Tax Update

Relief from the National Taxpayer Advocate—Taxpayer Assistance Orders

Congressional Testimony 2/26/09

Congress created the IRS’s Taxpayer Advocate Service (TAS) as an independent organization within the IRS to help taxpayers resolve their tax problems (see IRS Manual 13.1.5). The National Taxpayer Advocate is Nina Olson. There is a local taxpayer advocate in each state.

Taxpayer Assistance Orders The TAS handled more than 274,000 cases in fiscal year 2008, most of which actually came from IRS personnel! Taxpayers often are referred to the TAS using Form 911, Application for Taxpayer Assistance Order (TAO) as long as TAS criteria are met. TAOs may require the IRS to release property levied upon, or to cease, take, or refrain from taking certain actions with respect to the taxpayer involving collection, bankruptcy, receiverships, or other statutorily authorized actions. The TAS issued 68 TAOs in fiscal year 2008.

There are four major criteria that must be met in order for the TAS to accept a taxpayer’s TAO request. These criteria are:

1. economic burden,
2. systemic burden
3. best interest of the taxpayer,
4. equity or public policy.

The taxpayer must be determined by the TAS to be suffering, or about to suffer, a significant hardship because of the way that the tax laws are being administered by the IRS. For example, economic burden may be met if the cost or fees incurred in obtaining representation is more than the liability the taxpayer owes or if a taxpayer may be going to a closing and needs a lien removed.

Bicycle Commuters Fringe Benefit

Emergency Economic Stabilization Act of 2008

Twenty dollars per month tax free for riding a bike to work Beginning in 2009, a qualified bicycle commuting reimbursement fringe benefit has been added to the parking and mass transit qualified transportation fringe benefits. An employer may reimburse, as a tax-free fringe benefit, up to a maximum of $20 per month for qualified bicycle commuting during a 15-month period beginning with the first day of such calendar year.

The purpose is to reimburse the employee for reasonable expenses incurred during the calendar year for the purchase and repair of a bicycle, bicycle improvements, and bicycle storage, provided that the bicycle is regularly used for travel between the employee’s residence and place of employment. The employee cannot receive any other qualified transportation fringe benefit (no double-dipping with mass transit during the month). In addition, the employee must regularly use a bicycle for a substantial portion of travel between the employee’s residence and place of employment (i.e., the use can’t be infrequent or constitute an insubstantial portion of the employee’s commute). The $20-per-month amount is not subject to inflation adjustment and may not be provided pursuant to an elective salary reduction agreement (§132(f ) (4)).

Comment: More than 500,000 people commute to work by bicycle (per the League of American Bicyclists). They have Republican Earl Blumenauer, who founded the Congressional Bike Caucus, to thank for this tax break.

Top 10 Tips about IRA Contributions

TT-2009-61

There is still time to make contributions to a traditional IRA Following are the top 10 things that should be known about money put aside for retirement in an IRA:

1. The taxpayer may be able to deduct some or all of the contributions made to an IRA and also may be eligible for a tax credit equal to a percentage of the contribution.
2. Contributions can be made to a traditional IRA at any time during the year or by the due date for filing the taxpayer’s return for that year, not including extensions. For most people, this means contributions for 2008 must be made by April 15, 2009.
3. The amount of funds in an IRA generally is not taxed until distributions are received from that IRA.
4. To figure the deduction for IRA contributions, use the worksheets in the instructions for the form the taxpayer is filing.
5. For 2008, the most that can be contributed to a traditional IRA generally is the smaller of the following amounts: $5,000 or the amount of the taxpayer’s taxable compensation for the year.
6. Taxpayers who are 50 or older can contribute up to $6,000.
7. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to determine whether the taxpayer is also eligible for a tax credit.
8. The taxpayer cannot deduct an IRA contribution or claim the Credit for Qualified Retirement Saving Contributions on Form 1040EZ; use either Form 1040A or Form 1040.
9. To contribute to a traditional IRA, the taxpayer must be under age 70½ at the end of the tax year.
10. The taxpayer must have taxable compensation, such as wages, salaries, commissions, and tips. When filing a joint return, only one needs to have compensation. Refer to IRS Publication 590, Individual Retirement Arrangements, for information on the amounts eligible to be contributed to an IRA account.

Section 105 Medical Reimbursement Plans Offer Tax Savings

 IRC §105

Qualified small business owners can deduct 100% of family medical expenses as business tax deductions Based on §105 of the Internal Revenue Code, a self-employed individual who employs a spouse in a business can become eligible for a medical reimbursement package. Qualified small business owners are given the ability to legally deduct 100% of family medical expenses including:

• All health and qualified long-term care insurance premiums.
• Out-of-pocket medical, dental, and vision costs.
• Over-the-counter items such as cold medicine, contact lenses and cleaning solution, allergy medication, aspirin, and more.

Qualified small business owners are able to deduct 100% of federal, state, and FICA taxes for family medical costs and, on average, save $4,000 or more a year. Key to these savings is the ability to declare a medical expense as a business expense rather than a personal deduction.

Example: Self-employed individuals who are in a 15% federal tax bracket can save 15% on all of their insurance premiums. Furthermore, with the ability to write off these same premiums as a business expense, the independent contractor’s tax savings will climb as high as 35% (by saving 15% on federal, 5% on state, and 15% on self-employment taxes).

To turn the personal tax deduction into a business tax deduction, one must follow the steps outlined by the government. The independent contractor:

1. hire his/her spouse,
2.  set up an employee benefits program,
3.  reimburse the employee spouse for the family’s medical expenses, and
4.  write off these reimbursements as an employee benefit on (Line 17 of Schedule F or line 14 of Schedule C).

Statistics show that 30% of farmers who file IRS Schedule F and 10% of small business owners who file Schedule C can take advantage of a §105 medical reimbursement plan. Like most tax deductions, certain requirements and compliance issues must be met to qualify.

$1,000 “Kiddie Credit” for 2009

In addition to the dependency exemption, the child care credit, and the earned income credit, a child tax credit of $1,000 is allowed for each qualifying child under the age of 17. The Working Families Tax Relief Act of 2004 extended the $1,000 to 2010, but it is not adjusted for inflation.

Qualifying child An individual may claim a child tax credit for each qualifying child under the age of 17 In general, a qualifying child is an individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer’s son or daughter (or descendent of either), stepson or stepdaughter (or descendent of either), or eligible foster child.

Child credit and dependency exemption are tied together Starting in 2009, a qualifying child, for purposes of the child tax credit, must also be the taxpayer’s dependent. This restores the pre-2005 rule under which the child credit was explicitly tied to the child’s dependency exemption.

Refundability when earned income exceeds $3,000 (§24(d)(1)(B)); (American Recovery and Reinvestment Act of 2009) Rev. Proc. 2008-66, §3.04; amended by Rev. Proc. 2009-21 The American Recovery and Reinvestment Act of 2009 modified the earned income formula for the determination of the refundable child credit to apply to 15% of earned income in excess of $3,000 (was $8,500) for taxable years beginning in 2009 and 2010. For 2008, the child tax credit is refundable to the lesser of either the unclaimed portion of the nonrefundable credit amount or to the extent of 15% of the taxpayer’s earned income in excess of $8,500 (which was decreased from $12,550 by the Emergency Economic Stabilization Act of 2008). Families with three or more children are allowed a refundable credit for the amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income credit, if that amount is greater than the refundable credit based on the taxpayer’s earned income in excess of $3,000 (2008: $8,500).

Note: By reducing the earned income threshold, more low-income taxpayers will qualify for a refundable portion of the child tax credit. The change can result in an increased credit of as much as $1,432 ($12,550 [the original 2008 amount] less $3,000 [the adjusted 2009 amount] times 15%).

Phase-out of credit For taxpayers with modified AGI in excess of certain thresholds, the sum of the otherwise allowable child credit and the otherwise allowable dependent care credit are phased out. The phase-out rate is $50 for each $1,000 of modified AGI (or fraction thereof) in excess of the threshold. The threshold is:

1. $110,000 for married taxpayers filing joint returns.
2. $75,000 for taxpayers filing single or head of household returns.
3. $55,000 for married taxpayers filing separate returns.

Note: These thresholds are not indexed for inflation.