The Journal Fall 2014

The Journal Fall 2014

From Diapers to Diploma: Tax Implications of Your New Addition

By Nicole DeRosa, CPA, MAcc

Dependency Exemption

You are allowed one exemption for each person you claim as a dependent. For the 2014 tax year, you can deduct $3,950 for each exemption claimed; this amount is adjusted for inflation on an annual basis. Taxpayers should be mindful that the amount claimed for dependency exemptions (like personal exemptions) is subject to a phase-out once certain income levels are reached, depending on filing status.

New Jersey resident taxpayers are entitled to an additional exemption for dependents attending college.

Child Tax Credit

Depending on your income, the child tax credit may be worth as much as $1,000 per qualifying child. To qualify for this credit, the child must meet the criteria of six tests: age, relationship, support, dependent, citizenship and residence. Like most tax credits, this credit is limited when your modified adjusted gross income exceeds a certain amount and is generally limited to your tax liability. If, however, the amount of your child tax credit is greater than the amount of income tax you owe, an additional child tax credit may be claimed.

Adoption Tax Credit

The American Taxpayer Relief Act of 2012 permanently extended the adoption tax credit. Individuals qualify for the adoption credit if they adopt an eligible child and pay out-of-pocket expenses related to the adoption; the amount of the tax credit is directly related to the amount of qualified adoption-related expenses incurred and is to be claimed in the year when the adoption is finalized. Taxpayers who adopt a special needs child can claim the full amount of the adoption credit, regardless of actual expenses paid. The full non-refundable credit amount for 2013 was $12,970, and the 2014 amount will be $13,190.

Child and Dependent Care Credit

Working parents, have no fear! If you paid someone to care for your dependent so that you (and your spouse if you are married filing jointly) could work or look for work, you may be able to claim this tax credit. In order to qualify, the care must have been provided to one or more qualifying persons, and the payments must meet certain conditions. Depending on your adjusted gross income, the credit can be up to 35% of your qualifying expenses; however, the total expenses used to calculate the credit are capped at $3,000 for one qualifying individual or at $6,000 for two or more qualifying individuals.

FSAs and HSAs = Tax Savings Made Easy

The primary benefit of flexible spending arrangements (FSA) and health savings accounts (HSA) is that you are able to contribute to these accounts pre-tax, and thus, the money is excluded from your gross income. These pre-tax contributions can be used for medical expenses not covered by insurance for your family. Unfortunately, money contributed during the year to an FSA does not roll over to the next year, so be sure to use it or else you will lose it. Unlike FSAs, the money in an HSA will remain in the account until used, and it has the opportunity to earn interest tax-free.

ESAs and 529 Plans – Start Saving Early

Coverdell education savings accounts (ESA) and 529 plans were created as an incentive to help parents and students save for education expenses. Both ESAs and 529 plan contributions grow tax-free, and the beneficiary will not be taxed on the distributions as long as they are used for qualified education expenses at an eligible institution. The table below depicts the main differences between the two types of college savings incentives:

New Yorkers, you may be entitled to a state tax deduction on contributions to your 529 direct plan of up to $5,000 per year, or $10,000 for married couples filing jointly.

Higher Education Credits

Paying for college? Don’t forget about these potential tax incentives to lessen the burden of the ever-rising costs. The below chart summarizes the basics of the American opportunity credit, lifetime learning credit and tuition & fees deduction:

Additional Exemption

If you have a dependent attending college and are a New Jersey resident, you may qualify for an additional $1,000 exemption in addition to the $1,500 exemption per each qualified dependent. In a nutshell, in order to qualify for this additional exemption, the student must be under 22 years of age for the entire tax year and attend full-time. Some additional requirements apply, but the age requirement is often the biggest hurdle.

Beware of the Kiddie Tax

In order to deter wealthy parents from shifting income to those with lower tax rates (i.e. their dependent), the Kiddie Tax came to exist. If your dependent earns investment income that exceeds certain thresholds (for 2014 the threshold is $2,000), his unearned income may be taxed at your rates instead of his rates. Effective just this past year, income subject to the Kiddie Tax also may be subject to the Net Investment Income Tax (NIIT), which is a whole other tax topic.

It is evident that having a child can dramatically affect your taxes and will continue with each subsequent child. After all, children are the (tax) gift that keeps on giving.

Unclaimed Property Due Diligence

By Lauren Taguer, CPA

Does your business have policies and procedures in place? If not, your company may be at risk for an audit, which could result in fines, interest and penalties.

Simply mailing a check to the unclaimed property owner does not free your business of the responsibility of finding the respectful owner. Companies must demonstrate that they have exhausted all options to locate the property’s rightful owner through a process of due diligence. Here are a few tips to demonstrate due
diligence:

• Have written policies and procedures in place that represent a timeline of the process (e.g., how often outstanding check listings are reviewed, how old the checks are when your business makes first contact with the owner, etc.);
• Prepare a template for company personnel to complete to notify the rightful owner that there is unclaimed property in his or her name;
• Formulate a plan of action for each different response that may be obtained after sending the template (undeliverable, wrong address, no response, etc.);
• Keep the documentation. It is extremely important to keep a trail of your written policies and procedures (e-mails, correspondence, notes of phone calls, etc.). When companies discard unclaimed property records, state auditors may use estimation techniques to determine historical liability. To prevent this, the organization should adopt record-retention policies compatible with unclaimed property laws; and
• Know the state that you are dealing with. The state law that you should follow will correspond to the last known address of the unclaimed property owner. Reporting requirements and due diligence laws vary from state to state, and in order to ensure compliance, it is important to be familiar with the laws in the state.

If the process of due diligence does not result in finding the rightful owner, you may need to report the unclaimed property and turn it over to the state where the owner is last known to have resided through a process called escheatment. State escheatment laws vary as to how old an uncashed check should be before remitting it to the state. Further, the laws vary based on the type of payment the check relates to. For example, New Jersey and New York law states that outstanding payroll checks become escheatable after one year, while Pennsylvania has a two-year threshold. In all states, however, property cannot be escheated unless due diligence requirements have been met. It is important that your organization become familiar with the due diligence requirements of each state in which their unclaimed property relates.

Failing to implement policies and procedures for compliance can put yourself and your business at risk. Following the few tips discussed above will ensure that your company remains in a position of strength.

Effective Communication Is the Key to Success

By Julia Van Saun, CPA, MS

Whether you are communicating with senior management or with a new staff member, you must start with the end in mind. Providing expectations to those you are working with allows them to better understand what is being requested and gives them the opportunity to ask questions.

With this in mind, I was introduced to the term “seagull management.” While the expression was new to me, the underlying meaning was not—swoop in, drop it off and leave. Have you ever visited a staff person’s cube to drop off work only to find he or she is not there? And instead of coming back or scheduling a time to meet, you just drop off the work—perhaps with a sticky note that says something like “see me with any questions.”

Not having that initial communication with the staff person proves to be inefficient and ineffective for all involved. The staff person may not fully understand what is expected, or he or she may think you are too busy to answer any questions, resulting in an end product that is not what you had envisioned. You now have to take the time to fix what is “broken,” leaving less time to focus on the things that are critical to your success. Remember, there is no growth for you tomorrow if you cannot delegate items today.

Communicating expectations is only half the battle. Providing effective feedback brings everything full circle. How many times have you worked on a project and thought it was a great success, only to never hear anything back? It’s great to think you did really well, but did you? Did your supervisor have to do some of that “fixing” mentioned earlier? The STAR method, although most commonly used for interviews, can be an excellent format for providing feedback. This method will allow you to provide effective feedback by discussing the situation, task, action and the result. Adding an additional action and result could be helpful as well. For example, if this action was taken instead, this would have been the result.

Another factor to providing effective feedback is to attach meaning to it. It doesn’t mean very much when you tell someone he or she did a great job. Rather, incorporate why he or she did a great job in your feedback. As important as it is to allow for questions when explaining your expectations, effective feedback must also include the opportunity for questions.

Being cognizant of the items discussed will set you down the path of having better communication skills. Although all the above takeaways are important, focus on perfecting one at a time. Just remember, know your own expectations, be sure to relay those expectations, allow time for questions and provide feedback. Communication must be a two-way street.

Hedge Fund Funny Business or Great Tax Planning?

By Dave Poillucci, CPA and Mark Simonovich

On July 22, 2014, the PSI hauled the typically ultra-private hedge fund, Renaissance Technologies, onto the world stage and grilled its management about a purported tax dodge. According to Senator Carl Levin (D-MI), chairman of the PSI, Renaissance and other hedge fund investors were able to skip out on paying nearly $7 billion in tax by establishing complex financial contracts with banks. The banks sold contracts known as “basket options” that allowed hedge funds to execute thousands of short-term trades, while reporting the profits as long-term capital gains.

The contracts were structured as call options. That is, a fund would pay a premium amount to a bank to acquire a 13-month call option on a particular securities account. The account was to trade a particular trading strategy. If the strategy did well over the 13-month term, the hedge fund would cash-settle the option contract and would report the profit as long-term capital gain. On its face, this financial derivative contract was not drastically different than a normal equity call option.

The strategy that Renaissance employed is only mildly different than the normal hedge fund options which high-net-worth investors regularly employ. Here, an investor simply buys a greater than 12-month call option on a hedge fund. Such a derivative can defer and convert taxable income that would otherwise be short-term capital or ordinary income into long-term capital gain. Only the options that Renaissance employed, and which the PSI found objectionable, had some peculiar features. The most obvious objectionable feature was that the underlying account, which was owned by the bank counterparty, would be managed day-to-day by Renaissance while the option was owned by a Renaissance affiliate. Think akin to you buying an option over your own E-Trade account. At least that’s how the PSI portrayed the transaction.

As reported in the PSI report, two of the biggest banks profited close to $1.1 billion from the sale of basket options which they have since stopped selling. In 2010, the IRS issued a memorandum that said basket options with constantly changing assets, controlled by the option holder or a related party, were not true options, and the investor would be treated as owning the underlying assets directly for tax purposes. Thus, the investor would recognize the gains or losses when they occurred rather than when an option was exercised.

Renaissance is currently involved in an IRS audit over its past basket option trades and is challenging the IRS position. Strangely, the Renaissance audit has apparently been ongoing since 2009 and has yet to even reach the IRS appeals office. Nevertheless, the IRS not only issued the advice memorandum in 2010 but, more recently, issued Chief Counsel Advice 201426025 and 201432016 (released 6/27/14 and 8/8/14, respectively), which determined that the IRS position, if correct, would constitute an accounting method change. This latest determination ups the ante for Renaissance to settle since it may allow the IRS to reach back to closed tax years. It would appear that the latest Chief Counsel Advice and PSI hearing, all occurring five years after the start of the audit, may be a desperate attempt to force a settlement.

The consequence of an IRS loss on the tax ownership argument in court could be disastrous for the IRS so this is one to watch.

WS+B Promotes Three to Partner

Chris is the team leader of WS+B’s Startup/Emerging Growth Technology Services Group. He has diverse experience in the technology, mergers and acquisitions, and manufacturing and distribution service areas. Chris graduated from Rowan University with a bachelor’s degree in accounting and a master’s degree in business administration. He is a member of the American Institute of Certified Public Accountants (AICPA), the New Jersey Society of Certified Public Accountants (NJSCPA), the New Jersey Technology Council (NJTC) and the New York Technology Council (NYTECH).

Justin serves as a member of WS+B’s Professional Services Group and Technology Services Group and has broad experience working with the professional services and information technology sectors. He graduated from Boston College with a bachelor’s degree in accounting. He is active in the profession serving on various national and state-level committees for the AICPA and NJSCPA. Justin is also a member of NJTC and the New Jersey Alliance for Action.

Brian is a member of WS+B’s International Tax Services Group, State and Local Tax Services Group, as well as a member of WS+B’s Real Estate Services Group. He has extensive experience serving the tax needs of both public companies and closely-held businesses. Brian graduated from The College of New Jersey with a bachelor’s degree in accounting and also received his juris doctor degree from Rutgers University School of Law. He is a member of the AICPA, NJSCPA, American Association of Attorney-Certified Public Accountants (AAA-CPA), and the American Bar Association.

Withum Is Hiring!

Individuals with public accounting industry experience who are looking for a new career opportunity should contact Debbie Lee-Ho at [email protected] or visit our website, www.withum.com/careers, for more information.