NATP TaxPro Monthly September2013

7/29/2019 NATP TaxPro Monthly September2013

1/16

National Association of Tax Professionals natptax.com

monthly

TAXPRIssue 9Volume 34September 2013

OverpaymentInterest ApplicationIRS gets to choose

By Becky Van Kauwenberg

According to a recent programmanager technical assistance(PMTA) the Chief Counselissued, the IRS has the discretion todetermine how overpayment interestis applied to payments of a tax liabil-ity on the same date. As such the IRS

can apply the payments in a way thatprovides the taxpayer with less over-payment interest on money becausedifferent rates apply to different typesof payments. Good for the IRS; badfor the taxpayer.

The PMTA is upholding a Dis-trict Courts conclusion in 2010that this situation is not addressed inany Internal Revenue Code section,Treasury Regulations or Rev. Proc.2005-18. The District Court could

find no reason why the IRS could notchoose which order of payments to usegiven the lack of authoritative materialrequiring the IRS to apply the pay-ments in a specific manner.

To illustrate how this affectsa taxpayer, the PMTA sets forth a

scenario that is summarized in thefollowing paragraphs. To review,under 6402(a), the IRS can applyan overpayment in a taxable yearto any unpaid liability the taxpayermay have. Section 6621(a)(1) statesinterest on overpayments is paid at theoverpayment rate, which is the Federalshort-term rate plus three percentagepoints (two percentage points ora half of a percentage point if theoverpayment is in excess of $10,000

for corporations). This interestbegins accruing on the date of theoverpayment, which occurs when allof the payments exceed the correct taxfor the year [Reg. 301.6611-1(b)]. Ataxpayer also has the option of makinga deposit to pay any disputable tax

that has not been assessed by the IRS[6603(a)]. This deposit becomesa payment upon the completion ofan examination. This disputable taxamount, as a safe harbor, is generallyassociated with the 30-day letter,which is the IRSs first proposeddeficiency letter given to a taxpayer[6603(d)(2)(B)]. Interest on thisdeposit is only the Federal short-termrate, compounded daily and begins

continued on page 4

How

To

Tax Planning WithEnergy Credits

6 Tax101Defining Dealer,Trader, Investor

14Government News& ViewsHealth Care Reform:Keeping up with the changes

2


2/16

We have a saying herein Wisconsin: Ifyou dont like theweather, wait five minutes and itllchange. The same can be said fortheAffordable Care Act(ACA). Itseems that the moment guidanceis issued something gets repealed,delayed, clarified or changed. Itsgetting more difficult to keep up

with all the changes unless yourewired directly into the minds ofCongress and the IRS. However,NATP can fill in the gaps and keepyou up-to-date.

What We KnowThe ACA is massiveso massivein fact that it is taking several yearsto fully implement. Or, if some inCongress have their way, it will becompletely repealed. Whatever takesplace, its important to be aware ofthe timeline so you can properlyprepare your clients. Parts of thelegislation have already becomeeffective. For instance, contributionsto flexible spending arrangementsare limited to $2,500 annuallyin 2013. Also for 2013, the AGIthreshold for deducting medicalexpenses on Schedule A increasesfrom 7.5% to 10% for those

taxpayers under the age of 65. Theincreased threshold doesnt kick infor taxpayers age 65 and over until2017. The net investment incometax kicks in for higher incometaxpayers, as does the additionalhospital insurance withholding.

As it stands now, the IRS hasnot delayed the individual mandateto acquire health insurance. If tax-payers are not provided insurance

through an employer, they can pur-chase it through an exchange. Theopen enrollment period to purchasehealth care coverage through the

new Health Insurance Marketplacebegins October 1, 2013. Taxpayerswho get health insurance throughthe marketplace may be able to getthe new advanced Premium TaxCredit that will immediately helplower monthly premiums. There aremany states that are creating theirown exchanges; others are relyingon the federal government to pro-vide them.

What We Dont KnowFor 2012, the IRS issued transitionalrelief to employers who issue 250or more Forms W-2 from report-ing the cost of employer-sponsoredhealth insurance coverage in Box 14.At this point we dont know if thatrelief will be granted for 2013 W-2s.Until we have further guidance fromthe IRS, we can assume that the

transitional relief still applies.Theres a lot of talk in Congressabout delaying the individual man-date, but we dont know if it will

actually happen. The employermandate has already been delayedone year and now becomes effectivein 2015. The reason for the delaywas the lack of guidance, the com-plexity of the law and the fact thatbusiness owners needed more timeto make arrangements to complywith all the requirements. The samecan be argued for individuals. Infact, many experts are predictingthe exchanges wont be ready by theOctober enrollment date.

Individuals who do not obtainhealth insurance by January 1,2014, will be subject to a penalty,which we now know is really anadditional tax. This tax is com-puted as either a flat amount or apercentage of household income.The definition of household incomeremains a bit of a mystery. The law

GOVERNMENT NEWS & VIEWS

By Cindy Hockenberry, EA

2 NATP TAXPROMonthly September 2013 natptax.com

Health Care ReformKeeping up with the changes


3/16

Annual Semiannual Quarterly Monthly

Revenue Ruling2013-13

Short-term(3 years or less)

.28 .28 .28 .28

Mid-term 1.63 1.62 1.62 1.61

Long-term(More than 9 years)

3.16 3.14 3.13 3.12

Applicable Federal Rates forAugust 2013

August 7520 rate = 2.0%; 2013 blended annual rate = .22%

NATP TAXPROMonthly September 2013 natptax.com

states that household income is thetaxpayers modified adjusted grossincome (MAGI), plus the aggregateMAGI of all other individuals who

are taken into account in determin-ing the taxpayers family who arealso required to file an income taxreturn for the year. Family meansthe individuals for whom a taxpayerproperly claims a personal exemp-tion deduction under 151 for atax year. Does this mean that youwill now have to ask your clientswho claim parents as dependents toobtain their parents tax informa-tion? What if the parents are in a

different state? It would seem rea-sonable to assume that this is notwhat the law intended; however,its right there in the statute. Untilfurther guidance is issued, we havenothing else to go on. What if adependent is not required per seto file a return but does so only toget a refund of withheld tax?

Compliance ComplexitiesOne of the more sticky require-

ments of the employer mandate isdetermining whether the employeris even required to offer healthinsurance. As the law is written,only large employers are requiredto offer health insurance to their

employees. A large employer isdefined as one that employs at least50 full-time and full-time equiva-lent employees. This determination

is made based on the number ofhours an employee works. Full timeis defined as 30 hours per weeknot 40 as we have all adapted. Ofcourse that too can change.

There are penalties that will beassessed on employers and individu-als who do not comply with thehealth care law. The law refers tothis penalty as the shared responsi-bility penalty. Whether its a pen-alty or a tax, employers who do not

offer insurance, or offer insurancethat is not affordable, will have towork their way through a maze ofcalculations to arrive at the correctpenalty amount. Individuals whodo not obtain health insurance facethe same complexities with amountsthat change in the future.

Tools For YouNATP realizes that complying withthe rules and staying current is

difficult at best. To assist you, wehave created a website filled withresources, education and FAQsthat specifically address the ACA.Included on the page are links to aworksheet you can use to calculate

the number of full-time employees,applications for health coverage,links to government websites andnumerous articles that we have pub-

lished on this topic.Your role as a tax professionalis to guide your clients throughthe regulations and inform themof the pitfalls for failing to comply.You will most likely need to addsome additional questions to yourinterview checklist to ensure youhave all the information necessaryto properly compute any requiredpenalties. In some states, you dontneed to be a licensed insurance

broker in order to assist your clientswith finding the insurance that bestfits their circumstances. In otherstates, however, tax preparers whowish to sell, solicit and/or negotiateinsurance must get a license.Alternatively, tax preparers can refertheir clients to a licensed insurancebroker. To help you figure outwhat is allowed or not allowed inyour state, we have compiled a listof the state requirements, complete

with a link to the state regulatoryagency.

All the resources that are avail-able to you are on NATPs websiteat natptax.com under the TaxKnowledge Center tab.


4/16

ACA and Undocumented Workers By Erik Lammert, J.D.

Internet rumors would have you believe that thenew health care law will force employers to providehealth insurance benefits to undocumented workers.Section 1411 of theAffordable Care Act(ACA) specifi-cally excludes people who are in our country illegallyfrom receiving any benefits.

Sec. 1411. Procedures for determining eligibilityfor exchange participation, premium tax creditsand reduced cost-sharing, and individual responsi-bility exemptions.

(1) IN GENERAL. An applicant for enrollmentin a qualified health plan offered through anExchange in the individual market shall provide:(A) The name, address, and date of birth of eachindividual who is to be covered by the plan (in thissubsection referred to as an enrollee); and(B) The information required by any of the follow-ing paragraphs that is applicable to an enrollee.(2) CITIZENSHIP OR IMMIGRATION STA-TUS. The following information shall be provided

with respect to every enrollee:

(A) In the case of an enrollee whose eligibilityis based on an attestation of citizenship of theenrollee, the enrollees social security number.(B) In the case of an individual whose eligibility isbased on an attestation of the enrollees immigra-tion status, the enrollees social security number (ifapplicable) and such identifying information withrespect to the enrollees immigration status as theSecretary, after consultation with the Secretary ofHomeland Security, determines appropriate.

Nothing in the ACA rules allow federal paymentsor credits for individuals who arent lawfully presentin the U.S. [Sec. 1412(d), PL 111-148, 3/23/2010.Joint Committee Staff, Tech Explanation of the Rev-enue Provisions of the Reconciliation Act of 2010, asAmended, in Combination With the Patient Protec-tion and Affordable Care Act(JCX-18-10), 3/21/2010,p. 12, 22]. The ACA specifically states in 1411 thatbefore an individual is eligible to benefit from the newsystem, they have to be able to prove their legal citi-zenship or immigration status.

TAX TALK


accruing once determined to be apayment (i.e., upon completion ofan examination). According to Reg.301.6611-1(g) interest accrues

until 30 days before the date of therefund check.On May 2, 2011, a taxpayer

received a 30-day letter fromthe IRS notifying him that a taxliability of $100,000 was due forthe 2010 taxable year. Ten dayslater, the taxpayer provided theIRS with a deposit for that liabilityin the amount of $60,000. Aftercompletion of the examinationon February 9, 2012, the IRS

determined the taxpayer was actuallyliable for $40,000 for the 2010taxable year. On April 9, 2012,the taxpayer agreed with the IRSby signing a waiver of restrictionson assessment and collection. OnApril 17, 2012, the IRS assessed the

$40,000 and applied an overpaymentof tax from the 2011 taxable yearof $60,000. The application of the2011 overpayment combined with

the deposit of $60,000, created an$80,000 overpayment for 2010. Thetaxpayer asked for a refund of theremaining amount. From this set offacts, the IRS has two options forcalculating the overpayment interestowed to the taxpayer.(1) The IRS can deem the $40,000

tax liability to be satisfied by the$60,000 overpayment from the2011 taxable year, which wouldleave the taxpayers refund to

consist of $20,000 from theoverpayment and $60,000from the deposit. The $20,000receives interest at a rate of theFederal short-term rate plusthree percentage points (a halfof a percentage point for corpo-

rations). The $60,000 depositreceives interest at a rate of theFederal short-term rate, com-pounded daily. Interest would

begin accruing on April 17,2012, to a date not more than30 days before the date of therefund check.

(2) The IRS can deem the $40,000tax liability to be satisfied bythe $60,000 from the deposit,which would leave the tax-payers refund to consist of$20,000 from the deposit and$60,000 from the 2011 tax-able year overpayment. This

option provides the taxpayer ahigher interest rate on a greateramount for the accrual period.

Obviously #2 is the best optionfor the taxpayer; unfortunately, theIRS makes the choice.

Overpayment Interest Application continued from page 1


5/16 NATP TAXPROMonthly September 2013 natptax.com

Its been well established thatemployees are not subject toself-employment tax and inde-pendent contractors are. Employeespay their share of FICA and Medi-care through withholding, whileindependent contractors pay theirshare and the employers share onSchedule SE. Whether a taxpayer is

an employee or independent con-tractor is a matter of fact. The IRSoffers tests that can be used to assistin determining this status.

Richard Blodgett was a miningengineer in Connecticut. He wasalso president of the local RotaryClub and served on the board ofdirectors for the group.

In 1977, one of the othermembers of the Rotary Club, whohappened to be the president of

Groton Savings Bank, contactedBlodgett to offer him a position onthe board of trustees at the bank.The bank president was impressedby Blodgetts work with the RotaryClub. Blodgett accepted the offerand was elected as a corporator andtrustee of the bank on February 17,1977.

The job duties of a corpora-tor are to oversee the actions of theboard of trustees, establish bankbylaws that meet the bank charter,as well as Federal and State laws,and elect other corporators, trusteesand bank officers. Corporators can-not be removed by the bank man-agement and are only dismissed ifthey miss three consecutive annualmeetings. Each corporator is paid afee for the meetings; the fee is set bythe board of trustees.

Bank trustees must also becorporators. The trustee has a dutyto work in the best interest of thebank. The trustees are required tomeet monthly, but more often ifneeded. The trustees work separatefrom the management of the bankand are not involved with the day-to-day operations of the bank. The

trustees approve the banks strategicvision, strategy and policies ofthe bank, supervise management,establish trustee committees andsign confidentiality agreements.

The trustees are compensatedbased on a fixed retainer and thenfor special duties and meetings. In2009 and 2010, the trustees werepaid $850 per month in retainer,$1,000 for board meetings, $1,300for lead director board meetings,

$1,100 for secretary board meetings,and $800 for committee meetings.The bank also provided theboard of trustees with continuingeducation so they could stay currentwith the Federal and State bankinglaws. It also provided life insurance,disability insurance, a retirementplan, and indemnification andreimbursement for reasonableexpenses incurred for lawsuitsinvolving the bank.

Blodgett was elected as a trusteeevery three years from 1977 untilAugust 5, 2011, when he retired.Before retirement, he averaged 20hours per month attending meet-ings and serving on various commit-tees. He did not hold himself outas a contractor to any other person,bank or organization. Blodgett didnot claim a deduction for business

expenses related to his trustee posi-tion as the bank paid them. He didnot receive any financial servicesfrom the bank.

For 2008, the year at issue,Blodgett received a 1099-MISC

reporting non-employee compen-sation of $26,750 for his trusteeservices. While Blodgett did reportthis income on Line 21 of his 2008Form 1040, he did not include theamount on Schedule SE.

Blodgett disputed the self-employment tax in the IRS noticeof deficiency. He argued that he wasan employee of the bank, not

continued on page 12

Payments to Bank TrusteeNon-employee compensation subject to self-employment tax

By Kevin Brown, EA

TAX TALK


6/16

Starting with the Energy and

Transportation Act of 2005,individual taxpayers have

been provided various tax creditsover the years for making energyefficient improvements to theirresidences.

This law enacted two separatecredits: the nonbusiness energyproperty credit (25C) and theresidential energy efficient propertycredit (25D). Since 2006, thesecredits have been extended andmodified several times to theircurrent status in 2013. The chart onpage 7 summarizes and comparesthe provisions of each credit.

Tax preparers have a significantopportunity to initiate tax planningwith clients who are interestedin making energy efficientimprovements to their homes.However, often times we do not get

the opportunity because our clientsdo not communicate their planswith us or we are not proactive inassisting the client through thisprocess.

Lack of planning can leadto unexpected results, as wellas unhappy clients who insistthey deserve the credit that their

salesman told them they shouldreceive. Often we are left in aposition of having to explain the taxlaw and why the credit is limited.

Its our job to remind clientsthroughout the tax year that weare here to advise them of the taxconsequences of their decisions.These reminders could be as simpleas a quarterly update on current taxlaws or perhaps NATPs Tax Tipsclient newsletters, which come out

in summer and winter.Following is an example of a

married couple who did not seekthe advice of their tax professional. Example: Tim and Amy Greenjust retired in 2012 at ages 63 and62 respectively. Tim receives apension from his former employerof $17,800 annually, as well as$16,800 in Social Security benefits.Amy receives periodic distributionsfrom her 401(k), which totaled$12,500 in 2012. She also receivesSocial Security benefits of $12,400annually. In addition, Tim andAmy have investment income inthe form of interest and ordinarydividends, which totaled $900 and$3,400 respectively in 2012.

The Greens no longer havea mortgage on their principalresidence or on their lake home.

Their only itemized deductionsare real estate taxes and charitablecontributions. They have notclaimed itemized deductions for thelast eight tax years.

With the rising cost of energy,the Greens decided to investigatemore efficient ways to heat andcool their two homes. After a trip

to their local home show in April,they decided a wood pellet stovewould be perfect for their principalresidence and a geothermal systemwould be the most efficient way toheat and cool the lake home.

In May 2012, the Greenspurchased a wood pellet stove fortheir home and paid a total of$3,750, including installation. Themanufacturer certified that the stovemet all of the requirements for the

nonbusiness energy property credit.The Greens also contacted

a salesman from the home showregarding a geothermal system fortheir lake home. The salesman toldthe couple that they could receivea 30% tax credit for a system thatwould fit their needs for the lakehome. In June 2012, the Greensput $1,000 down on a systemthat was fully installed in August2012. The remaining $55,500 ofthe purchase price was paid with ahome equity loan the Greens tookout on their principal residence.

The taxpayers had neverclaimed a credit for energy improve-ments in the past. The Greens areallowed to take a credit of $300 forthe wood pellet stove and $16,950for the geothermal system on theirForm 5695 (see page 8).

HOW TO

Energy CreditsTax planning with 25C and 25D

By Kevin Brown, EA



7/16

Despite having $17,250 in taxcredits from their energy efficientproperty purchases, Tim and Amycan only use $2,959 in the 2012

tax year due to the tax limitationimposed on the nonrefundablecredit. The full $300 credit fromthe wood pellet stove is used inthe current year, as well as $2,659of the residential energy efficientproperty credit from the geothermalsystem. Thankfully, the remainingresidential energy efficient property

credit of $14,291 can be carriedforward. At this point, the creditexpires as of December 31, 2016.If the credit is not used, the Greens

will lose any remaining credit.If the Greens income remainsthe same, they will not be able tofully absorb the remaining creditand will lose roughly $2,000 ofcredit.

Had the Greens consulted theirtax preparer, they could have lookedto increase their income for the

current year, or taken a smaller sec-ond mortgage by utilizing more ofAmys 401(k). They were expectingthe full credit on the 2012 return,

not $2,959 (see page 9).Remember, when talking toyour clients regarding potential taxbenefits and pitfalls, remind themthat you are there to offer adviceon minimizing their overall taxbill. The goal is to avoid taxpayerfrustration and make you look like ahero come tax time.

Nonbusiness Energy Property

Credit (25C)

Residential Energy Efficient

Property Credit (25D)Type of qualifying property Building envelope components

including insulating materials,

windows, doors and roofing. Labor

for installation is not included.

Qualified energy property

including electric heat pumps,

high-efficiency furnaces, air

conditioners, and water heaters

as well as biomass fuel stoves.

Includes labor for installation.

Solar water heating and solar

electric property, fuel cell

property*, small wind energy

property and geothermal heat

pump property. Includes labor for

installation.

*Fuel cell property must beinstalled on the taxpayers

principal residence only.

Maximum credit $500 lifetime total. Separate

limitations apply: advanced air

circulation fans ($50), furnaces

($150), windows and doors ($200)

and water heaters, heat pumps,

central air conditioners and

biomass stoves ($300). Available

to offset both regular tax and AMT.

30% of the installed cost of the

equipment. Available to offset both

regular tax and AMT.

New construction Not allowed Allowed

Basis adjustment Must reduce basis by the amount

of credit

Must reduce basis by the amount

of credit

Manufacturer certification Can be relied upon unless the IRS

publishes revocation

Can be relied upon unless the IRS

publishes revocation

Refundable/carryover Not refundable and carryover is

not allowed

Not refundable but carryover is

allowed to any year the credit

applies

Expiration of credit December 31, 2013 December 31, 2016

NATP TAXPROMonthly September 2013 natptax.com

HOW TO



HOW TOEnergy Credits continued from page 7

Tim

an

dAmy

Green

Form

5695

,Res

identia

lEnergy

Cre

dits



Tim

an

dAmy

Green

Form

1040

,U

.S.

Individua

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Tax

Return



If you arent sure what to makeof theAffordable Care Act, thenyoure in excellent company.Quite a few people still dontunderstand how the healthcare planis going to work, and even moreare unclear on how the individualhealthcare mandate in particular willaffect them and their loved ones.

Thankfully, you still have some timeto figure it all out and get your factsstraight. The individual mandate,along with all it entails, officiallygoes into effect on January 1, 2014.Lets take a closer look at some ofthe specifics in regards to how itsgoing to work.

What is the IndividualHealthcare Mandate?In a nutshell, the individual health

reform mandate will require alllegal residents of the United Statesof America to purchase at leastbasic health coverage beginning in

2014. The consequence of failingto do so will come in the form ofa tax penalty. In the year 2014,the penalty will be the greater ofa fixed $95 per adult and $47.50per child, or 1% of the householdincome. The fixed amount, however,is capped at three times the dollaramount for adults. A family of

two adults and three children, forexample, would have a fixed dollaramount of $285 (3 x $95) insteadof $332.50 ($95 + $95 + $47.50 +$47.50 + $47.50). In this example,the penalty would be the greaterof $285, the fixed dollar amount,or 1% of their household income.These values increase in future yearsto account for inflation.

Before we can finally accomplishthe goal of implementing a full-

scale universal healthcare system,we must first lay the groundwork.The individual mandate is a bigpart of that groundwork, as is the

establishment of theAffordableCare Act, which further preventsinsurance companies from unfairlyraising rates, stopping coverage, ortaking advantage of their customers.

Who is Exempt from theIndividual HealthcareMandate?Naturally, there are going to be cer-tain groups of people who are exempfrom the requirements set forth bythe mandate, particularly those whotruly cant afford the costs of indi-vidual healthcare and those who aresubject to extenuating circumstancesAccording to Congressional BudgetOffice estimates, less than 2% ofAmericans are expected to qualify foexemption. Those who do include: Members of recognized religiou

sects who are exempt from self-employment tax.[5000A(d)(2)(A)]

Members of health care sharingministries. [5000A(d)(2)(B)]

Individuals who are not U.S.citizens or nationals who arenonresident aliens or are presenin the U.S. illegally.[5000A(d)(3)]

Incarcerated individuals, other

than those who are incarceratedafter dispositions of charges.If the charges are pending,this exemption does not apply.[5000A(d)(4)]

Members of Indian tribes.[5000A(e)(3)]

Individuals with a shortcoverage gap, which is generallyless than three months.[5000A(e)(4)]

ACA

The Individual Health Care MandateWhat does it mean for you?

By Sean T. OHare, CPA



Affordable Care ActGet the Answers You Need

natptax.com

Individuals whose householdincome is below the thresholdfor having to file an income taxreturn. Note that household

income generally includesthe income of all dependentsclaimed by the taxpayer. Itspossible to have no filingrequirement, but not be exemptif the household income is overthe threshold. [5000A(e)(2)]

Individuals who cannot affordcoverage based on their expectedcontribution being higher than8% of their household income.[5000A(e)(1)]

Individuals with a hardshipexemption certificate.This is based on facts andcircumstances when all theother exceptions dont apply.This is based on the statemarketplace determination, notthe IRS. [5000A(e)(5)]

The penalty is calculated andimposed on the individuals tax

return and is paid with the return.If the penalty is not paid, demandwill be made by the IRS and followsthe procedures similar to penaltiesin Subchapter B of Chapter 68.An example of a penalty in thissubchapter is the willful failureto furnish Form W-2. The IRScannot, however, levy property forthe individual mandate penalty.The IRSs only recourse is to offsetfuture refunds.

What Kinds of HealthInsurance Plans Qualify?Assuming you dont fall into anyof the exemption categories, youllnaturally want to know what theactual standards are as far as whichinsurance plans qualify and whichdont. The official definition ofqualifying health insurance refers

to health insurance plans thatencompass the minimum allowableamount of coverage. Beginningin 2014, plans that cover essential

health benefits must cover a certainpercentage of costs, known asactuarial value (AV).

The Health and HumanServices Department (HHS) has acalculator available that will helptaxpayers determine whether theplan provides minimum value.When certain values, such asdeductibles, premiums, coverageand more, are entered, the AVcalculator is able to determine what

percent the plan provides. TheHHS also intends to assign metalliclevels asserting what percent ismet, with bronze being 60%, silver70%, gold 80%, and platinum90% (Public Law 111-148 Section1302). Metal levels will allowconsumers to compare insuranceplans with similar levels ofcoverage and cost-sharing based onpremiums, provider networks, and

other factors. In addition, the healthcare law limits the annual amountof cost sharing that individualswill pay across all health planspreventing insured Americans fromfacing catastrophic costs associatedwith an illness or injury.

For more information from theHHS website, including how theAV was determined, see http://cciio.cms.gov. Search for actuarial valueand then click on the Actuarial

Value and Cost-Sharing ReductionsBulletin link.

A Closer Look at theInsurance ExchangeMarketplaceThe future of healthcare undertheAffordable Care Actand theIndividual Healthcare Mandatewill be moderated by each states

official health insurance exchange.These insurance exchanges willmake shopping for, obtaining, andmaintaining qualifying insurance

plans much easier for Americancitizens by providing a sort ofone-stop shopping option theycan utilize.

To be listed, each insuranceoption offered to citizens via theexchange will have had to undergoan intensive evaluation and needto adhere to strict standards.Each plan included as part of theexchange will be guaranteed toprovide essential and necessary

health benefits while also helpingAmerican citizens to qualify for anyand all tax subsidies, governmentprograms, and additional perks thatare available to them.

The insurance exchangewill also be designed to make ita simple process to compare thebenefits of one plan to another.Comprehensive details and statisticswill be made available in regards to

both individual and small businessplans. Furthermore, all of thisinformation will be easily accessibleonline to anyone with an Internetconnection. For more information,visit healthcare.gov.

Sean T. OHare is a CPA and owner of

OHare Associates, CPAs, which has offices

in South Portland, Maine and Boston,Massachusetts. Sean primarily works

with individuals and small businesses

doing proactive tax planning and tax

compliance. He is an active community

member and has held leadership

positions in many civic and non-profit

organizations. When hes not at work,

Sean enjoys running marathons, bicycling,

swimming, stand-up paddle boarding,

and spending time with his family.



QJon is the owner of an S Corporation that doesnthave a fixed business location. Can he claim ahome office deduction?

AIf Jon provides services on behalf of the corporation,he is an employee and should be receiving reasonablecompensation. If the corporation requires Jon to

have a home office, he can deduct the expenses on Form2106 as unreimbursed employee business expenses. Sincethe corporation has no fixed business location, theres anobvious need for Jon to have a home office. Alternatively, thecorporation can set up an accountable plan and reimburse Jonfor any out-of-pocket expenses he incurs. Or, the corporationcould pay rent, but this is not the best option because the IRSdoes not allow employees to deduct expenses when rentingpart of their dwelling unit to their employer.

Q & AFrom the NATP Research

Services Archives

an independent contractor, and thushis compensation was not subject toself-employment tax.

The Tax Court considered thefacts of Blodgetts relationship withthe bank and tried to find statute,regulations, IRS rulings or case lawthat would specifically characterizethe income earned by a trustee onthe board of a community savingsbank. None were found, so theyturned to the common law rules todetermine his status.

First, the Court found manysimilarities between a bank trusteeand a corporate director. However,

they did note that regardless of thesimilarities, the trustee would bean employee if the facts met thecommon law analysis and whetheror not he fell within one of the

statutory employee categories. TheCourt looked at the degree of con-trol, investment in facilities, theopportunity for profit or loss, theability to discharge, the taxpayersregular business, the permanency ofthe relationship and the belief eachparty had with regard to the rela-tionship being created.

While Blodgetts facts sup-ported employee status regardinginvestment in facilities, opportunityfor profit or loss, and permanencyof relationship, the factors againstthis classification weighed muchheavier. The bank could not

exercise control over him as trustee;his duties were governed by thecorporators of the bank and wereoutside of the bank management.The bank could not discharge

Blodgett from his duty as a trustee.That was up to the corporators.Finally, the relationship of theparties indicated independentcontractor status. He was neverissued a W-2 in the years as trustee,the bank CPAs classified the trusteeas independent contractors, andForm 1099-MISC was consistentlyissued to him.

Because the Court found thefactors for independent contractorstatus to outweigh the employeestatus, they concluded the amountof non-employee compensationreported to Blodgett was equivalent

to the fees paid to corporate direc-tors, and thus was subject to self-employment tax.

Richard E. Blodgett, Jr., et ux. v. Comm

TC Memo 2012-298

TAX TALKPayments to Bank Trustee continued from page 5



Gerard F. Cannito, CPA, CFP

Denver, NC

As owner of a public accounting andtaxation office, Gerard has servedover 1,600 individual and business

clients. He has over 30 years of experience in the industry,holds a Series 7 Securities Broker license and a Life &Health Insurance license. In 2008, he sold part of his

practice to spend more time with his family. Currentlyserving as treasurer on the NATP National Board ofDirectors, Gerard has also served as both president andvice president of the North Carolina Chapter.

BOARD CANDIDATES

On behalf of their Chapter members, Chapterpresidents will soon be voting for candidatesto the NATP Board of Directors. Becausethese are the future leaders of our Association, its in

your best interest to get to know the candidates andexpress your opinions to your Chapter president. Learnmore about the candidates at natptax.com by clicking onAbout NATP and then 2014 National Board Candi-dates. You can find contact information for your Chap-ter president and other Chapter leaders by clicking onChapters or by calling 800.558.3402. Being connectedat the Chapter level is the best way to get the most fromyour NATP membership. NATP election results will beannounced at the November Board of Directors meeting.

Jean Millerchip, EA, CFP

Nutley, NJ

Bringing 37 years of experienceto her practice, Jean specializes infinancial planning and individual,

estate and trust taxation. An NATP member since 1988,Jean has served as treasurer, secretary, vice president,and president of the New Jersey Chapter. She hasserved on the National Board for six years, has beenthe Nominations Chair for two years, and is currentlythe National vice president. In 2007 Jean was namedNATPs Tax Professional of the Year.

Brett A. Rosser EAGroveton, TX

A former police officer, Brett joinedNATP in 2001 after returningto the family bookkeeping

and tax preparation business. In 2005, he became aboard member for the Texas Chapter and has servedas treasurer and president. He is a Certified State

Instructor and has taught RPM, RTRP, and variousother classes throughout Texas. In early 2011, Brettopened his own practice. His work, NATP, his wife andfour children keep him busy at all times.

JoAnn Schoen, EARochester, MN

JoAnn has been a tax professionalin Rochester, MN since 1976 andhas owned Accounting & Tax

Associates, Inc. since 1984. She has been an NATPmember since 1986, having served on the MN ChapterBoard as president and treasurer, and treasurer onthe Chapter Advisory Council. JoAnn served as theNational treasurer from 20092011, and as presidentfrom 20122013. She is a graduate of the University ofWisconsinMadison.

Kim P. Loewer, EA, ATAWeybridge, VT

Since graduating cum laude fromMiddlebury College in 1976,Kim has spent the last 26 years in

private practice preparing personal and business incometaxes and representing clients in tax controversies. Hisfirm, Loewer & Associates, also provides bookkeepingand payroll services. In 2012, Kim was appointed tothe Vermont Tax Advisory Board and the VermontTax Technical Workgroup. He is a co-founder of theVermont Chapter and currently serves as its president.


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Whether yourclient is a trader,dealer or only aninvestor in stocks, bonds and othersecurities, you need to know howthe difference in the definitionsaffect his or her tax return. All three

have one element in common,the activity the person is engagedin involves the buying and sellingof securities. Its the level ofparticipation in the activity thatdrives the tax consequences.

DealerDealers are perhaps the most dis-tinguishable of the three groups. Adealer is an individual who acquires

securities from sources that areusually unavailable to the generalpublic and resells them to custom-ers at a profit. This is perhaps thekey distinction between a dealer anda trader or investor. Additionally,dealers who act as brokers must beregistered with the Securities andExchange Commission. To qualifyas a dealer in securities, an individ-ual must engage in transactions withcustomers. This means dealers typi-

cally keep an inventory of securitiesand depend on its turnover (ratherthan dividends, interest and appre-ciation) for their profits.

Unquestionably, a dealer isengaged in a trade or business. Thisclassification is important whendetermining the tax consequencesand reporting requirements. Theterm trade or business is not

By Cindy Hockenberry, EA

Dealer, Trader, Investor

TAX 101

DEFINING




defined in the code or regulationsso we must rely on the courtsand certain facts of each case.Specifically, dealers are engagedin the activity on a regular andcontinuous basis. They havecustomers and clearly have a profitmotive. If they have not elected tobe taxed as a separate entity, such asa partnership or corporation, theirincome and expenses are reportedon a Schedule C. The determinationof trade or business becomes evenmore significant (and less clear)when a taxpayer is deemed a trader.

TraderA trader is somewhat differentthan a dealer and perhaps themost controversial of the threeclassifications. Its difficult todetermine trader status. To makethings more complicated, there areseveral different types of traders,and the IRS has provided little tono guidance on the subject. Thereare day traders, swing traders,position traders, extreme investors

and short and long term investors.The type we hear about the mostoften is day trader so the focus onthis discussion is on this group,simply referring to them as traders.

A trader typically buys and sellsvia the Internet, making several,perhaps hundreds, of trades a day.Traders do not sell to customers,are not required to hold a securitieslicense and only trade for their ownaccount. Traders profit on the fluc-tuations in the market and generallyhold the stock for a short periodof time. Their securities are capitalassets, the dispositions of whichresult in capital gains and losses.

The Taxpayer Relief Act of1997attempted to clarify the taxtreatment of traders. In generalterms, taxpayers are engaged in atrade or business when they are

able to ascertain that the activityis conducted with a profit motiveand conducted on a regular andcontinuous basis. In many cases,this is their only, or primary, sourceof income. In Groetzinger v. Comm.107 S. Ct. 980, the SupremeCourt ruled that to be engagedin a trade or business, the taxpayermust be involved in the activitywith continuity and regularity andthat the taxpayers primary purposeengaging in the activity must befor income or profit. Althoughthis case dealt specifically with aprofessional gambler, it confirms

the availability of business statusfor traders and provides a basisfor deducting the expenses under162.

The Supreme Court decisionestablished that the expenses atrader incurs are deducted as busi-ness expenses on Schedule C asopposed to investment expenses onSchedule A. As such, they are notsubject to the 2% AGI limitation oradded back for alternative minimum

tax purposes as is the case for aninvestor. Another benefit for tradersis that they can make the mark-to-market election under 475(f)on their tax return. This electioneffectively changes capital gains orlosses into ordinary income or loss.Depending on the taxpayers situa-tion, this can be a huge advantage.

InvestorInvestors are generally in the marketfor the long haul. They do not havethe volume of buys and sells a trader

would have and they depend on theinterest, dividends and appreciationto make their profit. Most taxpayersare classified as investors. The IRSFAQ website defines an investor astrading solely for their own accountand do not carry on a trade or busi-ness. Their securities sales result incapital gain or loss and their deduct-ible expenses are itemized deduc-tions. At first glance, this mightappear similar to the definition of atrader. There is one significant differ-ence, however. An investor generallyhas another source of income anddoes not depend primarily on thefluctuations of the market to subsist.An investor can, and generally does,sit on his or her stocks and waitsfor the most opportune momentto sell. Since this is not their mainsource of income, they can afford todo just that. This boils down to theregularity of the sales. Since clas-sification of a trade or business hashinged on regularity and continuity,it would be safe to assume that aninvestor is not engaged in the busi-ness of buying and selling stocks.

Once you understand the dif-ferences between the three groups,classifying your clients and knowinghow to effectively apply the propertax law becomes clearer.

Cindy Hockenberry, EA joined NATP in 1989 as a tax researcher and laterbecame the information coordinator. She is currently the Tax Knowledge

Center Manager with duties that include interpreting complex tax laws and

disseminating the information to the association members through various

NATP publications. In addition, she is responsible for the overall quality of the

responses to questions answered by the Tax Knowledge Center team. Cindy

is also the primary association spokesperson for media inquiries. Hundreds

of newspapers, magazines, and websites have quoted her in their tax-related

articles. Cindy has a Bachelor of Arts degree in liberal studies from the

University of WisconsinOshkosh.


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PO Box 8002Appleton, WI 54912-8002

www.natptax.comPERIODICALS

(ISSN 1535-5896)

is published monthly by the

National Association of Tax Professionals

(NATP)

PO Box 8002

Appleton, WI 54912-8002

Periodicals postage paid at Appleton, WI

and additional mailing office.

Editor: Cindy Van Beckum

Managing Editor: Susan Lucius

Contributing Writers:

Kevin Brown, EA

Cindy Hockenberry, EA

Erik Lammert, J.D.

Sean OHare, CPA

Becky Van Kauwenberg

Postmaster: Send address changes to:

TAXPRO Monthly c/o NATP

PO Box 8002

Appleton, WI 54912-8002

Change of address?

Please contact NATP at

800.558.3402 ext. 3 or 920.749.1040 ext. 3

Fax: 800.747.0001

Email Address: [email protected]

Website: www.natptax.com

Views expressed in TAXPRO Monthly are not

necessarily endorsed by the

National Association of Tax Professionals

Copyright 2013. National Association of Tax

Professionals, Inc. All rights reserved.

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NATP TaxPro Monthly September2013