By Harold Goedde CPA, CMA, Ph D

MARRIED FILING JOINT

To be able to file a joint return, taxpayers must be legally married on the last day of the tax year, which is December 31 for most taxpayers. In all states except Connecticut, the IRS does not allow same-sex married couples to file a joint federal tax return for federal tax purposes, even if the state permits it. Recently, the IRS rejected joint returns for two same sex married couples. The Service cited a 1996 law that bars a couple from being treated as married for federal law. The couples appealed to the Federal District Court which said the 1996 law was invalid. The Court also said that there is no other basis in the tax law to deny joint filing status to same sex couples who are legally married. Even though the Internal Revenue Code restricts joint filing to a husband and wife, the Court said those terms are intended to be gender neutral. [Pedersen v. PM , D.C., Conn]. There is no indication that the Service will appeal the District Court decision to a federal appellate court. (Case cited in Kiplingers Tax Letter, August, 14, 2012).

This District Court decision is only applicable to Connecticut. To refute the IRS premises, for same sex married couples, in other states, filing a joint return for federal tax purposes, the state must recognize this status, and be upheld by the courts.

In case of a spouse who dies during the tax year, the surviving spouse can still file a joint return in the year of death just as if the spouse was alive, so long he or she is not remarried on the last day of the tax year. On a joint return, the spouses combine their income and deductions, if itemized deductions are more than the standard deduction. For tax year 2012, the standard deduction is $12,200 [J.K. Lasser’s Monthly Tax Letter October 2012]. Only married persons who file a joint return can claim the student interest deduction, educational credits, and regular IRA contribution for a non-working spouse.

SURVIVING WIDOW(ER) [SURVIVING SPOUSE]

This status is used for two year(s) after the year of the spouse ‘s death if the spouse has not remarried and has a child that qualifies as a dependent, the spouse can file a return use the married joint tax rates.

EXAMPLE

John and Terrie are married and have a 15 year old daughter whom they claim as a dependent. John dies on January 15, 2012. As of December 31, 2012 Terrie has not remarried. For tax year 2012, Terrie can file a joint return with John even though he was not living at the end of the year. If Terrie is unmarried in 2013 and 2014 and still claims her daughter as a dependent, she can file as a surviving spouse. Filing as a surviving spouse instead of single or head of household, allows Terrie to use the married filing joint tax rates to determine her tax for 2013 and 2014. Note, that a joint return is not being filed, but only the joint tax rates are being used.

HEAD OF HOUSEHOLD

To qualify for head of household, the following tests must be met:

(1) Were unmarried or treated as unmarried at the end of the tax year.

(2) Paid more than half of the household costs for a qualifying person who lives with the t taxpayer in the same house for more than half the year, disregarding temporary absences. A parent does not have to live in the same house as the taxpayer.

Tests for a qualifying child

(1) The child must be your son, daughter, stepchild, brother, half brother, sister or half sister, or a descendant by any of them.

(2) The child must be younger than taxpayer or spouse (if filing jointly), under age 19 (age 24, if a full time student) at the end of the tax year.

(3) The child can be any age if permanently and totally disabled.

(4) The child must have lived with taxpayer for more than half the year.

(5) The child must not have provided more than half of his or her own support for the year.

(6) The child does not file a joint return with his or her spouse (unless a return is being filed only to claim a refund)

Tests for a qualifying relative

Taken from IRS web site:

(1) The person cannot be your qualifying child of the taxpayer or any other person.

(2) The person must be either (a) related to you (and not be in violation of the law) or

(b) live with you all year as a member of your household.

(3) The person’s gross income must be less than $3,700. There is an exception to this if the child is disabled and has income from a sheltered workshop. Other exceptions pertain to multiple support agreements (to be discussed in a future article), children of divorced or separated parents, or who live apart, and kidnaped children.

(4) Housekeepers, maids, and servants who work for you cannot be claimed as an exemption.

A taxpayer may still qualify as head of household even if a qualifying person does not qualify as a dependent. If you are divorced or separated and are the custodial parent and waive your right to claim the child as an exemption and release the exemption to your spouse, you may still file as head of household, but the other parent cannot. A married child must be your dependent unless the only reason you cannot claim the dependency exemption for the child is that you are the dependent of another taxpayer. A parent or other qualifying relative can be your qualifying person for head of household, only if you can claim a dependency exemption for him or her. However, even if you cannot file as head of household if the relative is your dependent because (a) you claim the exemption under a multiple support test (this topic will be discussed in a later article on exemptions for dependents) or (b) he or she is your qualifying relative under the member-of-household test [J.K. Lasser’s Monthly Tax Letter October 2012].

An advantage of filing as head of household, compared to filing single, is a larger standard deduction and lower tax rates. The 2012 standard deduction for head of household is $8,920 compared to $6,100 for a single person [J.K. Lasser’s Monthly Tax Letter October 2012].

A married spouse may file as head of household if he or she is an “abandoned” spouse.

This occurs if the spouses are separated and living apart for the last half of the year, and have no contact with one another.

The IRS has ruled that same sex couples, legally married under state law, who cannot file as married joint, also cannot file as head of household.

The information in this article is based on the writer’s knowledge from teaching income tax and practical experience preparing tax returns. Other information was taken from J.K. Lasser’s income tax topics.

CIRCULAR 230 DISCLOSURE:

Pursuant to regulations governing practice before the IRS, any tax advice contained herein is not intended or written to be used and cannot be used by the taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

The Internal Revenue Service has announced updated procedures to strengthen the Individual Taxpayer Identification Number (ITIN) program requirements. The new modifications and documentation standards further protect the integrity of the ITIN application process and strengthen the refund process while helping minimize burden for applicants.

ITINs play a key role in the tax administration process and assist with the collection of taxes from foreign nationals, nonresident aliens, and resident aliens who have filing or payment obligations under U.S. law. Designed specifically for tax administration purposes, ITINs are only issued to people who are not eligible to obtain a Social Security Number.

The updated procedures take effect Jan. 1, 2013 and build on interim procedures announced June 22, 2012 and Oct. 2, 2012 to safeguard the integrity of the tax identification number system, while improving the refund process. Based on an extensive review and feedback from a variety of stakeholders, updated procedures are being put in place that will strengthen controls over the ITIN process while providing applicants flexibility to accurately follow the application process. The interim procedures announced earlier this year remain in effect through 2012.

The IRS will maintain its stronger standard for issuing ITINs. Under the procedures, ITIN applications will continue to require original documentation or copies certified by the issuing agency.

To protect the integrity of the application process, notarized copies of documents or copies with an apostille are not acceptable for obtaining ITINs. Though most of the interim guidelines have been made permanent, others have been modified following feedback from key groups. The changes will provide additional flexibility for people seeking ITINs while continuing the stronger protections.
Final procedures are outlined below.

Individual Applicants
For those who are applying directly to the IRS for an ITIN, original documents or copies certified by the issuing agency are required. The IRS will continue to accept only original identification documents or certified copies of these documents from the issuing agency with the Form W-7 and federal tax return attached. The documentation list includes passports, national I.D. cards, visas issued by U.S. Department of State, U.S. or foreign military identification card, civil birth certificates, medical and school records, U.S. state or foreign driver’s licenses, U.S. state identification card, foreign voter’s registration card and U.S. Citizenship and Immigration Services photo identification. A full list of acceptable documents is available through the ITIN page on IRS.gov.

Additional Options for Applicants
The IRS heard from stakeholders that it was difficult in some instances for individuals to be without documents such as passports for extended periods of time. As a result, the IRS determined that other outlets will be available to review original documentation. As part of this effort, while original documents or copies certified by the issuing agency are still required for most applicants, there will be more options and flexibility for people applying for an ITIN. These options provide alternatives to mailing passports and other original documents to the IRS.

The Certifying Acceptance Agent (CAA) program will remain but will be modified. CAAs will be required to review original identification documents or copies certified by the issuing agency from applicants, spouses, and dependents. CAAs will be able to certify and then forward proof to the IRS that they have verified the authenticity of the documents supporting the ITIN application for applicants and spouses. This means they will not need to mail original documents such as passports to the IRS, a step previously required under the interim procedures. However, ITIN applications for dependents submitted to the IRS by CAAs will continue to require original documents or copies certified by the issuing agency. There will also be new requirements for the CAA program that are described later in this document.

In addition to direct submission of documents to the IRS centralized site or use of CAAs, ITIN applicants will have several other avenues for verification of key documents. These options include some key IRS Taxpayer Assistance Centers (TACs), U.S. Tax Attachés in London, Paris, Beijing and Frankfurt, and at Low-Income Taxpayer Clinics (LITCs) and Volunteer Income Tax Assistance (VITA) Centers that use CAAs. The procedure announced Oct. 2, 2012 for foreign students at educational institutions to be certified through the Student and Exchange Visitor Program (SEVP) remains. The table below provides the full list of options for submitting ITIN documents.

The finalized procedures are effective Jan. 1, 2013 in time for the 2013 tax-filing season when many ITIN applications are submitted along with a taxpayer’s income tax return. Later in January, participating IRS Taxpayer Assistance Centers will be available to review and certify passports and national identification cards in person for primary, secondary and dependent applicants. The first set of TACs that will review and certify documents for ITINs are located in areas where past ITIN activity has been prevalent. Additional details on participating IRS locations will be available soon on IRS.gov.

ITINs Will Have An Expiration Date
For the first time, new ITINs will be issued for a five-year period rather than an indefinite period. This change will help ensure that ITINs are being used for legitimate tax purposes. Taxpayers who still need an ITIN will need to reapply at the end of the expiration period.

In addition, the IRS will engage with interested groups on options to deactivate or refresh information underlying previously issued ITINs. This step will provide additional safeguards to the ITIN program and help ensure only people with legitimate tax purposes are using the numbers.

Having Problems Getting an ITIN?

We first posted Mexico Becomes the 3rd Country to Sign a FATCA Agreement on Tuesday, November 27, 2012. The Treasury Department has now posted this agreement on its Website.

This agreement sets out each Parties’Obligations to Obtain and Exchange Information with Respect to Reportable Accounts.

This will affect not only US taxpayers who have unreported Mexican bank income but it will equally adversely impact Mexicans who have unreported income from deposits with US Banks.

We discuss the adverse impact on US Banks in our post “Florida Banks Explain 2013 IRS Reporting Rule For Foreigners;” where we discuss that these new reporting rules which go into effect Jan. 1, 2013 have raised privacy concerns among some international account holders which have cause many Foreign Depositors with US Banks, especially Banks in Florida, to move several million dollars of Deposits to other jurisdictions, since the new regulation were passed in April.

Details of actual Agreement.

Are you a US Person with a Foreign Bank Account???

Are you a Mexican Person with a US Bank Account???

Have FATCA Problems???

We orginally posted on Tuesday, May 8, 2012, Swiss bank Pictet gave data to U.S. in tax probe regarding Swiss bank Pictet statement that it handed over bank account details to U.S. authorities probing cases of tax evasion, as a newspaper reported it had accepted funds from two former UBS clients suspected of having cheated on taxes.  Now Pictet & Cie., Switzerland’s biggest closely held bank, said its wealth-management business with American clients is the subject of a “general inquiry” by the U.S. Department of Justice. Pictet plans to cooperate “as fully as possible” with the U.S. authorities, the Geneva-based private bank said in a statement yesterday.

Pictet reported the DOJ inquiry after Der Sonntag newspaper yesterday said the wealth manager and Pictet, which manages 281 billion Swiss francs ($302 billion) for clients worldwide, said in May it wasn’t under investigation by the DOJ after an indictment of three Americans in Phoenix last year showed the bank was used to set up secret accounts not reported to the IRS.

The Swiss Financial Market Supervisory Authority, known as Finma, has communicated with Pictet and Bank Frey regarding data delivery to the U.S., according to Der Sonntag.

Unreported Income from Swiss or Other Foreign Banks?

Partnerships and pass-through entities will receive much more attention by the IRS’s Small Business/Self-Employed Division beginning in 2013.  SB/SE is developing an enterprise-wide strategy, in conjunction with the Large Business and International Division, “to address the inherent risks that exist with these sorts of business structures,” Fink said at the Fall Tax Division Meeting of the American Institute for Certified Public Accountants.

IRS will lay the foundation next year for building the strategy through developmental stages, after which audit activity will increase in 2014, Fink said. That will mean a reduction in other types of returns that SB/SE handles, he added.

Over the first six to nine months of next year, IRS will pilot methods to better identify its workload by looking at the right kind of partnership entities and returns, Fink said. IRS will also focus on issue identification, such as looking at loss limitations or distributions, and make sure those issues feed into its workload identification strategy.

Fink also said IRS would work to provide additional training for its revenue agents, as the increased focus on partnerships will be done by field revenue agents.

Fink said he wanted to emphasize the point that the expanded focus on partnerships and pass-through entities does not mean IRS believes all partnerships are formed with the intention of avoiding payment of taxes. Rather, he said, IRS recognizes that more businesses are migrating to partnerships and away from traditional corporate structures.

This shift in priorities “makes good business sense,” Fink said, as IRS looks ahead to the types of business entities that are taking shape. The IRS will need feedback from practitioners, “as it does whenever it engages in an effort to shift direction to look at something more closely,” he said.

The Mexican government recently signed a Foreign Account Tax Compliance Act (FATCA) agreement with the United States thereby becoming the third country to do so.  On November 19, 2012, in Washington, the Mexican Undersecretary of Revenue, José Antonio González Anaya, and the United States Assistant Secretary for Tax Policy, Mark J. Mazur, signed a government-to-government agreement for the bilateral implementation of the Foreign Account Tax Compliance Act (FATCA).

A government-to-government agreement, as signed between the US and Mexico, does not contain any exemption from FATCA, but, instead, a model for information sharing is offered based on existing bilateral tax treaties and allowing FFIs to report the necessary information to their respective governments rather than to the Internal Revenue Service.

The FATCA agreement has taken two years to negotiate between the two governments, and, while a copy has not yet been released, is said to be a significant improvement in the mechanisms for the exchange of banking and other financial information between the two countries.

In addition, after the signing of the agreement, the Mexican government believes that it is placed amongst the countries with the best practices for the exchange of information, as driven by the Organization for Cooperation and Economic Development and the G20.

FATCA Problems??? Have a Foreign Bank Account???

by Harold Goedde CPA, CMA, Ph.D.  hgoedde1@nycap.rr.com

Low and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

(1) Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;

(2) Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and

(3) Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

There are rumours that the UK government is about to reveal legislation imposing automatic client disclosure provisions on financial institutions in the Crown Dependencies and British Overseas Territories.

The journal International Tax Review claims to have seen draft UK legislation imposing client disclosure provisions on financial institutions in the Crown Dependencies and the British Overseas Territories.

The draft, described as a UK version of the US Foreign Account Tax Compliance Act (FATCA), is said to mandate the automatic reporting of financial and beneficial ownership information for each account of each offshore financial institution to the UK’s HM Revenue and Customs.

A leaked government document seen by International Tax Review reveals that the UK is planning to impose its own version of the US Foreign Account Tax Compliance Act (FATCA) on its Crown Dependencies and Overseas Territories. The move will deal an almost-fatal blow to tax evasion through the UK’s tax havens.
Responding to an International Development Committee report earlier this week, the government publicly rejected the need for a UK version of FATCA, which would require tax authorities to automatically exchange information relating to UK citizens or corporations.

In private, however, the government has already drafted FATCA legislation which it will impose on its Crown Dependencies and Overseas Territories. These include some of the world’s most notorious tax havens such as the Cayman Islands, the Channel Islands and the Isle of Man.  The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies.

It will also require the account number, name and identifying number of the reporting financial institution as provided when registering with the IRS for FATCA purposes, and the account balance or value as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure.

The UK Treasury declined to comment, but said that it is assisting the Crown Dependancies and Overseas Territories in their response to FATCA.

Quoting Tax Campaigner Richard Murphy, the Observer newspaper says the UK government will force other jurisdictions to comply by threatening to veto their own FATCA agreements with the US. Most international financial centres are anxious to comply with FATCA, because the US Treasury plans to impose a 30 per cent levy on all payments from US sources to non-compliant foreign financial institutions.

The evidence is now clear: the writing is on the wall for secrecy in the UK’s tax havens. There are now two options for those hiding their funds in these locations. The first is to own up now. That’s the wise option. It’s the only safe option. The alternative is to flee. My suspicion is that it’s already too late for that to work.

FATCA Problems??? Have a Foreign Bank Account???

The highly targeted and most commonly audited taxpayers earn in excess of $10 million and the IRS audited 30% of taxpayers within this income bracket in 2011. This was an 18% increase from the previous year. As a result, many high income earners have reasons to be concerned about the possibility of an IRS audit.

Other taxpayers who are likely to get audited were those who made between $5 and $10 million in 2011. An increase was also recorded among taxpayers who earned between $1 million and $5 million (there were 12% as opposed to the 6.7% that faced auditors the previous year).

Also, 5.4% of the $500,000-$1 million earners were audited, increasing from 3.4% in 2010. Despite the increase in audit cases, these figures are still low. According to the IRS, 1.1% of individual tax returns are targeted by the IRS with the high income earner targeted most.

The listed statistics are not to be confused with the IRS Global High Wealth Industry Group. This Group was launched in 2009 and focuses mostly on assets as opposed to incomes. Taxpayers are likely to be scrutinized if they own assets worth $10 million or more. Auditors may first focus on the conventional Form 1040 but gradually mirror on excise taxes, gift transfers, and charitable donations-related issues.

The IRS employs a meticulous approach when auditing high income earners. They don’t leave any stone unturned, as they spread and even review family companies and gifts amongst others. To boost chances of spotting and successfully auditing large and more advanced business enterprises and individuals, the IRS uses some of the most experienced auditors, who will demand for documentation for almost everything owned, plus incomes and expenditures. It is therefore, important that you keep your receipts and tax related documentation.

Need to review your Tax Planning?

On July 30, 2012, the IRS issued their PLR 104521-12 finding that a Fideicomiso was not a trust for federal tax purposes and that for US tax purposes it is actually a tax nothing or and ignored entity.

Mexican law provides that only Mexicans can own coastal real estate. In the early 1970s, Mexico’s government realized that allowing foreigners to purchase real estate in these coastal areas would benefit Mexico’s economy; so they provided that a foreigner could have a beneficial interest in a Fideicomiso or “Mexican Trust.”
Now that PLR 104521-12 has been released by the IRS and Amy Jetel, the attorney who requested the PLR has written an article Fedeicomisos: Clarity at Last which not only analyzes this PLR as it relates to Mexican Fideicomiso, but also provides insight on how the IRS will review other trusts .
Don’ t Know Whether Your Trust is a Trust for US Tax Purposes?