Tag Archives: deductions

Mortgage Interest Deductions for Unmarried Couples

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Background: Generally, for income tax purposes an individual or married couple may deduct interest on up to $1.1 million of “qualified residence” indebtedness.

For example, consider a married couple, taxpayers A and B, who buy a personal residence and incur $3.3 million of qualified residence debt bearing interest at 3% per year. Of the $99,000 of annual interest, $33,000 would be deductible, based on the 3% rate on the $1.1 million debt limitation.

Note: Following a Supreme Court case in 2013, same-sex couples who marry under state law are deemed “married” for federal income tax purposes and, as such, are also subject to the foregoing interest expense limitation.

Question: What if taxpayers A and B are unmarried and together choose to buy a personal residence on the same terms as in the foregoing example. If unmarried, can they each deduct $33,000 on their respective separate returns, based on each claiming an interest deduction on $1.1 million of qualified residence debt, thus doubling their interest deduction?

Answer: Yes, according to a recent Court of Appeals case heard in the 9th Circuit Voss v. Commissioner.  Moreover, the IRS has “acquiesced” to the Court’s decision, thus extending the result nationwide.

Implications: Married couples often pay more income tax than similarly situated unmarried couples, due to differences in marginal income tax rates and for other reasons. This holding augments the “marriage penalty”.

For unmarried persons, who jointly owned a personal residence and filed separate 2012 thru 2015 returns based on the $1.1 million debt limitation, there may be a refund opportunity. For taxpayers contemplating whether to get married, there may be another tax planning consideration.

For more information or to have your questions answered, please contact Richard Lee at 301.231.6200, ext. 6268 or rlee@aronsonllc.com.

 

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Related Entites; Who Gets the Deduction?

M&A
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Taxpayer was allowed a deduction for a charitable contribution by a Related Entity – Assume that a partnership (“PSP”) is 99% owned by a Trust, and the other 1% is owned by a related corporation (“INC”). Assume that the related corporation issued a $5 million check for a charitable contribution to a qualified charity.

The $5 million charitable contribution was not reflected on PSP’s original partnership tax return, and no charitable deduction was claimed by the Trust; instead, three years later the partnership’s return was amended to reflect the charitable contribution, at which time the Trust filed an amended return to claim a charitable deduction for 99% of the $5 million charitable contribution.

Somewhere along the way, both entities issued “letters” and “affidavits,” and financial statements were corrected, all to the effect that the contribution was a PSP charitable contribution, and PSP reimbursed the corporation for its $5 million contribution.

Question: Is the Trust, via its 99% interest in PSP, entitled to a deduction for 99% of the charitable contribution made by INC?

Answer: According to an Oklahoma District Court (Green, 117 AFTR 2d ¶), the answer is yes.

The Court concluded that the contribution was inadvertently made using a corporation check rather than a partnership check, and to disallow a charitable deduction simply because of a “clerical error” goes against public policy that encourages charitable giving.

Words of Caution 

A 1974 Supreme Court case (National Alfalfa, 417, US 134) said that “a transaction is to be given its tax effect in accordance with what actually occurred.”

Query: If the contribution using a check from the corporation for payment was merely a “clerical error,” why wasn’t the contribution reflected on the original PSP return, rather than on its amended return three years later? The Trust may have lucked out.

Application: Seek to get it right in the first place, avoiding any “clerical errors,” and reporting the contribution correctly on an original return, when making charitable contributions.

For further information about charitable contributions or other tax-related matters, please contact Aronson Tax Team’s Richard Lee at 301-231-6268.

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Early Gift for Taxpayers – PATH Act Passed

Protecting Americans from Tax Hikes (PATH) Act
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Taxpayers received an early gift last week when the Protecting Americans from Tax Hikes (PATH) Act of 2015, also commonly referred to as the “extenders tax act,” was signed into law. This legislation permanently allows IRA participants over age 70½ to make annual tax-free distributions from their IRAs for charitable purposes.

Beginning immediately, a taxpayer, via direct transfer by the IRA trustee, can give up to $100,000 per year to the charitable organization of their choosing tax-free. The amount so distributable can count toward meeting a participant’s “minimum required IRA distribution,” but the amount so distributed will not be included in the participant’s Adjusted Gross Income.

Furthermore, since this IRA distribution is not included as income, no itemized deduction can be claimed for the corresponding charitable deduction.

In layman’s terms, the passage of PATH provides taxpayers an advantage by lowering their Adjusted Gross Income (AGI). A lower AGI results in a lower threshold for claiming various items on your individual tax returns, such as medical deductions, child tax credits, inclusions in income for example, Social Security, Roth IRA contributions, and the Obamacare 3.8% surtax on net investment income.

For more information and practical commentary regarding the PATH Act, review Accounting Today’s recent article or contact Aronson’s Tax Services Group at 301.231.6200.

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Charitable Donations as a Business Expense

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We have all seen various businesses advertise that they will donate a percentage of sales to a particular cause, typically to a charity.  Many assume that such donations are deducted as charitable contributions.  For a sole proprietorship or flow-through entity, charitable contributions do not reduce income subject to employment taxes, and for a “C” corporation the deduction is limited to 10% of net profit.  But are these in fact charitable contributions?

A Chief Council Advice (CCA) memorandum addressed this very issue.  The conclusion was that such payments are not charitable contributions but rather ordinary and necessary business expenses.  This is a very favorable decision, because an ordinary business expense is deducted against profit just like any other, without any limitations associated with a traditional charitable contribution.

Such a position is very much based on facts and circumstances, and most importantly the intent of the business.  A business that has a reasonable expectation of financial gain from making the contribution (for instance, attracting more customers), and can document that expectation, will have a much easier time defending ordinary expense deduction treatment for these contributions.

CCAs are written advice prepared by the Office of Chief Council conveying interpretations tax provision to assist IRS personnel.  A CCA cannot be cited as authority for taking a particular tax position, but does indicate thought process.  Thus, care should be taken when adopting a position based on a CCA.

To discuss your particular situation, or for any other matters, please contact Aronson’s tax controversy lead partner Larry Rubin, CPA, at 301-222-8212.

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TAX ALERT: Tax Increase Prevention Act & Extenders

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Late Tuesday, December 16th, Congress passed tax package H.R. 5771 which the President is expected to sign into law.  This package includes the “Tax Increase Prevention Act of 2014” (TIPA), which retroactively extends nearly all tax provisions that expired at the end of 2013 and the “Achieving a Better Life Experience Act of 2014” (ABLE),  which establishes a new type of tax-advantaged savings program for individuals with disabilities and makes a number of other non-extender tax changes. Here are some of the key individual and business provisions that will be renewed through December 31, 2014:

Individual Provisions

  • Itemized deduction for state and local sales taxes
  • Above-the-line deduction for qualified tuition and related expenses
  • Above-the-line deduction up to $250 for certain unreimbursed expenses of elementary and secondary school teachers
  • Premiums for mortgage insurance deductible as qualified interest
  • Exclusion of discharge of principal residence indebtedness from gross income for individuals
  • Tax-free distributions from individual retirement accounts for charitable purposes
  • Increase in excludible employer-provided mass transit and parking benefits
  • Qualified conservation contribution increased limitations

Business Provisions

  • Section 179 expensing up to $500,000 with $2 million phase-out
  • 50 percent bonus depreciation and election to accelerate AMT credits in lieu of additional first-year depreciation
  • 15-year straight-line cost recovery for qualified leasehold, restaurant and retail improvements
  • Reduction in S corporation recognition period for built-in gains tax to five years
  • Tax credit for research and experimentation expenses
  • Alternative Fuel & Alternative Fuel Mixture Credit
  • Indian Employment Tax Credit
  • Special rules for qualified small business stock
  • Basis adjustment to stock of S corps making charitable contributions of property
  • Empowerment Zone Tax Benefits
  • New Markets Tax Credit
  • Work Opportunity Tax Credit

Provisions Not Extended

  • Energy-efficient appliance credit
  • Health care tax credit for displaced workers
  • New York Liberty Zone tax-exempt bond financing
  • Plug-in electrical vehicle credit
  • Partial expensing of refinery equipment

Keep in mind, for future tax planning puposes, that the extender legislation only provides relief for the 2014 tax year and these provisions are scheduled to expire again at the end of 2014. At that time, Congress could choose from various options including making temporary provisions permanent or extending some or all of the expiring provisions. In the meantime, please contact your Aronson tax advisor or call 301.231.6200 to discuss the effects of these provisions.

 

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Disclaimer: All Conclusions and advice contained in this memorandum represent the firm’s tax return reporting position (not requiring special disclosure) and accordingly represent a substantial authority standard, as defined pursuant to IRS Sec. 6694, unless otherwise stated.  Except for the opinions and advice expressly stated in this memorandum, no other opinion or advice is implied nor should be inferred.

The opinions and advice contained in this memorandum are based in part on the completeness and accuracy of the above-stated facts and assumptions.  If any of these facts and assumptions are not complete and accurate, please notify us immediately as we may have to materially modify the opinions and advice of this memorandum.

We are relying upon the relevant provisions of the statutory authority and judicial and administrative interpretations thereof, which exist as of the date of this memorandum.  These provisions are subject to changes or modifications by subsequent legislative, regulatory, administrative, or judicial actions or decisions. Any such changes could have a material effect on the opinion and advice of this memorandum.  Unless specifically requested, we will not update our advice for subsequent changes to the law and/or regulations or the judicial and administrative interpretations thereof.

This correspondence is intended for the use of the recipient and may not be relied on by third parties.  Without the prior written consent of our firm, this memorandum may not be quoted in whole or in part or otherwise referred to in any documents or delivered to any other person or entity.

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