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Tax Lawyers Minneapolis | 2011 Reduction in Social Security Payroll Taxes

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One of the most important provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), which was signed into law on December 17, 2010, deals with Social Security tax reduction for employees.

The Act reduces the employee’s share of Social Security tax from 6.2% to 4.2% for wages earned in 2011 up to $106,800. The employer’s share of Social Security tax remains at 6.2%. The Act makes no changes to the Medicare portion of payroll taxes, which remains at 1.45% for each of the employee and employer on all wage income.

Individuals who are self-employed will also benefit from the Act’s Social Security tax reduction. Self-employed individuals would pay Social Security tax at a 10.4% rate on self-employment income up to $106,800. However, self-employed individuals would continue to calculate their deduction for employment taxes without regard to the temporary rate reduction.

If you have tax questions or need tax representation, contact Sherayzen Law Office to discuss your case with an experienced Minneapolis tax lawyer.

Tax Lawyers Minneapolis | Wash-Sales: General Rules

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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!

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

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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!

Innocent Spouse Relief

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In general, a husband and wife are jointly and separately liable for any tax, penalty and interest owed for a year in which they have filed a joint tax return. This means that the IRS can collect the entire amount of tax owed from either spouse alone, regardless of who reported income, or who may have been responsible for errors, omissions, or fraud on a tax return. Joint and several liability thus can potentially result in a situation where substantial amounts of taxes, penalty and interest are owed by one spouse due to the errors, omissions, or fraud committed by the other spouse.

Difficulties involving joint and several liability tend to arise especially when spouses have divorced or separated, and are no longer living together after they have filed a joint tax return. A spouse who is responsible for the errors, omissions, or fraud in a tax return may have an incentive to not cooperate with the former spouse, and may be difficult to even locate. However, due to the fact that a joint return was filed, the IRS could collect the entire amount of tax, penalties, and interest owed from the spouse who was not at fault for the problematic tax return.

In order to provide a remedy for this unjust outcome, in certain circumstances, the IRS allows a spouse, who lacked knowledge of a tax understatement and did not engage in activity giving rise to the understatement, to claim “Innocent Spouse Relief” resulting in full or partial relief from the payments and penalties associated with an understatement of tax made by another spouse.

Legal Test for Innocent Spouse Relief

In order to qualify for Innocent Spouse Relief, all five of the following conditions must be met:

1. A taxpayer must have filed a joint return for a taxable year.

2. On the tax return, there was an understatement of tax attributable to “erroneous items” (see definition below) of a spouse (or former spouse).

3. A taxpayer must establish that when he/she signed the joint return he/she did not know (“actual knowledge”) and “had no reason to know”, that there was an understatement of tax.

4. Taking into account all the facts and circumstances, it would be unfair to hold the taxpayer liable for the deficiency in tax for such taxable year attributable to the tax understatement; and

5. A request for innocent spouse relief will not be granted if the IRS can prove that the taxpayer requesting Innocent Spouse Relief and the taxpayer’s spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. (A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.)

Definitions

a) Erroneous Items: an “item” for the Innocent Spouse Relief purposes generally means anything that is required to be reported separately on a tax return or its attachments. There are two types of erroneous items. The first is unreported income, which is any gross income item received by a spouse (or former spouse) that is not reported. The second is an any improper deduction, credit, or property basis claimed by a spouse (or former spouse).

b) Actual Knowledge: if taxpayer requesting Innocent Spouse Relief actually knew about an
erroneous item that belongs to his/her spouse (or former spouse), then the taxpayer will not qualify for Innocent Spouse Relief, and will remain jointly liable for that part of the understatement.

c) Reason To Know: If a reasonable person in similar circumstances would have known of the
understatement, then the taxpayer will not qualify for Innocent Spouse Relief, and will remain jointly liable for that part of the understatement. The IRS will consider a number of facts and circumstances in determining whether a taxpayer had reason to know of an understatement of tax due to an erroneous item, including the taxpayer’s educational background and business experience, the financial situation of both spouses, the nature of the erroneous item and the amount of the erroneous item in relation to other items, the extent of the taxpayer’s participation in the activity that resulted in the erroneous item, whether a reasonable person would have inquired at the time the tax return was signed about the erroneous items, omitted items on the return, and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns.

d) Indications of Unfairness: The IRS will examine a number of factors including, whether the taxpayer’s spouse (or former spouse) deserted him/her, whether the taxpayer and his/her spouse have divorced or separated, whether the taxpayer benefitted from the understatement on the return, and whether the taxpayer received a “significant benefit” (any benefit in excess of normal support), including transfers of property or rights to property, and transfers that are received several years after the year of the understatement.

Types of Innocent Spouse Relief

There are three types of Innocent Spouse Relief available:

1. Full Relief from tax liability (including penalties and interest) for a taxable year to the extent that the liability is attributable to the tax understatement on the joint return. There are certain requirements which must be met in order to qualify.

2. Apportionment of Relief from tax liability (including penalties and interest) for a taxable year. Under this type of innocent spouse relief, the understatement of tax is apportioned between the taxpayer and his/her (or former spouse). In order to meet this type of relief, a taxpayer must show that he or she did not know, and had no reason to know, the extent of understatement on a tax return. If granted, the taxpayer will be relieved of a tax liability to the extent that such liability is attributable to the portion of the understatement that the taxpayer did not know, or did not have reason to know that was in error or omitted.

3. Equitable Relief may be granted if an individual does not meet the requirements for the first two types of relief, but, after taking all the facts and circumstances into consideration, the IRS determines it would be inequitable to hold the taxpayer liable for the unpaid tax.

How Sherayzen Law Office can Assist You

Requesting Innocent Spouse Relief may require legal expertise because of the specificity of the requirements involved, and the necessity of persuading the IRS that you qualify for this relief. Moreover, in some cases, the Tax Code regulations governing the Innocent Spouse Relief process may themselves be challenged in courts. Sherayzen Law Office can help you understand and comply with the required regulations, draft the necessary documents and represent you in your negotiations with the IRS in order to help you limit your tax liability.

Call NOW to discuss your case with an experienced tax attorney!

Importance of Determining Your Tax Filing Status

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Figuring out your filing status is the first major step in filing your tax return. Your tax filing status not only will allow you to determine the correct tax (from the Tax Computation Worksheet or appropriate column in the Tax Table), but also it is crucial to understanding your eligibility for and the exact amount of deductions, exemptions, tax credits. For example, in some situations, if your taxable income is close to $160,000, the choice between filing as “single” and filing as “married filing separately” may influence whether you need to pay the alternative minimum tax (“AMT”); it is more likely that filing as “single” will help you avoid AMT, while “married filing separately” status may have the opposite effect. Sometimes, the latter tax filing status may also make you ineligible for certain tax credits even at a much lower income bracket – a situation that may be avoided if you are filing joint tax return with your spouse.

There are five possible tax statuses: 1) single; 2) married filing jointly; 3) married filing separately; 4) head of household, and 5) qualifying widow(er) with dependent child. The benefits and drawbacks of each status differ greatly depending on a tax situation. In some cases, you may be eligible for more than one status (for example, single and head of household); in other cases, your eligibility may be greatly influenced by the choices you make.

In order to draw out the benefits and avoid costly mistakes, careful tax planning is necessary. The Internal Revenue Code (“IRC”) is so complex that it requires a tax professional to fully understand its provisions. Tax attorneys are professionals who usually are in a much better position to legitimately utilize possibilities offered by the IRC.

Sherayzen Law Office is a law firm that offers individual and business tax services. We can help you understand your current tax position, file the tax returns for you, and carefully plan your tax strategies for the future. CALL NOW to start resolving your tax issues!