The Tax Cuts and Jobs Act (TCJA) – Part 1

Lately I’ve received a lot of calls as well, as impromptu questions when I am moving around town, of people wanting to know what the heck is the ‘new tax law’ all about and how these changes will affect them.

So, I thought the best and most efficient way to get preliminary information out to everyone is through this blog with a “brief” (Lol) overview.

And, off to the races we go……

Soooo, there have been many claims on both sides of the political aisle about the Tax Cuts and Jobs Act which is also referred to as the TCJA (and as a side note the TCJA is over 500 pages). Will your taxes go down? By how much? For middle class taxpayers it will ultimately depend on your particular situation. There’s no doubt that some taxpayers in states with high income and/or real estate taxes could see their taxes go up. And it can also depend on what other deductions you’re losing. But higher-income taxpayers won’t feel the pinch as much. That’s because their deductions under the old law may be phased out or lost because of the Alternative Minimum Tax (AMT). Most taxpayers will see a decline in their taxes, a few will see an increase. The higher your income the bigger the benefit, both in absolute and percentage amounts. The increase in the exemption for the Alternative Minimum Tax will mean far fewer taxpayers will be caught in the trap. In fact the estimate is that only about 200,000 taxpayers will pay the tax, down from 4.4 million. For many taxpayers that can be a big saving.

Home ownership will not be as attractive as it was, particularly in high tax states. And that could depress home prices. On the other hand, new benefits for landlords will make owning a rental more profitable. That could be enhanced because more people may be renting.

Business owners should fare well under the new rules. While owners of business in certain services (medicine, accounting, legal, etc.) may not do as well as others, everyone will get a benefit. For C corporations (otherwise known as a regular corporation) tax rates will be materially lower; for owners of S corporations and other pass-through entities, the benefits are less clear, but should be significant. But there are some changes that could reduce the benefits. For example, an employee who is asked to move to another location may want more of an incentive since his moving expenses are no longer deductible.

One issue that I haven’t heard mentioned more than once is the effect on state income taxes. Most states tie their computation of taxable income to the federal rules. Some do it automatically (when the fed makes a change, the state automatically does), some have to pass a legislation to follow the change. Most states have modifications to federal taxable (or adjusted gross) income. For example, New York State excludes state and federal pensions and allows an exclusion for up to $20,000 in other pension income. It also exempts all of Social Security income. But it doesn’t follow some of the federal depreciation rules.

Some deductions were eliminated in total. For example, moving expenses are no longer deductible (with an exception for the armed forces). But unless a provision of existing law was mentioned, it’s still in effect. The 0.9% medicare tax on wages of higher income individuals as well as the 3.8% tax on net investment income. The special benefits for capital gains and dividends were largely untouched.

Most amounts in the new law are adjusted for inflation using the chained CPI approach (for your reference, a quick read primer about the chained CPI is here), a method that results in smaller annual increases in tax brackets, thresholds, etc.

Finally, keep in mind that most of the provisions take effect January 1, 2018. (Technically, they apply to tax years beginning after December 31, 2017; I’ll point out any that don’t). Most of the provisions that apply to individuals expire on December 31, 2025.

Beginning with this article you and I will take a look at all the important changes in the law and how it will affect taxpayers.

 

Individual Tax Rates

 

Tax Rates Based on Filing Status

 

There’s no question that income tax rates are lower across the board (with the exception of estates and trusts). But how much varies with your situation. Of course, you could still pay higher taxes if your taxable income is higher because you can’t deduct some of your state and local taxes, can’t claim a credit, etc. That’s why it’s important to work through your numbers. Unless you take the standard deduction and never have any unusual circumstances, trying to make them arrive at generic examples is very difficult =>(Solid Tax Solutions can work the numbers for you).

Tax Rates: Single Taxpayers–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $  9,525        $    0.00   10       $      0
   9,525       38,700           952.50   12          9,525
  38,700       82,500         4,453.50   22         38,700
  82,500      157,500        14,089.50   24         82,500
 157,500      200,000        32,089.50   32        157,500
 200,000      500,000        45,689.50   35        200,000
 500,000      .......       150,689.50   37        500,000
 

Tax Rates: Married Individuals Filing Joint and Surviving Spouses–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $ 19,050        $     0.00  10       $      0
  19,050       77,400          1,905.00  12         19,050
  77,400      165,000          8,907.00  22         77,400
 165,000      315,000         28,179.00  24        165,000
 315,000      400,000         64,179.00  32        315,000
 400,000      600,000         91,379.00  35        400,000
 600,000      .......        161,379.00  37        600,000 
 
Tax Rates–Head of Household–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $ 13,600        $     0.00  10       $      0
  13,600       51,800          1,360.00  12         13,600
  51,800       82,500          5,944.00  22         51,800
  82,500      157,500         12,698.00  24         82,500
 157,500      200,000         30,698.00  32        200,000
 200,000      500,000         44,298.00  35        200,000
 500,000      .......        149,298.00  37        500,000 
 
Tax Rates: Married Filing Separate–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $  9,525        $     0.00  10       $      0
   9,525       38,700            952.50  12          9,525
  38,700       82,500          4,453.50  22         38,700
  82,500      157,500         14,089.50  24         82,500
 157,500      200,000         32,089.50  32        157.500
 200,000      300,000         45,689.50  35        200,000
 300,000      .......         80,689.50  37        300,000 
 
Tax Rates: Estates and Trusts–>2018
      Taxable income:                   Tax:
  Over     But not over         Tax       +%   On amount over            

$      0     $  2,550        $     0.00  10       $      0
   2,550        9,150            255.00  24          2,550
   9,150       12,500          1,839.00  35          9,150
  12,500      .......          3,011.50  37         12,500 
 

So what are the savings? I computed the tax using several levels of taxable income. I didn’t take into account different situations such as the loss of tax deductions or the higher standard deductions or the Alternative Minimum Tax. I used 2017 rates for the “old” rates because many taxpayers want to compare last year to the new rates. If the law hadn’t been enacted, 2018 rates would be slightly lower after accounting for the annual cost-of-living adjustment.

Here’s how a married couple would fare under four different taxable income assumptions.

Taxable Income of $40,000– Jack and Jill have taxable income of $40,000. Under the new law they’ll pay tax of $4,419 versus $5,068 under the old law. That’s a savings of $649.

Taxable Income of $100,000– Assume taxable income of $100,000. They’ll pay $13,879 under the new law versus $16,478 under the old. A savings of $2,599.

Taxable Income of $375,000– With taxable income of $375,000 they’ll pay $83,379 versus $98,967 for a $15,588 savings.

Taxable Income of $600,000– Taxable income of $600,000 will result in $161,379 under the new law, down from $182,831 under the old law. A savings of $21,452.

I also computed the saving at taxable income of $75,000. That was $1,699, in between the $40,000 and $100,000 savings amounts.

For single individuals, I computed the differences at taxable income of $100,000 and $500,000. At $100,000 there’s a savings of $2,692; at $500,000 the savings rise to $3,129.

There’s no question that the tax rates are lower, and higher-income taxpayers will see the biggest savings, both in absolute and percentage amounts. But all taxpayers should benefit. The question is how will this be offset by the loss of deductions? That depends on your particular situation. Both the rates and brackets generally combine to lower taxes. For example, in 2017 the 25% rate for a married couple filing joint started at $75,901; under the new law, the rate is 22% and the bracket starts at $77,401. But there are some anomalies, such as the 35% bracket for married, filing joint starts at $416,701 under the old law and $400,001 under the new.

Capital Gain Rates and Related Taxes

The tax rate on long-term capital gains follows the old rules updated for the new rates. For example, under the old rules, you’d pay no tax on qualified dividends or long-term capital gains if you’re in the 10% or 15% bracket. There is no 15% bracket under the new law. The 12% bracket is substituted. Thus, if you’re in the 10% or 12% bracket, you pay no tax on qualified dividends or long-term capital gains. Above that, qualified dividends and long-term capital gains are taxed at 15% until you reach the top bracket. If you’re in the top bracket, they’re taxed at 20%.

The maximum tax rate on unrecaptured Section 1250 gains remains at 25%; the maximum tax on collectibles is 28%, as under prior law.

The Net Investment Income Tax (NIIT) of 3.8% remains in effect. This tax generally applies to dividends, capital gains, and passive income. The additional medicare tax of 0.9% continues to apply to Medicare wages in excess of the threshold amounts.

 

Alternative Minimum Tax

Congress did not eliminate the alternative minimum tax for individuals, but by making two strategic changes it slashed its impact.

The first change is the exemptions. Under prior law the exemption was $84,500 for a married couple filing joint. That’s increased to $109,400. For single individuals or head of household, the exemption increases from $54,300 to $70,300; for married filing separate it goes from $42,500 to $54,700. Under both prior and new law the exemption is phased out 25 cents for each $1 that the Alternative Minimum Taxable Income (AMTI) exceeds the thresholds. That was a big trap for many taxpayers. Under prior law the phaseouts began AMTI of $160,900 (married, joint), $120,700 (single, head of household), and $90,450 for a married couple filing separately. Under the new law, phaseout of the exemption begins at $1 million for a married couple filing joint and $500,000 for all other filers. That, coupled with the fact that only the first $10,000 of state and local taxes are deductible for regular tax purposes (state and local taxes are not deductible for AMT purposes) significantly reduces a major add-back.

The rates for the AMT are unchanged from prior law (after adjustment for inflation). The 26% rate applies to AMTI up to $191,500 ($95,750 if married, filing separate) for 2018; the 28% rate applies to income above those amounts.

For many taxpayers who either paid or had to consider the AMT in the past, they should discuss the tax with their advisor. There’s a good chance a few rules of thumb may provide them with relief from having to consider the tax.

 

Standard Deduction, Personal Exemption and Child Tax Credit

This is where things start to get more complicated. Under prior law, the standard deduction for a single taxpayer was $6,500 and $13,000 for a married couple filing jointly. Each individual was entitled to a personal exemption of $4,150. These were the amounts released by the IRS in November that would have taken effect for 2018. Thus, a single taxpayer, taking the standard deduction would have been entitled to deduct $10,650 from their adjusted gross income to arrive at taxable income. A married couple with no children could deduct $21,300 ($13,000 standard deduction plus two $4,150 exemptions). They could deduct another $4,150 for each dependent child. In addition, a single individual or married couple with children could take a tax credit of $1,000 for each child under the age of 17. The personal exemption and child credit were phased out for higher-income individuals.

Under the new law the standard deduction is increased to $12,000 for a single individual; $24,000 for a married couple filing jointly and $18,000 for head of households. The amounts are adjusted annually for inflation. That seems generous, but the new law also eliminates the personal exemption. That would be $4,150 per person. Thus, the standard deduction isn’t going from $13,000 to $24,000 for a married couple with no children, in effect it’s going from $21,300 to $24,000. For a single individual the deduction is going from $10,650 to $12,000. It’s an increase, but a more modest one than appears on the surface.

A bigger issue is the exemptions for dependent children. These are also eliminated. In their place is a higher child tax credit.

Under prior law taxpayers could claim a tax credit of $1,000 for each child under the age of 17 at the end of the year. The credit is phased out ($50 for every $1000) for taxpayers with Modified Adjusted Gross Income (MAGI) above $110,000 (married, joint) $75,000 (single). Part of the credit may be refundable. There are other restrictions.

Under the new law the credit is increased to $2,000 per qualifying child. Phaseout begins at $400,000 (married, joint); $200,000 for any other filing status. The phaseout is the same as under the old law. In addition, a $500 credit can be claimed for each dependent who doesn’t qualify for the child credit. The maximum refundable portion is $1,400 per qualifying child. The refundable portion is equal to 15% of a taxpayer’s earned income in excess of $2,500 to the amount the tax credit exceeds the taxpayer’s tax liability. In addition, there are new requirements for a proper taxpayer identification number. A social security number will be valid only for a person who is a U.S citizen or is authorized to work in the U.S. Without this, the refundable credit is limited to $500.

So, are you better or worse off under the new law? Here it depends on your tax rate. A credit is a direct reduction in taxes. The tax savings doesn’t depend on your tax rate. With a deduction, the value depends on your tax rate. For example, Bob and Susan can get a $1,000 tax credit or a $4,150 deduction (the amount of the personal exemption for a child). They’re in the 10% bracket. The tax credit will save them $1,000 in taxes, but a $4,150 deduction will only reduce their taxes by $415 (10% of $4,150). Jack and Jill can also choose between a $1,000 credit or a $4,150 deduction, but they’re in the 35% bracket. The $4,150 deduction will reduce their taxes by $1,452.50. They’re better off with a deduction.

Under the old law a qualifying child would give you a $1,000 credit and a $4,150 deduction. Continuing the example above, under the new law Bob and Susan now have $2,000, much better than the $1,000 credit and a personal exemption which would save $415 in taxes. Jack and Jill get a $1,000 credit (which they would not have gotten under prior law because of the phaseout of the credit). But they also get another $1,000 credit instead of a $4,150 deduction which would have been worth $1,452.

There’s another important difference here. Under prior law a qualifying child for the dependency exemption had to be either under age 19 or, if a full-time student, under age 24 at the end of the calendar year. For the $2,000 credit the child must be under the age of 17. For a dependent older than that you’re only entitled to a $500 credit. Offsetting this is the phaseout of the child credit under the new law which occurs at a much higher income level.

Stay tuned ladies and gentlemen for more TCJA fun to follow, very soon, in the next post (Part 2).

_______________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

The IRS Gives Guidance on the Prepayment of State and Local Property Taxes!

To prepay or not to prepay state and local taxes? That’s been the burning question over the past week. With tax reform now law, taxpayers are anxious to take advantage of certain tax planning strategies. But will they work? The Internal Revenue Service (IRS) now has an answer as to whether it might accept prepayment as a tax strategy – and not surprisingly, it’s maybe.

An IRS Building.

Here’s what you need to know about the prepayment of state and local taxes. Typically, those taxes are deducted on a Schedule A. Beginning in 2018, deductions for state and local sales, income, and property taxes remain deductible but are limited: The amount that you can deduct for all state and local sales, income, and property taxes may not exceed $10,000 ($5,000 for married taxpayers filing separately).

One of the ways to “beat” the cap in 2018 is to prepay your taxes in 2017. With that in mind, under the new law, Congress specifically prohibited pre-payments for income tax to be used as state and local tax deductions for the current year. Amounts paid in 2017 for 2018 state or local income taxes will be treated as paid in 2018.

But Congress did not impose a similar restriction on property taxes. Many tax professionals, including yours truly, have suggested that prepaying real estate taxes should be allowed in some circumstances. The IRS, in response to “a number of questions from the tax community concerning the deductibility of prepaid real property taxes” agrees and has finally issued some official guidance.

As part of IR-2017-210: IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017, the IRS declared that whether the deduction is allowed “depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.” That’s consistent with their prior treatment of prepayments. By way of additional clarification, a prepayment of “anticipated real property taxes that have not been assessed prior to 2018” would not be deductible in 2017. That is also consistent with their prior treatment of prepayments.

So, you might ask, who decides whether those taxes will be assessed prior to 2018? The respective state or local authorities.

On December 22, 2017, New York State Governor Andrew Cuomo signed an Executive Order authorizing local governments “to immediately issue warrants to levy property taxes by the end of the year.” Assuming those bills go out as intended, they should be deductible in 2017 if paid in 2017.

Also, the City of Philadelphia typically issues assessments for the new year in December of the prior year. So, 2018 bills should be in mailboxes now. Under the IRS guidance, those should also be deductible in 2017 if paid in 2017.

The IRS offers the following as an example of a deductible prepayment:

Assume County A assesses property tax on July 1, 2017, for the period July 1, 2017 – June 30, 2018.  On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.

However, there are limitations. The IRS also offered the following as an example of a nondeductible prepayment:

County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018.  County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.

So, can you see the difference? A prepayment on its own isn’t enough: Taxes must be assessed in order to claim the deduction for the prepayment.

Even if you can deduct the prepayment, you may want to ask your tax professional whether it makes good tax sense to do so. But keep in mind that there may not be a clear advantage to prepayment – and if you prepay in 2017 for 2018, you can’t claim the deduction in 2018 unless you pre-pay the next year.

And don’t forget about the dreaded Alternative Minimum Tax, or AMT. The AMT was NOT repealed under tax reform for 2018 . And, more importantly, it remains “as is” for 2017.

The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items. If you’re subject to the AMT, you have to calculate your taxes a second time, adding back in some of those tax-preference items. For example, normally, if you live in a high-tax state like New York, you can deduct your state and local taxes on your Schedule A if you itemize. For AMT purposes, however, you could lose the deduction. For more on the AMT, check out this prior blog post here.

In addition to the IRS guidance above, you should also make sure any required estimated state income tax payments have been made for your 2017 tax return. In most states the last estimated payment for 2017 is due January 15, 2018, but can be paid earlier. Technically, any amount overpaid is not deductible, in 2017. Therefore, if you estimate you’ll owe (in addition to withholdings) $3,000 for your state income taxes for 2017, pay them now and they’ll be deductible in 2017. However, if you pay $15,000 under the same circumstances because you know you’ll have to pay $12,000 in 2018, the additional $12,000 would not be deductible.

Remember: No two taxpayers are alike. Give Solid Tax Solutions (SolidTaxSolutions.com) a call at (845) 344-1040 if you have questions about whether prepaying your property tax or other year-end tax strategies can work for you.

____________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

The IRS Has Released the Standard Mileage Rates for 2018.

The Internal Revenue Service (IRS) has issued the 2018 optional standard mileage rates and beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 54.5 cents per mile for business miles driven (up from 53.5 cents in 2017)
  • 18 cents per mile driven for medical or moving purposes (up from 17 cents in 2017)
  • 14 cents per mile driven in service of charitable organizations (this amount is set by statute and has remained at 14 cents per mile since 1998)
A Picture of a Car Odometer.
Solid Tax Solutions Will Show You How Your Mileage Can Save You Money in 2018: Just Give Us a Call At (845) 344-1040.

And just in case you’re wondering about the difference in the rates for business and medical or moving purposes, there’s a reason: the standard mileage rate for business is calculated using an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil while the rate for medical and moving purposes is based on the variable costs of operating an automobile, such as gas and oil.

The optional standard mileage rates are used to calculate the amount of a deductible business, moving, medical or charitable expense (miles driven times the applicable rate). To use the rates, simply multiply the standard mileage rates by the number of miles traveled. If you use your car for business and personal use, you’ll want to keep appropriate records and back out the cost of personal travel.

It’s possible to use more than one rate on your tax return. Let’s say, for example, that you drive 20,000 miles in 2017. Of those miles, 10,000 are for personal use, 2,000 are for charity and 8,000 are for business use. You would calculate your deduction as follows (for 2017):

10,000 Personal Miles x 0 = 0

2,000 Charitable Miles x .14 = $280

8,000 Business Miles x .535 = $4,280

Your total deductible mileage related expenses would be $4,560 plus additional related charges such as parking fees and tolls.

Under current law, taxpayers have the option of deducting their actual expenses rather than using the standard mileage rates – though admittedly, that’s a lot more work. Ugh!

Whether these 2018 rates will impact most taxpayers in 2018 isn’t yet clear. The current tax reform proposals would eliminate the mileage deduction for moving expenses and job-related business mileage deductions for employees filing a Schedule A. In addition, both proposals would disallow – on the employer’s side – favorable tax treatment for employer reimbursement of employee moving expenses. However, under the Senate version of the bill, the tax treatment of these deductions would sunset, which means that the treatment of expenses would go back to the way the law is now (in 2017) beginning in 2026.

Both proposals would retain the charitable donation deduction, including for charitable miles. And in good news, under the House proposal, the mileage rate for charity would finally be indexed for inflation (it’s been 14 cents per mile since the Clinton era).

Both proposals would continue to allow you to deduct business miles related to your trade or business.

Remember: These are the rates effective at the beginning of 2018 for the 2018 tax year. Assuming that they still apply to you, that means they’ll show up on your 2018 returns (the ones you’ll file in 2018). However, you can still use the 2017 standard mileage rates for the tax return that will be filed in 2018. Even if the tax reform bills eliminate certain deductions as of January 1, 2018, those deductions are still applicable for the 2017 tax year.

____________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

You and Your Spouse Own a Business Together. What are the Tax Issues?

Ahhhhh……….The Husband and Wife owned business.

Love, love, love……….

A man and a women holding hands.

No one knows for sure how many businesses in the U.S. are co-owned by spouses.

A professor from Oklahoma State University estimated in 2000 that there were 3 million such businesses, so the number today likely is much higher.

Some giant corporations — Fiji Water, Forever 21, Panda Express, and Houzz — were founded by husband-wife teams.

There are many personal issues that couples face when co-owning a business.

Here are some of the tax issues that spouses co-owning a business should think about.

Tax Filing for Spousalpreneurs

A couple who co-owns and operates a business that is unincorporated and shares in the profits and losses are in a partnership, whether or not they have a formal partnership agreement. Usually they must file a partnership tax return, Form 1065, as well as report the income, losses, etc. on their personal return. However, they can elect to file Schedule Cs along with their Form 1040 instead of Form 1065, saving them from the complexities of the partnership return. To make this election:

  • Both spouses must materially participate in the business, which essentially means working on a day-to-day basis. (Material participation tests can be found at the IRS.) Neither spouse can be merely an investor.
  • Each spouse must file a Schedule C to report his or her share of income, gain, loss, deduction, and credit attributive to the respective interests in the business. If they split things equally, then both Schedule Cs will look the same.
  • Each spouse must file a Schedule SE to pay self-employment tax on his/her share of the net income from the business. This is the same action that would occur if the couple had filed a partnership return.

Divorce

It’s not uncommon for spouses who co-own a business to get divorced. What happens in the property settlement? Some spouses continue to co-own the business after divorce. Others may transfer interests to the other so that only one spouse owns and runs the business after the couple splits up.  How the business interests are addressed all depends on the couples involved.

From a tax perspective, the transfer of property incident to divorce is tax free. This means the transferring spouse does not recognize any gain or loss on the transfer to the other spouse. The spouse who now owns the business steps into the shoes of the other spouse when it comes to tax basis, so that if the business is later sold, the recipient-spouse recognizes the gain on any appreciation the transferor-spouse had but did not recognize at the time of the property settlement.

If spouses try to co-own and run a business after the divorce but it doesn’t work out, they can still part ways tax free. That’s what happened recently to one couple who had co-owned three dance-related businesses. After 17 months following the divorce, one party bought out the other for $1.6 million, and the Tax Court said this wasn’t a sale but rather part of the property settlement.

Innocent Spouse Relief

Spouses who co-own businesses typically file joint tax returns. These tax returns include the couple’s business income. By filing jointly, each spouse is jointly and severally liable for the tax due on the return, plus any interest and penalties. Can an owner obtain innocent spouse relief for the actions of the other spouse? Seems so.

In another recent case, one spouse was the sole owner of the business; the other handled the books and all other back-office operations. This spouse routinely had the tax return prepared and, after obtaining the other’s signature, filed it. The problem: She didn’t file it one year and he was assessed interest and penalties (she had died by this time). While he owed the tax, the Tax Court gave him innocent spouse relief for the interest and penalties.

Bottom Line

Spouses who co-own businesses should have very good lawyers and tax professionals so that each spouse’s interests are protected.

Solid Tax Solutions (SolidTaxSolutions.com) is skilled in such matters and can be reached year-round at: (845) 344-1040.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

A Sole Proprietorship May Be The Easiest Route to Travel for SOME Businesses!

A lot of people think that the first step to starting a business is incorporating or organizing a Limited Liability Company (LLC). While both types of entities can provide your business with additional protection, they’re not the answer for everyone. And that protection comes at a cost. I’ve created a list of some factors that should be reviewed before deciding on an LLC, a corporation, or a sole proprietorship. For the sake of this post, I will assume that your business, at least in the beginning is a one-person show with no partners and no employees. While that leaves out many startups, it encompasses many more.

The Words 'Sole Proprietorship'.

Here Are Some Points to Consider:

Potential Liability. If you’re designing and importing a children’s toys, you will need all the protection you can get. On the other hand, if you’re a carpenter your insurance should be able to handle most liability issues. Many professionals are likely to be sued personally even if the business is incorporated. Things quickly change if you have employees. If that’s the case a corporation or LLC can protect you personally.

Business Debts. In earlier times the corporate form was used mostly to protect owners from being personally liable for corporate debts. Today, it’s used for personal protection from a range of lawsuits. But for most small businesses, owners will be required to personally guarantee any bank, etc. loans. The only advantage to a corporation or LLC may be avoiding accounts payable on a default. And even a corporation or LLC won’t protect you if don’t respect the formalities of the entity.

Cost. If you do it yourself, the cost of setting up (and dissolving if it doesn’t work out) a corporation or LLC may be relatively small (generally between $125 and $800). Using an attorney will add to the cost. There may be annual fees such as filing fees and franchise taxes. These vary widely. Not much of an issue if the business is nicely profitable, but a burden if you’re suffering losses. If you do business as a corporation (S or C) you’ll have a separate return to file. That is a consideration if you have a professional prepare it.

LLC vs. S Corporation. While you could do business as a regular C corporation, you could find yourself subject to double taxes. Most small businesses elect S corporation status where profits and losses are passed through to the shareholders. An LLC with only one member is a separate entity for legal purposes, but is disregarded for federal tax purposes. That is, instead of filing a partnership return (the normal return for an LLC with more than one member (owner)), a single-member LLC reports its income and expenses on the owner’s Schedule C. That, plus the fact no balance sheet is required, can save some preparation costs at tax time.

DBA. If you’re doing business as a corporation or LLC you will decide on a name when filing with the state. While you could use your own name (e.g., Ralph Kramden, Inc.) that’s usually not the case. As a sole proprietorship, the default is to use your own name. That’s fine if you’re Ralph Kramden, Attorney-at-Law, but not so attractive if you want to brand the business. The solution is filing with your state for a Doing Business As (DBA) to do business under an assumed name (e.g., Ralph Kramden doing business as Brooklyn Auto Body). You have to decide if you want the extra work of a DBA.

Transactions Between You and Entity. If you’re doing business as a separate entity, you’ve got to respect the formalities. Business assets are purchased and titled in the name of the entity. Assets transferred to shareholders or LLC members should be accounted for on the books and for tax purposes. Loans are taken out in the name of the entity. Not in your name personally. Paying a corporate loan (or other expense) with a personal check won’t get you a deduction. The proper approach is either to make a loan or equity contribution to the business so the business can pay the expense and get the deduction. Alternatively you can submit an expense report and have the business reimburse you. Paying personal expenses with a business check as well as not respecting other formalities such as making customers, creditors, etc. aware that you’re doing business as an LLC or corporation can allow outsiders to challenge the existence of the corporation or LLC. It sounds simple enough, but most small business owners don’t follow through. A sole proprietorship doesn’t have these problems.

Switching Entities. If you start a business as a sole proprietorship and later decide to incorporate or change to an LLC, doing so is relatively straightforward and there are generally no tax consequences. Going in the other direction can be more complicated, particularly if you have fixed assets. In some cases there may be tax consequences.

The Best Approach? If you have or will have shortly, owners in addition to yourself, you might as well use a corporation or LLC from the businesses inception. If additional owners are unlikely (at least for some time) a sole proprietorship should be considered if the liability protection of an LLC or corporation isn’t needed. You should discuss the issue with your attorney and with your tax advisor.

Keep in mind that this discussion is in no way inclusive of all factors to be considered in starting a business.

If you found this information to be helpful drop us a line to let us know and feel free to pass this article along to your friends and family.

If you are considering starting a business (or already have a business) give us a call for a consultation. Your business will thank you.

We can be reached at: (845) 344-1040. You can also learn more about us at our website:
SolidTaxSolutions.com.

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Donating Your Car to Charity – What You Need to Know!

A customer of mine, whose car recently “died”, told me he wanted to donate that car to charity for a tax deduction. I know that a number of people have expressed an interest in doing the same thing with their cars but think it is as simple as dropping their car off at their favorite charity and then just taking the tax deduction.

Well it not quite that simple.

So, for my customer, all of those who have expressed an interest in donating their vehicle, and all of my valued readers, I thought I would review the rules for donating a car.

Taking a tax deduction for donating your car is not as easy as commercials make it out to be.
Taking a tax deduction for donating your car is not as easy as commercials make it out to be.

I have seen a lot of ads that entice you to donate your car to a charity and get a tax deduction – but you should be aware . . .

First, you will get no tax benefit from donating your personal automobile to charity unless you can itemize on Schedule A! This means the total of your “itemizeable” deductions exceeds your applicable Standard Deduction amount. While the donation itself can put you over the top and cause you to be able to itemize, to get the maximum tax benefit you must be able to itemize without the car donation.

A few years ago a customer expressed excitement when telling me that he donated his car to charity, and that he expected to get a big tax deduction. Unfortunately, his tax benefit from the deduction was zero, nothing, zilch. He was not able to itemize, and had not in the past, and even with the addition of the value of the car he was still not able to itemize.

FYI – you may want to itemize if your total deductions do not exceed your applicable Standard Deduction amount if you fall victim to the dreaded Alternative Minimum Tax (AMT). The Standard Deduction is not allowed in calculating AMT, but an itemized deduction for charitable contributions is.

Second, the amount you receive “in your pocket” will be only a small percentage of the car’s value. The amount of cash you will realize depends on your federal and, if your state allows a similar tax deduction (New York does not), state tax bracket.

And third, you have to wait to file your tax return to get the money. If you donate a car to charity today you will not see the cash until at least next tax season.

When you donate a vehicle (car, motorcycle, boat, or airplane) to a church or charity the amount you can deduct depends on what the organization does with the donated vehicle.

(1) If the organization sells the vehicle without significant interim use or material improvement your tax deduction is limited to the gross proceeds from the sale.

(2) If the organization intends to temporarily or permanently use the vehicle in its operations, or make “material” improvements to the vehicle before selling it, or sell the car to a “needy” individual at a price that is significantly below market value, or give the car to such an individual, you can deduct the “fair market value” of the vehicle.

You can use the “private party value” for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book (www.kbb.com) or a similar established used vehicle pricing guide.  If the fair market value of the vehicle is more than $5,000.00 you must obtain a formal appraisal.

To claim a deduction of more than $500.00 for donating a motor vehicle to charity you must include Copy B of the IRS Form 1098-C, provided by the charity, with the filing of your Form 1040.

The Form 1098-C will include the name and Taxpayer Identification Number of the donee organization, the vehicle identification number, the date of contribution, and information on what the charity did with the vehicle. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the donee organization. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed above.

So, these are the basics of donating a vehicle to a charitable organization and taking a tax deduction for that donation. If you are considering donating your vehicle, don’t miss out on a very valuable tax deduction. Call Solid Tax Solutions (SolidTaxSolutions.com) before you make the donation: (845) 344-1040.

Your wallet will thank you!

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

HERE IS WHAT YOU SHOULD KNOW ABOUT YOUR SIDE GIG AND TAXES.

Ahh…the ‘Side-Gig’, the ‘Side-Project’, ‘Moonlighting’, or the ‘Side-Hustle’ (NO not this Hustle). From Uber to Dogwalker.com, there are tons of ways to make some money on the side while pursuing your dream job – or just digging out of debt. If you’re hoping to pick up some extra cash with a side gig this year, here’s what you need to keep in mind on the tax side.

1) Income is Income. It doesn’t matter if your extra income is from driving a car or trading stocks, income is reportable unless it’s otherwise excluded.

2) Understand the Difference Between a Real Business and Just a Fun Way to Make Some Money. Income may be income but how and where it’s reported can vary depending on whether you’re engaged in a business or making money with a hobby.

Hobbies and businesses are reported on different spots on your federal income tax return (line 21 for hobby income versus Schedule C for business income), and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income: if you spend more than you make, you’re unfortunately out of luck.

If, however, you earn income in the pursuit of a business, you can offset the income with deductions, and you can carry losses forward or backward to other years. These are sometimes referred to as the “hobby loss rules,” and they’re important.To distinguish a real business from a hobby, the IRS looks at a lot of factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business)—so how seriously you treat your new pursuit will matter.

3) Keep Good Records. It may seem like all good fun when you’re renting out your apartment on the weekends, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously.

If you’re working by the hour, keep a log of your time. Save your invoices and document income: if you can stash it in a separate account, even better. When it comes to expenses, keep receipts and annotate the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). And please don’t ditch those receipts immediately after Tax Day (click here to find out how long to hold onto your tax records).

4) You May Need to Prorate Some Expenses. Typically, you can only deduct expenses primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost: you can typically deduct the business portion of the expense.

To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage (there are also apps that can help you do this). If at the end of the year, you find, for example, that 40% of the use was for business, then you can typically deduct 40% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline as personal {not business}, even if you swear it’s used solely for business).

5) You May Need to Make Estimated Tax Payments.The extra few hundred dollars you earn from ads on your blog might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead.

If you expect to owe more than $1,000 at tax time, you’ll want to make estimated tax payments. To make estimated tax payments, you’ll use federal form 1040ES, Estimated Tax for Individuals (downloads as a pdf). Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.

6) Consider Hiring a Tax Pro. If your tax situation becomes more complicated from your side hustle—especially since all of your income will not be reported by your employer on a W-2, you may need help. Don’t hire just on cost.

If you have a Side-Gig or are just thinking about starting that Side Hustle, don’t get caught up in the IRS tax net.

Solid Tax Solutions (SolidTaxSolutions.com) Can Help You!

Give Us a Call At: (845) 344-1040.

We Are Open Year-Round!

Sometimes, a side hustle is just that. But if it turns out to be something more, don’t ignore the business and tax side of things.

_________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: Business, Income Tax

HURRICANE PREPARATIONS

This post, due to the nature of the topic, will be short.

In light of Hurricanes Harvey, Irma, and Jose I want to say, first of all, that my heart goes out to those who have dealt with or are about to deal with these catastrophic events.

A street with a 'Hurricane Evacuation Route' sign.

Here are a couple of tips that may be of help to you.

For individuals and businesses in the affected areas, there’s not much time left for preparations. There are two things you can do–or have your kids do:

  1. Take pictures of the interior of the house and important or valuable items, then take pictures of the exterior.
  2. Either take your computer with you or download your most important files onto a flash drive. Accounting records, business data, etc. as well as any personal information such as bank and brokerage account numbers, etc. In the future you should consider backing up the computer to the cloud or to an outboard hard drive (if you don’t already). Make sure you put the flash or hard drive in a waterproof container before leaving the house.

Again, my heartfelt best wishes to those who have been affected by these hurricanes or who will be dealing with life changing hurricanes in the near future.

Bruce

__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: General 'Thoughts'

HOW THE TAX LAWS AFFECT HOME RENTALS!

It’s common practice for people to rent out their vacation homes when they are not being used for personal Rest and Relaxation. That rental income can cut the costs of owning and maintaining a second home. But these days, some of you may be cashing in on short-term rentals of your primary homes. Those of you who live in or near vacation destinations or who live in the vicinity of major events can now connect with renters through advertising sites like Craigslist or rental sites like Airbnb. So for example, back in 2015 many Philadelphia residents jumped into the short-term rental market when Pope Francis visited that city.

House with the words For Rent
A Short-Term Rental Can Affect Your Taxes!

Unlike typical vacation home landlords, some taxpayers may be unfamiliar with the tax law rules on rentals of a residence.

Rule #1:

Short Term Rentals. Under a longstanding tax rule, many short-term home rentals are essentially tax-free. The IRS says that when a home is rented for less than 15 days during a year, there’s no need to report the rental income or expenses. The rental income and rental expenses are simply ignored for tax purposes. Home-related expenses, such as mortgage interest and property taxes, are deducted as usual if the homeowner itemizes deductions.

Once rentals hit the 15-day mark, two other rules come into play depending on whether the property qualifies as a personal residence or as investment property.

Rule #2:

Personal Residence Rentals. If a personal residence is rented for 15 days or more during the year, all the rental income is included in income. Expenses are allocated between personal and rental use based on the number of days the home is used for each purpose. Otherwise deductible expenses attributable to personal use (mortgage interest, property taxes) can be written off if the homeowner itemizes deductions. All expenses attributable to rental use are deductible—but only up to the amount of gross rental income.

A home is treated as a personal residence for a tax year if it is used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days it is rented at a fair rental price.

Days of personal use generally include any days the home is used by you or a family member or by anyone at less than a fair rental price. However, days the homeowner spends on repairs and maintenance are not personal use days, even if family members use the property for recreational purposes on the same day.

KEY POINT: This rule is not likely to come into play when a homeowner rents out their primary residence on a short-term basis. But it can crop up with vacation home rentals. For example, if a person uses a vacation home for a three-week vacation each year (21 days), the home will be treated as a personal residence only if rental use is limited to a total of 30 weeks (210 days).

Rule #3:

Investment Property Rentals. If a person’s property does not qualify as a personal residence, it’s considered an investment property. In that case, it is subject to the passive loss rules. Rental deductions are not limited to the amount of rental income, but any overall loss on the rental is deductible only to the extent of income from other passive investment sources. There is, however, an important exception: If a person has adjusted gross income of $100,000 or less and is actively involved in rental of the property (for example, by making repairs, approving tenants, and the like), the homeowner can write off up to $25,000 of the net rental loss against non-passive income, including his or her salary. The $25,000 exception is phased out a rate of 50 cents for each dollar of income between $100,000 and $150,000.

TAX TIP: By fine-tuning personal use of the home, homeowners can pick the rule that will yield biggest tax deductions.

Example: Bob and Carol Smith have adjusted gross income of about $95,000. The Smiths own a beach home that they use for three weeks each summer and rent for the remaining 12 weeks of the season. Their annual rental income is $18,000. Their total annual expenses for the home, including mortgage interest, taxes, maintenance and depreciation, come to $40,000. Of that amount, $8,000–including $4,000 of mortgage interest and $800 of property taxes—is allocable to personal use. The remaining $32,000 is allocable to the rental. The Smiths’ three weeks of personal use puts the vacation home in the personal residence category. Therefore, the Smiths can deduct the $4,800 of mortgage interest and taxes attributable to their personal use (the remaining expenses attributable to personal use are nondeductible). In addition, they can deduct their rental expenses—but only up to the amount of their rental income. Total deductions: $22,800. 

Change of Plans: The Smiths limit their annual vacation to just two weeks and rent the home for an additional week, increasing their rental income to $25,500. Based on their new mix of rental and personal use, they allocate $5,320 of expenses, including $2,660 of mortgage interest and $532 of property taxes, to their personal use. The remaining $34,680 of expenses are allocable to the rental.

Cutting back on vacationing makes the home an investment property. The Smiths lose some deductions on the personal side; they can deduct the $532 of property taxes attributable to personal use, but not the $2,660 of mortgage interest. (Mortgage interest attributable to personal use is deductible only if the home qualifies as a personal residence.) However, they pick up substantial deductions on the rental side. They can deduct their rental expenses up to the amount of their $25,500 of rental income. In addition, because the Smiths’ adjusted gross income is below $100,000, they can deduct their $9,180 loss on the rental ($34,680–$25,500) against other income. Total deductions: $35,212.

On The Flip Side: Assume the Smiths’ adjusted gross income exceeds $150,000. In that case, they may want to do more vacationing, rather than less. Reason: Whether the home is classified as a residence or an investment property, their rental deductions will be limited to their rental income. But by boosting their personal use, they can increase the amount of deductible mortgage interest and taxes attributable to personal use.

So, I hope that you have found this article to be helpful. Feel free to drop me a reply.

If you have a short-term (or even a long-term) rental you may be hurting yourself when it comes to taxes and the IRS.

So, give Solid Tax Solutions a call at (845) 344-1040 and let us get and keep you on the correct and profitable path.

And, don’t forget to check out our other informative articles on our blog: TheTaxNook.com.

Until the next time….
__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

ARE YOU SELLING YOUR HOME?

Ahhh……Summer Is Here!

 

Summer is typically a “hot season” in the home sale market. Young families typically want to get settled in a new home before school begins in the fall, and older home sellers in northern climates want to head south before winter sets in. People who are buying a new home will need to do some serious number crunching to determine what they can afford to pay and how they will pay it. However, those of you who are home sellers will need to do some number crunching as well.

Under current tax rules, a loss on a home sale is not deductible. On the other hand, the first $250,000 of gain on a home sale is excluded from income. What’s more, for joint filers, the exclusion is generally doubled to $500,000. However, for long-time homeowners, even those generous exclusions may not shelter all of that gain from tax. Therefore, you will need to:

Get Back to Basis

To properly determine gain (or loss) on the sale or exchange of a home, a taxpayer must know the basis of the home for tax purposes. And calculating basis will involve information that dates back to the time the home was purchased. Or perhaps even earlier.

The amount of gain or loss on a sale is determined by comparing the amount realized on the sale to the adjusted basis of the home. If the amount realized is greater than the adjusted basis, the difference is a gain. If the amount realized is less than the adjusted basis, the difference is a loss.

Cost Basis

In most cases, the starting point for determining basis is the cost of the home. So, if a home was purchased from the builder or from a former owner, the initial cost basis includes the purchase price and certain settlement costs. The purchase price generally includes the down payment and any debt, such as mortgage or notes given to the seller in payment for the home.

Settlement fees or closing costs associated with the purchase of the home can be added to basis. However, fees associated with a mortgage on the home (e.g., appraisal fees, costs of a credit report or mortgage insurance fees) are not added to basis. In addition, escrow amounts for payment of future liabilities are not included in the basis of the home. Some examples of settlement fees that can be added to basis include:

  • Abstract of title fees
  • Charges for installing utility services
  • Legal fees (e.g., fees for a title search and for preparing the sales contract and deed)
  • Recording fees
  • Survey costs
  • Title insurance
  • Transfer taxes

When a home changes hands, real estate taxes for the year of the sale are apportioned between the buyer and seller based on the number of days each of them held the property during the year. The date of the sale counts as a day the property is owned by the buyer. Real estate taxes for the year of sale may increase or decrease basis, depending on how the taxes were handled at the closing. If the buyer paid taxes owed by the seller and was not reimbursed, the taxes increase the buyer’s basis of the home. If the seller paid taxes owed by the buyer and was not reimbursed, the taxes decrease the buyer’s basis of the home.

In the case of a home that was constructed by or for the taxpayer, basis includes the cost of the land plus the construction costs. However, if the taxpayer did all or part of the construction personally, basis does not include the value of the taxpayer’s own labor or the value of any other unpaid labor. 

Basis Other Than Cost

Special rules apply in determining basis if a home was acquired other than by purchase or construction—for example, as a gift or inheritance or as part of a divorce settlement. In addition, a taxpayer may have a basis other than cost if a home was acquired as a replacement home in a home-sale rollover under prior law. 

Adjustments to Basis

A taxpayer’s basis in a home is not static. Basis may be adjusted upward or downward to reflect expenditures made in connection with the home or payments or other benefits received.

Improvements that increase basis include:

  • Additions to the home, such an extra bedroom or bath, a family room, a deck or patio, or a garage.
  • Landscaping and other outdoor improvements, such as a new driveway or walkway, fences and walls, a sprinkler system, or a swimming pool.
  • Systems improvements, such as a new heating system, central air conditioning, a new furnace or ductwork, wiring upgrades, a septic system, a water heater or water filtration system, a satellite dish, or a security system.
  • Exterior improvements, such as new storm windows or doors, roof, siding or shutters.
  • Interior improvements, such as built-in appliances, kitchen cabinetry, flooring, wall-to-wall carpeting and insulation.

CAUTION: Improvements that are no longer part of a home are not included in the home’s basis.

Example: John Smith bought his home for $200,000 in 2005. In 2006, John added a deck to the home at a cost of $6,000. In 2012, John remodeled the home, which involved removal of the deck and the addition of a new covered porch. The addition and porch cost $30,000. Result: After the addition of the deck in 2006, John’s basis in the home increased to $206,000. However, after the deck was removed in 2012, it was no longer included in the home’s basis. Therefore, John’s basis for the home following the remodeling is $230,000 ($206,000 – $6,000 + $30,000).

Some examples of repairs that do not increase basis (unless they are part of an overall renovation or remodeling) include interior or exterior painting, fixing gutters, repairing leaks or plastering, and replacing broken windowpanes.

AND HERE ARE 11 ADDITIONAL ‘HOME SELLING’ TAX TIPS:

  1. Generally, you can exclude a gain from the sale of only one main home per two-year period.
  2. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.
  3. You can choose not to exclude the gain from a sale. If you expect to sell another main home within two years, you may want to consider claiming the gain on sale of your current main home instead of excluding the gain. You can only claim an exclusion on the sale of your main home once every two years (See Tax Tip #1). Depending on your specific sale, it may be more beneficial to claim the current gain as income and use the exclusion on the future sale of your main home.
  4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S – Proceeds From Real Estate Transactions.
  5. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.
  6. If you received the First-Time Homebuyer Credit when you purchased your home, you may have to pay some or all of it back.
  7. If you didn’t live in the home the entire time you owned it, you may have to pay tax on part of the gain. If your house went up in value when you were not living in it; for example, when you used the property as a rental house, you cannot exclude gain from the time you rented it out. For determining the amount of the gain you cannot exclude, the property is assumed to have gone up in value evenly over the period of time you owed it.
  8. You don’t have to buy a home of greater value, or any other home, to exclude this gain.
    There are no longer any requirements to buy another home after you sell in order to exclude the gain from the sale of your home.
  9. Long-term capital gains rates are lower than the ordinary tax rates you pay on short-term gains. Long-term capital gains tax rates for 2017 are 0%, 15%, or 20%, depending on your income tax bracket. Ordinary income tax rates for 2017 range from 10% to 39.6%. High-income taxpayers must pay an additional 3.8% tax on Net Investment Income (NIIT), including any gain from the sale of a residence that is not excluded from income. For this purpose, a high-income taxpayer is a taxpayer with a Modified Adjusted Gross Income (MAGI) of more than $200,000 ($250,000 if married filing jointly or a qualifying widow(er), $125,000 if married filing separately).
  10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822 – Change of Address, to notify the IRS.
  11. Most Importantly——>If you are selling your home (or are just thinking about it) contact Solid Tax Solutions and let us help you: (845) 344-1040.

Hey, if you like this article let us know and also take the time to look at some of the other helpful articles here at The Tax Nook and please feel free to share our blog with your family and friends.

Until the next time….

_________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).