Helpful Tips


Identity Theft and IRS Tax Scams
Estimated Tax Payments
Foreign Assets
Use Tax
Unclaimed Property
A Little Short on April 15th?
Charitable Contribution - Deductible or Not?
Vehicle Donation Rules
Kiddie Tax Alert!
Changes for 2016

Identity Theft and IRS Tax Scams

Identity Theft. Many individuals had an unwelcome surprise this past tax season when they were notified that someone else had already filed a return using their social security number. This type of identity theft is used to obtain fraudulent tax refunds and has become one the IRS's top problems. When this happens, the victim has to alert the IRS by calling the IRS Identity Protection Unit at 1-800-908-4490. They must file their tax return by mail along with an affidavit and proof of identity, such as a copy of a driver license or social security card. The IRS then issues a PIN number to be used for filing future tax returns, so that fraudulent returns can no longer be filed on the victim's account. To help minimize your chances of becoming a victim of any type of identity theft, avoid sending your social security number by email, or on any attachments to email. Also, although many standard forms requested by your medical provider or school may include a space for a social security number, ask if it is absolutely necessary to provide it. In some cases, your insurance card or other information may be sufficient.

IRS tax scams. The IRS has issued multiple warnings that IRS tax scams have become pervasive and sophisticated. Currently there are telephone scams where callers claim to be from the IRS and tell the intended victim they owe taxes that must be paid using a credit card or wire transfer. The scammers are able to spoof the IRS toll free number on caller ID, may recite IRS badge numbers, and use serious threats such as arrest, jail time, or loss of driver's license. They have even been known to hang up and have someone call back pretending to be from the local police or DMV. It is important to understand that the IRS will always send taxpayers a written notification of tax due via U.S. mail. More importantly, the IRS will never ask for credit card or other payment information over the phone. You can report such calls to the IRS at 1-800-366-4484.

There are also email scams that use the IRS logo and are made to appear very authentic. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS will never ask for PINs, passwords, or other confidential access information for financial accounts. If you receive a suspicious email, do not reply or click any links, and do not open any attachments. You can help the IRS investigate email scams by forwarding the suspicious email to phishing@irs.gov.

Estimated Tax Payments

No penalty for failure to pay estimated tax will apply to an individual whose federal tax due is less than $1,000 for the year. For the State of Michigan, the threshold is $500. Also, a U.S. citizen or resident need not pay estimated tax if he or she had no tax liability for the preceding 12-month tax year. Individuals who do not qualify for these two exceptions may generally avoid the penalty for failure to pay estimated tax by paying at least 90% of the current year's tax liability or paying 100% of the prior year's tax liability. A special rule applies to individuals with adjusted gross income for the previous tax year in excess of $150,000 ($75,000 for married individuals filing separately). For these individuals the safe harbor percentage is 110% of the prior year's tax liability for both the Internal Revenue Service and State of Michigan. The required payments may be made either through withholding or payment of equal quarterly installments. In the event that your income has increased from the prior year, it is generally best to use the prior year safe harbor rule to keep you "safe" from penalty. You may have a balance due with your income tax return, but you have kept your money working for you rather than the IRS.

Foreign Assets

Taxpayers with foreign financial accounts that exceeded $10,000 at any time during a calendar year must report those assets on Form 114, Report of Foreign Bank and Financial Accounts. Taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to the IRS on Form 8938, State of Specified Foreign Financial Assets, with their tax return.

Use Tax

Every state with a sales tax has a companion tax for purchases outside the state. In Michigan, that tax is called the "use tax". While many Michigan residents are not aware of the use tax, it has been on the books since the 1930's. The law says that you owe tax on purchases from companies that do not collect Michigan sales or use tax. This includes mail order and Internet purchases as well as purchases while traveling in foreign countries and other states. You do not have to pay Michigan use tax if (1) Michigan sales or use tax was paid to the seller, (2) The seller charged another state's sales tax of at least 6% on purchases made while traveling in that state, or (3) Purchases made outside Michigan in a calendar month did not exceed $10. Examples of purchases subject to use tax include (1) Out-of-state catalog, Internet or mail order purchases ( L.L. Bean, Amazon.com), and (2) Purchases made outside of Michigan (furniture, computers, appliances).

Use tax can be paid on MI-1040 Michigan Income Tax Return. The use tax due can be calculated by multiplying purchases under $1,000, if you know the actual amount, by 6% (.06) or for purchases under $1,000, if you have incomplete or inaccurate receipts, you may use the Use Tax Table that is provided in the Michigan Tax Instruction Booklet. In all cases, if a single purchase exceeds $1,000, you must pay 6% on those purchases. Maintaining these records throughout the year will make this calculation easier.

NOTE: In January 2015, the "Michigan Fairness Act" was signed into law, forcing online-only retailers to collect Michigan sales tax. This law becomes effective as of October 1, 2015. After this date, use tax reporting may not be relevant to most taxpayers.

Unclaimed Property

The Michigan Department of Treasury is holding millions of dollars in abandoned and unclaimed property belonging to Michigan residents. To check if the Treasury Department is holding funds for you or your family, visit their web site by clicking Here.

Michigan businesses should be aware that they are required to remit the unclaimed property to the Michigan Department of Treasury. Some of the more common unclaimed properties that businesses may encounter are money, checks, deposits, customer overpayments, uncashed checks, gift certificates, security deposits, and unpaid wages. Early in 2011, the Treasury Department mailed a Notice Regarding Your Obligation to Report Unclaimed Property to all Michigan businesses, stating that every business must file a report for unclaimed property or attest that they have none by July 1st of each year. The forms are available on the State of Michigan website at michigan.gov/unclaimedproperty.

A Little Short on April 15th?

For those taxpayers who find themselves short of funds to pay that tax bill on April 15th here are some options that may help you

Take out a loan. At first this may not sound like an appealing option but consider this: The IRS late-filing penalty is 5% per month on the tax you owe in addition to the late-payment penalty of ½ % per month. That's 5 ½ % per month up to a maximum of 5 months. After that, the late-payment penalty continues on your outstanding balance. In addition, interest is charged on the outstanding balance at the federal short-term rate plus 3%. Depending on your circumstances, you can see how a loan might not be such a bad idea.

Of course, the best loan is an interest-free or low-interest loan from family or friends. Just keep in mind that if the loan is over $14,000 there are imputed interest issues to consider.

A personal loan from a financial institution might be another option for you, although the interest is considered personal and therefore not deductible.

Perhaps the best option for homeowners is to take out a home equity loan or a draw from a home equity line of credit. Unlike the other two choices, the interest paid on this loan would be deductible on your individual tax return.

Use your credit card. You could also charge your tax liability for a non-deductible fee of 1.87% to 2.35%. This fee combined with your credit card interest rate is an expensive choice unless you pay your balance within a month.

If none of these options suit you, the important thing to remember is that if you are able to file your return on April 15th do so. If not, file an extension and avoid the 5% late-filing penalty and work out an installment agreement with Uncle Sam.

Charitable Contribution - Deductible or Not?

The IRS has introduced new documentation requirements that affect the deductibility of charitable contributions. The following is not a complete list, but are the ones that will affect most taxpayers who take charitable contribution deductions.

Cash contributions of Less than $250 in Single Donation. It's no longer sufficient to simply keep good records of these donations. Instead, cash contributions of less than $250 given in a single contribution are only deductible if you keep a bank record (most likely a cancelled check, wire transfer acknowledgement, or credit card record) or written acknowledgement from the charity. It is advisable to make contributions by check rather than cash to ensure their deductibility.

Cash and Property Contributions of More than $250 in Single Donation. Rules for substantiation of larger contributions of cash or other property (those that are more than $250) have not changed. A written acknowledgement must be obtained, showing the description of the property or amount of cash donated and a statement as to whether the donor received any goods or services for the property donated. A cancelled check or other reliable records are not sufficient proof.

Contributions of Used Clothing and Household Items. Donated clothing and household items must be in "good condition or better" to claim a deduction. If the item is valued at more than $500, an appraisal must be obtained and attached to the tax return.

Contributions Via Payroll Deductions. For any amount of contributions made by payroll withholding, you are now required to keep an official pledge card from the charity and documents from your employer (ex: pay stub, W-2) showing the amount donated.

The written acknowledgment from the charity must include all of the following or the deduction will be disallowed:

  1. The name and address of the charity.
  2. The date of the contribution.
  3. The amount of cash and/or a description (but not an estimate of value) of any property contributed.
  4. Whether the charity provided the donor any goods or services in exchange for the contribution; and, if so, a description and a good faith estimate of the value, of the goods or services provided or, if the only goods or services provided were intangible religious benefits, a statement to that effect.

Vehicle Donation Rules

Taxpayers are no longer able to use their discretion to determine the charitable deduction for a donated vehicle. Lawmakers have long believed that taxpayers have been claiming inflated deductions for their donated vehicles and Congress cracked down on this abuse in the 2004 Jobs Act. The deduction is limited to the actual sales price of the vehicle when sold by the charity, with some exceptions.

  • Example: Ann decides to donate her old car to a local charitable organization. Based on the condition of the vehicle, she looks up the vehicle's "Blue Book" value and determines that the car is worth $1,500. On August 1, 2016, she donates the car. On September 30, 2016, the charity sells the vehicle for $800. Under the old rules, Ann would have claimed a $1,500 deduction. Under the current rules, the deduction will be limited to $800, the gross proceeds received by the charitable organization from the sale of Ann's vehicle.

An important exception to this rule exists if the charitable organization intends to "significantly" use the vehicle in its charitable activities or make "major" improvements before selling it. In either of these cases, the taxpayer's donation is the vehicle's FMV before any improvements.

The charitable organization must provide a written acknowledgement to the donor on a timely basis. The acknowledgement must include the following:

  • Donor's name and TIN;
  • Vehicle identification number; and
  • Date of contribution.

If the vehicle is sold, the acknowledgement must include the date of the sale and the gross proceeds from the sale. Similarly, the organization must identify if it intends to use or improve the vehicle. The charitable organization must also report the donation to the IRS on Form 1098-C. The taxpayer must include a copy of the acknowledgement with their tax return or the deduction will be disallowed.

Kiddie Tax Alert!

Your dependent child age 18 or under or under 24 if the child is a full time student at year-end, who has unearned income (typically from investments) over $2,100 may be taxed at the parent's higher tax rate.

If the following four requirements are met, the excess unearned income (over $2,100) will be taxed at the parent's higher tax rate.

  1. One or both of the child's parents are alive at the year-end and are in a higher income tax bracket.
  2. The child doesn't file a joint income tax return.
  3. The child's unearned income exceeds $2,100 for 2015 and 2016.
  4. Your child is-
    • Age 18 or under at the end of the year and doesn't have earned income that exceeds 50% of his or her support.
    • Age 19-23 at the end of the year, is a full time student and doesn't have earned income that exceeds 50% of his or her support.

Tax Planning Advice

There are ways to plan ahead that may reduce this "Kiddie Tax". Invest in a 529 College Savings Plan. This investment income is not subject to the additional tax; however, these funds must be used for higher education to receive the desirable tax free status. Another option for investing for your child is to invest in tax-exempt municipal bonds or growth oriented stocks.

Changes for 2016

Individuals

Expiring Provisions. The following list includes some of the more commonly used provisions that expire at the end of 2016. You can find a complete list on the IRS website. Please note that Congress may or may not retroactively reinstate some of these expired provisions:

  • Above-the-line deduction for qualified tuition and related expenses.
  • Treatment of mortgage insurance premiums as qualified residence interest.
  • Exclusion from income for cancellation of mortgage debt on principal residence

Individual Health Insurance Mandate. Starting in 2014, individuals who fail to carry health insurance that meets minimum standards became subject to penalties unless certain exceptions apply. Lower income individuals may be eligible for refundable tax credits to assist with the cost of health insurance.

IRA Rollover Rules. Starting in 2015, a new tax rule went into effect that limits the number of IRA rollovers to one per year from all IRA accounts of the same owner. The IRS previously allowed one rollover per year, per IRA account. This rule applies when IRA funds are rolled over via a distribution to the owner and then manually re-deposited to another IRA. The annual limitation does not apply to direct IRA-to-IRA transfers where the owner never receives the funds.

Businesses

Changes to Business Return Due Dates. For tax years beginning after December 31, 2015, the due date for C corporation returns (Form 1120) will be one month later (i.e., April 15th for calendar year businesses instead of March 15th). The due date for partnership returns (Form 1065) will be one month earlier (March 15th instead of April 15th). There is no charge to the due date of March 15th for S corporation returns.

Section 179 Expensing. The Section 179 expensing election has been permanently set at $500,000 with a $2,000,000 investment-based ceiling.

Bonus Depreciation. Bonus depreciation has been extended through 2019, phasing down from 50% in 2015 through 2017 to 40% for 2018 and 30% for 2019.

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