Even though this post is not directly about taxes I wanted to timely share information that could, under certain circumstances, affect a segment of the population as a result of a recent action by a bureau of the U.S. Treasury. Don’t worry, I’ll keep this article short.
The Financial Crimes Enforcement Network (FinCEN) has announced Geographic Targeting Orders (GTO) that will temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. FinCEN remains concerned that all-cash purchases (i.e., those without any bank financing) may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. So to better understand this vulnerability, FinCEN issued similar GTOs earlier this year covering transactions in Manhattan and Miami-Dade County, Florida. The GTOs announced yesterday will expand upon the valuable information received from the initial GTOs. You can see the complete release here——> https://www.fincen.gov/news_room/nr/pdf/20160727.pd f.
So, I promised that I would keep this post short. But, I hope that this information is helpful to those potentially affected.
Ah, Capturing the IRS Pokémon. So, even though I haven’t joined the little packs of people wandering together in the streets, parks, and buildings while looking at their phones, the Pokémon Go craze fascinates me. It’s strange and wonderful how something like this can come out of nowhere and become such a thing. Hmm…..
Of course, the IRS will want to spoil the fun. As I understand it, you collect “experience points” as you follow your phone from Poke-stop to Poke-stop. As explained in a Wikipedia entry:
Players earn experience points for a number of in-game actions. As the player earns experience points, they will rise in level. At level five, the player is able to battle at a Pokémon gym and join one of three teams (red, blue or yellow) which act as larger factions within the Pokémon Go world. If a player enters a Pokémon gym that is controlled by a player that is not part of their team, they can challenge the leader to lower the gym’s “prestige”. Once the prestige of a gym is lowered to zero then the player will take control of the gym and is able to deposit one Pokémon to defend it. Similarly, a team can upgrade the prestige of a gym under their control by battling the gym leader.
In general, you can receive income in the form of money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income. IRS guidance also applies when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income tax return.
“Money, property, or services”. If you can convert “experience points” to cash, you likely have an “accession to wealth” as you earn them. Now I’m not going to tell you to report your experience points on your 1040. That’s between you and your virtual conscience, and I expect your conscience to not to fight very hard.
There is, though, a broader point worth making: you don’t have to convert something to cash to be taxable on it. Barter deals, swaps of goods for services, and so on are taxable unless they fit one of the narrow carve outs, like the ones for “like-kind exchanges” and for corporate and partnership formations. A non-cash deal might be harder for the IRS to find, but it’s still taxable.
After filing a Notice of Federal Tax Lien (NFTL), the IRS must notify the affected taxpayers in writing, at their last known address, within five business days of the NFTL filings.
Taxpayers’ rights to timely appeal the NFTL filings may be jeopardized if the IRS does not comply with this statutory requirement. The Treasury Inspector General for Tax Administration (TIGTA) reviewed a statistically valid sample of 133 NFTLs filed for the 12-month period beginning July 1, 2014 and ending June 30, 2015, and determined that the IRS timely and correctly mailed the copy of NFTL filing and appeal rights to the taxpayers’ last known address, as required by Code Section 6320(a). However, tests of a judgmental sample of 162 undelivered lien notices identified nine cases for which lien notices were not timely sent to the taxpayers’ last known addresses because the lien notices were sent to the taxpayers’ old addresses even though IRS systems reflected their new addresses. Among the nine, seven sampled lien notices were not sent to the secondary taxpayers’ last known addresses because employees did not identify separate addresses for taxpayers’ spouses. Both notices were instead sent to the primary taxpayers’ addresses. Although the IRS reissued lien notices for three of the cases upon receipt of the undelivered lien notices and subsequently reissued lien notices for the remaining six cases, all nine cases involve potential legal violations because the IRS did not meet its statutory requirement to timely send lien notices to the taxpayer’s last known address. IRS regulations require that taxpayer representatives be provided copies of all correspondence issued to the taxpayer. However, for six of the 37 sample cases for which the taxpayer had an authorized representative, the IRS did not notify the taxpayers’ representatives of the NFTL filings. TIGTA estimated that 22,866 taxpayers may have been adversely affected. In addition, for 17 of 162 judgmentally sampled undeliverable lien notices, employees did not update the mail status of the lien notice with the appropriate transaction code and action code combination.
When a person lives in one state and works in another, the usual pattern is for the state of residence to require the person to compute an income tax based on all of the person’s income, and then to provide a credit for income taxes imposed by the other state on the income earned by that person in the other state. The credit is limited to the amount of income tax that the state of residence would impose on the income earned in the other state. So, to use a simple example, suppose X lives in State 1 and works in State 2. Suppose X’s only income is a $50,000 salary earned in State 2. Suppose State 2 imposes a $5,000 income tax on the salary. Suppose State 1 has a flat 3 percent income tax. X would compute a $1,500 income tax in State 1, but would then be permitted a credit not to exceed $1,500. In this example, X would not pay any tax to State 1.
In some instances, states enter into reciprocal agreements. Under these agreements each state agrees not to tax the income earned within its borders by someone who is a resident in the other state. The purpose of these agreements is twofold. First, it eliminates the complexity of computing the credit, something that often is much more intricate than demonstrated in the simple example above. Second, it shifts revenue so that taxpayers are paying income tax to their state of residence. How that works out in terms of revenue shifting depends on the numbers.
Now comes news that New Jersey’s Governor Christie has instructed state officials to examine and report to him on the possibility of withdrawing from the reciprocal income tax agreement that exists between New Jersey and Pennsylvania. New Jersey officials estimate that the income tax they would collect from Pennsylvania residents working in New Jersey would “far outweigh” the taxes New Jersey collects on New Jersey residents working in Pennsylvania. Because Pennsylvania has a flat 3.07 percent rate and New Jersey has a progressive system with rates ranging from 1.4 percent to 8.97 percent, the impact on residents of each state working in the other state will vary. Pennsylvanians working in New Jersey for higher salaries will pay more tax because they will pay at New Jersey’s higher rates, and the Pennsylvania credit will be limited to Pennsylvania’s 3.07 percent rate. Pennsylvanians working in New Jersey for lower salaries will pay New Jersey income tax but then receive a Pennsylvania credit, leaving them with the same tax liability they otherwise would have had. New Jersey residents working in Pennsylvania for higher salaries will not pay more taxes, because they will receive a credit for the taxes paid to Pennsylvania. But New Jersey residents working in Pennsylvania for lower salaries will end up paying more taxes, because the credit for taxes paid to Pennsylvania will be limited to the lower tax paid to New Jersey. For example, a New Jersey resident earning $20,000 in Pennsylvania currently is not taxed in Pennsylvania. Ignoring deductions and assuming no other income, this person would have a $280 New Jersey income tax liability. If the reciprocal agreement is terminated, this person will be taxed in Pennsylvania in the amount of $614, will compute a New Jersey tax of $280, and will claim a credit of $614 limited to $280. This person will end up with a $334 income tax increase.
According to this graphic, roughly 100,000 south Jersey residents work in the southeastern Pennsylvania area. I did not try to figure out how many other New Jersey residents work in other parts of Pennsylvania. Roughly 40,000 southeastern Pennsylvania residents work in south Jersey. Again, I did not try to determine how many other Pennsylvanians work in New Jersey. The point is, Christie’s proposal would affect far more than a few people.
Fourteen years ago, another New Jersey governor floated a proposal to end the agreement. Opposition was rapid and strong. The agreement survived. What will happen this time if Christie decides to move forward with his proposal? Yes, there will be opposition. Will it succeed? We’ll find out soon enough. What are your thoughts?
A customer of mine, whose car recently “died”, told me he wanted to donate that car to charity for a tax deduction. I know that a number of people have expressed an interest in doing the same thing with their cars but think it is as simple as dropping their car off at their favorite charity and then just taking the tax deduction.
Well it not quite that simple.
So for my customer, all of those who have expressed an interest in donating their vehicle, and all of my valued readers, I thought I would review the rules for donating a car.
I have seen a lot of ads that entice you to donate your car to a charity and get a tax deduction – but you should be aware . . .
First, you will get no tax benefit from donating your personal automobile to charity unless you can itemize on Schedule A! This means the total of your “itemizeable” deductions exceeds your applicable Standard Deduction amount. While the donation itself can put you over the top and cause you to be able to itemize, to get the maximum tax benefit you must be able to itemize without the car donation.
A few years ago a customer expressed excitement when telling me that he donated his car to charity, and that he expected to get a big tax deduction. Unfortunately, his tax benefit from the deduction was zero, nothing, zilch. He was not able to itemize, and had not in the past, and even with the addition of the value of the car he was still not able to itemize.
FYI – you may want to itemize if your total deductions do not exceed your applicable Standard Deduction amount if you fall victim to the dreaded Alternative Minimum Tax (AMT). The Standard Deduction is not allowed in calculating AMT, but an itemized deduction for charitable contributions is.
Second, the amount you receive “in your pocket” will be only a small percentage of the car’s value. The amount of cash you will realize depends on your federal and, if your state allows a similar tax deduction (New York does not), state tax bracket.
And third, you have to wait to file your tax return to get the money. If you donate a car to charity today you will not see the cash until at least next tax season.
When you donate a vehicle (car, motorcycle, boat, or airplane) to a church or charity the amount you can deduct depends on what the organization does with the donated vehicle.
(1) If the organization sells the vehicle without significant interim use or material improvement your tax deduction is limited to the gross proceeds from the sale.
(2) If the organization intends to temporarily or permanently use the vehicle in its operations, or make “material” improvements to the vehicle before selling it, or sell the car to a “needy” individual at a price that is significantly below market value, or give the car to such an individual, you can deduct the “fair market value” of the vehicle.
You can use the “private party value” for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book (www.kbb.com) or a similar established used vehicle pricing guide. If the fair market value of the vehicle is more than $5,000.00 you must obtain a formal appraisal.
To claim a deduction of more than $500.00 for donating a motor vehicle to charity you must include Copy B of the IRS Form 1098-C, provided by the charity, with the filing of your Form 1040.
The Form 1098-C will include the name and Taxpayer Identification Number of the donee organization, the vehicle identification number, the date of contribution, and information on what the charity did with the vehicle. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the donee organization. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed above.
So, these are the basics of donating a vehicle to a charitable organization and taking a tax deduction for that donation. If you are considering donating your vehicle, don’t miss out on a very valuable tax deduction. Call Solid Tax Solutions (SolidTaxSolutions.com) before you make the donation: (845) 344-1040.