Edmundson CPA, PLLC

Tax & accounting are our business

You are here: Home / Archives for Financial

Financial

By

Foreign financial filing due (FinCen 114)

FinCen websiteForm FinCen 114 is due June 30, 2016. No extensions are available! Failure to timely file can result in severe penalties as much as 50% of the highest account value and possible criminal charges that can carry a prison sentence.

This is why I ask each year if you have an interest in a foreign financial accounts.

What is a foreign financial account?

As with most things to do with the government, the definition is complex. Generally, a foreign account is any financial asset held at a foreign branch of a financial institution. Some examples:

  • Life insurance
  • Annuities
  • Pensions and other retirement accounts
  • Bank accounts
  • Brokerage accounts
  • Investment accounts

Owning a foreign stock held at a U.S. branch of a financial institution is not a foreign financial account. Nor is a mutual fund that holds foreign stocks when the mutual fund is held at a U.S. branch. (There are other filing requirements if you own a significant amount of any particular foreign company but those rules are beyond the scope of this post.)

When do you have a financial interest?

If you own, have signature authority over or can direct the use of the account then you have an interest in the account.

  1. Owning an account should be easy to understand – titled in your name either jointly or solely then it is owned by you for these purposes.
  2. Signature authority – you can sign a check or initiate a transfer or payment.
  3. Direct the use – if the account is titled in another entity’s (person, company, partnership, etc.) name and you are not listed as a signatory but the owner or signatory will follow your directions, then you have a financial interest. For example, you give your brother $12,000 to deposit into his Bank of Somewhere Other than the U.S. account. Your understanding is he will give the money to you when you visit, then you have a financial interest in that account and must report it.

Conclusion

File now or pay a severe penalty later. The U.S. Treasury requires online filing here. Some tax software companies also provide software for filing purposes.

By

Bad tax advice does not save taxpayer

In Private Letter Ruling 201432032 (PDF), the IRS denies late IRA rollover relief. The taxpayer wanted to invest IRA funds into a limited partnership (LP) and the taxpayer’s IRA custodian would not go along with it. This should have been the first red flag for the taxpayer but he went right past this warning. Instead he asked his financial advisor, also a CPA, how he could accomplish his goal. His financial advisor told taxpayer to title the LP investment in the IRA’s name and the taxpayer did so.

In 2012, over 2 years after the investment, the financial advisor realized titling the LP investment in the IRA’s name did not work because the investment was not held by a qualified custodian. The taxpayer requested that IRS waive the 60 day rollover requirement as he had relied upon professional advice but IRS said that excuse did not meet the requirements of Revenue Procedure 2003-16. The IRS stated that the taxpayer “chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”

What can we learn from this PLR? First, a financial advisor, even a CPA, can have his or her opinion influenced by the commission or fees earned from the investment. Perhaps this was a case of a subconscious influence but it still could have influenced the outcome. Second, reliance on professional advice is not always a cure for bad tax outcomes. Third, if one advisor (the original IRA custodian) will not go along with the deal, the taxpayer should proceed with extreme caution. Finally, we can learn that investing in a business through an IRA is a tricky thing. The penalties and taxes can be quite significant if all the “I’s” are not dotted and all the “T’s” are not crossed.

By

IRS making slow progress on identity theft

While it took a long time, IRS has finalized rules allowing truncated Social Security Numbers, Employer Identification Numbers, and Adoption Identification Numbers on many payee statements and other forms. The IRS started a pilot program in 2009. I wonder how many people consider 5 years a fast turnaround on this common sense change? Perhaps a bigger question is why it took until 2009 for the IRS to begin the pilot program.

Of course IRS had to come up with a new name and acronym TTINs standing for truncated taxpayer identification numbers.

Some eligible forms are:

  • Various forms 1099, examples
    • interest income (1099-INT)
    • dividends (1099-DIV)
    • sales of capital assets (e.g. stocks and mutual funds) (1099-B)
    • sales of real estate (1099-S)
    • retirement, annuity, and IRA distributions (1099-R)
    • forgiveness of debt (1099-C)
    • payments to independent contractors, etc. (1099-MISC)
  • Various forms 1098, examples
    • Mortgage interest (1098)
    • Tuition (1098-T)

The truncated number can only be used on the recipient’s copy. The copy going to IRS still shows the full number. The bulk of forms are transmitted electronically to the IRS thus eliminating the chance of waylaid mail.

Your W-2 still has to show your full Social Security Number.

Sources: Fighting Identity Theft, IRS Issues Final Rules on Truncated Identification Numbers , AICPA and Treasury Document 9675 (PDF).

By

Good news from Social Security


The Social Security Board of Trustees released their annual projection of when the Disability and Social Security Trust Funds will be emptied. This year, things did not get worse. Not great news but not as bad as in some past years.

The Disability Trust fund is in real trouble as it will be emptied by 2016. If Congress does nothing, people on Social Security Disability will still get about 81% of what they were promised. This is better than nothing but not good.

The Combined Trust Fund (old-age and disability) will last until 2033. Again, assuming Congress does nothing, people will still get about 77% of what they were promised.

By

State surpluses, deficits, credit ratings

The Pew Charitable Trusts has an interesting article on how the states have fared since 2008 with budget surpluses and deficits. As of December 31, 2013, NC is still collecting less revenue than it did in 2008.  NC currently has a deficit of $445 million. Pew notes that “‘Recent tax law changes, not economic conditions, are the reason that collections (in North Carolina) are likely to miss the target’ for the remainder of 2014, the National Conference of State Legislatures (NCSL) concluded in a May report.” The link is to the free PDF summary of the NCSL report.

Regardless of whether you feel the budget news is good or bad, I hope you can agree with the news on NC’s S&P rating. NC is one of only seven states that had a AAA S&P rating every year from 2001 through May of 2014. Pew has a nice chart, reproduced below, on the states’ S&P ratings:

State Credit Ratings 2001-2014

 

By

New Year resolutions

OK, now that you have all those “other” resolutions made how about some financial resolutions for 2014? Suggestions:

  • I will review my investment allocations. Do I need to rebalance my portfolio?
  • I will plan before making a significant financial move instead of after. History cannot be changed, only our recollections change but not the facts.
  • I will keep a questioning mind when I hear something that sounds too good (or too bad) to be true. I realize that many times they are not true.
  • I will put more away for my retirement, especially via my retirement plan.
  • I will review my employer’s benefit plans to make sure I am taking advantage of all available and appropriate tax savings.
  • I will work towards paying off all my personal debts such as credit cards, car loans, and lines of credit.
  • I will not borrow against my home equity except in a real emergency as I could lose my house if I have financial difficulties later. The interest is also often not deductible.
  • I will keep taxable income, such as operating businesses and many partnerships, out of my IRA. I do not want my IRA to pay income taxes.
  • I will keep charitable receipts for all contributions over $249 and bank records for those below. I will not wait until April 2015 to get these receipts at the last second as I know I must have them on hand when I file my return.
  • I will remember that my hair dresser/barber is not a tax expert and will run tax savings ideas by a professional before I implement them.
  • I will remember that I only owe income taxes because I am fortunate enough to have a decent income.

photo credit: Pepe Martin