In Notice 2014-29, April 14, 2014, http://www.irs.gov/pub/irs-drop/n-14-29.pdf
, the Internal Revenue Service has provided adjustments to the limits on excludable foreign housing costs for a large number of high-cost foreign locations.
U.S. workers stationed overseas remain taxable in the U.S. on all income received, whether it comes from the U.S. or a foreign country. However, if certain conditions are satisfied section 911 of the Internal Revenue Code allows those workers an election to exclude from their U.S. income some of their "foreign earned income," and some of their reimbursed expenses for foreign housing.
To qualify for the foreign earned income exclusion (section 911(a)(1)) and the foreign housing exclusion (section 911(a)(2)) the worker must have income received for working in a foreign country, have a tax home in a foreign country, and meet a bona fide residence or physical presence test in that country.
Assuming that those requirements are met, the law also limits the amount of income excludable, and the amount of the excludable housing expense. Those limits are indexed for inflation. For 2014, the amount of foreign earned income that is excludable is $99,200.
Prior to 2006, the housing exclusion was unlimited to the extent it exceeded a base amount. The base amount was 16% of the salary of a federal employee at salary grade GS-14, step 1, or about $12,500 in 2005. So, if housing costs were $40,000 in 2005, then $27,500 would generally have been excludable (the amount by which actual costs exceeded the base amount).
However, the 2006 law amended these provisions to change the calculation of the base amount, and to limit the maximum amount of the exclusion. The new law changed the calculation of the base to 16% of the foreign earned income exclusion amount. For 2014, that is $15,872 ($99,200 x .16). The new law then imposed a maximum on the costs that may be taken into account in computing the exclusion. The maximum is 30% of the earned income exclusion, or $29,760 for 2014 ($99,200 x .30). The result is that in general the maximum housing exclusion for any location is $13,888 for 2014 ($29,760 minus $15,872).
The new law, however, also gave the Treasury Department the authority to provide higher maximum housing cost limits for areas in which it determined housing costs to be high. IRS has regularly exercised that authority in a series of publications, of which Notice 2014-29 is the latest.
The Notice provides a lengthy table of foreign locations, and replaces the $29,760 general limitation with one specific to the locale. Beginning with Luanda, Angola at $84,000, and ending with Ho Chi Minh City in Vietnam at $42,000, the table visits nearly every country in the world, and should always be consulted by Worldwide ERC® members calculating the foreign housing exclusion. A few highlights: Hong Kong remains the highest cost city at $114,300, followed, as usual, by Moscow at 108,000, Geneva at 100,800, and Tokyo at 96,000. European capitals such as Paris and London remain in the high-cost group as well, at $86,000 and $88,700, respectively.
Finally, as it did last year, the IRS provides a welcome option for taxpayers in locations where housing costs are higher in Notice 2014-29 than they were in Notice for 2013-31 applicable to 2013. If the taxpayer resided in one of those locations in 2013, he or she is allowed to use the higher 2014 amount in calculating the 2013 exclusion.
Posted by Peter K. Scott
The enactment of comprehensive immigration reform legislation would have a direct and profound impact on the workforce mobility industry as more high-skilled foreign workers would gain entry into the U.S. Immigration reform would have a significant impact on another key component of our industry– real estate. Approximately 11 million undocumented immigrations currently reside in the U.S. According to estimates by the National Association of Hispanic Real Estate Professionals, 3 million of those 11 million individuals would likely purchase homes if they were given a path to citizenship driving $500 billion in real estate transactions and $233 billion in related commissions, fees and consumer spending. However, while Congress has never been closer to passing comprehensive immigration reform, it is still unlikely legislation will be enacted this year.
In June of 2013, the Senate passed the Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 (S.744). The “Gang of Eight” comprised of Senators Charles Schumer (D-NY), Michael Bennett (D-CO), Dick Durbin (D-IL), Jeff Flake (R-AZ), Lindsey Graham (R-SC), John McCain (R-AZ), Robert Menendez (D-NJ) and Marco Rubio (R-FL) developed the bipartisan comprehensive immigration reform proposal. The primary provision of the proposal is a path to citizenship for those undocumented immigrants currently residing in the United States. The bill also would reduce the employment-based green card backlog and increase the number of high skilled employment-based visas.
Under S. 744, family members of foreign workers with green cards would no longer be counted toward the annual limit on green cards. Thereby freeing tens of thousands of green cards to other foreign workers and subsequently their families. The number of H-1B visas available each year to high skilled foreign workers would increase from a current base of 65,000 to 115,000, and possibly as high as 180,000 in the first year and higher in subsequent years if the limit is exceeded.
With a large block of House Republicans against a path to citizenship, the House Republican leadership has chosen to not move a comprehensive proposal but instead several smaller bills on the respective aspects of immigration reform. Last June, the House Committee on Judiciary passed the SKILLS Visa Act (H.R. 2131) which would increase the number of H-1B visas available each year to high skilled foreign workers to 155,000 and increase the separate cap for advanced degree visas to 40,000. The bill would also allow 25,000 green cards for family members of foreign workers.
Under H.R. 2131, the individual country cap for green cards would also be eliminated. Up to 55,000 green cards would be allocated for foreign graduates of U.S. universities and colleges in the field of STEM or Science, Technology, Engineering and Mathematics. Finally, the bill would allocate 10,000 entrepreneur green cards and make changes to the investor visa program among other changes to visa programs.
The increases under S. 744 or H.R. 2131 in the number of foreign employees entering the U.S. alone would result in more demand for housing. Both rentals for those transferred to the U.S. on a temporary basis and ownership by those coming to the U.S. or are already in the country who would stay longer and be more willing to actually purchase a home. However, the largest impact on home sales would not be from high-skilled foreign workers but the more controversial provision of providing amnesty to millions of undocumented immigrants already living in the U.S.
According to the Pew Hispanic Center, as of March 2010 there were 11.2 million undocumented immigrants living in the U.S. Of these 11.2 million individuals, the National Association of Hispanic Real Estate Professionals (NAHREP) estimates that 6 million undocumented immigrants would seek a pathway to citizenship under S. 744. Using past housing purchase trends of immigrants, NAHREP approximates that as many as 3 million would pursue home ownership once they have achieved legal status. Based on household incomes of $40,000 and the national home median sales price of $173,600, NAHREP calculates the possibility of an additional $500 billion in new mortgages. They also estimate $25 billion in mortgage origination and refinance income, $28 billion in real estate commissions, and $180 billion in additional consumer spending relating to the purchase of a new home and initial home ownership. These estimates are over a five-year period following a path to citizenship being in place. To access more information from NAHREP, go to: http://nahrep.org/immigration-reform
The NAHREP analysis was focused on the potential impact of immigration reform on home sales. The housing focus of the Bipartisan Policy Center (BPC) report was on new housing construction resulting from immigration reform. The October 2013 report by the BPC entitled “Immigration Reform: Implications for Growth, Budget and Housing” determined that the increase in demand for homes would spur spending on new residential construction at an average of $68 billion per year over the next twenty years. The BPC report did not estimate the additional amount generated from mortgages, fees, commissions are related spending from the new construction. To access a copy of the BPC report, go to: http://bipartisanpolicy.org/sites/default/files/BPC_Immigration_Economic_Impact.pdf
While the NAHREP and BPC estimates make several assumptions and the actual impact on housing from enactment of immigration reform could be much lower, nearly all economists concur that reform would result in a significant boost to the recovering real industry. The much less certain question is whether Congress will act on comprehensive reform before the end of this congressional session. The House has not made significant progress on any pieces of its reform package since last summer and statements by House Republican leaders suggest no further action will be taken before this summer. If Congress does not act by the end of this year, new legislation will need to be filed and the process to passage will have to begin over again.
Reversing a decision in late 2012 from the 6th Circuit Court of Federal Appeals and resolving a dispute that has been litigated in a number of courts over the last several years, on March 25 the U.S. Supreme Court ruled 8-0 that severance payments made to involuntarily terminated employees are subject to payroll taxes. United States v. Quality Stores Inc., Case # 12-1408, http://www.justice.gov/osg/briefs/2012/2pet/7pet/2012-1408.pet.aa.pdf
The issue is whether severance payments to employees are subject to FICA tax. The payments are clearly wages for purposes of income tax withholding, but a long series of confusing IRS rulings and legislative changes going all the way back to the 1950’s led to litigation as to whether so-called “supplemental unemployment compensation benefits” (SUB) are taxable under FICA.
Beginning in 2002, the United States Court of Federal Claims held in a series of three comprehensive opinions concerning various severance payment plans maintained by CSX Corporation that many of the payments were not subject to FICA. See, 52 Fed Cl. 208 (2002); 58 Fed. Cl. 341 (2003); 71 Fed Cl. 630 (2006).
As a result, many other companies filed claims for refund of FICA paid on wages to laid-off or terminated employees. However, the government appealed these decisions to the Court of Appeals for the Federal Circuit, and did not act on claims for refund pending that decision. The latter court reversed the Claims Court in an opinion issued March 8, 2008, holding that the payments in question are subject to FICA. CSX Corporation v. United States, 518 F.2d. 1328 (F. Cir. 2008). http://scholar.google.com/scholar_case?case=4414885152114764008&q=CSX+Corporation
+v.+United+States&hl=en&as_sdt=80000000000002&as_vis=1. Consequently, the IRS began disallowing claims.
However, an opinion from a different court cast doubt on the government’s win in CSX. In United States v. Quality Stores, No. 1:09-cv-00044 (Dist. Ct. for the Western District of Michigan, Feb. 23, 2010), the court disagreed with the Appeals Court in CSX, holding that severance payments are not subject to FICA. Worldwide ERC® reported this development in its Tax & Legal Update for July/August of 2010, and suggested member companies might want to consider filing protective claims for refund.
The government subsequently appealed the Quality Stores case to the United States Court of Appeals for the 6th Circuit, and on September 7, 2012, the 6th Circuit rejected the government’s arguments, holding that the payments in question are not “wages” for purposes of FICA. For Unites States v. Quality Stores, Inc., No. 10-1563 (6th Cir., Sep 7, 2012), go to http://www.ca6.uscourts.gov/opinions.pdf/12a0313p-06.pdf
The government filed a petition requesting Supreme Court review in October of 2013, resulting in the March 25 Supreme Court decision. The Supreme Court concluded that FICA’s broad definition of wages as “remuneration for employment” included severance payments such as the ones in Quality Stores, and that such payments could not be lumped in with nontaxable (SUB) payments.
As a result, IRS will now disallow all claims for refund previously filed.
Many Worldwide ERC® member companies that had significant layoffs or downsizing during the economic downturn filed protective claims in case the courts ultimately hold that severance payments are not subject to FICA. However, the issue has now been conclusively resolved in favor of the IRS position, and such claims will not be allowed.
Posted by Peter K. Scott
House Ways & Means Chairman Dave Camp (R. Mich.) released a long-anticipated draft of a comprehensive Tax Reform plan on Wednesday afternoon, February 26. The enormous document tackles the entire tax code, with a myriad of proposed changes to a wide range of provisions. The stated goal is to simplify the Code by eliminating or reformulating numerous deductions, exclusions, and other tax breaks while reducing tax rates for most taxpayers.
Unfortunately, the draft proposes changes that would negatively affect the Mobility industry.
The moving expense deduction would be eliminated entirely. Although the draft does not provide any analysis of the reason, it claims the repeal would raise some $8 billion over the ten years from 2014-2023.
The mortgage interest deduction would be retained, but further limited. The current $1 million limitation on mortgage debt would be reduced to $500,000, but phased in over a four year period beginning with debt incurred in 2015. Interest on debt incurred prior to the reductions would continue to be deductible. Home equity indebtedness incurred after 2014 would no longer be deductible at all. The proposal also retains the ability to deduct mortgage interest on up to two homes, and specifies that debt that is refinanced after the new rules go into effect will remain subject to the old ones. The reporting provisions for mortgage interest would also be stiffened.
The exclusion for capital gain on sale of a principal residence would also be retained, but significantly restricted. Currently, the taxpayer must own and use the home as the principal residence for two of the five years preceding its sale, and may use the exclusion once every two years. The proposal would require the taxpayer to own and use the home as the principal residence for five of the eight years preceding sale. The provision could only be used once every five years. In addition, the exclusion would be phased out for taxpayers whose income exceeded $500,000 ($250,000 single), and eliminated once income hit $1 million. The extension of the time period is intended to prevent “speculators and so-called ‘flippers’” from benefiting from the exclusion, but there is no apparent appreciation of the effect this would have on employees who are relocated and cannot meet the 5-year rule.
The deduction for state and local taxes would be limited to taxes incurred in carrying on a trade or business or producing income. Consequently, most deductions of such taxes would be eliminated for transferees.
Charitable deductions would also be restricted. Under the proposal, deductions would be permitted only to the extent they exceeded 2% of the individual’s Adjusted Gross Income, and the value of contributions of property would be limited to the property’s adjusted basis rather than fair market value.
The over-riding rationale for many of these limitations (of which the foregoing is merely a small sample) is that tax rates would be reduced to three brackets (10%, 25%, and 35%), with the vast majority of taxpayers falling into the 10% and 25% brackets. The Standard Deduction would then be greatly increased (from $12,200 to $22,000 for joint filers, and from $6,100 to $11,000 for singles), so that according to Mr. Camps estimates only about 5% of taxpayers would need to itemize deductions, most of whom would be high-income filers.
The proposal also contains literally hundreds of other provisions, most of them affecting business taxes. Many, many “loopholes” (at least in the view of Mr. Camp) would be eliminated, again in trade for lower tax rates.
Worldwide ERC® and the American Moving and Storage Association (AMSA) have been preparing for some years to defend the moving expense deduction, and will now move forward to do so.
However, it is worth noting that even Mr. Camp does not expect any action in Congress on his proposals this year. The draft is intended to provoke discussion and debate leading to eventual tax reform that may yet be years away.
Posted by Peter K. Scott
Two more Federal Courts of Appeal have ruled that Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency, are not liable for state or local transfer taxes on foreclosed properties sold to buyers. Appeals courts in both the Fourth and Eighth Circuits have joined the Appeals Court for the Sixth Circuit in holding that when Congress specifically exempted Fannie and Freddie from “all taxation” in their charters, it logically included excise taxes such as real estate transfer taxes.
The Sixth Circuit decision, County of Oakland v. Federal Housing Finance Agency
, was filed May 20, 2013, and reversed the only lower court decision so far to have held the agencies liable for the taxes. That case was reported on in the Worldwide ERC® Tax & Legal Update for May/June, 2013.
Since then, two more circuit courts have weighed in.
In Montgomery County, Maryland v. Federal National Mortgage Association, Nos. 13-1691 and 13-1752 (January 27, 2014), the Fourth Circuit Federal Court of Appeals held that counties in Maryland and South Carolina may not collect transfer taxes from the housing entities because Congress specifically exempted them in their enabling legislation. It also held that Congress did not violate the Commerce Clause of the Constitution by exempting the agencies from local taxes, nor did it otherwise stray from Constitutionality. Click here for the decision.
Similarly, in Hennepin County v. Federal National Mortgage Association, No. 13-1821 (February 5, 2014), the Eighth Circuit Federal Court of Appeals also held the federal entities exempt from transfer taxes in Minnesota. Click here for the decision.
Although some of the losing Counties have said they would seek Supreme Court review, at this point it is doubtful that the Supreme Court would accept Certiorari. Ordinarily, that Court does not accept cases unless the issue is of paramount importance, or there is a conflict among the Circuit Courts of Appeal. Here, no conflict has developed, and three Circuits have ruled decisively that no taxes are owed. Consequently, unless another Circuit disagrees, it likely that the issue, which could have cost the federal government billions of dollars, has been decided.
This is good news for the Mobility industry. Continuing doubt over whether taxes were owed on purchases from Fannie, Freddie, or FHFA could have slowed such transactions, or cast lingering doubt on the title for such properties if the states successfully asserted that taxes were unpaid.
Posted by Peter K. Scott
Some states have enacted laws to prevent lenders from holding borrowers liable for a deficiency in various circumstances involving foreclosures or short sales. Recent IRS advice to California confirms that those laws, in general, should be effective to qualify the loans as non-recourse, which in turn would mean that those borrowers would not have cancellation of indebtedness income. This could be important if the federal law exempting most short sales of principal residences from debt cancellation income, which expired at the end of 2013, is not extended.
The Full Story:
Today’s tax quote: “A bank is a place that will lend you money if you can prove that you don’t need it.” Anonymous.
However, banks invariably insist on repayment, even if a mortgage debtor cannot scrape up the money. In such cases, the lender and the borrower may agree on a short sale of the property, that is, a sale for less than the amount owed. Generally, the lender will then agree not to pursue the borrower for the unpaid mortgage amount. The tax consequences of that relief from indebtedness, however, will vary depending upon whether the loan was “recourse” or “non-recourse.” A debt is recourse if the debtor is personally liable and can be pursued for any losses. It is non-recourse if the lender’s only source of recovering the unpaid debt is to take and sell the property itself.
Relief from debt is taxable under section 61(a)(12) of the Internal Revenue Code. This is usually referred to as “cancellation of debt” or “discharge of indebtedness” income, and it is taxable whether debt relief is full or only partial, unless the debtor is in bankruptcy or insolvent.
However, if the debt is nonrecourse, there is no cancellation of debt income. Rather, the debt is taken into account as proceeds of the sale. Consequently, regardless of the value of the property the proceeds of sale consist of the entire debt plus any actual cash retained by the borrower. If that amount exceeds the borrower’s basis in the property, there is a taxable gain, but no cancellation of debt income.
Assume a short sale of a principal residence for $250,000, with $300,000 debt. If the debt is nonrecourse the proceeds of sale are deemed to be $300,000, rather than the $250,000 actually received. If basis was less than $300,000 there will a potentially taxable gain. But even if there is a gain, up to $250,000 ($500,000 for married joint filers) may be excludable from income under section 121 of the Code if the home was owned and used as the taxpayer’s principal residence for two or the five years preceding the disposition and the gain was not attributable to depreciation claimed since 1997.
If the loan is recourse, the tax law divides the disposition transaction into two parts; a sale, and a cancellation of indebtedness. The amount realized on the sale part of the transaction does not include the debt to the extent the debt exceeds the fair market value of the property. Rather, the excess of debt over fair market value is cancellation of debt income, reportable as ordinary income, and not capital gain.
To illustrate the computation involved, assume the same facts discussed earlier; a short sale of a home for $250,000 that is burdened with $300,000 of debt. If the debt is recourse, and $50,000 of excess debt is written off as part of the transaction, the borrower has $50,000 of debt cancellation income. That is, proceeds of the sale are $250,000, with cancellation of debt income in the amount of $50,000. There may also be taxable gain if the taxpayer’s basis is less than $250,000, with the same result discussed above.
Federal law since 2007 has provided an exclusion for debt cancellation income on a disposition of the taxpayer’s principal residence, up to $2 million of debt incurred to acquire the property, but that provision was only extended through 2013, and will not be available for debt cancelled in 2014 unless Congress acts to extend it again. Moreover, the provision does not cover debt such as home equity loans or cash-out refinancings.
As a result, the question of whether a debt is recourse or non-recourse is of considerable importance.
Most mortgages are recourse. That is, the lender can pursue the borrower for any unpaid deficit unless the lender explicitly agrees not to do so. However, some states have enacted “anti-deficiency” statutes which forbid the lender from pursuing the borrower under various circumstances even if the loan was recourse on its face. It has never been clear whether the IRS would treat such provisions as turning the loan into a non-recourse loan for purposes of federal taxation.
California has had anti-deficiency laws for some time, and expanded them during the mortgage crisis. In 2010, the California State Legislature added section 580e to the Code, and expanded it in July of 2011. Under that section, a lender is prohibited from pursuing a deficiency on any debt (first or second mortgage, home equity line, etc.) disposed of in a short sale approved by the lender.
Senator Boxer of California inquired of the IRS whether the effect of that law was to make such debts non-recourse for purposes of federal tax on cancellation of debt. In a letter late in 2013, the IRS responded that it was. That is, California debts subject to section 580e (and by implication, other portions of section 580 that ban deficiencies in other circumstances) will be treated as non-recourse for purposes of avoiding cancellation of debt income under the Internal Revenue Code.
Although the IRS was careful to hedge its advice by limiting it to California law, it is difficult to see why it would not apply to anti-deficiency laws in other states to the extent that they in fact bar deficiency proceedings on a particular debt.
Consequently, in both short sales and other proceedings in which a lender takes over the home (for example, a foreclosure or a deed in lieu of foreclosure) taxpayers should ascertain whether there is a state law that would prevent the lender from pursuing them individually. If so, the application of the now-expired federal exclusion will not be necessary to avoid ordinary cancellation of debt income, and cancellation income may also be avoided even if the debt included a second trust or home equity line if the state law, as in California, precluded a deficiency.
Posted by Peter K. Scott
States that follow or incorporate the federal tax system, but in which same-sex marriage is not recognized, have been required to provide guidance as to how same-sex couples who are now permitted to file joint federal tax returns should file for state purposes. All have now done so, and the great majority has opted to continue to require such couples to file as single. Those decisions will have consequences not only for the couples in question, but for the gross-up and benefits decisions of their employers. This Mobility LawBlog entry provides the details.
The Full Story:
Today’s tax quote: “Nothing makes a man and wife feel closer, these days, than a joint tax return.” Gil Stern
As the filing season for 2013 tax returns ramps up, Mr. Stern’s observation for the first time applies to married couples of the same sex. But state rules discussed below will, in most cases, confine the joy to federal returns.
After the Supreme Court’s decision in the Windsor case in 2013, holding that the federal Defense of Marriage Act (DOMA) is unconstitutional in denying federal benefits to same sex married couples, it was left to IRS and Treasury to resolve a number of issues concerning the application of federal tax law to such couples. In a related series of rulings and announcements on August 29, 2013, they did so. See IR-2013-72 ; Frequently Asked Questions for same sex married couples ; and Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions. For more on that guidance, see the Mobility LawBlog post from August 30, 2013
. In brief, that guidance says that same-sex married couples can file joint federal tax returns regardless of where they live if they are legally married in a state that recognizes same-sex marriage.
However, it was unclear what the states that do not recognize same-sex marriage but follow federal tax law in their own system would do. Currently, 17 states and the District of Columbia recognize same sex marriage, and no guidance as to state filing is necessary. There are 22 states, however, that follow the federal tax code in general, but ban same sex marriage. In those states, the state tax authority has had to decide how same sex couples who filed joint federal tax returns should proceed for state tax purposes.
This is more complicated than it might appear, since those couples have not calculated taxes for federal purposes based on each individual’s income. If the state requires them to file as single, there is no federal income tax return from which to import data. In general, such states have followed one of three approaches: (1) taxpayers allocate income to two single returns using a state-provided schedule (5 states); (2) taxpayers must complete “pro forma” federal tax returns as single and use that information for state filing purposes (12 states); (3) taxpayers apportion income between two single returns using a state provided ratio (Alabama).
All 22 states have by now decided how to proceed, and as discussed above, the majority has opined that even though same-sex couples may now file joint federal tax returns if they are legally married in any state that recognizes such marriages regardless of their state of residence, they must continue to file as single at the state level.
Based on the most recent available information, here is the line-up of the states:
1. States that do not recognize same-sex marriage in which such couples must file as single:
Alabama, Arizona, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Montana, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Virginia, West Virginia, and Wisconsin.
Arkansas, Mississippi, and Pennsylvania ban same sex marriage, but do not base their calculations on the federal system, and as a result same sex couples there also would continue to file as single.
2. States in which same-sex couples may file joint returns:
Colorado, Missouri, and Oregon do not currently recognize same-sex marriage, but have announced that same-sex married couples who file jointly for federal purposes may do so for state purposes as well. Utah is embroiled in litigation over the constitutionality of the state’s same sex marriage ban, which has preliminarily been held unconstitutional, and has therefore announced that for 2013 same sex couples may file joint Utah returns.
Other states in which joint filing is permitted include California, Connecticut, Delaware, DC, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, and Vermont.
For Worldwide ERC® members, the decisions at the state level may affect not only gross-up calculations for these employees, but also the taxability for state purposes of benefits made available to spouses of employees married to a person of the same sex. (Note that the IRS recently published guidance on the treatment for federal tax purposes of benefits under so-called “cafeteria plans” under section 125, including flexible spending arrangements, and health savings accounts under section 223. That guidance can be found at http://www.irs.gov/irb/2014-2_IRB/ar13.html
.) Consequently, human resources functions for relocation, benefits, and payroll will need to take them into account.
Posted by Peter K. Scott
Today’s tax quote: “If the Lord had meant us to pay income taxes, He’d have made us smart enough to prepare the return.” Kirk Kirkpatrick
In the interest of assisting more transferees to prepare “smart” returns, here are Worldwide ERC®’s annual tax season filing tips for transferees.
Here are several items deductible as moving expenses that are sometimes overlooked:
- Tips to the moving van driver or helpers.
- Mileage for driving second or third cars to the new location (in addition to the first car). The deduction for 2013 is 24 cents per mile. (The deduction will decrease to 23.5 cents per mile for 2014).
- Lodging expenses in the departure location for one night after the household goods are packed, and one night in the new location on the day of arrival.
- Moving household goods from a location other than your main home, up to what it would have cost to move them from the main home
- Storage of household goods for up to 30 days, including the cost of moving the goods into and out of storage. Note that the costs for moving the goods into and out of storage remain deductible even if the goods are in storage more than 30 days.
- Expenses not reimbursed by your employer, such as extra crating, shipment of unusual items, tips to van line staff, etc.
And remember: You don’t have to itemize to deduct moving expenses.
Other filing season tips:
- If the seller of your new house agreed to pay part of your mortgage points instead of reducing the sales price, IRS says you can deduct those points, even though the seller paid them.
- If you ever refinanced your mortgage, don’t forget to deduct the entire remaining balance of points paid on the refinancing in the year you sell your home.
- If your new job is for a different employer, and you earned more than $113,700 in 2013, you may have had too much deducted as contributions to Social Security. You can take a credit for the excess over $7,049.40 on line 69 of your Form 1040 tax return. However, you may still owe the additional 0.9% Medicare tax that went into effect in 2013 if combined wages from both employers exceeded $200,000, or if your wages combined with those of your spouse exceeded $250,000. In such a case, you will need to file Form 8959 to report the additional tax, which applies to amounts in excess of the thresholds above, and include it on line 60 of the Form 1040.
- If you moved to one of the states with state and local sales taxes but no general income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming) you may benefit from an itemized deduction for state sales taxes. The deduction was reauthorized by Congress for 2012 and 2013 at the end of 2012.
- If you paid a premium for mortgage insurance, you may be entitled to an itemized deduction as mortgage interest for the portion of the premium allocable to 2013. No deduction is available, however, if your adjusted gross income is more than $110,000.
- If you claimed a homebuyer credit on your purchase of a home in 2008 through 2010, and you sold your home or stopped using it as your principal residence when you were transferred in 2013, you may have to repay on the 2013 return the entire credit taken. See IRS Form 5405 and its Instructions for details. Repayment is always required for credits taken in 2008. However, for credits claimed in 2009 and 2010, repayment is only required if the home ceased to be your principal residence within 36 months of its purchase. If you sold the home and did not have a gain, none of the credit must be repaid. In calculating gain, remember to subtract from the sale proceeds all purchase closing costs, and any improvements you made to the home during the time you owned it.
- If the sale of your former principal residence was a “short sale,” and you were relieved of some of the mortgage debt by your lender, you may receive a Form 1099-C reporting that debt relief to the IRS. However, a provision of the tax code excusing tax on such relief for acquisition mortgage debt up to $2 million was extended through 2013 in late 2012, and no tax should be due.
The 2013 return will be due on Tuesday, April 15, 2014.
Posted by Peter K. Scott
On December 6, 2013, the IRS released its annual optional standard mileage rates that may be used in computing automobile deductions during 2014. See IR-2013-95, http://www.irs.gov/2014-Standard-Mileage-Rates-for-Business,-Medical-and-Moving-Announced
, and Notice 2013-80. The new rates, applicable for auto use after December 31, 2013, are 56 cents per mile for business use, 23.5 cents per mile for medical or moving use, and 14 cents per mile for charitable use. The business rate is down a half cent from the 56.5 cents per mile rate that has been in effect since January 1, 2013, while the rate for medical and moving is also down a half cent from 24 cents. The charitable rate of 14 cents per mile does not vary from year-to-year because it is fixed by statute.
The rates are based on an annual study of fixed and variable costs of operating an automobile conducted for the IRS by an independent contractor. The rates for business and moving differ because the rate for business use includes fixed costs such as depreciation, which are not allowed as medical or moving deductions. Both rates include variable expenses such as fuel. Taxpayers are also allowed to deduct items such as parking and tolls in addition to the standard mileage rate.
Use of the standard deduction rates is optional; taxpayers are always free to determine their own actual costs of operating a vehicle. However, such costs must be substantiated through detailed records, while the use of the standard rates avoids any need to substantiate the underlying costs incurred, although taxpayers must still maintain records of the miles driven and the purpose of each trip.
Notice 2013-80 also provides amounts by which taxpayers using the standard business mileage rate must reduce the basis in their automobile for depreciation that is included in the standard mileage rate. Those amounts are 23 cents per mile for 2010, 22 cents per mile for 2011, 23 cents per mile for 2012 and 2013, and 22 cents per mile for 2014.
Some companies use mileage rates higher than the standard rates to reimburse business travelers or transferees. In such cases, the excess amounts are treated as taxable wages, and are subject to withholding and payroll taxes. Amounts up to the standard mileage rates are excluded from the income of the employee. An employee cannot deduct moving expenses using the business travel rate. See Adamson v. Commissioner, 32 T.C.M. 484 (1973).
Generally, the rates the IRS announces in November or December remain in effect during the entire following year, regardless of changes in underlying costs. However, in 2011 the IRS changed the rates in mid year due to a dramatic rise in fuel costs, the third time in six years in which it had done so. Currently, however, gasoline costs have been relatively steady and the current mileage rates are likely to remain in effect for all of 2014.
Posted by Peter K. Scott
IRS and Treasury have published final regulations requiring reporting of mortgage insurance premiums on Form 1098 by the recipient, but excuse such reporting for 2012 because no reporting requirement was in place. See http://www.ofr.gov/OFRUpload/OFRData/2013-28381_PI.pdf
. Although payers of such premiums must allocate prepaid premiums to the years they cover for purposes of the deduction, and may deduct the amount allocable to 2012, the recipient is not required to allocate them, or to file a report for 2012. If the premium received during 2013 exceeds $600, the recipient reports the entire premium on Form 1098.
The Full Story:
Today’s tax quote: “The tax law is six times longer than War and Peace and not nearly as easy to read.” Michael J. Graetz
The saga of the deduction for mortgage insurance premiums and the reporting of them is a fine illustration of Professor Graetz’s point.
Congress first enacted legislation in 2006 allowing a deduction for some mortgage insurance premiums by treating them as additional mortgage interest. The original legislation was for one year only (2007), but has been periodically extended, most recently through 2013 by the American Taxpayer Relief Act of 2012.
Mortgage insurance premiums are commonly prepaid for the entire length of the mortgage, but the law allows a deduction only for the amount allocable to the current year. It also gives the Treasury Department authority to write regulations requiring recipients of such premiums to report them both to the payer and to the government.
In its initial attempts to provide rules, Treasury simplified the allocation required by allowing individuals to allocate the premium ratably over the shorter of 84 months, or the length of the mortgage. It also told recipients to report the amount actually allocable to the year of receipt, but eliminated any penalties if the recipient reported the entire amount received, or utilized the 84 month rule applicable to the payer.
Eventually, temporary and proposed regulations were issued adopting the allocation rules above for individuals, but requiring the recipient only to report the full amount received if it exceeded $600. That is, the recipient is not required to allocate the premium received. The proposed regulations relating to the payer’s deduction were finalized in 2012. However, the regulations for recipients were not finalized at that time because the law allowing the deduction had expired at the end of 2011, and Treasury concluded it had no statutory authority to require reporting.
Now that the deduction has been extended to both 2012 and 2013, Treasury has finalized the regulations requiring reporting of premiums received when the premiums exceed $600. The final regulations retain the rule that no allocation is required by the reporting person; it only reports the full amount of the premium received in that year.
However, in an unusual twist, Treasury says that because there was no statute applicable in 2012 under which it could require reporting, no reports are required for that year, and there are no penalties for failing to report. But even though payers of premiums did not receive a Form 1098 for 2012, they still are allowed a deduction for amounts allocable to that year. If they did not take the deduction on their 2012 return, they may claim it by filing a claim for refund.
The deduction for mortgage insurance premiums is limited. It phases out at adjusted gross income of $110,000, and therefore is of use to a limited universe of taxpayers. However, the regulations create considerable likelihood of misunderstanding and inflated deductions by instructing recipients of prepaid premiums to report the full amount of Form 1098 even though the payer can only deduct the portion allocable to the current year. This is a break for the recipients, who otherwise would have been required to calculate an allocation and then continue to report it each year, but as noted may result in payers over-deducting.
Perhaps a re-reading of War and Peace might indeed have been easier.
Posted by Peter K. Scott