Taxes 2015

IRS has announced a few other small changes to the tax code going forward that you can plan on. Here's a look at what you need to know.

Inflation adjustments. In October, the IRS announced several tax benefits that will increase next year due to inflation. The maximum Earned Income Tax Credit amount will be $6,242 for those filing jointly who have three or more qualifying children, up from $6,143 in 2014. The personal exemption will rise to $4,000, up from the 2014 exemption of $3,950, but that exemption phases out at higher income levels (beginning at $258,250 for single taxpayers or $309,900 for married couples filing jointly and phasing out completely at $380,750 for single taxpayers or $432,400 for married couples filing jointly).

All of a child’s unearned income (for instance, interest or dividends) above $2,100 will be taxed at the parent’s tax rate, up from $2,000 in 2014. However, The annual gift tax exclusion remains at $14,000 per person.

Retirement. The IRS has increased the contribution limit for 401(k) and similar plans from $17,500 to $18,000 for 2015. The catch-up contribution limit for those age 50 and over will also increase $500, from $5,500 to $6,000. While the 401(k) contribution limit has been gradually rising the past few years, the catch-up contribution limit had remained at $5,500 for the past several years.
An extra $500 in a retirement account may not seem like much, but saving that amount over 25 years, assuming an 8 percent annual return, could yield an extra quarter million dollars in your retirement portfolio, points out Kimberly Foss, certified financial planner and founder and president of Empyrion Wealth Management in Roseville, California. "In one year's time, people just discard [the opportunity to save more]," she says. "But it does make a difference, especially in those critical compounding years between 40 and 65."

Starting in 2015, the IRS will also limit nontaxable IRA rollovers to one every 12 months regardless of how many individual retirement accounts you have. In the past, people with multiple IRAs would take advantage of a provision allowing them to withdraw money, and put it back within 60 days without the tax hit of an early distribution. By rolling money from one IRA to another, they could essentially give themselves a short-term loan because the money was held in separate accounts. "If you had a fair amount of IRA funds and you didn't care about the paperwork, you could set up multiple IRAs and do multiple loans per year," says Robert Zeigen, tax director at professional services company CBIZ MHM in Florida. "That was pretty common." Note that trustee-to-trustee transfers between IRAs and rollovers from traditional to Roth IRAs are not limited.

Health care. Under the Affordable Care Act, the penalty for not having health insurance increases from $95 per adult (or 1 percent of income, whichever is greater) in 2014 to $325 per adult (or 2 percent of income) in 2015. If you're enrolled in health insurance through the federal marketplace, you can renew your current plan or choose a new one through Feb. 15, 2015, although some states have different deadlines for their own marketplaces.

Other changes apply to flexible spending accounts and health savings accounts. As of 2015, employees can save $2,550 in an FSA, up from $2,500. Previously, FSAs had a "use it or lose it" rule that forced employees to use up funds for eligible medical expenses before Dec. 31 (or in some cases, during a spring grace period) or forfeit that money.

Earlier this year, the IRS announced that employers could now allow employees to carry over up to $500 from one year's FSA into the next. But if you're also using an HSA, then you can't also take advantage of the FSA carry over provision. Gevertzman says an HSA is better than an FSA for most people because it has higher contribution limits (up to $3,350 for individuals or $6,650 for a family in 2015) and greater flexibility. "It's almost like a retirement plan because you don't use it or lose it," he says. "Whatever you don't spend gets carried forward, and you can earn income that gets tax deferred."

Dependent Care Flexible Spending Account

Child and dependent care is a critical issue and a large expense for many American families. Millions of people rely on child care to be able to work, while others are responsible for older parents or disabled family members. Dependent care expenses include a wide range of child and elder care expenses in or outside your home, as long as the care is necessary to allow you and your spouse to work or actively seek employment, including:
• Babysitting or au pair expenses
• Before and after school programs
• Child day care and nursery school
• Pre-School
• Senior citizen day care – to the extent not attributable to medical services
• Summer day camp
• FICA and FUTA taxes of daycare provider
• Expenses paid to a relative 19 years of age or older that is not a dependent of the participant
• Nanny expenses to the extent attributable to dependent care expenses and expenses of incidental  household services
If you care for a child or adult who is incapable of self-care, who lives in your home for at least eight hours each, and whom you can claim as a dependent on your income taxes, you may be able to take advantage of dependent care flexible spending accounts (FSAs). These accounts allow individuals to pay for qualified child and dependent care expenses while lowering their taxable income.

Dependent Care FSA Overview
Dependent care FSAs are set up through your workplace. Participants authorize their employers to withhold a specified amount from their paychecks each pay period and deposit the money in an account. Instead of using the FSA money to pay for expenses directly, you pay those costs out-of-pocket and then apply for reimbursement. 

Once you have paid for expenses that qualify for reimbursement from the FSA you will need to complete a claim form provided by your employer and attach receipts or proof of payment with the form. The receipts must include specific information to prove that the payment was for qualified expenses. Specifically, the receipt must note:

• the date of the expense incurred
• the expense amount
• the full name, address and social security number (SSN) or tax identification of the person who provided the care

The main benefit of an FSA is that the money set aside in the account is pretax, thus reducing the amount of our income subject to taxes. For someone in the 28% federal tax bracket, this income reduction means saving $280 in federal taxes for every $1,000 spent on dependent care with an FSA.
The IRS limits the total amount of money you can contribute to a dependent care to $5,000 each year for married couples filing jointly, unmarried couples, and single individuals, and $2,500 if you are married and filing separately.

If you and your spouse are divorced, only the parent who has custody of the child(ren) can use FSA funds for child care. If you are married both you and your spouse must work and earn income to qualify for reimbursement (unless one spouse is disabled and unable to work). If not, the money you contribute to the account will be forfeited and you will be billed for the taxes due because you did not pay taxes on the amount in the first place.

You can use your Dependent Care FSA to pay for eligible care for the following individuals:

• The child must be under 13 years old and must reside in your home over 50% of the time
• Your spouse, qualifying child or relative (if over 13) who is physically or mentally incapable of self care
• The services may be provided inside or outside the home, but not by someone who is your minor child or dependent for income tax purposes
• If the services are provided by a day-care facility that cares for six or more children at the same time, it must be a qualified day-care center
• The services must be incurred to enable you, or you and your spouse if you are married, to be employed or look for employment or spouse is a full-time student
• The amount to be reimbursed must not be greater than your spouse’s income or one-half your income, whichever is lower

You must provide proof for each dependent care service that you would like to be reimbursed for. Proof of service must include the date of service, name of provider, and cost of service. Documentation may be in the form of your provider’s signature verifying the date and cost of service, or a formal/informal statement or bill from your provider.
Remember, dependent care expenses are incurred when the services are provided, not when you are billed or pay for the services. You can only be reimbursed up to the amount that has been deposited into your account. If your submitted expense exceeds the current amount deposited, additional reimbursements will be issued as additional monies are deposited into your account.

 The following list is a partial list of expenses that are eligible and ineligible for reimbursement under your dependent care flexible spending account. 

Eligible Dependent Care FSA Expenses

• Adult daycare programs

• Amounts paid to dependent daycare center (e.g. nursery school or daycare) for children under the age of 13

• Amounts paid for nanny or daycare services inside your home for children under the age of 13

• Babysitting – in someone else’s home or in your home while you work 

• Before and after school programs

• Child care

• Elder care – in your home or outside your home

• Latch Key programs before and after school for children under the age of 13

• Lodging provided for an in-home babysitter can be paid when submitted with dependent care charges

• Nursery school

• Pre-school

• Senior daycare

• Sick childcare

• Summer day camp

• Utilities for provider’s lodging (for an inhome provider) when submitted with dependent care charges

Ineligible Dependent Care FSA Expenses

• Agency finder fees

• Any expenses you claim for the dependent care tax credit on your federal income tax return

• Care provided for a dependent age 13 or over in full-time residential institutions, such as nursing homes or homes for the mentally disabled

• Care provided in a group care center that does not meet state and local laws

• Charges for referrals to day care providers

• Costs for after-school educational programs

• Costs for clothing, entertainment or food

• Dance lessons

• Day nursing care

• Dependent daycare expenses incurred if your spouse does not work, unless your spouse is a full-time student or is disabled

• Dependent daycare obtained for non-work related  reasons

• Dependent daycare provided by your own child under age 19 or another dependent

• Dependent daycare that could be provided by your employed spouse whose work hours differ from yours

• Educational expenses (such as those for private school) for kindergarten or higher

• Expenses for overnight camp

• Expenses incurred before you began contributing to the account

• Expenses paid by another organization or provided without cost

• Medical care

• Music lessons

• Non-custodial day care costs

• Nursing home care

• Piano lessons

• Sleep-away camp

• Swimming lessons

• Transportation to or from the dependent care location

• Tuition for schooling in kindergarten or higher

What to Consider

Before creating a dependent care FSA, you should consider the following:

• FSAs are not "prefunded." With some healthcare FSAs, the employer "fronts" the money and is repaid through paycheck withholding. With dependent care FSAs, you pay expenses out-of-pocket, then receive reimbursement based on how much you have withheld from your paycheck for dependent care expenses.

• Before setting up a dependent care FSA, compare its potential tax benefits with the child and dependent care tax credit.

• FSAs operate with a "use it or lose it" policy, meaning that you must use all of the money you deposited into the account for qualified expenses by the end of the plan year or you will lose your money.

• You will need to report your FSA contributions on your federal tax return.

• Participation in a dependent care FSA is not automatic - you must re-enroll every year by the enrollment deadline.

• You can only change the amount of money you choose to have withheld from your paycheck for the FSA within a 31-day window following a "qualifying event", such as a marriage, the birth or adoption of a child, the death of a dependent, divorce or a change in your (or your spouse's) employment. 

 

U.S. Taxpayers Holding Foreign Financial Assets

1.            U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets must report those assets to IRS and Financial Crimes Enforcement Network. Penalties apply for failure to file accurately.   An individual may have to file both forms and separate penalties may apply for failure to file each form. The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

   Comparison of Form 8938 and FBAR Requirements
2. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN  Form 114 (Report of Foreign Bank and Financial Accounts). Individuals must file each form for which they meet the relevant reporting threshold. 

	Form 8938, Statement of Specified Foreign Financial Assets	FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
Who Must File?	Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold	U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold
Does the United States include U.S. territories?	No	Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting
Reporting Threshold (Total Value of Assets)	$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad)	$10,000 at any time during the calendar year
When do you have an interest in an account or asset?	If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return	Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title. Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account. See instructions for further details.
What is Reported?	Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets	Maximum value of financial accounts maintained by a financial institution physically located in a foreign country
How are maximum account or asset values determined and reported?	Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reported Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.	Use periodic account statements to determine the maximum value in the currency of the account. Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.
When Due?	By due date, including extension, if any, for income tax return	Received by June 30 (no extensions of time granted)
Where to File?	File with income tax return pursuant to instructions for filing the return	File electronically through FinCENsBSA E-Filing System. The FBAR is not filed with a federal tax return.
Penalties	Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply	If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply
Types of Foreign Assets and Whether They are Reportable
Financial (deposit and custodial) accounts held at foreign financial institutions	Yes	Yes
Financial account held at a foreign branch of a U.S. financial institution	No	Yes
Financial account held at a U.S. branch of a foreign financial institution	No	No
Foreign financial account for which you have signature authority	No, unless you otherwise have an interest in the account as described above	Yes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institution	The account itself is subject to reporting, but the contents of the account do not have to be separately reported	The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account	Yes	No
Foreign partnership interests	Yes	No
Indirect interests in foreign financial assets through an entity	No	Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.
Foreign mutual funds	Yes	Yes
Domestic mutual fund investing in foreign stocks and securities	No	No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor	Yes, as to both foreign accounts and foreign non-account investment assets	Yes, as to foreign accounts
Foreign-issued life insurance or annuity contract with a cash-value	Yes	Yes
Foreign hedge funds and foreign private equity funds	Yes	No
Foreign real estate held directly	No	No
Foreign real estate held through a foreign entity	No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate	No
Foreign currency held directly	No	No
Precious Metals held directly	No	No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles	No	No
‘Social Security’- type program benefits provided by a foreign government	No	No

Foreign financial institutions may provide to the IRS third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders. The Foreign Account Tax Compliance Act (FATCA) was created to address non-reporting of income related to foreign financial accounts held by US taxpayers.  FATCA requires Foreign Financial Institutions (FFIs) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Generally, FFIs will commit to this reporting requirement by registering with the IRS and signing an agreement with the IRS. In most cases, FFIs that do not register with the IRS will be subject to 30% withholding on all US payments. IRS provides List of registered Foreign Financial Institutions at following link.

List of Registered Foreign Financial Institutions

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