Boston Tax Law Blog

Foreign financial institutions (FFIs) without an adequate reporting strategy could risk noncompliance with IRS regulations regarding offshore accounts. Non-domestic accounts subject to the Foreign Account Tax Compliance Act (FATCA) must be reported by financial institutions as well as by the account holders themselves under the tax code. Not adequately informing the IRS – either directly or indirectly – about the presence of foreign assets held by U.S. taxpayers could lead to steep penalties, both for the account holder and the FFI itself. In particular, the FFI could face a punitive withholding tax that may far outweigh the cost of any single foreign account.

Evolution is key

A recent tax court decision reveals just how important it is to not ignore income on Form 1099-C come tax time. The case, TCM 2018-140, involves a taxpayer who received debt discharge to the tune of over $360,000 back in 2010. Lacking any other income for the year, the taxpayer chose to not file a tax return. In 2018, he incurred failure-to-file and failure-to-pay penalties due to his lack of tax reporting.

The tax court tried to throw the taxpayer a proverbial bone by allowing him time to prove that the debt discharge dealt with his primary residence and/or that he was insolvent at the time, but the taxpayer failed to meet the burden of proof for either claim. Had he proven that debt forgiveness income as reported on Form 1009-C was indeed tied to his primary residence, that would have offset the income and made him eligible for tax forgiveness as well.

We’ve discussed previously the importance of proper estimated tax payments if you have a profitable hobby or so-called “side-gig.” It’s understood and fairly well-known that if your side project brings in more than $1000 per year (via cash, check, bank account transfers, electronic currency or other source), you need to report that income, even if you don’t receive a 1099-MISC, W-2 or other similar tax form. You can also deduct qualified business expenses for a side gig just like you’d be able to with a full-time job.

It’s also pretty common knowledge that side-gigs have become the only gigs for many people, as they’ve been able to quit their full-time jobs just from the income of renting spaces via AirBnB or similar services, driving cars for Uber or Lyft, or selling products from a multilevel marketing company like Amway or LulaRoe.

The passage of the 2017 Tax Cuts and Jobs Act (TCJA) brought many changes to the way that most Americans handle their income taxes. Most of the changes for middle-class earners comes with the loss of personal exemptions and an increase in the standard deduction. There are also new tax brackets, which may allow some people to pay less even while maintaining their same salary.

Two key changes as a result of the TCJA deal with head-of-household and child tax credits. The IRS recently offered guidance (in the form of Notice 2018-70 “Qualifying Relative and Exemption Amount”) to make it easier for the average person to understand when he or she would be eligible for credits for dependents and “qualifying relatives.”