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Year End Tax Planning Moves

The following are some tax planning moves that can be implemented before the end of the year.

 

Defer Income to Next Year – If possible, defer income to next year. You’ll defer the tax on the income for one year and depending on your tax situation next year, you may end up paying less tax on that income next year.

Accelerate Expenses to this Year – Pay as much business and tax deductible personal expenses as you can such as charitable contributions before the end of the year to reduce your taxable income. That includes paying us too if you have an outstanding balance with us!

In short, the lower your taxable income or the more tax deductions you have, the less taxes you’ll pay.

Make a Purchase with a Credit Card - Consider using a credit card to prepay expenses that can generate deductions for this year. You can claim the expense in the year the credit card was charged, not when the credit card was paid.

Two Additional Taxes – Be aware that you may be subject to two other taxes as well. Therefore, you may want to accelerate expenses to this year or defer income to next year to reduce your income below the thresholds to avoid these taxes:

Additional Medicare Tax – This additional 0.9% tax is imposed upon wage earners and self-employed taxpayers whose wages and self-employment income exceeds a threshold amount. The threshold is $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others. Although each employer will withhold the additional tax, the employer is not required to account for other employment or both spouses working. Thus, in these situations where the total earned income exceeds the threshold amounts, the unpaid tax will have to be included on your current tax return.

Net Investment Tax – This is a 3.8% surtax on the lesser of a taxpayer’s net investment income or the excess of the taxpayer’s modified adjusted gross income in excess of the threshold amount, which is the same amount as for the additional Medicare tax explained above. This surtax would apply to home sale gain where the long-term gain substantially exceeds the $250,000 home-sale exclusion amount ($500,000 for joint filers). Withholding and estimated taxes should be increased as necessary to cover this tax.
Retirement Plans – If you are self-employed, incorporated or in a partnership and don’t have a retirement plan, you may want to establish a retirement plan. The contributions that you make to the plan are tax deductible. The earnings grow tax deferred.

Certain types of plans must be established before the end of the year in order for the contribution to be deductible for this year, even if the actual contributions aren’t made until next year. The different types of retirement plans are; Solo 401(k), Profit Sharing, Regular 401(k), SEPIRA, Simple IRA, Traditional IRA, Roth IRA, Defined Benefit Plan and etc.
myRAs - The Treasury Department is expected to unveil a new retirement savings arrangement before the end of this year. The new accounts are called myRA. These accounts will be offered through employers that elect to participate. Account holders will build savings for 30 years or until their myRA reaches $15,000, whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs. Small business owners should explore the benefits of offering myRAs to their employees. As more details are released, business owners can weigh the value of these new accounts. At the same time, business owners can explore other retirement savings vehicles, including SIMPLE IRA plans, SEP plans, and payroll deduction IRAs. Our office can explain the mechanics of these savings programs.

Pay Children – If your child/children help you with your business, you should hire them like an employee and pay them for their services. If your business is a sole proprietor or a partnerships, then your child’s wages is not subject to payroll taxes either. If you’re incorporated, then your child’s wages is subject to payroll taxes.

You would be creating an expense for you and income for your child. However, your child’s wages up to their standard deduction ($6,200 for 2014 and $6,300 for 2015) is tax free. Then your child can start a retirement plan such as a Traditional IRA and make a tax deductible contribution to it. For 2014, the amount is $5,500.

Thus if you paid your child $11,700 ($6,200 + $5,500), the entire amount would be tax free to your child and a business deduction for you. Assuming that you are in the highest marginal tax brackets, 39.6% federal and 12.3% state, you would save approximately $6,072 ($11,700 x 51.9%) per child per year in federal and state taxes.

Your child can use the salary he or she receives and the money they invest in the Traditional IRA to pay for their college expenses. It’s a win/win situation for you and your child/children. However, there must be a legitimate employee/employer relationship and you must be able to prove the hours worked and services provided.
Realize Losses on Stock While Substantially Preserving Your Investment Position - There are several ways this can be done. For example, you can sell the original holding then buy back the same securities at least 30 days before the sell or at least 30 days after the sell.

Long-term capital gains are taxed at the following federal rates:

(a) 20% if they would be taxed at a rate of 39.6% if they were taxed as ordinary income
(b) 15% if they would be taxed at a rate of 25% to 35% if they were taxed as ordinary income, and
(c) 0% if they would be taxed at a rate of 10% or 15% if they were taxed as ordinary income.

For California there is no lower state tax rate on capital gains.

Therefore, if you have capital gains this year, you can offset the gain by selling investments that are at a loss by December 31 to offset the loss against the gain.

C Corporations & Dividends - If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you'll be taxed at a maximum federal rate of only 24.7% versus the highest rate of 44.3%.

Employer Health Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. As a reminder, you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs. Maximum contribution for this year is $2,500.

Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.

The amount that can be set aside in a health savings account for this year is: $3,300 for individuals and $6,550 for families. Those 55 or older can contribute an additional $1,000.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA or your other retirement accounts into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.

State Income Taxes – State income taxes paid during the year are deductible as an itemized deduction on your federal return. As long as pre-paying the state taxes does not create an AMT problem and you expect to owe state and local income taxes when you file your current year tax return. Thus, it may be appropriate to increase your withholding at your place of employment or make an estimated tax payment before the close of this year to advance the deduction into this year.

Advance Charitable Deductions – If you regularly tithe at a house of worship, you might consider pre-paying part or all of your next year’s tithing, thus advancing the deduction into this year. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Don’t Forget Your Minimum Required Distribution – If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan, and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2014, you can delay the first required distribution to the first quarter of 2016, but if you do, you will have to take a double distribution in 2016. Consider carefully the tax impact of a double distribution in 2016 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption – You can give $14,000 in 2014, it’s also $14,000 for 2015, to an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the Kiddie tax rules.

Kiddie Tax Rules – Basically the first $1,000 of your child’s unearned income, such as interest or dividends, is tax free. The next $1,000 is taxed at your child’s tax rates and anything over $2,000 is taxed at your highest marginal rate.

Thus by making gifts to your child/children and having them invest it so that they earn the interest or dividends income from the investment, you will decrease your taxes.

Avoid Underpayment Penalties – If you are going to owe taxes this year, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory limit.

Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss this year, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

Code Section 179 Expensing – The Section 179 deduction, which allows current expensing of items normally capitalized and depreciated, is also in limbo until the fate of the tax extenders bill is known.

Unlike the bonus depreciation, however, there is a limit on the amount that may be expensed and the business must have taxable income to take advantage of this deduction. If the bonus depreciation and Section 179 deduction are passed, we need to evaluate whether it may make more sense to spread these deductions over the life of the property by electing out of these provisions. Currently, for taxable years beginning in 2014 and thereafter, your business may immediately expense up to $25,000 of Section 179 property annually, with a dollar for dollar phase-out of the maximum deductible amount for purchases in excess of $200,000.

If the EXPIRE bill becomes law, it would increase the maximum amount and phase-out threshold in 2014 and 2015 to the levels in effect in 2010 through 2013 ($500,000 and $2 million respectively). The law would also extend the definition of Section 179 property to include computer software and $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Bonus Depreciation - Although bonus depreciation is not currently available for 2014, there is a good possibility it will return. While the likelihood of bonus depreciation being available for 2014 depends on the "tax extenders" bill (i.e., the EXPIRE bill) being passed and signed into law, many politicians have a vested interest in seeing this bill come to fruition. The drawback is that we may not know until late 2014 or even early 2015 whether purchases in 2014 will qualify for the bonus depreciation or what amounts will qualify. On the assumption that the bill passes as written, the 50-percent additional first-year depreciation deduction in effect in 2013 will be extended to qualified property purchased and placed in service before 2016 or before 2017 for certain longer-lived and transportation assets..

Purchase an SUV for Business – If you are in the market for a business car, and your taste runs to large, heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross [loaded] vehicle weight), consider buying it before December 31. Due to a combination of favorable depreciation and expensing rules, and depending on the percentage of business use, you may be able to write off most of the cost of the heavy SUV this year.

Pass-through Issues - Many business operations are not taxed on the entity level as corporations but, instead, pass through taxable profits and losses to their unincorporated owners or to their S corporation shareholders. Starting in 2013, these owners face new year-end planning challenges in the form of a higher individual tax rate of 39.6 percent and additional surtaxes on passive income by way of the net investment income surtax of 3.8 percent and the Additional Medicare Tax of 0.9 percent on compensation, both aimed at the “higher-income” taxpayers. Deferring some of this income, or harvesting losses to offset some of the income, are traditional year-end planning techniques that take on added value for this tax year.

Affordable Care Act - As of January 1, 2014, the Affordable Care Act requires all individuals to carry health insurance or make a shared responsibility payment, unless exempt. For many, employer-provided health insurance will satisfy the individual mandate. Others will satisfy the individual mandate if they are covered by Medicare or Medicaid. Individuals who are not exempt will need to make a shared responsibility payment when they file their 2014 returns in 2015.
Generally, the shared responsibility payment amount is either a percentage of the individual's income or a flat dollar amount, whichever is greater. The amount owed is 1/12th of the annual payment for each month that a person or the person's dependents are not covered and are not exempt. For 2014, the payment amount is the greater of:

1 percent of the person's household income that is above the tax return threshold for their filing status; or A flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285.
The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014.
The lack of health insurance does not automatically mean an individual must make a shared responsibility payment. The types of exemptions are broad. For example, an individual may have no affordable coverage options because the minimum amount he or she must pay for the annual premiums is more than eight percent of household income. An individual also may have a hardship that prevents him or her from obtaining coverage.
Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses for this year. If it is not the maximum allowed for computing the credits, you can prepay next year’s tuition as long as it is for an academic period beginning in the first three months next year. That will allow you to increase the credit for this year.

Hire Veterans – If you are considering hiring some new employees between now and the end of the year, you might consider hiring a qualifying veteran so that you can qualify for the work opportunity tax credit (WOTC). The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran’s period of unemployment and whether he or she has a service-connected disability).

College Access Credit – California has a new personal and corporate tax credit for 2014 through 2016 for contributions made to the College Access Tax Credit Fund. By making a contribution to the fund you will receive a credit certification. The funds will be used to bolster the dwindling resources used to provide Cal Grants to low-income college students.

You should apply for the credit before making the contribution. The amount of state tax credit that you will receive is:

For 2014, 60% of the amount contributed
For 2015, 55% of the amount contributed
For 2016, 50% of the amount contributed

There is no limit on the amount that you can contribute. However, the annual amount that can be certified is $500 million.

Again, first get the certification by going to www.treasurer.ca.gov/cefa and then make the contribution. To receive the 2014 credit, applications must be received by 5 pm on December 31, 2014.

Paying Federal Taxes – A new Direct Pay system allows taxpayers to pay their federal tax bills and make estimated tax payments online directly from a checking or savings account, without fees. Additional payments types will likely be added in the future. Please go to www.irs.gov/payments/direct-pay.

2015 Tax Numbers - The IRS and the Social Security Administration recently published some inflation-adjusted numbers for 2015. Use these numbers as you begin your tax and financial planning for the coming year.

* Social Security Taxable Wage - The limit for will be $118,500. For 2014 it is $117,000.

* Kiddie Tax Rule - The threshold for unearned income a child can earn in
without having the Kiddie tax apply is $2,000.

* Annual Gift Exclusion - The amount that can be given each year without paying
gift tax is $14,000 ($28,000 for joint gifts).

* 401(k) Deferral - The maximum salary deferral for a 401(k) is $18,000. The catch-up limit for those 50 or older is $6,000.

* IRA Contribution - The maximum IRA contribution limit $5,500; the limit for those 50 or older is $6,500.

* Simple IRA - The maximum salary deferral for Simple IRAs is $12,500. The catch-up limit for those 50 or older is $3,000.

* Defined Contributions – The maximum defined contribution amount is $53,000.

* Unified Estate & Tax Exclusion – The amount is $5,430,000.

Caution – There are additional factors to consider for a number of the strategies suggested above, and you are encouraged to contact us prior to acting on any of the advice to ensure that your specific tax circumstances will benefit.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Retirement Savings the Earlier the Better

Generally, teenagers and young adults do not consider the long-term benefits of retirement savings. Their priorities for their earnings are more for today than that distant and rarely considered retirement. Yet contributions to a retirement plan early in life can enjoy years of growth and provide a substantial nest egg at retirement.

Due to its long-term benefits of tax-free accumulation, a nondeductible Roth IRA may be the best option. During most individuals’ early working years, their income is usually at its lowest, allowing them to qualify for a Roth IRA at a time where the need for a tax deduction offered by other retirement plans is not important.

Because retirement will not be their focus at that age, young adults may balk at having to give up their earnings. Parents, grandparents, or other individuals might consider funding all or part of the child’s Roth contribution. It could even be in the form of a birthday or holiday gift. Take, for example, a 17-year-old who has a summer job and earns $1,500. Although the child is not likely to make the contribution from his or her earnings, a parent could contribute any amount up to $1,500 to a Roth IRA for the child. Note that amounts contributed to an IRA on behalf of another person are nondeductible gifts by the donor and are counted toward the donor’s annual $14,000 (2014 and 2015 gift exclusion per done).

But keep in mind that young adults, like anyone else, must have earned income to establish a Roth IRA. Generally, earned income is income received from working, not through an investment vehicle. It can include income from full-time employment, income from a part-time job while attending school, summer employment, or even babysitting or yard work. As a parent you can hire your child to work for you and that will create earned income for the child and an expense for you. This is actually the subject of another article you will soon receive from us.

The amount that can be contributed annually to an IRA is limited to the lesser of earned income or the current maximum of $5,500.

Parents or other individuals who contribute the funds need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability.

Consider what the value of a Roth IRA at age 65 would be for a 17-year-old who has funds contributed to his or her IRA every year through age 26 (a period of 10 years). The table below shows what the value will be at age 65 at various investment rates of return.

Value of a Roth IRA—Annual Contributions of $1,000 for 10 years beginning at age 17

Investment Rate of Return 2% 4% 6% 8%
Value at Age 65 $23,703 $55,449 $127,900 $291,401

What may seem insignificant now can mean a lot at retirement. Individuals who are financially able to do so should consider making a gift that will last a lifetime. It could mean a comfortable retirement for your child, grandchild, favorite niece or nephew, or even an unrelated person who deserves the kind gesture.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com or www.SilkRoadRealtyInc.com. Thank you.

Will the Interest on Your Vehicle Loan be Deductible

Whether or not the interest you pay on a loan to acquire a vehicle is deductible for tax purposes depends how the vehicle is being used (for business or personal purposes), the tax form on which the expenses are being deducted, and the type of loan.

If the loan were a consumer loan secured by the vehicle, then the following rules would apply:

If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule such as Schedule C, then the business portion of the interest will be deductible as business interest, but the personal portion will not.
If the vehicle is being used partially for business as an employee such as Form 2106, and the expenses are being deducted as an itemized deduction, Schedule A, then neither the business portion nor the personal portion of the interest will be deductible.
If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.
As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit also known as HELOC. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest deductible. You can actually use this rule for the purchase of any item. For example, you can purchase a $100,000 jewelry with the home equity line and the interest will be tax deductible.

However, there is an overall limit. You can only write-off the interest on the first $1,100,000 of mortgage debt plus home equity line of credit. Thus if your home mortgage debt is already $1,100,000 or more, you will not be able to write off the interest on the home equity line of credit, no matter what the amount is. Because you’re already at the $1,100,000 over all limit allowed.

Before borrowing against the home, you should consider the following:


Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for. Or, you may end up paying a lot more for that item after you take the interest into consideration.
When buying a car, you can sometimes get very favorable interest rates or a rebate. To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.
If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.
The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him at david@saacpa.com or visit www.saacpa.com or www.SilkRoadRealtyInc.com. Thank you.

 

How Long Are You on the Hook for a Tax Assessment

A frequent question that we are asked is: how long does the IRS have to question and assess additional tax on my tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait – as in all things taxes, it is not that clean cut. Here are some complications:

You file before the April due date – If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2014 return on February 15, 2015 or April 15, 2015, the statute did not start running until April 15, 2015.

You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer’s delinquency, or under a filing extension granted by IRS. For example, say your 2014 return is on extension until October 15, 2015, and you actually file on September 1, 2015. The statute of limitations for further assessments by the IRS will end on September 2, 2018. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.

If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. We also retain the confirmation for you. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return.

You file an amended tax return– If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax.

You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three-year statute of limitations is increased to six years.

In determining if more than 25% has been omitted, capital gains and losses aren’t netted; only gains are taken into account. These “omissions” don’t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services.

You file three years late – Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties.

However, the statute of limitations that applies to your refund or credit claim depends on whether or not you filed a return. If you filed a return, the claim for refund or credit must be filed within three years of the date the return was filed or within two years of the date the tax was paid, whichever is later. If you were not required to file a return, the claim for credit or refund must be filed within two years of the date the tax was paid.

Example: John filed his 2005 tax return, which included a claim for refund, with the IRS on March 20, 2011. John's taxes for 2005 had been timely paid on April 15, 2006, because John's employer had withheld federal income taxes from his paychecks in 2005 and had submitted the payments to the IRS on his behalf. Although the two-year window for filing a refund claim expired on April 15, 2008 (two years after his withholding tax was paid to the IRS), the three-year window for filing a refund claim did not expire until March 20, 2014 (three years after the 2011 filing of his 2005 tax return). Thus, because John filed his claim for refund simultaneously with his 2005 tax return, his claim for refund is timely because it was filed within three years of the filing of his tax return and well before the closing of the later window on March 20, 2014.

Furthermore, there are a number of special circumstances in which a different statute of limitations period applies to the filing of a claim for refund or credit:

(1) If you and the IRS have executed a written agreement that extends the statute of limitations for the assessment of tax and that agreement was executed within the statute of limitations period for filing a claim for refund or credit discussed above, the period of the latter statute of limitations is extended to a date six months after the expiration of the former statute of limitations.

(2) If a claim for refund or credit relates to an overpayment of income tax that is attributable to bad debts or worthless securities, a seven-year statute of limitations applies.

(3) If a claim for refund or credit relates to an overpayment of income tax that is attributable to a net operating loss carryback or a capital loss carryback, the statute of limitations for filing a claim for refund or credit is extended to a date three years after the due date of the return for the tax year in which the net operating loss or net capital loss arose.

(4) If a claim for refund or credit relates to an overpayment of income tax that is attributable to a foreign tax credit, a ten-year statute of limitations applies.

(5) If a claim for refund or credit relates to an overpayment of income tax that is attributable to an unused general business credit carryback, the statute of limitations for filing a claim for refund or credit is extended to a date three years after the due date of the return for the tax year in which the general business credit arose.

10-year collection period – Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period.

Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don’t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.

Also, late filed returns are actually looked at by a person at the IRS versus timely filed returns that are directly inputted into IRS’ computer system. Therefore, late filed returns have a higher chance of being audited.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Home Affordable Modification Program HAMP and Its Tax Consequence

To help financially distressed homeowners lower their monthly mortgage payments, the Dept. of the Treasury and the Dept. of Housing and Urban Development (HUD) established HAMP. In appropriate cases, HAMP has been offering the Principal Reduction Alternative (PRA) as part of a HAMP loan modification since the last quarter of 2010. Current plans call for HAMP to continue accepting new borrowers through the end of 2013.

Mortgage Reduction – Where the borrower satisfies certain conditions during a trial period, the principal of the borrower's mortgage may be reduced over three years by a predetermined amount called the “PRA Forbearance Amount.”

Trial Period – Before a loan modification becomes permanent, the borrower must meet certain conditions during a three-year trial period. If those conditions are met, the borrower will be offered a permanent modification of the terms of the mortgage loan. Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply.

After the mortgage loan is permanently modified under HAMP, if the loan is in good standing on the first, second and third annual anniversaries of the effective date of the 3-year trial period, the loan servicer reduces the unpaid principal balance of the loan by one-third of the initial PRA Forbearance Amount on each anniversary date. Accordingly, if the borrower continues to make timely payments on the loan for three years, the entire PRA Forbearance Amount is forgiven.

Tax Consequences – The borrower realizes cancellation of debt income equal to any excess of the balance of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan.

Where the taxpayer qualifies, the cancellation of debt income can be excluded using either or both insolvency exclusion and/or principal residence acquisition debt relief exclusion. The latter exclusion is only available through 2013, unless further extended by Congress.

· When Income Is Realized – To the extent the cancellation of debt income cannot be excluded, the borrower may treat the cancellation of debt income as being realized in either of the following ways:

(1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or

(2) One-third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date, when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. If some or all of the reduction in the unpaid principal balance is accelerated because the HAMP-PRA borrower prepays the non-forbearance portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction.

· Incentive Payments to Lenders – Incentive payments made by the HAMP administrator to mortgage lenders to encourage their participation in the program are treated as payments on the mortgage loans by the U.S. government on behalf of the borrowers. The borrower treats these payments as follows:

o Personal residence – Under the “general welfare exclusion”, the borrower excludes the incentive payments from income if the property that is encumbered by the mortgage is used by the borrower as his principal residence or the property is occupied by his legal dependent, parent or grandparent without rent being charged or collected. No information return (1099) will be issued.

o Rental property – If the borrower uses the property as a rental, or it is vacant but available to be rented, the incentive payments made to the lender are includible in the borrower’s income in the year in which the payments are applied to the loan. The lender is obligated to issue a Form 1099-MISC reporting the amount.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him at david@saacpa.com or visit www.saacpa.com or www.SilkRoadRealtyInc.com. Thank you.