The IRS Recognizes Same Sex Marriage

IRS Recognizes Same Sex Marriage
The Internal Revenue Service have ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage. The ruling implements the federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act and had been long-awaited by tax professionals who wanted more clarity from the IRS. Under the ruling, same sex couples will be treated as married for all federal tax purposes including income, gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits like deducting health insurance, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships or civil unions recognized under state law. Legally married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

In addition, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

Individuals who were in same-sex marriages may file amended income tax returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the three year statute of limitations. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some individuals may have signed an agreement with the IRS to extend the statute of limitations and permit them to file refund claims for tax years 2009 and earlier.

If you need assistance in filing an amended federal income tax return please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604. Spadea & Associates, LLC provide estate and tax planning and file income tax returns year round.

How Can I Qualify For The IRS First Time Penalty Abatement Policy?

Tax inspector is pointing to you
Recently the Internal Revenue Service (IRS) has introduced a new first time abatement (FTA) policy of penalty removal that is available for first-time penalty charges and is based on your compliance history. However FTA relief only applies to a single tax period. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods. In addition to qualify for the FTA policy, you must have filed all required tax returns and paid, or arranged to pay, all tax currently due.

Keep in mind even if you get the IRS penalty abated and have a valid installment agreement, if you owe more than $10,000 in taxes the IRS may file a Notice of Federal Tax Lien which may harm your credit score. However after you pay the tax in full, you can request to have the Federal Tax Lien released.

Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, U.S. Gift and Generation-Skipping Transfer Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. In those cases you can contact the taxpayer advocate, write a letter demonstrating reasonable cause or file a claim for refund using form 843.

If you have many questions or what help in dealing with the IRS please contact Gregory J. Spadea of Spadea & Associates, LLC located in Ridley Park, Pennsylvania at 610-521-0604.

Why I Should Form a Family Limited Partnership

Basic Strategy
The estate planning strategy employed by business owners is to gift limited partnership interests to family members at a discount based on their future business succession plan. This works well for succession planning because a business owner that has a successful LLC can gift the nonvoting LLC units to his children and out of his estate over time. The business owner acts as a general partner and his children are limited partners. In addition all the assets transferred to the Family Limited Partnership are protected from business creditors.

Gifting to the Limited Partnership
The general partner (business owner) can gift the limited partnership interests up to the annual exclusion of $13,000 in 2012 without filing a form 709 federal gift tax return. If the business owner wants to gift more than $13,000 per person he has to file a Form 709 return and may use part of his $5.12 million exemption in 2012. However, the value of the limited partnership shares or nonvoting LLC units may be discounted up to 30% due to their lack of marketability since there is no ready or available market to sell those shares on.

Tips on Surviving an IRS Challenge
In order for the Family Limited Partnership to survive a challenge by the Internal Revenue Service the general partner (business owner) must resist the temptation to maintain too much control over the partnership assets. The general partner should not pay personal expenses from the partnership bank account or comingle his personal funds with the partnership funds. The partnership should be operated as a separate entity and hold annual meetings to discuss management issues.

The partnership agreement should be drafted to

  1. avoid potential abuses by the general partner;
  2. address when distributions from the partnership bank account should be made;
  3. state at least three nontax reasons indicating why the partnership was formed such as:
    • To make a profit.
    • To increase the family’s wealth
    • To provide a means whereby family members can become more knowledgeable about the management and preservation of the family’s assets.*

If you have any questions about Family limited partnerships please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.

*Estate of Turner, TC Memo 2011-209

What are the Advantages of Being a Real Estate Professional?

A real estate professional going over paperwork
The IRS treats rental property losses like passive losses meaning they are not from a trade or business. Rental activities are presumed to be passive by the IRS allowing passive losses to be deducted only against other passive income. Therefore if there is no other passive income such as rental income, the losses for that activity are suspended until the rental property relating to that activity is sold. Note that the IRS keeps track of the suspended passive losses for each activity when you file form 8582 with your federal income tax return.

However, there is an exception to that passive loss rule which is when a taxpayer is treated as a real estate professional. A real estate professional is someone who:

1. Devotes more than half of his or her personal services during the tax year in real estate businesses, and
2. who spends more than 750 hours materially involved during the tax year as a developer, broker, landlord or other real estate professional (also known as the Material Participation Test).

If both tests are met for each real estate activity then the loss is treated as an ordinary loss for that activity and can be deducted against other ordinary income.

Keep in mind the best type of loss to have is an ordinary loss because it can be deducted against other ordinary income like wages, bonuses, self- employment income, interest, dividends, rents and royalties.

To meet the 750 hour requirement the IRS requires you keep a log of the work you do as a landlord, contractor or broker. Examples include:

1. Working on or improving the property,
2. Researching and Bidding on properties,
3. Finding and Screening tenants,
4. Collecting rent,
5. Performing maintenance.

Since Material Participation must be established on an activity by activity basis, I always recommend an election be made under Treasury Regulation 1.469-9(g) to aggregate all real estate activities as one activity. This makes meeting the 750 hour rule much easier for taxpayers with more than one rental property or brokers who have other businesses besides real estate.

Once an election it is made is good for that tax year and all future tax years until either the Taxpayer or the IRS revoke it. Feel free to contact Gregory Spadea at 610-521-0604 to learn how to make the election.

How Long Do I Have to Keep My Tax Records For?

A folder of records and a tax form on the table.
The length of time you should keep a document depends on the expense or event that the
document records. Generally, you must keep your records until the period of limitations for that return runs out.

General Rule – The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The Statute begins to run from the later of that date the returns are filed or the due date which is typically April 15.

If you owe no additional tax and the following four situations do not apply to you; keep the tax records for 3 years.

However, if
1. You do not report income that you should report, and it is more than 25% of the gross
income shown on your return; keep your records for 6 years.

2. You do not file a return; keep your records indefinitely.

3. You file an amended return for credit or refund or a claim after you file your return; keep your records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

4. You file a claim for a loss from worthless securities or bad debt deduction; keep your records for 7 years.

Federal Income Tax Returns – Keep copies of your filed federal income tax returns forever. I recommend scanning them into your hard drive or cloud so they don’t take any space. Copies of previous federal tax returns help in preparing future tax returns, filing an amended return or applying for a mortgage or loan. In addition you should check to ensure all your wages and income have been reported correctly and match your Social Security earnings history. You can file Form SSA-7004 to get a copy of your earnings history from Social Security.

Employment Tax Returns and Records – Keep all employment tax returns and records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Rental or Business Property – Keep records relating to the purchase and improvements on a rental or business property until the period of limitations expires for the year in which you sell the property. You must keep these records to verify any depreciation or amortization deduction taken in the years you owned the property, as well as to figure the gain or loss when you sell the property.

If you never sell the rental property and fully depreciate it over 29 1/2 years you need to keep a record of all your cost basis and improvements until 3 years after the 29 ½ year period ends to verify the depreciation in the event you are audited.

Section 1031 Property – Generally, if you received property in a nontaxable 1031 exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inherited Property – If you inherit property from an estate, you get a stepped up basis in the property which is the fair market value at the decedent’s date of death. Therefore you should keep a copy of the appraisal taken at the date of death, or the inheritance or estate tax return for as long as you own the property to verify your basis so when you sell the property you can calculate your gain. Keep in mind if you only inherit half of a jointly owned property you only get a stepped up basis in the half that you inherited and did not already own.

Primary Residence – Cost records for your primary residence and any improvements should be kept until the home is sold. Note that a net gain (selling price less the basis and expenses of sale) are less than $250,000 if you are single or $500,000 on a joint return isn’t subject to income tax. However, the home had to be your primary residence for 2 out of the last 5 years prior to the sale. If the net gain profit is more than $250,000 ($500,000 on a joint return), or if you don’t qualify for the full gain exclusion, then you’re going to need those records for another three years after that return is filed.

Brokerage Statements and Cancelled Checks – When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does. Common examples are brokerage statements which should be kept for 7 years and bank statements and cancelled checks which should be kept for 7 years.

If you are not sure how long you should keep a specific document feel free to call Spadea & Associates, LLC at 610-521-0604 or email Gregory J. Spadea at

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