May 18, 2001 Spousal Social Security Numbers The Internal Revenue Service has just completed the mailing of 2,400,000 notices to taxpayers who filed a joint 1999 income tax return where the name and social security number for the spouse on the second line of the tax return did not match Social Security Administration records. The notice instructs current filers to verify the correct name and identifying number used on the return with the information on the identification issued by the Socia Security Administration. Without the correct name and identifying number, the IRS will not allow the personal exemption, the Earned Income Credit, or both. Individuals most likely to receive a notice, wives, since they may be using their husband’s name but did not legally change their name with Social Security; wives and Hispanics because they are using a hyphenated name, but Social Security has no record of the hyphen. If you have received such a notice and cannot resolve it, send the notice to us together with a copy of your social security card so that we can correct it for you at no charge. Millions of Taxpayers learned the hard way this year that the Internal Revenue Code can tax a bite out of an investment even when the investor has lost, rather than made, a return on their investment. This is due to capital gains being owed on mutual funds distributions when the mutual fund went down in value. A prior newsletter warned of this and discussed the accounting problems of tracking your basis for tax purposes. (To review prior newsletters check out our website at lisch.com and visit AOHL Newsletter Archives). Federal Reserve Lowers Interest Rates so now is the time to review the tax rules on home mortgage refinancing. Deductions when refinancing differ from your original mortgage. Generally, your write off for points will be smaller when you refinance, but savvy use of refinancing proceeds can lower your overall tax bill. Unlike points paid on an initial purchase, points paid on a refinanced loan are deducted over the loan term, not all in the year paid as with a purchase money mortgage on your principal residence. The deduction is now allowed even if the points were added to the refinanced loan. Refinancing with the same lender will not taint the write off for the points. If you are remodeling your home in conjunction with the refinancing, the part of the points used for improvements is fully deductible. The balance (the percentage of the loan not used for improvements) is deducted ratably over the term of the loan. If you are refinancing a second time (or more) the remaining balance of the points from the previous refinancing becomes deductible in full. If you strip out more than the old loan balance on your main home, the first $100,000 of the excess is treated as home equity indebtedness and interest on that $100,000 is fully deductible no matter what you do with the funds. If the loan balance increases by more than the $100,000, interest on the excess is not treated automatically as home mortgage interest except for any portion that is used to substantially improve the residence. How the money is used determines if you can deduct the interest. For example, if the excess is for business or investment, the interest is deductible in most situations, provided you can prove how the funds were used. IRS Will Send Reminders this summer and each year thereafter to taxpayers paying off prior tax liabilities on the installment plan. Notices will list payments received and show the amounts applied to taxes, penalties and interest. Taxpayers will be able to call a toll free number if any payments were omitted. If you receive one, please send us a photocopy for our records. Not Filing 1099 Forms? It can draw multiple penalties from the IRS. In a recent case, a company did not file Form 1099s for payments of $600 or more to unincorporated subcontractors. The firm did not even ask for their tax identification numbers. The district court ruled that the payer is liable for backup withholding and must give the IRS 20% of the payments made to the subcontractors who did not furnish their tax ID numbers. (There is an exception to the penalty if the payer can prove the payee reported the funds o the IRS). The payer must also pay a penalty of $50 for each Form 1099 not filed. In cases of flagrant violations, penalties can run as high as 10% of the payment. We prepare Form 1099s and advise you to have us do them if you have not already contracted us to do them. Employee Health Insurance Costs Jumped an average of 9% for 2000 and is expected to increase by an average of 12% in 2001, according to a survey of 45 major health care organizations. The expected increase for a non-network fee for service plan in 2001 was 15%, 12.5% for a preferred provider organization, 11.75% for a point of service plan and 10% for an HMO. Prescription drug coverage cost is expected to increase 20% in 2001. For further details, we suggest you go to www.segalco.com. Oversight Board Gives IRS Failing Grade What this means to you is that if you are audited, your cost of professional representation will go up because we have to take additional time to educate the IRS Agent as to the law because the IRS agent is usually ignorant of the finer points of the tax law due to a lack of funds to train the agents. New Jersey Changes S Corporations On February 2, 2001, Acting Governor, DiFrancesco signed a bill that phases out the double taxation of income from an S corporation doing business in New Jersey. As of July 1, 2001 S Corporations with less than $100,000 of income will no longer be subject to a corporate level tax on their regular income. S Corporations with income in excess of that amount will be subject to a corporate tax of 1.33% as of July 1, 2001, which will be reduced to .67% as of July 1, 2002 and eliminated altogether as of July 1, 2003. If you have any questions about these or any other tax or financial matters, please call us.