May 15, 1995
IRS Announces Procedures to Claim Reinstated Self-Employed Health Insurance Deduction
The self-employed`s above the line deduction for 25% of health insurance costs was retroactively reinstated and can be claimed on 1994 tax returns. Self-employed persons who previously filed for 1994 without claiming their health insurance deduction may now do so on an amended return.
Our clients do not have to worry, we claimed it on your tax return anticipating the passage of the law.
Taxpayers who took a more aggressive position by claiming the deduction in anticipation of its reinstatement may have received a notice from the IRS denying it. The IRS has announced that those who received such a notice and have not yet responded to it should write "SE Health Insurance" on the notice and return it to the IRS. You will then automatically receive the benefit of the deduction. Those who received a disallowance notice and agreed to it should file an amended return to claim the deduction and obtain a refund. The IRS says it will take at least 60 days to process the amended returns or responses to the notice.
IRS Has Absolute Discretion Not to Abate Interest
Delay by the IRS in settling a tax case does not stop interest from running on a tax deficiency. However, the Code says the IRS may abate interest on a deficiency if the interest is partially or wholly attributable to a processing error or delay by the IRS. The Second Circuit, in a recent case agreed with the IRS` view that it alone has absolute discretion to abate interest or not to abate interest in such cases.
Investing Records
Keep careful records of the cost of stocks shares, and other investments. Specifically identify the stock shares to be sold by written institutions to the broker; this will enable you to pick particular shares to sell for maximum tax benefit.
Note that a taxable transaction occurs every time you "transfer" money from one investment to another. Keep records documenting both the amount received for the sold shares and the cost of the purchased ones.
Accelerated Death Benefits To Be Clarified
Under current law, accelerated death benefits paid from a life insurance policy to a terminally ill insured are not tax exempt; and there is some question as to whether a policy that pays such benefits qualifies as life insurance for tax purposes at all. Proposed regulations would treat certain accelerated death benefits as life insurance death benefits.
New Schedule H to Report 1995 Nanny Tax
Last year`s Nanny Tax law raised the FICA tax liability threshold for household employees from $50 per quarter to $1,000 per year, effective for wages paid after 1993. It also changed the way domestic employers report and pay FICA, FUTA and voluntarily withheld income taxes for 1995 and later years. Instead of reporting and paying them quarterly with the Form 942, employers will report and pay them annually with their individual income tax returns. The IRS has just issued some guidance on the new rules and has stated there will be a Schedule H for Form 1040 to report the 1995 taxes.
Surprisingly, the guidance provides a break for sole proprietors who have employees in their businesses as well as domestic employees. In the past, sole proprietors who filed Form 941 for business employees had to include the employment taxes for household employees on the Form 941 and Form 940. However, the new guidance says that until further notice, the employers can either:
1. continue as in the past, or
2. segregate domestic employees onto Schedule H.
The due date for payment of the Schedule H taxes is the due date of the individual income tax returns, not including extensions.
If you have any questions, about these or other financial matters, please call us.