The Alternative Minimum Tax and You! – Part 2

    In my last post (The Alternative Minimum Tax and You! – Part 1), I addressed the Alternative Minimum Tax (AMT) as it applies to individuals. A little known fact is that businesses, like individuals, can be subject to the AMT. Although the purpose is the same (i.e., assure that taxpayers with certain types of income and deduction structures pay at least a minimum amount of tax) the way in arriving at the AMT is slightly different. This post will address the AMT as it applies to tax-paying corporations (C Corporations). It does not apply to pass-through entities such as S Corporations or Partnerships, because the AMT is calculated at the individual level.

    Not All Businesses Are Alike:

    Unlike individuals, some corporations are exempt from the AMT. A corporation that qualifies as a “small corporation” is exempt from the AMT.
    To be classified as a small corporation, the entity must:

    • Be in its first year of existence, (i.e., the current tax year is the year the entity began operations), or
    • The company was treated as a small corporation for all prior tax years beginning after 1997, and
    • The company’s gross receipts did not exceed an average of $7.5 million for the preceding 3 tax years
      ($5 million if the entity has been in existence for 3 years or less)

    After determining that the corporation is subject to the AMT, the taxpayer will complete Form 4626 with the Form 1120. Form 4626 is organized similar to Form 6251 for individuals. It begins with the corporation’s taxable income, and then adds back (i.e., takes away) various  adjustments and preferences, such as:

    • Differences in depreciation
    • Differences in gains and losses
    • Depletion
    • Intangible drilling costs
    • Adjusted Current Earnings adjustments (ACE)

    After the corporation accounts for these adjustments and preferences, it will arrive at it’s Alternative Minimum Taxable Income (AMTI).
    Corporations are afforded an exemption if their income falls in a certain range, typically $40,000. The AMTI is then multiplied by 20% to arrive at the AMT.

    Just like individuals, if the AMT exceeds the corporation’s regular tax, then they must pay the higher amount.

    Because corporation’s do not receive the same preferential treatment of gains being taxed at a lower rate like individuals, the biggest factor in a corporation’s AMT calculation is depreciation. A corporation needs to be mindful when capitalizing depreciable property that a large difference between the tax and AMT depreciation methods could subject the corporation to a higher tax rate. Some assets, when capitalized using the 200% double-declining method of depreciation can only be depreciated using the 150% MACRS method for AMT purposes. This will cause the AMT depreciation expense to be lower than the tax depreciation, resulting in an addition to taxable income in arriving at AMTI.


    Bruce – Your Host at The Tax Nook

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    The Alternative Minimum Tax and You! – Part 1

    The Alternative Minimum Tax (AMT) for individuals, enacted by Congress in 1969, is becoming less of an alternative for some taxpayers. The AMT was originally targeted at approximately 150 taxpayers that had high Adjusted Gross Income (AGI), but paid zero tax due to the types of income and structuring of deductions. In effect, under the current structure the AMT almost guarantees that once taxpayers reach a certain level of income, their effective tax rate will be at least 26% or higher.

    The IRS Shaking AMT Money From a Taxpayer

    The AMT is calculated by both businesses and individuals, but under different circumstances. In this post I will discuss the AMT as it applies to individuals (In the next post I will talk about how the AMT applies to businesses).

    Individuals Subject to AMT

    Individuals calculate their share of the AMT on Form 6251. That taxpayer begins with their AGI after itemized deductions, and then adds back the following:

    • Medical expenses
    • State and local income, real estate, and property taxes
    • Miscellaneous deductions

    The taxpayer must also add back or reduce by the difference between their income tax and AMT amounts for the following:

    • Investment interest expense
    • Depletion
    • Basis in exercised incentive stock options
    • Depreciation expense

    Taxpayers may also have to report AMT adjustments passed through on K-1’s from their other activities (partnerships, trusts, or S-corporations).

    Once all of these adjustments have been considered, the taxpayer arrives at their Alternative Minimum Taxable Income (AMTI). Taxpayers are allowed an exemption amount, which has been indexed for inflation thanks to acts by Congress at the end of 2012. The exemption amounts for 2015 are $53,600 for Single filers ($53,900 in 2016), $83,400 ($83,800 in 2016) those taxpayers who are Married and File Jointly and $41,700 ($41,900 in 2016) for Married taxpayers who file separately ($23,800 for Estate and Trusts in case you were wondering [$23,900 in 2016]). The exemption amount is subtracted from AMTI, and the resulting amount is multiplied by either 26% or 28% depending on whether the amount is above or below $185,400 ($186,300 in 2016) for Married Filing Jointly or $92,700 ($93,150 in 2016) if Married and filing separately.
    If income is above that amount, it is multiplied by 28%, and 26% if not.

    Once the AMT is calculated, it is compared to the regular tax calculated on the taxpayer’s Form 1040. This is where the AMT earns the name “Alternative”. Once the taxpayer compares their AMT to their regular tax, the higher amount becomes their income tax.


    Why does the AMT work? Because it attacks two types of tax situations and makes them less beneficial.

    First, the AMT trues up the tax rate for taxpayers that have high incomes from sources that are not taxed at regular tax rates, such as long-term capital gains, qualified dividends, and tax-exempt interest. If a taxpayer has $10 million in AGI, but it consists completely of long-term capital gains and qualified dividends, their “regular” tax rate is only 20% (in 2015) as opposed to 39.6% (in 2015). The AMT would require this taxpayer to pay a higher rate due to their high income.

    Second, the AMT penalizes taxpayers with certain higher-than-normal deductions. As I mentioned above, one deduction added back for AMT purposes is state and local taxes from Schedule A. For a taxpayer living in an income tax state (a state that has their own income tax, such as New York, New Jersey, or North Carolina but not Florida), a deduction is allowed on their Federal return for state tax payments made during the calendar year. The difference
    between paying the state 4th quarter estimated tax payment on December 31 instead of January 15 of the following year is that the payment will be allowed as a deduction Schedule A in the year of payment. However, making that payment before year-end will not matter if the taxpayer will be subject to AMT, because those amounts will be added back.

    A Monopoly 'Go to Jail' Card

    Can It Be Avoided?

    Unfortunately, the AMT is a “Do Not Pass Go, Do Not Collect $200” situation. One simple way to forego the calculation is for the
    taxpayer’s income after itemized deductions to stay below the AMT exemption amounts. Also, if the majority of the taxpayer’s income is taxed at regular rates, the AMT will not be a problem because the regular tax will most likely exceed the AMT. If a taxpayer, because of their types of income, will be subject to the AMT, they should try to avoid certain deductions (if possible) in order to minimize their AMTI. Simple planning maneuvers such as paying state taxes on January 15 of the following year and staggering the exercise of incentive stock options can minimize the amount of AMT adjustments in a given year. Taxpayers with depreciable property can elect depreciation methods that do not create large tax to AMT differences.

    In all, if you are (or think you are) subject to the AMT, contact us at (845) 344-1040 or visit our web site => (open year-round) and we will help you with the impact the AMT could have on your situation, and what measures can be taken in order to minimize the AMT’s impact.

    For those of you who have businesses or are planning to enter the world of entrepreneurship, stay tuned for the next post.

    In – The Alternative Minimum Tax and You – Part 2 – I will address the AMT as it pertains to businesses.


    Bruce – Your Host at The Tax Nook

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

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    Merry Christmas!

    On behalf of SOLID TAX SOLUTIONS and THE TAX NOOK I want to wish all of you a safe, happy and Merry Christmas to you and your family.

    Oh, I almost forgot…………I have a Christmas card for you  —————–>Your Christmas Card!


    Bruce – Your Host at The Tax Nook

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    Categories: Uncategorized

    Understanding Taxes on Year-End Bonuses

    As the year winds down people (hopefully) are receiving their year-end bonus. It’s also at this time of year that I am oftentimes asked “I just got my bonus check and they took so damn much out in taxes. Why?”

    Well let me try to clear this up.

    There is generally some confusion as to how year-end bonus income is taxed. Many people mistakenly believe that the bonus they receive from their employer during the holiday season is taxed at a higher rate than regular income. Others believe that a year-end bonus could bump them into a higher income tax bracket, resulting in their being subject to a higher tax rate on their total income for the year. Fortunately, however, neither scenario is necessarily true.

    Bonus Income is the Same as Regular Income

    As far as the IRS is concerned, bonus income is the same as your regular income. Any bonus income that you receive is added to your W-2 income, and is calculated in the total income you report to the IRS on your federal tax return forms. Employers often treat bonus income differently in terms of how they withhold taxes from the payment. That is why some people have the mistaken believe that a bonus will increase their taxes.

    While a year-end bonus may technically put you into a higher tax bracket, you must realize that since you are taxed on an incremental basis, you won’t be taxed at a higher rate for all of your earnings last year. So, for example, if you look at the
    2015 Tax Brackets for taxes due April 18, 2016 (or April 19, 2016 if you live in Maine or Massachusetts) and your filing status is single, you’ll see that the 10% tax bracket is up to $9,225 in earnings. This means that if you earn $9,225, your tax rate is 10%, and if you earn more than that – let’s say $30,000 – you will be placed into the 15% tax bracket, meaning that you still pay 10% on the earnings up to $9,225 and then you pay 15% on the earnings from $9,226 to  $30,000. Therefore, your actual tax rate is not 15%, but rather a combination of the different rates for the tax brackets that you fall into throughout the year.

    So, yes, it is possible that your year-end or holiday bonus can push you into a higher tax bracket, but that does not mean that you will pay more money on the income that you earned earlier in the year.

    How Employers Handle Bonus Income

    Another reason why people think that they will be taxed at a higher rate on the bonuses that they receive is because more money may be withheld by the employer for taxes.
    However, it is all dependent upon the employee’s final income at the end of the year. A person who makes 90% of his income in bonuses compared to someone who makes 10% of his income in bonuses and earns the same amount of money with the same filing statuses and deductions will still actually pay the same taxes.

    Regardless of which of the following three methods for withholding federal taxes from bonus income an employer uses, your bonus income and regular pay are added together and   reported the same on your income tax return. If you overpay taxes, you receive a refund; if you underpay, you will owe more money when you file:

    1. The bonus can be included in the employee’s paycheck. The sum of the regular paycheck and the bonus payment are added together, and the standard withholding is calculated. The amount of tax already withheld from the regular income payment is subtracted, and the difference is withheld from the bonus.
    2. The employer can elect to withhold 25% federal income taxes from the bonus, and 35% for any bonuses over $1 million.
    3. The bonus can be included in the employee’s paycheck with no difference between the two types of income, and taxes are calculated based on the total amount of the pay and bonus combined.

    It may seem like your bonus check is being taxed more money than you are used to – and even cause you to fear receiving a bonus. While you may see more money withheld from your bonus pay than you are used to seeing from your regular paycheck, keep in mind that it will all even out when you file your income taxes.

    Exceptions for Hedge Fund and Investment Managers

    Hedge fund managers and other investment managers who receive bonuses are considered to receive “carried interest.” So if an investment manager receives a bonus from investment gains, they are taxed at a top tax rate of 23.8% (long-term capital gains rate topping out at 20% plus 3.8% net investment income tax), which is generally lower than their marginal tax rates that the rest of their income is taxed on.


    Bruce – Your Host at The Tax Nook

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    Categories: Income Tax

    Highways, Taxes, and Passports……….Oh My!

    Are you planning a trip outside of the United States? Well, make sure that you go down your checklist to make sure that you have everything in place before you head off on that trip: Itineraries, tickets and reservation confirmations, cell phones and chargers, back taxes and your passport.

    Whoa, wait a minute, Bruce. What were the last two on the list you ask? Back taxes and your passport? Eh?

    Well since you’re wondering, there is a definite connection.

    As I mentioned in my last post, President Obama recently signed into law (December 4, 2015) the Fixing America’s Surface Transportation Act, or the “FAST Act.” The purpose of the bill was to provide long-term funding for transportation projects, including new highways. But also stuffed into the bill were a few new tax laws: one (which I talked about in my last post), a requirement that the Internal Revenue Service (IRS) use private debt collection companies and another that requires the Department of State to deny a passport (or renewal of a passport) to a seriously delinquent taxpayer or revoke any passport previously issued to a seriously delinquent taxpayer. I will talk about the latter requirement in this post.

    A Picture of Two United States Passports

    So, to start with, the IRS has not been charged with revoking passports. That’s not within their scope of duties.The administration of passports has been and remains the responsibility of the Department of State.

    Currently, the Secretary of State may refuse to issue or renew a passport for a number of reasons, including delinquent child support obligations. Procedurally, the names of noncustodial parents who owe more than $2,500 in back child support are submitted to the Department of State from an individual state; the Department will then deny the applicant a U.S. passport until the debt is satisfied. There was no similar rule which applied to delinquent federal taxes………………until now.

    Under the new law, the Secretary of State is required to deny a passport or turn down the renewal of a passport to a seriously delinquent taxpayer. The Secretary of State is also permitted to revoke any passport previously issued to a seriously delinquent taxpayer. The new law also authorizes the Secretary of State to deny a passport if the passport applicant fails to provide a Social Security Number (SSN) or provides an incorrect or invalid SSN (but only if the wrong SSN was provided “willfully, intentionally, recklessly or negligently”). Exceptions are permitted for emergency or humanitarian circumstances, such as if there’s a need for the applicant to return to the United States.

    So, what the heck is a “seriously delinquent debt” you ask? For purposes of the new law, a “seriously delinquent tax debt” is defined as “an unpaid, legally enforceable federal tax liability” when a debt greater than $50,000, including interest and penalties, has been assessed and a notice of lien or a notice of levy has been filed. The $50,000 threshold will be adjusted each year for inflation and cost of living – but overall, it’s a pretty low threshold. The limit is not a per year limit but a cumulative total: if you’ve ever owed money to the IRS, you know that with penalties and interest, the amount you owe can add up pretty quickly. The result? This has the potential to affect a lot of taxpayers. Fortunately though, exceptions will apply if the tax debt is subject to an Offer-in-Compromise (OIC) or an installment agreement or if collection action has been suspended because the taxpayer has requested a Collection Due Process (CDP) hearing or has made an application for innocent spouse relief. However, just how effective IRS will be in ensuring that taxpayers on the list aren’t subject to any of those exceptions remains to be seen.

    Since the Department of State doesn’t have access to an individual’s tax records, how exactly will the Secretary know which taxpayers are subject to the new law? As with child support delinquencies, the names of the affected taxpayers have to be turned over. In this case, because of the way that privacy laws work, the Commissioner of Internal Revenue must certify to the Secretary of the Treasury a list of names that meet the criteria. The Secretary of the Treasury is then authorized to transmit that information to the Secretary of State. Any names on that list are ineligible for a passport. If your name is on the list, you will also be separately notified.

    What if there’s a mistake? There is a provision for “reversal of certification” under the new law. The IRS is required to notify the Secretary of the Treasury who will then notify Secretary of State if the original certification was made in error or if the tax debt is fully satisfied or ceases to be “a seriously delinquent tax debt.” And because the potential for a lengthy reversal process exists, the law also provides a limited right to seek injunctive relief by a taxpayer who is wrongly certified.

    Since disclosure and process are so important here, the new law insists that the IRS follow its normal examination and collection procedures and allow taxpayers the chance to exercise their full administrative rights. To alert taxpayers, there’s also a provision that additional notice of the potential loss of a passport is included in collections communications. So in theory, this is a good idea – but if you’ve ever received a letter from the IRS, you know that it’s very much full of notices. Most taxpayers can’t decipher all of the information and generally tend to ignore them. Hopefully, the additional notice requirements will be sufficient.

    This isn’t the first time Congress has considered such a proposal. Two years ago, the House introduced a similar bill; it never got anywhere. But tucked away in the 1,301 page highway bill, it sailed through with virtually no amendments. The new law is effective immediately.

    You can read the text of the law here (it downloads as a pdf). You’ll find the passport provision at Section 32101: Revocation Or Denial Of Passport In Case Of Certain Unpaid Taxes (it’s on page 1113).

    If this new law will affect you, SOLID TAX SOLUTIONS can help. Just give us a call at
    (845) 344 – 1040.


    Bruce – Your Host at The Tax Nook

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    Categories: Tax Debt

    Back Taxes and Fixing Highways……Oh, What a Mix!

    Well, well, well. Talk about strange bedfellows.

    Recently, (December 4, 2015), President Obama signed into law the Fixing America’s Surface Transportation Act, or the “FAST Act”. It provides long-term funding for transportation projects, including new highways, over a period of ten years. And as you would expect in a bill targeting highways and infrastructure, it also requires the Internal Revenue Service (IRS) to use private debt collection companies.

    Oh wait minute! You didn’t expect that? Well of course you didn’t. Because tax policy, in my opinion, has no business being jammed into an already extremely large bill of
    1,301 pages mainly focused on highways
    (here are all 1,301 pages of the FAST Act in case you are looking for a nice weekend read).
    But that isn’t anything new for Congress. Is it?

    But lo and behold there it is, at Section 32102 of the FAST Act: REFORM OF RULES
    (I’ll save you a little
    trouble; Section 32102 is on page 1,124 of 1,301. See the link in the prior paragraph).

    So why “reform” you might ask? Under current law, the IRS already has the authority to use private debt collection companies to locate and contact taxpayers owing outstanding tax liabilities and to arrange payment of those taxes.
    But historically, farming out collection hasn’t worked out to well for the IRS.

    Under the new law, there’s little in the way of discretion: the IRS is required to use private debt collection companies to collect “inactive tax receivables.” Inactive tax receivables are defined as any tax debt that has been:

    • removed from the active inventory for lack of resources or inability to locate the taxpayer;
    • for which more than 1/3 of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or
    • for which, a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third-party for purposes of furthering the collection.

    For purposes of the law, a tax receivable is any outstanding assessment which the IRS includes in potentially collectible inventory.

    Debts which are not eligible for collections from private debt collection companies include those that are subject to a pending or active Offer-In-Compromise (OIC) or installment agreement as well as innocent spouse cases. Also excluded are cases currently under examination, litigation, criminal investigation, or levy and those subject to appeal as well as any taxpayer who has been identified as deceased, a minor under the age of 18, in a designated combat zone, or a victim of identity theft. The bill also allows for procedural discretion for matters involving taxpayers in presidentially declared disaster areas.

    The language regarding disclosure is, of course, sufficiently vague. Private debt collection companies “may” – not must – identify themselves to taxpayers as IRS contractors, as well as the subject and reason for the contact. Disclosures are “permitted only in situations and under conditions approved by the Secretary.”

    Categories: Tax Debt

    Which Clothing Items are Exempt from Sales Tax in New York State?

    I just finished writing an article today (December 2, 2015) on our Facebook page
    ( – or just click on the Facebook icon located in the right sidebar of this page) about certain qualifying items of clothing that are exempt from New York State sales tax and, for certain counties, exempt from local sales tax.

    So basically, clothing, footwear, and items used to make or repair exempt clothing sold for less than $110 per item or pair are exempt from the New York State 4% sales tax, the local tax in localities (New York City and 8 other counties) that provide the exemption, and the ⅜% Metropolitan Commuter Transportation District (MCTD) tax within exempt localities in the MCTD.

    The following two charts list examples of exempt and taxable clothing, footwear, and items used to make or repair exempt clothing (Happy Holiday Shopping!).


    Exempt Items
    Aerobic clothing
    Antique clothing (for wear)
    Arm warmers
    Athletic supporters
    Athletic or sport uniforms or
    clothing (but not equipment such as mitts,
    helmets and pads)
    Bathing caps
    Bathing suits
    Beach caps and coats
    Belt buckles
    Bibs (baby)
    Boots (climbing, fishing, riding, ski,
    Bridal gowns and veils (unless rented)
    Coats and wraps
    Corset laces
    Diapers (adult – including disposable)
    Diapers (children – including disposable)
    Dress shields
    Ear muffs
    Eyeglasses (prescription – including
    goggles, safety and sun glasses)
    Formal clothing (unless rented)
    Fur clothing
    Garters/garter belts
    Gloves (batting, bicycle, dress [unless
    rented], garden, golf, ski, tennis, work)
    Graduation caps and gowns (unless
    Gym suits
    Hand muffs
    Hosiery (pantyhose, peds, etc.)
    Jogging suits
    Lab coats
    Leg warmers
    Pants (slacks, jeans, etc.)
    Prom dress (unless rented)
    Rain wear
    Receiving blankets
    Religious clothing
    Rented uniforms (unless formal wear/
    Riding pants
    Scout uniforms
    Shawls and wraps
    Shoes (ballet, bicycle, bowling,
    cleated, football, golf, jazz/dance, soccer,
    track, etc.)
    Shoe inserts
    Shoe laces
    Shoulder pads for dresses,
    jackets, etc. (but not athletic or sport
    protective pads)
    Shower caps
    Ski masks
    Sports clothing and uniforms (but not
    equipment such as mitts, helmets, and
    Support hosiery
    Sweat bands
    Sweat suits
    Tuxedos (unless rented)
    Uniforms (occupational, military, scouting,
    Wet and dry suits
    Yard goods and notions1
    Taxable Items
    Antique clothing (collectible, not for wear)
    Bobby pins
    Crib blankets
    Elastic ponytail holders
    Goggles (nonprescription)
    Hair bows
    Hair clips
    Handbags and purses
    Headbands (sweatbands are exempt)
    Helmets (sport, motorcycle, bicycle, etc.)
    Ice skates
    In-line skates
    Key cases
    Mitts (baseball fielder’s glove, hockey, etc.)
    Party costumes
    Personal flotation devices
    Protective masks (athletic, sport, or
    Roller skates
    Safety glasses (nonprescription)
    Sewing accessories (not an integral part of
    clothing such as chalk, instruction books,
    knitting needles, measuring tapes, needles,
    patterns, scissors, pins, thimbles)
    Shin guards and padding
    Shoulder pads (football, hockey, etc.)
    Sunglasses (nonprescription)
    Watch bands
    Yard goods and notions1


    1 Note: Yard goods and notions (fabric, thread, yarn, buttons, snaps, hooks, zippers and like items) which are used or consumed to make or repair exempt clothing which become a
    physical component part of the clothing are generally exempt.


    Bruce – Your Host at The Tax Nook

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    Categories: Sales Tax

    To Gift or Not To Gift (or The Basics of the Gift Tax)!


    Lately I have received a number of questions concerning gift taxes and, based on these questions, there are a lot of misconceptions. In this post I will deal with the basics about giving gifts to relatives, friends, etc. But keep in mind, things can get much more complicated and, if you’re making a large gift or trying a unique approach, you should get professional advice.

    An envelope with five $100 bills and five $50 bills.

    The discussion below involves only the current rules. Over the years there have been a number of changes in the gift and estate tax rules that makes some of the discussion inapplicable to older gifts. You should also be aware that there is a considerable impetus to eliminate the estate tax. So you should remain flexible in any planning.

    The Basics:

    Basic Concept

    For federal purposes the gift and estate taxes are unified. In other words, you can’t save on estate taxes by giving your fortune away before you die. Once you’re above the exemption amount (discussed below) $1 of gifts reduce your estate tax exemption by $1. The exemption amount is currently $5,430,000 ($5,450,000 in 2016; adjusted for inflation) per individual. An individual can use their spouse’s unused exemption amount, effectively doubling that for a couple. In the discussions below I’ll use the $5,430,000 (in 2015) exemption. So let’s say Fred, in our example, is a single guy but has a favorite nephew. Fred’s net worth, in 2015, is $6,500,000. He gives $5,430,000 to his nephew free of the gift tax (Wow, this nephew must have done something right). But two years later Fred dies with a $1,070,000 estate. He’s used up his $5,430,000 exemption so the estate pays tax on the $1,070,000. The top estate tax rate is currently (in 2015) 40%.

    Well, clearly it’s more complicated. Even calculating the tax can be complicated for a number of reasons. There are a number of differences between making gifts and leaving assets in your will. I’ll deal with the most frequently encountered below. Keep in mind that a number of states have gift and estate taxes. Some of them are structured the same way, some are not. In some cases the exemption is lower than the federal and the rates are high enough that the tax consequences cannot be ignored.

    Income Taxes

    You can’t claim a deduction on your income tax return for gifts to your children, relatives, etc. On the other hand, the recipient is not generally liable for income taxes on the amounts  received.

    Annual  Gift Exclusion

    The most frequent question that I hear goes something like this “I know I can give away $10,000 (or $12,000) a year without paying a gift tax”. The law has contained an annual exemption amount for many years. The way it works is simple. Let’s say you give $9,000 to your favorite niece, in 2015. The $9,000 gift does not affect your $5,430,000 estate tax exemption for 2015.

    The second point here is that the annual gift exclusion was $10,000 some time ago, but the amount has changed and it’s indexed annually for inflation (though rounded to $1,000 so it can remain static for several years). For 2015 the annual gift exclusion is $14,000 and will remain the same for 2016.

    Exclusion Mechanics

    The $14,000 gift exemption is an annual one and applies to each donee (i.e., the receiver of the gift). Thus, Sue can give $14,000 tax-free to each of her 10 children (each year), or $140,000, without impacting her estate exemption. Over a 10-year period she could give away $1.4 million. Her husband, Fred, could do likewise, giving an additional $14,000 annually to each child.

    What if Sue controls all the money? She takes care of all the family finances and all the bank accounts are solely in her name. Sue and Fred could elect to “split” any gifts.
    Thus, Sue writes a check for $28,000, but Sue and Fred are each deemed to give $14,000 if the election is made. The election is made on a gift tax return (Form 709).
    Thus, even if you don’t go over the $14,000 threshold, if you elect to split a gift, you’ll need to file a gift tax return. If it’s just as easy for Fred to ask Sue to deposit $14,000 in his personal checking account, both could write $14,000 checks and avoid filing a return.

    The exclusion applies to each donee and expires at the end of each year. Once the year is over, you’ve lost a chance to reduce your estate tax by $14,000. That’s why year-end gifts can be important.


    Usually we think of making gifts to our children, or close relatives. But the gift tax isn’t limited to that. Your college friend from 20 years ago has a talented child that could go on to become a professional musician but needs funds to live on. A gift here is the same as one to your children, at least from a gift tax standpoint.

    The exclusion applies to an unlimited number of donees. But there’s a prohibition against reciprocal gifts. For example, Ken and Keith are brothers and each have two children.
    Ken can give $14,000 to each of his two children and $14,000 to each of Keith’s two children. But if Keith reciprocates, the exclusion can be denied. On the other hand, Sue and Sharon are sisters and both doctors. Sue is a neurosurgeon who makes over $800,000 a year. Sharon is a tropical medicine specialist who does volunteer work.
    Sue gives $14,000 annually to Sharon’s daughter, but Sharon does not reciprocate. The exclusion applies.

    No gift taxes apply to gifts to political organizations.

    Keep in mind that a gift is a transfer where no consideration is received. So for an example, let’s say that you have a business but the business is not fully staffed to handle the work load. Because your business was short-staffed your secretary worked long hours during the year so you gave her a check for $10,000 in late December.
    That would probably be considered a bonus and fully taxable. On the other hand, your secretary and wife have been friends for years. Your wife became ill and your secretary,
    without being asked, took her to the doctors, stayed with her after an operation, etc. and you gave her $10,000.
    That could be considered a gift. The facts are important here. Get professional advice.

    Spousal Gifts

    Gifts, of cash or property, to your spouse are not considered gifts for gift tax purposes. Put another way, there’s an unlimited exclusion. For example, you inherit a small office building worth $750,000 from your parents. The attorney titles it in your name. The following year you get married and re-title the property in both your names.
    There are no gift tax consequences. However, if your spouse is not a U.S. citizen and the total gifts exceed $147,000 (in 2015), you need to file a gift tax return.

    There are some gifts (certain terminable interests) to a spouse that require the filing of a return.

    Same-sex couples who are legally married also qualify for the unlimited exclusion.

    Medical, Tuition Exclusion

    Amounts you pay for qualified medical or tuition expenses are excluded from gift taxes, no matter what the amount. There are two requirements.

    First, the expense must be qualified. For medical expenses, they must meet the requirements for a deduction. Thus, amounts paid for cosmetic surgery generally don’t qualify.
    In the case of education expenses, the payment must be made to a qualifying domestic or foreign educational organization for tuition. College tuition qualifies, horseback riding lessons do not.

    The second requirement is that the amount must be paid directly to the provider–doctor, hospital, etc. for medical expenses; college, school, etc. for education. You can’t write a check to your daughter so she can pay for her tuition.

    While contributions to 529 plans are subject to the $14,000 annual exclusion, you can make a lump-sum payment and treat it as made ratable over a 5-year period. For example, you can
    write a check to the plan for $70,000 and treat it as made $14,000 annually for 5 years.

    Return Requirements

    If you don’t make any gifts that exceed $14,000, you generally don’t have to file a return. A gift can be cash, marketable securities or property. For marketable securities you’ll have to list how you calculated the value. For other property you’ll need a qualified appraisal. Giving your son that classic Camaro? You’ll need more than a handwritten note from the guy down the street who rebuilds old cars in his spare time. Depending on the property an appraisal might be costly. And the appraisal must be attached to the return. For that, and several other reasons, you might want to just give cash. But there can be advantages to property. See below.

    Failure to file a return or to disclose all required information will keep the statute of limitations open. If a valuation question is involved, convincing the IRS of the value you claimed could be difficult years down the road. In addition, there are penalties for willful failure to file and substantial understatement (e.g., undervaluing the property subject to an appraisal).

    Loan vs. Gift–Documentation

    Is it a loan or a gift? There can be very different tax implications. A loan has to be repaid, a gift doesn’t. If you intend a loan make sure you document it by drafting a formal promissory note. It doesn’t have to be very complex, but it should state the names of the parties, the amount, an interest rate equal to at least the Applicable Federal Rate (AFR), and a fixed maturity date. Repayment should not be dependent on some factor such as the profits of a business. It helps to have a repayment schedule and collateral. And you should adhere to the terms of the note.

    If either the donor or donee has a business, documentation of the loan or gift and repayments is important. Canceled checks on both sides of the transaction should be retained. Why?

    If audited, the IRS could claim the receipt of funds by one party was additional income. For example, Fred gifts his son $10,000 to help out his business.
    On audit the IRS could claim the $10,000 was additional income unless the son can prove otherwise. The same could be true of a loan, but there could be a challenge going
    both ways.

    Gifts to Minors

    A gift to a minor is considered a present interest and qualifies for the $14,000 exclusion if all of the following conditions are met:

    • Both the property and its income may be expended by, or for the benefit of, the minor before the minor reaches age 21;
    • All remaining property and its income must pass to the minor on the minor’s 21st birthday; and
    • If the minor dies before the age of 21, the property and its income will be payable either to the minor’s estate or to whomever the minor may appoint under a general power of appointment.

    Basis in Property Received

    There’s a big difference in the recipient’s basis in the property if the transfer is a gift versus an inheritance. A donee’s basis in the property is the same as the donor’s basis for gain, but the lesser of the donor’s basis or the fair market value of the property at the time of the gift for loss. If an individual inherits property, the basis is the fair market value at the date of death of the transferor for gain or loss.

    Example 1–Fred bought Middletown Tech Inc. stock at $1 a share in 1994. His total investment was $10,000. The stock is now worth $2 million.
    Fred has substantial assets and gives his entire holdings to his daughter, Sue, who sells the stock the next day for $2 million. She has to report a long-term capital gain of $1,990,000.

    Example 2–The facts are the same as in Example 1, but Fred wills the stock to his  daughter.
    On his death the stock is valued at $2 million. She sells it the next day for $2 million and reports no gain.

    The differences in basis will make a big difference in what assets should be gifted or left in your estate and the timing of any transfer. For example, Fred inherited a lake house from his parents that has been in the family for years. The house is not only valuable monetarily ($500,000), it has sentimental value. Fred’s basis is $150,000. Fred’s been single for years and will have a taxable estate. Fred’s two children, Sue and Sharon, both enjoy the property as do their children. Sue and Sharon have always been on good terms and want to keep the property. Because of the lake’s location and a low turnover of properties, prices have been climbing at more than 12% per year. Fred’s in good health. It’s reasonable to assume that the property could double in value before he passes. Gifting the property now would keep at least $500,000 (the additional increase in value) out of his estate. Moreover, the stepped-up basis on an inherited property doesn’t mean much here because the beneficiaries have no intent to sell the property.

    If you own a business or have income-producing assets such as rental properties, etc.,
    talk to your tax adviser concerning your options.

    Other Considerations

    The more complicated your assets, the more planning opportunities and the more complex those opportunities become. While there are steps you can take if your family assets consist only of a personal residence, vacation home, and $10 million in marketable securities, your options increase if your assets consist of one or more active businesses, rental properties, farm or timber land, etc. Planning here involves tradeoffs and analysis of both the estate tax and income tax implications of any action.

    Other planning options include a family limited partnership, other methods of gifting property at a discount because of minority interests or other restrictions, basis in business ownership
    (S corporation, partnerships, LLCs, etc.), passive activity losses associated with business ownership, special trusts including charitable trusts, and the generation-skipping transfer tax.

    If you are considering giving a gift, call Solid Tax Solutions ( at (845) 344-1040 (we are open year-round) to help guide you in exploring all of your options safely and efficiently.


    Bruce – Your Host at The Tax Nook

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

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    Categories: Gift Tax Tags: ,

    Happy Thanksgiving!

    On behalf of Solid Tax Solutions, I would like to wish our clients and friends a very Happy Thanksgiving.

    Enjoy your Thanksgiving, watch some football, eat too much turkey, and enjoy time with your family.  It will definitely be a time to relax and enjoy life for a couple of days (unless you are thinking of getting to the stores early for some of the Black Friday sales!)

    But remember, there are only 35 more days remaining in 2015 before the new year starts.  So after the long Thanksgiving weekend is over, it will be time to start thinking about those last-minute tax deductions and tax strategies to reduce your 2015 taxes.

    If you have any questions or need some advice on tax planning, please just give us a call.

    But for now, here is a Thanksgiving song for you to share with your family and friends and to even get everyone to sing along ♭ ♪ ♫ ♬♬ ♩ ♯.


    Bruce – Your Host at The Tax Nook

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

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

    Twitter: (BTW, We Follow-Back).

    Categories: Uncategorized

    Ten Things That You Should Consider If You Owe Money to The IRS!

    The IRS Restructuring and Reform Bill of 1998 was a landmark law that put respect for the individual taxpayer back into the system. It forces the IRS to more fully communicate with the public and grant taxpayers “due process” rights. When the IRS comes around to collect, sooner or later you’re going to have to face the music. If you play games with the tax collector, the system is designed to make your life miserable. So here are ten things to remember when you owe the IRS:

    Top 10
    Ten Things to Know if You (or Someone You Know) Owes Money to the IRS.

    1. Don’t Ignore Any IRS Notices.

    More people get into more trouble than they’ve ever bargained for because they ignore those computer-generated IRS notices. Some IRS notices are sent by certified mail. If you think you can ignore these notices by not going to the post office to pick them up, you’re mistaken. Respond to the IRS every time.

    2. The IRS Must Explain Your Rights During an IRS Interview.

    The IRS has recently revised its publication entitled “The IRS Collection Process.” This  publication tells you that you have a right to be represented and that you have a right to be treated in a professional and courteous manner. If you do not like the way you are being treated, you can stop the interview and ask to speak with a supervisor.

    3. Before You Go To the IRS, Spend An Hour With a Tax Expert.

    This may be the best hour you’ve spent in a long time. The tax expert will tell you how to prepare for your collection interview, how to conduct yourself and make you aware of when the IRS revenue officer is attempting to take advantage of you. You must always remember that the IRS revenue officer’s job is to collect money for the Government (See #4).

    4. NEVER Meet the IRS Alone.

    IRS collection interviews are no picnic and you should have representation. Chances are you will wind up with much better results with representation accompanying you.

    5. The IRS Is Not Infallible.

    The IRS was recently “audited” by the General Accounting Office and it seems that the IRS’ own house needs some cleaning. Often, the IRS cannot keep track of how much you owe, especially if you have been making regular payments. The IRS makes mistakes, don’t just take their word for things.

    6. You Have Due Process.

    The IRS can no longer simply take your bank account, your automobile, your business or  garnish your wages without giving you written notice and an opportunity to challenge what the IRS claims. When you challenge the IRS, all collection activity must come to a screeching halt. You can even take the IRS to court and they cannot collect from you until the judge issues a decision. You can literally tie the IRS’ hands for years. The IRS is not going to tell you what to do or how to protect yourself.

    7. You May Be An Innocent Spouse.

    Are you widowed, divorced or separated? Do you have tax problems that arose out of the actions of your former spouse? If you answered yes to any of these questions, you may be entitled to innocent spouse relief. This relief could result in the entire tax bill being written off against you. Yes, individual states also grant innocent spouse relief.

    8. You Don’t Go To Jail If You Can’t Pay.

    In this country, no one goes to jail for owing taxes. You can go to jail for cheating on your taxes and you can go to jail for trying to trick the tax collector, but you can’t go to jail simply because you owe the IRS and can’t pay.

    9. You Have Options When You Owe The IRS.

    People who owe taxes, whether to the IRS or their home state, generally have several options available to them. First, if you owe and can pay in full, you should pay the taxes despite the pain. However, if you cannot pay in full, four avenues may be open to you:

    • Hardship Suspension. Here the IRS leaves you alone temporarily. Your account will be reviewed periodically for your ability to pay. Even though the IRS will not bother you, interest continues to accrue on your account and is compounded daily.
    • Installment Payment Arrangement. Here the IRS allows you to make monthly installment payments. Ideally, the IRS wants the bill paid in full within three years.
      You complete a financial statement and essentially pursue a conventional bank loan. Interest continues to accrue and is compounded daily on the remaining balance.
    • Bankruptcy. It’s not for everyone. However, some taxes, usually income taxes, state and federal, may be dischargeable in a Chapter 7 bankruptcy proceeding.
      Other bankruptcy chapters allow you to pay your tax bill in monthly installments with either little or no interest at all. Bankruptcy rules are complicated. See a qualified bankruptcy attorney who understands both bankruptcy law and tax law.
    • Offer in Compromise. This is the IRS version of “let’s make a deal”. Under certain circumstances, the IRS will accept the payment of a smaller sum as payment in full for a larger tax debt. Individual states have similar procedures. If your offer is accepted, tax liens are removed and you are given a fresh start.
      You Should Consult With a Tax Professional Who Specializes in These Offers.

    10. Respect the Power Of the Tax Collector.

    IRS tax collectors have more power than just about anyone in the federal government. They operate under very few rules. They can make your life pleasant or miserable.
    Most success in dealing with tax collectors comes from your communicating with them in a prompt manner. Here is a ‘taste’ of what they can do:

    • File a tax lien against you;
    • Levy your bank account;
    • Garnish your wages;
    • Close down your business;
    • Seize and sell your home;
    • Damage employment and business relationships;
    • Assess you personally for corporate employment taxes;
    • Put you in a monthly installment payment arrangement that is too high;
    • Contact your banker, neighbors, friends and business relationships concerning your tax liabilities;
    • Go after third-party transferees of your assets.

    So, if you owe money to the IRS (or the state) or if you have received a notice from the IRS (or the state), give Solid Tax Solutions a call: (845) 344-1040. We will help you navigate this stressful and confusing process.

    You can also find out more about us at our web site:


    Bruce – Your Host at The Tax Nook

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

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

    Twitter: (BTW, We Follow-Back).

    Categories: Tax Debt