Federal Tax News – October

By Team HRH | October 24, 2016

Tax break for Olympic athletes and this summer’s winners can take advantage. President Obama signed a new law eliminating the tax on medals or cash prizes awarded to Team USA athletes during the Olympic and Paralympic Games if their adjusted gross incomes don’t exceed $1 million ($500,000 for a married individual filing a separate return). The law applies to awards received after December 31, 2015, and thus includes winners from the Games in Rio De Janeiro. In the 2016 Games, U.S. athletes won 46 gold, 37 silver and 38 bronze medals. They received $25,000 for gold medals, $15,000 for silver medals and $10,000 for bronze medals.

Unemployment compensation is taxable. If you receive unemployment compensation, you should receive IRS Form 1099-G, showing the amount paid. It must be included as income on your tax return. In one new case, a taxpayer didn’t include more than $28,000 of unemployment payments she’d received. Her argument: She wasn’t aware it was taxable “because it was not earned income” and the online program she used to file her return didn’t “describe” it as income. The U.S. Tax Court disagreed and also upheld a penalty for substantially understating tax. (TC Memo 2016-181)

Six quick year-end tax planning ideas. 1. Keep AGI down to avoid reduction (or elimination) of tax breaks that phase out over higher AGI levels. 2. Make the best tax use of losses. 3. Increase withholding on salaries and wages to avoid the estimated tax underpayment penalty. 4. Make year-end gifts of appreciated property to shift taxable gain to lower-bracket family members while taking advantage of the annual gift tax exclusion. 5. Make the best tax use of stock market losses. 6. Defer income into next year and accelerate deductions into this year.

However, year-end planning must take into account each taxpayer’s particular situation and goals. For example, while most taxpayers come out ahead by following the traditional approach of deferring income and accelerating deductions, others may do better by accelerating income and deferring deductions.

Accounting change permission required. Taxpayers seeking to change the method of accounting they use (such as from cash to accrual) to compute taxable income and for bookkeeping must obtain prior IRS consent. One mining company owner filed taxes for 2005-2011 using the cash method. His 2011 return included a legal fees deduction of $12,007. He later amended the return, using the accrual method, and deducting legal fees of $77,823. The IRS rejected the deduction, and the U.S. Tax Court agreed, saying it constituted an accounting method change, without consent. (TC Memo 2016-180)

Defaulted qualified retirement plan loan amount was income. Taxpayers may be able to take tax-free loans from such plans, if certain criteria are met, including repayment within five years (exceptions exist). In a new case, a taxpayer took two loans from her 403(b) plan totaling $32,984 but failed to make all scheduled payments. She received IRS Forms 1099-R for the loan balances, but didn’t include the amounts on her tax return. The U.S. Tax Court ruled the unpaid loans were includable in income and subject to the early withdrawal penalty. (TC Memo 2016-182)

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