Category: Individual Taxes

  • Online Gambling and Payment Accounts Tax Reporting Warning

    In a recent court case (Hom, (DC CA 6/4/2014) 113 AFTR 2d ¶ 2014-893), a taxpayer’s online payment and poker accounts were found to be reportable under FBAR. All of the accounts were with companies located outside the United States. The taxpayer had control over them and could deposit and withdraw funds at will, therefore the court decided they were financial accounts. Since the accounts had at times more than $10,000 in them, they should have been reported and the taxpayer was assessed penalties for not doing so.

    Interestingly, in this case, the foreign companies did hold some of their customers’ fund inside the US, however the court ruled that the nationality of the company and not where the funds were held determined their reporting requirement.

    Also of note, the current regulations specifically mention “bank accounts…[which means] a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.” (31 CFR 1010.350)

    The court interpreted the activities that the taxpayer could perform with these accounts to be functionally the same as a banking account.  I think that others will be caught in this same wicket. Taxpayers would probably not think of these types of accounts when asked by their tax preparer if they have any reportable foreign bank accounts.

  • Beware the 3.8% Investment Surtax

    Plan now to save yourself from this new tax on investment income. If you meet the income thresholds below and have net investment income, an additional 3.8% tax will be due. This tax went into effect on January 1, 2013.

    I see this coming into play unexpectedly for taxpayers who have gain on a home sale that is above the exclusion amount and for those selling a business. For those with wage or business income normally near or above the thresholds listed below, we’ll need to do some planning to minimize taxes due in those years.

    When Does it Apply:

    Filing Status

    Threshold Amount

    Married filing jointly

    $250,000

    Married filing separately

    $125,000

    Single

    $200,000

    Head of household (with qualifying person)

    $200,000

    Qualifying widow(er) with dependent child

    $250,000

    Source: http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

     

    Important Points

    Consider re-evaluating passive or investment income if you will be above the threshold in the current year. Active participation in a formerly-passive business could turn investment income into regular income, which might be more beneficial. Be mindful of taking investment gains in a year affected by this tax.

    This tax is not indexed for inflation. Like the AMT before Congress’ recent fix, the Medicare Tax’s grasp on taxpayers will increase in future years.

    Need more details?

    Call me to discuss your specific situation. Forbes also has a nice series with more details.