Archive for February, 2012

Education Tax Credits

February 28, 2012

As you work on your tax returns for last year, here is some helpful information from the IRS on the education tax credits available. The American Opportunity Credit can be up to $2,500 per student for the first four years of college, and up to $1,000 of that is refundable (meaning, even if you don’t owe any tax, you can receive up to $1,000 in a refund).  The other credit is the Lifetime Learning Credit, which can be up to $2,000 per student per year, and as the name implies, is for an unlimited number of years os postsecondary education. The Lifetime Learning credit is not refundable.  

These credits are available to most people paying postsecondary tuition and fees for yourself, your spouse, or your dependent. Alternatively, a taxpayer can take a deduction for tuition and fees paid.

Remember as you go through tax season, the IRS website has helpful tips and tools for taxpayers, and a decent search feature if you are looking for specific information.


Good Work at the University of Iowa

February 24, 2012

There is some good work being done at the University of Iowa. No, I am not talking about the Hawkeye’s basketball victory over the Badgers on Thursday night, although I was happy to see it.  I am talking about the 13-week Elder Law Colloquium, “The Aging Population, Alzheimer’s and Other Dementias: Law & Public Policy,” sponsored by Professor Josephine Gittler and the National Health Law and Policy Resource Center at the University of  Iowa College of Law.

Professor Gittler is a national expert on many areas of health law and has for years been an advocate for children and health.  She has now lent her considerable scholarship and expertise to organizing this series. The colloquium will include the following topics:

  • Health Care and End of Life Surrogate Decision-Making
  • Legal Needs of the Aging Population and the Practice of Elder Law
  •  Legal and Clinical Approaches to Determination of Diminished Capacity
  • Elder Abuse and Neglect and Financial Exploitation of the Elderly
  • Long Term Care Financing and Family Caregiving
  • Governmental Regulation of Nursing Homes and Assisted Living Facilities

I was lucky enough to attend yesterday’s session on Financial Powers of Attorney.  The speaker was Linda S. Whitton, JD, Professor of Law at Valparaiso University School of Law.  Professor Whitton has been very instrumental in drafting a Uniform State Law governing financial powers of attorney.

That Uniform Act is a guide that states can use when looking to implement legislation to protects individuals from financial abuse, theft and fraud.  Iowa’s statute needs to be updated to provide more financial protection for individuals with diminished capacity.

Current Iowa law on powers of attorney, Iowa Code Chapter 633B, has a very limited scope.  It specifies that powers of attorney can continue to be effective after the principal’s disability (which was not the case before the statute was passed), provides protection for banks, other financial institutions and purchasers if they rely on the presence of a power of attorney to complete a transaction, and provides for notice of revocation of a power of attorney.  It does not specify authority an agent should or may be given, does not authorize any sort of mechanism to authorize an interested party to receive an accounting, or provide other protections to the principal and the principal’s estate of the power once the grantor is incapacitated.

About me:
My name is Margaret Van Houten and I practice in the areas of wills, trusts, estate planning and probate law, taxation, charitable organizations, and employee benefits.

If it’s too good to be true…

February 21, 2012

Joe Kristan, of the venerable Roth & Company P.C. Tax Update Blog, raises an important issue that all taxpayers should keep in mind. Joe reminds us to beware of promises of fast, dramatic tax relief. Whenever a notice of federal tax lien is filed with a county reporter, it becomes a public record. Companies such JK Harris, Integrated Debt, and First Class Tax Relief promise to reduce the tax debt that you owe. Many times these companies send official looking documents which contain threatening language unless you act immediately – by calling them, of course.

These companies promise pennies on the dollar savings for a small fee. These trade practices can be deceptive and many states are now cracking down. Joe points out two such companies that have been targets of state attorneys general. What they are promising is relief through a process known as an offer in compromise. The IRS may agree to settle your tax debt for less than the amount due if certain conditions are met. First and foremost is that your total net worth (including future earning capacity) is less than the amount owed. Thus, the vast majority of all offer in compromise claims are rejected. Even if you qualify under the net worth determinations, there are a plethora of other requirements that you will have to go through before an offer in compromise is approved. There are certain circumstances where an offer in compromise is warranted, but taxpayers should be cautioned against paying any money to an “offer in compromise mill” to handle their case.



Non-profit Organizations and Iowa Sales and Use Taxes

February 18, 2012

A common misconception persists among Iowa non-profits and vendors that all non-profits are exempt from sales tax on goods purchased on behalf of the non-profit. Most non-profits do, in fact, have to pay sales taxes on their purchases. Only specifically enumerated non-profits are fully exempt from sales taxes. However, nonprofit organizations typically do not have to collect tax on items that they sell so long as the proceeds go directly to the educational or non-profit purposes of the organization. It is always a good idea to review these rules if you are a non-profit operating in Iowa.

The following are the Iowa entities that are exempt from sales and use taxes:

  • American Red Cross.
  • Navy Relief Society.
  • U.S.O. (United Service Organizations).
  • Community health centers.
  • Migrant health centers.
  • Certain Residential care facilities and intermediate care facilities for the mentally ill.
  • Residential facilities for mentally retarded children.
  • Certain licensed residential facilities for child foster care.
  • Rehabilitation facilities which provide certain accredited rehabilitation services to persons with disabilities and qualified adult day care services.
  • Community mental health centers.
  • Sales of tangible personal property and services made to nonprofit hospitals and nonprofit hospices.
  • Statewide nonprofit organ procurement organizations.
  • Nonprofit legal aid organizations.
  • Nonprofit organizations organized solely for the purpose of lending property to the general public for nonprofit purposes.
  • Nonprofit private museums.
  • Governmental units, subdivisions, or instrumentalities of the federal government or of the state of Iowa.
  • Federal corporations created by the federal government which are exempt under federal law.
  • Private nonprofit educational institutions located in Iowa.
  • Private nonprofit art centers located in Iowa.
  • Habitat for Humanity in Iowa when purchasing building materials.
  • Toys for Tots when purchasing toys.
  • Community action agencies.

For non-profit organizations which are not found on the preceding list, Iowa Code § 423.3(78)(2011) exempts the sales price of sales of tangible personal property if the profits from the sale are used for educational, religious, and charitable purposes. Organizations should be aware that this is a separate test from the IRS requirements for exempt status under IRC §501(c)(3).  Iowa Administrative Rule 701-17.1 defines the terms, “educational, religious, and charitable”. Exemption as a religious organization is fairly straight-forward and most churches, synagogues, or mosques should qualify. Educational is defined as “the acquisition of knowledge tending to develop and train the individual. An activity that has as its primary purpose to educate by teaching.” Charitable is defined, “the term ‘charitable ‘may be applied to almost anything that tends to promote well-doing and well-being for public good or public welfare with no pecuniary profit to the one performing the service…”.  In short, it is a good idea to review these rules prior to claiming an exemption.

The IDR has a good website for non-profits that covers these issues in some depth. The exemption for non-profit sales requires that the net proceeds go towards the charitable activity. However, if not all of the proceeds go towards charitable activities, then the exemption is prorated, not denied. The website referred to above, gives the following illustration:

A local organization (not a 501(c)(3)) has a fundraiser and collects $10,000 in net proceeds. The organization gives $9,000 to a local nonprofit homeless shelter and uses $1,000 to pay guest speakers at its meetings. The organization does not pay sales tax on the $9,000 given for a charitable activity, but must pay sales tax on the $1,000 it retained for its own use.

The term net proceeds means the gross revenue less the costs of operating and holding the event. Unfortunately, non-profit sales tax issues can get complicated in a hurry. Notice in the above example, the organization was likely not a qualifying non-profit for sales tax purposes. However, it qualified for the exemption because the organization expended the proceeds for charitable purposes. If the organization were exempt under Iowa sales tax law, the speaker fees could also be considered exempt net proceeds because the speakers would be furthering the charitable or educational purposes. It is important to look at who the entity is that is claiming the exemption.

Other examples given include a food vendor at a little league game where the proceeds of the vendor go back into the little league for uniforms. That example is determined to be an exempt activity for sales tax purposes so long as the little league organization is a IRC § 501(c)(3) charity. Certain local theaters, civic centers, and similar entities can also claim an exemption for the sales prices of the ticket sales to their events, provided that the entity sponsoring the event is an exempt organization and the event furthers the charitable or educational purposes.

Operationally, it is important to keep track of the proceeds that are gathered from exempt events. If the organization provides any benefits (other than reasonable compensation) to its volunteers and members, the Department has taken the position that the organization must remit sales tax on the amount spent for these benefits. The Department provides a simple example of a charity that raised $10,000.00 but spent $1,000.00 on a pizza party for those that helped with the event and its members. The Department takes the position that those proceeds are not spent in furtherance of the exempt purposes and the organization must pay sales tax on the $1,000.00. Thus, it is a good idea to segregate unrestricted donations from proceeds raised through fundraising and event activities. If a pizza party is desired, then the donated funds can be used for those purposes from a separate account without triggering a sales tax liability.

To summarize, only a select few non-profits in Iowa can claim an exemption for purchases for their organization. Most, however, can claim a sales tax exemption for their fundraising and event activities – keeping in mind that the proceeds must be spent in furtherance of the exempt purpose.

Developing Issues for Tax Professionals – A question that is being considered by tax professionals and the Department at the moment is just how the “net proceeds” concept is to be applied in practice. As we know, the vendor is responsible for the collection of sales taxes from the consumer at the time the sale is completed. Thus, the following question is necessarily raised – if the exemption is applied on the back-end of the transaction (determining the net proceeds requires analysis after the sale takes place), then how is the tax to be collected on the front end of the transaction? In practice, most non-profit organizations simply remit the tax on the for-profit proceeds without consideration as to how it was collected. This raises a number of issues as to how you would itemize a receipt or disclose to those purchasing the item that sales taxes are being collected. The Department has yet to provide guidance on this issue, but as charities provide more and more complex services and goods, this is becoming an issue that will have to be dealt with and developed. We will post any guidance that we receive on this issue in the future.

Reasons You Need a Will

February 10, 2012

Wills do more than just distribute property. A will lets you decide who gets what assets, and also who should take care of your minor children.  Without a will, the state will decide who gets what without consideration of your wishes, or the needs or wishes of the family and friends you leave behind. Here are some of the top reasons to have a will:

1.  Appoint a Guardian for Minor Children

If you have minor children, a will lets you appoint a guardian to take care of your minor children. If parents don’t have a will, the court will likely choose among family members, but don’t you have a preference? By making the decision in a will, you can be assured it’s the person you want to raise your children (or make sure it isn’t someone you don’t want) and you can likely save some family arguments.

2.  Delay Distributions for Minor Children

By state law, any money transferred to a child under age 18 or 21 (depending on the state) must be held by the courts until the child reaches 18 or 21. Then, the child gets the lump sum, free and clear. Would you have wisely spent a lump sum of money at age 18 or even 21? Probably not. A will lets you delay when your children receive that distribution or divide the distribution over a few years.

3.  Appoint an Executor

An executor is in charge of winding up all of your affairs. He or she makes sure all the bills are paid, cancels your credit cards, notifies banks, and terminates any leases. Your executor will also be in charge of finding and distributing all your assets.   This is a good time to make a list of assets you own that others might not know about. Do your children know where all of your retirement accounts are held? Do your parents know where you have bank accounts? That information isn’t necessarily in the will, but can be on a list stored with the will.

4.  Distribute Personal Property

A will controls more than just the house and the car, it can control who gets your Grandmother’s heirloom jewelry and your Grandfather’s stamp collection. Make sure these things go to the relatives that will treasure the items most by putting it in your will. Avoid the “mom would have wanted me to have it” arguments.

5.  Address Non-Traditional Families

State intestate laws are old and typically don’t address non-traditional family situations such as second marriages, stepchildren, children from a prior marriage, or unmarried significant others.  To make sure those people are taken care of, you need a will.

6. Provide for Certain Family Members

You may have certain family members or friends who need more of your support, or certain close relatives you want to exclude. Making a will ensures your property goes to the family and friends you want.

7.  Minimize Estate Taxes

Depending on the size of your estate, a will can be designed to minimize estate taxes. While all property passing to a spouse is tax-free, when the second spouse dies all the property (both husband’s and wife’s) could be subject to tax if over the exemption amount. In 2012, the estate tax exemption is $5.12 million.  Hard to say what the exemption amount will be in future years, but in 2013 it could drop to $1 million. Two people can quickly get to $1 million in assets with a house, cars, retirement accounts, etc.

8.  Support Charities

If you have provided support for a certain charity during your life, you may want that support to continue after your death also. Even if your family members agree to create a memorial fund in your honor, designating a charity or charities in your will ensures the funds go where you want, not where your family wants.

9.  Powers of Attorney

Technically a power of attorney is a separate document from a will, but they really go hand-in-hand, and if you are making a will, you might as well get powers of attorney too. By granting someone power of attorney, you are giving them permission to make certain decisions for you when you are incapable. (That person is your “agent.”) Who will pay your mortgage and electric bills? If you run a business by yourself, how will the bills get paid if you can’t sign the checks? The documents can be worded so your agent can only make decisions when you are medically incapable. Without powers of attorney, a court has to step in to appoint someone to make decisions. That takes time and legal fees. Plus, healthcare and financial decisions can be very personal, don’t  you prefer to pick who makes those decisions for you?

10.  Peace of Mind

Finally, having a will saves everyone a little stress. Not just you, but also the family and friends you leave behind. Having a will ensures your wishes are carried out, the family and friends who depend on you are cared for, and your family won’t have to piece together all the details after you are gone.

Drafting a will isn’t nearly as burdensome or painful as everyone makes it out to be. The sooner you do it, the easier it will be. This list likely has you thinking about some of the most important decisions. Why not do it now?

Are Frequent Flyer Miles Taxable Income?

February 2, 2012

Citibank is treating certain frequent flyer miles as taxable income, and they are sending IRS Form 1099 to customers who were given miles in exchange for opening bank accounts.  (1099s report income other than wages to the IRS.) Now, don’t panic, not all frequent flyer miles are taxable.  In fact, the IRS issued a policy announcement in 2002 regarding frequent flyer miles stating “[t]here are numerous technical and administrative issues relating to these benefits,” including issues of timing and valuation, and as a result of the unresolved issues, “the IRS has not pursued a tax enforcement program.” 

How is the Citibank situation different?  Frequent flyer miles and cash back on credit cards have historically been treated as rebates on spending which are not taxed as income. That is likely the type of miles the IRS announcement was referring to. Citibank takes the position that the miles they are taxing are different, the miles were given as a reward/prize for opening a bank account, not as a rebate on spending, and therefore the miles are taxable. (The IRS said earlier this year taxpayers must pay income tax on prizes greater than $600.) However, one news agency refers to a statement by IRS representatives that the 2002 announcement focused on a specific area and does not address the issue Citibank faces.  The IRS has not released an official statement on this issue.  This may be the beginning of a debate whether these particular frequent flyer miles are taxable.  United States Senator Sherrod Brown of Ohio wrote a letter earlier this week that is receiving a lot of attention, urging Citibank to stop treating the miles as income.

Bottom Line: The only certainty at this point is if you received a Form 1099 from Citibank, the IRS sees those miles as income to you.

New Online Tool for Individuals that Received the First Time Homebuyer Credit

February 2, 2012

The First Time Homebuyer Credit is a credit which reduced a taxpayer’s tax bill (or increased his or her refund) if he or she purchased a new home between certain time periods.  This credit was one of the incentives used by Congress to try to help the real estate market by giving an incentive to certain individuals to purchase a home.

Were you aware that you may have a repayment obligation for receiving the First Time Homebuyer Credit?  If you claimed the credit for a house you purchased in 2008 (applicable for homes purchased after April 8, 2008 and before January 1, 2009), the credit was really a 0% loan and was to be repaid in 15 equal annual installments beginning in 2010 as an additional “tax” on the tax return (shown on line 59b of the 1040).  The credit was extended for a few additional years and if you took the credit during 2009 or 2010 (and even for part of 2011 for military personnel) you do not have a repayment obligation unless the home you purchased is no longer considered your home (meaning that you sold it, it was destroyed or it was converted into a business or rental property) within three years from the date of purchase.

The IRS has a new tool on its website that allows individuals who received the First Time Homebuyer Credit to determine his or her repayment obligation.  In order to access the information you will need your Social Security Number, date of birth and complete address.  The website will show the original amount of the credit, the annual repayment amounts, total amount paid and the total balance left to be paid.  The IRS will no longer be mailing reminder letters to individuals that have to repay the credit and this will be the only way to access the information.

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