Tag: taxes

SALT Workarounds Squashed

$10k Limit on SALT Deductions Stands

On Tuesday the Treasury Department issued final regulations that officially prohibit high-tax states like SALT Workarounds SquashedNew 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?

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 iraHowever, 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.

Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership Interests

Take advantage of this window of opportunity for tax-free wealth transfer

Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership InterestsThe Tax Cuts and Jobs Act of 2017 expanded the federal estate and gift tax exemption to $11.2 million per person, or $22.4 million for a married couple.

Under the Act, these higher limits are applicable through December 31, 2025.  On January 1, 2026 the limits return to $5 million per person, adjusted for inflation.

These changes present a significant but temporary opportunity for tax-free wealth transfer, including gifts of ownership interests in the family business.  Also, in certain circumstances valuation discounts may further reduce the value of the gifted business interest, which would facilitate larger gifts while remaining within the exemption amount.  These gifts will also qualify for the annual exclusion, which currently stands at $14,000 per recipient and may also be split with your spouse, resulting in $28,000 per recipient annual gifts that do not reduce your lifetime exemption.

Gifting strategies

Business owners are often reluctant to gift business ownership interests because they are concerned about losing control of the business, or do not want to make gifts to minor children.   There are many ways to overcome this problem.  The most common solutions are to gift only non-voting shares and include restrictions on their sale or transfer, or to gift the shares to a trust of which you or your spouse are trustee.

Conventional gifting strategy is to transfer assets that are likely to appreciate in the future.  That way, the asset is transferred at a low value and appreciates in the hands of the recipient.  The first step in this process is to identify the assets to be transferred and determine their value.  If you are considering transfer of an ownership interest in a business, it would be prudent to have that business valued by a qualified business appraiser.

We’ve got your back

Although 2025 seems like a long way off, you never know what changes may occur.  Although it is unlikely that tax laws will change after the mid-term election, you never know what the tax law changes will be after the 2020 presidential election.  This is great opportunity to transfer assets at little or no estate and gift tax cost.  If this is interesting to you, there is no reason to delay.  Contact your attorney or CPA and start the process now, before this opportunity is gone.

Capital Gains and Losses: How Do They Work?

Selling a capital asset results in a gain or loss and impacts your income taxes.

How do capital gains and losses work?A capital gain is a profit made when you as an individual or business sell a capital asset — investments or real estate, for instance — for a higher cost than its purchase price. A capital loss is incurred when there’s a decrease in the capital asset value compared with its purchase price. Almost everything you own and use for personal or investment purposes is a capital asset: a home, personal-use items like furnishings, and collectibles.

A capital gain may be short term (one year or less) or long term (more than a year). The capital gain must be claimed on income taxes. While capital gains are generally associated with stocks and mutual funds due to their volatility, a capital gain can occur on any security sold for a higher price than the price that was paid for it. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but haven’t yet triggered a taxable event.

The profit you realize when you sell a capital asset at a profit is your gain over basis paid. Basis is often defined as the original price plus any related transaction costs; basis also may refer to capital improvements and cost of sale. Capital losses are used to offset capital gains of the same type: short-term losses are deducted against short-term gains, for example.

Capital gains and losses for businesses

A business may gain or lose money in two ways: It can make a profit on its sales activities or lose money by spending more than it brings in from sales. And, of course, it can gain or lose money based on its investments or sales of assets — items of value that the business owns.

Each type is taxed differently. Profits are taxed as ordinary income and at regular business or personal tax rates. Gains or losses on investments or the sale of assets are taxed as capital gains or losses, but it can depend on the type of business. When expensive equipment is involved, businesses have to consider depreciation, which takes into account the equipment’s declining value over its useful lifetime.

Capital gains and losses can come into play when a business writes off an asset, taking it off its balance sheet. That might be the case with accounts receivable when a debt is owed to the business but is unlikely ever to be paid.

Individual shareholders or business owners who sell their capital shares or owner’s equity in a business also incur capital gains or losses from those sales. Note the following distinction: Operating profits and losses result from the ongoing operations of the business; sometimes called net operating losses for tax purposes, they result from day-to-day operations.

We’ve got your back

Whether you’re buying or selling as an individual or as a business, be sure to keep track of your sales and discuss them with a qualified financial professional. The experts at KRS can help you determine whether you have a gain on loss and its tax implications. Contact managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

Does Your Rental Real Estate Activity Qualify for the QBI Deduction?

Knowing the requirements for Qualified Business Income (QBI) deductions can help you save taxes on your rental real estate

Does Your Rental Real Estate Activity Qualify for the QBI Deduction?The IRS recently issued guidance on the 20% tax deduction for Qualified Business Income (QBI) and rental real estate activity. Here’s what you need to know:

If all the general requirements (which vary based on your level of taxable income) are met, the deduction can be claimed for a rental real estate activity – but only if the activity rises to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.

The IRS safe harbor

Because determining whether a rental real estate enterprise meets those criteria can be difficult, the IRS has provided a safe harbor under which such an enterprise will be treated as a trade or business for purposes of the QBI deduction (IRS Notice 2019-7). For this purpose, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties. Commercial and residential real estate may not be part of the same enterprise.

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year for a rental real estate enterprise:

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
  • 250 or more hours of rental services are performed annually with respect to the rental enterprise. Note that these hours of service do not have to be performed by you personally.
  • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, for: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to the 2018 tax year.

Rental services defined

For purposes of the safe harbor, rental services include:

  • Advertising to rent or lease the real estate
  • Negotiating and executing leases
  • Verifying information contained in prospective tenant applications
  • Collection of rent
  • Daily operation, maintenance, and repair of the property
  • Management of the real estate
  • Purchase of materials
  • Supervision of employees and independent contractors

Real estate not eligible for safe harbor

Some types of rental real estate are not eligible for the safe harbor. Real estate used by the taxpayer (including an owner or beneficiary of passthrough entity) as a residence for any part of the year is generally not eligible for the safe harbor, nor is real estate rented or leased under a triple net lease.

To qualify for the real estate safe harbor in 2019, it is important for you to maintain contemporaneous records starting with the 2019 tax year. I have listed above the information which needs to be tracked as part of the 250 hours of rental services above.

We’ve got your back

As the real estate tax guy, I’m here to assist you in all your real estate accounting matters. If you have questions about the QBI deduction as it applies to your rental real estate, you can reach me at [email protected] or 201.655.7411.

Put Your Children on Your Payroll and Reduce Taxes

One tax reduction strategy that most business owners do not take advantage of is putting their childrenPutting Your Children on Your Payroll 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 payrollIf 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]

Filing Taxes as a Married Couple

Filing Taxes as a Married CoupleIf you were married this past year, congratulations!

Getting married is a big step in your life and along with it comes many changes.  One change is filing taxes as a married couple for the first time. This advice can help you get started.

First, you must determine your filing status. Your status depends on your marital status on the last day of the year. If you were legally married as of December 31, you are considered to be married for the full year and must either file a Married Filing Joint or Married Filing Separate tax return.  Filing status is important for determining your standard deduction, whether you qualify for various deductions and credits, and the amount of tax is owed.

Filing Alternatives

If you choose to file a Married Filing Joint tax return, you must include all your and your spouse’s income, deductions, and credits on one tax return.  The standard deduction in 2018 for filing a Married Filing Joint tax return is $24,000. If you choose to file a Married Filing Separate tax return, each of you will report your respective income, deductions, and credits on separate tax returns.

The standard deduction for a Married Filing Separate tax return is $12,000 each. Married Filing Separate will rarely produce a lower tax liability. Most tax preparing software will provide you with an analysis on whether filing separately makes sense.  If using a self-preparing software or if you work with a tax preparer, be sure to ask which way produces a lower liability for your family.

When filing a separate tax return, there are some tax deductions that may be unavailable to you:

  • If you itemize your deductions, your spouse must also itemize their deductions.  You may not mix and match the itemized deduction and the standard deduction.
  • The Earned Income Credit is unavailable.
  • The Child and Dependent Care Credit is generally unavailable.
  • You cannot deduct interest paid on student loans.
  • Adoption Credit is generally not allowed.
  • Reduction of Child Tax Credit is unavailable.

Considerations for Working Couples

For couples who both work, both spouses will need to adjust the tax withholding from their paychecks.  One of the biggest mistakes of newlywed couples and taxes is the under withholding of income tax from their paychecks.  Because your income will be taxed together, this may push you into a higher tax bracket and when it’s time to file your tax return, there will be a surprise balance due.  Be sure to sit down with your spouse and properly fill out each of your Form W-4s Employee’s Withholding Allowance Certificate correctly.  Form W-4 worksheets are available to walk you through the process of matching tax due with withholdings.  The goal here is to match these as close as possible so that there is not a large balance due or large refund.  This way you have the most money in your pocket all year long.

Name and Address Changes

One other thing to keep in mind is filing with the correct names and addresses.  If there are any name changes, be sure to use the correct name on your married tax returns.  If there is an address change, you should change your address with the IRS by filing Form 8822 Change of Address and mailing it to the address on the form.  You should also update your address with your local post office.  If you have any children, be sure to include them as well on your tax return with their full name and social security number.  Retirement accounts and beneficiary information should also be updated accordingly if your spouse is the beneficiary.

Considerations for Home Sales

Planning on selling your home? Your taxable gain exclusion on your personal residence doubles from $250,000 to $500,000 once you are married.  This is only the case if you own the home and both you and your spouse have lived in the home the past 2 out of 5 years.  If you sold your home before you were married, the $250,000 would still apply.

Keeping these tips in mind can help make your first tax season together go a bit more smoothly.

Lance Aligo, CPA, MSA, is a senior accountant at KRS CPAs, LLC, Paramus, NJ.  You can reach him at [email protected] or 201-655-7411. Check out KRSCPAS.com for more tax tips, checklists, blogs, and other resources to help you succeed.

The IRS and Private Tax Debt Collection

To collect unpaid taxes, the IRS is turning to private companies.

IRS Using Debt Collection AgenciesThe growing backlog of debt has proved too much for the agency, which continues to use four debt collection companies to round up outstanding payments from taxpayers who’ve been contacted numerous times and still haven’t coughed up any cash.

The new private debt collection program originally started slowly, with just a few hundred taxpayers a week receiving mailings and subsequent calls. But now it’s in full swing, with thousands of people being contacted.

Taxpayers with long-overdue tax bills who’ve received several collection notices from the IRS through the mail are now being informed that their accounts have been transferred to private collectors. The collection agencies send letters of their own, clearly identifying themselves in all communications as working for the IRS.

Collectors Follow the Fair Debt Collections Practices Act

Of course, these new debt collectors need to follow the Fair Debt Collection Practices Act, which spells out when they can call, whom they can call, and what they can and cannot say. The IRS has told the collectors not to use robocalls to contact taxpayers.

The new private debt collection program comes straight from Congress, which required this action, noting that it’s a way to fund road improvement projects for the Fixing America’s Surface Transportation Act, which was passed in 2015.

The four collection agencies are CBE Group, ConServe, Performant and Pioneer Credit Recovery. These agencies explain how they work. For example, Performant notes on its website how they work and lists official government sites for more information.

Protecting Yourself from Scammers

A problem jumps into anyone’s mind: how to tell the official debt collectors from the scammers. The IRS has noted that the it is urging taxpayers to be on the lookout for scammers who might use this program as a cover to trick people. One sign is payment: Performant notes, for example, that it tells taxpayers to make checks out to the federal government, and not to the private agency.

So, how can taxpayers protect themselves from new scams? There are some simple ways to tell whether the call is legitimate or from a fraudster. It’s a scam if the caller does any of the following:

  • Is very aggressive or threatens you in any way with arrest or someone coming to your house.
  • Tries to pressure you to make immediate payment.
  • Asks for your credit or debit card information.
  • Requests payment via gift cards, including Amazon and iTunes, prepaid debit cards, or a wire transfer.

More information is available on the U.S. Treasury site.

We’ve got your back

Legitimate private debt collection firms will instruct taxpayers to send a check, made out to the U.S. Treasury, directly to the IRS. It’s always a good idea to check with us to keep up to date with the new program and the new scams that come from it. Of course, if you have an outstanding debt to the IRS, contact us immediately so we can help you with the process of paying the government what you owe. Don’t go it alone! Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

Medical and Dental Expenses: What Can You Deduct?

Can you deduct medical and dental expenses? That’s a complicated question.

Medical and Dental Expenses: What Can You Deduct?To start with, your deductions must exceed 7.5 percent of your adjusted gross income. And they have to fall into an IRS-approved category.

Deductible medical expenses may include, but aren’t limited to the following:

  • Payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and nontraditional medical practitioners.
  • Payments for inpatient hospital care or residential nursing home care, if the availability of medical care is the principal reason for being in the nursing home, including the cost of meals and lodging charged by the hospital or nursing home. However, if medical care isn’t the principal reason for the nursing home stay, then the deduction is limited to medical care costs only.
  • Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction, for participating in a smoking-cessation program, and for drugs to alleviate nicotine withdrawal that require a prescription.
  • Payments to participate in a weight-loss program for a specific disease or diseases diagnosed by a physician, including obesity; but not ordinarily payments for diet food items or the payment of health club dues.
  • Payments for insulin and payments for drugs that require a prescription.
  • Payments made for admission and transportation to a medical conference relating to a chronic disease that you, your spouse, or your dependents have (if the costs are primarily for and essential to necessary medical care). However, you may not deduct costs of meals and lodging while attending a medical conference.
  • Payments for false teeth, reading or prescription eyeglasses or contact lenses, hearing aids, crutches, wheelchairs, and for a guide dog or other service animal to assist the visually impaired or hearing-disabled person, or for a person with other physical disabilities.
  • Payments for transportation primarily for and essential to medical care that qualifies as medical expenses — payments of the actual fare for a taxi, bus, train, ambulance or for transportation by personal car to include the amount of your actual out-of-pocket expenses, gas, oil, etc. Standard mileage rate for medical expenses, plus the cost of tolls and parking apply as well.

Caveats for long-term care insurance

Payments for insurance policy premiums that cover medical care or for a qualified long-term care insurance policy are both deductible, but there are some caveats:

  • If you’re an employee, don’t include in medical expenses the portion of your premiums treated as paid by your employer under its sponsored group accident, health policy or qualified long-term care insurance policy.
  • Don’t include premiums that you paid under your employer-sponsored policy under a premium conversion policy (pre-tax), paid by an employer-sponsored health insurance plan (cafeteria plan), or any other medical and dental expenses unless the premiums are included in box 1 of your Form W-2, Wage and Tax Statement.

Only include medical expenses paid during the year and use the expenses only once on the return. Reduce your total deductible medical expenses by any reimbursement, whether you receive the reimbursement directly or it’s paid on your behalf to doctors, a hospital or other medical provider.

Finally, note that the threshold rises to 10 percent for 2019.

We’ve got your back

This is just a summary of a complicated series of rules.Rather than guessing at the IRS rules and requirements, why not let the KRS CPAs tax experts help? We will help you determine which expenses you can safely deduct. Contact us at 201.655.7411 to get started.

Time to Send Out Those 1099-Misc Forms

Time to Send Out Those 1099-Misc FormsWith tax season right around the corner, it’s time to start thinking about closing your books out for the year and preparing all your tax documents.

One of the required tax documents you may need to send out is the 1099-Misc. While this can be a tedious task, especially if you haven’t kept good records on your independent contractors, it is necessary to avoid penalties by the IRS. To help simplify things, here are the basics:

As a general rule, you must issue a Form 1099-Misc to each person to whom you have paid at least $600 in rents, services (included parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099-Misc for payments made for personal purposes.  You are required to issue 1099-Misc to report payments you made in the course of your trade or business. You’ll send this form to any individual, partnership, Limited Liability Company, Limited Partnership, or estate.

Some 1099 exceptions

There is a lengthy list of exceptions, but the most common one is payments to corporation. All payments made to a corporation do not typically require a 1099-Misc.  This means that if you make payments to a company that is incorporated or to an LLC that elects to be treated as a C-Corporation or S-Corporation, then this would not be reported on a 1099-Misc.  Unfortunately, this exception doesn’t apply to payments you made to an attorney.

Another exception is payments to vendors using a credit card or through a third-party payment network. You are not required to send a 1099-Misc for amounts paid electronically.  Instead, the credit card companies and payment companies will handle any required reporting.  Those electronic payment providers are required under certain circumstances to send out a different version of the 1099-Misc, called the 1099-K, instead.

Get those W-9s from vendors

To make the 1099 process easier, it is best practice for business owners to request a Form W-9 from any vendor you expect to pay more than $600 before you pay them.  Form W-9 will give you the vendor’s mailing information, Tax ID number, and also require the vendor to indicate if it is a corporation or not.  Having a completed W-9 will give you all the information to complete the 1099-Misc and save you a lot of headaches during tax season.

For the current year’s payments, businesses must send 1099-MISC to the recipients by January 31 of the following year.  Businesses also must send copies of each 1099-MISC sent to recipients to the IRS.  The deadline to the IRS is January 31.  This deadline applies to Form 1099-MISC when reporting non-employee compensation payment in Box 7.  Otherwise, paper filings must be filed with the IRS by February 28 and electronic filing by March 31. Also depending on the state law, businesses may also have to file the 1099s with the state.

We have your back

Rather than guessing at the IRS rules and requirements, why not let the KRS CPAs tax experts help? We will help you organize Form 1099 MISC recipient data and prepare all the necessary forms for you to submit. Contact Kelley DaCunha at [email protected] to get started.