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FAQ

Do FICA taxes apply for a child under age 18 who works for his or her parent in a trade or business?

Ans: According to the IRS, such payments are not subject to social security and Medicare taxes, i.e. Federal Insurance Contribution Act (FICA), if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under age 17 who works for his or her parent in a trade or business are not subject to the Federal Unemployment Tax Act (FUTA) tax either.

Is income tax withholding applicable to employees who are under age 18?

Ans: Yes, payment for the services of an employee are subject to income tax withholding, regardless of age. So, even if the child is under 18-years-old, his earnings will be subject to income tax withholding.

Are attorney fees deductible?

Ans: The 2017 Act eliminates miscellaneous itemized deductions as part of individual tax reform. However, based on the claims that qualify for above the line deductions, clients can still deduct attorney’s fees. These claims are set forth in the Internal Revenue Code (IRC) Section 62 and are deducted against the taxpayer’s gross income to reach a lower AGI (Adjusted Gross Income).

When do you receive a Form 1099-B?

Ans: You only receive a Form 1099-B if you have sold stock units or investment securities that year. The Form 1099-B reports any capital gain or loss resulting from the transaction on your tax return.

What is a MEC? How is it taxed?

Ans: A modified endowment contract (MEC) is a life insurance contract. Unlike traditional life insurance policies, taxes on gains are regular income for MEC withdrawals under last-in, first-out (LIFO) accounting. However, the cost basis within the MEC and withdrawals is not subject to taxation.

Can I switch from an S Corp to a C Corp? How?

Ans: Yes, it is possible to switch your election between an S Corp to a C Corp. This requires you to complete the following steps:

  1. Draft a letter to the IRS Service Center stating that you want to withdraw your election to be taxed as an S Corporation.
  2. File Form 8832 – Entity Classification Election with the IRS as instructed.

How can I revoke S Corp election?

Ans: To revoke an S Corporation Election that was made on Form 2553, you need to submit a statement of revocation to the service center where you file your annual return. The statement should include specific points, such as:

  1. The corporation revokes the election made under Section 1362(a)
  2. Name and address of the shareholder(s)
  3. Taxpayer identification number of the shareholder(s)

Also, make sure that you file the statement of revocation before the specified due date.

Is there a penalty for failing to file 3520?

Ans: Failure to file Form 3520 on time or an incomplete or incorrect form on time is subject to a penalty. According to the IRS website, the initial penalty can be equal to the greater of $10,000, or as one of the following (whichever is applicable):

  1. 5% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.
  2. 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.
  3. 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II.

due date.

Can severance pay be considered as earned income for FEIE?

Ans: Yes. While claiming Foreign Earned Income Exclusion (FEIE), severance pay, as well as sick leave and vacation pay, may be included as earned income.

What is the new section 199A deduction? Does my rental income qualify for this deduction?

Ans: The section 199A of the Internal Revenue Code provides a deduction to qualified business income for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. The new section 199A deduction allows for up to a 20% deduction of qualified business income if you qualify as a trade or business run directly or indirectly through a pass-through entity.

Rental income has always been an area of concern for a lot of taxpayers, however, under the new regulations, Revenue Procedure 2019-7, the IRS has offered more simple ways to determine what is a rental activity. For instance, your business needs to be active with some regularity. So, if your rental activity meets these conditions and qualifies as a business for tax purposes, you may be eligible for section 199A deduction.

Do American expats need to pay tax?

Ans: Yes. If you are an American citizen or green card holder who works in a foreign country, you are required to file taxes and report your income in the U.S. You can do this by filing the appropriate forms with the IRS. Although there are a lot of things that you may need to consider in order to be well-informed about your taxes, as an expat, you are eligible for certain benefits and deduction like the Foreign Earned Tax Exclusion (FETE).Ans: Yes. If you are an American citizen or green card holder who works in a foreign country, you are required to file taxes and report your income in the U.S. You can do this by filing the appropriate forms with the IRS. Although there are a lot of things that you may need to consider in order to be well-informed about your taxes, as an expat, you are eligible for certain benefits and deduction like the Foreign Earned Tax Exclusion (FETE).

What is FATCA?

Ans: FATCA, or the Foreign Account Tax Compliance Act is an act that helps the U.S. prevent offshore tax evasion. This requires foreign banks to share information with the U.S. by providing a W-9 form with which your foreign bank can follow FATCA rules.

How do inheritance and estate tax waivers work?

Ans: If you inherit property from someone after their death, you may be liable for federal and state taxes based on the value of the estate which might put you in an inconvenient situation. These taxes are due approximately nine months after the decedent’s date of death. Also, keep in mind that these taxes must be paid before assets are distributed to the beneficiaries.

An inheritance or estate tax waiver can release the heir from the right to claim assets at the event of another person’s death. However, the way the waiver works depends on the state’s requirements.

Is stolen money tax deductible?

Ans: According to IRS, theft is “the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.” If you have had your money stolen during the tax year then you can deduct the amount of money that was stolen on your federal income tax return. However, according to new regulations in 2018, you can only claim this deduction if the crime has occurred due to a presidential disaster area declaration.

How does casualty deduction work?

Ans: A casualty can be defined as the loss of property due to unprecedented events like earthquakes, floods, accidents, or vandalism. Prior to regulation changes in 2018, casualty and theft deduction can only be claimed if it occurs due to an event that has been declared by the U.S. president.

 

The following losses are not tax-deductible:

  1. Accidental damage of assets
  2. Pet-related accidents
  3. Arson by or on behalf of a taxpayer
  4. Progressive deterioration like termite infestations that take an excessive amount of time to cause damage
  5. Willful or willfully negligent car accidents that are caused by or on behalf of the taxpayer