Tax Lawyers Minneapolis

Tax Lawyers Minneapolis | Wash-Sales: General Rules

/in , /by

Do you frequently trade stocks or purchase options? Then you should be aware of the wash-sales rules. In some extreme circumstances, the wash-sales rules can have drastic negative effects on your taxes, so they are well worth knowing.

A wash-sale occurs when stock, securities, or options are sold for a loss, and within a 61-day period (30-days before or after the sale), “substantially identical” stock, securities, or options (termed here, “replacement stock”) are purchased. The loss is not deductible under the wash-sales rules. Instead, the loss is added to the basis of the replacement stock. Wash-sales do not apply to gains.

The wash-sales rules apply to investors and traders, but not to dealers in stocks or securities, or losses sustained in the ordinary course of business. In general, “substantially identical” refers to stocks or securities of the same company (i.e. shares of Apple stock is not “substantially identical” to Microsoft for purposes of the wash-sales tax rules).

For year-end tax planning purposes, taxpayers should be aware that the wash-sale 61-day rule applies even if duration is spread over two years. Thus, stock sold for a loss in 2010 will not be deductible for tax year 2010 if the replacement stock from the same company is purchased within the 61-day window. Also, for tax planning purposes, keep in mind that the holding period of the replacement stock will include the holding period of the original shares. Thus, if a taxpayer sold shares that were held for more than a year (“long-term” for tax purposes), and then purchased replacement stock within the wash-sales window, the replacement shares will also be considered to be long-term, even if they are eventually sold in less than a year.

Example of the Wash-Sale Rule

A taxpayer buys shares of Widget Company for $20,000. The stock declines to $10,000, and the taxpayer decides to sell the shares for a loss. However, good news is reported from Widget Company after the shares are sold, so the taxpayer decides to buy Widget shares for $12,000 five days after the sale, believing that the shares will increase substantially this time. Because the new shares are purchased within the wash-sale rule time period, the $10,000 loss will not be deductible. Instead the $10,000 will be added to the cost of the new shares, meaning the new shares will have a basis of $22,000 (and thus, the original loss will be deducted when the new shares are sold).

Do you have tax problems or questions relating to your investments? Then give Sherayzen Law Office a call to discuss your tax situation with an experienced Minneapolis tax lawyer!

Tax Lawyers Minneapolis | Tax Rates for Individual Taxpayers through 2012

/in , /by

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) was singed into law on December 17, 2010. Prior to the Act, the previous tax cuts were scheduled to expire and the marginal federal income tax rates for individuals were scheduled to return to 15%, 28%, 31%, 36% and 39.6%.  Under the Act, however, the marginal federal income tax rates for individuals will remain at the 10%, 15%, 25%, 28%, 33% and 35% graduated rates through the tax year 2012.

Keep in mind that the Act does not in any way alter the taxes that were enacted as part of the recent health care reform, such as 0.9% tax on wage income and 3.8% tax on investment income for higher-income individuals.  These taxes will be imposed in 2013.

Attorney Tax Minneapolis | Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

/in , /by

On December 17, 2010, the President signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”).  The new law preserves the 2001 and 2003 tax cuts through the year 2012, reduces the estate tax to 35 percent and allows a $5 million individual exemption, cuts the  Social Security payroll taxes by 2 percentage points, and renews the alternative minimum tax patch for the tax years 2010 and 2011.  Additional provisions of the Act are devoted to renewing other tax incentives (such as the research and development credit and a 100% exclusion on gain from the sale of small business stock) that either already expired in the tax year 2009 or were scheduled to expire in the tax year 2010.

Look for more detailed explanation of the specific provisions of the Act on this website throughout this week!

Tax Lawyer Minneapolis | Common Tax Penalties and Interest: The Basics

/in , , /by

Penalties and interest may be impose

d by the IRS relating to various tax underpayments. Taxpayers should understand some of the basic tax penalties detailed in this article (many of which can be quite sever) in order to avoid such penalties if possible, and to perhaps mitigate any imposed penalties.

Accuracy-Related Penalties

An accuracy-related penalty of 20% of a tax underpayment may be imposed by the IRS if the underpayment is attributable to one or more of the following: (1) negligence or disregard of the rules and regulations; (2) any substantial understatement of income tax; (3) any substantial valuation overstatement; (4) any substantial overstatement of pension liabilities; and/or
(5) any substantial gift or estate tax valuation understatement.

Late-Filing Penalty

If a taxpayer files a late tax return, unless he/she can demonstrate “reasonable cause” to the IRS for not filing on time, a late filing penalty of 5% of the net tax due for each month the return is due, up to five months (25% maximum) can be imposed. In addition, there is a minimum
penalty, equal to the lesser of $135 or the net amount required to be shown on the tax return, for returns that are more than 60 days late (including extensions).

The late filing penalty does not apply if a return is filed late but no taxes are owed.

Failure to Pay Penalty

In general, if a taxpayer is late in paying taxes owed, the IRS can impose a failure to pay penalty of 0.5% (0.5 of 1%) upon the net amount of tax due and unpaid by the due date. The penalty begins on April 16th, and stops accruing when the IRS receives the payment amount. The maximum penalty that can be imposed is 25%.

Combined Penalties

Taxpayers may also be subject to combined penalties, with special rules. For example, if both late-filing and late-payment penalties are imposed on a taxpayer, a combined penalty of 5% per month will be applied for the duration in which both penalties apply at the same time (maximum penalty of 25%). The combined penalty is made up of a reduced late-filing penalty (4.5% instead of the standard 5%) added to the 0.5% late-payment penalty. After the maximum 25% penalty is met, the late-filing portion of the penalty ends, but the late-payment portion will continue at 0.5% up to a maximum of 22.5%.

Other penalties may also be imposed in addition to the combined penalty.

Civil Fraud Penalties

If the IRS can establish by clear and convincing evidence that a taxpayer has fraudulently underreported income, it can impose a penalty equal to 75% of the entire amount underreported. After such determination, the burden of proof rests upon the taxpayer to establish that fraud did not constitute the entire underreported amount. Fraud is defined to be an intentional wrongdoing by the taxpayer with the specific intent to evade a tax known or believed to be owing.

Furthermore, if the IRS determines that a taxpayer fraudulently failed to file a tax return, a penalty equal to 15% of the net tax due for every month that a return is due and not filed, up to five months (for a maximum of 75%) can be imposed.

Interest on Tax Underpayments

In addition to the various penalties, interest on tax underpayments may also be imposed. For individual taxpayers, the interest rate is equal to the short-term Federal rate plus 3%. Interest is compounded daily in most cases, and begins to accrue from the due date of the return.

IRS Announces 2011 Standard Mileage Rates

/in , , , /by

On December 3, 2010, Internal Revenue Service issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

a) 51 cents per mile for business miles driven
b) 19 cents per mile driven for medical or moving purposes
c) 14 cents per mile driven in service of charitable organizations

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously. Taxpayers also have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.