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Working Remotely? Watch Out for Unintended Tax Consequences! July 1, 2020

Posted by bradstreetblogger in : COVID, COVID-19, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

  Typically, you are taxed by the location of your physical presence (this is changing now to some degree to better deal with the complexities of the internet).  For example, Ohio cities tax you first where you work and then next where you live.  That is to say that you won’t owe any city tax for your residence city if your workplace is located in a city whose tax rate is equal to or higher than the city where you live.  This is true only if your resident city allows a full tax credit for the city taxes paid where you work and its tax rate is equal to or less than your work city.  Not too long ago, almost all cities allowed a full credit for the tax paid to the city where you are employed.  But this full tax offset is becoming more of a rarity the last few years as city budgets continue to become more and more strained. These deficit situations for state and local governments won’t become any better with the current pandemic placing even greater demands on city finances.  

    For all intents and purposes, your state income tax model differs little from that of the cities.  It is not unlikely to find yourself double taxed by cities AND states.

    Now having attempted to make a long story short and leaving out the numerous tax exceptions for the general tax rules for cities and states as mentioned above; and, all the while assuming you have a good handle on how your state and local taxes should currently be filed, let’s throw you a curve ball.  Let’s presume you are now working from home.  And, your home is in a different city or even a different state than where you work.  What if you are working half the week at home and the rest of the week at work?  All of a sudden, a tax nightmare has developed.  

    I wish I had the silver bullet to answer my own questions.  Perhaps, the cities and states will pass legislation to overcome these added complexities resulting from the pandemic.  But I doubt it.  In the meantime, we better become accustomed to even more tax correspondence from cities and states.  None of them are going to roll-over in their efforts to collect all the monies that they can.  It is always a mystery to me why they would spend megabucks and create huge amounts of ill will in the community all in an effort to collect a nominal amount of taxes.  But some things never change.

This week’s Author – Mark Bradstreet

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

– until next week.

Tax Tip of the Week | New Tough Tax Rules for Business Losses March 4, 2020

Posted by bradstreetblogger in : 2019 Taxes, Business consulting, Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes, Uncategorized , add a comment

March 4, 2020

Some businesses are very profitable, others are not – many businesses exist somewhere in the middle. Until recently, a Net Operating Loss (NOL) could be carried back two (2) years and the remainder forward for twenty (20) years (all within various limitations). Things have changed. For the vast majority of businesses, NOLs may only be carried forward without a sunset provision. BUT and there always is a BUT with the tax law – NOLs may not exceed certain amounts and percentages.  This is explained in greater detail below:
                                -Mark Bradstreet

Okay, you’re not in business to lose money but it can happen from time to time. The tax law has new rules in store for you when it comes to writing off business losses in 2018 and beyond. These rules make it more difficult to use losses to save taxes.

Net operating loss

Essentially, a net operating loss arises when the amount of a current business loss is greater than what can be used in the current year (i.e., greater than taxable income), and it becomes a net operating loss (NOL). (Technical rules apply to make an NOL more complicated than this.)

When and how the NOL is used has been changed by the Tax Cuts and Jobs Act.

•    NOLs arising prior to 2018. Generally these NOLs can be carried back for 2 years (there are some special rules for certain situations and an option to waive the carry-back) and forward for up to 20 years. The NOLs can offset up to 100% of taxable income.
•    NOLs arising in 2018 and beyond. No carry-back is allowed (other than for certain farming losses and losses of property and casualty insurance companies), but there’s an unlimited carry-forward. However, the NOL can only offset up to 80% of taxable income.

Record-keeping. If you have a carry-forward of a pre-2018 NOL, be sure to keep track of it separately from newer ones so you can use it as a 100% offset going forward. NOLs are taken into account in the order in which they are generated, so that old NOLs are used before newer ones. This rule hasn’t changed.

Non-corporate excess business losses

If you own a pass-through entity—sole proprietorship, partnership, S corporation, or limited liability company—the rules for writing off your losses have changed dramatically. Until now, if you had $1 million in revenue and $1.6 million in expenses, the $600,000 loss passed through to you would be deductible on your return (limited by your basis in the business).

Now there’s an important change in the treatment of losses. Instead of being currently deductible, excess business losses are characterized as net operating losses that must be carried forward.

What is a non-corporate excess business loss?This is the excess of business deductions for the year over the sum of (1) gross income or gain from the business, plus (2) $250,000 for singles or $500,000 for joint filers (with these dollar amounts adjusted for inflation after 2018).

So continuing the example I started earlier, under the new loss limit, instead deducting $600,000 in 2018, assuming you’re single, you’d only be able to write off $350,000 ($1.6 million – [$1 million + $250,000]). The balance of the loss–$250,000—is treated as a net operating loss that becomes deductible in 2019 to the extent permissible (explained earlier).

For owners of partnerships and S corporations, the limit is applied at the owner level, based on the owner’s distributive share of business income and expenses.

The excess business loss limit applies after applying the passive activity loss limit. The excess business loss limit is effective from 2018 through 2025.

Conclusion

To sum it up, when you’re doing well, the government is your partner by sharing in your good fortune via taxes. But when you aren’t doing well, the government doesn’t want to know you anymore. The Tax Cuts and Jobs Act rewards profitable businesses by lowering the taxes to be paid on profits. But this same law essentially penalizes unprofitable businesses by imposing limits on utilizing losses. In the past, for example, if you had an NOL, you could carry it back to generate an immediate cash refund that could be ploughed into the business. In effect, a loss could be turned into a gain. No longer.

Perhaps the lesson here is: Be profitable. Take the steps you need to ensure this—cut expenses, raise prices, etc. And work with your tax advisor to see what other measures can be used to keep you in the black.

Credit given to – Barbara Weltman

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.  

Today’s author – Mark Bradstreet

– until next week.

Tax Tip of the Week | How is Hobby Income Taxed? February 12, 2020

Posted by bradstreetblogger in : 2019 Taxes, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

February 12, 2020

The hobby world has been turned upside down. In the past, hobby expenses were deducted to the extent of hobby income. Starting with 2019 and moving forward, hobby expenses are no longer deductible but your hobby income is fully taxable. Why? I have no idea. Hobbyists should be making whatever efforts necessary to convert their hobby to a business. Unlike hobby expenses, business expenses are deductible.  

                                -Mark Bradstreet

If you earn money from a hobby, you must report it as income on your federal income tax return. But if your hobby turns into a business, you may be eligible to take business deductions as well.

If you’re like most people, you probably have at least one hobby.

Unless your hobby’s mining for cryptocurrencies, you may not profit much from it. But you could still have at least a little hobby income coming in. If you do, you’re probably wondering: How is hobby income taxed?

The answer: You must pay taxes on any money your hobby makes, even if it’s just a few dollars. The good news is, if you incurred hobby expenses, you might be able to deduct them. It’s important to know how to declare hobby income, how to deduct hobby expenses and how to know if your hobby’s a business. You can find out about the rules right here.

Is it a hobby, or is it a business?

First things first — are you pursuing a hobby or running a business? Generally, if you’re doing something with the intention of making a profit, that’s a business, according to the IRS. A hobby is something you do for sport or recreation, and not for the objective of making a profit.

Some additional factors the IRS considers when defining a hobby versus a business include:

•    Do you depend on the income from your hobby?
•    Do you conduct your hobby like a business, maintaining meticulous records?
•    Have you taken steps to make your hobby more profitable?
•    Do you (or anyone who’s advising you) have the knowledge you would need to conduct your hobby as an actual business?
•    Can you expect to turn a profit from appreciation of assets you use in your hobby?

Maybe you answered “no” to all of the questions above. Sometimes, however, your hobby isn’t just for fun and you decide to try to make a living doing what you love. If your hobby becomes a business in the eyes of the IRS, the rules change. Check out the IRS Small Business and Self-Employed Tax Center if you find that your hobby has turned into a business.

You must declare hobby income

The IRS wants you to declare all your hobby income, even if it’s a small amount of money.

“If your hobby or side business has a net profit, you have to pay income taxes on that net profit, even with the new tax law,” says Irene Wachsler, a CPA at Tobolsky & Wachsler CPAs LLC in Canton, Massachusetts.

If you file your taxes using Form 1040, you’ll typically report your hobby income on Line 21, labeled “Other income.” While this is the simplest approach for most situations, there’s an alternative if you’re a collector.

If your hobby income comes from selling collectibles at a profit, you may report income from sales, including stock sales, on Schedule D. Reporting profits on a Schedule D means you could be taxed at capital gains rates instead of ordinary income tax rates.

Hobby expenses

Most hobbies — even those that earn you income — also cost money. Prior to the 2018 tax year, you could deduct hobby expenses equal to your hobby income. For tax years after 2018, this deduction is no longer available.

Since tax reform has significantly increased the standard deduction for 2018, you may be thinking you’ll likely lose the ability to deduct hobby expenses if it no longer makes sense for you to itemize. In fact, it doesn’t matter whether you do or don’t itemize — you’ve lost the deduction for hobby expenses in 2018 anyway because tax reform removed the miscellaneous deduction.

“Under the new tax reform bill, there is no place to deduct the expenses, so income will be recognized but the expense will not, starting in 2018,” says Alan Pinck, an enrolled agent and founder of A. Pinck & Associates, San Jose, California.

When does your hobby become a business, and why does it matter?

If your hobby becomes a business, you’re subject to a whole different set of tax rules.

First, you’ll typically have to declare income on Schedule C and pay both income tax and self-employment taxes (self-employment taxes include taxes for Social Security and Medicare, which an employer normally pays half of when you earn wage income). You can also deduct losses from a business, even if those losses exceed income the business earns, which differs from hobby losses.

It may seem tempting to classify your hobby as a business so you can deduct all your expenses, but proceed with caution — as mentioned earlier, the IRS uses specific criteria to differentiate a hobby from a business.

“If the activity makes a profit during at least three out of the last five years, the IRS will generally consider it a business,” Pinck explains, noting that the rules change if horses are involved.

Still, if you decide you do want to turn your hobby into a business and reap the tax benefits of business deductions, Wachsler recommends you keep a log showing your attempts to participate materially in the business.

Your log could include details on your efforts, including advertising, meetings, trying to obtain income or sell services, mileage logs and work logs. Of course even if you make an effort, the IRS may still decide your “business” isn’t really a business at all if you suffer persistent losses year after year.

Bottom line

Now that you know how hobby income is taxed, it’s up to you to decide if making money doing something for fun is worth the potential tax ramifications. While declaring income earned from your hobby may seem like a hassle — especially since you can’t deduct expenses after 2017 — you don’t want to get in trouble with the IRS for not reporting all your income.

Be sure to follow the rules for paying taxes on any money your hobby earns, and be sure you understand the differences between a hobby and a business. If the IRS decides you incorrectly classified your hobby as a business or vice versa, you could face additional taxes, penalties and interest.

Credit Given to: Christy Rakoczy Bieber

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.  

Today’s author – Mark Bradstreet

–until next week.

Ohio Income Tax Updates January 29, 2020

Posted by bradstreetblogger in : 2019 Taxes, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

A filing season approaches, we are often focused on the federal changes to tax law, but one shouldn’t fail to keep their eyes and ears open to the state changes.  For those of us in Ohio, the 2019 tax law changes were fairly mild.  Below are a few of the key changes to Ohio tax law for the 2019 tax year.

Change in Tax Brackets:

Following the example of the Federal government, Ohio has decreased the number of tax brackets and overall tax rates which are applicable to the 2019 tax year.  The change in rates are displayed below:

Ohio Earned Income Credit:

The Ohio Earned Income Credit (EIC) was also expanded and simplified for 2019.  Historically, the credit was calculated utilizing 10% of the Federal EIC, and possibly subject to limitations based on income.  For the 2019 tax year, the credit is simply 30% of the Federal EIC.

Modified Adjusted Gross Income (MAGI):

The 2019 tax law introduces a new term for purposes of means testing.  Means testing is applied to determine exemption amounts and qualifications for certain credits.  Historically, Ohio Adjusted Gross Income (OAGI) was used in means testing.  The primary difference with this new metric is that income which would have been excluded under Ohio’s generous Business Income Deduction is now included for means testing.  Note, that this doesn’t mean that the business income is now taxable.  It simply means that this income will be considered when determining exemptions and credit qualifications.

In the ever-changing world of taxes, the changes take place not only on the Federal level, but on the state, and even local as well.  We strive to stay abreast of these changes, and help you make the best tax-conscious decisions. 

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 – Josh Campbell

Tax Tip of the Week | Great News from the IRS for Retirement Savers January 15, 2020

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

The Internal Revenue Service (IRS) gave retirement savers an early holiday gift this year in the form of higher contribution limits for 2020. According to its November 6th announcement, workplace retirement plan contribution limits would be increased in 2020. Likewise, the income limits for Traditional IRAs and ROTH IRAs will also rise in 2020.

Larger contributions to retirement accounts will allow you to further minimize your current tax bills. Additionally, higher retirement account contribution limits can be great for those who are playing catch up for retirement and/or who are making good incomes.

2020 Contribution Limits for Workplace Retirement Plans

The employee contribution limit will be increasing from $19,000 to $19,500 for the following types of retirement accounts in 2020:
•    401(k) plans
•    403(b) plans
•    Most 457 plans
•    Thrift Savings Plans
•    Profit-Sharing Plans
•    Cash Balance Pension Plans

For those of you with a SIMPLE IRA at work, the contribution limit will be increasing from $13,000 to $13,500. If your employer offers a SIMPLE IRA it may be time to ask them to upgrade your retirement plan to a 401(k), or something similar, that offers larger contribution limits.

Larger Catch-Up Contributions for Workers Who are 50+

Workers, at least 50 years old, are allowed to contribute even more to workplace retirement accounts. In 2019, the maximum catch-up contribution to a 401(k) was $6,000. For 2020, that amount will increase to $6,500.

That means workers who are at least 50-years-old will be allowed to contribute a combined total of $1,000 more than they could have in 2019. For example, a worker who is 55 years old in 2020, with a workplace retirement plan, will be able to contribute up to $19,500 to his 401(k) plus a maximum catch-up contribution of $6,500. If he makes the maximum contributions, they will equate to an investment of $26,000 into his retirement account. That’s $1,000 more than the maximum amount he could have invested in 2019.

Catch-Up Contributions are Typically Allowed on the Following Retirement Plans
•    401(k)
•    403(b)
•    Most 457 plans
•    Thrift Savings Plan

Sadly, catch-up contributions are not allowed on SEP IRAs.

Solo 401(k) Contribution Limits for 2020

With a Solo 401(k), small business owners can contribute as both the employee and the employer. That could lead to some pretty nice tax savings for those who max out the plans. As the employee, you can contribute the aforementioned $19,500 for 2020, plus the catch-up contribution if you are at least 50 years old. Total contribution limits as both the employee and employer have increased by $1,000 to $57,000 for 2020. That number does not include the potential $6,500 catch-up contribution. That means small business owners who are at least 50 years old have the option to contribute the maximum contribution limit of $65,500 for a Solo 401(k) plan.

Defined Benefit Pension Plan Benefits Increase In 2020

Small business owners who are maxing out their 401(k) or profit-sharing plan, and who want to save more on taxes, should check out a Cash Balance Pension. This defined benefit plan will allow even larger pre-tax retirement plan contributions when combined with a 401(k) profit-sharing plan. 

Effective January 1, 2020, the limitation on the annual benefit of a Pension plan will be increasing from $225,000 to $230,000. While this may not seem like a big deal, it will allow for a larger contribution, each year, to the pension plan. Your potential contributions will depend on how the plan is designed, your age, and your income. I work with many business owners who are stashing away hundreds of thousands of dollars each, pre-tax, into a Defined Benefit Pension Plan every year.

No Increase to IRA Contribution Limits

Bad news plus some good news for IRA or ROTH IRA lovers. The maximum contribution limits for individual retirement accounts are remaining the same. Also remaining the same are catch-up contributions for individual retirement accounts. For 2020, the catch-up contribution will be just $1,000 for an IRA and ROTH IRA. It should be noted that cost-of-living adjustments (COLA) for IRAs are not indexed to inflation. 

The good news is that the income limits to fully contribute to a ROTH IRA, or to fully deduct contributions to a Traditional IRA, have increased for 2020.

The income limits for both types of IRAs, ROTH or Traditional, will vary depending on your federal income tax-filing status and, of course, your income. For specifics, check out the IRS announcement. Knowing those thresholds will help making the choice of going with a ROTH IRA or Traditional IRA easier.

What Should You Do Now?

Whether you are maxing out your contributions, or not, take them up a notch for 2020. If you already maximize your tax-saving by contributing the maximum amount allowed for your retirement plan, adjust your contributions in 2020 so that you stay at the maximum. 

If you are unsure about your investment choices or about how much to save for retirement, talk with an independent fee-only financial planner who can help make the process smoother and easier for you. While it is never too late to improve your retirement outlook, the more you procrastinate, the harder it will be to reach financial freedom.

Credit given to: David Rae, a Certified Financial Planner and Accredited Investment Fiduciary. This article was published by Forbes on Nov 20, 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.  

–until next week.

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 , 1 comment so far

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 | IRS Provides Tax Inflation Adjustments for Tax Year 2020 December 18, 2019

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

Previously, the IRS used inflation measured by the consumer price index for urban consumers, known as the CPI-U. That index tracks the cost of certain goods and services the typical household buys, from bread and soap to the cost of utilities.

Under tax reform, inflation is measured using something called Chained CPI. With Chained CPI, the people measuring inflation assume buyers have choices when they spend money, and they shift from one product to another when the price of that product goes up. For example, if the price of coffee beans increases too much, you may start drinking tea. If you don’t like tea as well as coffee, you may argue that you are worse off now because you can’t afford your favorite beverage. But to the economists measuring Chained CPI, you found a cheaper replacement, and that’s what matters.

Using Chained CPI, tax benefits and limitations don’t rise as quickly or as high as they would under the old measurement system. 

WASHINGTON — The Internal Revenue Service today announced the tax year 2020 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2019-44 provides details about these annual adjustments.

The tax law change covered in the revenue procedure was added by the Taxpayer First Act of 2019, which increased the failure to file penalty to $330 for returns due after the end of 2019. The new penalty will be adjusted for inflation beginning with tax year 2021.

The tax year 2020 adjustments generally are used on tax returns filed in 2021.

The tax items for tax year 2020 of greatest interest to most taxpayers include the following dollar amounts:

•    The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 in for 2020, up $200, and for heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.

•    The personal exemption for tax year 2020 remains at 0, as it was for 2019, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

•    Marginal Rates: For tax year 2020, the top tax rate remains 37% for individual single taxpayers with incomes greater than $518,400 ($622,050 for married couples filing jointly). The other rates are:
o    35%, for incomes over $207,350 ($414,700 for married couples filing jointly);
o    32% for incomes over $163,300 ($326,600 for married couples filing jointly);
o    24% for incomes over $85,525 ($171,050 for married couples filing jointly);
o    22% for incomes over $40,125 ($80,250 for married couples filing jointly);
o    12% for incomes over $9,875 ($19,750 for married couples filing jointly).
Note:  The lowest rate is 10% for incomes of single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

•    For 2020, as in 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

•    The Alternative Minimum Tax exemption amount for tax year 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800).The 2019 exemption amount was $71,700 and began to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption began to phase out at $1,020,600).

•    The tax year 2020 maximum Earned Income Credit amount is $6,660 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,557 for tax year 2019. The revenue procedure contains a table providing maximum credit amounts for other categories, income thresholds and phase-outs.

•    For tax year 2020, the monthly limitation for the qualified transportation fringe benefit is $270, as is the monthly limitation for qualified parking, up from $265 for tax year 2019.

•    For the taxable years beginning in 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.

•    For tax year 2020, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, the same as for tax year 2019; but not more than $3,550, an increase of $50 from tax year 2019. For self-only coverage, the maximum out-of-pocket expense amount is $4,750, up $100 from 2019. For tax year 2020, participants with family coverage, the floor for the annual deductible is $4,750, up from $4,650 in 2019; however, the deductible cannot be more than $7,100, up $100 from the limit for tax year 2019. For family coverage, the out-of-pocket expense limit is $8,650 for tax year 2020, an increase of $100 from tax year 2019.

•    For tax year 2020, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $118,000, up from $116,000 for tax year 2019.

•    For tax year 2020, the foreign earned income exclusion is $107,600 up from $105,900 for tax year 2019.

•    Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000, up from a total of $11,400,000 for estates of decedents who died in 2019.

•    The annual exclusion for gifts is $15,000 for calendar year 2020, as it was for calendar year 2019.

•    The maximum credit allowed for adoptions for tax year 2020 is the amount of qualified adoption expenses up to $14,300, up from $14,080 for 2019.

Credit Given to:  Sally Herigstad. Posted on the Internal Revenue Service Website.

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 | Make These 2019 Tax Moves Now – Before It’s Too Late December 4, 2019

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

Although it has been two (2) years now since the sweeping tax law changes of 2017, many taxpayers are still missing out on many of the new available tax planning opportunities. Eleven (11) such tax savings strategies follow as outlined in the following article by Laura Saunders in the WSJ weekend edition of November 2-3, 2019. I will put my own “spin” on some of the bigger opportunities that many business owners are either unaware of or not optimizing.

(1)  Some of the higher deduction retirement plans MUST be set up by year end (December 31, 2019). Too often, I will meet with a taxpayer dropping off their tax detail who mentions their desire of contributing to a Solo 401(k) plan or a profit-sharing plan, etc. Sure, that is fine ONLY IF the plan was established prior to year-end even though the plan contributions are made the following year.

(2)  We see many retired taxpayers who may have low or negative taxable income after their standard or itemized deductions BUT have mega bucks in retirement accounts.  In these situations, a retirement plan distribution could have been taken federally tax free up to the amount of negative taxable income (provided they are over 59 ½). We meet with many retirees to make this calculation near the end of each year.

(3)  Too many taxpayers make conventional charitable contributions ignoring the better options of using IRAs or appreciated stock. These options create an opportunity of potentially “doubling” the tax value of this conventional tax deduction by deducting the full market value without the appreciation ever being taxed. This is truly the best of both worlds which is rare indeed in the tax world.

(4)  Maximizing the 199A pass-through deduction aka the 20% business income deduction or QBID. Many of the factors in this calculation may be optimized to maximize this deduction e.g. salaries and guaranteed payments.  

The article by Ms. Saunders follows.

                           –    Mark Bradstreet

It’s Year Two following the massive tax overhaul of 2017. For Americans who are still getting used to the new rules, it’s important to sort things out before the year ends.

“People are confused about their withholding and refunds, and whether they need to save receipts to prove itemized deductions—plus other things,” says Terry Durkin, an enrolled agent in Burlington, Mass., who prepares over 300 tax returns a year.

Most filers must pay 90% of their income and self-employment taxes by year-end or soon after, or else face penalties. The IRS forgave these penalties for many people for 2018, but it won’t for 2019.

There are few ways to cut a 2019 tax bill after Dec. 31, so now is the time to make moves that will lower your tax bill in April.

> Check your withholding. At the top of Ms. Durkin’s, and many tax advisers’, to-do list for clients: Check your withholding or estimated taxes. The overhaul, followed by automatic changes to paycheck withholding in 2018, brought bad refund surprises to many filers last spring.

As it turned out, overall refunds changed little. For both 2017 and 2018, about three-quarters of filers received refunds, which averaged $2,800. But these results conceal wide variations. For 13 million filers earning between $100,000 and $250,000, average 2018 refunds dropped 11% compared with 2017, according to mid-July data from the Internal Revenue Service.

This shift got the attention of the IRS, which has since improved its withholding calculator. Employees and retirees can use it to find out what they owe under Uncle Sam’s pay-as-you-earn system and then fine-tune their refunds. Taxpayers who aren’t employees need to use complex worksheets in IRS Publication 505 or talk to a tax preparer.

But the law contains a boon for many employees. Usually they won’t owe penalties if they increase their withholding late in the year—even if it’s for a spouse’s self-employment income, according to an IRS spokesman.

> Make your payments. Those with income not covered by employer-paycheck withholding must usually make quarterly payments based on earnings for each period to avoid penalties. Are you behind on payments? The sooner a mistake is corrected, the less damage it does.

> Assess itemized deductions. As a result of the 2017 overhaul, more than 25 million taxpayers have switched to claiming the standard deduction rather than itemizing write-offs on Schedule A. The share of returns with Schedule A has dropped to about 10% from about 30%.

For 2019, the standard deduction is $12,200 for single filers and $24,400 for married couples filing jointly.

The most common itemized deductions are for state and local taxes (SALT), charitable donations and mortgage interest. Now that Congress has limited the SALT deduction to $10,000 per return both for single and married joint filers, it’s often easier for singles than couples to benefit from itemizing.

For example, a married couple who deducts the limit of $10,000 of SALT needs more than $14,400 of other deductions to benefit from itemizing for 2019, because their standard deduction is $24,400. But a single filer who deducts $10,000 of SALT only needs other write-offs totaling more than $2,200, because his standard deduction is $12,200.

Filers taking the standard deduction don’t need to save receipts to prove their write-offs.

> Check deadlines for retirement-savings contributions. There are significant differences.

Savers eligible for traditional IRAs and Roth IRAs for 2019 can open and fund them up to April 15, 2020.

SEP IRAs, for taxpayers with self-employment income, often have higher contribution limits and longer deadlines. Many taxpayers can set up and fund SEP IRAs until Oct. 15, 2020, if they extend the due date of their 2019 return.

Solo 401(k) plans are also for self-employment earnings and have contribution limits higher than those for traditional or Roth IRAs. For 2019, taxpayers can fund a solo 401(k) until Oct. 15, 2020, if they extend their due date. But the plans must usually be set up by Dec. 31, 2019, even if contributions come later.

> Take required payouts from retirement plans. Savers must often begin taking annual payouts from tax-sheltered retirement plans when they turn 70½. Congress is considering raising the beginning date to age 72, but it hasn’t yet.

The payout deadline is Dec. 31, 2019, for most people, and the withdrawal is based on the account value as of the last day of 2018. However, savers taking their first required payout this year have until April 1, 2020. Think twice before doing this, because it means taking two withdrawals in one year and perhaps moving to a higher tax bracket.

Currently no annual payouts are required from Roth IRAs, except for heirs who aren’t spouses.

Required payouts from 401(k) plans are somewhat different, although the deadline for beginning withdrawals is often age 70½. But many still-working employees who are 70½ and older needn’t take required withdrawals from their firm’s 401(k) if the plan allows that.

Also remember that 401(k) payouts can’t be aggregated as IRA payouts can. For example, a saver with four traditional IRAs can take the total required withdrawal from just one IRA. But if required payouts are due from two 401(k)s, the saver must take the required amount from each one.

> Strategize charitable giving, including from IRAs. The higher standard deduction poses a hurdle for donors who want a tax break. One way around it is to bunch charitable gifts by combining several years’ donations into one larger amount every few years that—together with other write-offs on Schedule A—is larger than the standard-deduction amount.

Such givers should also consider donor-advised funds. These popular accounts enable charitably minded taxpayers to make one or more gifts and take a deduction. The donor can then designate charitable recipients later, and meanwhile the assets can be invested and grow tax-free.

Do think twice before writing a check to a charity. A better move is often to give appreciated investments held in taxable accounts, such as stock shares. The donor gets an immediate deduction for the full market value, within certain limits, while not owing capital-gains tax on the growth.

Donors with traditional IRAs who are 70½ or older have another good option: They can donate up to $100,000 of IRA assets directly to one or more charities and have the gifts count toward their required payouts. This move can help lower Medicare premiums.

> Evaluate capital gains and losses. Check up on your positions in taxable accounts.
Investors can use realized capital losses to offset realized capital gains plus $3,000 of ordinary income such as wages, every year. Unused losses can carry forward for future use.

Sometimes it makes sense to sell an underwater investment at a loss before the end of the year, or to take gains if you have realized losses.

Also beware of increases in investment income that could trigger a 3.8% surtax. This levy takes effect at $250,000 of adjusted gross income for most married couples filing jointly and at $200,000 for most single filers.

> Take care with cryptocurrency. The IRS is cracking down on cryptocurrency tax compliance, and tax preparers will follow suit on 2019 returns. Now is the time to get ready by taking gains to use up losses and losses to offset gains. This may mean getting records in order, but crypto investors only have until Dec. 31 to make moves for 2019.

> Make 529 college-savings contributions. There’s no federal deduction for contributions to 529 college-savings plans, although some states allow a deduction on their returns. Contributions to these accounts can grow tax-free, and withdrawals used to pay eligible college expenses are also tax-free. Contributions for 2019 must be often made by Dec. 31, although a few states allow them by the following April 15, according to Mark Kantrowitz, publisher of Savingforcollege.com.

> Review eligibility for the 199A pass-through deduction. The tax overhaul added a 20% deduction for the net income of many businesses that pass through profits and losses to their owners’ tax returns, including rental real estate. This benefit is often curtailed for owners whose incomes exceed certain limits.

In 2019, the limits are taxable income of $160,725 for single filers and $321,400 for married couples filing jointly.

Business owners whose incomes will exceed these limits can sometimes get below the threshold by making tax-deductible donations to charity or contributing more to tax-deductible retirement plans.

> Be aware of the so-called Kiddie Tax. It’s a levy on the “unearned” income of young people as old as 23, above an annual exemption currently set at $2,200.

The 2017 overhaul changed the Kiddie Tax rates and brackets so that children of lower- and middle-income families often owe more now than under the prior law, so plan accordingly.

Grandparents, for example, might want to give stock shares that will help pay college tuition to the parents of a grandchild, not to the grandchild.

> Remember extenders. Congress hasn’t extended dozens of provisions that expired in 2017, 2018 and 2019 but it may. Among them are breaks for tuition, medical expenses, taxes on mortgage-debt forgiveness, and energy efficiency investments.

Stay tuned for coverage if Congress manages to move forward on these provisions.

Credit Given to: Laura Saunders.  You can write to Laura Saunders at laura.saunders@wsj.com.

Corrections & Amplifications

Contributions for 2019 to 529 college-savings plans must often be made by Dec. 31, although a few states allow them as late as the following April 15. An earlier version of this article incorrectly stated the deadline was Dec. 31 for all states. (Nov. 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 | Should You Gift Land (or Anything Else) in 2019? November 20, 2019

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

Our current lifetime estate and gift exemption is currently $11.4 million per person (indexed for inflation) through 2025. In other words, you may gift or have an estate of that value without any gift or estate tax. And, your spouse also has the same $11.4 million exemption. So, each couple has a combined total exemption of $22.8 million per couple. This current lifetime exclusion has never been higher. But as the old saying goes – nothing is forever. The House has proposed a new bill to carve 2 years from the 2025 sunset provision. Some of the Presidential candidates propose ending this $11.4 million exemption even sooner than 2023 as proposed by the House.

Considering the current law, pending tax proposals and campaign trail promises, one may make a good argument, that 2019 may be as good of a year as ever to consider making a gift. Please remember that you may make an annual gift of up to $15 thousand a person(s) without it counting against your lifetime exclusion of $11.4 million and your spouse may likewise do the same.

                                     –    Mark Bradstreet

“Tax reform doubled the lifetime estate and gift exemption for 2018 through 2025. This means in 2019, you can gift during your lifetime or have assets in your estate of $11.4 million and not owe any estate or gift tax. Your spouse has the same amount. However, many states continue to assess an estate tax. Be sure to check on your state’s rules (Note: currently Ohio does not have an estate tax.)

This means farm couples worth $30 million or more won‘t owe any estate or gift tax. Discounts of around 30% (or more) reduce the value of land (or other assets) put into a limited liability company (LLC) or another type of entity. Gifts during your lifetime will shrink the amount subject to an estate tax.

Understand The Numbers

For example, mom and dad have farmland and other assets worth $30 million. They place the land into an LLC with a gross value of $20 million. This qualifies for a 35% discount ($7 million), dropping the estate valuation to $13 million. This drops their taxable estate to $23 million, which is about equal to their combined lifetime exemption amounts.

However, there is a chance the lifetime exemption will go back to the old numbers (or even less). The House has proposed a new bill that will make the exemption revert to the old law two years earlier. Some Presidential candidates propose making it even sooner or perhaps reducing it even lower (some would like to see it go to $3.5 million).

Let’s look at our previous example. If the exemption amount reverts to the old numbers, the heirs would face an estate tax liability of about $5 million. But if they make a gift of about $12 million now, no estate tax would be due.

Now might be the time to consider gifting some of your farmland to your kids, grandkids or into some type of trust. We normally like to have grain, equipment and other assets go through an estate so we can get a step-up in basis and a new deduction for the heirs.

However, farmland is not allowed to be depreciated. If it will be in the family for multiple generations, a step-up does not create any value anyway.

If your net worth is more than $10 million, now is a good time to discuss this with your estate tax planner. If you wait and the rules change, you could cost your heirs a lot of money.

Gifting Assets is Powerful

Remember you and your spouse can give $15,000 each year to as many people as you’d like in the form of gifts (not a total of $15,000 each year). This does not eat into your lifetime exemption. As a result, it is a smart strategy to take advantage of gifting each year.

For instance, if mom and dad have five kids, each married, they can give $150,000 total (including spouses, or children and spouses) without filing a gift tax return or eating into their lifetime exemption amount.

Credit is given to Paul Neiffer. This article was published in the Farm Journal article in September, 2019.  Paul gives some great examples and further commentary on this topic.  

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 C. Bradstreet, CPA

–until next week.