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Aug 29

IRS Phone Fraud Calls Increasing

By Paul Oliveira, CPA

The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS. I was even recently surprised when my wife received one of these calls and was told that the police were on their way with an arrest warrant!

There have been over 90,000 complaints to date and more than 1,100 victims who have lost an estimated $5 million from these scams.  There are some clear warning signs about these scams that you should be aware of. Educating yourself and learning what to listen for can save you time and money if confronted by a scammer.

  • Calls from the IRS, especially your first contact with the agency are never out of the blue. This is done via official correspondence through the mail. If you receive a random call from someone saying they are with the IRS and you have not received a notice in the mail, which is a huge red flag!

Additionally, it is important to note that the IRS will:

  • Never ask for credit card, debit card or prepaid card information over the telephone.
  • Never insist that taxpayers use a specific payment method to pay tax obligations.
  • Never request immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies.

Many callers in the IRS scam have told victims that they owe money that must be paid immediately to the IRS or that they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Be on the lookout for some of these scam tactics:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
Be vigilant against any phone calls you may receive from the IRS.

The IRS will never contact taxpayers via email for personal or financial information. If you receive an email that contains this information, do not click on any of the attachments and forward it immediately to phishing@irs.gov. For more information or guidance on IRS communications contact any member of our Tax Services Group.


Aug 25

4 Ways to Reduce Your Liability for the 3.8% NIIT

By Dave Desmarais

Since last year, the net investment income tax (NIIT) has applied to some or all net investment income of taxpayers with modified adjusted gross income (MAGI) exceeding the applicable threshold:

  • $200,000 singles and heads of households
  • $250,000 married couples filing jointly and qualifying widow(er) with dependent child
  • $125,000 married couples filing separately

For NIIT purposes, investment income may include — but isn’t limited to — interest, dividends and capital gains. If you meet the applicable MAGI threshold, the NIIT equals 3.8% of the lesser of the amount by which your MAGI exceeds the threshold or your net investment income.

Fortunately, there are ways to reduce your NIIT liability:

  1. Plan your gains — and losses. Generally speaking, appreciation on investments isn’t included in net investment income until you sell the investment and recognize capital gains. So you can minimize NIIT by waiting to sell an appreciated investment until a year when you have capital losses to absorb the gains. What if you’ve already recognized some large gains this year? Then look for unrealized losses in your portfolio and consider selling those investments by Dec. 31 to offset your gains.
  2. Make gifts to loved ones. If you transfer highly appreciated assets to family members who won’t be subject to the NIIT because their incomes are too low, they can sell the assets and your family as a whole will save NIIT. But beware of the “kiddie” tax that may apply on the sale if the recipient will be under age 24 on Dec. 31 (although there would still be some tax savings because there is no NIIT kiddie tax). Also be sure to consider the gift tax consequences.
  3. Take advantage of retirement plans. Pretax or deductible contributions to retirement plans reduce your MAGI and, thus, potentially reduce or eliminate your NIIT liability in the contribution year. Alternatively, consider Roth accounts. Contributions aren’t pretax or deductible, but qualified distributions will be excluded from MAGI, and thus could minimize NIIT liability in retirement. In either case, having the assets in retirement plans allows the assets to grow tax deferred (and, in the case of Roths, tax free), so the interest and dividends being generated in the plans are not currently contributing to your MAGI.
  4. Buy municipal bonds. Municipal bond income is not part of the calculation in determining MAGI, so they can help to keep you under the threshold before you fall into being subject to NIIT. Further, municipal bond interest isn’t included in the income subject to NIIT. So municipal bonds have two benefits here (in addition to others mentioned in my previous blog).

These are only some of the ways you can keep your NIIT liability to a minimum. For more NIIT-reduction ideas — or information on what is and isn’t subject to the NIIT — please contact us.

Aug 25

EU Cracking Down on Multinational Firm Tax Loophole

By Paul Oliveira, CPA

The European Union (EU) is closing a loophole that has allowed multinational companies to reduce their tax responsibilities. Companies like Starbucks and Apple have been able to dodge taxes on certain profits under the current loophole by using certain equity and debt combinations in their tax planning.

New Changes and Developments

New developments that the EU will be correcting or changing by the end of 2015 include:

  • Unanimity Among Member States- While multinational companies were previously able to open subsidiaries in other member states so that they paid little or no tax, EU tax law now requires unanimity among member states.
  • “Patent Box”- A tax planning tool known as a “patent box” is under close scrutiny. Countries use this to assign lower tax responsibility to their companies so that the companies may concentrate on research and development projects.

This is not expected to be an easy task for the EU as companies are resisting the changes however, more developments are expected in the near future. For a more detailed explanation of the EU’s changes, read our article “EU Closing Tax Loophole for Multinational Firms”.


Aug 18

For Now, Taxpayers Do Not Have to Report Bitcoins on FBARS

By Paul Oliveira, CPA

Virtual currency, or a digital representation of value that functions as a medium of exchange, is becoming popular in mainstream international transactions. In March, the IRS addressed the tax treatment of virtual currency and how it is affected by Foreign Bank Account Report (FBAR) requirements.

Why the debate?

The debate as to whether virtual currency such as Bitcoins should be included under FBAR reporting is a topic in the financial and tax community. Since the IRS decided that virtual currency is treated as property for U.S. federal tax reasons, tax principles for property transactions could apply. Some of the requirements under the FBAR that virtual currencies could be subject to in the near future include:

  • On Schedule B, Part III of an individual tax return, a U.S. citizen or U.S. entity is required to reveal any financial accounts they are involved in.
  • Taxpayers who neglect to file their FBARs on a timely basis can suffer a penalty of 50% of the balance in the undisclosed bank account for each year they fail to file the report.

There are a number of others who are required to file FBARs, so many are wondering if Bitcoin’s and other virtual currencies will be subject as well. The answer is still up in the air as of now, but the IRS urges you to stay tuned for updates. For a more detailed explanation of virtual currency and the debate, please read our article, “IRS official: Taxpayers don’t have to report virtual currency on FBARs — yet”.


Aug 14

Governor Deval Patrick Signs Economic Development Bill

By Robert D’Andrea, Tax Principal

Yesterday, Governor Deval Patrick signed an “An Act to Promote Economic Growth in the Commonwealth,” aimed at building on the investment of education, innovation and infrastructure.

A major component of the economic development law is its noted expansion of the research-and-development tax credit and its multiple initiatives to accelerate job growth. The research-and-development tax provision in the economic development bill creates an Alternative Simplified Credit (ASC) as an alternative to the traditional tax credit. ASC provides the option to claim a credit equal to 10 percent of any research expenses that exceed a base amount calculated over a period of three years. Current law allows credits only for incremental R&D spending over a set base period. For many business the base period could go back to the early 1980s; making it extremely difficult or impossible (due to the lack of records going back that far) to calculate and take advantage of the credit.

Between 2007 and 2011 there has been a 19.3 percent decline in R&D spending among Massachusetts employers to which this initiative is aimed at improving. The vast majority of research and development in Massachusetts takes place not in urban innovation districts, but in advanced manufacturing, medical device, defense and bio pharma companies throughout the commonwealth. Lawmakers are hoping that with this update and push towards R&D credits in Massachusetts this will increase and stimulate the kind of innovation that drives economic growth.

Along with signing the bill, Governor Patrick also included a number of vetoes and amendments including (but not limited to):

  • A new “live theater” tax credit. This new tax credit is designed to encourage more productions of pre-Broadway and pre-Off Broadway Theater in Massachusetts.
  • A provision to give local governments across Massachusetts control over the number of liquor licenses in their jurisdiction.
  • $12 million for the middle skills job training grant fund to support advanced manufacturing, mechanical and technical skills at vocational-technical schools and community colleges.
  • The Workforce Competitiveness Trust Fund will receive $1.5 million to prepare Massachusetts residents for new jobs in high-demand occupations, helping close the middle-skills gap and creating a seamless pathway to employment.

Initiatives to expand the Commonwealth’s world class innovation economy including:

  • Expansion on the Commonwealth’s international tourism and marketing efforts, capitalizing on new connections overseas, helping to bring more businesses and jobs to Massachusetts and more tourists to our world class destinations;
  • A job creation incentive under the Economic Development Incentive Program (EDIP), allowing business to receive a tax credit up to $1,000 per job created, or up to $5,000 per job created in a Gateway City, so long as the total credit per project does not exceed $1 million.

For more information on the Economic Development Bill or how this will impact R&D credits and your tax savings please contact us. Click here to read the full legislation.


Aug 14

Benefits of Municipal Bonds

By Dave Desmarais

Looking to acquire interest at a tax free rate? Municipal bonds or “munis” are attractive to high income investors for this reason. Munis are debt obligations distributed by cities, counties, states, and other governmental units to private investors and are used to purchase services for the public, including schools, highways, and hospitals. These bonds are exempt from federal taxes and the majority of state and local taxes.

How does a municipal bond work?

Municipal bonds are usually purchased by banks and broker-dealers who then resell these bonds to high net worth individuals and corporations. The investors then become lenders to the issuer and in turn,collect periodic payments of interest on the bonds.  The principal is typically returned when either the bonds are called by the issuer or their maturity date.

Should I invest in a municipal bond?

Keep in mind that the minimum price for most munis is $5,000 and for this reason are often only a feasible option for high net worth individuals whose income exceeds $1 million. Because munis are virtually tax free, they are particularly attractive to high net worth investors. Unlike corporate bonds, the interest you receive from a muni is exempt from federal taxes. Although corporate bonds and other taxable investments may have higher interest rates, munis often offer a higher yield in the long run. For those who fall within a high federal tax bracket, the tax break from a muni can result in a significant gain. With a muni, it could also qualify for state and local income tax exemption which would mean that you avoid having to pay income taxes altogether.

Incomes that exceed $1 million aren’t always in the highest tax brackets.  In fact, many are subject to alternative minimum tax (AMT), meaning the yield on a corporate bond doesn’t have to be that much higher than a muni bond.  Assume you have a taxpayer in a state with no income tax and is in the AMT.  A corporate bond with a coupon of 7% would net a taxpayer the same amount as a 5.04% muni.  Now assume that the taxpayer is in a state with a 5% income tax and is taxed at the highest marginal tax bracket federally (39.6%).  That corporate bond with the 7% coupon only nets the taxpayer the same amount as a 3.878% muni.       


If you are an investor in a higher tax bracket, investing in a municipal bond could be advantageous for you or your company. The benefits of a muni include:

  1. Tax exemption- The primary benefit to municipal bonds is that they are free from federal tax. If you are an investor living in the state where the bond was issued, you are also exempt from state and local income taxes.
  2. Low default risk- With any type of bond, there is a risk that the bond issuer will fail to make a principal repayment or interest payment, but fortunately muni issuers have had very low default rates.
  3. Interest in local projects- The projects covered by municipal bonds could hold great meaning for you. Their projects have an impact on daily lives, and certain projects could directly concern you- whether you have a child in a new school, or are concerned with the availability of a modern and advanced hospital.

Are there different kinds of municipal bonds?

There are a number of municipal bond types but the two primary types are general obligation and revenue bonds.

  1. General Obligation (GO)- General obligation bonds do not cover a specific project. Rather, they are sponsored fully by the “full faith and credit” of the bond issuer. To make interest and principal payments, then, the issuer can use any source of revenue and if it encounters economic hurdles, it can make up for the loss by raising taxes.
  2. Revenue Bonds- Revenue bonds finance a specific project like the construction of a school or hospital. Once the project is finished, it gradually generates revenues to pay back the principal and interest on the bonds.

Any drawbacks?

There are a few risks involved in the municipal bond process, including:

  • Credit risk- The bond issuer could be plagued with economic issues that make it tough or unmanageable to fully pay interest and principal. There are credit ratings available for many bonds that estimate the credit risk of the bond compared to others, but in the end there is no way to completely predict a default.
  • Interest rate risk- Interest rates could rise, and if they do, market prices of existing bonds will decline.

Municipal bonds are not beneficial for all investors, they’re better suited for investors in higher tax brackets. Consider your status as an investor and take into account the risks involved in the process. If it turns out to be a viable option for you, the financial benefits will likely be extremely favorable.

For more information regarding Municipal Bonds, please contact our Private Client Services group.


Aug 11

Massachusetts Sales Tax Holiday

By Richard Freedberg

Looking for back to school deals or other savings? Massachusetts lawmakers have settled on August 16-17th for the 2014 sales tax-free weekend. 

What items are tax-free?

Virtually any non-business purchase in MA during the sales tax holiday weekend is tax-free. Specifically, any single item of $2,500 or less is tax exempt (excluding motor vehicles, motorboats, telecommunications services, restaurant meals, gas, and tobacco). The sales tax holiday is specifically for personal purposes, so purchases made with business checks or credit cards are not exempt from the sales tax.

The MA sales tax holiday also applies to Internet purchases, as long as the sale is completed and payment is made on August 16-17. The actual delivery of items purchased over the Internet may occur at a later date.

Fortunately, Massachusetts tax-free weekend applies to more than just clothing. For Connecticut’s 2014 tax free week (August 17-23) only clothing and footwear are tax exempt. Each item purchased must be under $300, and the exemption does not apply to athletic uniforms or protective gear.

RI is also actively considering instituting two tax free holidays on President’s day and the Saturday before Labor Day. Stay tuned for updates on these potential tax holidays.

How much will I save?

Let’s say you are looking to purchase a new computer for $1,600. Without the usual 6.25% tax, you will save $100. Being that a new school year is fast approaching, it is smart to take advantage of these savings. Unlike CT, MA’s tax free holiday spans only one weekend, so be sure not to miss it!

For more information, contact any member of our Tax Services Group, or refer to the KLR Tax Guide.

Aug 7

IRS Releases Instructions for FATCA Form

By Paul Oliveira, CPA

The IRS has recently issued instructions for filing Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)”. Through the form, entities can document their status as recipients and beneficial owners for FATCA purposes.

What’s included in the new instructions?

Form W-8BEN-E deals with chapters 3 and 4 of the Internal Revenue Code (IRC) and there are a number of newly released instructions including:

  • Before income is paid or credited, the form should be provided to the withholding agent or payer. If you fail to present a form when requested, it could lead to 30% withholding rate (foreign-person withholding rate) or the backup withholding rate under IRC Section 3406.
  • The form is to be provided to the person requesting it from the taxpayer. This is typically the person who makes the payment and credits the taxpayer’s account.

For foreign entities in the private sector, full compliance with form W-8BEN-E is vital. For the full list of instructions, and a more detailed explanation of the form’s requirements, read our article “Long-awaited Instructions for FATCA Form Issued”.


Aug 4

Back to School Tax Tips

By Loree Dubois

With students returning to school in just about one month, it is easy to be reminded of the financial stress of schooling. With the ever growing cost of both primary and secondary education, there are several invaluable tax tips that could save you money and stress!

What parts of education are deductible?

Certain costs in private school education- Apart from educational costs of private school tuition, costs for child care in private schools may be deductible for children under 13 years old.
Before and after school supervision- Qualifying expenses for cost of before and after school care may be deducted for children under age 13.

School fundraisers- These charitable donation deductions are limited. In return for your donation, it is mandatory that you reduce your deduction by the market value of any products that you receive through the fundraiser.

Education loan interest- For students or guardians paying interest on an educational loan, there is a student loan interest deduction of up to $2,500, which is reduced or phased out once a taxpayer’s income is over a certain range.

Tuition and fees deduction- This deduction can be claimed for an innumerable amount of years. It applies to qualified education expenses for an eligible (at least half-time undergraduate or graduate) student’s higher education, also subject to income phase-out rules.

Be aware that the following expenses are NOT deductible:
• Cost of school uniforms, even if they are not optional.
• Private school tuition
• College moving costs

Offsetting cost of higher education

Careful consideration of all available funds is crucial when you are financing you or your child’s college education. There are a few options to help you comfortably fund higher education, and potentially receive tax credits by doing so.

  1. 529 Plans- Planning ahead and saving money prior to college is very sensible if this is possible for you or your family. As long as the money in 529 plans is used for eligible educational expenses, the earnings and withdrawals are tax free.
  2. Tax-deferred accounts- For qualified educational expenses for primary, secondary or higher education, you can use a tax deferred account, such as an educational savings account.
  3. The American Opportunity Credit (AOC)- Eligible students in the midst of their first four years of college can receive up to $2,500 in tax credits through the AOC. The taxpayer can receive $1,000 even if they have no tax liability because 40% of the credit is refundable.  Income limitations and phase-outs apply.
  4. Lifetime Learning Credit- Eligible students can receive $2,000 for education expenses through this credit. Unlike the AOC, it is a nonrefundable credit of 20% off a maximum of $10,000 in education expenses. Income limits apply, but as of now there is no limit on the number of years a taxpayer can rightfully claim this credit.

Education is a necessary foundation for future success, but, considering all other life expenses, it can often times be difficult or seem altogether impossible to fund. With the right knowledge and planning, however, you can benefit greatly from certain tax credits and tax deferred accounts. Keep in mind that these benefits depend on your income, so their amounts could vary. For more information and guidance, contact any member of our Tax Services Group.


Jul 28

Is a Credit Shelter Trust Right for You?

By Dave Desmarais

When estate tax exemption portability was made permanent in 2013, many married couples thought they no longer needed credit shelter trusts. After all, the primary purpose of such trusts was, historically, to preserve both spouses’ estate tax exemptions. But credit shelter trusts still offer significant benefits that portability doesn’t, especially for high-net-worth couples.

Limitations of Portability

Portability has a couple of significant limitations:

  1. It isn’t recognized in all states and doesn’t apply to the generation-skipping transfer (GST) tax. Additional planning may still be needed for state and GST tax purposes.
  2. It’s available for only the most recently deceased spouse. If a surviving spouse remarries and also survives the subsequent spouse, any portability of the previous spouse’s exemption will be lost.

In addition, portability must be elected on a properly filed estate tax return — even if no tax is due.

Benefits of a Credit Shelter Trust

A credit shelter trust can address these issues and provide other valuable benefits, such as creditor protection. But perhaps the most valuable benefit for high-net-worth couples is the ability to protect future appreciation from estate tax.

Here’s an example: Mike and Karen’s combined estates equal double the 2014 exemption amount, or $10.68 million. Mike dies in 2014, and, under his estate plan, his $5.34 million in assets transfers to a credit shelter trust benefiting first Karen and then the couple’s children.

Karen limits her trust distributions to trust income. By the time she dies, the trust principal has grown by almost 50%, to $8 million. Her other assets also have grown and will use up her own exemption amount. Nevertheless, the entire trust balance of $8 million transfers to the children tax-free. Why? Because Mike’s exemption protects the entire trust, regardless of how large it grows.

If instead the couple had depended on portability, the $2.6 million of appreciation would be subject to estate tax. Assuming the current 40% rate applied, this would be $1.04 million.

Please contact us if you’d like more information on credit shelter trusts and how they might help you achieve your estate planning goals.

See all Tax Blog articles in the archives.