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Tax Tip of the Week | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental? December 13, 2017

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Tax Tip of the Week | Dec 13, 2017 | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental?

One of the biggest tax surprises of our clients arises from the income tax liability caused by the sale of their rental property.

Here is how such a surprise typically unfolds:

The daughter heads off to college. Cash is needed for her tuition. Mom and dad decide to raise cash by selling their rental property. They paid $100,000 for this property which has now been rented for about fourteen (14) years. Net of selling expenses, the rental property is sold for $100,000. So far so good. The net sales price and the purchase price were identical. Mom and dad would have liked to sell the property for more but it is what it is. At least from a tax standpoint, mom and dad think they are home free – no gain, no income taxes. WRONG! They forgot to consider the depreciation expense that was taken over the fourteen (14) year holding period. That expense amounts to $45,000. So now, instead of the property basis or net book value being $100,000 as they guessed; it is $55,000 or the $100,000 less the depreciation expense already taken of $45,000. Now mom and dad’s taxable gain has climbed to $45,000. Mom and dad are not happy! Uncle Sam is going to take a chunk of their monies planned for tuition. Hmmmm…not good!

Now let’s look at how the federal income tax is calculated.  Since the property had been held for more than one year, the gain is a long term capital gain. However, this type of capital gain on the depreciation recapture may be taxed as high as 25%. Had the sales price exceeded the purchase price – conventional capital gain rates would have applied instead but only for that difference including the gain on the land portion. So their federal income tax may be as high as 25% of $45,000 or $11,250 – all resulting from the depreciation recapture. Not a pleasant surprise!

Always, know what your tax consequences may be before embarking down a road.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author….Mark Bradstreet, CPA

…until next week.

Tax Tip of the Week | No. 436 | Do You Need Tax Planning or Business Consulting? December 6, 2017

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Tax Tip of the Week | Dec 6, 2017 | No. 436 | Do You Need Tax Planning or Business Consulting?

As the year end draws near – the usual hosts of magazines, newspapers and the internet will all be busy with age-old articles on tax planning. Most will be repeating essentially the same techniques as they have for the last thirty (30) plus years.

And that is not to take away from these strategies – most are quite valid and very useful. Tax planning is important! Do it! Deferring income taxes is always a good thing. And, if the tax deferral is for a long enough period of time; then, in certain situations those deferred income taxes might be eliminated with your demise.

However, what does one do when a tax liability does not exist because your business and/or other adverse personal events resulted in tax losses and little tax liability? Then, one removes the tax planning hat and instead puts on their business consulting hat. With that hat comes a new mission with a new set of questions:

1.    Do I have the right people?
2.    Do I have the right customers?
3.    Are incentives aligned with my business goals?
4.    Are my assumptions still reasonable?
5.    Am I outsourcing the right tasks?
6.    Am I measuring the right things?
7.    Were our sales on goal?
8.    How am I different than my competition?
9.    Am I really optimizing technology?
10.    Am I stressed out?
11.    Were our gross profit margins on goal?
12.    What is our accounts receivable turnover?
13.    Am I avoiding the really tough decisions?
14.    What is our inventory turnover?
15.    Are we committed?
16.    What is our accounts payable aging?
17.    What is our capital assets budget?
18.    On a day-to-day basis, can the business function without me?
19.    Do we have adequate capital to take the business where we want it to go?
20.    Etc., etc., etc.

And, provided you arrive at the right answers for these questions and implement the answers according to your strategic plan; then next year you will also be wearing a tax planning hat as well. A good business person will always be wearing both hats along with some others.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author….Mark Bradstreet, CPA

…until next week.

Tax Tip of the Week | No. 435 | Passive Activity Losses November 29, 2017

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Tax Tip of the Week | Nov 29, 2017 | No. 435 | Passive Activity Losses

Passive activity losses are also known as PAL’s. However, from a tax standpoint, they are anything but your PAL.

A passive activity is a business activity in which the taxpayer does not materially participate. There are seven tests for material participation, and you only need to pass one of the tests to be considered active. But most investors do not meet any of the tests.

Beginning in 1986, you may only deduct a passive activity loss to the extent you have passive activity income. A PAL cannot offset non-passive income or portfolio income.

The passive activity rules were passed by Congress in 1986 in an effort to limit the losses being deducted by many taxpayers through the use of tax shelters. Prior to enactment, taxpayers could invest in a myriad of limited partnership interests or other passive activities, most of which generated losses that the investors would deduct on their personal returns.

The passive activity rules prevented such deductions, causing many taxpayers to search for PIG’s (passive income generators). Those looking for PIG’s need to be cautious as to the type of investment they are buying. For instance, your broker might try to sell you an interest in a publicly traded partnership (PTP). However, these types of partnerships have their own set of rules, and might not be the PIG you were hoping for.

Rentals are another form of passive activity. Ordinary rental income or loss is passive by definition. Even if you are active in a rental activity, the net income or loss is still considered passive (assuming you are not a real estate professional). However, if certain conditions are met, a landlord can deduct up to $25,000 of rental loss on his or her return, even if there is no other passive income. Since net rental income is considered passive income, non-rental passive losses can be used to offset the income.

Any PAL limited by passive activity income is not lost but carried forward indefinitely, usually until the property is sold. In the year of sale, you can deduct the suspended loss, up to the amount of your basis in the activity.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author….Norman S. Hicks, CPA

…until next week.

Tax Tip of the Week | No. 434 | Tax Depreciation – Section 179 November 22, 2017

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Tax Tip of the Week | Nov 22, 2017 | No. 434 | Tax Depreciation – Section 179
As the end of the year draws near, many taxpayers are thinking about tax planning. One of the tax planning strategies often used is the Section 179 deduction (accelerated depreciation).

This deduction allows new or used qualifying property to be expensed in the year of purchase, rather than be depreciated over the life of the asset. The maximum cost of such property under Section 179 that may be expensed in 2017 is $510,000.

There are two primary limitations which may reduce the amount of the Section 179 deduction allowed. The first is related to the total cost of Section 179 property purchased during the year. For every dollar of qualifying property purchased over $2,030,000 in 2017, the Section 179 deduction is reduced by one dollar (but not below zero).

The second limitation is the business income limitation. The business must have taxable income to take any Section 179 deduction, and the deduction cannot be used to create an overall business loss. Form W-2 is considered business income for this calculation. For example, if you are a Schedule C filer, and also have a W-2 from a different source, the W-2 income and the business income or loss is combined for the overall limitation on the taxpayer’s Form 1040. Any Section 179 unused because of the income limitation may be carried forward indefinitely. However, no carryover exists if asset additions exceed the qualifying property threshold. This situation could occur if a taxpayer has Section 179 deductions from multiple pass-through entities.

The expensing election is an annual election, and can only be used on assets placed in service during the current year. The asset must also be used more than 50% in the business. If business use drops below 50% in a future year, any Section 179 depreciation that was taken in the year of purchase must be recaptured (reported as income) in the year business use drops below 50%. Also, please note that assets purchased from a related party do not qualify for the Section 179 expensing election.

Some examples of qualifying property include furniture, machinery and equipment, certain vehicles (within limitations), tractors and single-purpose agricultural structures.

Non-qualifying property includes:  land, docks, elevators, landscaping, and swimming pools.

The Section 179 deduction is a great tax planning tool for small to medium-sized businesses. The decision to use this deduction may be made with your tax return simply by claiming the deduction on Form 4562, Depreciation and Amortization. No separate election statement is required. Please keep in mind that your cost basis in the asset(s) will be reduced by the Section 179 deduction and will increase the gain upon a subsequent sale.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author….Norman S. Hicks, CPA

…until next week.

Tax Tip of the Week | No. 429 | Cash Method vs. Accrual Method of Accounting (Generally Speaking) October 18, 2017

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Tax Tip of the Week | Oct 18, 2017 | No. 429 | Cash Method vs. Accrual Method of Accounting (Generally Speaking)

Many taxpayers are unaware of the method of accounting used for their business income tax returns. And, many businesses are unaware that a different accounting method may also be used for their financial statements. Yes, effectively, creating two sets of books.

Typically, the two most common accounting method choices are the cash method and the accrual method.

Use of the cash basis method of accounting (if eligible) will usually result in lower income taxes than the accrual method for a particular period of time. This is especially true when a business is growing.  However, if a business is experiencing a decline in revenues, additional taxes may be incurred as a result of reporting on the cash basis.

On the other hand, accrual basis accounting will often show the largest bottom line on your financial statements. This may be important when reporting your financial results to your bank and/or your bonding company. Both always enjoy seeing good news.

Thusly, these two methods may show significantly different results even, when accounting for essentially the same transactions. One may wonder how that could be. Well, the cash basis reports only taxable income when it is received in cash. Also, under this method, a tax deduction does not occur unless a cash disbursement for an expense has occurred.  The accrual method shows the income once the sale is completed and the expense when incurred which can more accurately reflect your net income.

The choice of an accounting method is a big one.  Its importance grows with the size of your business.  If you ever decide to change methods, please remember that some changes require Internal Revenue Service approval, while others are automatic. Regardless, your accounting method choice should be evaluated on an annual basis.

This week’s author….Mark Bradstreet, CPA

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.

Tax Tip of the Week | No. 427 | Top 10 Things to Know About Amending Returns October 4, 2017

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Tax Tip of the Week | Oct 4, 2017 | No. 427 | Top 10 Things to Know About Amending Returns

If you need to make a change or correct your federal tax return after it has been filed you will use Form 1040X. Here are the top 10 things you need to know when filing a 1040X:

1.    To file a 1040X, it must be mailed—you cannot e-file an amended return.

2.    You normally don’t need to file an amended return to correct math errors.  The IRS will automatically correct math errors and send you a bill or refund.

3.    You can track the status of the 1040X three weeks after filing.  To track the status, go to www.irs.gov and click on the “Where’s My Amended Return” link.  Note:  it can take up to 12 weeks for the IRS to process an amended return.

4.     If a refund is due from the original return, wait until you receive the refund before filing the 1040X to claim additional refund amounts.

5.     If more tax is due, file a 1040X and pay the tax as soon as possible to reduce any interest and penalties.

6.     You usually have three years to file an amended return.  See the 1040X instructions for the exact details.

7.      If you are amending more than one tax year, prepare a 1040X for each year and mail them in separate envelopes.

8.      If you use other IRS forms or schedules to make changes, attach those forms to the submitted 1040X.

9.     The most important section on the 1040X form is the “Explanation of Changes”.  You need to clearly and precisely explain why you are submitting an amended return and what changes you are making.

10.    If the changes you make on the federal return also results in a change to your Ohio return be sure to submit an Ohio amended return as well. Note: Ohio no longer uses a special amended tax return.  Instead, use the normal Ohio IT 1040 return and mark the “Amended” box located on the top of page 1.

Let us know if you have any questions about filing an amended return.

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.

Tax Tip of the Week | No. 426 | Birth Dates You Need to Know September 27, 2017

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Tax Tip of the Week | Sept 27, 2017 | No. 426 | Birth Dates You Need to Know

Many of the tax rules for individual taxpayers depend on age.  Attaining a birthday may entitle an individual to a special tax break or end entitlement to another. It should be noted that some apply on the date of the birthday, some rules apply when the birthday is achieved at the end of the year, and some apply with respect to a half-year birthday. Following are some of the major birthdays you need to know:

1 day:  If a child is born on December 31, the child is considered a dependent of his or her parents for the entire year.

If you are legally married on December 31, you are considered married for the entire year.  Likewise, if you are divorced on December 31, you are considered single for the entire year.

Age 13:  The dependent care credit (Daycare credit) can be claimed until the child reaches his or her 13th birthday.

Age 17:  A tax credit up to $1,000 can be claimed for a child under age 17.  You lose the credit the year the child turns 17—the credit is not prorated.

Ages 19 and 24:   A child is considered a “qualified child” and can be claimed as a dependent on the parent’s return until the child turns 19, or turns 24 if he or she is a full-time college student.

However, a parent can still claim a dependency exemption for a child as a “qualified relative” after age 19 or 24 if certain conditions are met.  For example, if a parent supports a child who is 32 years old and lives in the parent’s home and earns less than $4,050 (in 2017), then the parent can claim the dependency exemption.  Certain other factors must also be considered.

If a child has unearned income (investment income) the “Kiddie Tax” rules also apply under ages 19 or 24.

Age 26:  Under the Affordable Care Act, a child can remain on his or her parent’s health insurance policy until the age of 26.  This is true even if the child cannot be claimed as a dependent or even lives with the parent.

Age 50:  When you turn 50 you can make “catch-up” contributions to qualified retirement plans such as 401(k)s, SIMPLE IRAs and Traditional and Roth IRAs.  For 2017, the additional contributions are $6,000 for 401(k)s, $3,000 for SIMPLE IRAs and $1,000 for IRAs.

Age 55:  The 10% early distribution penalty on distributions from qualified retirement plans and IRAs prior to age 59.5 do not apply if the distributions are made because of a separation of service from the employer.

You can also make a $1,000 additional “catch-up” contribution to an HSA account once you reach age 55.

Age 59.5:  The 10% early distribution penalty on withdrawals from qualified retirement plans and IRAs do not apply after attaining age 59.5.

Age 65:  Taxpayers who use the standard deduction vs. itemized deductions can claim additional deductions the year they turn 65.  For 2017, the additional standard deduction is $1,550 for single filers and $1,250 for each spouse at age 65 on joint returns.

Age 65 is also the age when distributions from HSAs can be taken without penalty for non-medical expenses.  However, such non-medical distributions are still subject to income tax.

Age 70.5:  The year you turn age 70.5 is when you must start taking Required Minimum Distributions (RMDs) from qualified retirement plans and IRAs.  (A full discussion of RMD rules goes beyond the scope of this Tax Tip)

Please Note:  This is a very simplified discussion of age-based tax rules and should not be relied upon without consulting with our office.

Happy Birthday!

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.

Tax Tip of the Week | No. 424 | Tax-Free Income September 13, 2017

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Tax Tip of the Week | Sept 13, 2017 | No. 424 | Tax-Free Income

Yes, that’s correct, there are some forms of income you receive that may be tax-free. Here is a list of eight common sources of tax-free income.

1.    Gifts. Gifts you receive are not taxable income to you. In fact, they are not subject to gift tax to the person giving the gift as long as the gifts received in one year from one person do not exceed $14,000.  As always, the “giver” is responsible for filing any gift tax returns, not the recipient.

2.   Rental income. If you rent your home or vacation cottage for up to 14 days, that rental income does not need to be reported. Homeowners often can earn some tax-free income by renting out a home while a large sporting event (Superbowl or a golf event) is in town.

3.   Child’s income. Up to the standard deduction amount ($6,350 in 2017) in earned income (wages) and $1,050 in unearned income (interest) for children is not taxed. Excess earnings above these amounts could be taxed and $2,100 in unearned income is taxed at the parent’s higher tax rate.

4.    Roth IRA earnings. As long as you meet this retirement account type’s rules, earnings in a Roth IRA are not taxed.

5.   Child support revenue. Income you receive as child support is not deemed to be taxable income. On the other hand alimony received is taxable income.

6.  Home sales gains. Up to $250,000 ($500,000 for married filing jointly) in gains on the sale of a qualified principal residence is not taxable.

7.  Scholarships/fellowships. Money received to cover tuition, fees, and books for degree candidates is generally not taxable.

8.  Refunds. Federal refunds (technically you’ve already accounted for this income) and most state refunds for non-itemizers are also tax-free.

This is by no means a complete list of tax-free income, but it’s nice to know that some areas of tax law still benefit taxpayers.

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.

Tax Tip of the Week | No.423 | Tips & Tricks to Reduce your Net Investment Income Tax September 6, 2017

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Tax Tip of the Week | Sept 6, 2017 | No. 423 | Tips & Tricks to Reduce your Net Investment Income Tax

With Congress in their seemingly never ending stalemate the 3.8% surtax on investment income apparently will be around at least for another year. This is a great time for taxpayers to understand the mechanics of this surtax and what goes on behind the scenes.

For starters, this surtax was heralded as a tax on the richest, and often it is. However, this 3.8% surtax can go beyond the wealthy. For example, if taxpayers have an investment windfall pushing their AGI above the surtax trigger points then this tax may make for an unpleasant and an unexpected surprise. And, its target group is ever expanding since the calculation is not adjusted for inflation.

Next, let’s define investment income –

What is investment income?  Interest, dividends, most capital gains, certain rental and royalty income, and certain passive investment income, such as from listed partnerships.

What’s not considered investment income?  In general, income from municipal bonds, and income from investments in partnerships or S corporations, if the recipient “actively” participates as defined by law. There are also exceptions for certain types of rental income and certain capital gains.

Here is how the tax works. The surtax of 3.8% applies to net investment income of most married couples who have more than $250,000 of adjusted gross income, or AGI. For most single filers, the threshold is $200,000. For example, a single person with $200,000 of AGI doesn’t owe any surtax. This is true, even if that income is entirely from investments. However, this person then reaps a one-time investment gain of $180,000 from selling long-held shares of stock and his income jumps to $380,000, then the $180,000 will be subject to the 3.8% surtax. Total surtax tax:  $6,840.

For those concerned about the tax, here are some tips:

    For many taxpayers, don’t worry about most home sales. A tax break allows most couples selling a primary residence to skip tax on up to $500,000 of profit ($250,000 for singles).

    Also, remember that one of the tax code’s benefits is that losses from one investment can off-set gains from another in the same tax year.

    Reduce AGI whenever possible. This alone can reduce the 3.8% tax.

Other ways of reducing AGI may include:  Making deductible contributions to tax-favored retirement plans, such as 401(k)s or pensions; making charitable contributions from IRA assets, if you’re older than 70 ½; and taking a capital loss up to $3,000.

    Taxable payments from pensions, traditional IRAs and Social Security aren’t themselves subject to the 3.8% surtax, but they can increase income in a way that subjects investment income to it. Thusly, when possible be aware of their timing.

On the other hand, tax-free payouts from Roth IRAs don’t raise taxable income and can help minimize the 3.8% surtax.

    Hold investment asset(s) until death. The 3.8% surtax doesn’t apply to profits on investments in one’s estate.

Credit to Wall Street Journal – By Laura Saunders

Thanks to Mark Bradstreet, CPA for submitting this Tax Tip!

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.

Tax Tip of the Week | No. 422 | Entity Choices For Businesses August 30, 2017

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Tax Tip of the Week | Aug 30, 2017 | No. 422 | Entity Choices For Businesses

A sound foundation is critical for any business. Part of that good foundation is choosing the proper entity. Too often this important piece is overlooked or even just ignored which can cause significant problems down the road.

The proper entity choice affects many financial and legal aspects of your business. These considerations will affect the amount of your income taxes, both now and in the future for your business along with your personal income taxes.

This decision also affects how owners (sole proprietorships, members, shareholders or partners) are paid. Various payment methods for the owners may include dividends, guaranteed payments, reimbursements, wages, subcontractor payments and distributions – all of which may be taxed differently.

In today’s litigious times, asset protection is a critical factor as well. Different entities have different degrees of asset protection. For many businesses asset protection may be the most important consideration.

Some of the typical entity choices include:

1.  Sole proprietor – default entity when no selection is made

2.  LLC (Limited Liability Company)

3.  Corporations:
a. S Corporation
b. C Corporation

4.  Partnerships:
a. General Partnership
b. Limited Partnership
c. Family Partnership

Each type of entity has its own pros and cons. No one size fits all. One must work through the features of each to determine the proper fit.

As your business evolves, please remember further evaluation of your business entity choice is needed.

This week’s author……..Mark Bradstreet, CPA

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.