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Income Tax Breaks for your Home October 28, 2020

Posted by bradstreetblogger in : Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

It is a good time to chat about some tax breaks associated with a personal residence since the real estate market remains hot for a variety of reasons.  According to companies like SoFi, some people are motivated by the historic low mortgage rates either to buy a home or to refi an existing mortgage.  Others, having spent a lot of time working from home because of the pandemic, wish to enlarge and/or remodel their home.  Some people are also buying a second home.  Interestingly, mortgage interest paid for boats and motor homes may be deductible provided they have a toilet, and cooking and sleeping arrangements.  Of course, this interest must still meet the other deduction requirements.  As a side note, mortgage interest may not be deducted on more than two homes.

Mortgage interest is deducted as an itemized deduction.  Itemized deductions also include medical expenses, state and local taxes and charitable contributions – each subject to their own limitations.  It does not make sense to use your itemized deductions if your standard deduction is larger.  If you are unable to itemize or go “long form”, your mortgage interest may not be of any value on your tax return.  As for most tax deductions, limitations do exist on the size of the home loan and the use of the loan proceeds as to what may be deducted for the mortgage interest.

Business owners may deduct expenses associated with the regular and exclusive business use of their home.  Such expenses are deducted typically more favorably as a business deduction than as an itemized deduction.  These expenses may include improvements made to your home.

The deduction for working from home as an employee was unfortunately eliminated in 2017.  But you may have a win-win situation if your company reimburses you for your home expenses.  The reimbursement is not taxable income to you but is deductible to the company. 

Various ideas written above were taken from the August 8, 2020 WSJ article written by Laura Saunders titled “Home Is Where The Tax Breaks Are.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Understanding AGI and How to Calculate it October 21, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes , add a comment

What’s adjusted gross income? Here’s what to know about this important income tax calculation.

WHEN IT COMES TO filing income taxes, it’s essential to understand your adjusted gross income, or AGI, and its relationship to certain tax benefits.
“The reason it matters is because a lot of deductions, tax credits, whether or not you can contribute to certain retirement accounts depends on your AGI,” says Michele Cagan, certified public accountant and author of “Debt 101.” “A lot hangs on it.”

In fact, recently, Americans’ eligibility for COVID-19 stimulus checks was tied to adjusted gross income reported in 2018 or 2019. The final amount taxpayers receive will depend on their 2020 AGI.

Ready to understand this essential tax concept? Here’s what to know about AGI, how it’s calculated and strategies to reduce your adjusted gross income.

What Is Adjusted Gross Income, or AGI?

AGI is a calculation of income for tax purposes that measures taxable earnings while subtracting certain tax deductions. For 2020 income taxes, it’s marked on line 11 of your Form 1040, according to IRS draft forms.

“Basically it’s all of your income minus certain adjustments that are found on Schedule 1,” says Eva Rosenberg, a Los Angeles-based enrolled agent and founder of TaxMama.com.

Why Is AGI Important?

Your adjusted gross income is an important tax calculation because eligibility for many tax deductions, tax credits and other tax breaks are tied to it, Cagan says. “It can lock you out of tax benefits if your AGI is too high,” she says.

For example, your AGI impacts limitations on these itemized deductions:

It will also determine your eligibility for and amount received in certain tax credits, including the earned income credit and retirement savings contribution credit.

Recently, the stimulus checks designed to combat the coronavirus’ economic repercussions was tied to AGI. The full $1,200 per taxpayer is available to single filers earning less than $75,000 in adjusted gross income and married filers earning less than $150,000 in 2020. Reduced amounts are available to taxpayers earning an adjusted gross income of less than $99,000 if single or $198,000 if married filing jointly.

How Do I Calculate AGI?

AGI is calculated this way:

All income
– exclusions from income
= gross income
– deductions for AGI
= adjusted gross income

On a practical note, most tax software programs will take you through the steps to calculate adjusted gross income within their interfaces. A tax professional can also help you calculate this number.

Here are the elements of the calculation in more detail.

All income. To determine this, collect income statements from all sources, including businesses, unemployment compensation, insurance, wages, investments, gifts and other sources.

Exclusions from income. Certain types of income are excluded from gross income for the purposes of calculating adjusted gross income. Depending on the circumstances, those could include these sources of income:

If you’re not sure whether an income source is excluded, consult with a tax professional.

Deductions for AGI. To calculate adjusted gross income, you’ll be able to subtract certain above-the-line deductions from gross income. Those deductions include:

Additionally, taxpayers who don’t itemize may deduct $300 in cash donations to charity. This is due to the coronavirus stimulus bill and new for 2020 taxes.

Keep in mind that some of these deductions are capped at a certain level. Subtracting them will yield your AGI. It’s simple math, although identifying the appropriate income sources and deductions may be less simple.

How Do I Reduce AGI?

A key tax-planning strategy is to reduce adjusted gross income to make the taxpayer eligible for more generous tax benefits. Most of those strategies are best enacted before Dec. 31, Rosenberg says. “If you’re looking at AGI, and it’s starting to make you ineligible for some things, it’s important to do the planning before the end of the year,” she says.

For example, you may want to generate investment losses by selling off stocks or securities at a loss to reduce your AGI, she says. Or you could consider making a contribution to your IRA or self-employed retirement plan. Contribute to your health savings account if you’re eligible or consider taking the deduction for tuition and fees interest.

“Every little bit makes a difference when you’re trying to reduce AGI,” Cagan says.

What’s the Difference Between AGI and Modified Adjusted Gross Income, or MAGI?

Don’t confuse AGI with modified AGI. To calculate your eligibility for certain tax benefits, such as the deduction associated with contributions to an IRA, modified adjusted gross income may be used.

Rosenberg says that different credits and deductions require different calculations for modified AGI. “Sometimes modified adjusted gross income might not include certain deductions,” she says. “Sometimes it may include nontaxable income, so there are different elements.”

Take note of whether a tax benefit you’re eyeing is tied to AGI or MAGI. If it’s tied to MAGI, you may have to do some extra math to determine your eligibility. It is entirely possible, however, that depending your financial situation, your AGI and MAGI will be the same since some of these deductions and forms of income are uncommon.

Credit given to US News & World Report published on Sept 17, 2020 by Susannah Snider

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

5 New Rules for Charitable Giving October 14, 2020

Posted by bradstreetblogger in : Charitable Giving, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Taxes , add a comment

New tax laws and strategies can help you maximize tax breaks for yourself and benefits for the charity.

THERE ARE SO MANY reasons to make charitable gifts this year – whether it’s to support nonprofits that help people and communities with challenges from the coronavirus pandemic, or to provide assistance after disasters such as the Beirut explosion or an active hurricane season.

Even though a lot of people are struggling financially right now, many people whose finances have stabilized want to do whatever they can to help out. And they’re not waiting until the end of the year to make their gifts. “A lot of things are driving people to be generous, and our numbers prove it,” says Kim Laughton, president of Schwab Charitable, which runs Schwab’s donor-advised funds. From January through June 2020, its donors recommended over $1.7 billion in 330,000 grants, almost a 50% increase in the dollars granted and the number of grants compared to the same period in 2019. “There’s great need out there, and people are stepping up.”

“Philanthropy and giving is on everyone’s mind,” says Dien Yuen, who holds the Blunt-Nickel Professorship in Philanthropy at the American College of Financial Services. Some nonprofits need help now just to stay afloat. “The donors who are quite active are making gifts now and not waiting until later in the year, because the nonprofit might not be there later on.”

New tax laws and strategies can help you maximize tax breaks for yourself and the benefits for the charity. Here’s what you need to know:

New $300 Charitable Deduction for Non-Itemizers

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created several incentives for people to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don’t itemize. Otherwise, you generally need to itemize to take the charitable deduction, which fewer people do since the standard deduction doubled a few years ago – now at $12,400 for single filers and $24,800 for married couples filing jointly in 2020.

“As a result of the Tax Cuts and Jobs Act of 2017, most taxpayers utilize the significantly higher standard deduction instead of itemizing deductions for mortgage interest, state taxes paid and charitable contributions,” says Mark Alaimo, a certified public accountant and certified financial planner in Lawrence, Massachusetts. “This special CARES Act provision now gives a tax incentive to all taxpayers to give at least $300 to charity during 2020.” To qualify, the gift must be made in cash and go directly to the charity, rather than to a donor-advised fund or private foundation.

“I think that the additional $300 provision in the CARES Act is really great, especially for the younger generation who may be just starting to work and may not be paying substantial mortgage interest,” says Kelsey Clair, tax strategist for Baird’s Private Wealth Management Group. “It allows them to give even in a small way and reap the tax benefit for it.”

The CARES Act also helps people who are in a financial position to make very large gifts. In 2020, you can deduct cash gifts of up to 100% of your adjusted gross income, rather than the usual 60% limit. To qualify for this higher limit, the gifts must go directly to the charities, rather than to a donor-advised fund or private foundation. This can help wealthy people reduce their taxable income significantly in 2020, and it may also help retirees who have money to give but bump up against the income limits for the deduction. “I see it in the older generation who have a lot of cash but don’t have a lot of income coming in and are trying to help out the community in any way they can,” says Clair.

Bunching Contributions and Donor-Advised Funds

Bunching contributions is a strategy that became popular after the standard deduction was increased. Instead of making smaller charitable contributions spread over several years, you can make larger contributions in one year so you can itemize your deductions (and claim the charitable deduction) that year, then take the standard deduction in the other years. “Rather than making a steady stream of charitable contributions from year to year, it may be beneficial instead to use a bunching strategy – give more and itemize in one year, and claim the standard deduction in other years,” says Clair.

Even though this can help you tax-wise, you might not want to give all of the money to the charities at one time and then neglect them over the next few years. But bunching can work well if you have a donor-advised fund. These funds are offered by brokerage firms, banks and community foundations, and you can take the charitable deduction in the year you give the money to the donor-advised fund, but then you have an unlimited amount of time to decide which charities to support. You can usually open a donor-advised fund with an initial contribution of $5,000 to $10,000 (it’s $5,000 at Schwab and Fidelity, $10,000 at T. Rowe Price, and $25,000 at Vanguard). You can make grants to charities of $50 or $100 up to thousands of dollars or more, and you can invest the money in a handful of mutual funds or investing pools until you make the grants. “It can be a great way to go ahead and make the contribution, without having to decide where that money goes right away,” says Clair.

Another benefit of the donor-advised fund is simplicity – you get one receipt for your tax records when you make the contribution and don’t have to wait for a variety of paperwork from each of the charities. “Donor-advised funds really help with the administrative side of things,” says Elliot Dole, a certified financial planner with Buckingham Strategic Wealth in St. Louis. “Itemizing charitable gifts is a hot button audit area. But with a donor-advised fund, it’s clear that you met the requirements.”

A Double Tax Break From Giving Appreciated Stock

Many people just write a check to the charity, but you may get a bigger tax benefit if you give appreciated stock. If you owned the stock for more than a year, you can deduct the value of the stock on the date you give it to the charity if you itemize. And even if you don’t itemize, you can avoid having to pay long-term capital gains taxes on your profits, which could have cost up to 20% if you sold the stock first. (Giving appreciated stock doesn’t qualify for the special $300 charitable deduction for non-itemizers for 2020; that only applies to cash.)

Most charities can accept appreciated stock, but the process can be easier if you have a donor-advised fund. “Given how volatile the stock market can be, many advisors recommend utilizing donor-advised funds due to the ease and speed that one can make a contribution,” says Alaimo. “This makes it easier to opportunistically gift highly appreciated securities, while regulating which charity receives how much of the donation, and when they receive it.”

It’s even easier if your brokerage account and donor-advised fund are with the same company. “When you log into your Schwab accounts, it shows your investment accounts, your bank accounts and your charitable account,” says Laughton. You can sort your investments by most highly appreciated or highly concentrated and see if you’re overweighted in one area. “We encourage people to rebalance their portfolios regularly, and when they see they’re overconcentrated, instead of selling those shares, they can just move them over to their charitable account,” says Laughton.

With so much stock market volatility this year, you may want to donate the stock when it reaches a target price, rather than giving at a certain time of year.

The donor-advised fund can also accept a variety of contributions – whether you write a check or you give appreciated stock, privately held stock, real estate, limited partnerships or even a horse farm. “It always makes sense for people who have highly appreciated non-cash assets to at least explore whether they could make good charitable gifts,” says Laughton. “Donor-advised funds can make that simple and easy.”

If you have investments that have lost value, however, it’s better to sell them first – and take a Charitable loss – and then give the cash to charity. “I’ve seen multiple times where people made mistakes of donating stocks that were in a loss,” says Clair. “It’s better to sell that and claim the loss on your return and donate the cash.” When you sell the losing stock, you can use the loss to offset your capital gains and can use up to $3,000 in losses to reduce your ordinary income, which you couldn’t do if you gave the stock directly to the charity.

Make a Tax-Free Transfer From Your IRA

People who are age 70½ and older can give up to $100,000 per year tax-free from their IRA to charity, a procedure called a qualified charitable distribution or QCD. The gift counts as their required minimum distribution but isn’t included in their adjusted gross income. (Even though the SECURE Act, another recent tax law, increased the age to start taking RMDs from 70½ to 72, you can still make a qualified charitable distribution any time after you turn age 70½.)

This is usually a great strategy for people who have to take RMDs and would like to give money to charity – they can help the charity and not have to pay taxes on the money they have to withdraw from their IRA. But because of the CARES Act, people are not required to take RMDs in 2020. However, you may still be able to benefit from making a QCD this year. “Some people who have been doing the QCD have been supporting a couple of charities every year, and they’re not going to stop, especially during this time of need,” says Yuen. The tax-free transfer takes money out of your IRA, which can help reduce future RMDs. “It’s great planning,” she says.

To keep the money out of your AGI, it must be transferred directly from your IRA to the charity – you can’t withdraw it first. Ask your IRA administrator about the procedure, and let the charity know the money is coming. You have to give this money directly to a charity; it can’t go to a donor-advised fund.

Make an Extra Effort to Research Charities This Year

Scam artists have been out in full force to take advantage of the coronavirus pandemic. It’s even more important now to check out charities before you give money, especially if they contact you first. You can look up charities at sites such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance. Local community foundations are also a great resource for aid focused on your community – see the Community Foundation Locator for links. If you have a donor-advised fund, you may have access to additional research tools, such as GuideStar.

Schwab Charitable can help its donors vet the charities and also provides lists of selected charities that focus on timely issues, such as COVID-19 relief and social justice. “We’re trying to develop short lists to help people narrow the charities down to ones we know are valid and doing good work,” says Laughton.

Credit given to US News & World Report published Aug 21, 2020 by Kimberly Lankford.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Who Will Pay Your Estate Taxes? October 7, 2020

Posted by bradstreetblogger in : Deductions, Depreciation options, General, Retirement, tax changes, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

To a large degree, paying federal estate taxes is voluntary since many estate planning tools are available to eliminate or at least reduce this tax.  Having said that, once your estate reaches over a certain size and you are not married (if you are married you may have an unlimited marital estate deduction for assets transferred to a spouse) – the available estate tax reducing tools may not be adequate to reduce the federal estate tax to zero. Regardless, your lifetime federal estate exclusion for 2020 is $11,580,000. If your taxable estate is less than the lifetime exclusion amount – no federal estate tax is normally due. For most people the current lifetime exclusion of $11,580,000 seems more than enough. But, as recent as 1997, the lifetime exclusion was only $600,000. Who knows how this might change with the possibility of a new incoming administration. The current top federal estate tax rate is 40%. At that rate, if you expect to have a taxable estate, spending some money now for estate planning may reap some huge benefits for your heirs. 

Too often people tend to focus only on their federal estate tax planning and overlook the possibility of a State death or inheritance tax. Currently, about 1/3 of the states have some sort of death or inheritance tax. The State of Ohio ended its death/inheritance tax for any deaths occurring after January 1, 2013.

Side note: Gifts are one of many effective tools for reducing one’s taxable estate.  In 2020, a gift of up to $15,000 may be made to an individual without having to report the gift or reduce your lifetime exclusion.

                                                                                                  -Mark Bradstreet

If you have a taxable estate, consider yourself fortunate. I often tell clients, “paying estate taxes is a good problem to have.” It is better than the alternative – dying with few or no assets. But sometimes little thought is given to who will pay these estate taxes.

An estate tax is a one-time tax that is due nine months from the date of a person’s death. It is not an income tax, although it is easily confused with yearly income taxes that estates, trusts and individuals have to pay. Republicans call it the “death tax.” Democrats and the Internal Revenue Code refer to it as the estate tax. Whatever you call it, it is the same thing – a tax on a person’s assets valued as of the date of death. 

Many estates are exempt from the estate tax. If the value of your assets (and prior taxable gifts) do not reach the filing threshold, an estate tax return may not be due. The federal amount you are allowed to leave in 2020 without paying an estate tax is $11,580, 000. That amount is scheduled to increase for inflation every year until 2026 when it drops to $5,000,000 adjusted for inflation. It also may drop sooner depending on what happens with the November elections. 

Keep in mind that depending on where you live, your state may also have a state estate tax. For example, the exemption amount in Massachusetts is only $1 million. 

If you have a will, it should specify how your estate taxes will be paid. In general, it is your executor’s responsibility to pay your estate taxes. Typically, the will directs your executor to use your probate assets to pay the estate taxes that are due. However, if some of your assets pass outside your will, i.e. by beneficiary designations or joint ownership, there may not be enough assets in your probate estate to pay your estate taxes. This scenario means that the beneficiaries of your will could end up paying a disproportionately greater share of the taxes due. 

To avoid this, you need to pay close attention to the beneficiaries named in your will and the beneficiaries of your non-probate assets such as life insurance policies, IRA’s and 401K’s. If the beneficiaries are not the same, you may stick some people with paying for the estate tax while others receive their assets free and clear of any tax.

Take the example of a woman who died leaving a large “payable on death” account and life insurance policy to her live-in boyfriend. These non-probate assets were paid directly to the boyfriend. They were still included in her taxable estate and taxed for estate tax purposes, but the boyfriend did not have to contribute to the estate taxes. He received the assets free of estate taxes. 

The estate taxes were paid out of the probate estate. The only probate asset was a heavily mortgaged house that was left to nieces and nephews. Because the will stipulated that all estate taxes must be paid from the probate assets, the nieces and nephews were on the hook for the entire estate tax which essentially ate up any monies they were to receive.  

Be sure to discuss payment of estate taxes with your attorney. You do not want to leave some of your beneficiaries to pay the bill while others walk away scot-free.

Credit Given to:  Christine Fletcher published on June 12, 2020 in Forbes.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s Author – Mark Bradstreet, CPA

–until next week.