Articles Posted in Tax Laws

Over the years I have received many calls from surprised taxpayers that their debts written off, whether it be from home loan or credit card debt, created income that needed to be reported on the tax returns as taxable income. The basic theory for all taxation, is that if you are wealthier,  then there is a good chance you need to pay taxes on that wealth.

a5-300x150When a person borrows money and buys an asset (for a car or home, for example), they typically do not think if they do not repay that loan that it creates income, but under the tax rules it may. As an example, say you borrow $20,000 from the bank and buy a car. You run into bad luck,  stop paying the loan, and the car loan defaults and they take the car. After selling the cat, say you still owe $5000 on the loan after the car is sold. If they write-off the $5,000 it can create income since you received $20,000 and paid back $15,000, so you are $5,000 richer and that $5,000 of wealth is subject to tax. The tax form that you would receive in these cases is a form 1099-C, Cancellation of debt.

There are a few exceptions to this rule, for instance, if you are in bankruptcy or insolvent (assets less than liabilities) when the debt is written off. If either of these exceptions are your case, then the write-off of the tax debt would not be taxable. The lender also needs to be a commercial lender and not a family member or friend. If you fail to pay the family member or friend, then the write-off would be viewed as a gift from them to you. The other main exception is if you merely guarantee  debt, by co-signing, then if the main borrow defaults typically you did not become wealthier and you would not have to pay tax on that transaction. The last major exception is if under the terms of the loan, the only recourse of the lender has is to take back the property to satisfy the debt. They call this non-recourse debt, and a write down of non recourse debt is typically not taxable.

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In two recent blog posts, we discussed issues that may affect and lengthen the statute of limitations for IRS Audits as well as options for taxpayers who fail to comply with FATCA reporting requirements. Recent actions by members of the U.S. Congress resulted in some important changes with regard to both of these IRS matters.

Oddly enough, these important tax changes were rolled into a completely non-tax related bill, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, making it likely that many taxpayers will miss them. Below are some of the important deadline and other changes that affect individual taxpayers, business owners and foreign-account holders.

Previously, an individual who was audited could expect to produce related financial records for the last three years and, under certain circumstances six or more years. However, with these most-recent tax changes, the standard IRS audit period increased from three to six years.

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Taxpayers have only a few days left before the April 15 deadline to file their income tax returns or request an extension with the Internal Revenue Service. “Review twice, file once” would be a good saying for tax returns, because any mistake could lead to problems down the road.

The reality is that even a careful review will not catch some of the mistakes made by taxpayers and even some inexperienced tax preparers who do not know all the complex rules. Listed below are just three things to watch out for when reviewing a 2014 tax return, and ones you should get some help with when filing.

  • Charitable deductions: Donations of many types are deductible on a tax return, but there are many rules. When someone gives clothes or furniture away to Goodwill, they need to get a receipt and should write down the items that they donated. They can only donate the value of the items at the time they donated them, not when they purchased them. Goodwill and other charitable organizations have an online pricing guide to help. Taxpayers should have any property worth more than $5,000 independently appraised with written documentation.

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There’s no end to items facing taxation – ones we may be unaware of. This includes unemployment benefits, forgiven debt, and certain Social Security benefits. With tax planning, we can minimize the amount of taxation owed and be better prepared for the next tax season.As welfare and public assistance benefits usually are not subject to taxation, it may seem surprising discovering that we owe taxes on unemployment benefits. Unfortunately, there’s little we can do to reduce the obligation to pay tax on unemployment received. It’s allowable to recover certain amounts paid in as nondeductible contributions to unemployment funds. Other than that, the way to lessen the amount of taxes we pay on these benefits in April is to have more taxes withheld from these benefits throughout the year.Taxation on debt forgiveness may also seem unfair. The reason we work with lenders to have debt forgiven is because we are struggling financially to begin with. However, coming to an agreement with banks and credit card lenders to have the debt forgiven usually leads to taxable consequences. This forgiven debt is in certain circumstances regarded as taxable income. Fortunately, there are exceptions to this rule. Debts discharged in bankruptcy are not subject to taxation. Forgiven debt concerning business real property or farms also is not necessarily subject to taxation. Certain type of student loan debt forgiveness does not face taxation. In the past, tax authorities did not tax forgiveness of debt concerning one’s principal resident. However, these protections expired in 2014.There are a large number of rules concerning taxation of Social Security benefits. This includes limits regarding the amount of income earned before taxation of these benefits occurs. We need to wait and see if legislators will raise these limits in the future.

Knowledgeable tax attorneys understand methods taxpayers can take to reduce tax liabilities and help in settling tax debt disputes. The tax code is so complex that usually only professionals routinely dealing with the tax code understand provisions taxpayers can use to limit their taxes.

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Thanks to budget cuts the IRS is warning that many taxpayers will not get the assistance they need this tax season.

It is expected that only about half of the people who call the IRS for assistance this year will be connected with a live person, and those callers who do get through could be put on hold for 30 minutes or more even to get answers to simplest of questions.

The National Taxpayer Advocate, who is an independent IRS watchdog, said taxpayers might not only find the lack of support annoying, it could also make it difficult for them to comply with the law.

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In recent years, the U.S. government has been cracking down on individuals who hide money in overseas bank accounts in effort to evade taxes. The Justice Department has mainly focused its efforts on foreign bank accounts in Switzerland but it beginning to expand to other countries such as Israel as well, the Wall Street Journal recently reported.

The Justice Department has not only been targeting individuals that have attempted to evade paying taxes themselves, but also top bank officials who allow it to happen. However, the government has learned that it’s not always easy to do that.

This week, a former top official at UBS AG was found not guilty of helping American banking clients defraud the Internal Revenue Service out of billions of dollars in taxes. It was fairly evident that the conspiracy was taking place at the bank, but the prosecution had little evidence to implicate the former UBS official beyond a reasonable doubt.

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Student loans are now one of the highest sources of debt for Americans, with more than $1 trillion owed. On average, college students graduating with about $30,000 of debt, and many can barely afford to make their loan payments each month.

Earlier this year, President Obama expanded the “Pay as You Earn” program, which is intended to help borrowers in this situation by basing their monthly loan payments on their income. Then, after 20 years of consistent payments, any remaining student loan balance is forgiven.

This sounds like a great program, but it has a catch. The Internal Revenue Service considers forgiven debt to be taxable income, which means the student loan debt that is forgiven after 20 years of consistent payments will come with a tax bill that could be tens of thousands of dollars.

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hanks to the efforts of the “national taxpayer advocate,” Nina E. Olson, the Internal Revenue Service recently adopted a “Taxpayer Bill of Rights.” If you have received an audit notice or fear that you might, it’s important to know how your rights protect you.

Under the Taxpayer Bill of Rights, you have the right to:

1. Be Informed

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It’s no secret that people in New York and all around the country dislike paying taxes. While most people see it as a necessary part of being a citizen, some people will go to great lengths to mitigate potential tax issues. This includes, in the most extreme cases, actually renouncing U.S. citizenship in favor of that of another nation in order to avoid American taxes.

This is rare, of course, but it does happen. A recent high-profile case involves singer Tina Turner. She has lived in Switzerland since the mid-1990s because her now-husband — a German record executive — was based there. Turner said in January that she planned to intended to become a Swiss citizen and renounce her U.S. passport.

Observers say it isn’t likely that this was a move based solely on tax concerns; Turner is a longtime resident of Switzerland, so being a citizen of the country in which she resides makes sense. There were many hoops she had to jump through in order for the process to take place; she had to get approval from both local and federal governments in order to receive her citizenship.

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The classification of profits as ordinary income or capital gains can be a controversial issue, even for professional securities and financial professionals. Recently, Renaissance Technologies, a New York hedge fund, found itself embroiled in tax controversy with officials from the Internal Revenue Service over this very issue.

There is a potential profit motive behind the distinction, of course. Capital gains are taxed in a lower tax back. If the event resulted in lost income, characterizing that downfall as a capital loss may also have tax benefits. In addition, a capital loss might have carryback potential to the three taxable years before the event or carryover to the five years following the loss year.

Yet the issue can also affect — and confuse — individual taxpayers. Investment gains or losses usually qualify as capital gains or losses. However, taxpayers may wonder how to characterize other sources of income, such as income from a rental property or sole proprietorship.

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