Being married to a Kindergarten teacher, I know a thing or two about just how much these folks can (and do) come out of their own pockets to make a classroom perfect...or to deliver their very best to their students...or to just pick up where the school resources leave off. To me, this deduction shouldn't be limited to just $250, but we work with what we're given. So here are a few thoughts as teachers across the country head back for a new school year. What are the limits? What can and can't be written off? I answer it here.
Here are some details about the educator expense deduction:
For 2019, educators can deduct up to $250 of trade or business expenses that weren’t reimbursed. (The deduction is $500 if both taxpayers are eligible educators who file a joint tax return, but these taxpayers can’t deduct more than $250 each.)
Qualified expenses are amounts educators paid, unreimbursed, out of their own pockets during the tax year. Examples of expenses that educators can deduct include books, supplies, computer equipment (including software), other materials used in the classroom, and professional development courses.
To be eligible, taxpayers must be kindergarten through grade 12 teachers, instructors, counselors, principals or aides. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.
Educators should keep receipts when they make eligible expenses and note the date, amount and purpose of each purchase.
Teachers or professors may see advertisements for job-related courses in out-of-town or exotic locations. You may have wondered whether traveling to these courses is tax-deductible on teachers’ tax returns. The bad news is that, for tax years 2018–2025, it isn’t, because the outlays are employee business expenses.
Prior to 2018, employee business expenses could be claimed as miscellaneous itemized deductions. However, under the Tax Cuts and Jobs Act, miscellaneous itemized deductions aren’t deductible by individuals for tax years 2018–2025.
Have questions? Comment below or send me a message!
The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This benefit results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefits of driving the cars!) Even better, recent tax law changes and IRS rules make the perk more valuable than before.
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips with your family. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new luxury $50,000 sedan.
Your cost for personal use of the vehicle will be equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to business-interest limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.
If you’re like many people, you’ve worked hard to accumulate a large nest egg in your traditional IRA (including a SEP-IRA). It’s even more critical to carefully plan for withdrawals from these retirement-savings vehicles.
Knowing the fine points of the IRA distribution rules can make a significant difference in how much you and your family will get to keep after taxes. Here are three IRA areas to understand:
Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Keep in mind that Roth IRAs operate under a different set of rules than traditional IRAs. Contact us to review your traditional and Roth IRAs, and to analyze other aspects of your retirement planning.
Operating a business as an S corporation may provide many advantages, including limited liability for owners and no double taxation (at least at the federal level). Self-employed people may also be able to lower their exposure to Social Security and Medicare taxes if they structure their businesses as S corps for federal tax purposes. But not all businesses are eligible — and with changes under the Tax Cuts and Jobs Act, S corps may not be as appealing as they once were.
The main reason why businesses elect S corp status is to obtain the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when it’s distributed to shareholders. Instead, tax items pass through to the shareholders’ personal returns, and they pay tax at their individual income tax rates.
But double taxation may be less of a concern today due to the 21% flat income tax rate that now applies to C corporations. Meanwhile, the top individual income tax rate is 37%. S corp owners may be able to take advantage of the qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.
In order to assess S corp status, you have to run the numbers with your tax advisor, and factor in state taxes to determine which structure will be the most beneficial for you and your business.
If you decide to go the S corp route, make sure you qualify and will stay qualified. To be eligible to elect to be an S corp or to convert, your business must:
Be a domestic corporation,
Have only one class of stock,
Have no more than 100 shareholders, and
Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.
In addition, certain businesses are ineligible, such as financial institutions and insurance companies.
Another important consideration when electing S status is shareholder compensation. One strategy for paying less in Social Security and Medicare employment taxes is to pay modest salaries to yourself and any other S corp shareholder-employees. Then, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.
However, the IRS is on the lookout for S corps that pay shareholder-employees unreasonably low salaries to avoid paying employment taxes and then make distributions that aren’t subject to those taxes.
Paying yourself a modest salary will work if you can prove that your salary is reasonable based on market levels for similar jobs. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. We can help you decide on a salary and gather proof that it’s reasonable.
Contact us if you think being an S corporation might help reduce your tax bill while still providing liability protection. We can help with the mechanics of making an election or making a conversion, under applicable state law, and then handling the post-conversion tax issues.
Years ago, Congress enacted the “kiddie tax” rules to prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets. And while the tax caused some families pain in the past, it has gotten worse today. That’s because the Tax Cuts and Jobs Act (TCJA) made changes to the kiddie tax by revising the tax rate structure.
The kiddie tax used to apply only to children under age 14 — which provided families with plenty of opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount was taxed at their parents’ marginal rate (assuming it was higher), rather than their own rate, which was likely lower.
The TCJA doesn’t further expand who’s subject to the kiddie tax. But it has effectively increased the kiddie tax rate in many cases.
For 2018–2025, a child’s unearned income beyond the threshold ($2,200 for 2019) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2019 taxable income exceeds $12,750. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2019 taxable income tops $612,350.
Similarly, the 15% long-term capital gains rate begins to take effect at $78,750 for joint filers in 2019 but at only $2,650 for trusts and estates. And the 20% rate kicks in at $488,850 and $12,950, respectively.
That means that, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax won’t save tax, but it could actually increase a family’s overall tax liability.
Note: For purposes of the kiddie tax, the term “unearned income” refers to income other than wages, salaries and similar amounts. Examples of unearned income include capital gains, dividends and interest. Earned income from a job or self-employment isn’t subject to kiddie tax.
One unfortunate consequence of the TCJA kiddie tax change is that some children in Gold Star military families, whose parents were killed in the line of duty, are being assessed the kiddie tax on certain survivor benefits from the Defense Department. In some cases, this has more than tripled their tax bills because the law treats their benefits as unearned income. The U.S. Senate has passed a bill that would treat survivor benefits as earned income but a companion bill in the U.S. House of Representatives is currently stalled.
To avoid inadvertently increasing your family’s taxes, be sure to consider the kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren no longer subject to the kiddie tax but in a lower tax bracket, consider transferring assets to them. If your child or grandchild has significant unearned income, contact us to identify possible strategies that will help reduce the kiddie tax for 2019 and later years
Here's the nuts and bolts - and read the fine print, because not everybody qualifies...but many can and will.
Section 1202 allows that the owner(s) of the stock of a Qualified Small Business Corporation - or QSBC - can sell that stock on a tax-free basis.
If you take that and add that to the post-Tax Cuts and Jobs Act 21% corporate tax rate, you've got plenty to think about. Imagine selling your small business and making a hefty capital gain - let's say you started up with $100K and you sell for $10M. First...call me! HA. But seriously, congrats...and guess what? That $990,000 capital gain MIGHT be FULLY TAX FREE!
To qualify, you must have acquired your stock in the QSBC AFTER September 27, 2010. Hint...if you haven't started your business yet, then you're in the clear here. Then, you've got to hold your QSBC stock for MORE than 5 years to qualify for this tax-free treatment.
Then there are limits...specifically - the gain can't be greater (in other words, this is the max) than:
1. 10 times the aggregated basis in the QSBC stock you sell, OR
2. $10 million less the amount of eligible gains that you've already taken in prior years ($5 million if you file married filing separately).
Still in? Yes...the limit is $10 MILLION in capital gains...OR MORE (if you invested over $1,000,000 in your QSBC stock).
The stock must meet the requirements setup in Section 1202 of the Internal Revenue Code. Those include:
1. Generally, you must acquire the stock upon original issuance, OR through a gift or inheritance.
2. You MUST acquire the stock in exchange for money, other property that doesn't include stock, or services provided.
3. The corporation MUST be a QSBC at the date of the issuance of stock and during substantially all the period for which you hold it.
The corporation must be a domestic C-Corporation. And it must satisfy an active business requirement - which is loosely defined as a corporation that uses at least 80% of its assets (by value) in the active conduct of a qualified business.
There's that dang "qualified business" again. This is the biggest catch - and it catches guys like me since we are in the excluded group! Qualified businesses do NOT include: businesses in teh performance of services in the fields of health, law, engineering, architecture, ACCOUNTING, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of one or more of its employees. Nor does it include business in banking, insurance, leasing, financing, investing, or similar activities. Farming (including timber-farming) isn't included either. Nor are businesses in the fields of production and extraction of oil, gas, or other natural resources for which the percentage depletion deductions are allowed. And those hospitality businesses - hotels, motels, restaurants - yep...they don't count either.
But...if you're still standing...let's make sure this rule doesn't get you: The corporation's gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued - including the amount received for the stock).
If you're still standing...still reading...and interested...there are more rules but we start splitting hairs. It might be better that we chat. Drop me a note, private message, or give me a call.
When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)
In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.
To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.
In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.
If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.
The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.
In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.
Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.
Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.
In the past few months, many businesses and employers nationwide have received “no-match” letters from the Social Security Administration (SSA). The purpose of these letters is to alert employers if there’s a discrepancy between the agency’s files and data reported on W-2 forms, which are given to employees and filed with the IRS. Specifically, they point out that an employee’s name and Social Security number (SSN) don’t match the government’s records.
According to the SSA, the purpose of the letters is to “advise employers that corrections are needed in order for us to properly post” employees’ earnings to the correct records. If a person’s earnings are missing, the worker may not qualify for all of the Social Security benefits he or she is entitled to, or the benefit received may be incorrect. The no-match letters began going out in the spring of 2019.
There are a number of reasons why names and SSNs don’t match. They include typographical errors when inputting numbers and name changes due to marriage or divorce. And, of course, employees could intentionally give the wrong information to employers, as is sometimes the case with undocumented workers.
Some lawmakers, including Democrats on the U.S. House Ways and Means Committee, have expressed opposition to no-match letters. In a letter to the SSA Commissioner, they wrote that, under “the current immigration enforcement climate,” employers might “mistakenly believe that the no-match letter indicates that workers lack immigration status and will fire these workers — even those who can legally work in the United States.”
If you receive a no-match letter telling you that an employee’s name and SSN don’t match IRS records, the SSA gives the following advice:
Check to see if your information matches the name and SSN on the employee’s Social Security card. If it doesn’t, ask the employee to provide you with the exact information as it is shown on the card.
If the information matches the employee’s card, ask your employee to check with the local Social Security office to resolve the issue.
Once resolved, the employee should inform you of any changes.
The SSA notes that the IRS is responsible for any penalties associated with W-2 forms that have incorrect information. If you have questions, contact us or check out these frequently asked questions from the SSA: https://bit.ly/2Yv87M6
Without fail, I am asked at least a few times a year whether a business owner can hire their own children to work in the business...and if so, what are the tax benefits of doing so. There are obvious deductions that go along with hiring your children - deductions at the business level. But you'll want to make sure the pay is befitting the work. In other words, don't just pay them for doing nothing. Have a job for them and pay them...wages that are seen as "fair" in the eyes of the IRS, should pass muster. The tax benefits of hiring your children are obvious in most cases - your business income will decrease, thereby reducing your own tax liability. But is there anything else?
This is TRUE with one asterisk - you must be operating as either a sole-proprietor OR a Single-Member-LLC (SMLLC) that has NOT elected to be treated as a corporation. In other words, as long as you aren't incorporated, you can avoid paying some of those ugly payroll taxes on your children's wages. In fact, under the family employment rules, wages paid to your children and spouse are exempt from unemployment taxes while wages paid to your children are ALSO exempt from the FICA/Medicare withholding taxes, too! (Wages paid to your spouse are NOT exempt from the FICA/Medicare)
Have questions? Message me or leave a comment below.
I've received a number of questions over the past few months related to this very topic. After going through the same song & dance over and over, it finally occured to me - BLOG IT!
The good news for business meals - the TCJA (or, "Tax Cuts and Jobs Act") removed the "directly related and associated with" requirements from business meals. How does that translate?
Let's say, for business reasons, you take a customer/client to eat at a restaurant, or even, to a bar for a few drinks, but you don't discuss business - can you deduct the cost of the meal (or drinks)? Yep! Even though you didn't discuss business, the law allows the deduction if the expenses are generally considered conducive to a business discussion.
So let's define what circumstances are "conducive to a business discussion". It depends on the facts, but a good rule of thumb is to take into account the surroundings where the meal/drinks are being furnished, your business role, and the relationship you have with the person you're entertaining. These surroundings should be free of any substantial distractions to the potential business discussion. In plain terms, generally a restuarant, hotel dining room, or similar locale that doesn't have distracting influeces are considered conducive.
What's not conducive? Nightclubs. Sporting Events. Large Cocktail Parties. Concerts. Any sizable social gathering is likely not conducive to a business discussion.
Believe it or not, you can take the deduction for meals served in your peronsal residence as long as these circumstances conducive to a business discussion. But one caveat here, the IRS does add that you must CLEARLY show that the expenditure was commercially motivated.
Let's say, for goodwill purposes, you take a customer/client and his/her spouse/significant other to lunch, and you don't discuss business. Is the presence of the "extra party" enough to disqualify the cost of that lunch? Nope! If the surroundings are considered conducive to a business discussion and the expenses are ordinary and necessary for carrying on the business rather than being purely socially motivated, you're still able to take the deduction.
For grins, let's add YOUR spouse or significant other to the mix. Deductible? Surely by now you've figured out...YES. As long as we're meeting the "ordinary and necessary" business expense standards, and as long as the surroundings are conducive for a business discussion, the meal/beverages would be deductible.
Burden of proof always seems tricky for people. I can tell you countless times I've had to sit beside a client under audit trying to reconstruct business lunches with their appointment calendar on the left, and the credit card statement on the right. This type of "reconstruction" is dangerous, at best and one where that "ordinary and necessary" is applied rather stringently. My encouragement is to:
1. Keep receipts that show the purchases (to establish meals/beverages consumed)
2. Proof of payment (typically credit card statements suffice here - or the signature copy)
3. Note the name of the person(s) in attendance directly on the receipt
4. Note the business reason for the meal - nothing fancy, just enough to describe that business reason.
There are any number of apps on the market, for those more inclined to NOT keep receipts in shoeboxes, that will keep these records for you. My only recommendation - make sure your app is cloud-based and backed-up. You don't want a phone mishap wiping out your records the week before an audit...trust me.
Yes, business meals are still deductible...just keep your records, and keep going to places conducive to a business discussion! If you have any questions or would like more information, comment below or message me here.
If you’re lucky enough to be a winner at gambling or the lottery, congratulations! After you celebrate, be ready to deal with the tax consequences of your good fortune. By the way, the implications you'll read about below, remind me of the old country song "The Winner" by Bobby Bare...
Whether you win at the casino, a bingo hall, or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line on Schedule 1 of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the race track turns into a $110 win, you’ve won $80, not $110.
You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. So you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.
Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.
The chances of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.
Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.
You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.
If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.
Since your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.
If you’re fortunate enough to hit a sizable jackpot, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.
Bitcoin and other forms of virtual currency are gaining popularity. But many businesses, consumers, employees and investors are still confused about how they work and how to report transactions on their federal tax returns. And the IRS just announced that it is targeting virtual currency users in a new “educational letter” campaign.
Unlike cash or credit cards, small businesses generally don’t accept bitcoin payments for routine transactions. However, a growing number of larger retailers — and online businesses — now accept payments. Businesses can also pay employees or independent contractors with virtual currency. The trend is expected to continue, so more small businesses may soon get on board.
Bitcoin has an equivalent value in real currency. It can be digitally traded between users. You can also purchase and exchange bitcoin with real currencies (such as U.S. dollars). The most common ways to obtain bitcoin are through virtual currency ATMs or online exchanges, which typically charge nominal transaction fees.
Once you (or your customers) obtain bitcoin, it can be used to pay for goods or services using “bitcoin wallet” software installed on your computer or mobile device. Some merchants accept bitcoin to avoid transaction fees charged by credit card companies and online payment providers (such as PayPal).
Virtual currency has triggered many tax-related questions. The IRS has issued limited guidance to address them. In a 2014 guidance, the IRS established that virtual currency should be treated as property, not currency, for federal tax purposes.
As a result, businesses that accept bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.
From the buyer’s perspective, purchases made using bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the currency exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis.
Wages paid using virtual currency are taxable to employees and must be reported by employers on W-2 forms. They’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.
Virtual currency payments made to independent contractors and other service providers are also taxable. In general, the rules for self-employment tax apply and payers must issue 1099-MISC forms.
The IRS announced it is sending letters to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or didn’t report them properly. The letters urge taxpayers to review their tax filings and, if appropriate, amend past returns to pay back taxes, interest and penalties.
By the end of August, more than 10,000 taxpayers will receive these letters. The names of the taxpayers were obtained through compliance efforts undertaken by the IRS. The IRS Commissioner warned, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics.”
Last year, the tax agency also began an audit initiative to address virtual currency noncompliance and has stated that it’s an ongoing focus area for criminal cases.
Contact us if you have questions about the tax considerations of accepting virtual currency or using it to make payments for your business. And if you receive a letter from the IRS about possible noncompliance, consult with us before responding.
Those who choose to sell a primary residence - whether they've lived in the home for a year or a lifetime - must be mindful of reporting requirements for Federal and State Tax purposes. Good record-keeping is a must - especially on residences with significant appreciation.
Let's look at the basic rules applicable to Federal Taxes. First, there's the "2 out of 5 years" rule. This one is fairly simple, if you've lived in the residence you're selling for at least 2 out of the past 5 years up to the date of sale, then you likely qualify for the full exemption. But you've also had to OWN the property for 2 out of the past 5 years. What's crazy? It doesn't necessarily have to be the SAME 2 years that you lived and/or owned the property. That one is too confusing for this post...just know if it applies to you, it's worth looking in to.
Furthermore, there are potential exceptions and or qualifiers to this rule that might get you at least a partial exemption if the 2-out-of-5 rule doesn't cover you. Email us for questions on this.
How much is the exemption? As it has been for several years now, there's a $250,000 exemption for singles, and $500,000 exemption for married couples. What does this mean? It means if you're a single person selling your house for a $200,000 capital gain and you meet the test above, then that $200,000 capital gain will not be subject to income tax (although the sale MUST still be reported on your tax return in the year of the sale). In cases where a spouse has passed away and the surviving spouse does not remarry, the surviving spouse still has "access" to the $500,000 exemption provided the other tests are met.
So how do you calculate the gain? What are the net proceeds from the sale after closing costs vs the purchase price (plus closing costs) from the original purchase? Don't know? Now's where we talk about record keeping. When it comes to your primary residence, ignore everything you hear regarding record retention. You'll see it on the web, and hear CPAs buzzing about it..."keep your records for 7 years" etc. etc. While this is great for cleaning out personal filing cabinets, it's downright scary advice for items related to your personal residence. WHY? Glad you asked...
Proving out a sale isn't hard...it's fresh. You probably have the docs close at hand. But that purchase you made 30 years ago...where are those closing documents? And what about that pool you added? The insulation you put in 10 years ago? The new A/C unit you replaced a few summers ago? That kitchen remodel you did a few years back to get more light into the kitchen? No records? Hmm...too bad...because if you can't prove that as part of your cost basis, then you don't get to count that expense against that potential capital gain. That's why I suggest keeping a separate folder for ANYTHING house related - whether you're certain it'll "count" for you come tax time or not. Hang on to it. When you sell...take that folder to your accountant and have them sort out what adds to cost basis and what doesn't. It can mean big savings for you when you do!
Questions? Click the link on the contact page to send me a question. Want to subscribe to my monthly newsletter for more tax-savings tips? Click the box at the top right of your screen and send us your email address - and we'll see to it you don't miss a single tip!
If you operate your business as a sole proprietorship (aka "Single Member LLC" that is treated as a Sole Proprietorship for tax purposes), there are many strategies to reduce your taxes.
Here's just ten of them:
1. Use the Section 105 plan to make your health insurance a tax-favored business deduction on your Schedule C.
2. Employ your under-age-18 child to make taxable income disappear.
3. Employ your spouse without paying him or her a W-2 wage.
4. Rent your office, even your home office, from your spouse to save self-employment taxes.
5. Establish that an office in your home is your principal office to increase (yes, increase!) your vehicle deductions and also turn personal home expenses into business expenses.
6. Give yourself flowers, fruit, and books as tax-deductible fringe benefits.
7. Combine the home office and a heavy SUV, crossover vehicle, or pickup truck to grab big deductions this year.
8. Design a business trip that includes some personal days—days you treat as 100 percent business even though you don’t work on those days.
9. Use the seven-day tax deduction travel rule to create a business trip that is 87 percent personal vacation.
10. Deduct your smartphone and provide smartphones to your employees as tax-free fringe benefits.
If one or more of these look good to you, let’s talk about how to make them work.
After spending the past 10 days with my daughter on her senior trip...and realizing I have only a few weeks before I ship my first off to college, I thought this might be a timely review for more folks than just me.
If you’re the parent of a child who is age 17 to 23, and you pay all (or most) of his or her expenses, you may be surprised to learn you’re not eligible for the child tax credit. But there’s a dependent tax credit that may be available to you. It’s not as valuable as the child tax credit, but when you’re saving for college or paying tuition, every dollar counts!
The Tax Cuts and Jobs Act (TCJA) increased the child credit to $2,000 per qualifying child under the age of 17. The law also substantially increased the phaseout income thresholds for the credit so more people qualify for it. Unfortunately, the TCJA eliminated dependency exemptions for older children for 2018 through 2025. But the TCJA established a new $500 tax credit for dependents who aren’t under-age-17 children who qualify for the child tax credit. However, these individuals must pass certain tests to be classified as dependents.
A qualifying dependent for purposes of the $500 credit includes:
1. A dependent child who lives with you for over half the year and is over age 16 and up to age 23 if he or she is a student, and
2. Other nonchild dependent relatives (such as a grandchild, sibling, father, mother, grandfather, grandmother and other relatives).
To be eligible for the $500 credit, you must provide over half of the person’s support for the year and he or she must be a U.S. citizen, U.S. national or U.S. resident.
Both the child tax credit and the dependent credit begin to phase out at $200,000 of modified adjusted gross income ($400,000 for married joint filers).
After the TCJA passed, it was unclear if your child would qualify you for the $500 credit if he or she had any gross income for the year. Fortunately, IRS Notice 2018-70 favorably resolved the income question. According to the guidance, a dependent will pass the income test for the 2018 tax year if he or she has gross income of $4,150 or less. (The $4,150 amount will be adjusted for inflation in future years.)
Although $500 per child doesn’t cover much for today’s college student, it can help with books, clothing, software and other needs. We had an entire conversation on the value of "Used Books" while on our vacation - fortunately my daughter was already on the same page!
If you are a small business owner, here is a list of organizations that may have tools, information, and other resources to help your business grow.
Business USA The mission of Business USA is to be a centralized, one-stop platform for businesses to access government services to help them grow and hire. Business USA uses technology to connect businesses to the services and information relevant to them, regardless of where the information is located or which government agency’s website, call center, or office they go to for help.
Department of Agriculture, Office of Small and Disadvantaged Business Utilization (OSDBU) The mission of the OSDBU is to provide maximum opportunities for small businesses to participate in USDA contracting activities by establishing and attaining small disadvantaged business program goals.
Department of Commerce The Commerce Department’s mission is to create the conditions for economic growth and opportunity by promoting innovation, entrepreneurship, competitiveness, and stewardship.
Department of Labor, Occupational Safety and Health Administration (OSHA) OSHA’s mission is to assure the safety and health of America’s workers by setting and enforcing standards; providing training, outreach, and education; establishing partnerships; and encouraging continual improvement in workplace safety and health.
GobiernoUSA.gov The U.S. government’s official Spanish language web portal.
Service Corps of Retired Executives (SCORE) SCORE is a nonprofit organization that is federally supported to provide free business mentoring and low-cost training to aspiring and existing business owners.
Small Business Administration (SBA) The mission of the SBA is to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.
Small Business Development Centers (SBDCs) SBDCs, which are located across the U.S., are hosted by leading universities and state economic development agencies. SBDC advisors provide free business consulting and low-cost training services including business plan development, financial packaging and lending assistance, exporting and importing support, procurement and contracting aid, and health care guidance.
Social Security Administration The Social Security Administration is the nation’s primary income security agency. It pays retirement, disability, and survivors benefits to workers and their families; administers the Supplemental Security Income program; and issues Social Security numbers.
State and Local Contacts The State and Local Government on the Net directory provides convenient one-stop access to the websites of thousands of state agencies and city and county governments.
U.S. Department of Labor (DOL) The DOL administers a variety of federal labor laws, including those that guarantee workers’ rights to safe and healthful working conditions, a minimum hourly wage and overtime pay, freedom from employment discrimination, unemployment insurance, and other income support.
U.S. Equal Employment Opportunity Commission (EEOC) The mission of the EEOC is to eradicate employment discrimination at the workplace.
USA.gov The U.S. government’s official Web portal.
With over half the year already gone, now is a good time to check to see if you are on track to have about the right amount of federal income tax withheld from your paychecks for 2014. The problem with not having the correct amount of taxes withheld for the year is that:
Neither situation is good. The simplest way to correct your withholding is by turning in a new Form W-4 ("Employee's Withholding Allowance Certificate") to your employer. Taking this action now will adjust the amount of federal income tax that is withheld from your paychecks for the rest of 2014.
Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck; the fewer allowances claimed, the greater the withholding. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.
While filling out a new Form W-4 seems like something that should be quick and easy, it's not necessarily so - because the tax rules are neither quick nor easy. Fortunately, there is an online Form W-4 calculator on the IRS website at www.irs.gov that can help to make the job simpler. From the IRS home page, click on the "More ..." link under "Tools." Then click on the "IRS withholding calculator" link. You will see the entry point for the online calculator. It's pretty easy to use once you assemble information about your expected 2014 income and expenses, plus your most recent pay stub and tax return.
Please understand that the IRS calculator is not perfect. (Remember, it's free, and to some extent, you always get what you pay for.) However, using the calculator to make withholding allowance changes on a new Form W-4 filed with your employer is probably better than doing nothing, especially if you believe you are likely to be significantly underwithheld or overwithheld for this year.
Of course, if you want more precise results, we would be happy to put together a 2014 tax projection for you. At the same time, we can probably recommend some planning strategies to lower this year's tax bill. Contact us for details.
Most taxpayers who trade stocks are classified as investors for tax purposes. This means any net gains are going to be treated as capital gains vs. ordinary income. That's good if your net gains are long term from positions held more than a year. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.
Traders have it better. Their expenses reduce gross income even if they can't itemize deductions, and not just for regular tax purposes, but also for alternative minimum tax purposes. Plus, in certain circumstances, if they have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss, which is limited to a $3,000 ($1,500 if married filing separate) per year deduction once any capital gains have been offset. Thus, it's no surprise that in two recent Tax Court cases the taxpayers were trying to convince the court they qualified as traders. Although both taxpayers failed, and got hit with negligence penalties on top of back taxes, the cases provide good insights into what it takes to successfully meet the test for trader status.
The answer is pretty simple. A taxpayer's trading must be "substantial." Also, it must be designed to try to catch the swings in the daily market movements, and to profit from these short-term changes rather than from the long-term holding of investments.
So, what counts as substantial? While there's no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days in the year, as substantial. Consequently, a few hundred trades, especially when occurring only sporadically during the year, are not likely to pass muster. In addition, the average duration for holding any one position needs to be very short, preferably only a day or two. If you satisfy all of these conditions, then even though there's no guarantee (because the test is subjective), the chances are good that you'd ultimately be able to prove trader vs. investor status if you were challenged. Of course, even if you don't satisfy one of the tests, you might still prevail, but the odds against you are presumably higher.
If you have any questions about this area of the tax law or any other tax compliance or planning issue, please feel free to contact us by email, phone, or the contact tab on our site.
As the April 15th tax filing deadline rapidly approaches, be sure to take these often overlooked deductions into consideration, when talking with your tax professional. These are simple deductions that can greatly impact your tax liability and therefore allow you to keep more of your money.
If you and your family experienced any of these changes, take the time to visit with your trusted tax professional today and ensure that you are keeping as much of the income you have earned as possible.
Lifetime vs. Testamentary Contributions
Many taxpayers with charitable intentions struggle with the decision of whether to donate property to charity during their lifetimes or to make a charitable bequest in their wills that will be fulfilled from property included in their estates (testamentary bequests). While taxpayers frequently base their choice between lifetime charitable gifts and testamentary bequests on nontax considerations, they need to be aware of the tax implications of their decision.
For income tax purposes, the deduction for charitable contributions is limited to a percentage of adjusted gross income (AGI), depending on the type of charity and the type of property donated. In contrast, no percentage limitation exists on the amount of charitable donations that may be deducted from the gross estate (as long as the donated property is included in the gross estate). However, in most instances a charitable gift during lifetime will provide a double tax benefit. The donation produces an income tax deduction at the time of the gift, plus the donated property and any future income and appreciation from the property are fully excluded from the donor's gross estate. The cost of the double benefit is giving up the property and all future income while the donor is still living.
Example: Greater tax benefits by lifetime giving
Tom, who is in the top tax bracket, plans on leaving $1 million to a qualifying charity. If he makes a $1 million testamentary bequest, this could save his estate up to $400,000 ($1,000,000 x an assumed marginal federal estate tax rate of 40%). If Tom makes a current gift, this will save him up to $396,000 in federal income taxes ($1,000,000 x 39.6% for 2014). In addition, if he has a taxable estate, it could also save another $241,600 [($1,000,000 - $396,000) x 40%] based on his estate being reduced by the net amount of $604,000, the difference between the value of the donated property and income taxes he saved. Thus, the total income and estate tax savings from making a current gift is $637,600 ($396,000 + $241,600).
The donor generally must transfer his or her entire interest in the contributed property for the gift to qualify for the charitable donation income tax deduction. Transfers of less than the donor's entire interest in the property (i.e., split-interest gifts) qualify for the deduction only if they meet certain criteria.
A charitable bequest has the obvious advantage of allowing the donor full use of the property until death. However, many lifetime gifts can be structured in a manner that allows the donor to continue to use the property or receive its income for life. In these instances, the donor gets the double tax benefit associated with lifetime contributions while retaining some benefit from the property until his or her death.
Passive Activity Loss Limitations
The passive activity loss (PAL) rules were introduced by the Tax Reform Act of 1986 and were designed to curb perceived tax shelter abuses. However, the PAL rules are far-reaching and affect activities other than tax shelters. Additionally, these rules limit the deductibility of losses for federal income tax purposes.
The PAL rules provide that passive losses can only be used to offset passive income, not active income the owners may earn from business activities in which they materially participate or portfolio income they receive from investments, such as dividend and interest income. So, while taxpayers may not benefit currently from losses sustained from passive activities, they may be able to use those losses to offset gains in future years.
A passive activity is a trade or business in which the taxpayer does not materially participate or, with certain exceptions, any rental activity. Rental activities generally are passive regardless of whether the taxpayer materially participates. However, the rental real estate activities of certain qualifying taxpayers in real estate businesses are subject to the same general rule that applies to nonrental activities. In other words, if the taxpayer satisfies certain participation requirements, the rental activity is nonpassive and any losses or credits it generates can be used to offset the taxpayer’s other nonpassive income. Additionally, federal regulations provide several exceptions to the general rule allowing a rental activity to be treated as either a trade or business or an investment activity.
A special rule allows taxpayers who actively participate in a rental activity to deduct up to $25,000 of loss from the activity each year regardless of the PAL rules. Examples of what would constitute active participation include approving new tenants, deciding on rental terms, and approving capital or repair expenditures. The $25,000 special allowance is, however, subject to a limitation. The $25,000 amount is reduced if the taxpayer has an adjusted gross income (AGI) (before passive losses) in excess of $100,000. The allowance is reduced by 50% of the amount by which AGI exceeds the $100,000 level. Consequently, the allowance is completely phased out when AGI exceeds $150,000. If taxpayers have rehabilitation or low-income housing credits, a special rule allows the credits to offset tax on nonpassive income of up to $25,000, regardless of the limitation based on AGI.
Another special rule is the exception for real estate professionals. This provision allows qualifying real estate professionals to deduct losses from rental real estate activities as nonpassive losses if they materially participate in the activity. To qualify as a real estate professional, a taxpayer must demonstrate that he or she spends more than 750 hours during the tax year in real property businesses in which they are a material participant. In addition, they must demonstrate that more than 50% of the services they perform in all of their businesses during the tax year are performed in real property businesses in which they materially participate.
Please contact us to discuss the passive activity provisions or any other tax planning or compliance issue.
For most people, tax preparation isn’t a top priority until year-end. However, NOW is the best time to start getting organized especially for small business owners. Pledging to be more organized can make the life of the average business owner easier but it could also keep money in the bank account.
Have you ever considered starting a small business? Read here about 7 tax breaks offered to small businesses for 2013 filings.
Each individual business owner is responsible for keeping the appropriate records. However, there is a fine line between trying to cheat the IRS and cheating yourself. This is why it is vital to understand the breaks offered and being organized. A reputable CPA can help you with this.
See the 2013 tax breaks offered to small business owners here:
1- Home-office deductions -- Many times, small business owners work from home. These taxpayers are allowed to deduct the portion of mortgage interest and utility bills (in direct proportion of the square footage of the home office divided by the square footage of the entire home) from their taxable income.
It is important to fully understand the home-office deduction. It is fantastic to minimize tax liability. For the 2013 tax year, the IRS is allowing taxpayers to deduct a standard $5.00 per square foot of the space used up to 300 square feet. Consult your CPA for questions regarding this break.
2 - Office supplies -- Any supplies purchased for business during the entire year
qualify as business expenses. This includes all (but not limited to); stamps,
envelopes, ink, paper and anything used to conduct business.
3- Training and education -- Any training or conferences a taxpayer attends to further their understanding of the business qualifies as a deduction. Small business owners filing a Schedule C – Sole Proprietorship can deduct these expenses directly as an “Other Expense”. However, individual taxpayers who attend training that is not reimbursed by an employer can also take advantage of this tax break, IF they itemize deductions. These “Miscellaneous Deductions” must exceed 2 percent of your adjusted gross income before the first dollar is deductible and the training must improve job skills.
4- Start up costs. If you started a business in 2013, you may deduct all costs to
get your business up and running.
5- Travel. Do not overlook travel as a business deduction. For 2013, the IRS
allows 56.5 cents per mile travelled for any business miles used other than “normal daily commute”.
6- Software subscriptions. Amounts paid either upfront or as part of a recurring monthly service fee can be deducted.
7- Capital investment. For 2013 taxes, companies may deduct up to $500,000
of capital equipment without depreciation. In other words, a taxpayer may deduct