IRS Addresses Virtual Currency (Bitcoin)

As far as I know, none of my existing clients have transacted any business involving bitcoins or other virtual currency.
But just to let the world know that I'm ready to file returns reflecting transactions denominated in bitcoins, my topic for today is virtual currency.

The official guidance issued by the IRS earlier this week (IR-2014-36) on the subject was exactly what I had expected:

• The virtual currency is treated as property for US federal tax purposes.
• General tax principles that apply to property transactions apply to transactions using virtual currency.
• Wages paid to employees using virtual currency are taxagble to the employee, must be reported on form W-2 and are subject to income tax withholding and payroll taxes.
• Payments using virtual currency to independent contractors and other service providers are taxable and general self employment tax rules apply.
• The character of gain or loss form the sale or eschange of virtual currency depends on the status of the virtual currency in the hands of the taxpayer is a capital asset (or not).
• Payments made with virtual currency are subject to information reporting to the same just like any other payment in property.
• Transactions using virtual currency are to be reported in US dollars.
• Taxpayers are to determine the dollar value of their virtual currency in a reasonable manner consistently applied.
• Virtual currency "mined" is includible in a taxpayer's gross income.
• Virtual currency is not treated as a foreign currency that could generate foreign currency gain of loss for US tax purposes.

Other than the fact that this is pretty obvious to anyone that has studied or worked with our tax laws for more than a day or two, these points are a nice top-level summary of general income tax law applicable to most business transactions and to most individual taxpayers.

Notice 2014-36 didn't indicate one way or the other whether the IRS will accept virtual currency in payment of federal taxes.  I guess that's such a dumb question, they just didn't want to go there...


- Mark S Gleason CPA
  www.lakes-cpa.com

Retroactive Minnesota Tax Law Changes

The CPAs that participate in an email tax forum I belong to are whining about changes to the tax law enacted last week. The tax cuts included in this new law affect 2013 tax returns that have already been filed.
Many tax preparers are not happy about this. I think the CPA's should be happy that taxes have been cut for their clients.

The MN Department of Revenue is having a little hand-holding session to comfort the upset tax preparers and "provide you with more information". So the upshot of all this (according to the MN Department of Revenue) is:

If your client has already filed, and the return is affected by the changes, they will receive notification from us.  Please tell them not to do anything until they receive direction from us.
One of three things will happen with the return.  The department:
1. Will fix the return and send the taxpayer a letter explaining how it was fixed.
2. Will send a letter to the taxpayer requesting more information and use that information to fix the return.  They will receive a letter explaining how it was fixed.
3. Will not be able to fix the return.  If this happens, the taxpayer will receive a letter explaining the return can’t be fixed.  If this happens, they will need to file an amended return to get the benefits of the law changes that apply to them.
If your client has not filed…
Please wait to file their return.  We are working to get new forms and instructions to you by April 3.  
Note:  If you use a desktop version of a software product, please be sure to watch for software updates from your software company.
We appreciate the job you do helping taxpayers file their returns and appreciate your patience as we review and implement the law changes.

Meaningful tax savings will be had by very few taxpayers including those suffering the tax consequences of a real estate foreclosure or who incurred adoption expenses. I don't think any of my clients will incur retroactive tax relief of over $50. Some of my clients will be effected by the mortgage insurance deduction, student loan interest and classroom expenses.

The Minnesota Society of Certified Public Accountants has released the following summary of things we tax preparers need to learn all about immediately:

Provisions enacted federally for 2012 and 2013 only and adopted for Minnesota retroactively to tax year 2013:
Deduction in adjusted gross income of up to $250 for classroom expenses paid by a K-12 grade educator
Exclusion for discharge indebtedness income on a principal residence
Itemized deduction for mortgage insurance premiums on a principal residence
F,or taxpayers 70-1/2 or older exclusion from gross income up to $100,000 of IRA distributions made directly to charitable organizations (the amount excluded is not allowed as a charitable deduction)
Increased maximum exclusion for employer provided commuter vehicle or transit pass fringe benefits from $125 per month to $245 per month to obtain parity with the exclusion of fringe parking benefits
Allowed expensing for the first $15 million of production costs of films and television shows
Allowed depreciation of leasehold improvements and qualified restaurant property, including new restaurant property and improvements to retail property over 15 years (rather than 39 years) for property placed in service through 2013
Allowed accelerated depreciation of qualified Indian reservation property for property placed in service through 2013
For contributions made in taxable years beginning through 2013, extension of basis adjustment to S corporation stock when the S corporation donates appreciated property, which is equal to the tax basis of the property rather than the fair market value
Allowed depreciation of certain motorsports entertainment complex property over 7 years rather than 15 or 39 years for property placed in service through 2013
Allowed expensing of 50% of the cost of advanced mine safety equipment for equipment placed in service through 2013
Special rule for charitable contributions of real property for conservation purposes for contributions made in tax years beginning in 2013
Allowance for companies other than C corporations to take a deduction for contributions to a charity equal to the cost basis plus one-half the normal price mark-up of food inventory for contributions made through 2013

Provisions enacted at the federal level for tax year 2013 and future years to which Minnesota would conform retroactively to tax year 2013 and for future years:
Increased contribution limits from $500 to $2,000 per year and allowed use of education savings accounts for elementary and secondary school expenses
Increased income limits and allowance of unlimited time period for the deduction of student loan interest
Exclusion from gross income for amounts paid or expenses incurred (up to $5,250 annually) by an employer in providing educational assistance to employees under an educational assistance program
Exclusion from income for awards under the National Health Service Corps scholarship program and related awards for health-care professionals
Exclusion for employer provided adoption assistance

Forgive the sloppy formatting of this post.  I am short of time today and this is what happens when cutting and pasting long quotations. My comments in this post are bold, the rest of this has been cut and pasted from the sources I identified.

- Mark S Gleason CPA
  www.lakes-cpa.com

April 15 is Your Last Chance to Claim Your 2010 Federal Income Tax Refund

The IRS announced today that there are $760 million in refunds for people who didn't file their 2010 income tax returns. "Refunds totaling almost $760 million may be waiting for an estimated 918,600 taxpayers who did not file a federal income tax return for 2010. However, to collect the money, a return for 2010 must be filed with the IRS no later than Tuesday, April 15, 2014."

As a matter of fact, I am meeting with someone next week to talk about preparing her 2010 income taxes. We believe there is a refund to be claimed.

This reminds me of Gleason's four rules of tax procrastination along with some of and their corollaries:

1. If you procrastinate long enough, the need to perform the task may go away. Corollary: You may die suddenly, and whatever it was that you didn't get around to doing, now just isn't going to get done.
2. The need to file a tax return doesn't go away, even if you die. Corollary: Someone else will have to take care of it for you.
3. Tax returns are never easier to prepare or file after they are long past due. Corollary: It's more difficult and time-consuming to gather the information to prepare a complete and accurate return years after the fact than it is right after the end of the year.
4. Filing your taxes late is illogical and more inconvenient than filing them on time.

- Mark S Gleason CPA
   www.lakes-cpa.com

Wealthy Taxpayers are Now Paying More in Taxes

Taxpayers having incomes that exceed 97% of all the other taxpayers' incomes are being hit with some new taxes for 2013.

Many of them (not my cients - they were all informed) are just finding out about these new tax hits as they prepare to file their 2013 tax returns.

First, the special reduced rate of tax for capital gains has been bumped up to 20% (from 15%) for married couples with incomes over $450,000 ($400,000 for singles).

Second, Medicare taxes are being increased from 1.45% to 2.35% on wages in excess of $250,000 for married taxpayers ($200,000 for singles).

In addition, there is a new 3.8% Medicare tax on investment income. This new tax applies to the lesser of: (a) taxable investment income or (b) the amount by  which their adjusted gross income exceeds $250,000 for married couples ($200,000 for singles). Investment income includes dividends, interest, rental income, capital gains and annuities.

Third, personal exemptions and itemized deductions for married taxpayers with adjusted gross incomes in excess of $300,000 ($250.000 for singles) are reduced. The "phase-out" of personal exemptions eliminates 2% of the personal exemption deduction for each $2,500 that adjusted gross income exceeds the $300,000/$250,000 thresholds. Itemized deductions are "phased-out" by reducing total itemized deductions by 3% of the amount adjusted gross income exceeds the $300,000/$250,000 thresholds. This reduction is limited to 80% of total itemized deductions.

- Mark S Gleason CPA
  www.lakes-cpa.com

¿Recién llegado a los Estados Unidos?

La informacion es del Internal Revenue Service:

Si usted está recién llegado a los Estados Unidos, deberá informarse sobre cuáles son sus responsabilidades tributarias. En esta página usted encontrará respuestas sobre quién tiene la obligación de presentar una declaración de impuesto federal en los Estados Unidos. Obtenga respuestas a las siguientes preguntas:
¿Cómo sé si tengo la obligación de presentar una declaración de impuesto federal en los Estados Unidos?
¿Determina mi estatus migratorio si debo o no pagar impuestos?
¿Qué beneficios obtendré al presentar una declaración de impuestos?
¿Existen multas por no presentar declaración?
Toda persona que resida en los Estados Unidos, reciba ingresos y cumpla con ciertos requisitos tiene la obligación de presentar una declaración de impuesto federal. La obligación de presentar la declaración no depende de su condición migratoria, sino más bien del nivel de sus ingresos. Presentar la declaración es la ley, y el no cumplir con ella le expone a sanciones, tanto civiles como penales.
La ley requiere un número de identificación a cada persona que aparezca en la declaración de impuesto federal. Por lo general, el Número de Seguro Social, expedido por la Administración del Seguro Social, es el número que aparece en la declaración de impuestos.
Si el contribuyente tiene la obligación de presentar una declaración de impuestos pero no cumple con los requisitos necesarios para obtener un Número de Seguro Social, el contribuyente, si reúne los requisistos, puede solicitar y obtener un Número de Identificación Personal del Contribuyente (ITIN) de parte del Servicio de Impuestos Internos para presentar la declaración.
Usted puede preparar y presentar su declaración por sí mismo o puede solicitar los servicios de algún profesional de impuestos. La declaración se puede presentar en formularios de papel y enviarse por correo. Algunos profesionales de impuesto ofrecen preparación y presentación.

- Mark S Gleason CPA
  www.lakes-cpa.com

Reduced Deduction for New Business Autos in 2014

With the end of bonus depreciation, which phased out at the end of 2013, the maximum deduction for depreciation on most automobiles for the first year is back down to $3,160.

The maximum deductions for the second and third years are now $5,000 and $3,500. The maximum annual deduction for years 4 and after is $1,875.

- Mark S Gleason CPA
  www.lakes-cpa.com

The IRS is Issuing Health Care Tips

The IRS is Issuing Health Care Tips
to explain to people what they need to know about how the Affordable Care Act will affect their income tax returns.

This resource is found at:
http://www.irs.gov/uac/Newsroom/Health-Care-Tax-Tips2.

Most of the items discussed in this forum are related to individual taxpayers and how their taxes for years after 2013 are affected by health care.

- Mark S Gleason CPA
  www.lakes-cpa.com

Minnesota K-12 Education Credit

The Minnesota Department of Revenue issued a reminder on it's Weekly Digest Bulletin about problems they are having with taxpayers claiming the K-12 education credit for items that do not qualify.

Here is what their bulletin said:
Minnesota offers a refundable education credit that reduces a taxpayer's income tax liability.  Taxpayers who meet the criteria can qualify to claim it.  We frequently see expenses claimed that do not qualify for the credit. Avoiding these common errors will help the taxpayer get their refund sooner.
Examples of expenses we see taxpayers claiming that DO NOT qualify include:
School uniforms including choir, band, dance, and graduation robes,
Fees for athletic programs including swimming and gymnastics,
PSAT, ACT, and SAT testing fees,
Computer hardware and/or software claimed for the full value (expenses are limited to $200 on line 14 of the M1ED),
Recreational programs such as Boy Scouts and Girl Scouts.

What they didn't say is that because a majority of the claims for this credit claim the credit for ineligible expenses, each one of these claims is manually examined (audited).  This was true some years ago and I don't know if it's still true, but this has been an ongoing problem for the MN Dept of Revenue. When I was a member of the MN House of Representatives during the Ventura years, the Department of Revenue wanted to repeal this credit because of the administrative headaches caused by all the ineligible claims.

Mark S Gleason CPA
www.lakes-cpa.com

Free Tax Preparation Assistance

Free in-person tax preparation assistance is currently being offered through two programs sponsored by the IRS. VITA (Volunteer Income Tax Assistance) is available to taxpayers having income of $52,000 or less. I have been a a VITA volunteer for one day each almost every year the past 15 years.

TCE (Tax) Counseling for the Elderly is for seniors over 60. To find a location near you, go to irs.treasury.gov/freetax-prep. It's best to call ahead for an appointment at most locations because the hours are limited.

Here in Minnesota, we also have AccountAbility Minnesota, a notn-profit that provides free tax assistance for low-income taxpayers. AccountAbility Minnesota offers appointments at two locations at 2610 University Ave W, Ste 450, St Paul, MN 55114 and at 2100 Plymouth Ave N, Minneapolis, NN 55411. Other locations are first-come, first-served. Visit www.accountabilitymn.org for more information.

Free tax preparation software is available from the IRS via "Free File" for taxpayers with income below $58,000. Electronic versions of IRS forms (pdf format) are available at www.irs.gov

- Mark S Gleason CPA
  www.lakes-cpa.com