A Tax Deduction Apple for Teachers

Kay Bell for Bankrate.com writes: Teachers and other educators can deduct up to $250 they spent last year to buy classroom supplies.  Even better, the deduction is claimed directly on Form 1040, meaning there's no need to itemize to get the break. Rather, it's an adjustment to your income, helping cut your tax bill by reducing your overall income. The less income to tax, the lower the tax bill.

While every little bit helps, the educator expenses deduction is indeed relatively small. But because it's an adjustment to income and doesn't require itemizing expenses, more school employees should now be able to claim at least a portion of their class-related expenditures.
Before this above-the-line deduction was created, these costs could be claimed only if they were included as miscellaneous itemized deductions on Schedule A. Even then, the expenses were useless unless they and all other allowable costs totaled at least 2 percent of the filer's adjusted gross income.

Who can claim costs?

The deduction is not limited to teachers. The Internal Revenue Service says you can take the deduction if, for the tax year, you were employed at a state-approved public or private school system and held one of a number of positions.

Your position can be with any class from kindergarten through grade 12 as long as you work at least 900 hours during the school year.  Couples who share education careers could get a double break if they file jointly. However, each spouse is limited to $250 of qualified expenses. That means if you spent $350 on school supplies and your husband spent $150 on his classroom, you can only deduct $400 on your return, even though your combined education expenses were $500.

What about home schooling? Sorry, but the tax law specifically states that costs for this type of instruction don't count toward the educator expenses deduction.

What items are deductible?

As for exactly what you can deduct, the guidelines are pretty broad. You can count unreimbursed costs for books, supplies, computer equipment (including software and services), and other equipment and supplementary materials used in the classroom.


The IRS also applies its "ordinary and necessary" rule here. To be considered ordinary, an item purchased for your classroom must be something that is common and accepted in the education profession. A necessary expense is one that is helpful and appropriate, but it doesn't have to be required to be considered necessary.


So buying a videotaped production of "Death of a Salesman" to help drive home Arthur Miller's points to your students would likely meet tax muster. But purchasing a new HD television upon which to watch it instead of using your school's working-but-old set may raise some IRS eyebrows.

Circumstances could limit expenses

In addition to the eligibility requirements, the IRS also has set some limits on the money spent on school supplies. Most notable is the restriction that could affect teachers who are continuing their own educations.  The IRS says when an educator uses any tax-favored funds to pay for his or her own schooling, those amounts must be subtracted from the total the teacher claims under the educator expenses deduction.  Take for example Joe Jones, a high school English teacher who is working toward his master's degree in literature during school breaks. He cashed in savings bonds to pay his tuition and excluded the bonds' $150 interest from tax. He also spent $200 for books on Shakespeare to distribute to his 11th-grade students. He must subtract the $150 in tax-free interest from the $200 for the books, leaving him only $50 to claim under the educator expenses deduction.
The same rule applies to nontaxable earnings a teacher gets from qualified state tuition programs or tax-free withdrawals from a Coverdell education savings account.

Coordinating classroom claims

The educator expenses deduction is definitely great for taxpayers who don't itemize. But claiming it won't prevent you from taking other eligible itemized deductions on Schedule A.
If you're a teacher who usually itemizes to save on taxes, such as deducting home mortgage interest and property taxes, keep doing that. In fact, if you spent more than $250 on your class, take another look at the miscellaneous deductions line on Schedule A to see if you can use the excess to also claim this itemized tax break.

Just remember to take the educator expenses deduction on Form 1040, too. For example, if you spend $500 on classroom supplies, claim half of it directly on your Form 1040 as an educator expenses deduction. Then add the other half to your potential miscellaneous itemized deduction amount.  It might be just enough to allow you to take that tax break, too.

5 Simple Rules for Keeping Your Tax Bill in Check

Dan Caplinger for Daily Finance writes: Governments on the federal, state, and local levels are all scrambling to collect cash ... from you, dear taxpayer.   It's getting a lot harder to stay current with all the tax-law changes and to keep your tax bill under control. It's all about identifying favorable provisions and steering clear of traps for the unwary. Follow these five rules and you can minimize the pain.

Rule 1: Track Your Bracket.

Back in 1986, the federal tax system was simplified down to just two brackets. Now, we're back up to seven different brackets, ranging from 10 percent to 39.6 percent.

Knowing your tax bracket is important because it tells you how much in extra tax you'll pay for every additional dollar you earn, or how much tax you'll save by taking an additional dollar of deductions.

One common misconception is that if you jump into a higher bracket, you'll have to pay that higher tax rate on your entire taxable income. Tax brackets only apply to the income within the bracket, and you still get the benefit of lower brackets along the way. So don't panic if you get close to a higher bracket -- but be aware that you'll pay more in tax on the final dollars you earn.

Rule 2: Know Your Thresholds.

As if tax brackets weren't hard enough to figure out, you also have to deal with a huge number of income thresholds that determine whether you're eligible for certain tax benefits. Make too much money, and you'll go over the threshold and find yourself unable to take a valuable deduction or credit.

With dozens of different threshold amounts for various tax provisions, it's impossible to list them all here. But if you're hoping to take advantage of tax-saving opportunities, be sure to look at whether an income threshold applies that could limit your savings.

Rule 3: Remember, It's Not Over 'Til It's Over.

As we all discovered on New Year's Day, tax laws can be changed retroactively. In the case of federal taxes, lawmakers used their ability to turn back the clock in ways that were beneficial to millions of Americans when they restored tax benefits that would otherwise have gone away.

But residents of California have found out the hard way that retroactive tax law changes can go against you as well. Last November, voters put tax provisions into law that imposed higher tax rates for high-income taxpayers on their entire 2012 income, even though more than 10 months of the year had already passed. Some small-business owners are fighting the retroactive tax, arguing that they were told earlier that they wouldn't have to pay one of the retroactively imposed taxes, but they face an uphill battle.

Rule 4: Claim What's Coming To You.

Paying taxes that you don't need to pay is the worst move you can make. Yet millions of taxpayers routinely fail to take advantage of all the provisions that can put more money in their pocket, especially when it comes to the complicated Earned Income Tax Credit.

This credit, aimed at low- and middle-income workers, not only lets you cut your tax bill but also entitles you to a refund of any excess credit over your regular tax bill. Yet every year, many taxpayers never file to get their credit back. Because you only have three years to file before those refunds are gone forever, it's important to file returns as soon as possible to get the money you deserve.

Rule 5: Beware of Hidden Taxes.

It's no longer enough to look at the regular provisions of the income tax. More and more taxes are getting added to the books, including this year's Medicare surcharge of 3.8 percent on high-income earners and the return of full payroll taxes after the 2 percentage point tax holiday on Social Security withholding that was in effect in 2011 and 2012. In addition, certain hidden phase-out provisions, such as those that reduce itemized deductions and personal exemptions, can effectively raise your tax rate without being immediately obvious.

IRS Issues 403(b) Plan Fix-It Guide

Mary K. Samsa, Todd A. Solomon and Joseph K. Urwitz for McDermott Will & Emery write: On February 21, 2013, the Internal Revenue Service (IRS) added to its "self-help" resources a new "403(b) Plan Fix-It Guide" to provide guidance more specifically directed at 403(b) plan sponsors that identify qualification or operational plan failures under their 403(b) plans.  Additionally, the IRS issued as a companion piece a booklet entitled "Voluntary Correction Program Submission Kit," which provides more detailed directions to 403(b) plan sponsors on how to complete and file a correction filing with the IRS specifically relating to the failure to adopt a written 403(b) plan document. 

This new "fix-it" tool addresses 10 potential errors (likely the most common 403(b) plan errors), including, but not limited to, ineligible organizations offering 403(b) plans, failure to adopt a written plan document as required by the final 403(b) regulations, violation of the universal availability rule, failure to appropriately limit elective deferrals and failure to follow the underlying terms of the plan document.  Although these types of failures are not necessarily new (i.e., they could have occurred in prior years), the IRS is slowly bringing 403(b) plans under more scrutiny as the dollars being contributed to these types of plans continue to increase.  The IRS is developing more expertise in this area and is training more agents to be able to identify the particular differences between 401(k) plans and 403(b) plans, and the specific nuances and legal requirements of operating 403(b) plans.  Since the 403(b) regulations were issued in 2007, this is the first step in which the IRS is taking a more active role to ensure compliance under these types of plans. 

Revenue Procedures 2013-12 (Employee Plans Compliance Resolution System, or EPCRS) may be used with respect to any 403(b) plan corrections going forward.  It incorporates in greater detail the "403(b) Plan Fix-It Guide."  Although prior EPCRS guidance such as Revenue Procedure 2008-50 was often applied to 403(b) plans by analogy for correcting errors, new Revenue Procedure 2013-12 is drafted to be directly applicable to 403(b) plans.  Consequently, given the IRS movement toward greater scrutiny of 403(b) plans, tax-exempt organizations that have not recently conducted any type of internal compliance review are encouraged to review, at a minimum, the mistakes highlighted in the "403(b) Plan Fix-It Guide" to determine whether greater analysis is required with respect the compliance and operation of their 403(b) plans.

Tax Rules for Children Who Have Investment Income

Some children receive investment income and are required to file a federal tax return. If a child cannot file his or her own tax return for any reason, such as age, the child's parent or guardian is responsible for filing a return on the child’s behalf.

There are special tax rules that affect how parents report a child’s investment income. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return.

Here are four facts from the IRS about the taxability of your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child's total investment income is more than $1,900. The parent’s tax rate may apply to part of that income instead of the child's tax rate.

3. If your child's total interest and dividend income is less than $9,500, you may be able to include the income on your tax return. See Form 8814, Parents' Election to Report Child's Interest and Dividends. If you make this choice, the child does not file a return.

4. Your child must file their own tax return if they received investment income of $9,500 or more. File Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, with the child’s federal tax return.

For more information on this topic, see Publication 929, Tax Rules for Children and Dependents. This booklet and Forms 8615 and 8814 are available at IRS.gov. You may also have them mailed to you by calling 800-TAX-FORM(800-829-3676).

The Last-Minute Tax Move That Could Be Worth $100,000

Chuck Saletta, for Daily Finance writes: The 2012 tax filing deadline is less than a month away and if you haven't filed yet, don't worry -- you're not alone. H&R Block (HRB) estimates that on average, Americans are about two weeks behind last year's filing pace, with about 60 million yet to file as of the beginning of March.

A big part of the delay is driven by the last-minute tax law changes and new reporting requirements that were so complex that even the IRS was forced to delay its typical starting date for accepting returns.

If you've got all the paperwork and are just dreading the effort or the bill you might have to pay, here's something that might motivate you to get moving: There's a last-minute tax move you can make for 2012 that could potentially be worth over $100,000.

The move that can be worth so much? It's simple: Fund your IRA for 2012.

And exactly how do we come up with the tasty $100,000 carrot to get you to act? Like this: The money you contribute to an IRA (traditional or Roth) grows tax deferred. And if the IRA you fund is a Roth IRA, that growth may even end up being completely tax free.

People under age 50 can contribute up to $5,000 for 2012. If that $5,000 contribution compounds at 8 percent annually for the next 40 years, your savvy tax move you make in the next month winds up being worth $108,623.

That's not a bad haul for a one-time investment, but you've got to get moving.

While the IRS will automatically let you extend the deadline to file your 2012 taxes , the window slams shut on 2012 IRA contributions after April 15. In short, filing extensions do not apply to IRA contributions.

What If You Don't?

Of course, there's nothing forcing you to contribute to your IRA. If you can't come up with the cash or otherwise choose to not contribute, that's fine. But understand what you miss out on:

• Tax-deferred compounding: You can still invest money outside of your IRA, but you'll likely owe taxes on dividends and capital gains on the returns that money makes, even years before you need to spend it.
• Creditor protection: Many states shield some or all of your IRA assets from creditors, protecting that money from being seized to satisfy most common debts. Money in an ordinary brokerage account does not enjoy that kind of protection.
• College financial aid: Money held in an IRA is not counted as an asset for calculating a family's expected financial contribution when calculating federal financial aid for college. Investments in ordinary brokerage accounts reduce the amount of aid a student can receive, whether those investments are held by the student or that student's parents.
• Penalty enforced retirement focus: With few exceptions, tapping your IRA prior to retirement is a very expensive proposition. Most early withdrawals are subject to being taxed at your marginal income tax rateplus a 10 percent penalty for taking the money out early. If you've ever been tempted to spend a chunk of money just because it's there, that penalty can help you avoid that temptation, giving your cash the opportunity to truly compound for decades on your behalf.

There's Always Next Year (or Is There?)

If you don't fund your 2012 IRA now, of course you can always "wait until next year." Of course, then you'll miss out on the benefits of starting the all-powerful compounding clock right now. Plus, unless you make the commitment to yourself to fund your plan, you may well wind up in the same situation next year, too.

If you wait long enough, the opportunity to invest a little now and let compounding turn it into a comfortable retirement will pass you by. And that would truly be a tragedy.

Itemizing vs. Standard Deduction: Six Facts to Help You Choose

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

For more information about allowable deductions, see Publication 17, Your Federal Income Tax, and the instructions for Schedule A. Tax forms and publications are available on the IRS website at IRS.gov  You may also call 800-TAX-FORM (800-829-3676) to order them by mail.

IRAs and Taxes, Pt. 2: IRA Rollovers / Can an individual roll over or convert a traditional IRA or other eligible retirement plan into a Roth IRA?

This is PART 2. (Here is Part 1 IRAs & Taxes  /  When are IRA Funds Taxed?)

AdvisorOne writes: Can an individual roll over or convert a traditional IRA or other eligible retirement plan into a Roth IRA?

Yes.

A “qualified rollover contribution” can be made from a traditional IRA or any eligible retirement plan to a Roth IRA. A rollover was not permitted prior to 2010 if a taxpayer had adjusted gross income (“AGI”) of more than $100,000 for the taxable year of the distribution to which the rollover related or if the taxpayer was a married individual filing a separate return.

Amounts that are held in a SEP or a SIMPLE IRA that have been held in the account for two or more years also may be converted to a Roth IRA.

The taxpayer must include in income the amount of the distribution from the traditional IRA or other eligible retirement plan that would be includable if the distribution were not rolled over. Thus, if only deductible contributions were made to an eligible retirement plan, the entire amount of the distribution would be includable in income in the year rolled over or converted. (Special rules apply for conversions made in 2010.) While the 10 percent early distribution penalty does not apply at the time of the conversion to a Roth IRA, it does apply to any converted amounts distributed during the five year period beginning with the year of the conversion.

Planning Point: Anybody could make a Roth IRA conversion for 2010. Income from a conversion in 2010 can be recognized one-half in 2011 and one-half in 2012, rather than all in 2010.

When an individual retirement annuity is converted to a Roth IRA, or when an individual retirement account that holds an annuity contract as an asset is converted to a Roth IRA, the amount that is deemed distributed is the fair market value of the annuity contract on the date of the (deemed) distribution. If, in converting to a Roth IRA, an IRA annuity contract is completely surrendered for its cash value, regulations provide that the cash received will be the conversion amount.

Non-rollover contributions made to a traditional IRA for a taxable year (and any earnings allocable thereto) may be transferred to a Roth IRA on or before the due date (excluding extensions of time) for filing the federal income tax return of the contributing individual and no such amount will be includable in income, providing no deduction was allowed with respect to such contributions. Such contributions would be subject to the maximum annual contribution limits.A “qualified rollover contribution” is any rollover contribution to a Roth IRA from a traditional IRA or other eligible retirement plan that meets the requirements of IRC Section 408(d)(3). A rollover or conversion of a traditional IRA to a Roth IRA does not count in applying the one IRA-to-IRA rollover in any twelve month period limit.

For years prior to 2010, the taxpayer’s AGI was calculated without regard to the exclusions for foreign earned income, qualified adoption expenses paid by the employer, and interest on qualified United States savings bonds used to pay higher education expenses. Deductible contributions to a traditional IRA also were not taken into account in determining AGI. Amounts included in gross income as a result of a rollover or conversion from a traditional IRA or other eligible retirement plan to a Roth IRA were not taken into account. Social Security benefits includable in gross income under IRC Section 86 and losses or gains on passive investments under IRC Section 469 were taken into account. The definition of AGI excludes minimum required distributions to IRA owners aged 70½ or older, solely for purposes of determining eligibility to convert a regular IRA to a Roth IRA.

An eligible retirement plan, for this purpose, includes a qualified retirement plan, an IRC Section 403(b) tax sheltered annuity, or an eligible IRC Section 457 governmental plan. Taxpayers, including plan beneficiaries, can directly transfer (and thereby convert) money from these plans into a Roth IRA without the need for a conduit traditional IRA. (Other than by direct conversion from an eligible non-IRA retirement plan, a beneficiary may not convert to a Roth IRA.)

Unless a taxpayer elects otherwise, income from conversions to Roth IRAs occurring in 2010 will be reported ratably in 2011 and 2012.

Qualified rollover contributions do not count toward the annual maximum contribution limit applicable to Roth IRAs.

A rollover from a Roth IRA or a designated Roth account to a Roth IRA is not subject to the adjusted gross income limitation and is not subject to tax.

Planning Point: Major reasons for converting to a Roth IRA often include obtaining tax free qualified distributions from the Roth IRA and greater stretch from the Roth IRA because distributions from a Roth IRA are not required until after the death of the owner (or the death of the IRA owner’s spouse if the spouse is the sole designated beneficiary and elects to treat the IRA as the spouse’s own), rather than starting at age 70½. A conversion also may make sense if it is expected that tax rates will increase (from the time of conversion to the time of distribution), but not if tax rates will decrease. Consider whether any special tax benefits, such as net unrealized appreciation, would be lost if a qualified plan is converted to a Roth IRA. Also, a qualified plan may offer better asset protection than a Roth IRA. State laws vary on this issue. If a taxpayer cannot qualify under the Roth AGI limitations, perhaps he or she can establish a traditional IRA, and then convert that into a Roth IRA. Note that this, however, has not yet been addressed by the IRS. 

Recharacterizations

If a taxpayer has rolled over funds from a traditional IRA or other eligible retirement plan to a Roth IRA during the taxable year, and later discovers that his or her AGI is in excess of $100,000 in a year before 2010 (or for any other reason wants the transaction undone), the taxpayer generally has until the due date for filing his or her return (including extensions) to correct such a conversion without penalty, to the extent all earnings and income allocable to the conversion are also transferred back to the original IRA, and no deduction had been allowed with respect to the original conversion.

This “recharacterization” in the form of a trustee-to-trustee transfer results in the recharacterized contribution being treated as a contribution made to the transferee IRA, instead of to the transferor IRA. A taxpayer can apply to the IRS for relief from the time limit for making a recharacterization.

For purposes of a recharacterized contribution, the net income attributable to a contribution made to an IRA is determined by allocating to the contribution a pro-rata portion of the earnings or losses accrued by the IRA during the period the IRA held the contribution. This allows the taxpayer to claim any net income that is a negative amount.

A time restriction is placed on reconversions (i.e., converting to a Roth IRA a second time after recharacterizing a first conversion). A person can reconvert back to a Roth IRA but only after the later of the beginning of the next year or thirty days after the recharacterization.

Planning Point: Where the value of converted property drops after a conversion to a Roth IRA, it may be useful to recharacterize the contribution back to the other type of IRA and then reconvert to a Roth IRA to reduce the amount taxable on converting to a Roth IRA. The time restriction on reconversions reduces, but does not eliminate, the potential value of this technique.

Reconversions and recharacterizations must be reported to IRS on Form 1099-R and Form 5498. Prior year recharacterizations must be reported under separate codes. All recharacterized contributions received by an IRA in the same year are permitted to be totaled and reported on a single Form 5498.

OECD issues Aggressive Tax Planning based on After-Tax Hedging report (Earnst & Young View)

Earnst & Young writes: On 13 March 2013, the OECD issued the report Aggressive Tax Planning based on After-Tax Hedging, describing the features of aggressive tax planning (ATP) schemes based on after-tax hedging, as well as the strategies used to detect and respond to those schemes. This report follows the 2011 OECD report Corporate Loss Utilisation through Aggressive Tax Planning, which advises countries to analyze the policy and compliance implications of after-tax hedges in order to evaluate the appropriate options available to address them.

Risk management and hedging are key issues in corporate management. In certain cases, taxpayers may see an opportunity or a need to factor taxation into their hedging transactions to be fully hedged on an after-tax basis. However, after-tax hedging, while not in itself aggressive, may be used as a feature of schemes which are designed to allow taxpayers to achieve higher returns, without actually bearing the associated risk that is, in effect, passed on to the government through the tax charge.

In general terms, after-tax hedging consists of taking opposite positions for an amount which takes into account the tax treatment of the results from those positions (gains or losses) so that, on an after-tax basis, the risk associated with one position is neutralized by the results from the opposite position. ATP schemes based on after-tax hedging pose a threat to countries’ revenue base: empirical evidence suggests that hundreds of millions of US dollars are at stake, with a number of multibillion US dollar transactions identified by certain countries.

ATP schemes based on after-tax hedging exploit the disparate tax treatment between the results (gain or loss) from the hedged transaction or risk on the one hand, and the results (gain or loss) from the hedging instrument on the other. In some of these schemes, the tax treatment of gains and losses arising from each transaction is symmetrical, while in others the tax treatment is asymmetrical.

Other schemes rely on similar building blocks and are often structured around asymmetric swaps or other derivatives. ATP schemes based on after-tax hedging can exploit differences in tax treatment within one tax system and are, in that sense, mostly a domestic law issue.

Any country that taxes the results of a hedging instrument differently from the results of the hedged transaction or risk is potentially exposed. The issue of after-tax hedging also arises in a cross-border context with groups of companies operating across different tax systems, which gives rise to additional challenges for tax administrations.

The report describes the following main challenges raised by after-tax hedging from a compliance and policy perspective, and takes the following positions:

• The difficulty in drawing a line between acceptable and non-acceptable after-tax hedging. The report concludes that, in practice, the decision on where to draw the line will depend on a number of elements, including the facts and circumstances of each case, the commercial reasons underlying the transactions, and the intent of the applicable domestic law.
• The difficulties in detecting ATP schemes based on after-tax hedging, especially cross-border schemes. These difficulties arise because often there is no explicit link between the hedged item and the hedging instrument or because there is no trace of them in the taxpayers’ financial statements. Here, the report underlines that, in order for tax administrations to be able to face the above challenges, it is important for them to ensure they have sufficient resources and expertise to understand schemes of this nature, which are often very complex. A fair and transparent dialogue with the taxpayer, as part of discussions which take place under cooperative compliance programs, has also proven to help tax administrations gain a better understanding.
• Deciding how to respond to ATP schemes based on after-tax hedging. The report shows that different response strategies have been used, including strategies seeking to deter taxpayers from entering into such schemes and promoters or advisors from promoting the use of such schemes.

Finally, the report recommends countries concerned with ATP schemes based on after-tax hedging to:

• Focus on detecting these schemes and ensure that their tax administrations have access to sufficient resources (in particular, expertise in financial instruments and hedge accounting) to detect and examine after-tax hedging schemes in detail
• Introduce rules to avoid or mitigate the disparate tax treatment of hedged items and hedging instruments
• Verify whether their existing general or specific anti-avoidance rules are suitable to counter ATP schemes based on after-tax hedging and, if not, to consider amending those rules or introducing new rules
• Adopt a balanced approach in their response to after-tax hedging, recognizing that not all arrangements are aggressive, that hedging in and of itself is not an issue and that ATP schemes based on after-tax hedging may necessitate a combination of response strategies
• Continue to exchange information spontaneously and share relevant intelligence on ATP schemes based on after-tax hedging, including deterrence, detection and response strategies used, and monitor their effectiveness

OECD Tax Alert / New report sees dangers in after-tax hedging transactions (Deloitte's View)

Bas Castelijn, Michiel Hoozemans, Hans van den Hurk and Hans Pijl for Deloitte write: In a report issued on 13 March 2013, the OECD (Organisation for Economic Co-operation and Development) alerts tax authorities worldwide of the potential for aggressive tax planning (ATP) in situations where taxpayers factor in the tax effect of hedging transactions (“after-tax hedging”). The report, entitled “Aggressive Tax Planning based on After-Tax Hedging,” describes the features of ATP schemes, the challenges arising from such schemes and the tools that can be used by governments to detect and respond to ATP schemes.

The OECD Steering Group on ATP was established in 2007. Since that time, the OECD has set up the ATP directory (a database accessible only to tax authorities) and has published several reports: “Tackling Aggressive Tax Planning through Improved Transparency and Disclosure” (2011), “Corporate Loss Utilization through Aggressive Tax Planning” (2011)), “Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues” (2012) and “Addressing Base Erosion and Profit Shifting” (BEPS).

The after-tax hedging report acknowledges that hedging and after-tax hedging (where the tax effect is factored in) are not necessarily aggressive per se. After-tax hedging will be considered aggressive only when the scheme concerned is artificial and designed to allow a taxpayer to achieve a higher return without assuming any risk, thereby shifting the risk to the government. Such schemes can negatively impact a country’s tax base, and the report notes that there is empirical evidence that hundreds of millions of dollars (USD) are at stake.

The report appears to be in the nature of a wake up-call and does not propose any concrete solutions to the perceived problem. That is, the aim of the report is to ensure that tax authorities are aware of potential schemes involving after-tax hedging and to issue a warning that any country is exposed where there is a mismatch between the taxation of the hedged risk and the hedging instrument. As in other case, the targeted response is to be left to individual countries.

The report provides examples of cases in which the hedged transaction/risk and the hedging instrument are taxed differently and where potential ATP could arise; for example, where an investment in shares serves as the hedging instrument to hedge the currency exchange risk in the context of a currency carry trade (i.e. where an investor sells a low interest rate currency and uses the proceeds to purchase a higher interest rate currency). The scheme exemplified here relies on the difference between the tax treatment of the hedged transaction/risk and that of the hedging instrument (disparity). Some schemes additionally rely on an asymmetry inherent in the different treatment of the hedging instrument itself, dependent on whether a gain or loss is made. The report illustrates the effect of after-tax hedging via examples that use actual numbers.

The after-tax hedging report addresses itself to tax administrations and describes various means by which they may detect ATP schemes (once identified, an ATP scheme is added to the ATP directory). The means envisaged include information provided by taxpayers in ruling requests, information uncovered during audits, intelligence that comes to light in the ordinary dialogue between taxpayers and the tax administration, items reported under mandatory disclosure rules and, finally, information that emerges in the context of enhanced taxpayer/tax administration relationships.

Significantly, the report does not actually answer the fundamental question: at what point do after-tax hedging transactions become ATP? In acknowledging the difficulty of distinguishing between what is and is not an acceptable transaction, the report confines itself to indicating that this will depend on facts and circumstances of, and the commercial rationale for, the transaction concerned. The report also recognizes that after-tax hedging (which is described in the report in a purely domestic context) becomes more complicated when a cross-border dimension is added. The report goes no further than suggesting that domestic tax departments need to have sufficient resources and expertise in the area, if only to recognize the existence of hedged transactions/risks.

As regards the strategies that tax authorities may adopt in response to ATP involving after-tax hedging, the report mentions the exercise of behavioral influence over taxpayers and scheme promoters, as well the application of transfer pricing rules, general anti-avoidance rules and specific anti-avoidance rules. Since counter measures must be appropriate to the domestic situation of each country, the report is not able to suggest a more detailed approach.

The publication of the report clearly demonstrates that aggressive forms of after-tax hedging have attracted the OECD’s attention. It is suggested that OECD member countries should regard this kind of ATP as a serious issue.

Tax Planning Transactions (Basic Understanding)

John Csiszar for Demand Media writes: Tax planning is not to be confused with tax evasion. Tax evasion is an illegal attempt to avoid paying the correct amount of taxes you owe, usually by hiding income or falsifying tax records. Tax planning, on the other hand, is an attempt to pay the minimum amount of tax that you legally owe. Successful tax planning involves undertaking any of a series of legal actions that can help you avoid paying excessive tax.

Gains and Losses

One of the great benefits of having a loss on your investments is that you can use it to lower your taxes. If you have taxable capital gains, such as profits on stock trades, the Internal Revenue Service allows you to offset those gains with losses. The ability to offset gains and losses is unlimited. For example, if you have $100,000 in both gains and losses, you won't have to pay tax on any of your gains. If your losses exceed your gains, you can take up to $3,000 of losses to offset ordinary income and carry forward any remaining losses for use in future years. However, you must realize your losses to use them for tax purposes. A realized loss is one you have actually taken by selling your investment. A loss on paper only doesn't count for tax purposes.

Deferring or Advancing Income

If you can defer or "push" your income into the next tax year, you can delay paying tax on it. Generally, the longer you can wait to pay your tax the better. If you plan on taking money out of an individual retirement arrangement, or if you are due a year-end bonus, you may be able to delay receiving that money until January, thereby deferring the tax until the next year. Income manipulation can work both ways. If you anticipate that you'll be in a higher tax bracket next year, you might want to advance any income you can into the current year, so you'll be taxed at a lower rate.

Deductions

The IRS offers numerous tax breaks you can use to lower your taxes. Making an IRA contribution may allow you to deduct as much as $5,500 off your income, or even $6,500 if you're 50 or over, as of 2013. If your employer offers a 401(k) plan, the amounts jump to $17,500 and $23,000, respectively. Itemizing deductions on your taxes will allow you to use your charitable contributions, mortgage interest payments and other deductible expenses to lower your taxes.

Investment Strategies

Not all investments are taxed the same way. Long-term gains, for example, are taxed at a maximum of 23.8 percent as of 2013, while short-term gains, which are taxed the same as ordinary income, can be taxed as high as 39.6 percent. The IRS designates investments held for longer than one year as long-term, so holding on to your investments for a longer time can end up helping lower your taxes. The type of income you receive from your investments can also affect your tax planning. While most interest payments, such as those from bonds and savings accounts, are taxed as ordinary income, dividends from stocks can be taxed at just 20 percent as of 2013, even for higher-income taxpayers.

Review: QuickBooks Online for iPad a limited app with potential

Jeffery Battersby for MacWorld writes: Last February, Intuit released an addition to its QuickBooks Online offering, an iOS app called QuickBooks Online for iPad that allow access to your QuickBooks data without requiring you to be pinned to your desk. While it’s clearly a first generation app—which means it doesn’t have all the features I’d like to see in an app of this sort—QuickBooks Online for iPad has the potential to ease your estimating and invoicing while you’re on the road.  It’s important to note from the start that QuickBooks Online for iPad is not a standalone app that you can use to manage your business’ books, and it isn’t an app you can use with the Mac or Windows versions of QuickBooks. QuickBooks Online for iPad is solely designed as a helper app for a new or existing QuickBooks Onlineaccount. A service that costs from $13 to $40 per month. If you don’t already have a QuickBooks Online account you can use the app to create one, and if you do you can use the app to log into your existing account and go right to work.

Mobile mogul: QuickBooks Online for iPad provides offers invoicing and basic reporting tools for you QuickBooks Online account.

Work using the app is limited to a few basics functions that do not encompass everything possible with QuickBooks Online. You can add new customers, create estimates and invoices, add expenses, receive payments, and create some basic but useful reports. These features work well, but you don’t have access to some of the core functionality of QuickBooks Online and it’s also missing features that seem pretty obvious for what is ostensibly a mobile app.

Adding customers is easy, as is adding any other type of transaction. From any QuickBooks Online for iPad screen you tap a (+) that appears in the app’s upper right-hand corner, then choose either Customer, Invoice, Payment, Expense, or Note and begin adding the appropriate information. If you’re creating a customer the app is able to pull info from your Contacts app. Although, while the app offers a field for a customer photo, that photo is not imported from the Contacts app. Customers viewed within QuickBooks Online for iPad display a map pinpoint with the address location for the customer. Tapping that map opens the Maps app and automatically finds directions from your location to the customer location.

Once customers are created you can begin creating invoices for those customers. Invoices can include personal notes with photos you’ve taken of a project or items you’re selling. If you don’t already have an item set up, you can create new items int he app as you’re creating your invoice. The beauty of QuickBooks Online for iPad is that, no matter whether you’re creating customers, invoices, or items you sell, as long as you have an active Internet connection, everything your create on the app is synchronized and updated to your QuickBooks Online account. And anything you create in QuickBooks Online is also synced to your iPad.

Invoices look gorgeous when you view them on the iPad, but that beauty doesn’t transfer to the invoices your customers receive. What they get instead are forms based on the default templates you’ve selected in the QuickBooks Online app. As is the case with the desktop version of QuickBooks and applications such as Acclivity’s AccountEdge products, these templates are sterile, uninteresting, and minimally customizable. They’ll work, but it’s small details like these that keep me using Billings for all my invoicing and time billing needs.

Which raises another important point. QuickBooks Online for iPad has no time billing features, which is a pretty obvious hole in an app designed to be brought on-site to a customer location. It’s also important to note that while the app has some basic reporting functionality—you can view open and closed invoices, profit & loss graphs, and a bar chart of invoices by month—these are a very limited subset of what’s possible at QuickBooks Online. Furthermore, while I know we live in an increasingly paperless world, there is no way to print anything from the app.

Bottom line

QuickBooks Online for iPad is an excellent start for what has the potential to be an amazing add-on to QuickBooks Online. Its invoicing tools, access to customer data, and basic reporting tools make it an enticing app, but missing time billing and access to more detailed reporting features make it an app that is not yet good enough to stand on its own.

Relief Available To Many Extension Requesters Claiming Tax Benefits

The Internal Revenue Service today provided late-payment penalty relief to individuals and businesses requesting a tax-filing extension because they are attaching to their returns any of the forms that couldn’t be filed until after January.

The relief applies to the late-payment penalty, normally 0.5 percent per month, charged on tax payments made after the regular filing deadline. This relief applies to any of the forms delayed until February or March, primarily due to the January enactment of the American Taxpayer Relief Act.

Taxpayers using forms claiming such tax benefits as depreciation deductions and a variety of business credits qualify for this relief. A complete list of eligible forms can be found in Notice 2013-24, posted today on IRS.gov.

Individuals and businesses qualify for this relief if they properly request an extension to file their 2012 returns. Eligible taxpayers need not make any special notation on their extension request, but as usual, they must properly estimate their expected tax liability and pay the estimated amount by the original due date of the return.

The return must be filed and payment for any additional amount due must be made by the extended due date. Interest still applies to any tax payment made after the original deadline.

Further details on this relief, including instructions for responding to penalty notices, is available in Notice 2013-24.

Internet tax supporters, with backing from Walmart, Macy's, and Best Buy, are hoping a Senate vote will give them enough political leverage to require Americans to pay sales taxes when shopping online.

Declan McCullagh

 for CNET writes: Internet tax supporters are hoping that a vote in the U.S. Senate as early as today will finally give them enough political leverage to require Americans to pay sales taxes when shopping online.

Sens. Mike Enzi (R-Wy.) and Dick Durbin (D-Ill.) are expected to offer an amendment to a Democratic budget resolution this week that, by allowing states to "collect taxes on remote sales," is intended to usher in the first national Internet sales tax.

"We're working overtime in pushing this, talking to our members, activating our grassroots," says Stephen Schatz, a spokesman for the National Retail Federation. The group's board members include OfficeMax, Macy's, the Container Store, and Saks, which argue it's only fair to force Americans to pay sales taxes when buying from online retailers.

The justification for the proposal reprises arguments that state tax collectors have made for at least a decade: online retailers that don't always collect taxes are unreasonably depriving state governments of revenue and enjoy an unfair competitive advantage over big box retailers that do collect taxes. On the other hand, there are close to 10,000 jurisdictions that can levy taxes, each with its own rules and ability to conduct audits, and complying with all of those as a small retailer is not a trivial task.

Taxpayer advocates say an endorsement of a multi-billion dollar tax hike on Americans shouldn't be snuck into an unrelated budget bill (PDF) that's expected to be voted on before senators leave for an Easter recess. The National Taxpayers Union set up a petition to Congress this week calling the amendment "really just a way to unleash state tax collectors on the Internet," and 15 conservative groups sent a letter last week to members of Congress saying an Internet tax law is "is bad news for conservative principles and the cause of limited government."

They're joined by by eBay, an association of small Internet sellers called W R HERE, and NetChoice, which includes Facebook, Yahoo, LivingSocial, and AOL as members.

The proposed amendment "does nothing to address what the Supreme Court says was an unreasonable burden on interstate commerce," says Steve DelBianco, executive director of NetChoice. "It's an unprecedented expansion of state sales tax authority."

Enzi and Durbin sponsored the separate Marketplace Fairness Act of 2013 (S.336), introduced last month, which has 25 other Senate supporters and would authorize state governments to collect taxes from remote sellers with more than $1 million in gross receipts.

But it takes effect only if state governments sufficiently simplify their notoriously labyrinthine tax laws. In New Jersey, for instance, bottled water and cookies are exempt from sales tax (PDF), but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but amink fur coat is not (PDF).

The Enzi-Durbin amendment takes a similar approach, but lacks mandatory simplification and is non-binding. It appears to be intended as a clever political hack: secure plenty of votes on a non-binding Internet tax amendment, then use those vote totals to argue there's sufficient support for S.336 when it's up for a binding vote later.

"The strategy of the bill's supporters is to offer this general amendment and then claim that all the senators that vote for it support the bill," says Brian Bieron, eBay's senior director for federal government relations and global public policy. "That is not just a stretch, it is not accurate. But the game plan is to rack up a sizable vote and then make the claim the bill itself should jump over the Finance Committee and go right to the floor." (Sen. Max Baucus, D-Mont., head of the Senate Finance committee who represents a state with no sales tax, has been less than enthusiastic about S.336.)

A spokesman for Enzi did not respond to queries from CNET yesterday afternoon. Durbin has previously said that enacting the Internet tax legislation is "a matter of basic economic fairness."

Enzi's allies, including big box retailers and Sens. Dianne Feinstein (D-Calif.), Al Franken (D-Minn.), Lamar Alexander (R-Tenn.), and Heidi Heitkamp (D-S.D.), hope that they can convince 60 senators to vote for the amendment -- a key supermajority that would ease the path for enacting S.336 in the future.

A letter (PDF) that the Retail Industry Leaders Association sent to all senators on Tuesday says the Enzi-Durbin amendment "simply provides states with the authority -- if they so choose -- to require online sellers to collect sales taxes just like brick and mortar and many of their dot.com Web sites already do today." RILA's board members include representatives of Best Buy, Home Depot, Walmart, Whole Foods, Target, and AutoZone.

The current legal and political landscape was shaped by a 1992 case called Quill v. North Dakota, in which the U.S. Supreme Court ruled that out-of-state retailers generally don't have to collect sales taxes.

One exception to that rule is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence, which is why Amazon.com wasn't required to collect sales taxes in California until recently. Another exception is the sale of cigarettes, which is covered by the Jenkins Act.

As a practical matter, many Americans already pay sales taxes on Internet purchases, either from big box retailers' Web sites or from online retailers like Amazon.com that have generated nexus by opening warehouses or subsidiaries in more states. Smaller retailers, including Newegg.com, Overstock.com, Blue Nile, Systemax's TigerDirect.com, and eBay sellers are less likely to have nexus, meaning their purchases would arrive tax-free (use taxes, however, may still apply).

Supporters of Internet tax legislation say they're optimistic. "It's bound to happen," says Schatz, from the National Retail Federation. "It's just a matter of when."

House panel considers cloud computing tax issue

AP for VCStar.com writes: The Idaho House Revenue and Taxation Committee has agreed to introduce legislation to clarify that cloud computing services delivered over the Internet aren't tangible goods subject to sales tax.

The Spokesman-Review reports (http://bit.ly/VXhBd9) that high-tech businesses in Idaho requested such legislation after an Idaho Tax Commission memo in October interpreted a 1993 state law as saying software is taxable property no matter how it is delivered.

Jay Larson, CEO of an industry organization called the Idaho Technology Council, told the panel that cloud computing involves people using the Internet to rent computing power, electronic storage space and other services. He said the state Tax Commission in recent months told some high-tech firms they have to pay large amounts in back sales taxes.

"This tax has caused a lot of people to consider moving their operations out of the state so they would not have to pay that tax," Larsen said. "It says if your servers are in the state of Idaho, you pay 6 percent more than if your server is in the state of Oregon."

He said lawmakers should keep Idaho competitive in attracting and keeping high-tech companies, including the nearly 200 businesses that are part of the Idaho Technology Council.

"This legislation will help set the foundation to continue to show that we have the right infrastructure from a public policy standpoint to support tech companies and software companies as they grow and develop," Larsen said.

Panel members worked to understand the nature of cloud computing.

"You're not an owner of this property, because you can't dispense it, you can't modify it, you can't change it," said Rep. Dell Raybould, R-Rexburg, a farmer from eastern Idaho. "So actually, what you're doing is just renting it. You're renting it from the provider. . Is that correct?"

Larson said that was correct.

Rep. JoAn Wood, R-Rigby, moved to introduce a bill and her motion passed.

"I can see in this committee there's a considerable amount of interest in what you've brought to us, so I think probably we ought to explore it further," she said.