March 02, 2015
Article Co-Authored by Donald Zidik, Tax & Business Services Director, "Recent Developments in Individual Taxation" Featured in The Tax Adviser
- A taxpayer whose claim for a first-time homebuyer credit was disallowed by the IRS prevailed when the court found that a recreational vehicle she had previously lived in was not a personal residence for purposes of the credit because it was personal property under state law.
- Circuit courts came to conflicting conclusions about whether the Sec. 36B premium tax credit is available for insurance purchased through exchanges run by the federal government. The Supreme Court agreed to hear one of the cases to decide the issue.
- In cases decided this year, taxpayers were largely unsuccessful in escaping the additional 10% tax on their early withdrawals from retirement plans.
- In two cases, taxpayers succeeded in convincing a court that their business activities were entered into with a profit motive, and, therefore, the losses from these activities were fully deductible.
This article covers recent developments affecting taxation of individuals, including regulations, cases, and IRS guidance. The items are arranged in Code section order.
Sec. 1: Tax Imposed
No major changes have been made to the tax brackets per se. Tax brackets are indexed for inflation, but self-employment tax, alternative minimum tax (Sec. 55), and net investment income tax (Sec. 1411) are not inflation-adjusted. The inflation-adjustment changes are coded into commercial software packages.
Those whose marital status has changed as a result of the Supreme Court's decision striking down one section of the Defense of Marriage Act may be subject to a different tax table (i.e., married filing jointly or separately), but that was true last year as well. Many same-sex couples who were already married when the Supreme Court issued its decision may still need to file amended tax returns or protective claims for amended tax returns before the statute of limitation expires. All of these amended returns could greatly increase the workload this tax season.
Sec. 31: Taxes Withheld on Wages
Taxes withheld on wages are treated as having been evenly withheld throughout the year, as opposed to withheld in the quarter in which they were actually deducted from a taxpayer's paycheck. Therefore, an underwithheld taxpayer can lessen or eliminate the penalty for underpayment/underestimation by withholding substantially more at the end of the year.
For households with self-employed taxpayers who make quarterly tax payments, underpayments of estimated quarterly taxes may be offset with overpayments of withholding, regardless of whether most of the withholding occurred at the end of the year. As an added tip, while some taxpayers are required to make quarterly estimated payments, many of those taxpayers may find it easier to break up those payments into smaller monthly estimated tax payments rather than have to come up with large amounts of cash every quarter.