Disclaimer: 

The materials contained herein below, are for informational purposes only, not intended to and may not be construed as rendering legal, tax or accounting advice. Your e-mails or phone calls to our firm seeking such advice do not create a CPA-client relationship, unless you have retained our firm in writing. For specific advice, please consult your adviser, or contact us.

  

Zaher Fallahi, CPA is a California CPA and practices as a Los Angeles Tax CPA and Orange County Tax CPA. We have concentrated on providing tax and accounting services to dentists and physicians and other doctors.  Zaher Fallahi, CPA has practiced as an Orange County Dental CPA and Doctor’s CPA, and a Los Angeles Dental CPA and Doctor’s CPA since 1992.

 

Zaher Fallahi, CPA is affiliated with Zaher Fallahi, Tax Attorney, CPA.

Zaher Fallahi, Attorney At Law, has been rated 10 out of 10 by Avvo Rated 10 of 10 .

Zaher Fallahi, Tax Attorney, has been ranked a top tax attorney TOP Tax Attorney

About 1.8% of the US lawyers are also CPAs, and we are proudly one of them.

 

Locations:

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Website:  http://www.zflegal.com/  e-mail: taxattorney@zfcpa.com

IRS; Know these Facts Before Deducting a Charitable Donation

posted by Zaher Fallahi

If taxpayers gave cash or non-cash goods to a charity in 2016, they may take a deduction on their federal tax return. Taxpayers can use the Interactive Tax Assistant tool, Can I Deduct my Charitable Contributions?, to help determine if their charitable contributions are deductible.

 

Here are six important facts to know about charitable donations:

 

1- Qualified Charities

Taxpayers must donate to an IRS approved charity. Gifts to individuals, political organizations or candidates are not deductible. To find out the status of a charity, use the IRS Select Check tool. 

 

2- Itemize Deductions

To deduct charitable donations, taxpayers must file Form 1040 and itemize deductions on Schedule A, Itemized Deductions, with a federal tax return.

 

3- Benefit in Return

If taxpayers get something in return for their donation, they may have to reduce the value of their deduction. Taxpayers can only deduct the amount that exceeds the fair market value of the benefit received. Examples of benefits include merchandise, meals, event tickets or other goods and services. 

 

4- Type of Donation

If taxpayers give non-cash property instead of cash, their deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price they would get if the property sold on the market. If they donate used clothing and household items, those items must be in good condition or better. Special rules apply to cars, boats and other types of property donations. 

 

5- Noncash Charitable Donations

File Form 8283, to claim Noncash Charitable Contributions, if all noncash gifts are in excess of $500 for the year. Complete section-A for noncash property contributions worth $5,000 or less. Complete section-B for noncash property contributions more than $5,000 and include a qualified appraisal to the return.

Taxpayers may be able to prepare and e-file their tax return for free using IRS Free File. The type of records they must keep depends on the value and type of their contribution. To learn more about what records to keep, see Publication 526, Charitable Contributions. 

 

6- Donations of $250 or More

If taxpayers donated cash or non-cash goods of $250 or more, they must have a contemporaneous written statement from the charity. It must show the amount of the donation and a description of any property donated. It must also say whether they received any goods or services in exchange for the gift.

 

Taxpayers should keep a copy of their tax return

Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

 

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail totaxattorney@zfcpa.com

IRS; Tax Benefits for Higher Education

posted Mar 17, 2017, 10:11 PM by Zaher Fallahi

Higher education costs paid in 2016 can mean tax savings when taxpayers file their tax returns. If taxpayers, their spouses and dependents took post-high school coursework in 2016, they may be qualify for a tax credit or deduction.

 

The following are some facts from the IRS about tax benefits for higher education.

 

For 2016, there are two tax credits available to help taxpayers offset the costs of higher education. The American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) that may reduce the income tax owed. Use  Form 8863 to claim the related education credits.

 

 

I- The American Opportunity Credit (AOC) is:

 

1- Worth a maximum benefit up to $2,500 per eligible student.

 

2- Only for the first 4 years at an eligible college/vocational school.

 

3- For students pursuing a degree or other recognized higher education credential.

 

4- For students enrolled at least ½ time for at least one academic period during 2016. Taxpayers can claim the AOC for a student enrolled in the first 3 months of 2017 as long as they paid qualified expenses in 2016.

 

 

II- The Lifetime Learning Credit (LLC) is:

 

1-Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.

 

2-Available for years of postsecondary education and for courses to acquire/ improve job skills.

 

3-Available for an unlimited tax years

 

The tuition and fees deduction can reduce the amount of income subject to tax. This deduction may benefit taxpayers who do not qualify for the AOC or the LLC. Use Form 8917 to claim the deduction.

 

 

III-The Tuition and Fees Deduction is:

 

1-Worth a maximum benefit up to $4,000,

 

2-Claimed as an adjustment to income,

3-Available even if a taxpayer doesn’t itemize deductions on Schedule A,

 

4-Limited to tuition and certain related expenses required for enrollment or attendance at eligible postsecondary educational institutions.

 

 

IV- Additionally:

 

1-Beginning in 2016, to be eligible for an education benefit, a student is required to have Form 1098-T, Tuition Statement. They receive this form from the school they attended. There are exceptions. See Publication 970 for more details.

 

2-They may only claim qualifying expenses paid in 2016.

 

3-They can’t claim either credit if someone else claims them as a dependent.

 

4-They can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense in the same year.

 

5-Income limits could reduce the amount of credits or deductions they can claim.

 

6-The Interactive Tax Assistant tool on IRS.gov can help check eligibility.

 

IRS Free File

Taxpayers can use IRS Free File to prepare and e-file their federal tax returns for free. File Form 8863, Education Credits, with your Form 1040. Free File is only available at IRS.gov/freefile.

 

The IRS reminds students using the Free Application for Federal Student Aid (FAFSA) that the IRS Data Retrieval Tool currently is unavailable.  This does not limit an individual’s ability to apply for aid. Applicants can manually provide their tax return information. The IRS offers alternatives for the retrieval of the income information needed.

 

 

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

IRS; Choose Reputable Return Preparers

posted Feb 12, 2017, 8:44 PM by Zaher Fallahi

IRS “Dirty Dozen” Series of Tax Scams for 2017 Includes Return Preparer Fraud; Choose Reputable Return Preparers

 

February 6, 2017, WASHINGTON — The IRS today warned taxpayers to be on the lookout for unscrupulous tax return preparers, one of the most common “Dirty Dozen” tax scams during tax season. 

 

The vast majority of tax professionals provide honest, high-quality tax returns. But there are some un-unscrupulous preparers who set up shop each year to fraud, identity theft and other scams that hurt taxpayers. That's why unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds make the Dirty Dozen list every year. 

 

"Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected," said IRS Commissioner John Koskinen. "Most preparers provide high-quality service but we run across cases where unscrupulous preparers steal from their clients and misfile their returns."  

 

Return preparers are a vital part of the U.S. tax system. About 60% of taxpayers use tax professionals to prepare their annual ax returns.  Illegal scams can lead to significant penalties, interest and potential criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the perpetrators. 

 

Choosing Return Preparers Carefully 

It is important to choose carefully when hiring an tax prepare. Well-intentioned taxpayers can be misled by preparers who do not understand taxes and mislead people into taking credits or deductions they are not entitled to in order to increase their own fees. Every year, these types of tax preparers face everything from penalties to jail time for defrauding their clients. 

 

Here are a few tips when choosing a tax preparer:

Ask the tax preparer if she or he has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, obtain a PTIN and include it on the second page of the Form 1040.

 

Inquire if the tax preparer has a professional credential (enrolled agent, certified public accountant or attorney), belongs to a professional organization or attends continuing education classes. A number of tax law changes can be complex, and competent tax professional needs to be up-to-date in the new laws. Tax return preparers are not required to have a professional credential. Visit the IRS website for more information regarding the national tax professional organizations.

 

Check the preparer’s qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help locate a tax return preparer with your desired qualifications

 

The IRS Directory is a searchable and sortable listing of certain preparers registered with the IRS. It includes the name, city, state and zip code of:

 

1) Attorneys

2) CPAs

3) Enrolled Agents

4) Enrolled Retirement Plan Agents

5) Enrolled Actuaries

6) Annual Filing Season Program participants

 

Check the preparer’s history. Inquire of the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with your State Board of Accountancy. For attorneys, check with you State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory.

 

Ask about service fees. Avoid preparers who base fees on a percentage of their client’s refund or boast bigger refunds than their competition. Don’t give your tax documents, SSNs, and other information to a preparer when only asking about their services and fees. Unfortunately, some preparers have improperly filed returns without the taxpayer’s permission once they obtain the records.

 

Ask to e-file your return. Be sure your preparer offers e-filing service. Paid preparers who prepare taxes for more than 10 clients generally must file electronically. The IRS has processed more than 1.5 billion e-filed tax returns. It’s the safest and most accurate way to file a return.

 

Provide records and receipts. Good preparers will ask to see your records and receipts. They will ask questions to determine your total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file your return using your only last pay stub instead of your annual Form W-2. This is against IRS e-file rules.

 

Make sure the return preparer is available. In the event questions come up about your tax return, you may need to contact your preparer after the return is filed. Avoid fly-by-night preparers.

 

Understand who can represent you. Attorneys, CPAs, and enrolled agents can represent any client before the IRS in any situation, subject to limitation. Annual Filing Season Program participants may represent you in limited situations if they prepared and signed your return. However, non-credentialed preparers who do not participate in the Annual Filing Season Program may only represent clients before the IRS on returns they prepared and signed on or before Dec. 31, 2015.

 

Never sign a blank tax return. Don’t use a tax preparer that asks you to sign an incomplete or blank tax form.

 

Review your tax return carefully before signing, and ask questions if something is not clear. Make sure you are comfortable with the accuracy of the return before you sign it and that your tax refund goes directly to you – not into the preparer’s bank account. Reviewing the routing and bank account number on the completed return is always recommended.

 

Report abusive tax preparers to the IRS. You can report abusive tax return preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your permission, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms on IRS.gov.

 

To find other tips about choosing a preparer, understanding the differences in credentials and qualifications, researching the IRS tax preparer directory, and learning how to submit a complaint regarding a return preparer, visit www.irs.gov/chooseataxpro.

 

Remember: Taxpayers are legally responsible for what is on their tax return even if someone else prepares it. Make sure the preparer you hire is up to the task.

 

Zaher Fallahi, CPA, Tax Attorney, is a Tax Resolution Attorney and defends taxpayers before the IRS (FBAR, FATCA and OVDP), FTB, EDD and BOE. Telephone: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail: taxattorney@zfcpa.com

IRS; Don’t Fall for Scam Calls and Emails Posing as IRS

posted Feb 7, 2017, 9:37 PM by Zaher Fallahi

Scams continue to use the IRS as a lure.

These tax scams take many different forms. The most common scams are phone calls and emails from thieves who pretend to be from the IRS. Scammers use the IRS name, logo or a fake website to try and steal money from taxpayers. Identity theft can also happen with these scams.

 

Taxpayers need to be wary of phone calls or automated messages from someone who claims to be from the IRS. Often these criminals will say:

 

i) Taxpayer owes money;

ii) Demand payment right away;

iii) They are due a refund; and,

iv)  Ask for bank account information over the phone.

 

The IRS warns taxpayers not to fall for these scams and follow several tips that may help filers avoid becoming a scam victim. IRS employees will NOT:

 

1) Call demanding immediate payment, without first sending a bill in the mail.

 

2) Demand payment without allowing people to question or appeal the taxes owed.

 

3) Require the taxpayer pay a certain way; for example, taxpayers use a prepaid debit card.

 

4) Ask for credit or debit card numbers on the phone.

 

5) Threaten to contact local enforcement agencies to arrest you for non-payment of taxes.

 

6) Threaten to bring a legal action.

 

 

If you don’t think you owe any tax, then:

 

1) Report to the Treasury Inspector General for Tax Administration (TIGTA) “IRS Impersonation Scam Reporting”.

 

2) Report to the Federal Trade Commission FTC); “FTC Complaint Assistant” .

 

In most cases, an IRS phishing scam is an unsolicited, bogus email that claims to be from the IRS. Criminals often use fake refunds, phony tax bills or threats of an audit. Some emails link to sham websites that look real. The scammers’ goal is to lure victims to give up their personal and financial information and use it to steal a victim’s money and their identity.

 

 

For those taxpayers who get a ‘phishing’ email, then:

 

1) Do not reply to the message.

 

2) Do not give out your personal or financial information.

 

3) Forward the email to phishing@irs.gov. Then delete it.

 

4) Do not open any attachments or click on any links. They may have malicious code that will infect your computer.

 

                                                       

Zaher Fallahi, CPA, Tax Attorney, represents taxpayers before the IRS, FTB, EDD and BOE. Telephones:  (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County) or e-mail taxattorney@zfcpa.com

US Totalization Agreements

posted Feb 4, 2017, 7:09 PM by Zaher Fallahi

US Totalization Agreements

 

The US has tax agreements with certain countries for the purpose of avoiding double taxation of income regarding social security taxes, called “Totalization Agreements”. These agreements must be taken into consideration when determining if an alien is subject to the U.S. Social Security/Medicare tax, or if a U.S. citizen or resident alien is subject to the social security taxes of a foreign country.

 

As of now, the following countries have “Totalization Agreements” with the US:

1) Australia

2) Austria

3) Belgium

4) Canada

5) Chile

6) Czech Republic

7) Denmark

8) Finland

9) France

10) Germany

11) Greece

12) Ireland

13) Italy

14) Japan

15) Luxembourg

16) Netherlands

17) Norway

18) Poland

19) Portugal

20) Slovak Republic

21) South Korea

22) Spain

23) Sweden

24) Switzerland

25) United Kingdom

 

Zaher Fallahi, CPA, Tax attorney, advises Americans living abroad with tax preparation, tax planning, IRS representation, and undisclosed foreign accounts (FBAR, FATCA and OVDP). Tel.: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail:   taxattorney@zfcpa.com

To file or not to file 2016 tax retrun, that is the questions

posted Jan 26, 2017, 10:09 PM by Zaher Fallahi

IRS; Five Tips on Whether to File a 2016 Tax Return

Most taxpayers file a tax return because they have to. Even if a taxpayer doesn’t have to file, there are times they should. They may be eligible for a tax refund and not know it.

 

Here are five tips on whether to file a tax return:

 

1- General Filing Rules

In most cases, income, filing status and age determine if someone must file a tax return. Other rules may apply if the taxpayer is self-employed or a dependent of another person.

 

For example, if someone is single and under age 65, he or she must file if their income was at least $10,350. There are other instances when a taxpayer must file. Go to IRS.gov/filing  for more information.

 

2- Tax Withheld or Paid

a) Did the taxpayer’s employer withhold federal income tax from their wages?

b) Did the taxpayer make estimated tax payments for the year?

c) Did they overpay last year and have it applied to this year’s tax?

 

If the answer to any of these questions is “yes”, they may be due a refund and should file a tax return to get it back.

 

3- Earned Income Tax Credit (EITC)

A taxpayer who worked and earned less than $53,505 last in 2016 may receive the EITC as a tax refund. They must qualify and may do so with or without a qualifying child.

 

They may be eligible for up to $6,269. Use the 2016 EITC Assistant tool on IRS.gov to find out. Taxpayers must file a tax return to obtain the EITC.

 

4- Additional Child Tax Credit

Did the taxpayer have at least one child that qualifies for the Child Tax Credit? If they do not qualify for the full child credit, they may be eligible for the Additional Child Tax Credit.

 

Beginning in January 2017,  the IRS must hold refunds for any tax return claiming either the EITC or the Additional Child Tax Credit until Feb. 15. This means the entire refund, not just the part related to either credit.

 

5- American Opportunity Tax Credit (AOTC)

To claim the AOTC, the taxpayer, their spouse or their dependent must have been a student enrolled at least half time for one academic period to qualify. The credit is available for four years of post-secondary education.

 

It can be worth up to $2,500 per eligible student. Even if the taxpayer doesn’t owe any taxes, they may still qualify. Complete Form 8863, Education Credits, and file it with the tax return. Learn more by visiting the Education Credits web page.

 

Zaher Fallahi, Los Angeles Tax CPA and Orange County Tax CPA. Contact information: Tel: (310) 719-1040, (714) 546-4272, Website: http://www.zfcpa.com/  and e-mail taxattorney@zfcpa.com

Zaher Fallahi, CPA, Tax Attorney, IRS; Signs of Identity Theft

posted Jan 4, 2017, 9:09 PM by Zaher Fallahi

IRS, States, Industry Urge Taxpayers to Learn Signs of Identity Theft

No matter how careful you are, identity thieves may be able to steal your personal information. If this happens, thieves try to turn that data quickly into cash by filing fraudulent tax returns.  The IRS, state tax agencies and the nation’s tax industry ask for your help in their effort to combat identity theft and fraudulent returns. Working in partnership with you, we can make a difference.

That’s why we launched a public awareness campaign called “Taxes. Security. Together.” We’ve also started a new series of security awareness tips that can help protect you from cybercriminals.  Here are a few signs that you may be a victim of tax-related identity theft:

1) Your attempt to file your tax return electronically gets rejected. You get a message saying a return with a duplicate Social Security number has already been filed. First, check to make sure you did not transpose any numbers. Also, make sure one of your dependents, for example, your college-age child, did not file a tax return themselves. If your information is accurate, and you still can’t successfully e-file because of a duplicate SSN, you may be a victim of identity theft. You should complete Form 14039, Identity Theft Affidavit. Attach it to the top of a paper tax return and mail to the IRS. 

2) You receive a letter from the IRS asking you to verify whether you sent a tax return bearing your name and SSN. The IRS holds suspicious tax returns and sends taxpayers letters to verify them. If you did not file the tax return, immediately follow the instructions in the IRS letter. 

3) You receive income information at tax time from an employer unknown to you. Employment-related identity theft involves the use of your SSN by someone, generally an undocumented worker, for employment purposes only. 

4) You receive a tax refund that you did not request. You may receive a paper refund check by mail that the thief intended to have sent elsewhere. If you receive a tax refund you did not request, return it to the IRS. Write “VOID” in the endorsement section, and include a note on why you are returning it. If it is a direct deposit refund that you did not request, contact your bank and ask them to return it to the IRS. Search IRS.gov for “Returning an Erroneous Refund” for more information. 

5) You receive a tax transcript by mail that you did not request. Identity thieves sometimes try to test the validity of the personal data they have chosen or they attempt to use your data to steal even more information. If you receive a tax transcript in the mail and you did not request it, be alert to the possibility of identity theft. 

6) You receive a reloadable, pre-paid debit card in the mail that you did not request. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they use for various schemes, including tax-related identity theft. 

More information about tax-related identity theft can be found at Identity Protection: Prevention, Detection and Victim Assistance  as well as the Taxpayer Guide to Identity Theft – all on IRS.gov.

The IRS, state tax agencies and the tax industry joined together as the Security Summit to enact a series of initiatives to help protect you from tax-related identity theft.

To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. Also read Publication 4524, Security Awareness for Taxpayers.  

Share this tip on social media -- #IRS, States, Industry Urge Taxpayers to Learn Signs of Identity Theft. http://go.usa.gov/x94Xe

 Zaher Fallahi, CPA, Tax Attorney, represents taxpayers before taxing authorities; IRS, FTB, EDD and BOE. Telephones:  (310) 719-1040 (Los Angeles), ( 714) 546-4272 (Orange County) or e-mail taxattorney@zfcpa.com

Zaher Fallahi, CPA, Tax Attorney; 2016 Year-End Tax Planning

posted Dec 20, 2016, 10:51 PM by Zaher Fallahi

Welcome you to the Website of Zaher Fallahi, CPA, Tax Attorney. The tax materials contained herein below are for general informational purposes only, and are not to be considered as tax or legal advice. These are selective items only and do not include all important 2016 tax law. For specific advice suitable to your particular situation, consult appropriate advice from tax advisors.

 

Defer/Accelerate Income

Most small businesses utilize cash basis of accounting for their taxes, may defer their 2016 billing and collection efforts to 2017, if they believe to have less income or predict the tax rates will be lower next year, and their conduct doesn’t violate any laws. Conversely, if they believe they will have more income next year or they will be in higher tax bracket next year, they may accelerate their billing and increase their current year income.

 

Tax Tip: If you believe the incoming Trump Administration will cut the tax rates, you may defer your income to 2017. For employees and executives, this means deferring 2016 bonuses to 2017. 

 

Accelerate/Defer Expenses

Taxpayers who believe they will be in a higher tax bracket next year, they may defer current deductions into 2017. Conversely, they may accelerate their business deductions, medical expenses, 4th quarter State estimated taxes, property taxes, etc., after consulting their advisor to avoid any AMT trap, and their conduct is not illegal.

 

Tax Tip: If you believe the incoming Trump Administration will cut the tax rates, you may accelerate 2016 expenses. 

 

0.9% Medicare Tax Hospital Insurance Tax

The employee’s share of the Federal Insurance Contributions Act (FICA) withholding from wages has increased from 1.45% to 2.35% on wages in excess of $250,000 for joint filers and $200,000 for married taxpayers filing separately. The extra tax is imposed on the combined salaries of the spouses for joint filers, including the self-employed individuals as well. No matching by employer.

 

Tax Tip: It may be tax-advantageous to accelerate other income such as year-end bonuses if you will have more income in 2017, or delay it if you will have less income in 2017. Any tax-advantageous reclassification of income must be analyzed thoroughly to ensure its legality.

 

Net Investment Income Tax (NIIT)

Starting in 2013 a 3.8% Medicare tax is imposed on certain net investment income (NII) of individuals, estates, and trusts by the 26 USC § 1411 on the lesser of:

 

1- Taxpayer’s net investment income is the investment income reduced by applicable associated cost; interest, dividends, rents, annuities, royalties, and net capital gains from disposition of property not used in a trade or business, or

 

2- Modified Adjusted Gross Income (MAGI; adjusted for foreign earnings) that exceeds the threshold of $250,000 for married filing joint taxpayers or $200,000 for single taxpayers.

 

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer. The NII is reduced by certain expenses properly allocable to the income.

 

Kinds of gains are included in Net Investment Income

To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing the NII:

 

a) Gains from the sale of stocks, bonds, and mutual funds.

b) Capital gain distributions from mutual funds.

c) Gains from the sale of investment real estate, including gain from the sale of a second home.

d) Gains from the sale of interests in partnerships and S corporations to the extent you were a passive owner.

 

What are some common types of income that are not NII?

Wages, unemployment compensation, operating income from a non-passive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, gain on the sale of a personal residence, and distributions from certain Qualified Plans.

 

Tax Tips: Eliminating or minimizing the 3.8% tax may be done by deferring the NII or reducing the MAGI, or both. Disposition of commercial rental properties with prior suspended losses may release those losses and reduce your tax burden. This is an unchartered territory and requires sophisticated professional advice.

 

Capital Gains Tax

Capital Gains and Dividends tax rates increased from 15% to 20% for taxpayers with taxable income in excess of the thresholds mentioned above ($400,000 for single filing status, etc). Net capital gains from selling collectibles such as coins or art are taxed at a maximum 28% rate. The rate will remain 15% for the middle class and the taxpayers in the 10% and 15% bracket still pay zero taxes on their Capital Gains.

 

Wash sale rule

Under the “wash sale” rule that applies to the disposition of an asset when a loss is

recognized, the IRS doesn’t permit taxpayers deduct the loss if they repurchase the same or identical investment during the 30-day period before or after the sale date.

 

Tax Tip: Consider selling worthless stocks or losing stocks and repurchasing them 31 days later to avoid wash sale, if advisable. See the §§ 1202 and 1244 stocks explained below.

 

Section 1202, Qualified Small Business Stock (QSBS)

Under 26 US §1202, taxpayer excludes 75% of the gain recognized from the sale or exchange of QSBS that is held more than five years on a qualified stock acquired on or before September 27, 2010 and after February 17, 2009 and 100% on qualifying stock acquired after September 27, 2010, and before Jan. 1, 2014.

 

Tax Tip: The stock must be issued by domestic C corporation, originally issued after August 10, 1993, with total gross assets of $50 million or less, at least 80% of the value of the corporation's assets was used in the active conduct of qualified businesses, held by non-corporate taxpayer, held more than five years, etc. Application of this law may be complicated and need tax professional advice.

 

Section 1244 (small business) stock

The loss from the sale of a qualified corporation may be used against ordinary income similar to net operation loss up to $50,000 for single filers and $100,000 for married filing jointly. 

 

Tax Tip:  To qualify as section 1244, stock must be issued by a domestic corporation, issued for money or other property. The total amount of money and other property received by the corporation for its stock as a contribution to capital and paid-in surplus generally may not exceed $1 million, etc. This loss is claimed on Form 4797, not Schedule D.

 

Cancellation of Debt (forgiveness)

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude up to $2 million of forgiven debt ($1 million if married filing separately) from the discharge of debt on their principal residence through foreclosure, restructuring, or short sale, thorough December 31, 2016.

 

Tax Tip: If you are in such an unfortunate event, try to get the process expedited and completed before the end of December 2016 to take advantage of this law, because of future uncertainty. Canceled debt on rental and other properties may be excluded on the basis of on bankruptcy, insolvency, etc.

 

Itemized State & Local Taxes, Medicare and Miscellaneous Deductions

Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance that exceed 10 percent of your adjusted gross income. There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouses are 65 years or older or turned 65 during the tax year, you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.

 

Tax Tip:  If tax advantageous, the amount of medical expense, state & local taxes and miscellaneous deductions, you may expedite or defer them to 2017. Do not fall into the Alternative Minimum Tax (AMT) trap, because some of these are AMT preference and adjustment items. Note: The incoming Trump administration has avowed to repeal AMT

 

Individual Retirement Account (IRA)

Traditional tax deductible IRA contribution for 2016 is $5,500, and $6,500 for taxpayers 50 years or older.  Contribution for a taxpayer married to one who is covered by a retirement plan at work, is phased out between Adjusted Gross Income (AGI) of $184,000 and $194,000.

 

Tax Tip: Contribution must be made on or before April 18, 2017.

 

Roth IRA Contribution

Non-tax deductible Roth contribution is $5,500 and $6,500 for taxpayers 50 years or older, for married filing jointly with AGI less than $184,000. More than $193,000 AGI, no contribution allowed.

Roth IRA Conversion

 If advantageous to your particular situation, and you are eligible, you may convert your 

traditional IRA into a ROTH IRA. This may be more appropriate when the traditional IRA has declined in value and costs you less in taxes.

 

Re-characterization

If you converted your traditional IRA during the year and the assets in the ROTH declined further in value, re-characterize the conversion by transferring the asset back to the traditional IRA to minimize your current taxes. You will need assistance from your tax professional in this respect to be sure.

 

Tax Tip: Contribution must be made on or before April 18, 2017. Distribution from Roth would be tax free.

 

Direct Charitable Distribution From IRAs 

Taxpayers over 70 ½ years old can now make $100,000 per year direct tax-free distributions from their IRAs to their choice of qualified charitable organizations, regardless of their Adjusted Gross Income (AGI). These transfers are neither included in gross income nor deducted on Schedule A. Furthermore, these distributions are not included in gross income for the phase-out purposes of deductions, exclusions, tax credits, etc.

 

Tax Tip: Transfer up to $100,000 per year directly from your IRAs to your favorite charities while alive and save on taxes.

 

Simplified Employee Pension Plan (SEP-IRA)

IRC § § 402(h) and 415 limit the amount of contributions made to an employee’s SEP-IRA to the lesser of $53,000 or 25% of the eligible employee’s compensation.

 

Tax Tip: Contribution may be made until the filing of the tax returns, including extensions through October 16, 2017.

 

401(K) Limit

The 2016 maximum employee contribution is $18,000.

 

Tax Tip: Maximize your contribution and benefit from most employers’ matching policy.

 

Foreign Account Tax compliance Act (FATCA), IRS Form 8938

Under the requirements of Sections 1471 through 1474 of the IRC, commonly known as Foreign Account Tax compliance Act (FATCA), certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 must report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return. 

 

Tax Tip: Include earnings from FATCA accounts in your 2016 estimated taxes to avoid potential penalties. If you have never reported these accounts to the US Treasury, consult a tax attorney with expertise in handling international and foreign bank accounts such as FBAR and Offshore Voluntary Disclosure Program (OVDP).

 

Report of Bank & Financial Accounts (FBAR), Financial Crimes Enforcement Network (FinCen Form 114) must be e-filed

If you have a financial interest in, or signature authority or other authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account with aggregate value exceeding $10,000, the Bank Secrecy Act (BSA) requires you e-file the FBAR report with the US Treasury Financial Crimes Enforcement Network (FinCen) form 114 (formerly TD F 90-22.1) by no later than April 15, 2017.  The new deadline is under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 and there will be a 6-month extension available for the first time.

 

Tax Tip: Include earnings from FBAR accounts in your 2016 estimated taxes. If you have never reported these accounts to the US Treasury, consult a tax attorney with special skill in handling international and foreign bank accounts such as FBAR and OVDP.

 

Foreign Earned Income Exclusion, IRS Form 2555

If you are subject to the US taxes (U.S. citizen or a US resident alien) and live overseas, you are taxed on your worldwide income (the US and Eritrea are the only two countries with such tax law). However, if you qualify, you may exclude from income up to $101,300 under tax code Section 911(b) (2) (D) (i) for the year 2016. In addition, you can exclude or deduct certain foreign housing amounts.

 

 

Tax Tips: Only earned income qualifies for exclusion. Other income such as interest, dividends, capital gains, etc. do not qualify.  Generally, you may not live more than 35 days a year in the US during the year, and must file timely tax returns to claim the exclusion.  Consult a tax attorney for filing delinquent 2555.

 

Documentation of charitable contribution

The substantiation requirements for monetary donations of less than $250 remain fairly informal under Sec. 170(f) (17): The donor should maintain a bank record of the contribution or written communication from the donee stating the name of the donee organization, as well as the date and dollar amount of the donation. For donations of $250 or more, Sec. 170(f)(8) requires that the donor must obtain a contemporaneous written acknowledgment, stating the amount of the contribution, whether the donee provided goods or services in consideration for the donation, in whole or in part, and a good-faith estimate of the value of any goods or services the organization provided. If goods or services received consist solely of intangible religious benefits, the contemporaneous documentation must contain a statement to that effect.

 

Tax Tip: Obtain supporting documents at the time of making the contribution.

 

Residential Energy Efficient Property Credit (Section 25D)

A credit of 30 percent of the expenditures made by a taxpayer during the taxable year for:

1) qualified solar electric systems;

2) qualified solar water heaters;

3) qualified fuel cell property;

4) qualified small wind energy property; and

5) qualified geothermal heat pumps.

 

The credit for expenditures made for qualified fuel cell property is limited to $500 for each 1/2 (one-half) kilowatt of capacity of the property; the amounts of the other qualified expenditures eligible for the credit are not limited. Furthermore, this credit may be carried over if it exceeds the limitation imposed by section 26(a). The credit is available for property placed in service through December 31, 2016.  The credit for solar electric property and solar water heating property is extended for property placed in service through December 31, 2021, as described in the statute.

 

Tax Tip:  Obtain documents proving eligibility from the manufacturer of these items to ensure eligibility.

 

Alternative Minimum Tax (AMT)

The 2016 AMT exemption increases to $83,800 for married filing jointly (MFJ), $53,800 for single filers, $41,900 for married filing separately, and $24,100 for trusts.

 

Tax Tip: Consult a tax advisor to avoid AMT trap.

 

Recognition of Same-Sex Marriage

In United States v. Windsor, (2013) (Docket No. 12-307), the Supreme Court held that section 3 of the Defense of Marriage Act (DOMA) is unconstitutional because it violates the principles of equal protection of the Fourteenth Amendment to the US Constitution. It concluded that this section “undermines both the public and private significance of state-sanctioned same-sex marriages” and found that “no legitimate purpose” overcomes section 3’s “purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect” (Windsor, 133 S. Ct. at 2694-95). This ruling provides guidance on the effect of the Windsor decision on the Internal Revenue Service’s interpretation of the sections of the Code that refer to taxpayers’ marital status.

 

Tax Tip: Because of the Windsor holding, all of the tax laws discussed herein are applicable to the Same-Sex couples as well.

 

Litigation attorneys beware; some settlement awards may be taxable

Some plaintiffs or their lawyers may assume that settlements or awards are tax free. Not so, says Uncle Sam. Internal Revenue Code (IRC) § 61 states all income from whatever source, including lawsuit awards, derived is taxable, unless specifically excluded by another Code section. IRC § 104 is the exclusion from taxable income with respect to lawsuit settlements and awards.

 

The 1996 amendment added to IRC § 104(a) (2) the word "physical" to the clause “on account of "personal physical injuries or physical sickness". Therefore, in order for damages to be excludible from income, the judgment or settlement must be derived from personal physical injuries or physical sickness. Prior to the 1996 amendment, IRC § 104(a) (2) was extensively litigated with respect to what was personal injuries.  

 

The litigators are advised to discuss the tax consequences of their potential awards or their settlements structure with a tax attorney before the case is settled, to ensure that their clients will get a tax advantageous settlement, if qualify. A complaint may be filed on the basis of a particular cause of action, if possible. The plaintiffs need to do their own tax planning and be aware of taxability of their awards and settlements to avoid unnecessary taxes and unexpected AMT trap due to deducing their legal fees on Schedule A subject to 2% limitation. The losing parties should study possible tax deductibility of the settlement or judgment and their legal fees.

 

Tax Tip:  If your trial attorney tells you that your settlements/awards are tax free, thank her or him for it, and ask to see the following in the documents:  

 

i) Internal Revenue Code 104(a) (2) or other;

ii) Cause of action contained in the complaint; and,

iii) Relevant sections of the settlement agreement or court decree referring to non-taxability and the amount.

 

Foreign Investment in Real Property Tax Act (FIRPTA)

The Foreign Investment in Real Property Tax Act (FIRPTA) requires a tax of 15% of the amount realized on the disposition of all US real property. A buyer of U.S. real property interest from a foreign investor is considered the withholding agent of the IRS and is obligated to find out if the seller is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the buyer may be held liable for the tax. The seller must report the sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F.  The withholding agent must remit the withholding of tax to the IRS by the 20th day of the date of the transfer.

 

The transferor may be eligible for a lesser withholding in the following circumstances:

 

The disposition of the US real property interest takes place under one of the non-recognition provisions of the Internal Revenue Code.

 

a) When the transferor’s maximum tax liability on the disposition is less than the amount otherwise required to be withheld.

 

b) The transferor or transferee wants to come under certain installment sale rules.

 

c) The transferor or transferee enters into an agreement with the IRS by posting a type of security (letter of credit, bond, etc.).

 

d) The transferor or transferee may enter into a 12- month agreement with the IRS to obtain a “blanket withholding certificate” for multiple properties.

 

e) A non-standard application may be submitted for unique situations that do not fit into the above categories.

 

Note: Acquisition of the US Real Property by Foreign Persons from countries under the US Economic Sanctions are subject to specific licensing requirements of the US Treasury Office of Foreign Assets Control (OFAC). In a addition, purchase of these properties from the foreign persons from citizens of those countries may be subject to the same laws. These countries include but are not limited to Syria, North Korea, Iran, etc.

 

Tax Tip:  The transferee; ascertain the nationality of the transferor and withhold the required taxes. When representing a client with connection to sanctioned countries, seek advice from OFAC attorneys.

 

Reasonable Compensation for Shareholders who work for the Corporation

When a stockholder works for her/his own corporation, she or must be on the company payroll and paid a reasonable amount of salary for the services performed. The Government Accountability Office has reported many employment tax abuses with respect to S corporation shareholders who worked for the corporation, alleging unreasonably low compensation paid to these shareholders. The IRS has ascertained corporate income tax abuses by unreasonably excessive compensation of C corporation shareholders who worked in their corporations.

 

Tax Tip: Pay the working shareholder reasonable salary before January 1, 2017 and incorporate any estimated taxes into W-2 form. Alternatively, if you discover this situation after January 1, 2017, convert some of the distribution into executive management fee and show as Schedule C income to have a good-faith defense in case of an audit.

 

 

S Corporation or Limited Liability Company (LLC) losses

The amount of losses from an S corporation or an LLC you can deduct is limited to your basis (your capital adjusted for earnings, drawls, etc.) in each entity.

 

Tax Tip: The above-mentioned losses are temporarily suspended and not deductible.

 

First Year Bonus Depreciation

The bonus depreciation expense for property acquired and placed in service during 2016 has been extended through 2019. The amount of deprecation is 50 percent for cost of property placed in service during the year, in addition to regular deprecation.

 

Tax Tip: You may purchase any necessary business equipment before January 1, 2017 deduct 50% of the cost as deprecation expenses, plus regular depreciation based on life-expectancy of the qualifying equipment.

 

Section 179 Depreciation

Under IRC Section 179, now permanent and indexed for inflation, taxpayers other than an estates, or trusts, or certain non-corporate lessors, may elect to deduct as an expense up to $500,000, rather than to depreciate over life- expectancy of assets specified by the IRS, with $2,000,000 total assets limitation, and the maximum annual expense is reduced dollar-for-dollar in excess of $2,000,000. Therefore, taxpayers with assets purchase of $2,500,000 cannot use Section 179 anymore.  After December 31, 2015, both the $500,000 and $2,000,000 are indexed for annual inflation; Code Sec. 179(b) (6). are

 

Tax Tip: You may purchase any necessary business equipment before January 1, 2017 and use up to $500,000 for the year 2016. The deduction is limited to $25,000 for California. at real property

i mad 

Credit Card Charges

All charges made to your credit cards before January 1, 2017 to pay business expenses may be deducted as 2016 expenses, although the payments may be made in 2017. In addition, all checks written and dated in 2016, but cashed in 2017 regarding 2016 tax related item can be deducted as 2016 tax year expenses.

 

Tax Tip: You may consider taking advantage of this option in consultation with your tax adviser.  

 

Estimated Taxes

In most cases, you must pay estimated taxes for 2016 if both of the following apply.

 

a) You expect to owe at least $1,000 in tax for 2016, after subtracting your withholding and refundable credits.

b) You expect your withholding and refundable credits to be less than the smaller of:

90% of the tax to be shown on your 2016 tax return, or 100% of the tax shown on your 2013 tax returns;

 

Note. The above percentages may be different if you are a farmer, fisherman or higher income taxpayer.

 

Tax Tip. The purpose of making estimated tax payments is to avoid underpayment and late payment penalties and interest. The 2016 estimates taxes must take into consideration the following factors:

 

a) New 4.6% tax for the high earners;

b) New 0.9% Medicare tax; and,

c) New 3.8% NIIT explained above. 

 

In addition, preparation of quarterly financial statements for business would be instrumental in calculating accurate estimated taxes.

 

Gift Tax

The life-time gift exclusion is $5, 450,000. Any amount in excess of this threshold is taxed at 40%. The annual gift exclusion remains $14,000 per person per year.

 

Tax Tip:  The annual gift, including funding an Irrevocable Life Insurance Trust (ILIT) must be paid before January 1, 2017. Do not forget the “Crummey Powers”.

 

Inheritance Tax/Estate Tax and Planning

The life-time estate exclusion is $5,450,000. Any amount in excess of this threshold is taxed at 40 %. The estate portability, by which the surviving spouse may use the Deceased Spouse’s Unused Exclusion amount, is now permanent and available through an election made in a timely filed estate tax return for the decedent spouse.

 

Tax Tip:  Consult a estate planning attorney whether an A-B or QTIP trust is still suitable to you particular situation.

 

Foreign Gifts and Inheritances, IRS Form 3520

In you received gifts or inheritances in excess of $100,000 during 2016; make sure to report it on the form 3520 “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” to the IRS. This is due at the same time as your personal income tax returns but is mailed to a separate address.

 

Tax Tip:  

a) Failure to file this form timely, may subject you up to 25% to 35% (distribution from a foreign trust) penalty on the whole amount of gift or inheritance.

b) Any delinquent filing of the form 3520 should be based "reasonable cause" and in consultation with a tax counsel.

c) Actual or constructive receipt of gift cash or equivalent overseas, may subject you to FBAR filing.

 

 

Zaher Fallahi, CPA, Tax Attorney, assists taxpayers, Americans living abroad and non-resident aliens, in resolving their tax problems, including the Report of Foreign Bank and Financial Accounts (FBAR) and Offshore Voluntary Disclosure Program (OVDP). Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com

Zaher Fallahi, CPA; 2017 Standard Mileage Rates for Business, Medical and Moving Announced

posted Dec 13, 2016, 11:09 PM by Zaher Fallahi

WASHINGTON — The IRS today issued the 2017 optional standard mileage rates used to calculate the deductible costs of using an automobile for business, charitable, medical or moving purposes.  Effective January 1, 2017, the standard mileage rates for the use of vehicles (car, vans, pickups or panel trucks) will be as follows:

 

a) 53.5 cents per mile for business miles driven, down from 54 cents for 2016

b) 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016

c) 14 cents per mile driven in service of charitable organizations

 

The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains the same.  The standard mileage rate for business is based on an annual study of the fixed and variable costs of using an automobile. The rate for medical and moving purposes is based on the variable costs.

 

Taxpayers always have the option of calculating the actual costs of using their vehicle instead of using the standard mileage rates.

 

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for the vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. These and other requirements are described in  Rev. Proc. 2010-51Notice 2016-79, posted today on IRS.gov.

 

Zaher Fallahi, CPA, JD, has been rated top tax attorney. Telephones:  (310) 719-1040 (Los Angeles), ( 714) 546-4272 (Orange County) or e-mail taxattorney@zfcpa.com

Zaher Fallahi, CPA; Non-Taxable Income

posted Dec 11, 2016, 10:23 PM by Zaher Fallahi   [ updated Dec 12, 2016, 8:00 AM ]

A- Generally, the following are non-taxable income: 

 1- Child support payments.

2- Gifts.

3- Inheritances.

4- Welfare benefits.

5- Court awards or settlements received for personal injury or sickness are normally tax-free. However, 
    i) Punitive damages are generally taxable

   ii) Compensation for lost wages are usually taxable

  iii) Settlements/awards for emotional distress are usually taxable

 

Note: If your trial lawyer tells you that your settlements/awards are tax free, thank her or him for it, and ask to show you the following references regarding non-taxable amount:  

 

i) Particular tax code.

ii) Causes of action alleged in the complaint.

iii) Specific language used in the settlement agreement.

iv) Pertinent sections in the court decree.

 

This would avoid receiving a surprised and unpleasant taxable 1099 at the year-end. Every year, I assist tax clients who have won or settled a case, and were informed by their trial lawyers that their settlements/ awards were non-taxable. But, they receive a 1099 from the payors to the contrary.

B- On the other hand; income may be taxed in some situations, but not in others. 
1- Social Security benefits are usually tax-free, unless your income is above certain levels. Therefore, you pay tax on part of your benefits.     
2- Distribution from a traditional IRA is generally taxable. But money you take out of a Roth IRA is usually tax-free.

3- Some settlements/awards such as Emotional Distress and Punitive Damages may be partially taxable.

Remember, income such as wages, salaries, tips and bartering income are taxable. To learn more about taxable and nontaxable income, refer to the IRS Publication 525 from their website at IRS.gov.

 

Zaher Fallahi, CPA, JD, advises taxpayers and their attorneys on tax implication of settlements/awards. Telephones:  (310) 719-1040 (Los Angeles), ( 714) 546-4272 (Orange County) or e-mail taxattorney@zfcpa.com

 

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