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Tax Tip of the Week | Rental Property Deduction Checklist for Landlords January 8, 2020

Posted by bradstreetblogger in : Business Consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

A business tax deduction is typically of more value than a personal tax deduction. Personal tax deductions are commonly in the form of itemized deductions. These may be of no value though if the standard deduction exceeds the so-called long form (itemized) deductions.

The following article by G. Brian Davis discusses business tax deductions specific to rentals. As an addition to his article, I will add that rental losses, if deductible on your federal income tax return, are also deductible on the State of Ohio and School District income tax returns. Within income limitations, rental income is not taxed to Ohio but is taxed by municipalities and school districts.

One lofty goal in the tax world is converting what otherwise was a nondeductible personal expense into a tax deduction. The world of rentals provides such opportunities.

                                            -Mark Bradstreet

The billionaires of the world are not doctors or lawyers, they’re entrepreneurs. Specifically, they are people who started their own businesses, whether those businesses are online, brick and mortar, or real estate empires.

Starting and owning a business provides a long list of tax advantages, and real estate investments provide all the usual tax advantages plus some extras unique to real property. Every expense associated with rental properties – plus some just-on-paper expenses – are tax deductible.

However, tax laws change fast and that means it is imperative for all those who invest in real estate must educate themselves. So, before you jump into the rental property deductions checklist, make sure you’re up to speed on how the new tax law affects landlords’ tax returns.

The changes in the Tax Cuts and Jobs Act of 2017 (TCJA) impacted homeowners, real estate investors and landlords alike. Here’s an outline of what you need to know as a real estate owner, and when in doubt, hire a professional who knows accounting with a real estate investing focus. Ideally one who invests in real estate themselves.

Lower Income Tax Rates

From 2018 through 2025, rental property investors will benefit from generally lower income tax rates and other favorable changes to the tax brackets. The TCJA retains seven tax rate brackets, although six of the brackets’ rates are lower than before. In addition, the new tax law retains the existing tax rates for long-term capital gains.

No Self-Employment Taxes for Landlords

In many ways, landlords get the best of both worlds: the tax benefits of owning a business, without the downside of self-employment taxes.

Real estate flippers can sometimes fall under the “dealer” category, and find themselves subject to double FICA taxes. FICA taxes fund Social Security and Medicare, and cost both employees and employers 7.65% of all income paid. Self-employed people end up having to pay both sides of FICA taxes, at 15.3% of total income.

But the Tax Cuts and Jobs Act of 2017 ended up leaving landlords and their rental income free from any FICA taxes.

New Passive Income Loss Rule

If you have losses from “passive activities” such as owning rental properties, typically you can only deduct those losses to offset other passive income sources, such as other rental properties. For example, if you earn $10,000 from one rental property and have an $8,000 loss on another, you can offset your $10,000 income with the $8,000 loss, for a net taxable rental income of $2,000.

But if you have a net loss, that can’t be used as a deduction against your active income from your 9-5 job. You can carry it forward however, to offset future passive income earnings and rents.

Here’s how the TCJA changes matters: there’s a new $250,000 cap for single filers, $500,000 cap for married filers, for passive losses. Any passive losses that you’re allowed, in excess of those caps, must be carried forward to the next tax year.

It won’t affect most landlords, but it’s something to be aware of.

20 Tax Deductions for Landlords

Here are 20 rental property expenses you can deduct on your tax return, to keep more of your money in your pocket where it belongs. It’s not 100% exhaustive, as there are a few obscure tax deductions that only apply to a few landlords, but think of this as a rental property deductions checklist for the average landlord.

IMPORTANT: These rental property tax deductions are “above the line” deductions, meaning they come directly off your taxable income for rental properties. That means you can deduct these expenses, and still take the standard deduction.

1. Losses from Theft or Casualty
The TCJA suspended the itemized deduction for personal casualty and theft losses for 2018 through 2025. Before 2018 deductions of this kind were permitted when they exceeded $100. But landlords can still deduct losses from theft or damage to their rental properties, as business expenses.

2. Property Depreciation
This is a handy “paper expense.” Much of the cost of buying your property can be written off as a tax deduction, although it must be spread over 27.5 years (don’t ask me where that number came from). Buildings lose value as they age (at least theoretically), so the IRS lets you deduct 1/27.5 of the property’s cost each year.

Major property upgrades and “capital improvements” must be depreciated as well, rather than deducted in the year you make them. For example, a new roof is a capital improvement that must be depreciated, rather than deducted all at once.

But the patching of a roof leak? That’s a repair.

3. Repairs & Maintenance
Basic repairs and maintenance such as new paint and new carpets are deductible for your rental properties. That’s not the case for your primary residence, in which repairs are not deductible. Remember, if it’s a large improvement or replacement (like the roof example), it may count as a “capital improvement,” in which case you’ll have to spread the deduction over multiple years, in the form of depreciation.

The line isn’t always crystal clear however, like the roof example above. Here’s an example of how it gets blurry: if you replace all your windows to modernize and improve your energy efficiency, it’s a capital improvement. If a baseball goes through one window, which you replace, it’s a repair. But what if you replaced a few windows last year, but not all? Talk to an accountant, and build a defensible argument for any repairs you deduct.

4. Segmented Depreciation
Some improvements, such as landscaping and “personal property” inside the rental/investment property (e.g. refrigerators) can be depreciated faster than the building itself. It’s more paperwork, to segment the depreciation of certain improvements as separate from the building’s depreciation, but it means a lower tax bill right now, not in the far distant, unknowable future.

5. Utilities
Do you pay for gas, heating, trash removal, sewer or any other utility for your rental? They are tax deductible.

Take heed however, if your tenant reimburses you for a utility, that would be considered income. So, you have to declare both the income and the expense, even though they offset each other.

6. Home Office
This is a popular deduction, but it’s also one you need to be careful about, as it can trigger audits. You have to set aside a percentage of your home for only doing work/business/real estate investing-related activities, and that percentage of your housing bill can be deducted. And 2018 may see this deduction scrutinized even more.

One new downer: no more home office deduction for those who work for others in the comfort of their home. But as a real estate investor, you’re a business owner, so you can still claim it if you use the space exclusively for “business.”

Make sure and talk to an accountant about this, and keep the percentage realistic.

7. Real Estate-Related Travel
Another popular-but-dangerous deduction, you can deduct travel expenses if your travel was for your real estate investing business… and you can prove it. Many people get cute with this one, and when they go on vacation, they’ll go see one or two “potential investment” properties and then write the entire trip off as a business expense.

Whenever you plan on deducting travel expenses, put together as much documentation as you possibly can so that you can make a strong case that it was an actual business trip. For example, meet with a real estate agent in the area, and keep all of your email correspondence with them. Keep all listing information and investment calculations for any properties you visit. Track your mileage for all driving done to and from rental properties.

C-Y-A!

8. Closing Costs
Many closing costs are tax deductible, and others can be depreciated over time as part of your acquisition cost. Use an accountant with a deep knowledge of real estate investments, and send them the HUD-1 (settlement statement) for each property you bought last year.

9. Mortgage Insurance (PMI/MIP)
No one likes mortgage insurance (other than banks). At least you can deduct the cost from your taxable rental property income.

10. Property Management Fees
Paid a property manager to handle the headaches for you and field those dreaded 3 AM phone calls from tenants? You can write off their management fees, including both monthly fees and tenant placement fees.

11. Rental Property Insurance/Landlord Insurance
Like homeowner’s insurance for your primary residence, your landlord insurance premium for each property is also tax deductible.

12. Mortgage Interest
All interest you pay to your mortgage lender on rental property loans remains tax deductible. As mentioned above, it’s an “above the line” deduction that simply comes off of your taxable rental property income.

But for your primary residence, 2018 limits the deductibility of mortgage interest only up to $750,000 of home mortgage debt.

13. Accounting, Legal & Other Professional Fees
All professional fees associated with your rental properties are tax deductible. Bookkeeping, accounting, attorney, real estate agent and any other fees you pay out for professional services can be deducted from your taxable income. Don’t forget the cost of any bookkeeping or landlord software (ahem!) you use.

One wrinkle introduced by the TCJA however is that personal tax preparation expenses are no longer deductible from 2018 onward. But business accounting – such as for your real estate LLC or S-corp – is still deductible as a rental business expense for landlords. Talk to your accountant about shifting as many of your tax preparation expenses as possible to the “business” side of the books!

14. Tenant Screening
If you paid for tenant credit reports, criminal background checks, identity verifications, eviction history reports, employment and income verification or housing history verification, those fees are deductible.

Even better, have the applicant pay directly for tenant screening report costs. Which, I might add, our landlord software allows you to do!

15. Legal Forms
Bought a state-specific lease agreement this year? Eviction notices? Property management contracts? The cost of legal forms is also deductible.

16. Property Taxes
Under the Tax Cuts and Jobs Act of 2017, landlords can still deduct rental property taxes as an expense.

But it’s a little more complicated for homeowners, and even though this is a list of landlord tax deductions, let’s take a moment to review the changes for homeowners, shall we?

In 2018, you can no longer deduct for state and local taxes in excess of $10,000. These state taxes include things like: state and local income tax, sales taxes, personal property tax, and… property taxes.

What does this mean for high-tax states like New York, New Jersey or Connecticut? Well, it could mean that more people may relocate to lower-tax states like Florida, and may even spark lower property values in states such as New Jersey. Only time will tell.

17. Phones, Tablets, Computers, Phone Service, Internet
Bought a new phone this year? Maybe a new laptop or tablet? If you use it for work, you can probably persuade your accountant (and the IRS) that the costs should be deducted from your taxable income. Likewise, for internet bills, phone service charges and the like, with the caveat that you need to be able to document that it was for business purposes. Printer toner, computer paper, pens, and the like; keep those receipts.

18. Licensing Fees
Licensing and registration fees are sometimes a local requirement for rental properties. For instance, in the city of Philadelphia, a rental license fee is required along with an inspection of the property.

So, if you’ve had to purchase or renew a landlord or rental license for the property, that cost is deductible.

Furthermore, some localities will require a vacation rental license for short term rentals such as seasonal, AirBnB and the like. These licensing costs are deductible as well.

19. Occupancy Tax
There are states that assess an occupancy tax on collected rental amounts, comparable to paying sales tax. This is more of a common practice in states where short-term rentals are common. Florida, Arizona and New Jersey are examples of states that charge an occupancy or tourist tax.

If you own rental property in an area that charges an occupancy-like tax, then the amount is tax deductible. Remember, however, that the tax will not only differ from state to state but also from local jurisdictions like cities and counties.

20. Business Entity Pass-Through Deduction
There are significant changes in 2018 tax regulations on how legal entities (e.g. LLCs) and pass-throughs and the like are going to be treated. Sole Proprietorship, Partnership, and Corporate Entities are now entitled to a “pass-through” deduction as long as the rental activities meet the requirements for business tax purposes.

The short version is that landlords can deduct 20% of their rental business income from their taxable business income amount. For example, if you own a rental property that netted you $10,000 last year, the pass-through deduction reduces your taxable rental business income from $10,000 to $8,000. Pretty sweet, eh?

There are restrictions, of course. The deduction phases out for single tax payers with adjusted gross incomes over $157,500, and married taxpayers earning over $315,000. Although under some conditions, higher-earning landlords can still take advantage of the pass-through deduction – definitely discuss with your accountant.

One more reason, beyond asset protection, to own rental properties under a legal entity!

Final Word

It’s hard to get ahead if 50% of your income is going to taxes (which it probably is, if you add up everything you pay in sales tax, property tax, federal income tax, state income tax, local income tax and FICA taxes). But by being savvier with your documentation and deductions, landlords and real estate investors can pay less in taxes than other people, and truly realize the advantages of entrepreneurship.

Remember to always document every expense you plan to deduct. That means keeping receipts, invoices and bills throughout the year as expenses pop up; to help with this, keep a separate checking account for your real estate expenses if you don’t already. Never swipe that debit card or write a check from that account without first getting documentation!

Credit Given to:  G. Brian Davis

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.

Tax Tip of the Week | Your 2019 Guide to Tax Deductions December 11, 2019

Posted by bradstreetblogger in : Business Consulting, Deductions, Depreciation options, General, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Practically all of the significant federal tax law changes were first effective on your 2018 federal income tax return. Many of these changes are still in place for your 2019 income tax return. Apparently, the media believes these changes to be old news; and, therefore, are not giving it any press coverage. But, the impact of these changes were so far-reaching, a refresher for all of us should be in order.

                               -Mark Bradstreet

Here are all of the tax deductions still available to American households and the requirements for claiming each one.

The Tax Cuts and Jobs Act was the biggest overhaul to the U.S. tax code in decades, and it made some significant changes to the tax deductions that are available. Many tax deductions were kept intact, but others were modified, and some were eliminated entirely.

There are also several different types of tax deductions, and these can get a bit confusing. For example, some tax deductions are only available if you choose to itemize deductions, while others can be taken even if you opt for the standard deduction. With all that in mind, here’s a rundown of what Americans need to know about tax deductions as the 2019 tax filing season opens.

What is a tax deduction?

The term “tax deduction” simply refers to any item that can reduce your taxable income. For example, if you pay $2,000 in tax-deductible student loan interest, this means your taxable income will be reduced by $2,000 for the year in which you paid the interest.

There are several different types of tax deductions. The standard deduction is one that every American household is entitled to, regardless of their expenses during the year. Taxpayers can claim itemizable deductions instead of the standard deduction if it benefits them to do so. Above-the-line deductions, which are also known as adjustments to income, can be used by households regardless of whether they itemize or not. And finally, there are a few other items that don’t really fit into one of these categories but are still tax deductions.

The standard deduction
When filling out their tax returns, American households can choose to itemize certain deductions (we’ll get to those in a bit), or they can take the standard deduction — whichever is more beneficial to them.

The Tax Cuts and Jobs Act nearly doubled the standard deduction. Before the increase, about 70% of U.S. households used the standard deduction, but now it is estimated that roughly 95% of households will use it. For the 2018 and 2019 tax years, here are the standard deduction amounts.

Tax Filing Status2018 Standard Deduction2019 Standard Deduction
Married Filing Jointly$24,000$24,400
Head of Household$18,000$18,350
Single$12,000$12,200
Married Filing Separately$12,000$12,200

DATA SOURCE: IRS.

To be perfectly clear, unless your itemizable deductions exceed the standard deduction amount for your filing status, you’ll be better off using the standard deduction.

Itemized deductions

The alternative to taking the standard deduction is choosing to itemize deductions. Itemizing means deducting each and every deductible expense you incurred during the tax year.

For this to be worthwhile, your itemizable deductions must be greater than the standard deduction to which you are entitled. For the vast majority of taxpayers, itemizing will not be worth it for the 2018 and 2019 tax years. Not only did the standard deduction nearly double, but several formerly itemizable tax deductions were eliminated entirely, and others have become more restricted than they were before.

With that in mind, here are the itemizable tax deductions you may be able to take advantage of when you prepare your tax return in 2019.

Mortgage interest

The mortgage interest deduction is among the tax deductions that still exist after the passage of the Tax Cuts and Jobs Act, but for many taxpayers it won’t be quite as valuable as it used to be.

Specifically, homeowners are allowed to deduct the interest they pay on as much as $750,000 of qualified personal residence debt on a first and/or second home. This has been reduced from the former limit of $1 million in mortgage principal plus up to $100,000 in home equity debt.

On that note, the deduction for interest on home equity debt has technically been eliminated for the 2018 tax year and beyond. However, if the home equity loan was used to substantially improve the home, the debt is considered a qualified residence loan and can therefore be included in the $750,000 cap.

Charitable contributions

This is perhaps the least changed of the major tax deductions. Contributions to qualified charitable organizations are still deductible for tax purposes, and in fact the deduction has become a bit more generous for the ultra-charitable. U.S. taxpayers can now deduct charitable donations of as much as 60% of their adjusted gross income (AGI), up from 50% of AGI.

One negative change to note: If you donate to a college in exchange for the ability to buy athletic tickets, that is no longer considered a charitable donation for tax purposes.

Medical expenses

The IRS allows taxpayers to deduct qualified medical expenses above a certain percentage of their adjusted gross income. The Tax Cuts and Jobs Act reduced this threshold from 10% of AGI to 7.5%, but only for the 2017 and 2018 tax years. So, when you file your 2018 tax return this year, you can deduct qualified medical expenses exceeding 7.5% of your AGI. For example, say your AGI is $50,000, and you incur $5,000 in qualified medical expenses. The threshold you need to cross before you can start deducting those expenses is 7.5% of $50,000, or $3,750. Your expenses are $1,250 above the threshold, so that’s the amount you can deduct from your taxable income.

However, the medical deduction threshold is set to return to 10% of AGI starting with the 2019 tax year. So, when you file your 2019 tax return in 2020, you’ll use this higher percentage to determine whether you qualify for the deduction.

State income tax or state sales tax

The IRS gives taxpayers the choice to claim either their state and local income tax or their state and local sales tax as an itemized deduction. Naturally, if your state doesn’t have an income tax, the sales tax deduction is the way to go. On the other hand, if your state does have an income tax, then deducting that will generally save you more money than deducting sales tax.

One quick note: If you choose the sales tax deduction, you don’t necessarily need to save each and every receipt to document how much sales tax you’ve paid. The IRS provides a handy calculator you can use to easily determine your sales tax deduction.

Property taxes

If you pay property tax on a home, car, boat, airplane, or other personal property, you can count it toward your itemized deductions. This deduction and the deduction for income or sales tax are collectively known as the SALT deduction — that is, the “state and local taxes” deduction.

There’s one major caveat when it comes to the SALT deduction. The Tax Cuts and Jobs Act limits the total amount of state and local taxes you can deduct — including property taxes and sales/income tax — to $10,000 per year. So if you live in a high-tax state or simply own some valuable property that you pay tax on, this could significantly limit your ability to deduct these expenses.

The bottom line on itemizable deductions

That wraps up the major itemizable deductions that are still available under the newly revised U.S. tax code. As you can see, there aren’t many of them, and some of those that remain — such as the medical expense and SALT deductions — are quite limited.

For itemizing to be worth your while, you need some combination of these deductions to exceed your standard deduction. It’s easy to see why most taxpayers won’t itemize going forward.

As a personal example, my wife and I have traditionally itemized our deductions. However, in 2018 we’ll have about $9,000 in deductible mortgage interest, a few thousand dollars in charitable contributions, and about $6,000 in state and local taxes, including property taxes. In previous years, this would have made itemizing well worth it, but it looks like we’ll be using the standard deduction when we file our return in 2019.

Above-the-line tax deductions

While you need to itemize deductions to take advantage of the deductions I discussed in the previous section, there are quite a few tax deductions that you can use regardless of whether you itemize or take the standard deduction.

These are known as adjustments to income and are more commonly referred to as above-the-line tax deductions. And with a few exceptions, most of these survived the recent tax reform unscathed. Here are the above-the-line deductions you may be able to take advantage of in 2019.

Tax-deferred retirement contributions

If you contribute to any tax-deferred retirement accounts, you can generally deduct the contributions from your taxable income, even if you don’t itemize. This includes:

Contributions to a qualified retirement plan such as a traditional 401(k) or 403(b). For 2018, the maximum elective deferral by an employee is $18,500, and for the 2019 tax year this is increasing to $19,000. If you’re 50 or older, these limits are raised by $6,000 each year.

Contributions to a traditional IRA. The IRA contribution limit is $5,500 for the 2018 tax year and $6,000 for 2019, with an additional $1,000 catch-up contribution allowed if you’re 50 or older. However, it’s important to point out that if you or your spouse is covered by a retirement plan at work, your ability to take the traditional IRA deduction is income-restricted.

If you are self-employed, your contributions to a SEP-IRA, SIMPLE IRA, or Solo 401(k) are generally deductible, unless they are made on an after-tax (Roth) basis.

Health savings account (HSA) and flexible spending account (FSA) contributions

If you contribute to a tax-advantaged healthcare savings account (HSA), your contributions are tax-deductible up to the IRS’s contribution limits. The 2018 contribution limit is $3,450 for those with single healthcare policies or $6,900 those with family coverage. In 2019, these limits will increase to $3,500 and $7,000, respectively. There’s also a $1,000 catch-up allowance if you’re 55 or older.

An HSA has many unique features. Most importantly, you can withdraw your HSA funds tax-free from your account at any time to cover qualifying medical expenses. That means you can get a tax break on both your contribution and your withdrawal — a perk that no IRA or 401(k) offers. Once you turn 65, you can withdraw money for non-healthcare purposes for any reason without paying a penalty — though you’ll have to pay income tax on withdrawals that don’t go toward qualifying medical expenses. Additionally, unlike a flexible spending account (more on this below), an HSA allows you to carry over and invest your money year after year.

You can participate in an HSA if all of the following apply:

You’re covered by a high-deductible health plan (HDHP)

You’re not covered by another health plan that is not an HDHP

You’re not enrolled in Medicare

You’re not claimed as a dependent on someone else’s tax return

If you don’t qualify for an HSA, you may still be able to contribute to a flexible spending account, or FSA. The FSA contribution limit is $2,650 in 2018 and $2,700 in 2019. While FSAs aren’t quite as beneficial as HSAs, they can still shelter a good amount of your income from taxation. Beware that you can only roll over up to $500 in leftover funds to the following year, so for the most part, FSAs are “use it or lose it” accounts.

Dependent care FSA contributions

There’s another type of flexible spending account that’s designed to help families pay for child care expenses. Married couples filing jointly can set aside as much as $5,000 per year on a pre-tax basis, and single filers can set aside as much as $2,500 to be spent on qualifying dependent care expenses.

Note that you can’t use a dependent care FSA and the popular Child and Dependent Care tax credit for the same expenses. However, with child care expenses running well into the five-figure range in many parts of the country, it’s fair to say that many parents should be able to take advantage of both child care tax breaks.

Teacher classroom expenses

If you’re a full-time K-12 teacher and have paid for any classroom expenses out of pocket, you can deduct up to $250 of those expenses as an above-the-line tax deduction. Potential qualifying expenses could include classroom supplies, books you use in teaching, and software you purchase and use in your classroom, just to name a few.

Student loan interest

The IRS allows taxpayers to take an above-the-line deduction for up to $2,500 in qualifying student loan interest per year. To qualify, you must be legally obligated to pay the interest on the loan — essentially this means the loan is in your name. You also cannot be claimed as a dependent on someone else’s tax return, and if you choose the “married filing separately” status, it will disqualify you from using this deduction.

One important thing to know: Your lender will only send you a tax form (Form 1098-E) if you paid more than $600 in student loan interest throughout the year. If you paid less than this amount, you are still eligible for the deduction, but you’ll need to log into your loan servicer’s website to get the required information.

Half of the self-employment tax

There are some excellent tax benefits available to self-employed individuals (we’ll discuss some in the next section), but one downside is the self-employment tax.

If you’re an employee, you pay half of the tax for Social Security and Medicare, while your employer pays the other half. Unfortunately, if you’re self-employed, you have to pay both sides of these taxes, which is collectively known as the self-employment tax.

One silver lining is that you can deduct one-half of the self-employment tax as an above-the-line deduction. While this doesn’t completely offset the additional burden of paying the tax, it certainly helps to lessen the sting.

Home office deduction

If you use a portion of your home exclusively for business, you may be able to take the home office deduction for expenses related to its use. The IRS has two main requirements you need to meet. First, the space you claim as your office must be used regularly and exclusively for business. In other words, if you regularly set up your laptop in your living room where you also watch TV every night, you shouldn’t claim a home office deduction for the space.

Second, the space you claim must be the principal place you conduct business. Generally, this means you’re self-employed, but there are some circumstances in which the IRS allows employees to take the home office deduction as well.

There are two ways to calculate the deduction. The simplified method allows you to deduct $5 per square foot, up to a maximum of 300 square feet of dedicated office space. The more complicated method involves deducting the actual expenses of operating in that space, such as the proportion of your housing payment and utility expenses that are represented by the space, as well as expenses relating to the maintenance of your home office. You are free to use whichever method is more beneficial to you.

Other tax deductions

In addition to the itemizable and above-the-line deductions I’ve discussed, there are a few tax deductions that deserve separate mention, because they generally apply only if you have specific types of income.

Investment losses: If you sold any investments at a loss, you can use these losses to offset any capital gains income that you have. Short-term losses must first be used to offset short-term gains, while long-term losses must first be applied to long-term gains. And if your investment losses exceed your gains for the year, you can use up to $3,000 in remaining net losses to reduce your other taxable income for the year. If there are still losses remaining, you can carry them forward to future years.

Pass-through income: This deduction is a product of the Tax Cuts and Jobs Act and is designed to help small-business owners save money. U.S. taxpayers can now use as much as 20% of their pass-through income as a deduction. This includes income from an LLC, S-Corporation, or sole proprietorship, as well as partnership income and income from rental real estate, just to name some of the potential sources. The deduction is not available to certain taxpayers whose income comes from “specified service businesses” (more details here) and exceeds certain thresholds.

Gambling losses: You can deduct gambling losses on your taxes, but only to the extent that you have gambling winnings. In other words, if none of your income came from gambling, you can’t deduct the $500 you lost on your last trip to Las Vegas.

Other self-employed deductions: Finally, if you’re self-employed, there are a ton of business deductions you may be able to take advantage of. You can deduct business-related travel expenses, office supplies and equipment, and health insurance premiums from your self-employment income, just to name a few potential deductions. And don’t forget about the special retirement accounts for the self-employed that we covered earlier.

Credit Given to:  Matthew Frankel, CFP

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.

Tax Tip of the Week | Veterans Who Own Small Businesses Can Follow the IRS on Their Smart Phones November 13, 2019

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

I am a subscriber of IRS publications and recently received the following article which I wanted to share with our readers. The article is directed toward veterans who are small business owners but the following article and the links provided can be used by any small business owner, and by individuals as well. To all the veterans out there – all of us at Bradstreet & Company would like to thank you for your service and hope you had a great Veterans Day.

                                    -Norman S. Hicks

Veterans who are small business owners likely have lots of questions about their business taxes. National Veterans Small Business Week is as good a time as any other to connect with the IRS over social media.

These business owners can pull out their smart phone or their computer and follow the IRS on these social media sites and apps:

Twitter
@IRSsmallbiz tweets geared specifically to small business owners
@IRSnews posts tax-related announcements and tips
@IRStaxpros tweets news and guidance for tax professionals
@IRSenEspanol has the latest tax information in Spanish
@IRSTaxSecurity tweets tax scam alerts

Instagram
Small business taxpayers can get tax tips and helpful news from the IRS on Instagram. The agency’s official Instagram account is IRSNews, which users can access on their smartphone.

YouTube
The IRS offers video tax tips on its small business playlist. Videos are available in English, Spanish and American Sign Language.

Facebook
The IRS uses Facebook to post news and information for taxpayers and tax return preparers. The IRS also has a Facebook page in Spanish.

LinkedIn
The IRS uses LinkedIn to share agency updates and job opportunities.

IRS2Go App
The IRS also has their own app, IRS2Go. Taxpayers can use this free mobile app to check their refund status, pay taxes, find free tax help, watch IRS YouTube videos and get IRS Tax Tips by email. Like Instagram, the IRS2Go app is available from the Google Play Store for Android devices or from the Apple App Store for Apple devices. IRS2Go is available in both English and Spanish.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Norman S Hicks, CPA

–until next week.

Tax Tip of The Week | Did You Know All Ohio Businesses Must File An Annual Report of Unclaimed Funds? October 23, 2019

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

It’s that time of year again…

Time to report unclaimed funds! This one really gets business owners excited (sarcasm intended).

As stated by the Ohio Department of Commerce, “All businesses that are located and/or operate in the State of Ohio, or hold funds due to Ohio residents, are required to file an Annual Report of Unclaimed Funds.”

Unclaimed Funds Reports are due by November 1st.

The Ohio Treasury wants Ohioans to recover money that is rightfully theirs. Every year 200,000 Ohioans lose track of their funds. They either put money in financial institutions and forget about it, or simply cannot track it in their records.

What is the Division of Unclaimed Funds?

The Ohio Department of Commerce, Division of Unclaimed Funds exists to protect money lost by Ohioans in various financial institutions, find the people the money belongs to, and then returns it as quickly as possible. More than $1 billion currently is in the custody of the Division of Unclaimed Funds. The Ohio Treasury makes Ohioans aware of the Division of Unclaimed Funds, so that they get back money rightfully theirs. You can perform a search using the following link:

SEARCH UNCLAIMED FUNDS

What types of accounts qualify as unclaimed funds?

We have a document from the Ohio Department of Commerce that helps explain what qualifies as “unclaimed funds,” as well as how to report them, here:

 HOW TO FILE AN UNCLAIMED FUNDS REPORT

Even if you have no unclaimed funds to report, a negative report must be filed.

What happens if your Ohio-based company does not report?

According to the Ohio Department of Commerce:

“For failing to report unclaimed funds or underreporting unclaimed funds, the company may incur civil penalties of $100.00 per day. The company may also have to pay interest at a rate up to 1% per month on the balance of unclaimed funds due per Ohio Revised Code section 169.12.”

What is NAUPA?

The National Association of Unclaimed Property Administrators (NAUPA) is a non-profit organization that maintains a national database, called Missing Money, to help people find unclaimed property.

MISSING MONEY

For additional assistance, contact the Ohio Department of Commerce’s Division of Unclaimed Funds at 1-877-644-6823.

Still struggling in determining how to file an Unclaimed Funds Report?

At Bradstreet & Associates and Bradstreet & Company CPAs, we’re here to help. If you need assistance filing your report, please call our Xenia office at 937-372-3504 or our Centerville office at 937-436-3133.

A complete information booklet on Reporting Unclaimed Funds is available here:
http://www.com.ohio.gov/documents/unfd_AnnualReportOfUnclaimedFunds.pdf

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 Co-Authors – Bobbie Haines & Linda Johannes, CPA

–until next week.

Tax Tip of the Week | Could You or Someone You Know Be Missing Out On Earned Income Credit? October 16, 2019

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

The Earned Income Tax Credit aka EIC is a benefit in the form of an income tax credit designed for working people with low to moderate income. To be eligible, one must meet certain requirements including filing an income tax return even if a tax return was not otherwise necessary to file. EIC is a refundable tax credit which means that a refund may be due you even if a tax liability did not exist. This credit may be as much as $6,431 so we can be talking about some real money. Although, the calculation is not complex, there are enough moving parts that estimating it short of preparing the income tax return is difficult. Many people miss out on this credit by not filing. Too often, a taxpayer looks at the tax return filing requirements and concludes filing a return is not necessary because their income is below the filing threshold. In many of these instances, the taxpayer may be walking away from a very significant refund.

The below Detroit Free Press article by Susan Tomporat was published on February 7, 2019. It provides additional information on the Earned Income Credit.

                                                     -Mark Bradstreet

The Earned Income Tax Credit is the biggest single check many working families see in a year. But they have to file a tax return — and be aware of the credit — to get the money.

Three years ago, low- to moderate-income households in Detroit left upwards of $80 million in unclaimed money by not claiming the credit. It was estimated that about 26,000 Detroit households were eligible for the credit but did not file tax returns to apply.

After a targeted awareness campaign that began in 2017, though, city officials say an average of 13,500 more Detroit residents each year have claimed their EITC. On average, $63 million more is being claimed each year. 

About $300 million has been claimed on average annually for the 2016 and 2017 tax years by Detroiters. The average EITC Refund: $4,600. The amounts represent a combination of state and federal earned income tax credits. 

Nearly 88,000 returns for Detroiters included the Earned Income Tax Credit. 

“It was a blessing to learn about this tax credit,” said Renee Perkins, 29, who works at MGM Grand Detroit at game tables dealing cards.

Perkins, a single mother with two children ages 7 and 1, expects to receive a tax refund of about $6,000 this year for state and federal taxes. It’s money she plans to save and use one day toward opening her own business offering assisted living to the elderly.

In the past, she has used the credit to pay down her debt and also put a down payment on a home once owned by the Detroit Land Bank.

“The extra cash helped me to accomplish a lot,” she said Tuesday as part of an awareness campaign event held at Focus: HOPE in Detroit.

Even so, the credit still remains overlooked by thousands of families. Here’s what you need to know:

Who qualifies to get the credit?

You must have earned income from a job and meet other requirements. For example, both your earned income and your adjusted gross income must be less than $45,802 in 2018 to qualify if you are single and have two qualifying children.

The limit is less than $51,492 for married couples filing a joint return with two qualifying children.

What’s the credit worth? 

The credit, for example, can be worth up to $6,431 this year for a working couple who qualifies with three or more children. 

But the size of the tax refund would vary considerably depending on your income, filing status and the number of qualifying children claimed on the tax return. 

To claim the credit, a tax return must be filed. 

The refundable tax credit enables tax filers to get back more from the federal government than you paid in taxes, so there’s a good chance for a significant refund. 

Nationwide, 25 million eligible workers and families received about $63 billion in the Earned Income Tax Credit during 2018. 

The average amount of EITC received nationwide was about $2,488.

Do you need a child to get the credit? 

No. But the income limits and the actual amount of the credit are significantly lower for those without children. 

The credit ranges from $2 to $519 for those with no qualifying children.

If you do not have children, your earned income and adjusted gross income must be less than $15,270 if you’re single to qualify for the credit. The limit is $20,950 for those who have no children and are married filing a joint return. 

Special EITC rules also apply for calculating the credit for those receiving disability benefits or have a qualifying child with a disability, members of the military, and ministers or members of the clergy. 

Why don’t people file for the credit?

Some don’t understand the credit. They might not have qualified in other years but may qualify now because their income has fallen. 

Some people think they just paid their taxes through payroll withholding and don’t need to file a return. They don’t understand how the complex credit can help get them more money.

Some people who don’t make a lot of money may not actually be required to file a federal income tax return. 

For some people, things could be more confusing this tax season. 

Under the new tax rules, the filing requirement thresholds have increased on 2018 returns somewhat because of the new standard deductions, according to Marshall Hunt, certified public accountant and director of tax policy for the Accounting Aid Society’s tax assistance program in metro Detroit.

“For example, as a general rule, a single person under 65 is required to file with gross income of $12,000 or more,” Hunt said.

“And for a married filing joint couple under 65 it’s $24,000.”

Last year, he noted, the amounts were $10,400 and $20,800. However, many should file in order to get a refund of money through credits such as the Earned Income Tax Credit even if they’re not required to file, Hunt said.

Returns can be amended for up to three years for any unclaimed benefits.

Families and individuals with incomes up to $55,000 may be eligible for the Accounting Aid Society’s free full service tax help. If so, the service offers to prepare and file your federal, state and local income tax returns, and to ensure you receive all of your federal and state Earned Income Tax Credits.

When do you receive a tax refund? 

Early filers may have to wait longer than expected, if they’re claiming the Earned Income Tax Credit or the Additional Child Tax Credit on a tax return.

The Protecting Americans from Tax Hikes Act, passed in 2015, mandated that the Internal Revenue Service cannot issue tax refunds that benefit from the Earned Income Tax Credit or the Additional Child Tax Credit before mid-February. The mid-February rule was put into place to combat tax refund fraud. 

This tax season, the IRS said people will have to wait until at least Feb. 27 for refunds with those credits to be available in their bank accounts or on their debit cards via direct deposit. That’s if there are no other issues with their tax return.

Credit given to: Susan Tomporat.

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.

Tax Tip of the Week | How Divorce Affects Social Security Benefits?? October 2, 2019

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

Social Security Benefits experts are difficult to find. I am not one. We understand the calculations of Social Security and Self Employment taxes along with some areas (and entity choices) in which they may be minimized. But, the nuances of Social Security Benefits do not fall directly into our world of income taxes, accounting and business consulting.

Social Security Benefits are complicated and a divorce increases this level of complexity.  Practically 50% of USA marriages end in divorces. The following article explains some of these rules and also walks us through an example of a divorced couple.

                                     -Mark Bradstreet

Here’s how a divorce can affect your Social Security situation.

A whopping 91% of Americans over the age of 50 don’t understand what factors determine the amount they can potentially receive in Social Security benefits, a survey from the Nationwide Retirement Institute found.

There are several factors that can affect how much you receive in Social Security benefits, such as the age at which you claim benefits, whether you continue working after you claim benefits, and how much you earned during the years you paid into Social Security.

One factor that’s easy to overlook, however, is divorce. If you are currently divorced and were married for at least 10 years, you or your ex-spouse could be earning more in Social Security benefits than you think.

How divorce affects Social Security

Not all divorced couples are eligible to receive additional benefits once they start claiming Social Security, and there are certain requirements you’ll have to meet.

The first thing to consider is how your benefits compare to your ex-spouse’s. If you’re receiving more in Social Security benefits than your ex-spouse (or if you haven’t claimed yet but are expected to receive more than your ex-spouse), you’re not eligible for any additional money each month. But if you’re receiving less each month than your ex, you may be eligible for an increase in benefits based on your ex-spouse’s work record.

Assuming you’re receiving less than your ex-spouse in benefits, there are a few other requirements you’ll need to meet. First, you and your former spouse need to have been married for at least 10 years, and you cannot currently be married (although it doesn’t matter whether your ex-spouse has remarried or not). In order to start claiming benefits, you also need to be at least 62 years old.

If you and your ex-spouse are old enough to file for benefits but your ex hasn’t claimed them yet, you can still claim your benefits based on their work record if you have been divorced for at least two years. Also, if you’re eligible for benefits based on your own work record, that money will be paid out first. Then if you’re also eligible to receive extra benefits based on your ex-spouse’s record, you’ll receive an additional amount each month.

Exactly how much extra you’ll receive depends on the age at which you claim. In order to receive the full amount you’re entitled to, you’ll have to wait until your full retirement age (FRA) – which is either age 66, 67, or somewhere in between. If you claim before then (as early as age 62), your benefits will be reduced. By waiting until your FRA, assuming you’re eligible to receive benefits based on your ex-spouse’s record, you can receive half of the amount he or she is receiving in benefits.

One last thing to keep in mind is that regardless of how much someone is receiving in benefits based on their ex-spouses record, it doesn’t affect how much the other person or their current spouse receives in benefits. So, if, say, your ex-wife is receiving benefits based on your record, you and your current wife’s benefits will not be reduced as a result.

Social Security in action: A hypothetical example

Figuring out whether you can claim benefits based on an ex-spouse’s record and calculating what you’d actually receive is complicated and confusing. So, let’s look at a hypothetical example to make it a little easier to understand.

Let’s say you and your husband were married 20 years, and you never remarried after the divorce. Your FRA is 67 years old, and if you claim at that age, you’d be receiving $1,000 per month based on your own work record and earnings. Your ex-husband, however, is currently receiving $2,500 per month in benefits. Because you were married at least 10 years, you’re unmarried now, and you’re eligible to receive less in benefits than your ex-spouse, you can apply for benefits based on your ex-husband’s record.

For simplicity’s sake, let’s say you wait until your FRA to claim. By doing so, you’ll receive the full $1,000 you’re entitled to based on your own record. Based on your ex-husband’s work record, you’re eligible to receive half of what he’s receiving, or $1,250 per month. With ex-spouse benefits, you’re not allowed to “double dip” – meaning you won’t receive your $1,000 plus $1,250 based on your ex-husband’s record. Rather, you’ll receive your $1,000 and an additional $250 per month so that your total benefit amount is equal to half of what your ex-spouse is receiving in benefits.

Also, all the normal Social Security restrictions still apply here. So, if, for example, you claim earlier than your FRA, your benefits will be reduced. And if you continue working after claiming benefits, you may see a (temporary) reduction in benefits as well, depending on how much you’re earning.

Social Security benefits can seem complex, and there are many factors that contribute to how much you’ll receive each month. But by understanding how much you’re entitled to and whether you’re eligible for additional benefits, you can maximize your monthly checks – and enjoy a more financially stable retirement.

Credit given to:  Katie Brockman, The Motley Fool This was published on July 1, 2019

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.

Tax Tip of the Week | Health Care Plans Gain More Flexibility August 14, 2019

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

On June 13, 2019, the IRS issued final regulations regarding health reimbursement arrangements (HRAs).  These types of plans were radically changed and restricted by the Affordable Care Act. The new regulations reinstate the ability of employers to use HRAs to reimburse employees who buy their own health insurance, but the rules can be fairly complicated in certain situations. The full set of rules can be found in the federal register at https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans. In pdf form (and in typical IRS fashion), this article is 140 pages long. It appears to be a collaboration between the IRS, the Employee Benefits Security Administration, the Department of Labor, the Centers for Medicare & Medicaid Services, and the Department of Health and Human Services, and is titled “Health Reimbursement Arrangements and Other Account-Based Group Health Plans”. 

Following is a nice (and much smaller) article published on June 24, 2019, by Jessica Kuester of Taft Stettinius & Hollister, LLP, which helps explain some of the provisions of the new rules, such as who can and cannot be covered, types of HRAs, effective dates, and other features and restrictions of the new HRA regulations.

                                                   –Norman S. Hicks, CPA

Final Regulations Allow Employers to Pay For Employees’ Health Insurance Premiums

Health reimbursement arrangements (HRAs) are a very flexible type of group health plan—they allow employers to reimburse employees for certain medical expenses on a pre-tax basis. Based on the IRS’s interpretation of changes in law that were enacted by the Affordable Care Act (ACA), these arrangements lost most of the flexibility that they had been able to provide for over 50 years. Although HRAs could be integrated with major medical plans offered by employers (i.e., a so-called “integrated HRA”), they could not be offered on a stand-alone basis without the employer incurring a $36,500 per year per participant excise tax. In effect, this meant that employers could no longer reimburse employees for the cost of premiums incurred when purchasing health insurance. New regulations (issued on June 13, 2019) bring back some of the flexibility of HRAs.

What is the new type of HRA?

In a so-called “individual coverage HRA,” employers can reimburse employees for medical expenses (including premiums) that they incur on a pre-tax basis. For each month that they are covered by the individual coverage HRA, employees must be covered by individual health insurance (either offered on the ACA Exchange or not), and employers must substantiate such coverage.

Who can be covered by an individual coverage HRA?

An individual coverage HRA cannot be offered to any employee offered a traditional employer-sponsored group health plan. This means that employees cannot be given a choice between the employer’s traditional group health plan and an individual coverage HRA—employers can only offer one or the other. However, employers can decide to offer an individual coverage HRA to one or more class of employees and a traditional group health plan to the other classes. The acceptable classes are full-time employees, part-time employees, seasonal employees, employees working in the same geographic location (such as the same state or same insurance rating area), collectively bargained employees, salaried employees, hourly employees and newly-hired vs. existing employees. These are only a few examples: there are other types of classes identified in the regulations and additional classes can be formed by combining any of the acceptable classes. In addition, minimum class size rules (generally, 20 class members) apply to employers offering a traditional group health plan to some classes and an Individual Coverage HRA to other classes.

How much can employers reimburse under an individual coverage HRA?

Just like with other types of HRAs, employers can reimburse as much or as little as they want. However, the individual coverage HRA must be offered on the same terms to all employees in the class. So although the amount of reimbursement can vary between classes, they generally cannot vary among the class members (except for variations based on an employee’s age or the number of dependents).

How do employers offer an individual coverage HRA?

Employers offering an individual coverage HRA must notify eligible participants about the individual coverage HRA and its interaction with the premium tax credit that is available to certain individuals under federal tax law. Although the individual coverage HRA itself is considered an employer-sponsored group health plan, the underlying health insurance coverage purchased by the employee is not, so long as the employee’s purchase of the insurance coverage is voluntary, the employer does not select or endorse any particular insurance carrier or coverage, the employer does not receive any kickbacks for an employee’s selection of any particular individual health insurance and each employee is notified annually that the individual health insurance they select is not subject to ERISA.

What about the employer mandate?

The good news: an employer’s offer of reimbursement through an individual coverage HRA counts as an offer of coverage for purposes of the ACA’s employer mandate. The bad news: although the new regulations offer guidance on when an individual coverage HRA will be considered “affordable” for purposes of the premium tax credit, the IRS has not yet issued rules describing when the coverage will be considered “affordable” for purposes of the employer mandate. These rules are likely coming soon.

Are there any other types of new HRAs available under the new regulations?

The new regulations also create an excepted benefit HRA. The excepted benefit HRA is different than the individual coverage HRA in that it only reimburses the employee for costs incurred in connection with “excepted benefits” (such as dental and vision benefits). This new excepted benefit HRA is an HRA offered as part of an employer’s traditional group health program and can reimburse medical expenses even when the employee opts out of the group health plan itself. This is a departure from the current rules that apply to integrated HRAs, which only permit reimbursement of medical expenses when the employee actually enrolls in the group health plan.

The excepted benefit HRA:

When can employers start offering these new types of HRAs?

The new types of HRAs can be offered beginning on Jan. 1, 2020. Note that, in order to start offering coverage under the individual coverage HRA on that date, employers will need to take action before then.  Most notably, the required notice must be provided prior to Jan. 1, and employees will need to take part in the 2020 open enrollment period for individual coverage, which typically occurs in late 2019.

Jessica E. Kuester is an attorney with Taft Stettinius & Hollister, LLP and represents employers in all of their employee benefit needs. She can be reached at jkuester@taftlaw.com. Her article, as reproduced above, can be found at https://www.taftlaw.com/news-events/law-bulletins/final-regulations-allow-employers-to-pay-for-employees-health-insurance-premiums.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Norman S Hicks, CPA

–until next week.

Tax Tip of the Week | New Tax Laws Benefit Retirees May 22, 2019

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

The tax year of 2018 was the first full year for some tax savings that may benefit retired taxpayers more than some other groups. Some of these possible benefits follow:

1.    Higher standard deduction – for those retirees that have paid off their home mortgage may now have difficulty in itemizing their deductions. But, no matter – the new higher standard deduction which has practically doubled from 2017 to 2018 is more likely worth more in tax savings than being able to itemize as before.  
2.    Taxpayers aged 70 ½ and older may transfer up to $100,000 to charities from their IRAs even if unable to itemize. These contributions may count toward their RMD – BUT, the withdrawal doesn’t count as taxable income. An added benefit is that making donations in this fashion holds down your adjusted gross income which can help save on taxes on Medicare premiums, investment income and social security benefits. 
3.    Higher gift tax exemptions are available. The annual gift exclusion for 2019 is $15,000. So, any annual gifts made less than $15,000 do not require a gift tax return. Above that amount, a gift tax return is required, but typically, no gift tax is paid, unless working with a high net worth individual that is making lifetime gifts exceeding $11.4 million. A sunset provision exists where in 2026 – gift and estate tax provisions revert back from the $11.4 million to the pre-2018 levels of $5.49 million per person.  

The article that follows, Tax Overhaul Gives Retirees Some Relief further discusses the above in greater depth and includes some additional benefits. It was authored by Anne Tergensen and published by the WSJ on April 12, 2019.  
                                        –    Mark Bradstreet

Taxpayers are now filing their first returns based on the tax law Congress enacted in 2017. For retirees, the largest overhaul of the U.S. tax code in three decades has created new opportunities to cut taxes, along with some potential headaches.

Here are important changes retirees should be aware of and steps they can take to reduce their future tax bills.

1.    Higher standard deduction:

Many retirees, especially those who have paid off mortgages, take the standard deduction. For them, one positive change is the near-doubling of this deduction, or the amount taxpayers can subtract from their adjusted gross income if they don’t itemize deductible expenses including state taxes and charitable donations.

For individuals, the standard deduction is $12,000 for 2018 and $12,200 for 2019, up from $6,350 in 2017. For married couples, it is $24,000, rising to $24,400 for 2019, up from $12,700 in 2017. People 65 and older can also take an additional standard deduction of $1,600 (rising to $1,650 in 2019) or $2,600 for married couples. The expanded standard deduction expires at the end of 2025.

2.    A tax break for charitable contributions:

Retirees who take the standard deduction can still claim a tax benefit for donating to charity.

Taxpayers age 70½ or older can transfer up to $100,000 a year from their individual retirement accounts to charities. These donations can count toward the minimum required distributions the Internal Revenue Service requires those taxpayers to take from these accounts. But the donor doesn’t have to report the IRA withdrawal as taxable income. This can help the taxpayer keep his or her reported adjusted gross income below thresholds at which higher Medicare premiums and higher taxes on investment income and Social Security benefits kick in. People over 70½ who itemize their deductions can also benefit from such charitable transfers, said Ed Slott, an IRA specialist in Rockville Centre, N.Y.

3.    More options for 529 donors:

The new law allows taxpayers to withdraw up to $10,000 a year from a tax-advantaged 529 college savings account to pay a child’s private-school tuition bills from kindergarten to 12th grade.

For parents and grandparents who write tuition checks, saving in a 529 has advantages. The accounts, which are offered by states, allow savers to make after-tax contributions that qualify for state income tax breaks in many states and grow free of federal and state taxes. Withdrawals are also tax-free if used to pay eligible education expenses.

As in prior years, donors who want to give a child more than the $15,000 permitted under the gift-tax exemption can contribute up to five times that amount, or $75,000, to a 529. (They would then have to refrain from contributing for that child for the next four years.)

About a dozen states don’t allow tax-free withdrawals from 529s for private K-12 school tuition, so check with your plan first, said Mark Kantrowitz, publisher of Savingforcollege.com.

4.    Higher gift-tax exemption:

The tax overhaul includes a sweet deal for ultrawealthy families. For the next seven years, the gift-tax exemption for individuals is an inflation-adjusted $11.4 million, up from $11.18 million in 2018 and $5.49 million in 2017. For couples, it is $22.8 million, up from $22.36 million in 2018 and $10.98 million in 2017.

Congress also raised the estate-tax exemption to $11.4 million per person today from $5.49 million in 2017. As a result, taxpayers can give away a total of $11.4 million tax-free, either while alive or at death, without paying a 40% gift or estate tax.

Because in 2026 gift- and estate-tax exemptions are set to revert to pre-2018 levels of $5.49 million per person adjusted for inflation, individuals with assets above about $6 million—and couples with more than $12 million—should consider making gifts, said Paul McCawley, an estate planning attorney at Greenberg Traurig LLP.

The sooner you give assets away, the more appreciation your heirs can pocket free of gift or estate tax, Mr. McCawley said.

The Treasury Department and the IRS recently issued proposed regulations that would grandfather gifts made at the higher exemption amount between 2018 and 2025 after the exemption reverts to pre-2018 levels.

5.    Less generous medical-expense deduction:

For 2018, taxpayers can deduct eligible medical expenses that exceed 7.5% of adjusted gross income. That means for someone with a $100,000 income and $50,000 of medical or nursing-home bills, $7,500 is not deductible.

In 2019, the threshold for the medical deduction is slated to rise to 10% of adjusted gross income. That would leave the person above unable to deduct $10,000 of medical bills. One way to reduce the pain is to take advantage of the tax break available to people 70½ or older who make charitable transfers from IRAs, said Mr. Slott. Because the donor doesn’t have to report charitable IRA transfers as taxable income, a $5,000 gift would reduce a $100,000 income to $95,000. That, in turn, would mean $9,500 of medical expenses are ineligible for the deduction in 2019, rather than $10,000.

6.    Goodbye to Roth re-characterizations:

The legislation ended the ability of savers to “undo” Roth IRA conversions, which had been used to nullify certain IRA-related tax bills.

With a traditional IRA, savers typically get a tax deduction for contributions and owe ordinary income tax on withdrawals. With a Roth IRA, there is no upfront tax deduction, but withdrawals in retirement are usually tax-free. Tax-free withdrawals are attractive since they don’t push the saver into a higher tax bracket or trigger higher Medicare premiums.

Savers can convert all or part of a traditional IRA to a Roth IRA, but they owe income tax on the taxable amount they convert in the year they convert. Until the overhaul, savers could undo a Roth conversion—and cancel the tax bill—within a specific time frame. But under the new tax law, Roth conversions can no longer be undone.

That doesn’t mean converting is no longer worthwhile, Mr. Slott said. But people should be careful to convert only an amount they know they can afford to pay taxes on.

Credit Given to:  Anne Tergesen. You can write to Anne Tergesen at anne.tergesen@wsj.com.

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.

Tax Tip of the Week |Offshore Tax Cheats – The IRS is Still Coming for You March 6, 2019

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

Having an offshore account is not illegal, provided the accounts are in compliance with U.S. tax laws which include appropriate disclosure. And, yes, you can get into serious trouble for failing to attach the appropriate forms to your income tax return. So, please be certain to advise your tax preparer of any foreign assets you may have. But, where things get really dicey, is the situation of using these “secret” accounts to hide your money and not paying any income tax (offshore tax evasions is a criminal act). More details from Laura Saunders follow.

  • Mark Bradstreet

“Hiding money from the U.S. government is a lot harder than it used to be.  

On Sept. 28, the Internal Revenue Service will end (now ended) its program allowing American tax cheats with secret offshore accounts to confess them and avoid prison. In a statement, the IRS said it’s closing the program because of declining demand.

But the agency vowed to keep pursuing the people hiding money offshore and said it will offer them another route to compliance.

What a difference a decade makes.

Before 2008, an American citizen could often walk into a Swiss bank, deposit millions of dollars, and walk out confident that the funds were safe and hidden from Uncle Sam, says Mark Matthews, a lawyer with Caplin & Drysdale who formerly helped the IRS’ criminal division.

Now he says, “Americans hiding money abroad have to go to small islands with sketchy advisers and less reliable financial systems.”

The reason:  a historic crackdown on the longstanding problem of U.S. taxpayers hiding money offshore, U.S. officials ramped it up after a whistleblower revealed that some Swiss banks saw U.S. tax evasions as a profit center and were sending bankers onto U.S. soil to hunt for clients.

The defining moment came in 2008, when Justice Department prosecutors took Swiss banking giant UBS AG to court and managed to pierce the veil of Swiss bank secrecy. In 2009, UBS agreed to pay $780 million and turn over information on hundreds of U.S. customers to avoid criminal prosecution.

The Justice Department repeated the UBS strategy, with variations, for scores of other banks and financial firms in Switzerland, Israel, Liechtenstein and the Caribbean. So far, institutions have paid about $6 billion and turned over once-sacrosanct customer information. More major settlements are still to come.

Prosecutors also successfully pursued more than 150 individuals hiding money abroad. Some defendants earned jail time, and many paid dearly – a total of more than $500 million so far. Dan Horsky, a retired business professor and a startup investor, appears to have handed over the largest amount: $125 million for hiding more than $220 million offshore.  

In many cases, a taxpayer can owe a penalty of half a foreign account’s value, if it’s greater than $10,000 and it’s not reported to the Treasury Department. Ty Warner, the billionaire creator of Beanie Babies plush toys, paid $53.6 million for hiding an account with more than $100 million.

The IRS capitalized on tax cheats’ fears of detection with its Offshore Voluntary Disclosure Program, the limited amnesty that’s ending. It hit confessors with large penalties in exchange for no prosecution. Since 2009, more than 56,000 U.S. taxpayers in the program have paid $11.1 billion to resolve their issues.

To be sure, the U.S. crackdown hasn’t reached everywhere – notably Asia.

Edward Robbins, a criminal tax lawyer in Los Angeles formerly with the IRS and Justice Department, attributes the enforcement gap to the widespread use of human beings, rather than structures like trusts, to shield account ownership in Asia.

“In the Far East, individuals often use other individuals who use other individuals to hold assets. Finding the true owner is a tough nut to crack, unlike in the West,” he says.

The crackdown also had drawbacks, making financial life difficult for many of the roughly 4 million U.S. citizens living abroad. Unlike most countries, the U.S. taxes citizens on income earned both at home and abroad. Often expatriates were stunned to find they could be considered tax cheats under the expansive U.S. Law and that compliance would be onerous.

In reaction, more than 25,000 expats have given up U.S. citizenship since 2008, with some paying a stiff exit tax. Others are working to get Congress to change the taxation of nonresidents.

For expats and others, the IRS now offers a compliance program with lesser penalties, or none, for offshore-account holders who didn’t willfully cheat. About 65,000 taxpayers have entered the program and the IRS says it will remain open for now.

Current and would-be tax cheats should take seriously the IRS’s vow to keep pursuing secret offshore accounts, says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink who has handled more than 1,500 offshore disclosures to the IRS.

Although the IRS’s staffing is way down, he says, the agency and the Justice Department have far better tools for detecting and combating evasion than 10 years ago.

Among these agencies’ tools are the Fatca law, which requires foreign firms to report information on American account holders.This law is providing the IRS with streams of useful information it’s using in prosecutions.This week brought the first guilty plea for a violation of Fatca rules by a former executive of a bank in Hungary and the Caribbean.

The IRS is also mining data from foreign bank settlements and whistleblower information. The payment of $104 million to UBS whistleblower Bradley Birkenfield, apparently the largest ever, has inspired other informers.

To detect clusters of cheats, U.S. officials now can use a “John Doe summons” to force firms to release information on a class of customers suspected of evading taxes – even if their identities aren’t known, and even if the information isn’t in the U.S.

This strategy has been so successful that the IRS has broadened its use to identify possible tax cheats using cryptocurrencies.

“More than ever, there’s no place to hide,” say Mr. Skarlatos.”

Credit given to Tax Report, Laura Saunders, WSJ, September 15-16, 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 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 C. Bradstreet, CPA

-until next week

Tax Tip of the Week | How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases) February 27, 2019

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

How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases)

As a refresher, the QBI deduction is available for the first time on your 2018 Form 1040. So, this is all new stuff for you and us (and the IRS). The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Yes, if you qualify – that may be a huge deduction for you. So, when it comes to the interpretation of 199A, there is a lot at stake for a lot of businesses.

Landlords have anxiously awaited further guidance in regards to Section 199A. There has been much speculation if, when and how the Section 199A would apply for them.  Finally, on Friday, January 18, 2019, the Treasury Department and the Internal Revenue Service issued final regulations on the implementation of the new qualified business income (QBI) deduction for rentals. Now we have to interpret their interpretation. And, only time will tell, whether this final interpretation is their last interpretation (probably not).

What follows is specifically about landlords and the applicability of 199A. For starters, let’s define “triple net lease.” This term often comes up in business conversations. Interestingly, not everyone has the same definition in mind. So, excerpts from the first article below define some different types of leases before moving into the second and last article which tends to revolve around “triple net leases.” Please keep in mind that his interpretation of the final 199A interpretation as well as some of his opinions may differ from ours. Many parts of the new tax law are still fuzzy, moving targets and this one is no exception.

By Mark Bradstreet

By Rob Blundred  – Commercial Sales Associate, Henkle Schueler and Associates
Aug 6, 2018

Net lease
The benefit of a net lease is that the landlord can charge a lower base rent price. However, along with the base rent the tenant is responsible for an “additional rent fee” which covers the operations and maintenance of the property. These costs can cover real estate taxes, property insurance and common area maintenance (CAM) items. The CAM fees cover the landlord costs for janitorial services, property management fees, sewer, water, trash, landscaping, parking lot, fire sprinklers, and any shared area or service.

There are several types of net leases:

•    Single net lease (N lease). In this lease, the tenant pays base rent plus their pro rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant). The landlord covers all other building expenses. The tenant also pays utilities and janitorial services.

•    Double net lease (NN lease). The tenant is responsible for base rent plus their pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.

•    Triple net lease (NNN lease). This is the most popular type of net lease for commercial freestanding buildings and retail space. The tenant pays all or part of the three “nets” – property taxes, insurance, and CAMS – on top of a base monthly rent.

Absolute triple net lease

The absolute triple net lease is an extreme form of an NNN lease where the tenant absorbs all of the real estate risk and responsibility. The tenant is ultimately responsible for all building-related expenses and repairs, including roof and structure.

Modified gross lease

The appeal of a modified gross lease is the tenant has one set amount to pay each month. In a modified gross lease, the base rent and “nets” (property taxes, insurance and CAMS) are all included in one lump sum payment; excluding utilities and janitorial services, which are typically covered by the tenant.
The benefit of a modified gross lease is their flexibility. They are generally an easier agreement to make between the landlord and tenant. The risk is if insurance, taxes or CAM increase or decrease the cost or savings is passed on to the landlord.

Why Is the IRS Punishing Triple Net Landlords?

Alan Gassman Contributor to Forbes Jan 26, 2019
Retirement  (writes about tax, estate and legal strategies and opportunities.)

“There are horrible people who, instead of solving a problem, tangle it up and make it harder to solve for anyone who wants to deal with it.

Whoever does not know how to hit the nail on the head should be asked not to hit it at all.”

– Friedrich Nietzche

While the IRS as a whole is by no means “horrible,” the new Final Regulations regarding Section 199A of the Internal Revenue Code must seem that way to landlords who lease property under triple net leases. The vast majority of these will not be considered to be “active trades or businesses” for purposes of qualifying for the 20% deduction that will be available to most active landlords.

Code Section 199A was introduced to the Internal Revenue Code as part of the 2017 Tax Cuts and Jobs Act with the intent of giving taxpayers some degree of parity with the 21% income tax bracket bestowed upon large and small companies that are taxed as separate entities (known to tax professionals as “C corporations.” C corporations are different than “S corporations,” as S corporations report their income under the “K-1” system that causes the shareholders to pay the income tax on their personal returns).

Since the term “trade or business” was not defined under Section 199A, the real estate community has been waiting for the Final Regulations which were released on Friday, January 18, and basically follow what the Proposed Regulations (released last August) said, which is that passive investors are not considered to be an active trade or business, even though they take significant economic risks and may work hard to verify that the tenants pay the taxes, insurances and maintenance of the leased property, comply with applicable law and otherwise do what tenants are supposed to do.

The practical result will be that landlords will need to become active and possibly renegotiate lease terms to have at least a chance of being eligible to have the deductions that other landlords will have, or to perhaps qualify under the new safe harbor rules that allow the deduction to non-triple net leases if they satisfy the 250 hour per year requirement, which requires tabulation of the work hours of landlords and agents of landlords, and certain time log and verification procedures.’

This seems very unfair since REIT (Real Estate Investment Trusts) income will often include triple net lease profits that will qualify for the Section 199A deduction, and C corporations only have to pay the 21% rate on net income from triple net leases.

Tax professionals, and masochists may enjoy or derive a better understanding by reading on.

The new Final Regulations refer to several Supreme Court cases to aide in defining what types of enterprises will qualify as a trade or business, and these cases do not bode well for landlords of triple net leases. For example, the Final Regulations cite to the Supreme Court’s 1987 landmark “trade or business” case, Commissioner v. Groetzinger, which held that to be engaged in a trade or business the following two requirements must be met:

1. The taxpayer’s involvement must be continuous and regular; and

2. The primary purpose of the activity must be for income or profit.

The very definition of a triple net lease seemingly disqualifies the majority of triple net landlords from qualifying under this definition under the assumption that they do not have continuous and regular involvement.

With triple net leases, the tenant is usually responsible for the three “nets”: real estate taxes, building insurance, and maintenance. By having the tenant be responsible for most of the on-site responsibilities, the landlord is able to spend more time and effort buying and selling other properties and therefore investing more into the economy.

In turn, triple net lease agreements usually benefit the tenant because the pricing of the agreement will reflect the fact that the tenant will be responsible for a lot of the on-site responsibilities. Now tenants have the upper hand when landlords ask to be allowed to provide at least 250 hours of services per year (cumulatively, as to all leases that the landlord will aggregate under the complicated aggregation rules, which are discussed in our blog post entitled Real Estate: Investing with Section 199A: Don’t Let Your Deductions Fly Out the Window).

The new Final Regulations do, however, contain one saving grace for taxpayers with triple net leases by quoting the 1941 Supreme Court case of Higgins v. Commissioner.

In Higgins the Supreme Court stated that the determination of “whether the activities of a taxpayer are ‘carrying on a business’ requires an examination of the facts in each case.” Since it is a factual determination, a taxpayer with the right facts can successfully argue that his or her triple net or almost triple net rental enterprise should constitute a qualified trade or business.

However, doing so will be a tough and expensive hurdle for many landlords to jump over.

Perhaps Congress will act in a compromise to assist the continued growth in the economy in recognizing that taxpayers with triple net leases put themselves at significant financial risk, in that tenants like Toys R Us and Sears may go bankrupt and leave a landlord high and dry after many months of eviction and then bankruptcy litigation. Many landlords are not aware that the bankruptcy law allows tenants to have the court terminate long term leases and limit damages to one year of rent.

Non-triple net lease landlords who spend considerable time in their leasing activities can take considerable comfort from Notice 2019-7, which was published alongside the new Final Regulations. The Notice provides the above-mentioned safe harbor for non-triple net leases to be “treated as a trade or business solely for the purposes of Section 199A.”

Under the new safe harbor, non-triple net rental real estate may be treated as a trade or business, if the following three requirements are met:

1. separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

2. 250 or more hours of rental services are performed per year with respect to the rental enterprise; and

3. the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding the following: a) hours of all services performed, b) description of all services performed, c) dates on which such services are performed, and d) who performed the service.

Interestingly, while triple net lease arrangements outside of REITs will likely not qualify under Section 199A, banks that are taxed as S corporations, or partnerships, are eligible for the deduction, although in many respects a loan is like a triple net lease where the landlord has put money out for a long term series of payments, where in many cases the vast majority of the value is in the years of payments to be received, just like a long term promissory note.

It is even more disturbing that other types of businesses involving much less risk on the part of the owner qualify for the deduction. These include brothels, franchisors and vending machine owners. How is it possible that a brothel owner sitting back and receiving rent from independent contractor “professional entertainers” may qualify for the benefits of Section 199A, but taxpayers with triple net leases do not?

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 C. Bradstreet, CPA

-until next week