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Boston Tax Law Blog

Selling your home? Know the tax consequences.

Tax implications are deeply interwoven into the experience of home ownership. The tax deduction for home mortgage interest ensures that this is the case.

But the deductibility of mortgage interest is not the only tax issue that can affect homeowners. For one thing, the taxation of mortgage debt relief following a foreclosure or short sale has been an ongoing issue in recent years. We discussed that issue in our September 16 post.

In this post, we will discuss a question that invariably comes up when a house is sold. How much of the profit from the sale of a home can be excluded from income?

More on taxation of retirement accounts: adjustments for 2015

One of the most fundamental aspects of tax planning for many people is maximizing the tax-shielding features of their retirement savings. This includes pensions, 401(k)s and individual retirement arrangements (IRAs).

There are of course very specific rules about the tax treatment of these accounts. These rules govern contributions, withdrawals and other administrative aspects of the accounts.

These rules have never included overall limits on the amount that can be accumulated in an IRA account. But as we discussed a few weeks ago, in our October 1 post, Congress has recently been considering imposing such limits.

In today's post, we will update you on a different aspect of IRAs: cost-of-living adjustments for the upcoming tax year that will affect such things as yearly contribution limits for 401(k)s and other retirement accounts.

Cash payment to an IRS auditor does not make an audit go away

A chiropractor in Lowell recently pleaded guilty to charges of bribing an Internal Revenue Service auditor. According to allegations in the complaint, the man paid $5,000 in cash to an IRS auditor to sign off on an audit.

The man had hoped that the auditor would ignore two false deductions made on his 2011 and 2012 tax returns. These business deductions were actually payments to several female patients who accused the chiropractor of inappropriate touching during their treatments.

In any tax audit, the IRS reviews financial and account information to make sure that has been correctly reported. An audit is also used to verify that the amount of taxes assessed is accurate. This post will discuss how the IRS selects returns to audit and the audit process.

Is a lawsuit settlement taxable income?

The answer depends heavily on the classification of the award. The tax consequences vary based on whether the damages cover lost wages, pain and suffering or a physical injury.

In general, if you win a lawsuit or negotiate a settlement the amount you receive is taxable according to the definition of gross income. As with many things in the tax code, there is an exception to the general rule. Damages tied to “personal physical injuries of physical sickness” are excluded from income. The Internal Revenue Service views this exception narrowly.

Are new limits possible for individual retirement accounts?

Currently, no limits exist to the amount a U.S. taxpayer can accumulate in an individual retirement account. A recent report from the Government Accountability Office found that roughly 9,000 individuals have more than $5 million saved in IRAs. The value of a 314 accounts tops $25 million. However, the vast majority of IRAs contain less than $1 million.

At a hearing earlier this month, Senate Finance Committee Chairman Ron Wyden expressed concerns that “the IRA was never intended to be a tax shelter for millionaires.”

New IRS rule simplifies rollover of after-tax 401(k) funds

If you have recently changed jobs, one important step is to rollover retirement savings from a company sponsored 401(k) plan into an Individual Retirement Account or Roth IRA.

Last week, the Internal Revenue Service issued new rules that allow you to roll any after-tax money in your 401(k) plan into a Roth IRA. The benefit for doing this is that the money can grow tax-free. In many cases it will no longer be necessary to pay taxes on the distribution to account for the percentage of pre-tax money in the 401(k).

Congress may extend mortgage relief for principal write-downs

Homeowners with underwater loans face the possibility of a large tax bill if they obtain a principal reduction through a deal with their lender, a foreclosure or a short sale in 2014. Congress recently returned from its summer vacation and now many wonder whether legislators will pass relief for struggling homeowners.

Bank of America recently agreed to a settlement with the U.S. Department of Justice over toxic loans, which includes borrower relief through principal write-downs. The problem is that the tax code treats the amount forgiven as ordinary income. For example, a $10,000 reduction in principal could result in a surprise tax bill and federal tax lien if you cannot pay. A temporary exception to the general rule had been in effect, but expired December 31.

Surprised by an IRS audit? Innocent spouse relief may help

Often in a marriage, one spouse handles the majority of the finances and gets the taxes done each year. The other spouse may just sign on the line. If a later audit shows that a spouse or former spouse failed to report income or overstated deductions, you could jointly owe additional tax, interest and penalties.

If you were unaware of the tax issues, you may be entitled to relief as an innocent spouse. This would mean the IRS could not collect the back taxes from you. To apply for innocent spouse relief, you must file Form 8857 and meet various criteria.

IRS takes closer look at fringe benefits in company audits

Technology employers have been known to offer the benefit of free meals to encourage collaboration and also longer hours. While not all employers go to the extent of free meals, most do offer coffee, tea and the occasional gift card as perks to improve performance.

During some routine company tax audits, the IRS has looked closer at free meals, according to a Wall Street Journal article. If an employer does not withhold taxes to cover the meals, the agency can seek back taxes amounting to as much as 30 percent the fair market value of the meals.

What is the cost of failing to apply IRS Levy?

A recent case details what can happen when a bank does not immediately apply an Internal Revenue Service levy to freeze a bank account. The bank was on the hook for the amount that its customer withdrew.

When a taxpayer is unable to pay a tax bill, the IRS has various collection tactics. The agency can take money directly from your bank account or paycheck through a bank levy or wage garnishment. Here, the IRS notified a taxpayer that it intended to levy his bank account.

 

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