Taxable Income

Taxes And Medical Expenses

Taxpayers that itemize​ personal deductions instead of claiming the standard deduction may deduct qualifying medical expenses to the extent that such expenses exceed 10 percent of adjusted gross income (“AGI”). Taxpayers that are 65 years or older, or turned 65 during the tax year, may deduct unreimbursed medical care expenses that exceed 7.5% of AGI. This threshold amount remains at 7.5% of adjusted gross income for these taxpayers until Dec. 31, 2016. I.R.C. §213(f).

The Mitigation Provisions Of I.R.C. §§1311-1314

While the IRS uses the mitigation provisions of I.R.C. §§ 1311-1314 to reopen a taxpayer’s closed tax year and assesses tax deficiencies, it hardly facilitates taxpayers in using these provisions in similar fashion when seeking a refund from a closed year. Nonetheless, Congress intended that the mitigation provisions ensure that if certain prerequisites are met, either the government or the taxpayer may secure appropriate relief.

The mitigation provisions of I.R.C. §§ 1311-1314 provide a form of statutory relief and apply in certain limited circumstances to claims that are otherwise barred by operation of law or any rule of law like the statute of limitations. The goal of the mitigation provisions is to place the parties in the position they would have been in if the tax item(s) had been properly treated.

Makric Enterprises, Inc. v. Commissioner: When Tax Mistakes Are Costly

Not knowing the details of a business transaction sounds preposterous on its face, especially when the ignorant taxpayer is the party which formulated the transaction. In the case of Makric Enterprises, Inc. v. Commissioner, TC Memo 2016-44, a failure to make sure that the right corporation was sold as part of the agreement literally proved costly to the taxpayers involved, to the tune of $2,839,780.

This tax matter involved two corporations. One of which was a holding company (Makric Enterprises, Inc.) which owned only one asset, the stock of a wholly owned subsidiary (Alpha Circuits, Inc.). A third party expressed interest in purchasing the business conducted by Alpha.

Tax Breaks for Home-Based Businesses

Home-based business owners may not be aware that there are many ways to cut their tax bill. Many tax breaks are available for home-based businesses, here are some tips for taking advantage of these allowable business expenses.

Business structure

Sole proprietors must pay self-employment taxes. Forming a corporation or another business entity like an LLC and electing to treat it as an S Corporation may help reduce self-employment taxes. S Corporations allow home-business owners the opportunity to pay themselves a “reasonable salary” and treat any remaining profits as a profit distribution, both of which are not subject to self-employment taxes.

Losing IRA Status Under IRC § 408(e)(2)

Owners of Self-Directed IRAs which engage in certain types of “prohibited transactions” or invest in life insurance, foreign investments or collectibles may risk losing the tax-deferred status of their IRA accounts. If the owner (or beneficiary) of an individual retirement account, as described in I.R.C. §408(a), engages in any transaction that is prohibited under IRC §4975, the entire value of the IRA, determined as of the first day of the taxable year for which the account or annuity ceases to be an IRA, is treated as distributed to the IRA owner. See I.R.C. §408(e)(2)(B).

Taxes And Winning The Lottery

Hopefully, if one of us is ever lucky enough to win a big lottery jackpot, we won’t care about how much of it we have to “share” with Uncle Sam as taxes. But winning any immense lottery jackpot, especially some of the recent Powerball or Mega-Million grand prizes, is likely to result in a considerable share for the Department of the Treasury. How much in tax would the IRS receive from a $500 million lotto winner?

Converting Your IRA To A Roth IRA

In 1997, the Roth IRA was introduced. Since then, many people have converted all or a portion of their existing traditional IRAs to a Roth IRAs, where interest earned may be completely tax-free. This benefit applies as, once a taxpayer has held the account for five years, no taxes will be owed when the money is withdrawn at retirement. This is the opposite of a traditional IRA where a tax break is received in the present, but income taxes are paid in retirement.

Taking A Short-Term Loan From Your IRA

When strapped for cash, IRA owners have traditionally been able to take a short-term loan from their IRA, although this has been limited in recent years. Taxpayers may withdraw money from an IRA, without penalty or any tax liability, for up to sixty (60) days. The borrowed monies must be “rolled back” into an IRA within 60 days from the day after the date of the withdrawal, or income tax and penalties apply to the amount withdrawn and unreturned. Similar rules exist for rolling over one Roth IRA to another Roth IRA. The sixty day count involves calendar days, not business days. Keep in mind there is no extension for the sixtieth day falling on a weekend or holiday.

Deduction Thresholds And Bunching Expenses

All of us as taxpayers continually think we have a lot of expenses that we can itemize and deduct to help reduce our respective tax bills. But they come, they go, all for naught and no effect. The problem usually arises from the fact that our costs regularly fall just short of the required income thresholds for some categories of deductions. One solution is “bunching expenses,” which is a term used to describe incurring as many expenses as possible in a particular category during a particular tax year. Of course, doing this in one tax year will usually significantly diminish any chance of repeating it the following year.

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