Tax

Don’t Wait to File an Extended Return

If you filed for an extension of time to file your 2016 federal tax return and you also chose to have advance payments of the premium tax credit made to your coverage provider, it’s important you file your return sooner rather than later. Here are four things you should know:

1. If you received a six-month extension of time to file, you do not need to wait until the October 16, 2017, due date to file your return and reconcile your advance payments. You can–and should–file as soon as you have all the necessary documentation.

2. You must file to ensure you can continue having advance credit payments paid on your behalf in future years. If you do not file and reconcile your 2016 advance payments of the premium tax credit by the Marketplace’s fall re-enrollment period–even if you filed for an extension–you may not have your eligibility for advance payments of the PTC in 2018 determined for a period of time after you have filed your tax return with Form 8962.

3. Advance payments of the premium tax credit are reviewed in the fall by the Health Insurance Marketplace for the next calendar year as part of their annual re-enrollment and income verification process.

4. Use Form 8962, Premium Tax Credit, to reconcile any advance credit payments made on your behalf and to maintain your eligibility for future premium assistance.

Help is just a phone call away.

If you have any questions about filing an extended return, don’t hesitate to call.

States Require Online Retailers to Collect Sales Tax

From declining sales at local retail establishments to brick and mortar store closings, almost everyone would agree that the rise of Internet sales has transformed the retail landscape. One consequence of this uptick in online sales is lost revenues in states that collect sales (or use) tax.

According to the National Conference of State Legislatures, state revenues declined by $17.2 billion due to lost sales taxes in 2016 alone. As such, states, which derive as much as one-third of their revenues from sales and use taxes, are struggling to find ways to harness this lost revenue. At least two states, North Dakota and Colorado, have turned to the US Supreme Court for relief sparking other states to take action and establish legislation governing payment of sales and use tax.

“Remote Sellers” and the “Physical Presence” Test

Referred to as “remote sales” (e-commerce to most people) retail transactions include catalog and Internet sales where the seller has no “physical presence” in the state where consumers are purchasing the goods. In the early days of Internet sales, several US Supreme Court cases (culminating with Quill v. North Dakota, 1992) ruled that sales tax could not be collected where the seller did not have a physical presence (property or employees, for example). While states do require residents to report sales tax owed on purchases made online or in another state, it is rarely enforced, resulting in lost revenue.

More recently, however, a 2015 US Supreme Court opinion by Justice Anthony Kennedy in Direct Marketing Association v. Brohl, while a major victory for online retailers, suggested that it might be time for the Supreme Court to take another look at the physical presence test.

For legal buffs, here’s what the lawsuit entailed according to SCOTUSblog:

A lawsuit by a trade association of retailers, alleging that a Colorado law requiring retailers that do not collect sales or use taxes to notify any Colorado customer of the state’s tax requirement and to report tax-related information to those customers and the Colorado Department of Revenue violates the federal and state constitutions, is not barred by the Tax Injunction Act.

And here is the plain language version:

Colorado requires internet retailers like Amazon.com to send it reports about their customers in Colorado. Colorado wants to use those reports to force those customers to pay taxes when they buy online. The district court enjoined the statute, thinking it probably is unconstitutional. Without deciding whether the statute is valid, the Court said that the injunction can stand while the parties litigate about the statute itself.

State Legislative Updates

At the state level, in the years since the Brohl opinion was issued, states have enacted or are planning to enact various regulations governing payment of sales and use tax. Several are already in place (or will be soon) and a few are proposed and/or facing court challenges. These states include Alabama, Indiana, Louisiana, Maine, Massachusetts, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Vermont, Washington, and Wyoming.

Federal Initiatives

Efforts to require online retailers to collect sales taxes at the federal level have stalled despite approval on both sides of the aisle but at least two new pieces of legislation have been introduced: The Marketplace Fairness Act of 2017 and the No Regulation Without Representation Act of 2017, which attempts to codify what states may and may not define as “physical presence.”

The Marketplace Fairness Act grants states the authority to compel online and catalog retailers (“remote sellers”), no matter where they are located, to collect sales tax at the time of a transaction–exactly like local retailers are already required to do. However, States are only granted this authority after they have simplified their sales tax laws in one of two ways:

A state can join the twenty-four states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA). Alternatively, states can meet essentially five simplification mandates listed in the bill.

Amazon and other Online Retailers

To further complicate matters, as online retail giants such as Amazon expand warehouse and operational facilities to other states, they are faced with state sales tax collection requirements because they now meet the physical test. In the “good old days” anyone could order online and escape paying state sales tax. Those days are almost over, however.

For example, starting April 1, 2017, Amazon began collecting sales taxes in Hawaii, Idaho, Maine and New Mexico. While they operate in five additional states, four of them–Delaware, Montana, New Hampshire and Oregon–do not have sales tax and the fifth, Alaska, has municipal sales taxes but not statewide sales tax. Currently, items sold by Amazon.com LLC, or its subsidiaries, and shipped to destinations are subject to tax in 46 states.

State and Local Sales Taxes are Complicated

If you’re an online retailer with questions about sales tax or are simply wondering whether you should collect sales tax from customers or not–given that legislation could either be rejected by the courts or upheld, don’t hesitate to call the office today and speak to a tax and accounting professional you can trust.

Avoiding Penalties on Early Withdrawals from IRAs

More than half of Millennials and Gen Xers have already or are planning to, withdraw money from their retirement plans to cover unexpected expenses such as medical bills, educational expenses, or buying a house, according to a recent PwC Employee Financial Wellness Survey (April 2017). Most notably, the survey also found that this trend is on the rise for both Millennials and Gen Xers, increasing 14 and 6 percent, respectively, from 2016 to 2017.

Background

When retirement plans such as the 401(k) were introduced, company pensions were still the norm and this “new” retirement savings vehicle was meant to be a supplement to the pension. Fast forward to today, however, and the retirement landscape has changed dramatically. Very few companies offer pensions anymore and most people rely entirely on whatever savings they’ve accumulated in their retirement account, along with social security) to get them through their golden years. In fact, for many people, retirement accounts are their most significant source of savings.

Because retirement plans such as the 401(k), tax-sheltered annuity plans under section 403(b) for employees of public schools or tax-exempt organizations, and Individual Retirement Accounts (IRAs) were created to help you save money for your retirement years, withdrawals before retirement age (59 1/2) are discouraged. As such, the IRS imposes a penalty of 10 percent for early withdrawals taken from qualified retirement plans before age 59 1/2.

Minimizing Early Withdrawal Penalties

While you should always think carefully about taking money out of your retirement plan before you’ve reached retirement age, there may be times when you need access to those funds. The downside is that you’ll be faced with an IRS penalty on the withdrawal unless you meet one of the exceptions listed below.

For instance, if you withdraw cash from your IRA to pay off credit card debt you will be liable for the 10 percent penalty when you file your tax return. Furthermore, that money is also considered taxable income by the IRS. In other words, you don’t want to get into the habit of treating your retirement fund like a cash cow but instead, should focus on building cash reserves in an emergency fund.

That being said, if an early withdrawal is unavoidable because you are suddenly unemployed, disabled, or have outstanding medical expenses, IRS provisions allow a number of exceptions that may be used to minimize or avoid the tax penalty.

  1. Beneficiary of a deceased IRA owner. If you are the beneficiary of a deceased IRA owner, you do not have to pay the 10 percent penalty on distributions taken before age 59 1/2 unless you inherit a traditional IRA from your deceased spouse and elect to treat it as your own. In this case, any distribution you later receive before you reach age 59 1/2 may be subject to the 10 percent additional tax.
  2. Totally and permanently disabled. Distributions made because you are totally and permanently disabled are exempt from the early withdrawal penalty. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.
  3. Distributions for qualified higher education expenses.Distributions for qualified higher education expenses are also exempt, provided they are not paid through tax-free distributions from a Coverdell education savings account, scholarships and fellowships, Pell grants, employer-provided educational assistance, and Veterans’ educational assistance. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution, as well as expenses incurred by special needs students in connection with their enrollment or attendance. If the individual is at least a half-time student, room and board are qualified higher education expenses. This exception applies to expenses incurred by you, your spouse, children and grandchildren.
  4. Distributions due to an IRS levy of the qualified plan. This exception applies if the IRS takes money directly out of your 401(k) plan to satisfy an IRS levy (tax debt).
  5. Distributions that are not more than the cost of your medical insurance. Even if you are under age 59 1/2, you may not have to pay the 10 percent additional tax on distributions during the year that is not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply: you lost your job, you received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job, you receive the distributions during either the year you received the unemployment compensation or the following year, you receive the distributions no later than 60 days after you have been reemployed.
  6. Distributions to qualified reservists. Generally, these are distributions made to individuals called to active duty after September 11, 2001, for a period greater than 179 days or for an indefinite period because you are a member of a reserve component such as the Army National Guard. Distributions taken during the active duty period are not subject to the 10 percent penalty.
  7. Distributions in the form of an annuity. You can take the money as part of a series of substantially equal periodic payments over your estimated lifespan or the joint lives of you and your designated beneficiary. These payments must be made at least annually and payments are based on IRS life expectancy tables. If payments are from a qualified employee plan, they must begin after you have left the job. The payments must be made at least once each year until age 59 1/2, or for five years, whichever period is longer.
  8. Medical expenses. If you have out-of-pocket medical expenses that exceed 10 percent of your adjusted gross income, you can withdraw funds from a retirement account to pay those expenses without paying a penalty.

    Example: If you had an adjusted gross income of $100,000 for tax year 2017 and medical expenses of $12,500, you could withdraw as much as $2,500 from your pension or IRA without incurring the 10 percent penalty tax. You do not have to itemize your deductions to take advantage of this exception.

  9. Buy, build, or rebuild a first home. An IRA distribution used to buy, build, or rebuild a first home also escapes the penalty; however, you need to understand the government’s definition of a “first time” home buyer. In this case, it’s defined as someone who hasn’t owned a home for the last two years prior to the date of the new acquisition. You could have owned five prior houses, but if you haven’t owned one in at least two years, you qualify.

    The first-time homeowner can be yourself, your spouse, your or your spouse’s child or grandchild, parent or another relative. The “date of acquisition” is the day you sign the contract for the purchase of an existing house or the day construction of your new principal residence begins. The amount withdrawn for the purchase of a home must be used within 120 days of withdrawal and the maximum lifetime withdrawal exemption is $10,000. If both you and your spouse are first-time home buyers, each of you can receive distributions up to $10,000 for a first home without having to pay the 10 percent penalty.

Questions about Early Withdrawals?

Before withdrawing funds from a retirement account please call the office and speak to a tax professional. While you may be able to minimize or avoid the 10 percent penalty tax using one of the exceptions listed above, remember that you are still liable for any regular income tax that’s owed on the funds that you’ve withdrawn–and you may be liable for more tax than you realize when you file your tax return next spring.

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