February 2011
Dear Clients and Friends:
The IRS and foreign bank accounts
The government continues to try to uncover foreign accounts of U.S. citizens and residents. The reasons are:
1. Collection of income taxes
2. Improve their audit techniques regarding US citizens living abroad
3. Identify money used for terrorism
4. Investigation of white collar crimes
A new tax bill for 2011 tax reporting (next year) requires individual taxpayers with an aggregate balance of more than $50,000 in foreign financial assets to file a statement with his or her return. This new tax provision does not replace the existing law which required the filing of Form TDF 90-22.1 if you have aggregate balances of more than $10,000 in a foreign financial account. The key differences between the two filing requirements are:
· A foreign financial account is one that holds investments in a foreign bank account, security account or other financial account. The new law covers an interest in any foreign financial assets, which includes the above, plus any stock or other financial instrument not held by a financial institution and any interest in a foreign entity.
So, if you own a 25% interest in your family’s privately held commercial winery in Italy that would be reportable under the new $50,000 rule but not reportable on the existing Form TDF 90-22.1 since it is not held in a foreign financial account.
· Due to privacy and disclosure concerns, the existing Form TDF 90-22.1 is not permitted to be verified against your tax return or tax information. The new law does not have these restrictions so the IRS will be allowed to use the new disclosure to ensure you are reporting all foreign income on your tax return. In the example above, the IRS would now be aware of your interest in a commercial winery and could use that information to confirm whether you are reporting the related business income.
Note the new rules are in addition to the old rules, not a replacement of them. This means you may have to file a form if you meet the rules under the $10,000 test and attach the statement to your return if you meet the rules under the $50,000 test.
You will not need to report foreign stocks or other foreign assets held in a U.S. brokerage account; only those that are held in a foreign financial account or foreign financial assets held outside of a financial account.
Business bonus depreciation
For 2011, there is an election to deduct 100% of the cost of new business furniture, equipment and vehicles under the bonus depreciation rules. If the vehicle is not a truck or SUV of more than 6,000 pounds, there are severe limitations.
100% bonus depreciation sounds like Section 179 expensing of business assets, which also allows for a 100% deduction of capital assets. Here are the differences:
1. Section 179 can be used for both new and used assets acquired during the year, bonus depreciation is only available for brand new assets
2. There is a $25,000 limitation on large SUVs (of more than 6,000 pounds) for Section 179 expensing. That limit does not affect bonus depreciation.
3. Section 179 expensing is limited to the business taxable income, whereas bonus depreciation is not.
Health premium credit for household employers
Household employee’s medical insurance can qualify for the health insurance credit. Since the law does not require the employer to be in a trade or business, household employers can claim the credit for payment of their household employee medical premium (the employer must pay at least 50% of the premium to qualify). If you are interested in doing so, ask us for more information.
IRS gift tax audits
The IRS is working on a major compliance initiative to sniff out unreported gifts. They estimate that between 60-90% of taxpayers who transfer real estate for little or no consideration to a family member fail to report the gift on a gift tax return. Currently, they are checking transfer records in 15 states. The good news is that the California Board of Equalization refused to voluntarily disclose the data, so California is not on the list yet. The government is working on a summons to get the records.
Morre & Company client appreciation party
Due to the variability in spring weather, we have moved the event to the fall. More specifics will be forthcoming.
Please call us if you have any questions about the issues and facts we raised or about any other tax, business or financial planning issue.
~Your partners in financial success~
~Visit our website at www.morrecpa.com~
