Tag: tax planning

Estate Planning for Those Under 40

Posted by Maria T. Rollins on October 8, 2019

The earlier you start planning, the more choices you’ll have

Get started on estate planning while you're young saves hassles later We all live as if we have decades ahead of us, dealing with the present — we can’t know the future. And that’s why now is a great time to get a jump on estate planning.

Do your family and loved ones know what accounts you have, where your financial information is and what your wishes are? Now is the time to tell them. If you start now, your plan will help keep your loved ones from becoming stressed if you suddenly become disabled or pass away.

Learning about estate planning

You can begin to educate yourself about estate planning. For instance, what should you be looking for in an estate planning attorney? You can interview several to see whom you feel most comfortable with. You can also explore estate planning strategies: Some organizations have free small-group events to share an understanding of the basics of estate planning.

You can start formulating how you’d want to be memorialized — how about creating a recording to share with your loved ones to help them by making the tough decisions in advance?

Getting started on your plan

Estate planning isn’t just for wealthy people — you don’t have to wait until you build up more savings. You may have a child or spouse who is financially dependent on you, so you don’t want to ignore your estate plan. Take these steps to be proactive:

Designate beneficiaries.
Designate a health care proxy to make medical decisions for you if you can’t.
Review asset titling — titling assets jointly with rights of survivorship is an easy way to ensure that your property passes to your heirs without delay.
Consider establishing a trust — in many ways these can be even more effective tools than wills.
Do some tax planning — although the federal estate tax affects only the wealthiest people, there are other tax issues, including state estate taxes.
Select guardians to care for minor children.
Plan ahead — an accident can result in an inability to make legal decisions; a durable power of attorney will name someone to act in your place if you are incapacitated.

Documents for your plan

Among the documents that are part of an estate plan, consider a will, life insurance, and a power of attorney. You can think of a will as a road map outlining how your property will be distributed if you’re disabled or die. Meet with an attorney and tell her or him what your assets are, who you want to leave them to, and that you want it all to be simple.

In crafting a will, name a trusted friend or family member as the executor to help shepherd your estate through any court-supervised process, such as probate. You may want to consider life insurance, particularly because you haven’t accumulated lots of money yet. You’d want your family to have assets to live on. You can choose a less expensive option such as a term policy for a set number of years.

We’ve got your back on estate planning

It’s never too early to start thinking about estate planning. KRS CPAs offers unbiased financial and tax guidance to help you realize your specific goals and vision. Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

IRAs to Charity: A Useful Estate Planning Technique

Posted by Maria T. Rollins on September 24, 2019

Save taxes with this smart estate planning strategy

If you’re like many people, you have a great deal of your wealth tied up in traditional IRA accounts. Why? The tax-free benefits have motivated you. But there’s going to come a time when you—or your heirs—will have to pay taxes on this money. Instead of worrying about what you’re going to do about that, you can follow a tax-saving strategy that considers designating your favorite charity or charities as beneficiaries of all or a portion of your IRAs. Then you can leave other assets to family members and other heirs.

IRAs and estate taxes

Your IRAs are considered part of your estate when you die, which means they are subject to estate taxes. Although very few people are subject to the federal estate tax, some states have lower thresholds for estate taxes. Also, your heirs will have to eventually withdraw the funds, and typically will pay income tax. This could be substantial, if your heirs are already in a high bracket.

Fortunately, there’s a tax-smart solution: leave some or all of your IRA to charitable beneficiaries while leaving other assets to heirs of your choice. Leaving money directly to charities by designating them as account beneficiaries is very tax-efficient. First, it avoids estate tax, since the IRA is removed from your estate. Second, there’s no federal income tax due on IRA money. (You may get a state tax break too.) No income taxes are due when your favorite tax-exempt charities make withdrawals from the IRAs.

This strategy allows you to leave more to your favorite charities and more to your loved ones while keeping as much as possible from the IRS.

Leave Roth IRAs to your loved ones

One final word, however. This strategy generally applies to traditional IRAs. Naming a charity as the beneficiary of your Roth IRA is generally inadvisable. Leave Roth balances to your loved ones by designating them as account beneficiaries. Why? As long as your Roth IRA has been open for more than five years before withdrawals are taken, all withdrawals will be federal income tax-free since the money went in after taxes. But if you leave Roth IRA money to charity, this tax break is wasted. (Roth IRA inheritance rules differ from the rules for traditional IRAs in several key ways.)

Looking at the Big Picture

Of course, this is just part of your estate plan, and there are lots of complexities. A giving strategy that makes sense for one family may not be appropriate for another. Also, the new tax law has changed the scenario for many. Finally, there are various limits and provisions you should be aware of before you proceed.

The bottom line? Talk to a qualified financial professional about your charitable goals and any traditional or Roth IRAs you have in order to take care of both your family and your designated nonprofits in as efficient a way as possible.

We’ve got your back on estate planning

What Is Tax-Efficient Investing?

Posted by Maria T. Rollins on September 10, 2019

Keep taxes in mind when investing

Tax Efficient Investing Avoiding taxation should not be the only goal, or even the main goal, of your investment strategy.

Still, you always have to keep taxes in mind to make sure you’re not unnecessarily sending too much of your money to the government.

Managing Your Investments

Keep on top of your tax losses. No one likes to see their investments fail, but there are hidden tax savings there. Tax-harvesting strategies take advantage of losses for tax benefits when you rebalance your portfolio if you comply with IRS rules on the tax treatment of gains and losses.

Note that losses can offset up to $3,000 in taxable income in realized investment gains annually. If losses exceed deduction limits in the year they occur, you may be able to carry them forward to offset gains in future years.

Also watch out for capital gains. Securities held for more than 12 months and sold at a profit are taxed as long-term gains, with a top federal rate of 23.8%. For short-term gains, the tax rate can hit 40.8%. Timing can be everything.

Consider tax-exempt securities. Municipal bonds typically are exempt from federal taxes and may receive preferential state tax treatment. However, choose carefully before jumping into them. If you have a low tax rate in retirement, for example, it may not be necessary or even wise to concentrate so heavily on avoiding taxes.

Managing Your Taxes

Sometimes it’s better to pay taxes later rather than now. For example, 401(k)s, 403(b)s, IRAs, and tax-deferred annuities let you postpone your taxes until you are retired and thus likely in a lower bracket. Contributions you make may reduce your taxable income if you meet income eligibility requirements, and typically, investment growth is tax-deferred.

On the other side of the coin are Roth IRAs, which don’t give you an immediate tax break, since you use after-tax dollars. But this can help you later. For example, you may be in a low tax bracket now, so you put money into a Roth IRA. Investment gains are tax-deferred. When you withdraw the money, you don’t have to pay taxes at what could be a higher rate.

Reduce Taxes through Charity

If you itemize, you can deduct the value of your charitable gift from taxable income, but be aware that limits apply. Consider contributing appreciated stock, which may help you avoid capital gains taxes. Also try a donor-advised fund in a high-income year. These funds let you make a donation, take an immediate deduction and spread the giving over a period of time.

Of course, this is just an introduction to a complex topic — there are limits and exceptions to these strategies. Tax law is detailed, especially when it comes to investments, and a slight miscalculation on your end can lead to an unexpected tax bill down the line.

We’ve got your back on tax efficient investing

Taxes are a key part, but not the only part, of an investment strategy and you need to work with tax and financial professionals to make sure your strategies are aligned with your goals.Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

What Changes With the New Taxpayer First Act?

Posted by Maria T. Rollins on August 8, 2019

The Taxpayer First Act of 2019 is redesigning how the IRS works with taxpayers, even though it may take a while for many of the provisions to take effect.

Some experts have highlighted the following aspects of the bill as especially important:

An independent appeals process. Taxpayers and small businesses will be able to challenge the IRS’ position without undertaking the cost and expenses of court. IRS Appeals will be an independent unit that grants taxpayers access to case files. Taxpayers will be able to protest if denied an appeal.

Innocent spouse treatment. The new law requires the U.S. Tax Court to take a fresh look at innocent spouse cases without taking previous decisions into account.

Modification of procedures for issuance of third-party summons. This is an important protection for taxpayers, especially small-business owners. It discourages the IRS from bypassing the taxpayer and contacting third parties — such as financial institutions — instead for information. The IRS should give taxpayers a meaningful opportunity to provide the information it is seeking prior to its contacting third parties. In practice, the IRS should provide the taxpayer with an understanding of what the issue is, what information is being requested and how the requested information relates to the issue.

Office of the National Taxpayer Advocate. The Taxpayer First Act has taken a strong approach with the Advocate’s issuance of Taxpayer Advocate Directives, which focus on systemic problems taxpayers deal with. Once they are issued by the Advocate, the IRS should comply within 90 days. The Advocate Annual Report will identify any TAD that is not honored by the IRS.

Credit card payments. The IRS is now allowed to directly accept credit and debit card payments for taxes; the taxpayer must pay any processing fees. The Act also requires the IRS to try to minimize processing fees when entering into contracts with the credit card companies.

Whistle blower reforms. The Act provides protections from retaliation and allows for better communication with whistle blowers about the status of their claims.

Cyber-security and identity protection. The IRS will now have to let taxpayers know whether it suspects there is evidence of identity theft. The Agency will explain to taxpayers how to file a report with police and how to protect themselves against additional harm resulting from the identity theft.

Taxpayer Act levels the playing field

Rep. Kevin Brady, R-Texas, ranking member of the Ways and Means Committee, was quoted as saying the Act “levels the playing field to ensure taxpayers have the same information as the agency, better protects our taxpayers’ information, and reins in past IRS abuses to guarantee families and local businesses never have to fear having their accounts and property seized without fair and due process.”

As with many new laws, it will take some time to see what specifically the effects are. The legal provisions are complex and will require interpretation over time. We’ll be keeping an eye on the developments.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

Tax Rules for Vacation Home Rentals

Posted by Simon Filip on July 23, 2019

Get the most from your vacation home rental property by knowing the tax rules

Summer is the time of family vacations, sun, sand and beaches. It’s also the time when a vacation home may be used to generate additional cash flow through rental.

Part-time landlords need to remember that, in many cases, the Internal Revenue Service expects them to report the extra income.

Short-Term Rentals

In general, if a taxpayer rents their vacation home for fewer than 14 days out of the year, the income is tax free and the property is considered a personal residence. Under this scenario, taxpayers are not required to report any rental income on their tax return. However, expenses attributable to the rental cannot be deducted, such as cleaning fees or rental commissions.

More than 14 Rental Days

If a taxpayer’s rental days are above the 14-day threshold, the income is required to be reported. Under this scenario, a taxpayer can also deduct a variety of direct rental expenses such as licenses, advertising and rental commissions.

Other expenses such as repairs, mortgage interest, property taxes and utilities are deductible on a prorated basis based upon the number of days a taxpayer rented the home out.

Claiming Expenses on Rental Property

When filing taxes on a rental property, an individual will use IRS Schedule E: Supplemental Income and Loss. The IRS provides an extensive listing of deductions in Publication 527, however common expenses include:

Real Estate/Property Taxes
Insurance
Cleaning
Repairs and Maintenance
Depreciation
Legal and Professional Fees
Advertising
Utilities
Commissions

We’ve got your back

For additional information on the taxability of your vacation home rental, contact Simon Filip, the Real Estate Tax Guy, at [email protected] or (201) 655-7411.

Home Office Expense Deduction for a Self-Employed Taxpayer

Posted by Sean Faust, CPA on July 17, 2019

Does your home office qualify for a tax deduction?

If you’re self-employed and work out of an office in your home and you satisfy certain strict rules, you will be entitled to favorable “home office” deductions. These deductions against your business income include the following:

Direct expenses of the home office – for example, the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
Indirect expenses of maintaining the office – for example, the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest and real estate taxes.

In addition, if this office is your “principal place of business” under the rules discussed below, the costs of traveling between it and other work locations in your business are deductible transportation expenses, rather than nondeductible commuting costs.

Tests to determine home office deductibility

You may deduct your home office expenses if you meet any of the three tests described below: (1) the principal place of business test, (2) the place for meeting patients, clients, or customers test, or (3) the separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

Principal place of business

You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

Home office used for meeting patients, clients, or customers

You’re entitled to home office deductions if you use this office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the office.

Separate structures

You’re entitled to deductions for a home office, used exclusively and on a regular basis for business, if it is located in a separate unattached structure on the same property as your home – for instance, an unattached garage, artist’s studio, workshop, or office building.

Space for storing inventory or product samples

If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

How much can you deduct?

The amount of your home office deduction is based on the amount of square footage allocated to your office space. There are two methods to choose from; Simplified Method and Regular Method.

Simplified Method

The simplified method for determining this deduction is straightforward: You receive a deduction of $5 per square foot, up to 300 square feet (the deduction can’t exceed $1,500).

Regular Method

You determine the deduction by figuring out the percentage of your home used for business. Then apply the resulting percentage to the total direct & indirect expenses discussed above.

To demonstrate, if your home is 2,000 square feet and your home office is 500 square feet, you use 25% of your home for business. You’re allowed to deduct 25% of the above-mentioned expenses against your income. The remaining 75% of qualified expenses carry over to Schedule A, if you itemize. These costs include property taxes and mortgage interest.

Someone with a larger office and higher expenses might benefit from the regular method of determining the home office deduction compared to the standard method.

We’ve got your back

At KRS, our CPAs can help you utilize the home office deduction to maximize potential tax savings. Give us a call at 201.655.7411 or email me at [email protected]

What You Need to Know to Deduct Medical Expenses

Posted by Sean Faust, CPA on June 25, 2019

Deducting expenses for medical and dental care is easier when you know the rules

If you itemize your deductions for a taxable year on Form 1040, Schedule A Itemized Deductions, you may be able to deduct unreimbursed expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income in 2018 and 10% beginning in 2019.

What qualifies as a medical expense?

Qualifying costs, which include many items other than hospital and doctor bills, often amount to much larger figures than expected. Below are some items you should take into account in determining your medical expenses:

Health insurance premiums

The cost of health insurance is a medical expense. This item, by itself, can total thousands of dollars a year. Even if your employer provides you with health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included in medical expenses, subject to specific dollar limits based on age. However, pre-tax insurance premiums paid by an individual are not deductible medical expenses.

Transportation

The cost of getting to and from medical treatment is a deductible medical expense. This includes taxi fares, public transportation, or the cost of using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019 (18¢ a mile for miles driven in 2018), plus tolls and parking. Alternatively, you can deduct your actual costs, such as for gas and oil (but not your general costs such as insurance, depreciation, or maintenance).

Therapists, nurses, etc.

The services of individuals other than doctors can qualify as long as the services relate to a medical condition and aren’t for general health. For example, costs of physical therapy after knee surgery would qualify, but not costs of a fitness counselor to tone you up. Amounts paid for certain long-term care services required by a chronically ill individual also qualify as deductible medical expenses.

Eyeglasses, hearing aids, dental work, psychotherapy, prescription drugs

Deductible medical expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling, and other ongoing expenses in connection with medical needs. Purely cosmetic expenses (e.g., a “nose job”) don’t qualify. Prescription drugs (including insulin) qualify, but over the counter items such as aspirin and vitamins don’t. Neither do amounts paid for operations or treatments that are illegal under federal law (such as marijuana), even if state or local law permits the procedure or drug.

Smoking-cessation programs

Amounts paid for participation in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible medical expenses. However, non-prescription nicotine gum and certain nicotine patches aren’t deductible.

Weight-loss programs

A weight-loss program is a deductible medical expense if undertaken as treatment for a disease diagnosed by a physician. The disease can be obesity itself or another disease, such as hypertension or heart disease, for which the doctor directs you to lose weight. It’s a good idea to get a written diagnosis before starting the program. Deductible expenses include fees paid to join the program and to attend periodic meetings. However, the cost of low-calorie food that you eat in place of your regular diet isn’t deductible.

Dependents and others

You can deduct the medical costs paid on behalf of dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as an elderly parent or grandparent, who would qualify as your dependent except that he has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them, regardless of who gets the dependency exemption.

We’ve got your back

At KRS, our CPAs can help you identify deductible medical expenses to maximize potential tax savings. Give us a call at 201.655.7411 or email me at [email protected]

SALT Workarounds Squashed

Posted by Simon Filip on June 14, 2019

$10k Limit on SALT Deductions Stands

On Tuesday the Treasury Department issued final regulations that officially prohibit high-tax states like SALT Workarounds Squashed New Jersey, New York, and Connecticut from utilizing workarounds to evade the new $10,000 limit on state and local tax (“SALT”) deductions.

The 2017 Tax Cuts and Jobs Act capped at $10,000 the amount of state and local tax payments that taxpayers could deduct from their federal returns. In response, a number of state governments enacted or proposed workarounds to find a way to remove the economic pain of the cap.

In the workaround, a state resident could, instead of paying state property taxes, choose to donate to a state-created charitable fund, for example, $40,000. The resident would then get to write off the $40,000 as a charitable donation on his or her federal taxes and receive a state tax credit for some of that donation, easing the burden of the lower write-off for their SALT levy.

The regulations will allow taxpayers to receive a tax write-off equal to the difference between the state tax credits they receive and their charitable donations. That means the taxpayer who makes a $40,000 charitable donation to pay property taxes and receives a $25,000 state tax credit would only be entitled to a charitable write off of $15,000 on his or her federal tax bill.

The Treasury indicated it would continue to evaluate the issue and release further guidance if necessary.

We’ve got your back

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and keep you up to speed on the latest tax developments. Contact him at [email protected] or 201.655.7411 today.

Real Estate in Your IRA: A Good Idea?

Posted by Simon Filip on April 22, 2019

Real estate can be a great investment, and many people don’t know they can also put the property into their IRAs.

real estate and your ira However, they have to be careful: one small mistake and an IRA’s tax advantages disappear.

So what are the rules to follow to have a qualified real estate purchase?

You can’t mortgage the property.
You can’t work on the property yourself — you’ve got to pay an independent party to do any repairs.
You don’t get the tax breaks if the property operates at a loss. You can’t claim depreciation either.
All costs associated with the property must be paid out of your IRA and all income deposited into the IRA. You can find yourself in a bind if there isn’t enough cash in the IRA to deal with a major property expense.
You can’t receive any personal benefit from the property — you can’t live in it or use it in any way. It has to be strictly for investment purposes. So that vacation property you’re considering buying or a house to rent to your kids — not allowable.

More rules for real estate in IRAs

Any investment made by your IRA must be considered an arm’s-length transaction: You can’t use money in your IRA to buy or sell real estate to or from yourself or family members. You can’t receive any indirect benefit either — you can’t pay yourself or a family member to be the property manager.

For a traditional IRA, you must take required minimum distributions at 70 1/2 and that applies with real estate as well. It can be awfully hard to sell real estate off in portions, so then how do you cover the required distributions without cash? These are problems you need to solve before you start your retirement investing. However, you can roll over money from the sale of one property to the purchase of another without any tax consequences, inside the IRA.

Three more points to weigh when thinking about investing in real estate IRAs:

Your IRA cannot purchase a property that you currently own. IRS regulations don’t allow transactions that are considered self-dealing. They don’t allow your self-directed IRA to buy property from or sell property to any disqualified person — including yourself.
A real estate investment needs to be titled in the name of your IRA, not to you personally. All documents related to the investment must be titled correctly to avoid delays.
Real estate in an IRA can be purchased without 100 percent funding from your IRA. You can use undivided interest and partnering with others.

For more, see my post, “Using a Self-Directed IRA to Buy Real Estate.”

We’ve got your back

There are a lot of working parts to keep in mind if you want to hold real estate in your IRA, and it might not be right for everyone. With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

Put Your Children on Your Payroll and Reduce Taxes

Posted by Sean Faust, CPA on February 28, 2019

One tax reduction strategy that most business owners do not take advantage of is putting their children on payroll.

This can help reduce the overall family tax bill and transfer assets to children without introducing gift tax implications.

As a business owner, you can deduct wages paid to children, while the child can offset those wages with their own standard deduction. In addition to the standard deduction, you could setup pre-tax retirement accounts that would allow taxpayers to deduct more, while the child saves for retirement.

For partnerships and disregarded entities, if your child is under 18, the company does not have to pay employment taxes such as Social Security, Medicare and Workers’ Compensation Insurance. You can also avoid Unemployment taxes until the child turns 21. But for S-Corps and C-Corps, Social Security and Medicare taxes are paid regardless of age. These payroll taxes amount to 15.3% of wages earned, your share and child’s share.

Potential tax savings

With that in mind, let’s review a sample of potential tax savings. Starting in 2019, the standard deduction is $12,000 for single filers. The maximum contribution to a traditional IRA is $6,000 (if modified adjusted gross income is less than $64,000 for single filers in 2019). Additionally, taxpayers can draft a 401(k) plan that includes no age limitations, which will allow younger children to contribute $19,000 of pre-tax dollars to their 401(k). The example below illustrates the potential tax savings if the taxpayer’s entity is an S-Corporation.

Save taxes by putting your children on your payroll If the entity is an LLC instead of an S-Corp, and your child is under 18, add back the payroll taxes of $5,585 to get your tax saving potential.

One other benefit you could produce is a safe harbor 401(k) plan or profit sharing/matching system that could increase your child’s retirement account and provides a deduction for your business. This strategy has plenty of scenarios to take into consideration which provide an opportunity to save even more money in taxes.

There are some rules you need to be aware of when using this strategy:

Keeping detailed employment records, including timely tracking of weekly hours and wages that correspond to services provided
Issuing paychecks as you would a normal employee (e.g., bi-weekly)
Documenting that the services are legitimate and considered ordinary and necessary for the business
Ensuring the services provided do not include typical household chores

If your child is not treated like any other employee in a similar position, the IRS could potentially deem their wages as not ordinary and necessary, and disallow them as a deductible expense.

We’ve got your back

At KRS, our CPAs can help you strategize setting your children up on payroll to maximize potential tax savings. Give us a call at 201.655.7411 or email me at [email protected]