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

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

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

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

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

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

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

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

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

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

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

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

This week’s author – Mark Bradstreet, CPA

–until next week.

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

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

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

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

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

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

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

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

This week’s author – Mark Bradstreet, CPA

–until next week.

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

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

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

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

Some of my misconceptions follow:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This week’s author – Mark Bradstreet, CPA

–until next week.

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

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

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

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

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

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

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

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

This week’s author – Mark Bradstreet, CPA

–until next week.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 449 | New Tax Law (TCJA) Restricts Like-Kind Exchange Rules for Non-Real Estate Property (Ouch!) February 28, 2018

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

Tax Tip of the Week | Feb 28, 2018 | No. 449 | New Tax Law (TCJA) Restricts Like-Kind Exchange Rules for Non-Real Estate Property (Ouch!)

In a like-kind exchange, a taxpayer generally does not recognize a taxable gain or loss on an exchange of like-kind properties provided both the relinquished property and the replacement property are held for productive use in a business or for investment purposes, and no cash(boot) is received in the exchange. For those exchanges completed after Dec. 31, 2017, the TCJA limits tax-free exchanges to exchanges of real property that is not held primarily for sale. Therefore, as previously allowed, exchanges of personal property and intangible property can no longer qualify as tax-free like-kind exchanges.

On the surface, you may think losing like-kind exchanges for personal and intangible property is not a big deal since we can instead use IRC Sections 168 and/or 179 to write-off the new or used equipment placed in service. This reasoning may be valid. BUT, what about those situations where some equipment or machinery is sold without buying a replacement? Under the new tax law, this scenario will cost you tax dollars since you most likely will have a gain on the sale. This is especially true if Sections 168 and/or 179 had been used on the asset sold.  In fact, the entire gain may all be taxable in the year of sale since your tax basis is zero.

Make your CPA aware of any significant asset sales during the year, especially the sale of any equipment or machinery for which a replacement won’t be purchased in the same tax year (of an equal or greater value). Otherwise, you may be in for an unpleasant surprise.

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

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 447 | New Tax Law (TCJA) – Rules Significantly Eased for Code Section 168 & 179 February 14, 2018

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

Tax Tip of the Week | Feb 14, 2018 | No. 447 | New Tax Law (TCJA) – Rules Significantly Eased for Code Section 168 & 179

Good news for business owners!

The Tax Cuts and Jobs Act (TCJA) has very favorably changed the tax rules for “accelerated” tax depreciation expense under IRC Sections 168 and 179.

Prior Law:  Section 168 (bonus depreciation) – taxpayers were allowed to deduct 50% of the cost of most new tangible property other than buildings (with a few exceptions). This “50% bonus depreciation” was scheduled to be reduced to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and thereafter.

New Law:  For property placed in service and acquired after Sept. 27, 2017, the TCJA has raised the 50% rate to 100%.

Also, perhaps, even more importantly, under the TCJA the post-Sept. 27, 2017 property eligible for bonus depreciation may be new or used.

Prior Law:  Section 179 expensing – taxpayers could elect to deduct the entire cost of Section 179 property up to an annual limit of $510,000. For qualifying assets placed in service in tax years that begin in 2018, the adjusted limit was $520,000. This annual limit was reduced by one dollar for every dollar that the cost of all Section 179 property placed in service during the tax year exceeded a $2,030,000 threshold. For those assets placed in service in tax years that begin in 2018, the threshold was to be $2,070,000.

New Law:  The TCJA ratcheted up the annual dollar limit for expensing to $1 million and $2,500,000 as the new phase down threshold.

The new definition of qualifying property has been expanded for both Sections 168 and 179. More favorable depreciation lives were also made available, meaning faster tax write-offs.

Vehicles.  The TCJA triples the annual dollar caps on depreciation (and the Code Sec. 179 vehicle expensing) of passenger automobiles and small vans and trucks. Also, because of the extension in bonus depreciation, the increase for vehicles allowed bonus depreciation of $8,000 in the other-wise-applicable first year cap is extended through 2026 (with no phase-down).

Farm property.  More good news!  For items placed in service after 2017, the TCJA reduces the depreciation period for most farm equipment from seven years to five. It also allows many types of farm property to be depreciated under the 200% (instead of 150%) declining balance method.

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

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 446 | Past Due Taxes May Jeopardize Your Passport February 7, 2018

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Tax Tip of the Week | Feb 7, 2018 | No. 446 | Past Due Taxes May Jeopardize Your Passport

The IRS has recently provided further details about delinquent tax debts and their impact on your ability to travel. The IRS is required by law to notify the State Department once your tax debt is deemed as “seriously delinquent.” At that point, the State Department will typically deny issuing or renewing a passport and may even revoke an existing passport. Even though this law was enacted back in 2015, the IRS and State Department are only now enforcing the rules.

Please note these rules are not limited to criminal tax cases or even where the IRS believes you are trying to avoid paying a tax debt. Upon notification from the IRS, the State Department typically will not issue or renew your passport. This applies only to a “seriously delinquent” tax debt or more than $50,000. However, remember this tax debt balance also includes penalties and interest both of which may grow at an alarming pace.

The IRS now has new details explaining some remedies should this situation arise. The IRS says that once taxpayers are notified that “certification” of their seriously delinquent tax debt has been transmitted to the State Department, they should consider: (1) paying the taxes in full; (2) entering into an installment agreement with the IRS; or (3) making an offer in compromise. This “certification” is not to be taken lightly. It is not something to be ignored, hoping it will resolve itself. Hope is not a plan. If a “certified” taxpayer applies for a passport, the State Department, in general, will provide the applicant with 90 days to resolve the tax delinquency before denying the passport application. If a taxpayer needs their passport sooner than the 90 day window to travel, the taxpayer must contact the IRS and resolve the issue within 45 days from the application date. This is necessary, so the IRS has enough time to notify the State Department.

Typically, the only avenue for a taxpayer who believes that a certification was wrongfully issued or not reversed because of an error (e.g. the tax debt is paid or ceases to be defined as seriously delinquent) is to file a civil action in court. Going to IRS Appeals, to challenge the certification or the IRS decision not to reverse a certification, is not an option. However, the taxpayer may contact the IRS using the phone number in the IRS Notice CP508C to ask for a reversal of the certification if the taxpayer believes that the certification was issued in error.

As always with the IRS, procedure is important. Before a tax debt reaches this stage, the IRS usually sends multiple notices. Do not ignore, you should respond by their deadline and be persistent. A tax debt does not become final if you keep your tax dispute going.

Note: Further information exists on the IRS website.

Credit for information is given to Robert W. Wood, Contributor to Forbes

We enjoy your questions, comments and suggestions for future topics. You may 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. 445 | Tax Cuts and Jobs Act – Estate and Gift Tax Changes January 31, 2018

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

Tax Tip of the Week | Jan 31, 2018 | No. 445 | Tax Cuts and Jobs Act – Estate and Gift Tax Changes

Congress debated at length as to whether the estate and gift taxes would survive. And, if they did – what new look might they have. In the final version of the Tax Cuts and Jobs Act as signed into law by the President on December 22, 2017, the estate and gift taxes did survive but with significant increases to their exclusion amounts.

Pre-act law – The lifetime estate exclusion amount was originally $5,000,000 and adjusted for inflation after the year 2011. This exclusion amount was $5,490,000 for the 2017 year and scheduled to be $5,600,000 for 2018 or $11,200,000 for a married couple if portability was elected. The annual gifting exclusion is $14,000 for 2017. This exclusion is adjusted for inflation but our low inflation rates and the fact that it is adjusted only in increments of $1,000 has left it unchanged since 2013.

New law – After December 31, 2017 and before January 1, 2026 (a sunset provision), the Tax Cuts and Jobs Act has effectively doubled the previous lifetime exclusion amount. The new amount is expected to be about $11,200,000 in 2018 or $22,400,000 for a married couple.

Note: Although the Act is silent on generation skipping transfers one may expect to see an increased exclusion amount here as well.

The annual gifting exclusion is now $15,000 for gifts made in 2018. This change from $14,000 to $15,000 is not a result of the new tax law but a result of inflation adjustments.

We enjoy your questions, comments and suggestions for future topics. You may 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. 444 | New Tax Law – 20% Pass-through Business Deduction January 24, 2018

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

Tax Tip of the Week | Jan 24, 2018 | No. 444 | New Tax Law – 20% Pass-through Business Deduction

For tax years beginning in 2018 and before 2026, the new 20% deduction is generally allowed by individuals, estates and trusts that have interests in pass-through business entities. These entities are sole proprietorships, partnerships, S corporations and limited liability companies (LLCs) and their income passes through and is taxed by another entity (generally taxed on your personal income tax return – Form 1040). This deduction will typically equal 20% of the qualified business income (QBI) provided personal taxable income is less than a threshold of $157,500 or, if married filing jointly, $315,000. Further limitations apply provided personal taxable income is in excess of these thresholds. Please note the QBI deduction isn’t allowed in calculating adjusted gross income (AGI), but it does reduce your overall taxable income. For all intents and purposes, QBI is treated as an itemized deduction.

QBI is income, gains, deductions and losses that are connected with a U.S. business. Some investment items, reasonable compensation to an owner or any guaranteed payments to a partner or LLC member are not considered QBI.

Limitations

For pass-through entities aside from sole proprietorships that exceed the above thresholds, the QBI deduction generally can’t exceed the greater of the owner’s share of:

•    50% of W-2 wages paid to employees by the qualified business during the tax year; or
•    The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

Qualified property is the depreciable tangible property (including real estate) owned as of year-end and used by the business during the year for the production of qualified business income.

Another limitation is that the QBI deduction usually isn’t applicable for income from certain service businesses. These include businesses that involve investment-type services and most professional practices (exceptions are engineering and architecture).

Please note that other rules and limitations are applicable to the QBI deduction.

These rules are complex and will require careful planning to optimize any benefits.

We enjoy your questions, comments and suggestions for future topics. You may 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.