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Tax Tip of the Week | Real Estate – Tax Basis April 24, 2019

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

In an earlier Tax Tip, different tax categories of real estate were briefly discussed. This week we will discuss how a tax gain or loss is treated upon sale by the various classifications as listed below:

1.    Principal residence – Your gain (loss) is calculated by subtracting your tax basis from your sales price. Your tax basis starts with your original cost, adds in any qualifying improvements, and includes most of the selling expenses you incur when sold. Provided certain tests are met, gain is excludable up to $500,000 on a joint return, or $250,000 for a single filer. Exception: Any depreciation taken after May 6, 1997 is usually taxable. Depreciation may have been taken on an office in the home or any business usage. Any loss upon the sale of a personal residence in non-deductible.

2.    Second home – Your tax basis is calculated in the same manner as a personal residence. Any gain is taxed as capital gain. No exclusion is allowed as with a personal residence. No one may designate more than one property as a personal residence. Just as with a personal residence, any loss upon the sale of a second home is non-deductible.

3.    Rental property – The tax basis is calculated in the same manner as a personal residence with one major exception.   Because rental properties are depreciated over time, basis has to be reduced by the depreciation allowed or allowable. Any gain on the sale of a rental property is taxed as capital gain. However, the gain attributable to the depreciation taken could be taxed as high as 25%. This in known as Section 1250 recapture. Any excess gain is taxed as normal capital gain with a maximum rate of 20%. A loss on the sale of a rental property is normally deductible as an ordinary loss (not subject to the $3,000 per year net capital loss limitation).

4.    Investment property – Depreciation is not normally allowed on investment property. A loss is deductible to the extent of capital gains plus $3,000 per year for joint or single filers, and $1,500 per year for a married filing separate return.

5.    Business property – Same as rental property above if owned individually.

6.    Gifted property – Your tax basis in a property received as a gift is the same as the basis was in the hands of the giver.

7.    Inherited property – Your tax basis in an inherited property is generally the fair market value of the property as of the date of death of the decedent, commonly called a “stepped-up basis”.

As noted above, gains and losses are often treated very differently depending upon the type of property. Please understand what your type of property is and that its character may change for a variety of reasons including your intentions. Being able to substantiate all of this may be important.

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 – Norman S. Hicks, CPA

–until next week.

10 Tips for Tiger Woods (Professional Athletes) and the New Tax Law April 17, 2019

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

The odds are good that this Tax Tip of the Week won’t reach more than a handful of professional athletes and maybe not even that many. Regardless, in the world of tax, many similarities exist between a professional athlete and an employee who travels around the country. Sadly, those similarities are the only things that I will ever have in common with the likes of Tiger Woods, Lebron James, Stephan Curry and Tom Brady. The commentary below was taken from an article dated April 23, 2018 by Travis Tandy who is a staff accountant with Ferguson, Timar & Co in Fullerton California. As you read through this article, please note that the tax laws are no different for you than for a professional athlete, especially if your job necessitates travelling between various taxing entities and you have been itemizing your deductions in the past.

                                                        – Mark Bradstreet

Whether you’ve provided tax and accounting services for professional athletes in the past or are just getting started, you’ll want to pay special attention to these 10 key issues that are unique to this type of client. Adding to the special circumstances these athletes have faced in the past year is the new tax law. Many business expenses that are common among professional athletes are no longer deductible or are limited. Tax planning opportunities abound for this type of client as we all sort through the ramifications of the new Tax Cuts and Jobs Act. Here are some of the many things you’ll face.

1. Jock Tax: Under the terms of what is commonly called the “Jock Tax,” athletes must report their income in each state in which they play. An additional challenge from a tax planning standpoint is player trades during the year. We may set up a tax plan, only to have the player traded to a different state or team in which they will play in an entirely different set of states.

2. Residency: Establishing residency can be most challenging for rookie players. Rookies are often young and unestablished outside of their parents’ home state. Veteran players have the benefit of choosing a permanent residency based on their tax situation. The key is to establish residency in a favorable county near the home stadium. Establishing residency can be done simply by finding a living space, obtaining a driver’s license in that state and setting up utilities in the player’s name. Many players choose states like Florida, Texas, and Washington that have no state tax requirements.

3. Charitable Giving/Non-profit: Players can take advantage of their status to help others through charitable giving. This allows them to support a cause close to their heart. You can help by explaining the value of maximizing charitable donations.

4. Agent Fees & Unions Dues: As of the tax year 2018, union dues and agency fees directly related to the generation of W-2 income no longer qualify as an itemized deduction. Rookie players have minimum dues exceeding $17,000 per year and agent fees of around 3%. These once-deductible items will need to be removed from the player’s tax plans moving forward, or different tax structures need to be explored. However, we are working diligently to review the NFL Collective Bargaining Agreement in conjunction with the new tax laws in hopes of changing the way this is handled.

5. Player Fines: Nobody wants to see a situation where a player does something to generate a fine against them. The fines are often donated in the name of the player, turning the fine into a tax deductible expense to the player. Fines not donated to a charity may be considered a necessary and ordinary business expense to the player, subject to new and limiting tax rules.

6. Athletic Equipment: Footballs, golf clubs, tennis rackets, racquetball rackets, basketballs, etc. are considered ordinary and necessary for the player to continue to play at a high level, and to maintain their employment with their team. Again, new tax rules cause us to reexamine the nature of this former itemized deduction. Look for professional athletes to start incorporating themselves to take advantage of more favorable tax provisions.

7. Royalties: Royalties can sometimes be a difficult issue with athletes. Most are unsure of the amount due to them through the year, making tax planning for royalty income a difficult task. Royalty deals also come and go based on player performance. A fluctuation in a multi-million dollar royalty deal can really change the outcome of the player’s tax situation.

8. Unknown increased salaries: It doesn’t happen all that often, but a veteran player may get sent to the injured list for the season. This means a lower paid backup player will be used to replace the player. Players moving from the bench to a starting position receive a significant increase in pay. This can cause a change in their current tax rate and plan.

9. Signing bonuses: The benefit of a signing bonus all comes down to the form in which the bonus is paid out. If the bonus is paid out properly by the league, it may not need to be included in state income.

10: Taxable Swag: Gifts or swag given to players is not truly a gift and it actually comes with a price tag. The items are almost always given in connection with an appearance or as a bonus for the player’s appearance. Unfortunately, the IRS will want a cut of that swag in the form of a tax payment. These fortunate events create additional taxable income for the players often overlooked in the excitement and lack of notice from the agency providing the swag.

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 | No. 327 | Expired Tax Provisions: No Relief in Sight? November 4, 2015

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | November 4, 2015 | No. 327 | Expired Tax Provisions: No Relief in Sight?

For the last several years, taxpayers have faced great uncertainty determining whether they can depend on tax incentives to help them lower taxes.  These have become known as the “51 Tax Extenders”.  Last December, Congress extended most of these provisions for one year retroactively to the beginning of 2014, but not going forward, so they expired again at the end of 2014.

Unlike many previous years, Congress did not spend much time or effort this summer working to fix the extenders situation.  So, as we enter the last quarter of 2015, with most of the tax incentives expired, it’s a good time to review which provisions might get a last minute reprieve.

We will look at the major pending extenders for individuals, businesses and energy-related provisions:

Individuals
–    Educator’s $250 above-the-line deduction for classroom supplies
–    Exclusion from income for discharge of debt on a primary residence
–    Deduction for mortgage insurance premiums (PMI)
–    Deduction of sales taxes in lieu of state/local taxes
–    Special rules for capital gain treatment of conservation easements
–    Option to use above-the-line deduction for tuition expenses
–    Option for those over age 70.5 to make tax-free contributions in lieu of taking taxable RMDs.

Businesses
–    Research & Development credit
–    Employee wage credit for active duty and reserve military employees
–    15-year straight line cost recovery for leasehold improvements
–    Section 179 and Section 168 accelerated depreciation options on capital purchases

Energy-related tax incentives
–    Several credits for renewable and energy-efficient fuels
–    Several credits for energy-efficient building construction

If history is any guide, and Congress finally acts, it will be at the last minute. This makes tax planning on many issues nearly impossible.  With the election nearing, the situation this year may be worse than normal.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.