IRS announces 2010 pension plan and social security wage limits

2010 Pension Plan Amounts: The major pension plan and related amounts will stay the same for 2010. This means that the following amounts will remain unchanged from their 2009 amount: (1) benefit limit for defined benefit plans ($195,000); (2) defined contribution plan limit ($49,000); (3) compensation limit for determining benefits and contributions ($245,000); (4) definition of a highly compensated employee ($110,000); (5) elective deferral limit ($16,500); (6) SEP contribution threshold ($550); and (7) SIMPLE retirement account limit ($11,500).

2010 Social Security Wage Base: The social security wage base will remain at $106,800 in 2010. As in prior years, there is no limit to the wages subject to the Medicare tax, so all covered wages are subject to the 1.45% tax. The FICA tax rate, which is the combined social security tax rate of 6.2% and the Medicare tax rate of 1.45%, remains at 7.65%, while the self-employment tax rate remains at 15.3%. In addition, the threshold for coverage for domestic employees will stay the same at $1,700. For more on the 2010 cost of living adjustments, go to http://www.ssa.gov/cola .

IRS Unveils Retirement Plan Navigator

The IRS announced a new Web-based tool to help small businesses (i.e. medical practices) determine which tax-favored pension plan best suits their needs and how to keep the plan in compliance with the law. The navigator focuses on three areas—choosing a plan, maintaining a plan, and correcting a plan—and can be accessed at

 http://www.retirementplans.irs.gov

It does not suggest which plan may be best for the business, but it does lay out the options and includes a side-by-side comparison of pension plans and their requirements. The navigator also offers suggested options for businesses seeking to correct errors and bring their plan back into compliance.

Repayment or compensation? When does intent occur?

Here is a common scenario – the physician-owner takes out money from his or her medical practice for one reason—then later decides to characterize it differently. For example, the physician takes out a distribution and then changes it to an expense reimbursement. Or he or she might turn a paycheck into a loan repayment. Well here’s a court case where owners of a business did exactly that; it is a good lesson about proper accounting and tax treatment:

 

The case: W was one of several owners of a corporation for which he performed personal services. All the owners had lent money to the corporation. The corporation issued a 1099-MISC to W, reporting $27,574 of self-employment income and paid that amount to him. W initially reported the amount as self-employment income, but did not pay self-employment taxes.

 

Subsequently, W had his employer (the corporation he partly owned) issue a corrected 1099 reporting $0 of self-employment income and filed an amended tax return characterizing the payment as a loan repayment from the corporation.

 

The decision: For the IRS. Whether a payment is compensation or something else is determined by the parties’ intent at time of payment. The corporation reported the payment as self-employment income, and the taxpayer reported it as wages on his tax return. Only after being told that it would be better from a tax standpoint to characterize the payment as a loan repayment did the taxpayer ask the employer to issue a corrected 1099 and change how the payment was characterized. The parties could have agreed in advance that the payment would be related to the loan, but they were not free to change it after forming the initial intent. [Wilson v. Commissioner, T.C. Summ. Op. 2008-114]

IRS Alerts Public to New Identity Theft Scams

The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.

 

In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone's personal data to steal his or her financial accounts, run up charges on the victim's existing credit cards, apply for new loans, credit cards, services or benefits in the victim's name and even file fraudulent tax returns.

 

The scams may take place through e-mail, fax or phone. When they take place via e-mail, they are called "phishing" scams. The IRS does not discuss tax account matters with taxpayers by e-mail. The IRS urges consumers to avoid falling for the following recent schemes:

 

Making Work Pay Refund

This phishing e-mail, which claims to come from the IRS, references the president and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient's bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.

In reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Additionally, consumers and retirees who are not wage earners are not eligible for this tax credit.

Inherited Funds/Lottery Winnings/Cash Consignment

In this phishing scheme, recipients receive an e-mail claiming to come from the U.S. Department of the Treasury notifying them that they will receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees.

Form W-8BEN

In this scam, fraudsters modify a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to request detailed personal and financial information. This could include nationality, passport number, bank account and PIN numbers, spouse's name and mother's maiden name, or other personal or financial information or security measures for financial accounts. The scammers may use the genuine form number and name or may make up a new form number, such as W-4100B2.

They either e-mail or fax the form or letter. If only a letter, the letter itself contains the request for the personal and financial information. The letter, which claims to come from the IRS, states that the recipient will face additional taxes unless he or she quickly faxes the required information to the number provided by the scammer.

In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS. Additionally, the genuine W-8BEN does not request the taxpayer's passport number, bank account number, security or similar information.

Refund Scam

The bogus e-mail, which claims to come from the IRS, tells the recipient that he or she is eligible to receive a tax refund for a given amount. It instructs the recipient to click on a link contained in the e-mail to access and complete a form for the tax refund. The form requires the entry of personal and financial information. The refund scam is the most common one seen by the IRS. Several recent variations on this scam have claimed to come from the Exempt Organizations area of the IRS. Some others have included the name and purported signature of a genuine or a made-up IRS executive.

Taxpayers do not have to complete a special form to obtain a refund. Taxpayer refunds are based on the tax return they submit to the IRS.

How to Spot a Scam

Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:

• Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother's maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient.
• Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
• Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient's funds.
• Gets the Internal Revenue Service or other federal agency names wrong.
• Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
• Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (www.irs.gov). To see the actual link address, or url, move the mouse over the link included in the text of the e-mail.

What to Do

The IRS does not initiate taxpayer contact via unsolicited e-mail or ask for personal identifying or financial information via e-mail. If you receive a suspicious e-mail claiming to come from the IRS, take the following steps:

• Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Do not click on any links, for the same reason. Also, be aware that the links often connect to a phony IRS Web site that appears authentic and then prompts the victim for personal identifiers, bank or credit card account numbers or PINs. The phony Web sites appear legitimate because the appearance and much of the content are directly copied from an actual page on the IRS Web site and then modified by the scammers for their own purposes.
• Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from your inbox.

Genuine IRS Web site

The only genuine IRS Web site is IRS.gov. All IRS.gov Web page addresses begin with http://www.irs.gov/. Anyone wishing to access the IRS Web site should initiate contact by typing the IRS.gov address into their Internet address window, rather than clicking on a link in an e-mail.

What You Can Learn From Michael Jackson

Simple - A very important lesson on estate planning. I saw this article by Neal Frankle, CFP in the AICPA Wealth Management Insider newsletter and thought it might interest the readership. Estate planning is something that always seems to get put on the “back burner”:

If you take the right steps you can do yourself a big favor. Just like Michael Jackson did. I live in Los Angeles. A few days ago, the city shut down to pay tribute to the controversial Mr. Jackson — but maybe — for the wrong reason.

The media are in frenzy and the tabloids are full of wild stories. They tease us by suggesting they know who is going to get what portion of Jackson's assets. And more important – who isn't going to get anything. Of course the media are lying to us because they need to sell their magazines.

The truth is they don't know anything about Jackson's estate. Very few people know that Jackson created a living trust in 2002.

Michael, wherever you are, ya done some good estate planning.

You can, and probably should, consider doing the same thing for yourself and your clients.

Living Trusts

A living trust is different from a will. If you use a will, it will get "interpreted" by the courts once you pass away and it will be argued about by the attorneys. This is probate. As you already know, it is a very costly, lengthy and public process — at least in California.

A living trust can help your clients avoid the cost, time delays and publicity associated with a will.

"Wait just a minute" you say … "Michael Jackson had a will!"

That's true. He did. But he, like most everyone who has a trust, created a "pour over will." Its only purpose is to provide for any assets that were mistakenly left out of the trust he created.

So when you read the tabloids' claim that so-and-so was left out of Jackson's will … they may be right but it doesn't necessarily mean that same person was left out of the estate. The trust could still award that person a great deal of money. The only difference is … we'll never know about it.

Benefits of Living Trusts

So a trust provides much greater privacy than a will. What other benefits does a trust offer?

Any assets you put into the trust go to the beneficiaries that you name. No lawyer or judge gets involved. Because of that, it's much less expensive and takes a lot less time to wind up an estate that has a trust versus an estate that doesn't. In some cases, a trust can be used to save big bucks on estate taxes but we're not going to get into that subject right now.

Another very important benefit of having a trust is that it usually includes setting up a health power of attorney. This gives legal authority to another human being to make medical decisions for you in the event that you are unable to do so. Keep in mind that you don't have to set up a trust to get such a document in place. You can usually get your local hospital to give you a blank health power of attorney form and just fill it out. I strongly recommend you consider getting such a document in place — whether or not you set up a trust.

Problems with Trusts

First, you have to actually create a trust. While that could cost you anywhere between a few hundred dollars to a few thousand dollars, it's well worth it. You have worked all of your life to build up assets. Doesn't it make sense to spend some money to protect those assets?

Next, you have to move assets into the trust. Keep in mind that a trust is only a shell. It creates the opportunity for you to have the benefits of the trust. In order to realize those benefits you have to rename their assets so that the trust is the owner of the assets. The renaming process is not difficult or costly.

Now, before you get into a big fuss, keep in mind that you don't have to give up control of the assets. By naming yourself the trustee of the trust, you can still call the shots. You don't have to give up anything. You can invest the money, sell the house … do anything you want. Nothing changes.

Another issue can be children. Some people say that a trust can't guarantee what happens to minor children if both parents pass away. That is true. But a will doesn't solve this problem either. As far as I know, there is no written document that you can create that will guarantee what happens to minor kids. You can make their wishes known by expressing them in the trust or will and the court usually carries that out.

Conclusion

The last lesson we learn from the Michael Jackson School of Estate Planning is that it's never too soon to take care of this issue. Nobody knows when his or her time is up. If you are responsible for other people or have assets you’d like your family to inherit without wasting lots of time and even more money, you should consider looking into setting up a living trust.

To subscribe to the newsletter, go to:

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/generic_template_content/Newsletters/Wealth_Insider.jsp

 

Reminder: Support Your Auto Expenses

Auto expenses are a very common deduction for business owners and employees who must travel. Often the taxpayer does not know the exact amounts necessary to calculate the proper deduction and the tax preparer must estimate the mileage, business percentage, and ultimate auto deduction with the client’s help. You need to have proper substantiation or, if the IRS examines your tax return, the deduction will more than likely be denied.

If the substantiation is lost or stolen, the IRS will generally deny the deduction because the Cohan rule (which allows a court to estimate deductible amounts of unsubstantiated expenses) cannot be applied for certain expenses, including automobile expenses (IRC § 274(d)(4)). In the case of a lost or stolen substantiation, combined with the nonavailability of contemporaneous records, substitute records may be provided, but they must include sufficient information to support the deduction (Temp. Treas. Reg. § 1.274-5T(c)).

Back in September of last year, the Tax Court in a summary decision upheld the Service’s disallowance of an auto expense deduction of a traveling salesperson due to lack of substantiation (Niyitegyeka, T.C. Summ. 2008-129). It was obvious that the taxpayer traveled for business and would ordinarily be entitled to a deduction, but the submitted evidence was too weak to allow it.

For a complete overview of the case, go to:

 http://www.journalofaccountancy.com/Web/SupportYourAutoExpense.htm

Estate Planning for 2009 and beyond

With the estate tax uncertain and changing over the next 3 years, you should try to avoid the estate tax regime altogether by making tax-free transfers out of your estate. One of the ways to do this is to start a gifting program (remember, I’ve never seen a  hearse pulling a u-haul trailer!).

Taxpayers are allowed an annual exclusion from the gift tax of up to $13,000 for 2009. Spouses can combine their exclusion amounts, allowing a married couple in 2009 to give gifts of up to $26,000 per donee tax free. Gifts in excess of the annual exclusion amount may be offset by a taxpayer’s lifetime gift tax exemption.

The key to remember here is to “start” a gifting program. Most wealthy people I deal with start this process way too late and as a result, leave monies in their estate thus exposing it unnecessary state and federal taxation.

Summertime Tax Tips

The IRS will publish three tax tips per week this summer on topics ranging from how parents can get credit for sending their kids to day camp to avoiding identity theft. The IRS wants taxpayers thinking about their tax situation now, rather than December or January, because issues like adjusting your withholding, getting the proper receipts from charities, and organizing your tax records "are most effective if they are done well before year's end." Taxpayers can read Tax Tips on www.irs.gov or receive them as soon as they are issued by signing up through the IRS e-news subscription page, e-News Subscription.

IRS Addresses Student FICA Exception for Medical Residents

Date: March 25, 2009

Refer Reply To: CC:TEGE:EOEG:ET2 - CONEX-111532-09

The Honorable Mr. David Obey

U.S. House of Representatives

Washington, DC 20515

Dear Mr. Obey: 

I am responding to your January 28, 2009, letter on behalf of your constituent, * * *, whose wife is a * * * graduate of the University of Minnesota medical residency program. * * * asked why the IRS continues to pursue the issue of whether stipends received by medical residents for their services are subject to taxes under the Federal Insurance Contributions Act (FICA).

Services students perform are excepted from FICA taxes [section 3121(b)(10) of the Internal Revenue Code]. The Code defines a student as an individual employed by a school, college, or university at which he or she is enrolled and regularly attends classes. The student FICA exception applies only to services performed in the employ of an organization that has the status of a school, college, or university (SCU); and only if the student who performs the services is enrolled and regularly attends classes at that school, college or university.

 

Our longstanding position is that medical residents are not students within the meaning of section 3121(b)(10); they are full-time employees. Therefore, they are ineligible for the student FICA exception. However, in State of Minnesota v. Apfel, 151 F. 3d 742 (8^th Cir. 1998) the Eighth Circuit held that medical residents the University of Minnesota employed in its residency programs were students as defined by the Social Security Act. Therefore, they did not need to pay FICA taxes on their wages.

 

In 2004, the IRS issued regulations to clarify the student FICA exception. The regulations provide more detailed standards for determining what is a SCU and who is a student within the meaning of section 3121(b)(10) of the Code. These regulations make it clear that a medical resident by virtue of being a full-time employee is ineligible for the student FICA exception. This regulation applies to services performed on or after April 1, 2005.

 

These regulations provide that any stipends * * * wife received for services provided as a medical resident on or after April 1, 2005 are subject to FICA tax. However, in Regents of the University of Minnesota v. United States, 2008 WL 906799 (D.Minn.2008), the district court for Minnesota held that the part of the regulation stating that a full-time employee is ineligible for the student FICA exception is invalid. The United States appealed this decision because the IRS and the Department of Justice believe the regulations are valid, and accordingly stipends the University of Minnesota pays to its medical residents for services performed on or after April 1, 2005 are subject to FICA tax. The Court system has not yet resolved this issue; therefore issuing any refunds of tax is premature.

 

I hope this information is helpful. If you have any questions, please contact me at * * * or * * * at * * *.

Sincerely,

Nancy J. Marks

Division Counsel/Associate Chief
Counsel

(Tax Exempt & Government Entities)

IRS COBRA Q and A

The IRS has added 19 new questions and answers explaining the COBRA continuation premium subsidy by employers for severed employees. The questions cover eligibility, form preparation, reporting and documentation, and taxability.

http://www.irs.gov/newsroom/article/0,,id=205364,00.html