2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

IRS Announces 2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2015 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.

Tax Rates. Beginning in the 2015 tax year, the following tax rates will apply:

If the Taxable Income Is: The Tax for Married Individuals Filing Jointly is:
Less than or equal to $18,45010% of the taxable income
Over $18,450 but not over $74,900
$1,845 plus 15% of the excess over $18,450
Over $74,900 but not over $151, 200$10,312.50 plus 25% of the excess over $74,90010% of the taxable income
Over $151,200 but not over $230,450$29,387.50 plus 28% of the excess over $151,200
Over $230,450 but not over $411,500$51,566.50 plus 33% of the excess over $230,450
Over $411,500 but not over $464,850$111,324 plus 35% of the excess over $411,500
Over $464,850$129,996.50 plus 39.6% of the excess over $464,850
If the Taxable Income Is: The Tax for Heads of Households is:
Not over $13,15010% of the taxable income
Over $13,150 but not over $50,200$1,315 plus 15% of the excess over $13,150
Over $50,200 but not over $129,600$6,872.50 plus 25% of the excess over $50,200
Over $129,600 but not over $209,850$26,722.50 plus 28% of the excess over $129,600
Over $209,850 but not over $411,500$49,192.50 plus 33% of the excess over $209,850
Over $411,500 but not over $439,000$115,737 plus 35% of the excess over $411,500
Over $439,000$125,362 plus 39.6% of the excess over $439,000
If the Taxable Income Is: The Tax for Unmarried Individuals is:
Not over $9,22510% of the taxable income
Over $9,225 but not over $37,450$922.50 plus 15% of the excess over $9,225
Over $37,450 but not over $90, 750$5,156.25 plus 25% of the excess over $37,450
Over $90,750 but not over $189,300$18,481.25 plus 28% of the excess over $90,750
Over $189,300 but not over $411,500$46,075.25 plus 33% of the excess over $189,300
Over $411,500 but not over $413,200$119,401.25 plus 35% of the excess over $411,500
Over $413,200$119,996.25 plus 39.9% of the excess over $413,200
If the Taxable Income Is:The Tax for Married Individuals Filing Separate Returns is:
Not over $9,22510% of the taxable income
Over $9,225 but not over $37,450$922.50 plus 15% of the excess over $9,225
Over $37, 450 but not over $75,600$5,156.25 plus 25% of the excess over $37,450
Over $75,600 but not over $115,225$14,693.75 plus 28% of the excess over $75,600
Over $115,225 but not over $205,750$25,788.75 plus 33% of the excess over $115,225
Over $205,750 but not over $232,425$55,662 plus 35% of the excess over $205,750
Over $232,425$64,989.25 plus 39.6% of the excess over $232,425
If the Taxable Income Is:The Tax for Estates and Trusts is:
Not over $2,500
15% of the taxable income
Over $2,500 but not over $5,900$375 plus 25% of the excess over $2,500
Over $5,900 but not over $9,050$1,225 plus 28% of the excess over $5,900
Over $9,050 but not over $12,300$2,107 plus 33% of the excess over $9,050
Over $12,300$3,179.50 plus 39.6% of the excess over $12,300

Estate Tax Exemption. The Estate Tax is a tax imposed on the transfer of property at a person’s death, for any portion of the decedent’s gross estate that exceeds the Federal Estate Tax Exemption. This year the estate tax exclusion has increased from a total of $5,340,000 to $5,430,000. This means that decedents who die in 2015 have an estate tax exclusion that has increased by $90,000 from the previous year.

Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2014. The 2015 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:

Attained Age Before Close of Taxable YearLimitation on Premiums
40 or less $380
More than 40 but not more than 50 $710
More than 50 but not more than 60 $1,430
More than 60 but not more than 70 $3,800
More than 70$4,750

Retirement Adjustments. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan has increased from $17,500 to $18,000. In addition, if you are 50 or over you can contribute an additional $6,000 as a catch-up contribution. However, the limit on annual contributions to IRA accounts remains unchanged at $5,500 with the catch-up contribution limit remaining $1,000.

The deduction for taxpayers making contributions to traditional IRA accounts is phased out gradually starting at an Adjusted Gross Income (AGI) of $61,000 for single taxpayers and heads of households, $98,000 for married couples filing jointly (when the spouse who makes the IRA contribution is covered by a workplace retirement plan), and $183,000 for an IRA contributor not covered by a workplace retirement plan but who is married to someone who is covered. 

The deduction for taxpayers making contributions to a Roth IRA is phased out gradually starting at an AGI of $183,000 for married couples filing jointly and $116,000 for singles and heads of households.

Lastly, the AGI limit for the saver’s credit (retirement savings contribution credit) for low and moderate income workers has also increased slightly for 2015. The credit is now $61,000 for married couples filing jointly, $45,750 for heads of household, and $30,500 for singles and married couples who file separately.

If you have any questions about how these adjustments might affect your tax situation, please feel free to contact our office for further assistance.

Court Affects Payments from Conservation Reserve Program

8th Circuit Ruling Affects Characterization of Payments from Conservation Reserve Program:

The US Court of Appeals for the 8th Circuit recently handed down a decision in Morehouse v. C.I.R, (8th Cir. Oct. 10, 2014), which decided whether or not payments received under the Department of Agriculture’s Conservation Reserve Program (CRP) should be included as income from self-employment on a taxpayer’s return.

In this case, the taxpayer inherited 1223 acres of land in 1994, located on three different properties in South Dakota (503 acres in Grant County, 320 acres in Roberts County, and 400 acres in Day County). All of the land was tillable cropland with exception of a gravel pit on the Grant County property and 129 acres on the Roberts County property that the taxpayer’s father placed under the CRP program. The taxpayer never farmed any of the land.

In 1997, the taxpayer enrolled the remaining acreage of the Roberts County property and the tillable land in Grant County in the CRP program. The primary purpose of the CRP program is to reduce soil erosion and improve soil conditions on highly erodible cropland by limiting the taxpayer’s use of the property. Therefore, by enrolling in the program, the taxpayer entered into a contractual obligation with the Commodity Credit Corporation (CCC) requiring him to implement conservation plans for the properties in the program. These plans required the taxpayer to establish and maintain certain types of grass or vegetative cover on the land and engage in periodic weed and pest control. As compensation for implementing the conservation plans, the taxpayer was reimbursed for a portion of his costs and was paid an “annual rental payment.”

In both 2006 and 2007, the taxpayer received CRP payments of $37,872. The taxpayer included the CRP payments on his return in both years as a rental payment received from real estate. As a result, on October 14, 2010 the IRS sent the taxpayer a notice of deficiency stating that the CRP payments should have been reported as self-employment income on a Schedule F, Profit or Loss from Farming. The taxpayer petitioned the Tax Court for review of this determination, claiming that the CRP payments were rentals from real estate under 26 U.S.C. §1402(a)(1), and therefore should be excluded from his net earnings from self-employment. However, the Tax Court sustained the service’s conclusion that the CRP payments constituted self-employment income reasoning that because the payments were proceeds from the taxpayer’s own use of the land they did not constitute rental payments.

On appeal, the primary issue centered on whether or not CRP payments should be categorized as “net earnings from self-employment.” In deciding this question, the Appeals Court first looked at types of payments that would generally be classified as self-employment income. The Court explained that self-employment income consists of the gross income derived from the taxpayer’s trade or business. Or in other words, the trade or business must give rise to the income before it can be included as self-employment income.

Contrary to the Tax Court’s opinion, the Appeals Court found that the CRP payments did not derive from the taxpayer’s activities on the land because the only reason the taxpayer engaged in any activities such as tilling and seeding on the land was because it was required by the CRP contracts. The Appeals Court further determined that because the contracts reserved a right of entry for the government onto the CRP property for purposes of inspection, that the government was “using” the land as much as if not more than the taxpayer. Therefore, the CRP payments were given to the taxpayer in consideration for this right to use and occupy the taxpayer’s property.

Next the Court looked at how similar payments to taxpayers have been categorized in the past. In doing so, the Court looked to Rev. Ruling 60-32, 1960-1 C.B. 23 (1960) concerning the CRP’s predecessor, the Soil Bank Act. In this ruling the IRS concluded that soil bank payments to people who did not operate or materially participate in a farming operation were to be viewed as rental income, not self-employment income. However, the ruling further stated that soil bank payments made to farmers were self-employment income.  Although this precedent was not controlling, the Court decided that given the significant overlap in the CRP and Soil Bank programs, and because it reflects a longstanding and reasonable interpretation of the Agency’s regulations, the revenue ruling was persuasive. Therefore, the Court decided to follow the Soil Bank Program distinction between payments to farmers and non-farmers in concluding that CRP payments to the taxpayer in this case were rental income because he was not engaged in farming operations. Looking forward it appears that at least in the 8th Circuit, taxpayers who receive payments from the CRP program will be able to include the income as rental income rather than self-employment income on their tax return, if they are not operating farming activities on the land.

If you have any questions about how this ruling might affect the characterization of your CRP payments, please feel free to contact our office.

Final Regulations Issued for Use of Truncated Taxpayer Identification Numbers

New IRS Regulations Aim to Fight Identity Theft Through Use of Truncated Taxpayer Identification Numbers

This week, in an effort to safeguard taxpayers from identity theft, the IRS issued its final regulations regarding the use of Truncated Tax Identification Numbers or (TTINs). The final regulations, published on July 15, are amendments to the Income Tax Regulations and Procedure and Administration Regulations, which allow the tax filer to truncate a payee’s identification number on certain documents. The Service states that the amendments are specifically targeted at reducing the risk of identity theft, which can stem from the use of an employee’s entire identification number on documents.

A “Truncated” identification number simply takes an existing nine-digit identification number and replaces the first five numbers with either asterisks or “X”s so that only the last four digits remain. (i.e. A tax identification number of 99-9999999 would become XX-XXX9999). Because a TTIN is merely a method of masking taxpayer identification numbers that already exist, use of a TTIN does not require the Service to issue any new identification numbers or expend any funds for the taxpayer to be able to use a TTIN. The new regulations allow for TTIN to be used for a taxpayer’s social security number (SSN), IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or employer identification number (EIN) on payee statements and certain other documents.

Before issuing their final regulations, the IRS ran a pilot program, which allowed certain qualified filers to truncate an individual’s payee identification number on a paper payee statements for Forms 1098, 1099, and 5498. This program ran from 2009 to 2010. In 2011 the IRS extended the pilot program for two more years and modified it by removing Form 1098-C from the list of eligible documents.

In January of 2013, the US Treasury and the IRS issued proposed regulations, in response to the growing threat of identity theft and associated tax fraud. The proposed regulations largely mirrored the pilot program, with TTINs permitted on electronic payee statements in addition to paper statements.

The final regulations became effective on July 15, 2014 and permit the use of TTINs “on any federal tax-related payee statement or other document required to be furnished to another person….” TTINs may not be used (1) on any return or statement filed with, or furnished to, the IRS, (2) where prohibited by statute, regulation, or other guidance by the IRS, or (3) where a SSN, ITIN, ATIN, or EIN is specifically required. Further a TTIN cannot be used by an individual to truncate their own identification number on any statement or other document that they give to another person. This includes an employer’s EIN on a W-2 or Wage and Tax Statement that they might give to an employee, and also an individual’s identification number on either a W-9 or Request for Taxpayer Number and Certification. 

If you have questions about the use of TTINs, please contact our office.

Professional Assistance With Long-Term Tax Delinquencies Can Be Key To A Turn Around

If you have experienced a continuing struggle with handling your ongoing employment and income tax filings and payments, you may be facing the stark reality that managing these obligations is getting more and more difficult.  Some businesses have operated off the premise that the federal and state government will perpetually respond to their tax problems in a certain way.  That response by the government, through a series of notices, delayed responses, and payment plans, is changing faster than ever.  This is especially true at the state level.  Businesses should not make what was once predictability of tax collections by the government a part of how they manage their ongoing business expenses.

While the government may not upgrade their technologies as quickly as the private sector, the actions being taken are making a difference in closing the Tax Gap. This is true at the federal level and even more so at the State level.  As Bloomberg Business Week reports, states are taking much more aggressive action to capture lost sources of tax revenue.  States are using better resources of data collection along with other enforcement tools to prevent businesses, large and small, from operating in a non-compliant tax status.

From a business perspective, the stark reality is that there are some businesses on the fringe of existence that may simply be forced to cease operations as the tax collection activity described here intensifies.  It’s my opinion that this is not necessary.  Rather, if these businesses spend less time juggling some of these obligations and direct their time towards the expertise they have related to their primary business function, their likelihood of success is much greater.  We have seen the most success for clients who have long-term tax delinquencies when that client acquires proper legal and accounting assistance.  For a long-term problem, a long term solution is necessary. 

Certified Public Accountants and other tax return specialists can provide a level of service that is invaluable to any business.  Assistance from a tax lawyer can be an important tool which allows for a delinquent taxpayer to create a long term plan for tax debt resolution which is then executed upon by the taxpayer, its accountant and lawyer.  Most clients find that the support of professionals that can readily provide expert guidance on stressful tax matters are invaluable.  The relief provided to the business owner typically gives them the breathing room they finally need from a stressful situation to focus on the reason they entered their business to begin with.  It is highly rewarding for the tax lawyer and accounting professional to observe this process.  No business operation will ultimately succeed with the passion of its owners for the services or products it provides. 

As a tax lawyer I have observed that the combination of a Certified Public Accountant or other tax return professional with the guidance of a tax lawyer is a highly beneficial combination for a delinquent business taxpayer.  The reality is that the Certified Public Accountant or tax return professional likely has all the expertise to resolve these issues, but due to the reality of the tax season, that person lacks the time to provide the level of assistance demanded from a Revenue Officer or other collection agent.  Without the obligations of providing return preparation services for clients, I have found the ongoing demands of dealing with delinquent tax matters for clients to be manageable. 

Ideally, the long term is a viable business with a plan to manage ongoing tax obligations while addressing delinquencies in a manner that does not effectively shut down the business.  Once that plan is in place, the taxpayer’s Certified Public Accountant or return preparation professional can provide services to manage current tax filing and payment obligations.  Should the government return for review of the client’s ability to address the tax delinquencies, the tax lawyer can return to representation to assist with that issue. 

As a business owner with a long term delinquency a critical perspective to have when acquiring professional assistance is that there is no “quick fix.”  A multi-year problem will likely take many months, if not years, to resolve.  But it can, and does, happen.  Feel free to contact us to discuss these issues if you have them.