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Tax Tip of the Week | No. 460 | The Biggest Estate Plan Mistake – It’s Not What You Think May 16, 2018

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Tax Tip of the Week | May 16, 2018 | No. 460 | The Biggest Estate Plan Mistake – It’s Not What You Think

Only about half of the adults aged 50 to 64 surveyed say they have a will that outlines how their monies and estate assets are to be divided following death. Only about two-thirds of those adults 65 and over say they have such paperwork. If you don’t have a valid will at death your assets will pass by what is known as “intestate succession” to your heirs according to state law. All fifty states have these statutes in place. So in summary, if you don’t have a will, the state will make one for you.

Ever hide some money and forget where you hid it? I have. It is such a pleasant surprise when I stumble across it. Presuming I ever do. Sure many people have wills drawn-up and some elaborate estate planning performed. However, if you are the only one who knows its whereabouts, is someone ever going to find it following your demise? Some people put these documents in a safe deposit box but never tell anyone where the key is. Or, your attorney has your will and estate planning in their vault. But, does anyone have a clue who your attorney is? If no one knows where your will is, then for all intents and purposes you do not have one; other than the one the state is going to do for you. I would be surprised if you like how the state distributes your assets.

Some financial persons advise putting together a two page or so letter along with a list as a hand-out for at least your immediate family and then review and discuss it with them. The letter will outline how the estate plan works and where your necessary documents are located. At the end of the day, your survivors will be more grateful than you know.

Credit given to Glen Ruffenach of the Wall Street Journal for some ideas, concepts and excerpts. (Monday, February 5, 2018)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 459 | The New Tax Law and Your Charitable Deductions May 9, 2018

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

Tax Tip of the Week | May 9, 2018 | No. 459 | The New Tax Law and Your Charitable Deductions

Granted, for many people, the tax savings is not the number one driver for making charitable contributions, “but rather it’s your desire to impact the lives of others that motivates you to give.” However, having said that, it is always nice for Uncle Sam to give you an even bigger bang for the buck by granting you a tax deduction for your contributions. The resulting tax savings, effectively, helps you fund the contribution.

Much press has been devoted to the new tax law and its impact on your itemized tax deductions. Your charitable contributions are but one of your itemized deductions. And, to be able to “itemize”, you must exceed the standard deduction. Which is all well and fine but the new law increased the amount of the standard deduction. As a result, fewer people will be itemizing since the standard deduction will result in a greater benefit. If you use the standard deduction you will not receive any tax benefit for your charitable contributions. Currently about 30% of the United States itemizes when filing their taxes. Only about half of those will continue to itemize under the new tax law.

The Dayton Foundation, along with other organizations, has what is known as a Donor-Advised Fund or Charitable Checking Account (CCA). The idea behind these are to create the ability to “bundle your charitable giving by making large gifts into your fund or account in one year then dispersing grants to charity over a multi- year period. This allows you to take advantage of the charitable deduction in the year you itemize while taking the standard deductions in other years when you may not meet the threshold.” Please note that the “bundling” technique is not necessary if you have enough to itemize.

Other new changes include “an increase on the limitation of cash gifts to a charity from 50% of adjusted gross income to 60% as well as a doubling of the estate tax threshold.  One thing that hasn’t changed, however, is the IRA Charitable Rollover provision. Donors ages 70-1/2 or older should consider this tax-wise option first when making a charitable gift. These individuals can donate up to $100,000 annually from their IRA to any 501(c)(3) charitable organization without treating the distribution as taxable income.” In my opinion, this IRA Charitable Rollover provision is one of the more under-utilized provisions in the tax law.

Many other charitable and estate planning opportunities other than the ones above exist. Be sure to work hand in hand with your financial planner and your CPA to optimize the tax savings for yourself and to maximize the dollars that flow to the charitable organizations that you support.

Credit to Joseph Baldasare, MS, CFRE, Chief Development Officer of the Dayton Foundation for some ideas, concepts and excerpts from his article, How the New Tax legislation Could Affect your Charitable Deductions.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 458 | Beware of the New Cap on Business Losses May 2, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | May 2, 2018 | No. 458 | Beware of the New Cap on Business Losses

Making money in the business world is not easy. Not many business owners would contest that statement. In spite of the best-laid plans and intentions, business losses can and do occur. I suspicion the IRS and/or Congress became concerned that someone might “create” a business loss only for tax saving purposes using some of the newly enacted faster write-offs for certain fixed assets. For that reason, I believe the IRS and/or Congress developed some of their own self-serving parameters to limit what they deemed as potential abuse. Thusly, the cap on “excess” business losses was apparently born.

This new tax law provision seems to have flown in under the radar. For the most part the press has chosen to write about other more popular topics. This limitation on “excess” business losses applies to individuals. However, remember that the income taxes on profits for many “flow-through” businesses are paid by the individuals on their own individual income tax returns. This new loss provision has been nicknamed the “anti-tax-shelter” measure. In certain instances, it treats taxpayers as though their business losses were from a tax shelter. This loss limitation was created to limit the ability of taxpayers (other than C Corporations) to use business losses to offset other sources of income, such as investment income. Limitations on business losses are not new. The ones already in place include passive activity loss limitations (PAL) and the at-risk basis limitations. Both of these are complicated and may have far-reaching consequences. The new loss limitation adds yet another hurdle to a loss deduction in addition to the ones already in place.

“Excess business loss” is essentially defined as the excess of aggregate business deductions over the taxpayer’s aggregate business income as defined in Internal Revenue Code Section 461(l), plus a floor amount. For 2018, the floor is $500,000 for married filing jointly taxpayers and $250,000 for all other taxpayers. The “excess business loss” that exists for the tax year is disallowed and becomes a net operating loss that will be carried forward for possible use in the future.

Thusly, the new law limits a taxpayer’s net business loss deduction to the threshold amount in the tax year incurred. The limitation also forces taxpayers to wait at least one year before these losses may be used. (Ouch!) In some instances one could draw some parallels between this business loss limitation and the Alternative Minimum Tax (AMT) – both are sneaky behind the curtain calculations that may result in an unpleasant tax surprise.

For illustration purposes:

A married taxpayer filing jointly has investment income from various sources of $875,000. She also has aggregate business losses of $1.2 million. The taxpayer’s excess business loss is $700,000 ($1.2 million aggregate loss – $500,000 threshold). This excess business loss may not be deducted in the year created. It will instead be treated as part of a net operating loss carryforward to later years. As a result, the taxpayer’s gross income for 2018 is $375,000 ($875,000 investment income – $500,000 limited business loss.)

This illustration demonstrates how the new law could limit a taxpayer’s ability to offset his other income with his business losses and result in a tax liability. Under prior law, the taxpayer’s business losses would have been deducted in full. For taxpayers that anticipate aggregate business losses above the threshold amount, they may need to engage in further tax planning.

As with other aspects of the new tax law, we await further IRS guidance and explanations about some of the technical aspects of this provision. We also are aware that further guidance may never be received.

Credit given for some ideas, concepts and excerpts from Tax Reform – The New Overall Loss Limitation February 20, 2018 – Aimee Reaving

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 457 | Financial Controls to Help Protect Your Business From Fraud April 25, 2018

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Tax Tip of the Week | April 25, 2018 | No. 457 | Financial Controls to Help Protect Your Business From Fraud

Theft, fraud, and embezzlement are always concerns of any business owner. These may be expenses you don’t know you have. Hopefully not!

What is known as the fraud triangle is a model that explains the three behavioral traits necessary for the occurrence of occupational theft. These characteristics are: (1) Need; (2) Opportunity and (3) Rationale. If you can block any one of the three traits then you may have saved the day.

Over the years I have seen numerous instances of stolen cash and other assets. I always tell business owners that problems may very well arise from an employee that you suspect the least.  I would love to tell you these thefts were very complicated, sophisticated schemes. They were not. Internal controls were simply lacking. How were these thefts discovered? No real detective work was involved – typically, the culprit was just careless such as bouncing a check to a vendor that company did use and the owner being called for payment. Perhaps in these cases, the owners were too trusting, not that trust is a bad thing – but, owners must inspect what they expect. Most internal controls revolve around separation of duties. That is all well and fine, but too often in a small business, your accounting department may consist of only one or two employees. With a limited number of staff a full separation of accounting duties is simply not always feasible.  When limited staff is the case, the owners must share a greater role in internal controls or employ someone else for that responsibility. I often wonder how much fraud goes on, unnoticed – where the culprits are never brought to justice.

Here are 17 financial controls that may help safeguard your business.

1.    If the owner is not vigilant about reviewing the online banking activity then the bank statements should be mailed to their home. The business owner should open and review these bank statements. Whether online or with your bank statements mailed – review cleared checks for the payees, amounts and endorsements on back of the check. AND, be sure your staff is aware that you are doing this by questioning transactions from time to time. This over watch is a great deterrent if nothing else.

2.    Preferably, someone other than the person making deposits should prepare monthly bank reconciliations.

3.    Use a separate post-office box for accounts receivable payments instead of having the funds come directly to your office.

4.    Consider the bank automatically sweeping excess funds from the main operating business account into another account that is controlled only by the owner.

5.    No one should pre-sign blank checks and only the owner should sign checks. Period.  There are better ways for expenses to be paid if you are out of town. Examples include company credit cards, two party “ACH” systems from your bank, or a two party check system with clear limits on the available cash held in that account.

6.    Any accounts receivable write-offs should be approved in writing by the owner or management.

7.    Use pre-numbered invoices and maintain an invoice log. Same system for checks.

8.    Aged accounts receivable reports should be reviewed weekly by the owner or management.

9.    Customer lists should be regularly reviewed by the owner and management for potential fake customers. Same system for your vendors’ lists – check for fictitious names.

10.    Look for other ways to confirm your sales/cash receipts. For example, compare the percent of your sales on account versus the amount of cash received and/or your gross profit margins and other key metrics. If any of these numbers are off – investigate.

11.    Purchase invoices should be approved and reconciled with purchase orders by the owner or management.

12.    Control company credit cards.  Review. Require receipts and invoices. Have an expensing policy which explains what expenses are allowed and their appropriate authorizations. Staff should sign off on their expense reports as to their truth and accuracy.

13.    Have “bidding and estimating” procedures that minimize risks of bribes, kickbacks, or other illegal collusion.

14.    Be certain any software or other purchase that the company pays for be owned and titled in the company name. This includes checking that the company is the one named with the software vendor or other supplier.

15.    Thoroughly check staff and contractors before you hire them. Consider criminal background checks, drug testing, and credit checks.

16.    Check with your insurance agent. Consider bonding staff or getting other appropriate insurance coverages. Typically, this coverage is not terribly expensive.

17.    All overtime should be approved by management prior to it being worked.

Credit for ideas and concepts to David Finkel of Inc.com PUBLISHED ON: MAR 2, 2017

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 456 | Your Most Valuable Resource April 18, 2018

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Tax Tip of the Week | April 18, 2018 | No. 456 | Your Most Valuable Resource

Time is free, but it is priceless.  
You can’t own it.
But you use it.
You can’t keep it.
But you can use it.
Once you’ve lost it, you can never get it back.

-Harvey Mackay

Nothing on our planet is more valuable than our time.

The following was taken from a presentation made by Dave Sullivan. It involves a new way of strategic planning using a technique that we shall call:

Make or Break

Makes:

Where must we succeed?

Examples:

1.    Breaking down Company goals into individual goals
2.    Geographical expansion
3.    Expanding product lines

Day to day focus:

Examples:

1.    Safety
2.    Quality
3.    Inventory control
4.    On-time delivery
5.    Reduce rejects
6.    Improve efficiencies

Breaks:

Where we must prevent failure.

Examples:

1.    Owners must unify goals
2.    Product Research and Development

Note:  Owners should be spending their precious time and energy on the Make or Break situations. They should not be worried about the day to day focus. It should be taking care of itself with the right systems and processes (although not perfectly). Trust that you have the right people to do so; if not find them. Too often owners are spending time on the minutiae instead of the all important “Make or Break” issues. This is where the rubber meets the road.

Be a better leader every day.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 454 | New Tax Law (TCJA) – How It Will Affect Alimony Payments April 4, 2018

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Tax Tip of the Week | April 4, 2018 | No. 454 | New Tax Law (TCJA) – How It Will Affect Alimony Payments

These new changes take effect for divorces and legal separations after 2018.

Prior law:  Under the current rules, an individual who pays alimony can deduct the alimony or separate maintenance payments paid during the years as an “above the line” deduction. An “above-the-line” deduction is a deduction that a taxpayer need not itemize to deduct. These deductions are more valuable than an itemized deduction.

And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse.

Please note that the rules for “child support”—remain unchanged. Payers of child support don’t receive a taxable deduction. Recipients of child support don’t pay tax on those amounts.

New law:  A tax deduction for alimony no longer exists for the payor. Also, alimony is no longer taxable income to the recipient. So, for divorces and legal separations that are executed after 2018, the alimony-paying spouse will no longer be able to deduct these payments and the alimony-receiving spouse doesn’t include the payments in gross income.

Note: TCJA rules are not applicable to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and that agreement is legally modified, then the new rules don’t apply to that modified decree, unless the new agreement expressly states that the TCJA rules are to apply. Situations may exist where applying the TCJA rules voluntarily is advantageous for the taxpayers.

If you wish to discuss the impact of these rules on your particular situation, please give us a call.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are very much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 453 | How Are Social Security Benefits Taxed? March 28, 2018

Posted by bradstreetblogger in : General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | March 28, 2018 | No. 453 | How Are Social Security Benefits Taxed?

A portion of the net benefits you receive each year from Social Security (or equivalent railroad retirement) benefits may be taxable income. If you receive either of these you will receive a Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099. How much of these benefits might be taxed will be explained below.

Your social security benefits are subject to federal income tax on a portion of your social security benefits only if the sum of the your modified adjusted gross income (MAGI) plus 50 percent of the social security benefits you received exceeds the applicable base amount – (1) $32,000 if you are married filing jointly, (2) $0 if you are married filing separately and lived with your spouse, or (3) $25,000 in any other instance. If you are married and file a joint return, you and your spouse must combine your incomes and benefits to decide if any of your combined benefits are taxable.

If you have concluded that your social security benefits are taxable, then the amount you must include in your taxable income is generally equal to the lesser of (1) 50 percent of the social security benefits you received, or (2) 50 percent of the amount by which the sum of your MAGI and 50 percent of the social security benefits received exceeds your base amount, not to exceed 85% of your benefits. Rules may differ for lump-sum distributions of social security benefits; if you have returned your social security benefits and your repayments exceed the gross benefits you receive; or if you receive social security benefits, have taxable compensation, contribute to a traditional IRA, and are covered (or your spouse is covered) by an employer retirement plan. The social security benefits are includible in the gross income of the person having the legal right to receive these benefits.

Ohio along with 36 other states and the District of Columbia do not tax social security benefits which often are a major source of income for many retirees.

Note:  Your employer makes a contribution on your behalf to the Social Security Administration. You also make a contribution for yourself albeit nondeductible. Contributions for the employer and the employee are the same. This creates a scenario of where double taxation may occur since the employee contributions are post-tax but the resulting benefits may be taxable.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are very much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 452 | New Tax Law – The Common Misconceptions (That Can Get You Into Big Trouble) March 21, 2018

Posted by bradstreetblogger in : tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | March 21, 2018 | No. 452 | New Tax Law – The Common Misconceptions (That Can Get You Into Big Trouble)

Too often I am guilty of just reading the “headlines” and believing I have the whole story. If it were only that easy! If I had only read the “headlines” on this new tax law I would have been significantly mislead.

Some of my misconceptions follow:

MISCONCEPTION #1 – EVERYONE SAVES TAX DOLLARS UNDER THE NEW TAX LAW.

Not so. For a multitude of reasons, including the loss of personal exemptions and the ceiling on state and local income taxes, the new tax law will cost some taxpayers extra tax dollars. Some a significant amount!

MISCONCEPTION #2 – ALL BUSINESSES SHOULD BE A “C” CORPORATION.

We are led to believe that the new flat 21% tax rate for “C” Corporations is a silver bullet and will cause a mass exodus from S Corporations, LLCs, partnerships and sole proprietorships. That is not going to happen. Sure, the 21% “C” Corporation rate is well less than the 37% top bracket on individuals, but SO many other even more important considerations exist.

MISCONCEPTION #3 – No need for IRC Section 179 deductions any longer since both new AND used property now qualify for the IRC Section 168 (bonus depreciation) deduction.

Section 179 and Section 168 are not treated the same in many states. In many states, the Section 179 is a faster write-off than Section 168; therefore of a greater value.

Also, please note that Section 179 has never been allowed to create a net operating loss (NOL). Section 168 may do so. However, under the new tax law – NOLs may not be carried back, only forward. So don’t fall into the trap of believing you may “catch-up” on your equipment purchases, create a large NOL with Section 168 depreciation expense, and carry that loss back for a tax refund.

MISCONCEPTION #4 – THE PENALTY FOR NOT HAVING HEALTH INSURANCE HAS BEEN ELIMINATED FOR 2018.

It is true the health insurance penalty is gone, BUT not until 2019.

MISCONCEPTION #5 – ALL PASS-THROUGH ENTITIES AUTOMATICALLY RECEIVE A 20% DEDUCTION.

Many S Corporations, partnership, and LLCs will receive the 20% deduction. Some will not. The 20% deduction is not necessarily an all or nothing proposition. If a business qualifies (and not all do) the actual deduction, if any, is all formula driven.

MISCONCEPTION # 6 – BIG TAX INCREASES WILL RESULT FROM THE ELIMINATION OF MISCELLANEOUS EXPENSES AS ITEMIZED DEDUCTIONS.

Very few people received any benefit from miscellaneous itemized deductions, anyway. You may have observed them as a part of your itemized deductions on Form A. However, they are often blocked from being deducted since they must exceed 2% of adjusted gross income.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are very much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 451 | Tax Considerations of a Reverse Mortgage March 14, 2018

Posted by bradstreetblogger in : Deductions, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | March 14, 2018 | No. 451 | Tax Considerations of a Reverse Mortgage

Definition – a reverse home mortgage is a loan. Although, not a conventional one. In the case of a reverse home mortgage, the lender pays you while you still live in your home and hold title. In general, your reverse mortgage becomes due along with the interest when you move, sell your home, reach the end of a pre-determined loan period, or pass away.

Since reverse mortgages constitute a loan advance, they are not considered taxable income. Most individuals use the cash basis method of accounting, so any loan interest accrued is not deductible until paid. Often, this is when the reverse home mortgage loan is paid in full.This interest deduction may be limited because a reverse mortgage loan is generally subject to the limit on home equity debt.

Prior law: Home equity debt is any debt (other than acquisition debt) secured by a home mortgage. The amount of deductible interest may only be on the debt that does not exceed your home’s fair market value, decreased by any acquisition debt. In addition, if you are not using your reverse mortgage loan proceeds to improve your home, the amount that you can treat as home equity debt may not exceed $100,000 or $50,000, if married filing separately. Any equity interest as the result of the loan being over these limits is typically treated as personal interest which is nondeductible. Some notable exceptions include interest from loan proceeds used for investment and/or business purposes.

New law:  Whether your home equity loan is considered acquisition indebtedness or home equity indebtedness may determine if this interest will continue to be deductible in 2018 and forward. However, further IRS guidance is necessary as to how the new tax law will be applied in the real world. Some tax professionals feel that all home equity interest will be disallowed while others take the position that home equity interest from acquisition indebtedness will continue to be eligible for a tax deduction in 2018. Stay tuned for further developments.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 450 | Tax Basis of Inherited Property March 7, 2018

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | March 7, 2018 | No. 450 | Tax Basis of Inherited Property

Short of selling an asset or a property at a break even, you will have a gain or a loss. This gain or loss is calculated by subtracting your tax basis in the asset from the sales price. Often, determining the amount of the sales price is not that difficult. On the other hand, calculating your tax basis may be quite complex. Your tax basis has a direct impact on your gain or loss. Therefore, arriving at an accurate amount for your tax basis is crucial.

For property inherited from an individual who died before or after 2010, your tax basis is generally one of the below:

(1) The fair market value of the property as of the date of the deceased individual’s death.

(2) The fair market value of the property on the alternate valuation date if the estate chooses to use the alternate valuation method. Several factors play in making what may be a big decision.

(3) The value under the special-use valuation method for real property used in farming or a closely held business. Election of this method may have far reaching implications.

(4) If a federal estate tax return need not be filed, the property’s appraised value at the date of death for state inheritance purposes.

Note: If you received appreciated property from the deceased individual and you or your spouse originally gave the property to that individual within one year before the individual’s death, your basis in this property is the same as the deceased individual’s adjusted basis in the property immediately before his or her death, rather than its fair market value.

Generally, if you and the deceased owned the property as joint tenants with right of survivorship, your basis in the property is determined based on (1) the proportionate amount you contributed to the original purchase price, and (2) for depreciable property, the way you were allocated income from the property.

If spouses held an interest in property as either (1) tenants by the entirety, or (2) joint tenants with right of survivorship where the spouses were the only joint tenants, then the surviving spouse’s basis in the property is the cost of the survivor’s half of the property with certain adjustments. The cost must be reduced by any deductions allowed to the surviving spouse for depreciation and depletion. The reduced cost must then be increased by the survivor’s basis in the half inherited.

If you inherited the property from an individual who died in 2010, your basis in the property depends on whether the executor of the deceased individual’s estate made a so-called Section 1022 election. If the executor did not make a Code Sec. 1022 election, your basis in the inherited property is determined under the rules described above. If the executor did make a Section 1022 election, the basis of property you acquired from the deceased individual generally is determined under modified carryover basis rules and not under the rules described above. Generally, the recipient’s basis is the lesser of the decedent’s adjusted basis or the fair market value at the date of the decedent’s death, increased by any allocation of “Basis Increase” (with certain additional adjustments).

Finally, the basis of certain property acquired from a decedent may not exceed the value of that property as finally determined for federal estate tax purposes, or if not finally determined, the value of that property as reported on Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent.

As you can see from above, there are many considerations in computing the basis of inherited property. Too often, the critical pieces of this puzzle are no longer available or require a visit to the courthouse at best to review old property and estate records. It is wise to never discard the estate paperwork of anyone from which you have inherited assets or expect to inherit assets. These may be very important to you many, many years down the road.

Thank you for all of your questions, comments and suggestions for future topics. They are all much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.