Residential Energy Efficient Property Credit

IRC Section 25D.  The Internal Revenue Service provides for a 30 percent credit for the installation of qualified solar water heating property, qualified solar electric property, geothermal heat pumps, and small wind energy property.  This credit will apply for property placed in service through December 31, 2016.

The expenditures that are eligible for this credit include the cost of installation.  However, costs that are allocable to a swimming pool or a hot tub are not eligible for the credit.  The installation does not have to be in the taxpayers principal residence, but it does have to be in a property located in the United States and used by the taxpayer as a residence (ie, could be a second home). 

This credit can be applied against any Alternative Minimum Tax through the 2011 tax year and any unused credit is carried forward.  There is no Adjusted Gross Income limitation for this credit.

Items Not Considered Alimony

Items Not Considered Alimony

In a couple of recent Tax court cases the court ruled on a few items that cannot be considered alimony.

Attorney Fees – The court held in Nicholas v. Comm, TCS 2011-91, that attorney fees incident to a divorce were not alimony.  These were attorney fees and costs paid on behalf of a husband’s ex-wife.  The court reasoned that because the payments made by the husband were not made contingent upon any factor of event, they did not constitute deductible alimony.

Contingency Related to a Child – In Knoedler v. Comm, TCS 2011-18, the court held that an individual cannot deduct as alimony the payments he made to his former wife under a postnuptial agreement where the agreement contained a contingency pertaining to his child.  The court reasoned here that the reduction of payments after the child’s graduation represented a contingency related to a child and, the payments were nondeductible child support.

Also, remember that if a divorce or separation decree provides for both the payment of alimony and child support and the spouse that is to pay the amount does not make payment in full, non-deductible child support will be deemed to be paid first pursuant to IRC Section 71(c)(3). 

Foreign – Earned Income Exclusion

IRC Section 911.  Revenue Procedure 2010-40.  For 2011 a United States individual that is living abroad can exclude up to $92,900 of foreign-earned income.  To take this exclusion the taxpayer must satisfy one of two tests.

The bona fide foreign residence test or the foreign physical presence test.

The exclusion applies separately to spouses.  Therefore, if both of the spouses are qualified individuals, the two spouses together can exclude up to $185,800, as adjusted for inflation, from their income.

Remember, that all United States Citizens are taxed on a World Wide basis and must report their income and prepare a United States Income Tax Return.  If United States citizens have foreign bank accounts they must be disclosed to avoid criminal and civil penalties.  These issues are not the focus of this article, but foreign based United States Citizens must be aware of these issues.

Exclusion of Disability Income for Police Officer

IRC Section 104 provides that compensation for injuries and sickness are not taxable and are excluded from income.  In Bakken v. Commissioner, TCS 2011-55, the court concluded that the disability income of a police officer who was injured in the line of duty and became permanently disabled remained nontaxable under Section 104 when he reached the eligible retirement age under the plan.

Officer Bakken served on the police force for 18 years and was injured in the line of duty, becoming permanently disabled and unable to perform the duties of a police officer.  The Austin Policemen’s Benefit Association approved his application for a disability pension as a result of his injuries.  He was not qualified for retirement due to his age at the time the benefit was granted by the Association.  He was given the same benefit as someone that would have retired at the regular retirement age.  Once the officer reached retirement age the Association converted the payments to a pension payment and issued Bakken a 1099-R showing the payments as taxable.

The Tax Court held that since Bakken had completed less than 20 years of service when he attained age 50, he remained ineligible for retirement.  Thus, the character of the payments remained unchanged, and he was entitled to exclude his pension distribution from income.

Exclusion of Disability Income for Police Officer

IRC Section 104 provides that compensation for injuries and sickness are not taxable and are excluded from income.  In Bakken v. Commissioner, TCS 2011-55, the court concluded that the disability income of a police officer who was injured in the line of duty and became permanently disabled remained nontaxable under Section 104 when he reached the eligible retirement age under the plan.

Officer Bakken served on the police force for 18 years and was injured in the line of duty, becoming permanently disabled and unable to perform the duties of a police officer.  The Austin Policemen’s Benefit Association approved his application for a disability pension as a result of his injuries.  He was not qualified for retirement due to his age at the time the benefit was granted by the Association.  He was given the same benefit as someone that would have retired at the regular retirement age.  Once the officer reached retirement age the Association converted the payments to a pension payment and issued Bakken a 1099-R showing the payments as taxable.

The Tax Court held that since Bakken had completed less than 20 years of service when he attained age 50, he remained ineligible for retirement.  Thus, the character of the payments remained unchanged, and he was entitled to exclude his pension distribution from income.

IRS STILL FOCUSED ON FOREIGN INVESTMENTS IN THE COMING YEAR

The IRS has set its priorities for the coming year.  It is no secret, they are going after those who evade their responsibility to pay their taxes.  Foreign banks in bank secrecy jurisdictions have turned over literally thousands of names to the IRS to settle civil lawsuits brought by the United States Department of Justice in an effort to catch those that use foreign institutions to evade U.S. Tax obligations.
The IRS has given these types of taxpayers two opportunities to come forward voluntarily with voluntary disclosure initiatives which were done to give taxpayers fair notice that the IRS would no longer tolerate these types of foreign arrangements,
Approximately 19,000 taxpayers came forward and disclosed their foreign relationships through these two programs.
Now, the IRS plans a renewed effort to uncover hidden assets with new laws, new international information exchange agreements, and further use of the courts.  The IRS has found that there is approximately 96 percent compliance with the tax laws where there is accurate information reporting, and only 50 percent compliance where there is not.  It is a high priority of the United States to close this gap.
So beware and if you are one of the remaining taxpayers that has a foreign account that is not disclosed, see a tax attorney immediately to discuss your options.  Remember that the IRS intends to criminally prosecute these offenders in the future that did not come forward when they had the opportunity.

Potential of "Clawback" of Gifts made in 2011 and 2012

The President signed into law on December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.  The Act reunified the Gift and Estate Tax when the maximum tax rate for both Gifts and Estates was set at 35 percent, and provided for a $5 Million applicable exclusion amount for both gift and estate tax purposes.  This new Act has the same problem as the old Act.  It has an automatic sunset provision and the law will then revert back to pre-Economic Growth and Tax Relief Reconciliation Act of 2001. 
If this happens the Gift and Estate tax rate will revert back to 55 percent with and applicable exclusion amount of $1,000,000 for gift and estate taxes.  The problem with this is that a clawback provision could be imposed for taxpayers that took advantage of the $5,000,000 gift tax exclusion in 2011 or 2012. 
If a clawback provision is applied in later years because the applicable exclusion amount goes down, the taxpayer will have to pay tax at the then current estate rate on gifts made in 2011 and 2012 on the difference between the $5 Million exclusion used in those years and the then current exclusion amount.
This is an uncertain area of the law and practitioners and their clients must be made aware of the potential for this to occur in the future.  It is likely that Congress did not intend for a clawback to occur, but this does not change the fact that those that might be affected should address the issue in their estate plans. 
We still do not have guidance from Congress in this area of the law, and until we do there will be uncertainty in the markets.  Hopefully, Congress will see the light and clarify this issue.