Archive for category Massachusetts Tax News

Estimated Tax Penalty

Around this time of the year, many people throughout the US are getting notices from the IRS asking them to pay estimated tax penalty. Many people do not understand why they have to pay estimated tax penalty if they have paid all the taxes owed.

Taxes are due when income is earned so even if a person pays all the taxes owed for the prior year by April when the person files a return, the person may still have to pay a penalty when the person did not pay enough estimated taxes by the deadlines for such taxes.

Estimated tax is the method used to pay tax on income that is not subject to withholding such as income from an employer. This includes income from self-employment when someone is an independent contractor, interest, dividends, alimony, rent, gains from asset sales, or prizes and awards.

Estimated tax is due 4 times a year. The IRS imposes estimated tax penalty on the amount of tax underpaid from the date the installment was due to the date the installment was paid. The installment that needs to be paid each quarter depends on the person’s income for the prior year, unless the person completes a form explaining that income is not the same each quarter or each year.

For someone who has a mix of employer income and self-employment or independent contractor income, the taxes from the employer income may be used to offset the amount that is due for estimated taxes on the non-employer income.

A person does not have to pay estimated tax for the current year if the person meets all three of these conditions:

  • Had no tax liability for the prior year
  • Were a US citizen or resident for the whole year
  • Prior tax year covered a 12 month period

The IRS may waive the estimated tax penalty if:

  • Failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  • A person retired, after reaching age 62, or became disabled during the tax year for which estimated payments were required or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

Tax-Related Identity Theft

In May 2012, the New York Times had a story describing the dramatic rise in identity thieves targeting the United States Treasury.  In a 2011 Annual Report to Congress, a taxpayer advocate reported tax-related identity theft as a serious problem facing taxpayers.  Criminals have sought to profit off the tax system by submitting fraud refund claims.  The criminals often steal and use the identity of another taxpayer.

With the Internet making everything so public, such as people’s photos, email addresses, phone numbers, and property ownership, it may be easy to use someone’s identity.  Take for instance, Open Book Bar Prep, which has used the photo of Congressman Dennis J. Kucinich to create fake testimonials on Yelp!, and to imply that the Congressman has tax problems in fake testimonials on the services from Strategic Tax Lawyers, LLP.

Each year, the IRS identifies identity theft claims, but some fraudulent claims are never identified, imposing burdens on honest taxpayers.  Identity thieves usually file multiple tax returns claiming refunds using Social Security numbers that are not their own.  When a legitimate taxpayer files the return, the refund may be blocked because the Social Security Number was previously used by an identity thief.

According to the New York Times, the Treasury Department’s Inspector General for Tax Administration testified that the IRS detected 940,000 false returns in 2010, avoiding $6.5 billion in payments to identity thieves.  However, the IRS missed 1.5 million fraudulent returns, resulting in over $5.2 billion in fraudulent refunds.

Congress may increase the criminal penalties for those caught filing fraudulent returns.  To improve on detecting taxpayer identity theft, the IRS distributes PINs to prior victims.

To protect against taxpayer identity theft, follow these tips: 

1. Check your bank account statements and balances frequently.

2.  When paying at a restaurant, follow the wait staff or pay at the counter to ensure the machine used to swipe your card is legitimate equipment.

3.  If a machine at a gas pump or ATM spits out a receipt, keep the receipt to reconcile with a bank statement.  Do not leave receipts at the machine for someone behind you to view your transactions.

4.  Use email services that are less targeted by spammers and phishers.  For example, Laszlomail may be less targeted that Gmail when it comes to virus attacks and bulk messages because it is not well known.

5.  Change passwords in email accounts often when using public computers at libraries and job search centers.

Dual US Citizens and Residents Penalties

The federal government is cracking down on taxpayers who are dual citizens or residents of the United States and another country. These people may have knowingly or unintentionally failed to timely file US federal and/or state income tax returns.

For example, individual U.S. citizens or permanent residents often fail to file if they live outside of the United States for an extended period of time and have not formally expatriated for U.S. immigration and tax law purposes. Their failure to file may be motivated by an attempt to save money, but it’s a mistake that exposes them to civil and criminal penalties. Ironically, their U.S. taxes due may not be substantial, since the taxes due are net after application of the foreign tax credit rules, foreign earned income exclusions, other provisions in the Internal Revenue Code allowing for a reduction of U.S. income tax, and applicable income tax treaties or conventions.

Another example, dual residents, despite taking advantage of a tie-breaker provision in an applicable treaty, may not realize that they are accountable to file FBAR and other ownership disclosure forms. These people may think, in good faith, that they were “non-resident”.

Dual residents or citizens also may fail to timely file Reports of Foreign Banks and Financial Accounts (FBARs) under the FINCEN regulations. The FBAR must be filed by any United States individual by June 30 of the year after the calendar year in which the United States individual (U.S. citizen or U.S. resident, corporation, trust, partnership or limited liability company created, organized or formed under U.S. law) has a financial interest in, or signature authority over, foreign financial accounts (FFAs) (including bank, securities and other types of accounts) where the aggregate value of the FFAs is more than $10,000 at any time during the calendar year. According to federal regulations, “signature authority” means the authority, either alone or in conjunction with another, to control the disposition of money, funds or other assets held in a financial account by direct communication to the person with whom the financial account is maintained. If you sign a signature card, you have “signature authority”.

The federal government is aware there are many people who fail to meet their personal obligations under Title 26 on federal income tax and Title 31 on FBAR reports for several years. The IRS released a fact sheet (FS-2011-13) on December 7, 2011, summarizing federal income tax return and FBAR filing requirements. The fact sheet discusses how to file a federal income tax return or FBAR and warns of potential penalties. Taxpayers who owe no U.S. income tax may not be subject to delinquency penalties for failure to file or pay.

Remember, U.S. citizens, even if also citizens of a foreign country and no matter where they reside, are required to annually file U.S. federal income tax returns reporting their income from U.S. and foreign sources. In addition, many U.S. states will try to assert tax jurisdiction over former residents who have moved abroad.

Stay up to date on federal and state tax laws by consulting with an experienced Massachusetts tax attorney.

Changes for Massachusetts Business Entity Classification for Income Tax and Corporate Excise Purposes

Under recent changes to the law, Massachusetts business entity classification for income tax and corporate excise purposes now generally conforms to federal entity classification under the so-called check-the-box rules. A result of this conformity, there are no longer special taxation provisions for corporate trusts.

IRAs and Roth IRAs Under Massachusetts Tax Statute

Under Massachusetts tax legislation, a personal income tax deduction for contributions to an IRA is not allowed whether or not there is an allowable federal deduction for such contributions. Therefore, amounts contributed to traditional IRAs for which no Massachusetts personal income tax deduction was previously allowed will not be subject to tax when the IRA is converted to a Roth IRA.

McLane Law Firm Welcomes Richard M. Stone

April 19, 2010, Manchester, NH and Woburn, Massachusetts – The McLane Law Firm welcomes attorney Richard M. Stone to its TradeCenter 128 office location in Woburn, MA.

About the McLane Law Firm

Founded in 1919, the McLane Law Firm is one of New England’s premier full-service law firms with offices in Manchester, Concord and Portsmouth, New Hampshire, as well as Woburn, Massachusetts. Driven by the firm’s depth of sophisticated legal expertise and an unwavering commitment to client service, McLane has built collaborative and lasting relationships with a broad spectrum of domestic and international clients.

Massachusetts One of the Few States to Tax Royalties and Interest Paid by Local Subsidiaries to their Corporate Parents in Other Countries

Foreign businesses, which include some of the major employers in the state of Massachusetts, are acting to transform a state law they state taxes their subsidiaries inappropriately and will discourage them from investment and growing here.

The law, put into practice as part of a wider rewrite of corporate and business tax regulations in 2008, makes Massachusetts one of the few states to tax royalties and interest paid by local subsidiaries to their corporate parents in other countries. Taxation of the payments raises about $40 million a year in additional revenue for the state, according to rough estimates by the state Department of Revenue.

Foreign-owned corporations claim the law is equal to double taxation, given that the corporate parents must pay taxes on royalties and interest in their home country. They also say it offends the spirit of tax treaties between the US government and more than 60 other nations that are targeted at stopping double taxation.

Massachusetts legislators are looking at legislation that would repair the problem for most foreign companies, but no action is imminent.

Read more

House Lawmakers Scrap Proposal To Increase Massachusetts Property Taxes

A proposal that could have raised property taxes by up to $500 million was scrapped today by Massachusetts House lawmakers.

Proposition 2 1/2 is a state law that limits property tax increases. The measure was approved by voters in 1980 and changed the way local districts raise taxes in order to pay for municipal services. Under the proposition, local government can not raise property taxes by more than 2.5% per year without getting voter approval.

You can read more about the failed plan here.

Leaders In Opposition To Proposed Ballot Cutting Massachusetts Sales Tax

Leaders are concerned that a proposal in place to cut the state sales tax to 3% would mean devastating cuts in state and municipal services. If approved, it would cost the state about $2.34 billion in revenues.

Another ballot proposal will get rid of the 6.25 percent sales tax on the retail sale of beer, wine and alcohol. If passed, this would cut $100 million in revenues each year from state government.

The concern is that the loss in revenue by the tax cut would be crippling to local government services.

You can read more about the tax cut proposals here.

No Gas Tax Hike According To Gov. Patrick

According to the Massachusetts Gov., Deval Patrick, there will be no gas tax hike. The Governor dismissed the idea of raising the gas tax at a breakfast forum today for the 2010 gubernatorial candidates.

At the breakfast, the governor outlined his agenda hoping for a second term in office. He also went on to explain his policy decisions over the past four years. According to the article:

The governor vowed to continue to examine the state’s transportation system, but dismissed any notion of hiking the gas tax, saying the state cannot afford it at this time. The governor had supported a gas tax in the past because, under state law, any revenues from the tax would have to be redirected to transportation projects.

This is a welcome relief for Massachusetts drivers.

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