tax breaks, including:

• Allowing tax-preferred distributions from §529 accounts to be spent on computer equipment and technology.
• Allowing ABLE accounts (tax-preferred savings accounts for disabled individuals), which currently may be located only in the state of residence of the beneficiary, to be established in any state. This will allow individuals setting up ABLE accounts to choose the state program that best fits their needs, such as with regard to investment options, fees, and account limits.
• Allowing a taxpayer to roll over distributions from an employer-sponsored retirement plan [e.g., a 401(k) plan] and traditional IRA (that is not a SIMPLE IRA) to a SIMPLE IRA, provided the SIMPLE IRA has existed for at least two years.

Cost Recovery Provisions

Enhanced Section 179 Deduction Made Permanent. The Act retroactively restores and makes permanent the (1) enhanced maximum Section 179 deduction of $500,000 (same as in effect from 2010 through 2014), (2) enhanced Section 179 deduction phase-out threshold of $2 million (same as in effect from 2010 through 2014), and (3) rule allowing Section 179 deductions for qualified real property. Without this change, the maximum Section 179 deduction was scheduled to be only $25,000, the phase-out threshold was scheduled to fall to $200,000, and there was to be no Section 179 deduction privilege for real estate.

Additionally, for tax years beginning after 2015, (1) the $500,000 and $2 million limits will be indexed for inflation, (2) the special $250,000 deduction cap that previously applied to qualified real property will be eliminated, and (3) air conditioning and heating units will be eligible for expensing.

15-year Depreciation for Certain Real Property Improvements Made Permanent. The Act retroactively extends and makes permanent the 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant property, and qualified retail space improvements.

Bonus Depreciation Extended through 2019. The Act retroactively extends bonus depreciation for qualifying new (not used) assets that are placed in service during 2015 through 2019 (2020 for certain assets with longer production periods). The bonus depreciation percentage is 50% for property placed in service during 2015 through 2017 (2018 for certain assets with longer production periods) and phases down to 40% for property placed in service in 2018 (2019 for certain assets with longer production periods), and 30% for property placed in service in 2019 (2020 for certain assets with longer production periods).

For new passenger autos and light trucks subject to the luxury auto depreciation limitations, the bonus depreciation increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service through 2017, $6,400 for vehicles placed in service in 2018, and $4,800 for vehicles placed in service in 2019.

Other Business Tax Breaks

Tax Breaks Made Permanent. Business provisions made permanent by the Act, include the following:

• Research and Development (R&D) Credit. The Act retroactively and permanently extends the R&D credit. Additionally, beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against Alternative Minimum Tax (AMT), and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.
• Break for S Corporation Built-in Gains. When a C corporation converts to S corporation status, the corporate-level Section 1374 built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The tax is only assessed on built-in gains (excess of FMV over basis) that exist on the conversion date. The recognition period is normally the 10-year period that begins on the conversion date. However, for S corporation tax years beginning in 2012 through 2014, the recognition period was five years. The Act makes the five-year recognition period permanent retroactive to tax years beginning in 2015. In other words, for gains recognized in 2015 and beyond, the built-in gains tax won’t apply if the fifth year of the recognition period has gone by before the start of the year.
• Differential Pay Credit for Small Employers. The Act retroactively and permanently extends the credit for eligible small employers that provide differential pay to employees while they serve in the military. The credit equals 20% of differential pay of up to $20,000 paid to each qualifying employee during the tax year. Additionally, beginning in 2016, the Act modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under current law.

Work Opportunity Credit (WOTC) Hiring Deadline Extended through 2019. The Act retroactively extends the general deadline for employing eligible individuals for purposes of claiming the WOTC to cover qualifying hires who begin to work before 2020. With respect to individuals who begin work for an employer after 2015, the PATH Act also modifies the WOTC to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) with the credit with respect to such long-term unemployed individuals equal to 40% of the first $6,000 of wages.

Tax Breaks Extended through 2016. The following business tax breaks were retroactively extended for two years through 2016:

• Credit for Building Energy-efficient Homes. The Act retroactively extends the $2,000 or $1,000 (depending on the projected level of fuel consumption) per-home contractor tax credit for building new energy-efficient homes in the U.S. to qualifying homes sold by December 31, 2016, for use as a residence.
• Energy-efficient Commercial Building Property Deduction. The Act retroactively extends the deduction for the cost of an “energy efficient commercial building property” placed in service during the tax year for two years, for property placed in service before 2017. The maximum deduction for any building for any tax year is the excess (if any) of the product of $1.80, and the square footage of the building, over the total amount of the Section 179 deductions claimed for the building for all earlier tax years.

New Rules for Information Reporting

Accelerated Due Date for Reporting Employee and Nonemployee Compensation. Currently, a business that pays nonemployee compensation totaling $600 or more in any tax year to a single payee must file a Form 1099-MISC (Miscellaneous Income) with the IRS by the last day of February of the year following the calendar year to which such returns relate (or March 31 if filed electronically). Similarly, employers must file Form W-2, Wage and Tax Statement, to report wage paid to employees with the Social Security Administration (SSA) by that same date.

The Act accelerates the date that Forms 1099-MISC and W-2 must be filed with the IRS and SSA. Starting with 2016 Forms 1099-MISC and W-2 filed in 2017, the returns must be filed with the IRS (or SSA) by January 31 of the year following the calendar year to which such returns relate and they are no longer eligible for the extended March 31 filing date for electronically filed returns.

Penalty Relief for De Minimis Errors on Information Returns. Substantial penalties can apply for failing to file correct information returns and to furnish correct information to payees. The penalties are the same regardless of the size of the error in the amount reported. For returns required to be filed after 2016, the Act establishes a new safe harbor from penalties if the return is otherwise correctly filed but includes only a de minimis error of $100 or less ($25 or less in the case of errors involving tax withholding). In this case, the issuer is not required to file a corrected return and no penalty is imposed, unless the recipient of such the incorrect return requests a corrected return.

 

Healthcare Excise Taxes Delayed

The Act delays the imposition following healthcare excise taxes:

• Medical Device Tax. The Act provides a two-year moratorium on the 2.3% excise tax imposed on the sale of medical devices. The tax will not apply to sales during calendar-years 2016 and 2017.
• Cadillac Tax. A 40% excise tax imposed on high-cost employer sponsored health coverage (often referred to as the Cadillac tax) was scheduled to take effect for tax years beginning after 2017. The Act delays the tax for two years. It will now be imposed for tax years beginning after 2019. The Act also makes this tax a deductible business expense.

Conclusion

As you can see, the tax extender legislation includes lots of tax changes and not all of them were extender provisions. We did not cover them all here because we did not want this to turn into a book. If you have questions or want more complete information, please contact us.

Sincerely

Steve Richardson, CPA

“Repair expenses” and IRS “audit efficiency”

This short article is about more than deductions for repair expenses; it is also about the new IRS “audit efficiency” being employed by the IRS with good results.  At least these results are good from the IRS’s point of view.

The Good News. “Repair expense” deductions are being liberalized!

The IRS is liberalizing the requirements for deducting “repair expenses”!  This is good news.  The IRS’s announcement is at the end of this article; take time to read it.

In a move that is consistent with recent IRS decisions that ease the requirements necessary to take a tax deduction, it is now easier (and safer) to deduct repair expenses.  This effectively removes a common tax audit issue from consideration and this decision is good for taxpayers and for the IRS.

It’s good for taxpayers because repair expenses reduce taxes.  Historically the issue with repairs is are they tax deductible or must they be capitalized and subjected to depreciation overtime.  Obviously this is good for taxpayers.

The Dark Side of the Force!

Do not forget that this decision is also good for the IRS.  Congress has “slashed” the IRS’s budget and sharply reduced the number of qualified IRS tax auditors.  These budget cuts have made it necessary for the IRS to rely on more efficient audit techniques.  This decision along with a series of other IRS announcements take nickel and dime tax audit issues off the table allowing the IRS to focus their audit strategy more efficiently.  This “audit efficiency” allows an IRS auditor to focus on big dollar tax audit issues.

Part of the IRS improved “audit efficiency” is how tax returns are selected for audit.  The last few IRS audits that I have been engaged in all have one common factor: the tax returns were filed late! Delinquent tax returns are being targeted for good reason.  The IRS has determined that people who tend to file delinquent tax returns often have poor accounting records.  Frankly, the IRS is correct!

This is one simple way to reduce IRS audit risk: File. On. Time!

The other part of the IRS’s drive for better “audit efficiency” is to single out unusual big dollar tax deductions or other tax issues.  Things like casualty losses, §1031 & §1033 exchanges, basis limitations and large NOLs are all subject to increased IRS audit scrutiny.

The tax planning principal required is, likewise, simple: make sure that your tax records for big dollar tax issues is neat, clean, organized and accurate.  And – always file on time!

So, the rumor that you have heard is true; the IRS has fewer auditors.  It’s also true that the IRS will engage in fewer audits.  But; and “but” is a big word; that does not mean that your IRS audit risk is lower.  The improved IRS audit efficiency is making the IRS audit selection process more effective selecting tax returns and discovering the big dollar tax errors hidden in these tax returns.

My message is clear: do not relax your diligence in preparing your tax and financial records.

The IRS’s News Release:

De Minimis Safe Harbor for Deducting Repair Expenses Increased to $2,500: Under the Tangible Property Regulations (TPRs), businesses must generally capitalize amounts paid to acquire or produce a unit of property. However, businesses can make a safe-harbor election to currently expense a de minimis amount of such expenses. The de minimis amount for a business without a Applicable Financial Statement (AFS) (basically, an audited financial statement or one required to be filed by the SEC) is $500 [Reg. 1.263(a)-1(f)(1)(ii)(D) ]. [Note: This amount, which applies to many small businesses, has long been criticized as not nearly large enough.] The IRS has now increased the de minimis safe-harbor amount for a business without an AFS to $2,500, effective for costs incurred in tax years beginning after 2015. However, the IRS will not challenge this issue in pre-2016 years if the other requirements of Reg. 1.263(a)-1(f)(1)(ii) are met. IRS Notice 2015-82, 2015-50 IRB and News Release IR 2015-133.

 

Newsletter from
Steve Richardson & Company, Certified Public Accountants

September 14, 2015

Boy-o-Boy; did I ever have a rough day at work!

Wednesday of this past week, I had a remarkable day at work; it wasn’t a good day.  In fact, it was awful; but it ended well. I’m exhausted!  I will tell the story and how I managed the IRS induced client crisis; and, at the end, I will tell you how this affects you and your business.

The story

The story goes like this: for no reason whatsoever and without any prior notices or warnings, the IRS froze a client’s checking account.  This account has over $100,000 in cash on deposit.  This is a crisis!

In two days, on Friday, this client makes payroll and must pay his sub-contractors.  Without access to this account a hundred or more people are out of work and this client is “out-of-business”.  A failure to make payroll and pay subs in a timely manner would have very likely caused his business shut down to become permanent.  In any event, the damage done to him would be difficult to calculate and impossible to repair.

My Task

My task was to get the IRS to release the lien on this client’s checking account before Friday – within one day!  On the surface, this is a daunting task.  The IRS is a bureaucratic behemoth; to get the IRS to research and release a tax lien in less than two days is very nearly impossible.  One obvious thing: I cannot deal with this matter through the US mail.  I much prefer to deal with tax and financial issues through the mail, mostly because I like having a history of the transactions in writing.

The only possible approach to accomplishing my task is to use the phones.

The IRS’s phone systems is a nightmare!

First I call the IRS Collections Department (logical right?).  I called at 10 AM; I was on hold for 2-plus hours.  I talked to an IRS human person for less than 10-seconds only to hear this: “you need to talk to business taxes; I’ll connect you.”

My call is transferred; I’m on hold for 2-more-hours! All the while I’m listening to awful music – interrupted every two minutes by a recorded message, “all of our agents are busy helping other taxpayers – please wait” or “do not hang up; our calls are answered in the order received”.  I’m going crazy!

Finally, a human being answers the phone! Thank you God! The agent says that she is with “business taxes”.  I’ll tell her my problem.  She tells me that she does not have the authority to lift a lien but she can research the problem for me.  And, she also says that she must do the research to find the problem otherwise she cannot transfer me to the person who can actually lift the tax lien.  Ok; she does her research; her research reveals that we do not owe them any money.

She is puzzled; I’m puzzled too.  The tax agent says that she needs to transfer me to collections so I can get the lien released. (I’ve already talked to collections once – it did not go well.) So, my phone call gets transferred again; guess what – 2-plus hours later an actual human being answers the phone; I say to the agent, thank you so much; I’ve been trying to talk to collections all day.  To which he replies, “Sorry, sir; this is not collections. This is business taxes. (This is the same office I just talked to – they transferred me back to the same office but a different person.)  I am frustrated.  I tell the business tax guy just how frustrated I am.  (I was polite! I promise.)  I ask him – please transfer me to whomever can lift a tax lien.  “Sorry, Sir; I’m required to ‘research’ the problem before I can transfer you to collections”.

So we get re-researched and discover two things: thing #1, we don’t owe the IRS any money and #2, we have the same problem researched only 2 and a half hours ago; he knows because the first researcher left notes in the file.  (If you are keeping up, I’ve been on the phone for seven hours!)  I’m tired; I’m irritable. I get transferred – yet again.

We’re on hold – again.  After 15-minutes, I tell Liz, my assistant, that we may hang up and deal with this tomorrow.  As I’m reaching to disconnect the phone – Collections Answers!!!  You know, God did part the Red Sea.

OK; the Collections Officer reviews the research and agrees that the lien is inappropriate and quickly agrees to lift the lien.  All this takes about a half hour; half hour is quick by IRS standards.  In the mean-time I ask him what went wrong.  What he said was important.

The Collections Officer said this, “Mr. Richardson, you and your client did everything right; this is entirely our error.  I’m so sorry this happened; I’m doing everything I can to make it right.”  He went on to say, “This taxpayer’s history runs from the old computer systems to the new system.  Unfortunately, the old system and new system do not communicate particularly well.”

I got the lien released! Finally!!!

The trigger event

The trigger event was that a Civil Penalty of about $8,000 was assessed for failing to properly file W-2 Forms in 2010; our CPA firm requested and was granted a penalty waiver due to reasonable cause in 2011 causing the penalty to drop to zero.  Well, the 2011 computer did not tell the 2010 computer that the penalty was removed; the 2010 computer “automatically” issued a tax lien against this Taxpayer’s bank account.  It was a 100% automated and totally ruthless response – no human being researched the problem; no warning letter was issued; no judgement was applied.  The short answer is this: it was a computer error! Computer error or not; it was ruthless!

What this means to you

The simple fact is this: the IRS is reducing its manpower and increasingly relying on computers.  The reason that the IRS is doing this is to control and reduce costs.  A laudable goal.  But, it is a goal that must have human oversight and judgement applied at crucial points in the process.  Issuing a tax lien seems to me to be a crucial point.

I have a big problem with this; computers lack human judgement.  Also, computers lack any sense of the humanitarian crisis that bad application of tax law can create.  They rely on logic like this: if we make less than 2% errors issuing a tax lien on a bank account, then we have been successful.  I do not agree with that logic.  If you are one of the 2% and an inappropriate tax lien puts you out of business, well that is a situation that has huge consequences for an honest taxpayer.

What you can do to protect yourself and your business

My story above demonstrates that you can do everything right and still find yourself engaged in an IRS initiated financial crisis.  That doesn’t mean that you are defenseless.

The most important bit of advice I can give any taxpayer is this: when the IRS sends you an official letter or notice – respond; and always respond in writing.  To state that as a negative: do not respond to the IRS by phone unless you have no choice.

The reason is simple: it is important to have a well-organized history of your dealing with the IRS.  If you do, and you find yourself in a crisis, your first line of defense is your written history.  I faxed my written files to each person who took more than 10-seconds to talk to me.  My written records were very important in allowing the IRS to quickly research the problem and, in the final analysis, the “quick” resolution I got to this problem was due in large part to the organized nature of how we approached the IRS.  (I have to give Liz a thank-you for that – she did a great job!)

I’m so sorry this happened

One of the most interesting things about my talk with the Collections Officer was his clear statement: “I’m so sorry this happened” and “I’m doing everything I can to make it right.”  In 40-plus years of practice before the IRS, I’ve heard a sincere apology, from the IRS, maybe a dozen times.  Sincere apologies from the IRS are rare.

The Collections Officer I talked to was a real gentleman.  He had a warm phone personality; he was sincere.  I appreciated his attitude so much.  After the intense frustrations of the day, it was a kindness that made me feel like we could work together to protect “our” taxpayer.  I deeply appreciate his statements and his attitude.

The number one problem with the IRS today!

The number one problem with the IRS’s customer services right now is telephone hold time.  Related directly to that issue is a lack of gracious telephone manners by IRS officers. It is brutal, frustrating, and, to a degree, it is dehumanizing.  (In defense of IRS customer service personnel, if I was trapped on the phone for 8 hours a day while staring at a computer screen, I might be a bit terse myself.)

Computers

The IRS’s increasing reliance on computers is inevitable; no matter how much we may want to go back to the human touch, it is not going to happen.  I hope the IRS will do two things: 1) cut down on telephone hold time, or in the alternative, allow for a scheduled telephone call back.  2) Have my new friend, the very pleasant and professional “Collections Officer” teach the rest of the IRS how to be gracious and kind on the telephone.

I’m sorry

Saying, I’m sorry, goes a long way!  Thank you Mr. Collection’s Officer.  (I have your name and number but I will keep it confidential.)

O-My; O-My; O-My

I’ve got to go; the Bank lost the lien release paperwork.  And, their telephone system is worse than the IRS’s.  What a Day!!!!

Sincerely

Steve Richardson, CPA

Newsletter from
Steve Richardson & Company, Certified Public Accountants

September 1, 2015

Entrepreneurship

Starting a new business is a daunting and often life changing task.  To say difficult is to make an understatement.  The rewards are however significant!

The Problems First

My staff will tell you that I am an expert in talking people out of business ventures.  I can see the problems with their plans and budgets and I ask the really difficult questions. My philosophy is this: if I can talk you out of it, I’ve saved you a lot of grief.  If you listen to me and adapt to the problems I point out, well then, you may have a winner!  Adapt is a point we will discuss more below.

In 1978, I started a new business. It has proven to be successful (for which I am immensely grateful!). I started Steve Richardson and Company, Certified Public Accountants.  I will tell you in plain language, it was difficult.  If I had known going into this business venture just how difficult, I’m not sure that I would have had the courage to do it.  But I did; thank God, now!

At one point, I was ready to merge into a larger CPA Firm but a client and dear friend, now deceased, Mary Relfe, talked me out of it.  Having encouragement is very helpful.

Here is a look at my experience:

1. You won’t make money right away.

Frankly, I have an advantage over most business start-ups.  As a CPA, I am a professional.  A professional, among other things, is a person who has most of what he needs to make money stuck between his ears.  It’s called intellectual capital.  I made a large investment of time, effort and money into these key capital assets.  That means that I did not need to invest in large amounts of equipment.

The reduced need for equipment and other assets means that I needed less money to open up a business. That’s a big deal; the number one problem of 99% of all business start-ups is being “under-capitalized”.

Even so, I was not able to draw a pay check from my own business for a year!  I had a young wife, a newborn baby and a mortgage to support.  I still have nightmares!  I biggest ace was my wife Jane who had total faith in me then and, thank God, she still does.

2. Your personal life will suffer.

Without Jane’s faith in me, I would have given up.  As you can easily tell, I have a very high opinion of my wife; my commitment to her is unwavering.  This business venture was hard on our relationship.  No matter how committed you are to protecting and prioritizing your personal relationships, they will suffer as you invest large amounts of time and money into your business.  Long working hours are only part of the issue.  I was working nights and weekends, and bringing work home. Thinking about work instead of Her!  Well, I can tell you, it was not always pretty.

3. Trying to juggle everything will take its toll on you.

We are human, not supermen or superwomen. As the CEO and Janitor of your new business enterprise, you will be working long hours and constantly changing hats.  This will take its toll on your mind and body.  The work is going to be fun, at times; at other times it will simply be grueling.

4. Your emotions will get the better of you.

Your time, your money, your family and your health are all invested in your business start-up; you cannot escape the emotional implications.  You will overreact; you will be too happy when things go right and too depressed with the little failures that are inevitable.  Fear is real; can I make enough money, fast enough, to take care of my family?  Emotional decision making in business is almost always bad decision making but separating emotional decision making in your own small business is very nearly impossible.  The most successful small businesses are the ones that make the fewest emotional decisions.

5. Nothing will happen the way you think it will.

A key to success is this: Adapt!  You need a well-researched budget and business plan.  A budget and business plan are essential to your success; but, nothing will happen as you envision.  Your plans are made of sand.  You will adapt or you will go out of business.  You will want to toss your budget and business plan in the trash – don’t!  Revise the budget, revisit it, restudy it and re-plan it.  Those who redo the budget constantly and recast the business plan have a much higher success rate than those entrepreneurs who simply toss the plan out!

6. You’ll make decisions that will haunt you.

Your business will succeed or fail based entirely upon your decision making skills.  You will make difficult and stressful decisions often.  This is an inevitable truth: it is impossible to make good business decisions all the time.  You will make bad decisions.  You hope you make more good decisions than bad ones.

Even good decisions will often haunt you, especially the decisions to hire or fire staff and employees.

7. You are going to fail.

You are going to fail! How could I get more negative?  But, it’s true; your entire company could go under.  Eighty-five percent (85%) of all business start-ups fail.  That is a fact.  Even if your company manages to stay in business there are other failures; some massive, some minor, but each failure will limit you and your vision of success.  Failure is an inescapable part of running a business.  How one adapts to failure (re-drafting the business plan) is a good indicator of future success.  Working through failure is an essential skill of any successful entrepreneur.  Your success depends upon it!

8. Your Success is not about Luck

Being lucky is not going to keep you in business. It may help; but, staying in business is a combination of many factors. A few of these factors are: how well capitalized is your start-up enterprise, how good are the marketing projections in your business plan, how strong are your professional or technical skills, how good is your staff, can you consistently make good decisions, how well do you recover from mistakes and bad decisions, and, I admit to it, how lucky are you.

9. A good business plan

A good business plan is essential to your success.  A good business plan is not based upon dreams or best case situations; it is based on the best facts you can find.  It is well researched and it includes a look at the key elements of success.  All your market and cash flow projections are based on the business plan.  Do not start a business, even a very small business, without a business plan.

10. We can help

You should not do this alone.  You need a person, like your CPA, who is emotionally disinterested but is also deeply committed to your financial welfare to scrutinize this essential business document.

Sincerely

Steve Richardson, CPA

Many IRS Tax Return Due Dates Just Changed, FBARs Too

Due date

The due date for many tax returns are changing.  Starting after December 31, 2015:

• Partnership tax returns are due March 15, NOT April 15 as in the past. If your partnership isn’t on a calendar year, the return is due on the 15th day of the third month following the close of your tax year.
• C corporation tax returns are due April 15, NOT March 15. For non-calendar years, it is due on the 15th day of the fourth month following the close of the tax year.
• S corporation tax returns remain unchanged—they are still due March 15, or the third month following the close of the taxable year;
• There are other deadline filing rules too.

These are, by far, not the only changes.

Other tax law changes

These and other tax law changes were tucked into an unlikely non-tax law, H.R. 3236, the “Surface Transportation and Veterans Health Care Choice Improvements Act of 2015”.  A few of the other changes are:

• Giving the IRS an increased audit period from three to six years in many cases.
• The due dates on FBAR reports for foreign bank accounts have also changed.

Extending time to allow an IRS Audit

Extending the time in which the IRS may audit is a big deal!  We are accustomed to a three-year period, called the “Statute of Limitations” in which the IRS can audit.  Being subject to a six-year period, called an extended statute of limitations, can be a harsh reality.  This six-year statute can be triggered by an under reported gross income of 25% or more.  The definition of what is factored into the 25% understatement is new; an over or understatement of “Basis” can be a part of, or all of the necessary 25% misstatement of gross income.

Basis

Basis is a complex tax topic.  Those who buy and sell capital assets such as stocks, bonds, real estate and many other assets (i.e., race horses) need to keep careful records of how much is invested into these assets.

Basis Errors can be 100% Accidental!

S-Corps are particularly vulnerable to accidental basis misstatements!  In S-Corps and LLC you can make an honest mistake and misstate your basis by a very large amount and be totally unaware of the error until the IRS (or your CPA) points the basis misstatement out to you, often with dire consequences.

 

 

Supreme Court Legalizes Same-sex Marriages Nationwide

Following is a news flash: the Supreme Court Legalizes Same-sex Marriages Nationwide. I encourage you to read this short report. Afterwards I will make some comments.

Steve Richardson, CPA

 Five-Minute Tax Briefing
No. 2015-13

Item for Monday, June 29, 2015

Supreme Court Legalizes Same-sex Marriages Nationwide: The U.S. Supreme Court held, in a landmark decision, that the Constitution requires a state to license marriages between same-sex couples. This ruling to legalize same-sex marriage in all 50 states has far-reaching consequences, including a number of important tax issues. Same-sex couples who are married in any state will now be able to file joint state tax returns, inherit property more easily, and receive Social Security and veterans’ spousal benefits. For federal tax purposes, legally married gay couples have been able to file joint income tax returns, elect to split gifts for gift tax, and claim the marital deduction for estate tax since the Supreme Court’s 2013 ruling in Windsor. However, some states required same-sex couples to file separate state income tax returns, regardless of whether they were legally married in another state. [Editor’s Note: Same-sex married couples should be able to amend their returns and file jointly to claim a refund (if entitled to one) for tax years that are still open.] Other areas likely to be impacted by this ruling include health and medical benefits. Obergefell v. Hodges, 115 AFTR 2d 2015-XXXX (Sup. Ct. 2015).

Comments: How will this affect my clients and friends?

First I want to point out a simple fact: this is the law of the land. You may agree with the ruling with a whole heart or you may think is a travesty but this is a central fact: Same-sex Marriage is now a constitutionally protected right of citizens.

• As such it is a fact we must learn to live with.
• That is the purpose of this letter; how do we live with this new reality.

It’s not all good news and it’s not all bad news. When the eight-hundred pound gorilla (also known as the United States Supreme Court) makes a ruling it is always a mixed bag; rarely, if ever, does a Supreme Court ruling produce a clear winner and a clear loser.

For the Gay and Lesbian Community, this is as near a complete victory as they could have hoped for but there was a distant mirage that is now a certain reality. Family court has a new group of constituents. The rules that apply to marriages now apply to Same-sex Marriage couples. That means: alimony, property settlements and all of the many other things that are the domain of family court now apply to all married couples be they heterosexual or not. As a part of my job, I’m in family court on a routine basis – it is not a place you want to be. This is a negative.

There are other aspects of this ruling that have a negative potential. I’m not a legal scholar and am therefore unable to address these potentials in a meaningful way.

For the Gay and Lesbian Community, there are some clear wins. Things like tax planning, estate planning, insurance planning, pension and retirement planning and family financial planning are going to be much easier to accomplish. This is important.

I’ve serviced Gay and Lesbian clients for over 40-years. Without this court ruling I can and have accomplished good results in each of these important financial areas – but – it wasn’t easy. Now; it’s much easier to do.

As a result, more people will have better tax and other financial planning. More people we have improved economic stability. This is a good thing.

When a constituent community enjoys an improving economic reality, the entire economy will reap the benefits. This is not hypothetical; this ruling is good for the economy; especially if you are a lawyer, CPA or financial planner.

But! But, there is a significant constituent of citizens who are deeply offended.

I advise caution here. I will deal with the religious and church issues in a bit but first, for private citizens – be cautious!

Be you an employee or entrepreneur your customers are not Black or White, nor are they Gay or Heterosexual; what they are is green dollars. In business purchasing power counts. Business is business and do not get fired from your job or lose your business in an ineffectual protest over an issue that will not change in your lifetime. Be kind, be gracious, and be at all times ethical in all your business dealings with whomever. That is just good common sense.

Religious and Church Issues:

Contrary to popular perception, the U.S. Supreme Court was not anti-religious or draconian in this ruling; quite the contrary. Church and ministers cannot be compelled to provide sacraments, ordinances or other sacerdotal services to anyone whose faith or lifestyle is contrary to their convictions. The First Amendment was not over turned. I state this as a clear fact: Churches and Clergy cannot be compelled to provide marriage services where they object for any reason.

What actions should church take?

Here again I advise caution. Frankly, you really do not need to do anything. If, however, you feel compelled to take some action I suggest that you modify your church by-laws or constitution to simple as a statement such as this:

“Our Church of the True Faith” cannot be compelled to provide sacraments, ordinances or other sacerdotal services to anyone whose faith or lifestyle is contrary to the convictions of this Church.

Notice that I did not even mention the Same-sex Marriage issue. Don’t. It’s not necessary and, if you do, you create an increased potential for litigation that is avoidable.

Matthew 5:25 – Come to terms quickly with your accuser while you are going with him to court, lest your accuser hand you over to the judge…

I will tell you this plainly and simply, if you are sued for refusing to administer a same-sex marriage based on religious convictions you will win.  But, trust me on this, you do not want to be sued!  Ever!

So, again, I advise caution.

Sincerely,

Steve Richardson, CPA

Churches “MAY” be able to pay for employee’s health insurance as a nontaxable fringe benefit!

There may still be a way for churches to pay for employee’s health insurance as a nontaxable fringe benefit.  IRS Notice 2013-54 points out three possibilities:

• The Affordable Care Act (the ACA) does not apply to group health plans that have fewer than two participants who are current employees on the first day of the plan year. (This is IRS-Speak; fewer than two participants actually means one participants; but, with IRS-Speak you need to use bureaucratic language which has only a passing relationship with English.)
• The ACA does not apply to “excepted benefits”. These are, according to the IRS, “among other things, accident-only coverage, disability income, certain limited-scope dental and vision benefits, and long-term care benefits and certain health FSAs.”  The plans are not necessarily prohibited for failing to comply with the ACA.
• Another option that may possibly allow churches to continue to pay employee insurance premiums on a pre-tax basis is to participate in the Small Business Health Options Program (SHOP) marketplace.

Guidestone, a program associated with the Southern Baptist Convention, cites the following example:

• We have two employees – our pastor and our children’s minister. Our children’s minister has coverage through her husband’s employer. Therefore, we only reimburse the pastor’s premium, which he purchased in the individual market. Are we subject to the new rules?
  • Answer – No. Because you are only contributing toward the premium for one employee, you are not subject to the new rules. However, if you decide to contribute to both employees’ health coverage, you will need to purchase group health coverage in order to stay in compliance.

This is our thinking; if we have a church where only one person is participating in a group health plan such as the plan GuideStone provides, then that church is not subject to the ACA.  What that means is that such health coverage can be structured as a TAX FREE Fringe benefit!

This is kind of a big deal.

If you have a small church where, in 2014 or 2015, only one person is covered by health insurance, we need to take a fresh look at the arrangement.  There is a chance that we may be able to amend tax returns to minimize your tax burden.

Also: please feel free to forward this email to you friends and cohorts who may be interested.

The IRS has no heart – until they do!  Tax Breaks for Nursing Mothers & Women’s Health

Dear Clients & Friends of the Firm:

There’s a joke in the movie, Men in Black; the punchline is:

No, ma’am. We at the FBI do not have a sense of humor we’re aware of. May we come in?

The IRS, likewise, has no sense of humor or heart; all they have is the Statute, The Code!  For the IRS, good, bad, ethical and unethical is defined by the Internal Revenue Code.  If it’s not in the Code, then, to the IRS, it is not relevant.

The IRS has no sense of humor whatsoever.

On occasion, however, the Code will allow the IRS to do something that is really good – like give a tax break to breastfeeding mothers.

Nursing mothers are getting a new tax break from the IRS– which puts breast pumps and other supplies on the list of tax-deductible items.  (IRS Ann. 2011-14, 2011-9 IRB).

Breastfeeding women can spend as much as $1,000 each year on nursing supplies, thanks to pressure from the American Academy of Pediatrics and other advocates that pushed to define breast pumps and other supplies as medical devices.

The reason for the IRS’s change of heart is the many long-lasting health benefits of breast milk for mothers and their babies.

The IRS announcement read:

“The Internal Revenue Service has concluded that breast pumps and supplies that assist lactation are medical care under 213(d) of the Internal Revenue Code because, like obstetric care, they are for the purpose of affecting a structure or function of the body of the lactating woman.”

It’s about much more than breastfeeding

Obviously this is good news.  Actually this news is better than you think because it represents a major shift in tax law on the topics of wellness and women’s health maintenance.  It’s about much more than breastfeeding though breastfeeding was a major driving force in this new focus on women’s health.

The list of items that now have tax benefits are:

• Breastfeeding support, supplies, and counseling.
• Contraceptive methods and counseling, as detailed below (also known as the contraceptive mandate, see text beginning at footnote 28).
• Annual screening and counseling for interpersonal and domestic violence.
  • A recommended screening and counseling for interpersonal and domestic violence may consist of a few, brief, open-ended questions, and can be facilitated by the use of brochures, forms, or other assessment tools including chart prompts.
• Gestational diabetes screening, in pregnant women between 24 and 28 weeks of gestation and at the first prenatal visit for pregnant women identified to be at high risk for diabetes.
• Human high-risk papillomavirus  DNA testing in women with normal cytology results; screening should begin at 30 years of age and should occur no more frequently than every three years.
• Annual counseling and screening for human immune-deficiency virus (HIV) for all sexually active women. For these purposes, “screening” means actual testing for HIV.
• Annual counseling for sexually transmitted infections for all sexually active women.
• Well-woman visits, annually, unless several visits may be needed to obtain all necessary recommended preventive services, depending on a woman’s health status, health needs, and other risk factors.

The new guidelines do not promote multiple visits for separate services but nothing in the Regs requires that each service be provided in a separate visit.

This is Good News; but it’s not that good.

This is obviously good news and long-overdue; but the news is not that good.  These are treated as itemized medical deductions subject to the 10% of AGI limitation.  In effect, for most families, this deduction will be lost in the labyrinth of IRS Forms.

This News is actually better than you think.

The best way to fully realize the tax benefits of women’s wellness law in the Tax Code is to use an employer’s FSA; and FSA is a “Flexible Spending Account” offered by many employers.  The new restrictions created by the Affordable Care Act will cause a substantial future increase in FSA accounts.

I may write a future new letter on FSA; do you think I should?

Sincerely

Steve Richardson, CPA

I’m having a new “Ready-Made” grand-baby!  The Adoption Credit!

Dear Clients & Friends of the Firm:

I have good news: I going to have another grandbaby, “Ready-Made” in China.  This will be our sixth grandchild.  Our “Ready-Made” grandbaby will arrive in late March or early in April!  How wonderful!

Adoptions have Tax Implications!  This Adoption will have Double Implications!

When grand-dad and the new Dad both work at a CPA Firm, Adoptions in the middle of tax season have double implications!

For our clients: please get your tax and accounting work into our Firm as soon as possible.  We need to get a jump-start on our busy season so that we can give maximum love and attention to our new grandbaby!

Let me state the obvious:
Adoptions are Very Expensive!

This is not an ordinary adoption (though I doubt that there is any such thing as “an ordinary adoption”). Our new grandbaby is “special needs”.

All adoptions are expensive.  Adoptions of “special needs” children are even more expensive.  All tax-breaks are appreciated.  There are tax-breaks for adoption and additional tax-breaks for “special needs” adoptions.

Adoption tax-breaks are very important and much appreciated.

Adoptions have Tax Implications for every family!

Two tax benefits are available to offset the expenses of adopting a child. For 2015, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $13,400 of “qualified adoption expenses” (see below) for each adopted child. That’s a dollar-for-dollar reduction of tax-the equivalent, for someone in the 25% marginal tax bracket, of a deduction of over $50,000. Also, adoptive parents may be able to exclude from their gross income up to $13,400 (for 2015) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are reduced (phased out) if the parents’ income exceeds certain limits, as explained below.

Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they may not claim both a credit and an exclusion for the same expense.

Qualified adoption expenses. To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child” (defined below).

Qualified adoption expenses don’t include expenses connected with the adoption of a child of a taxpayer’s spouse, expenses of carrying out a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a federal, state, or local program. Expenses that are reimbursed by an employer don’t qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.

Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e., one in which the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.

Taxpayers who adopt a child with special needs will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $13,400 for 2015. They can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $13,400 of actual expenses.

Eligible child. An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. A child who turned 18 during the year is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for himself is also eligible, regardless of age.

Special needs child. This refers to a child who the state has determined cannot or should not be returned to his parents and who can’t be reasonably placed with adoptive parents without assistance because of a specific factor or condition, e.g., ethnic background, age, membership in a minority group, medical condition, or handicap. Only a child who is a citizen or resident of the U.S. is included in this category.

When to claim the credit or take the exclusion. If the qualifying expenses are paid before the year the adoption becomes final, the credit is claimed for the year after the one in which the expenses are paid. If the expenses are paid in the year the adoption becomes final or in a later year, the credit is claimed for the year in which the expenses are paid. For example, say $3,000 was paid in 2013, $2,000 in 2014, and $4,000 in 2015, when the adoption becomes final. The taxpayer claims a $3,000 credit in 2014 (for the 2013 expenses). The $2,000 of 2014 expenses and the $4,000 of 2015 expenses are combined to be claimed in 2015.

Employer-provided adoption benefits are excludable from the employee’s gross income for the year in which the employer pays the qualified adoption expense.

In the case of a foreign adoption, or an adoption of a child with special needs, neither the credit nor the exclusion may be taken until the year in which the adoption becomes final.

Non-refundable credit. The adoption credit is not a refundable credit. So, if the sum of your refundable credits (including any adoption credit) for the year exceeds your tax liability, the excess amount is not refunded to you. In other words, the credit can be claimed only up to the amount of your tax liability.

Phase-out for high-income taxpayers. The credit allowable for 2015 is phased out for taxpayers with adjusted gross income (AGI) over $201,010 and is eliminated when AGI reaches $241,010. The 2015 credit is reduced by a percentage equal to the excess of AGI over $201,010 divided by $40,000.

For example, say taxpayers who could have otherwise claimed a $2,000 credit have AGI of $211,010 in 2015. Their $211,010 AGI minus $201,010 equals $10,000, and $10,000 divided by $40,000 is 25%. Accordingly, the taxpayers “lose” 25% of their credit ($2,000 times 25% is $500) and can only claim a credit of $1,500. (Special rules for determining AGI apply in some cases.) The phase-out rules for high-AGI taxpayers apply for the exclusion as well.

How to claim the credit or take the exclusion for qualified adoption expenses. Adoptive parents who paid qualified adoption expenses or who received employer-provided adoption benefits must use Form 8839 to compute the amount of the credit and the amount of benefits that may be excluded from their gross income. Taxpayers who are filing Form 8839 cannot file electronically, but must file a paper return. So taxpayers claiming the adoption credit or the exclusion for employer-provided adoption benefits must file paper returns. In addition to filling out Form 8839, eligible taxpayers should keep one or more adoption -related documents, detailed in IRS-issued guidance.

Child’s taxpayer identification number required for credit or exclusion. IRS can disallow the credit and the exclusion unless a valid taxpayer identification number (TIN) for the child is included on the return. Taxpayers who are in the process of adopting a child can get a temporary identification number, called an adoption taxpayer identification number (ATIN), for the child. This enables the adoptive parents to claim the credit and exclusion for qualified adoption expenses. Form W-7A is used to get an ATIN.

When the adoption becomes final, the adoptive parents must apply for a social security number for the child. Once obtained, the social security number, rather than the ATIN, must be used.

Adopted child may qualify for dependency deduction, other tax benefits. Your legally adopted child will qualify as your dependent if the other dependency tests are met, e.g., you provide more than half of the child’s support. Even if the adoption isn’t yet final, the child will be your dependent if he or she was placed with you for legal adoption by an authorized placement agency and was a member of your household for at least part of the year. Special requirements apply to adoptions of foreign children who aren’t U.S. citizens or residents.

Once the child is your dependent, you will qualify for the dependency deduction and for other tax benefits, such as the child tax credit.

I can help you to make sure that you get the full benefit of the substantial tax savings available to adoptive parents. Please call if you have any questions. I look forward to discussing these tax benefits with you.

Sincerely

 

Steve Richardson, CPA