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Tax Tip of the Week | Escaping Income Tax on Real Estate Gains is Entirely Possible January 16, 2019

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

Escaping Income Tax on Real Estate Gains is Entirely Possible

With the proper tax planning and foresight, use of Internal Revenue Code Section 1031 offers the opportunity of not paying any income tax on real estate property gains.

The “1031” tax break aka a “like kind” exchange is one of the most commonly overlooked tax breaks.

Using 1031 exchanges as explained below enable a taxpayer to escape paying income tax on a real estate gain by effectively trading their properties for more expensive ones. The gains are deferred through a basis reduction in the newly acquired property. However, if this property is held at death and the total estate value is below the current taxable threshold of roughly $11,000,000; then, your beneficiaries receive the real estate at its “fair market value” at date of death which becomes their new “stepped-up basis.” The difference between the basis (even after depreciation) and its fair market value at date of death remains untaxed.

However, there are some “mines in this minefield” that must be avoided. Further explanation is offered below by Robyn A. Friedman (WSJ, November 16, 2018).

-Mark Bradstreet, CPA

The tax overhaul enacted last year made a lot of changes, but one provision cherished by real-estate investors survived:  so-called 1031 exchanges.

It’s the name for a tax break that lets you defer capital-gains taxes on the sale of a property used for business or investment if you reinvest the proceeds in another business or investment property. It’s often used by large real-estate investment companies, but individual investors – even those who own a single rental-income property – can take advantage of it as well. The “1031” name refers to Section 1031 of the U.S. tax code.

“You don’t have to be a professional investor to use this tax break to your advantage,” says Andy Weiser, a real-estate agent with Better Homes and Gardens Florida 1st Real Estate in Fort Lauderdale, Fla. “You just have to be a smart investor.”

One typical way small investors use the provision is by selling one rental property and buying another. Mr. Weiser recently represented an investor who did just that. The investor sold a two-bedroom rental property in San Antonio, for what would have been a $125,000 gain. If he had simply taken the cash, he would have paid capital-gains tax. But instead, under the 1031 rules, he was able to defer paying those taxes by using the proceeds to buy another rental property, a $395,000 two-bedroom waterfront condominium that he bought in Fort Lauderdale.

The provision only applies to properties held for business or investment; a personal residence is not eligible for the tax break. You also must complete certain steps at set times. You have 45 days from the date of the sale of the old property to identify potential replacement properties. And you must acquire the new property no later than 180 days after the sale.

Before the tax code overhaul this year, a variety of transactions – not just real estate – qualified for 1031 exchange treatment. These transactions also called “like-kind exchanges,” were allowed for any type of property used for business or held as an investment, including exchanges of personal or intangible property such as artwork or other collectibles. The new rules now limit exchanges to real estate only.

But many types of real estate qualify. An investor can exchange a single-family home held for investment in New York for a farm in Colorado or a small strip shopping center in Las Vegas, as long as all those properties are used for business or investment purposes.

Many investors engage in successive 1031 exchanges, effectively swapping each of their properties into bigger and better ones. Ultimately, when the investor dies, the heirs who inherit the last property receive a “stepped-up basis,” which means that the property is valued at the market value at the time of death. If the heirs sell it then, there’s likely no gain – and hence, no capital-gains taxes due – on the sale.

“You keep buying and selling and roll the profits from one to the next,” said David Goss, co-founder and managing principal of Interra Realty, a brokerage in Chicago. “And when you die, and your kids inherit them, they get a stepped-up basis so the capital gains are gone forever.”

•    Beware of the personal property. Personal property is excluded from like-kind exchanges. So, if you’re exchanging an apartment building and it has appliances, you need to determine how much of the value is attributable to the building and how much for the appliances. “That’s an area where you have to watch out,” Mr. Moskowitz says.

Robyn A. Friedman, WSJ, Friday, November 16, 2018

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

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Stop Helping Cybercriminals Steal Your Info January 9, 2019

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

Stop Helping Cybercriminals Steal Your Info

We all face computer security threats on a daily basis. Some attempts by cybercriminals are outright obvious! But, others, admittedly are ingenious, sneaky (see (2) below – that is a new one for me) and can literally put you out of business. An IT instructor I had a few weeks ago said he could hack our hotel’s Wi-Fi and be on our cell phones in 2-3 minutes. He said if he was really good it could be done in 30 seconds. Ouch! Also, too many people use passwords that are simply too short and too easy to guess. Please read on…

-Mark C Bradstreet, CPA

“When you take a moment to think about the various data breaches and identity theft scams that have occurred over the past few years – from Equifax to WannaCry – there tends to be a common theme:  These wounds are self-inflicted.

Because we face data security threats every day, it helps to know the most common tactics cybercriminals use and how to prevent falling victim to them.

(1) Spear phishing
Phishing scams are one of the most common and successful methods of data theft, which makes sense. They target the single most vulnerable part of the security apparatus:  People. And there’s one subset of phishing that is particularly effective.

“Spear phishing” specifically targets individuals by using personal information to convince the victim that the criminals are a familiar entity – an employer, family member, or favorite retailer – to gather private data: bank accounts, credit card information, and Social Security numbers are common requests. Luckily, there are usually a few clues that the communication isn’t legit and knowing how to spot them can protect you from being a victim.

First, businesses will not request your bank account number or Social Security number in an email. If someone on the phone is claiming to be from a collection agency, you can perform a few quick Google searches to verify their identity. Second, a legitimate agency will never ask for payment via cryptocurrency or gift cards. Third, email and letter phishing scams tend to feature glaring spelling and grammar issues.

The other, most obvious way to avoid email phishing scams is to avoid opening unsolicited emails and, on those occasions when you do open them, never clicking links or downloading attachments. If you’re worried about not being able to receive files from customers or coworkers, secure client portals and shared folders are viable options.

(2) Evil Twins
Evil twin attacks are when cybercriminals create a fake wireless access point that impersonates a real Wi-Fi- network, enabling cybercriminals to directly monitor victims’ traffic or redirect victims to websites containing malware. Criminals usually set up shop in high-foot-traffic areas that advertise free Wi-Fi, like airports, coffee shops and shopping malls. Unfortunately, there’s no way to know which “hotel Wi-Fi” is legit.

If you don’t want to self-regulate what you do while connected to public Wi-Fi, one solution is a virtual private network (VPN) service. When you use a VPN, your device’s traffic is encrypted, which – while not impenetrable – places a barrier between your data and would-be cybercriminals.

(3) Ransonware
Stop me if you’ve heard this one:

You’re working late on a project that’s due tomorrow morning, but a Windows notification asking to download and install an operating system update stops you dead in your tracks. Rather than taking a break that could last an hour or more, you click “Remind Me Later” and keep working on that deadline. Six months later, the update is waiting patiently for you to find the time. It’s essential for us to find the time to update our operating systems because such updates often include security patches that can help prevent attacks that compromise our cybersecurity.

Ramsonware holds your computer’s data hostage until you make a payment to the cybercriminals responsible for the attack. Generally, if you don’t make a payment by a specific date, all your data is deleted. But even if you pay the ransom, there’s no guarantee you’ll get your data back – and since most of these scams ask for payment in Bitcoin, it’s not possible to simply reverse the charges.

The May 2017 WannaCry ransomware attack succeeded because people failed to update their Windows operating system. Before installing the update, Windows users were vulnerable to an exploit that didn’t even require they actively download malware to their system – even worse, if one computer on a network became infected, it was likely that WannaCry would spread to others. Here’s the rub:  Microsoft issued a fix for supported versions of Windows two months before the attack took place.

(4) Wrapping things up
What else can you do to protect your data?

Aside from installing security software like antivirus and antispyware programs, you probably need to address your password hygiene.The problem with passwords is if they’re easy to remember, they’re usually not very secure. Since every account needs a strong unique password, a password manager can be a relatively easy solution.

Password managers randomly generate and store passwords associated with your accounts, and some will even auto fill website forms with all of your login information. In the event of an account compromise, you just generate a new password. When you use a password manager, you only need to remember the password that logs you into that service.

Criminals have many ways to get their hands on your private information. Let’s stop making their job easier.”

Credit to Ryan Norton, CPA Voice The Ohio Society of Certified Public Accountants  – September/October 2018. Ryan is a GruntWorx contributor. This originally appeared on the Boomer Consulting, Inc. blog on June 14, 2018.

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

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Students Get Help From Judges January 2, 2019

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

Students Get Help From Judges

To give you an idea of the pervasiveness of this issue, student loan debt “has eclipsed credit cards as the largest source of consumer debt after mortgages.”  Please read the write-up below for potential relief for some former students.

Mark Bradstreet, CPA

“More bankruptcy judges are throwing lifelines to people struggling to repay their student loans after decades of refusing to consider any sort of relief.

In interviews with the Wall Street Journal, more than 50 current and former bankruptcy judges, frustrated at seeing borrowers leave federal courtrooms with six-figure debts, say they or their colleagues are more open to chipping away at the decades-old guidelines that determine how such debt is treated.

“If the law’s not going to be improved by Congress, we have to help these young people who are drowning in student loan debt, said U.S. Bankruptcy Court Judge John Waites in South Carolina.

Outright cancellations remain rare, but judges said they have other tools at their disposal, including asking lawyers to represent borrowers for nothing. The lawsuits can cost $3,000 to $10,000 and take years.

Other judges are embracing debt-relief techniques that don’t fully erase student loans but make repayment more affordable by, for instance, canceling future related tax bills. The popularity of these relief strategies could get a boost from a panel of professors, judges and advocates who are studying failures in consumer bankruptcy law and plan to release a report next year.

Hundreds of thousands carry student debt in the U.S. – the total has more than doubled over the past decade to $1.4 trillion – nearly all backed by the federal government. It has eclipsed credit cards as the largest source of consumer debt after mortgages. Almost every other type can be extinguished in bankruptcy, but standards made college debt untouchable. Borrowers typically must repay student loans over their lifetime, even those facing extreme financial hardship.

In March, Federal Reserve chairman Jerome Powell said he would be “at a loss to explain” why student loans can’t be cancelled like other debt. The Trump administration is considering whether to fight cancellation requests less aggressively.

Consumer bankruptcy lawyers are starting to notice that judges are being more flexible. One Las Vegas law firm recently filed the first cancellation request in its 14-year history after hearing a judge at a conference voice concern over student loans. Other lawyers said growing sympathy amounts to judges making lenders more willing to reach resolutions in court.

“I’m getting really good results with settlements these days,” said Chicago lawyer David Leibowitz. “I’m not the only one.”

Rules governing how student debt is handled in bankruptcy are made by Congress and by judges who issue influential rulings. Several bills in Congress that would erase student-loan debt in bankruptcy have stalled in recent years.

Last year in Philadelphia, U.S. Bankruptcy Court Judge Eric Frank cancelled a single mother’s $30,000 in student loans. Opposing lawyers from the U.S. Department of Education said the borrower needed to prove her hardship would persist 25 years. Judge Frank ruled that the relevant window was five years.

An appeals court over-turned his ruling, but his decision inspired a Tacoma, Wash., judge in December to cancel a portion of another borrower’s loans.

Such rulings are rare because few troubled borrowers attempt to cancel their student loans, because of the historically slim chances of victory.

Some bankruptcy judges criticize colleagues for re-interpreting well-settled law on student loans. “My view is, if the law is clear, follow it,” said retired California judge Peter Bowie.

The push to rethink the legal standard on student-loan debt is bipartisan. Judges interviewed by the Wall Street Journal were appointed during both Republican and Democratic administrations, though bankruptcy judges are appointed by appeals court judges, not the president.

Before 1976, laws allowed borrowers to do away with student-loan debt in bankruptcy. Congress, out of concern that the new graduates would take too much advantage of that option, made a new rule: Borrowers could cancel student loan debt after only five years of payments. Judges could grant exceptions if borrowers showed that repaying would cause “undue hardship.”

Congress didn’t define “undue hardship” so the task of doing so fell to federal judges. When Marie Brunner, a 1982 graduate of a master’s program in social work tried to cancel her loans in bankruptcy, a New York judge in 1985 said she had to show three things: she struggled financially, her struggles would continue and that she had made a good faith effort to repay. She lost.

That list still serves as a baseline for hardship in circuit courts that control the rules in most states.  Some appeals courts set even higher bench-marks, with one, for instance, saying borrowers must face a “certainty of hopelessness.”

In 1998 Congress said any borrower trying to cancel any federal student loans must prove “undue hardship,” like Ms. Brunner. Congress gave private student loans the same protection in 2005.

Some of the country’s bankruptcy judges are starting to argue that the prevailing legal standard is unintentionally harsh and wasn’t meant for adults still on the hook for student-loan debt years after college.

Judge Frank Bailey in Boston made that argument in an April ruling wiping out $50,000 in student loans for a 39-year-old man whose health ailments prevent him from working.

Some judges, including U.S. Bankruptcy Court Judge Michael Keplan in Trenton, N.J., said they are looking for ways to be more forgiving after seeing their own adult children borrow heavily for their education. Other judges grew concerned after talking to their law clerks. The typical law-school student takes out $119,000 in loans.

Two judges said they regret their rulings against borrowers more than a decade ago.

Kansas judge Dale Somers said he worked particularly hard to justify the reasoning in a December 2016 ruling that cancelled more than $230,000 in interest that built up on a couple’s student loans from the 1980s. They left bankruptcy owing $78,000.

Alabama judge William Sawyer declared that student loans had become “a life sentence” in a 2015 decision cancelling a $112,000 student loan debt for high school science teacher Alexandra Conniff, a single mother of two teen boys whose yearly income is $59,400.”

Credit given to Katherine Stech (Wall Street Journal)

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

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | New Expensing and Bonus Depreciation Rules for Small Businesses December 19, 2018

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

New Expensing and Bonus Depreciation Rules for Small Businesses

As we approach the end of 2018, many businesses are reviewing their capital asset needs for this year and next and considering the tax benefits of buying these assets this year or next.

Some of the new rules are shown below as a refresher.

Remember Section 179 may be elected for part or all of the qualifying asset cost. However, use of Section 179 may not be fully deducted if it creates a loss and can not exceed certain thresholds as described below.

Section 168 is now available for new or used qualifying assets. It may create a loss but it must be taken on all purchased assets in a particular “asset class.”

-Mark Bradstreet, CPA

Isaac M. O’Bannon, Managing Editor on Nov 15, 2018 (CPA Practice Advisor)

“Some of the changes in the tax reform law mean small businesses can immediately expense more of the cost of certain business property. Many are now able to write off most depreciable assets in the year they are placed into service.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead. Among those for business owners are tax rate changes for pass-through entities, changes to the cash accounting method for some, limits on certain deductions and more.

Section 179 expensing changes

A taxpayer may elect to expense all or part of the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017. For most businesses, this means the 2018 return they file next year.

Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. The TCJA also modifies the definition of qualified real property to allow the taxpayer to elect to include certain improvements made to nonresidential real property. See New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act for more information.

New 100 percent, first-year ‘bonus’ depreciation

The 100 percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. The law also allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

The deduction applies to business property acquired after Sept. 27, 2017, and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.  In general, the bonus depreciation percentage is reduced for property placed in service after 2022. See the proposed regulations for more details.

Taxpayers may elect out of the additional first-year depreciation for the taxable year the property is placed in service. If the election is made, it applies to all qualified property that is in the same class of property and placed in service by the taxpayer in the same taxable year. The instructions for Form 4562, Depreciation and Amortization, provide details.”

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

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Pay Your Taxes Like a Billionaire: Carefully December 12, 2018

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

Pay Your Taxes Like a Billionaire:  Carefully


One of the more common comments I hear is that the “rich” don’t pay income taxes. That is simply not true. However, many of the “rich” own and operate a business, sometimes more than one. These businesses do offer some great planning opportunities not available to many non-entrepreneurs. Often, some of the major components of these tax saving strategies revolve around the use of accelerated depreciation methods for qualifying assets and some sophisticated retirement plans.
The following excerpts from Laura Sanders (WSJ, December 1-2, 2018) further explain some of the intricacies of extended planning for individuals and businesses under the new tax laws.

-Mark C. Bradstreet

“The richest Americans have long saved billions from multi-year tax planning. Now it makes sense for many others to do the same. Advisors to high earners have always done multiyear analyses of items like operating-loss carryforwards or stock options for their clients. But because of last year’s tax overhaul, filers earning less have an incentive to use this approach.

Individuals may decide to speed up or slow down their charitable donations, while business owners may want to spread out certain deductions instead of taking them all at once. The result could be a significantly lower tax bill over time.

One key driver of the change is the near doubling of the standard deduction, the amount taxpayers get if they don’t itemize write-offs like mortgage interest, state and local taxes, and charitable donations on a Schedule A. This write-off is now $12,000 for single filers and $24,000 for married couples.

This is where multiyear planning helps.

Say that John and Jane have paid off their mortgage, owe $15,000 in state and local taxes, and give $10,000 a year to charities.

For 2017, they deducted the $25,000 total on Schedule A because it was greater than their standard deduction of $12,700. But their 2018 state-tax write-off is capped at $10,000. Thus, their deductions total $20,000, less than their $24,000 standard deduction this year.

Now see what happens if they accelerate their $10,000 of 2019 donations into 2018. They can deduct $30,000 on Schedule A for 2018 and take the standard deduction for 2019, which is $24,400 after an inflation adjustment. By doing this, their write-offs over two years total $54,400 rather than $48,400.

“People should maximize charitable deductions, as it’s often the only Schedule A strategy left,” says David Lifson, a CPA with Crowe LLP in New York.

Multiyear planning is also newly important to owners of pass-through businesses like a proprietorship, partnerships and S corporations. They now get a 20% deduction, as long as their own taxable income doesn’t exceed $157,500 for single filers or $315,000 for married couples. Above that, the deduction can shrink or disappear.

Owners with income above the limits can use various strategies to get below it. Among them: investing in depreciable equipment; making charitable donations; and saving more in retirement plans with deductible contributions.

Say a married business owner has a taxable income of $330,000 and buys $100,000 of equipment. The law allows him to deduct 100% of the cost right away, which gets him far below the $315,000 income threshold – for one year.

Instead, says Mr. Porter [a CPA in Huntington, W. VA], the owner should consider spreading out these deductions, as is often allowed.  If he takes the $100,000 write-off over five years, perhaps he can lower his income so it’s below the threshold for that period, qualifying him for a full 20% write-off each year.

With year-end nearing, here are other tax moves.

•    Take capital gains and losses as needed.  Don’t let the tax tail wag the dog, but remember that capital losses can offset taxable capital gains from investments and reduce a filer’s bill. Up to $3,000 of excess capital losses can also be deducted against “ordinary” income like wages.

Investors who sell losing securities can’t repurchase them for 30 days before or after without running afoul of Internal Revenue Service rules. Winners can be rebought right away.

•    Beware of the 3.8% surtax. The 3.8% tax on investment income applies to most married couples with more than $250,000 of adjusted gross income and most singles with more than $200,000.

It’s levied on net investment income, such as interest, dividends, capital gains and royalties, above the thresholds.  Thus, if a single filer has $150,000 of income and a $75,000 capital gain, $25,000 would be subject to the 3.8% tax.

Some people can avoid this tax by planning, such as by selling part of an investment before year-end and the rest early in January.

•    Take required IRA payouts.  These are typically from traditional individual retirement accounts held by taxpayers 70½ and older.  The required payout is a percentage of total assets on the prior Dec. 31. Except for those taking their first such withdrawal, the payout must be taken by year-end.

IRA owners taking their first required payout have a later deadline:  April 1 of the year after they turn 70½.  But waiting means the IRA owner will owe tax on two IRA payouts in the second year, pushing some into a higher bracket, so it may make sense to take it before year-end.”

-Laura Saunders, WSJ

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

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | An IRA/Charitable Contribution (QCD) for Year-End Planning December 5, 2018

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

An IRA/Charitable Contribution (QCD) for Year-End Planning

Over the last few years we continue to see an uptick in charitable contributions made from an IRA. I continue to believe this tax strategy is very often overlooked or just simply ignored. So as this year winds down and many people are making charitable donations, please remember the new tax law has made the way to make charitable contributions even more worthwhile to consider.

-Mark C. Bradstreet, CPA

Bob Carlson Contributor (excerpts from an article titled “7 IRA Strategies For The End of 2018”)

“It’s time for IRA owners to be proactive by planning and implementing their strategies for the rest of the year. Consider these steps now and take those that are appropriate for you.

Caution: Don’t wait until the last few weeks of the year to consider your actions. IRA custodians are very busy then. Many won’t process requests for some types of transactions during the last couple of weeks of the year or won’t guarantee they’ll be completed by December 31.

Use QCDs to make charitable contributions. It’s one of the best ways to make charitable contributions, though it’s available only to owners of traditional IRAs who are age 70 ½ and older.

The Tax Cuts and Jobs Act made the qualified charitable distribution (QCD) even more valuable. The law increased the standard deduction and reduced the itemized expenses that can be deducted.  The result is fewer taxpayers will be itemizing expenses and deducting charitable contributions.

In a QCD, you direct the IRA custodian to send a contribution directly to the charity of your choice. Or you can have the custodian send you a check made payable to the charity, which you deliver to the charity.

The distribution isn’t included in your gross income, yet it counts towards your required minimum distribution (RMD) for the year.”

Bob Carlson is the editor of Retirement Watch, a monthly newsletter and web site he founded in 1990. He researches and writes about all the financial issues of retirement and retirement planning, for both those planning retirement and already retired.

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

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | Are You Protecting Your Assets After Death? November 28, 2018

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

Are You Protecting Your Assets After Death?

I have sometimes wondered how often following a person’s death that their estate assets are not distributed according to their wishes. Probably more often than anyone would care to admit. Not that I think the mistakes are made intentionally; but face it, wires may easily get crossed by the executor and the attorney through the fault of no one.  And, the person (the decedent) is no longer here to oversee their dying wishes and keep things straight.

The below article shares some “checks and balances” that may help safeguard the distribution of your estate assets.

– Mark C. Bradstreet

By Cheryl Winokur Munk

PEOPLE USUALLY take great pains to protect their assets from would-be thieves during their lifetimes. But they don’t always give a lot of thought to safeguarding their estates from interlopers after death.

Estate-planning experts say it is important that individuals put certain safeguards in place while they are still alive – and to instruct heirs to institute protective measures posthumously. While nothing is full-proof, here are a few steps that can offer an added layer of protection.

Checks and balances
In most cases, experts recommend naming two or more executors to make sure that the deceased’s property is collected properly and distributed appropriately. Such an arrangement ensures there is more than one set of eyes involved in coordinating the deceased person’s financial life, says Lynn Halpern, senior fiduciary counsel at Bessemer Trust.

Families with complicated assets might consider hiring a professional to be the second executor as an added safeguard. Costs for these services can vary depending on the will and the state and the corporate executor selected, Ms. Halpern says.

Experts also recommend naming two or three trustees to invest and distribute any assets held in trust. From a cost and simplicity perspective, many people choose to name only one trustee, but there can be a downside to doing this.

“Any time you name one person who can act with autonomy, you increase the level of risk,” says Bob Wyche, partner and managing director at Waldron Private Wealth, a registered investment adviser in Bridgeville, Pa. While naming multiple trustees doesn’t guarantee thievery won’t occur, it lessens the likelihood, he says. “It’s just another system of checks and balances because you can’t do anything unilaterally.”

It’s common for individuals to name the attorney who drafted their trust as the sole trustee, but Mr. Wyche discourages this setup. If a lawyer is simply drafting documents, he or she doesn’t have access to the funds. But if the attorney has sole authority over the assets, the risk of trouble rises, he says.

If people want to use their attorney as trustee, he suggests they at least name a co-trustee. It could be a family member who is familiar with the deceased’s wishes, or a professional, corporate trustee.

Before picking a family member as co-trustee, make sure he or she understands the responsibilities that come with the job – and has enough financial knowledge to identify when someone might not be acting in good faith. “It may not always be clear to [individual family members] where the line is,” Mr. Wyche says.

With an institutional trustee, families will receive more frequent statements, and there is typically oversight from a corporate level to ensure no one individual acts inappropriately, experts say. But such services can be pricey.

Generally speaking, families should expect to pay about 1% of assets for institutional trustee commissions. This fee may be more or less, depending on factors such as applicable state law, the family’s assets and the trust company. Separate investment management charges may also apply.

Still, for some families it may be worth the added cost. “If you have a corporate trustee and pay attention, you’ll be unlikely to miss something,” says Jessica M. Warren, an estate-planning and probate attorney with Warren & Lewis in Austin, Texas.

Another tactic for safeguarding assets held in trusts is to add contingencies to the will, such as requiring an annual accounting from trustees to beneficiaries or their guardians. Most corporate trustees are forthcoming with information, but private trustees generally don’t do it unless a beneficiary requests the information, says Janis Cowhey, a partner at Marcum LLP, an independent public accounting and advisory services firm. “If they know the cookie jar is being watched,” she says, “it can take away temptation.”

Safeguarding tangible assets
When it comes to protecting an estate, families are usually focused most on intangible assets such as bank or brokerage accounts. But Doug Schneidman, a trust and estates partner at Sullivan & Worcester in Manhattan, urges clients to also think about protecting tangible assets such as jewelry and artwork that can be at risk if there’s unfettered access to the deceased person’s home.

Mr. Schneidman advises clients to maintain an updated inventory of the assets in their home and take pictures. Having such a list helps heirs know what’s there, and it helps prevent people from stealing things heirs don’t know about.

Even if some of the items are insured and accounted for elsewhere, it helps to have everything listed in one place, he says.

Keep the list in a protected place, such as an attorney’s office, with a financial adviser, in a house safe or with a child who is going to be the executor of the estate.

The moment someone dies, relatives close to the descendant should secure the apartment or home and quickly take an inventory of the assets, Mr. Schneidman says. He also recommends families severely limit access to the home going forward.

“Many people manage their assets carefully while they are alive; they need to make sure that after they pass away that the goals they worked so hard to achieve are actually accomplished,” says Ms. Halpern of Bessemer Trust.”

Credit to Ms. Cheryl Winokur Munk, Wall Street Journal, October, 2018.  Ms. Winokur Munk is a writer in West Orange, N.J. You can email her at reports@wsj.com.

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

This Week’s Author – Mark C. Bradstreet, CPA

–until next week

Tax Tip of the Week | The New Kiddie Tax: How It Might Change Gift Giving November 21, 2018

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

The New Kiddie Tax: How It Might Change Gift Giving


The following article is about a tax that we seldom deal with, but one which can be significant when it comes into play – the so-called Kiddie Tax. The article was written by Bob Carlson and was taken directly from the Accountants’ Daily News (10-16-2018), and discusses changes to the tax and how it is computed.
-Norman S. Hicks, CPA

By Bob Carlson

Opinions expressed by Forbes Contributors are their own.

“Beginning in 2018, youngsters who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate.

Take a good look at the new Kiddie Tax before making gifts to children and grandchildren.

The Tax Cuts and Jobs Act greatly simplified the Kiddie Tax. The tax was imposed in the Tax Reform Act of 1986 on unearned (investment) income of children. The idea was to end income splitting. That was the practice of high-income earners shifting some of their income to relatives in lower tax brackets, usually by giving investment assets to children directly or through trusts. Initially, only children under age 14 were subject to the tax. The scope was increased over the years.  Now, it applies to most children under 18 and full-time college students under 24 who don’t pay for more than half of their support.

The original Kiddie Tax had the children paying taxes on their investment income at their parents’ highest tax rate. It required a separate form and some complicated computations. It also required parents to share their tax information with their children.

Beginning in 2018, youngsters who are subject to the Kiddie Tax will pay tax on their unearned income using the same tax tables as trusts. There will be no reference to the parents’ tax rate. That greatly simplifies computation of the tax and means parents don’t have to share their data. But the new rules mean many who are subject to the Kiddie Tax will pay higher taxes than they would have under the old rules.

For example, the maximum 20% capital gains tax is imposed on trusts when taxable income reaches $12,700. Last year, that rate wasn’t imposed on an individual until taxable income exceeded $400,000. Throughout the tax tables, higher tax rates are imposed on trusts at much lower income levels than for individuals.

But some children will pay lower income taxes under the new rules.  When a child’s parents are in the top tax bracket and the child receives only a few thousand dollars of investment income, the income will be taxed at a lower rate under the new rules. The child won’t be in the top tax bracket.

The Kiddie Tax applies to all unearned income. That, of course, includes all types of investment income, but also includes distributions from traditional IRAs and 401(k)s and some Social Security survivor benefits.

A child subject to the Kiddie Tax receives a $1,050 standard deduction that makes that amount of unearned income tax free. The next $1,050 of unearned income is taxed at a lower rate, but tax advisors disagree on whether it is taxed at the child’s tax rate or using the trust tax tables. The rule is unclear until the IRS issues guidance.

This means the first $2,100 of unearned income earned by a child or grandchild is either untaxed or taxed at a low rate. Additional income will be taxed using the trust tax tables. So, parents and grandparents have to monitor a youngster’s unearned income sources carefully before giving additional income-producing investments or selling long-term capital assets held in the youngster’s name.

If you plan to leave assets to a youngster as part of your estate plan, you should consider leaving a child who might be subject to the Kiddie Tax a Roth IRA instead of a traditional IRA. There might be a family member in a lower tax bracket who should inherit the traditional IRA.

Another strategy for grandparents might be to give appreciated property to the parents instead of to the grandchildren. Suppose the grandparents are in the top tax bracket but the parents are in a lower bracket. The grandparents have an investment asset with a significant long-term capital gain. They want to sell the asset to help pay for the grandchild’s education or other needs.

The grandparents would owe the 20% capital gains rate if they sold the asset, and the grandchild also would owe the 20% rate if the amount of the gain plus other investment income put him or her in the top trust tax bracket. But the parents might owe only a 15% (or lower) rate if they were given the property and sold it.

The irony is that under the new rules, top-bracket parents or grandparents probably can transfer more money to youngsters before triggering a higher tax than lower-bracket adults can. The top tax rate of 37% begins at $600,000 of taxable income for married taxpayers filing jointly and at $12,500 for trusts. That means a top-bracket family can transfer up to $12,500 of gains or other unearned income to a child or grandchild before the 37% rate is triggered on the child. But an adult in a lower tax bracket has to transfer less than $12,500 before the child begins paying a higher rate than the adult would pay

The new Kiddie Tax makes computing the tax easier, but it can make planning more complicated for many families.”

Bob Carlson is a contributing editor of Forbes Media and is the editor of Retirement Watch, a monthly newsletter and web site he founded in 1990.

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

This Week’s Author – Norman S. Hicks, CPA

–until next week

Tax Tip of the Week | The Biggest Mistakes with Student-Loan Repayments November 14, 2018

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

The Biggest Mistakes with Student-Loan Repayments


Among them: Borrowers not knowing how much or who they owe

By Cheryl Winokur Munk

Until maybe 2 or 3 years ago, I failed to fully understand the complexity of student loan repayments. Lots of different options exist, some having very different tax and repayment ramifications. The below article deals with some but not all of these options. However, it is a good starting point.

– Mark C. Bradstreet, CPA

Over the next few months, many 2018 college graduates and their families will have to start making payments on student loans.

Graduates are typically given a six-month grace period to find a job and start earning income, meaning the bill is coming due for many of them beginning in November.

With that in mind, here are some of the biggest mistakes parents and students make with student-loan repayment—and how to avoid them.

1. Payment-related confusion

While students are in school and during the grace period before repayments are due, it can be easy for students and families to lose sight of who they owe, how much they owe and when they owe it—especially if they have taken out a combination of federal and private student loans over several years.

A 2017 survey of 1,040 college students by College Ave Student Loans, a private student-loan provider, found that 35% of seniors were unsure how much they would owe on their coming monthly student-loan bill. This can lead to issues with repayment and budgeting, experts say.

To avoid confusion—and late payments—students are advised to make a list of all their loans and loan servicers, keeping in mind that the company that provided the loan may not be the same company servicing the loan. Students should then create a simple spreadsheet with basic information such as each servicer’s name, address, phone number and website, says Tori Berube, vice president of college planning and community engagement at the NHHEAF Network Organizations, which helps New Hampshire families plan and pay for college.

The spreadsheet also should list when each loan payment is due and the amounts of the respective payments, Ms. Berube says.

Federal and private student-loan servicers contact borrowers directly with loan and payment information, but families sometimes miss or misplace these communications. Families may have to do some legwork to be sure they have properly accounted for all borrowed funds, experts say. For information on federal-loan servicers and loans, families can visit nslds.ed.gov, click on Financial Aid Review, and log in with the username and password they created when they first applied for financial aid. For information about private loans, students can reach out directly to their loan company or to their school’s financial-aid office if they are aren’t sure which company to contact.

Students also can request a free copy of their credit report, which lists all outstanding loans, Ms. Berube says. They can get a free copy of their credit report every 12 months from each of the three credit-reporting companies via annualcreditreport.com.

2. Failing to update contact information or education status

Many students list their parents’ address or a school email as part of their contact information for student loans. But when they move or change email addresses—as students often do after graduation—they sometimes forget to tell their loan servicers.

If students and families don’t report contact-information changes to their loan servicers, they risk missing important communications about their monthly payments, which increases the likelihood that they will fall behind on payments, says Elaine Rubin, a communications specialist at Edvisors, a provider of free information on paying for college and financial aid. Once that happens, it can be hard to catch up, she says.

It’s also important for students to notify their loan servicers if they return to school at least half time, because their loans, in most cases, will be eligible for a deferment, Ms. Berube says.

3. Missing opportunities to reduce student-loan debt

Families don’t always take advantage of opportunities to pay down student debt sooner—even though doing so would result in them paying less overall, experts say.

There are a number of ways students and families can save on student loans. For instance, they may receive interest-rate incentives for enrollment in automated-payment plans, says Melissa Shoemaker, customer experience manager of strategy and planning at the Pennsylvania Higher Education Assistance Agency, a national provider of student financial-aid services.

Students also could pay more on their loans than is owed each month—with special focus on paying down loans with the highest interest rates or balances—by rounding up their monthly payment, applying large sums of money such as tax refunds when they can or paying half the amount twice monthly so the borrower effectively makes 13 monthly payments a year instead of 12, Ms. Shoemaker says. Doing so would reduce the amount of interest they pay overall.

4. Not asking for help

Students and families who are struggling financially don’t always ask for help when they need it. That can be a critical mistake, experts say, because delinquency can lead to default.

Students who can’t afford to make payments, or who want to know what their options are should that ever happen, should contact their loan servicer, says Rick Castellano, a spokesman for Sallie Mae, a private student-loan provider. Loan servicers may be able to offer a temporary interest-rate reduction, he says, or provide information on income-driven repayment plans or loan consolidation.

“Students and their families should understand that there are resources available to help through their struggles,” Mr. Castellano says.

5. Falling for student-loan repayment scams

In recent years, federal and state regulators have cracked down on student-loan debt-relief scams, but bad apples persist and consumers need to recognize warning signs. Experts advise students to steer clear of any company that changes an upfront fee to purportedly lower their debt or forgive it quickly. Students and families also should be wary of companies that call or email out of the blue, claiming to be associated with the government or a loan servicer. They should never give out sensitive personal information such as their Federal Student Aid—or FSA—ID to a third party; that’s an automatic red flag that something is amiss, says Ms. Rubin of Edvisors.

“You don’t have to pay for help to lower your monthly payments, consolidate your loans or understand your options for loan forgiveness,” she says. Students and families can review their federal student-loan repayment options at StudentAid.gov/repay. For private student loans, they should contact the loan servicer directly. There is no cost for these services.

If a third party is offering a debt-relief opportunity that sounds too good to be true, it probably is, Ms. Rubin says.

Ms. Winokur Munk is a writer in West Orange, N.J. She can be reached at reports@wsj.com.
This article appeared in the October 8, 2018, print edition as ‘5 Big Mistakes with Repaying Student Loans.’

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

This Week’s Author – Mark C Bradstreet, CPA

–until next week

Tax Tip of the Week | How to Apply for Social Security Benefits and Medicare – the Ins and Outs November 7, 2018

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

How to Apply for Social Security Benefits and Medicare – the Ins and Outs

No matter who you are, we are ALL moving ever closer towards that magical age of drawing your Social Security Benefits and using the Medicare system; unless, of course,  you already are reaping such benefits.  On a regular basis, we receive calls asking how and when to apply for these programs.  The following article very nicely answers these questions.

–    Mark C. Bradstreet, CPA

“Pundits spend a good deal of time advising Americans about the best age to claim Social Security – at age 62, at full retirement age, at age 70 and the like.

But they hardly ever discuss the nuts and bolts of applying for Social Security benefits like they should.

You see, the seemingly simple act of completing an application for your own or your spouse’s retirement or for disability benefits isn’t always as straightforward as you might think. “I had a client once who described this as ‘the most complicated and bureaucratic process known to mankind,’” says Robin Brewton, the chief operations officer for Social Security Solutions.

Here’s what experts say you need to know:

Start three months before you want payments. “It doesn’t take that long to clear a claim—no way,” says Andy Landis, author of Social Security: The Inside Story. “But (starting the process early) allows time to iron out any wrinkles that come up, like finding your military discharge form – DD Form 214, Discharge Papers and Separation Documents – or other documents. Then it’s clear sailing to your first payment.”

Others suggest the same. If you want benefits to start on your 66th birth month go to the Social Security office three months prior to your birth month, says Ted Sarenski, the CEO of Blue Ocean Strategic Capital. “Social Security will only give retroactive benefits six months prior so in no case go to them more than six months past your birth month if you intend to begin benefits on your birth month.”

Most claims are done online these days. You really don’t have to apply for benefits in person anymore. Just go to www.ssa.gov and click on the “retirement” box for retirement, spousal or Medicare claims. “There are great instructions and tips there,” says Landis. “Then it takes maybe 20 minutes to complete the application.”

Other experts agree that online is the best way to apply for Social Security. “I am a firm believer in applying online for benefits,” says Kurt Czarnowski, a principal with Czarnowski Consulting.

Prefer to work with a real live human? You can, of course, still apply in person. But if you choose this route, don’t walk into your local office cold. “You might face a one- or two-hour wait, or worse,” says Landis. Instead, call 1-800-772-1213 to set up an appointment, for either a phone or in-office claim. Of note, the Social Security Administration (SSA) generally doesn’t publish the phone numbers of their local offices. You can find your local office and its business hours at https://secure.ssa.gov/ICON/main.jsp.

Consider this warning from Brewton if you do decide to file in person: “Our experience with our own clients has been that the (SSA) agents have attempted to get them to do something different than the client wanted.”

Word to the wise. The SSA’s phones are staffed from 7 a.m. to 7 p.m. in whatever time zone you’re in. “But they’re swamped mid-day, from about 10 a.m. to 3 p.m.,” says Landis. “Instead, call near either end of the day, like 8 a.m. or 5 p.m. If the recording says it will be a long wait, just hang up and call back at a better time.”

When calling Uncle Sam, Landis recommends always having a magazine or other diversion at hand in case you have to wait.

The two “gotcha” questions. When you file, there are two questions that seem to trip people up, according to Brewton. One: “If you are eligible for both a retirement benefit and a spouse’s benefit, do you want to delay receipt of retirement benefit?” And two: “When do you want benefits to begin?”

So many consumers are confused by the first question, says Brewton. “Some don’t know that they may be eligible for multiple benefits; others just simply don’t understand the question,” she says, noting that the question applies only to those who are still eligible to “restrict the scope of the application to spousal benefits only” or what some refer to as filing a restricted application. This applies only to those who were born on or before Jan. 1, 1954. “Those wanting to receive only spousal benefits must answer ‘yes” to this question,” she says. “If you answer “no,” your own retirement benefits will begin.”

The second question is a “gotcha” because, says Brewton, the field is pre-populated with the earliest possible date for someone to start benefits. “For those who are filling out the application up to four months in advance of when they want benefits to start, they’ll need to change the date in the field,” she says. “If a consumer has carefully crafted a claiming strategy, particularly if it is coordinating retirement and spousal or divorced spouse benefits, the wrong date can cost thousands of dollars and ruin the strategy.”

Use the comment section. Would-be Social Security beneficiaries should always use the comments section near the end of the application to clearly spell out what their intentions are, says Brewton. “If they’re trying to file a restricted application, they should say so,” she says. “If they want to collect divorced spouse benefits at full retirement age and switch to their own later, they should say it in the comments. This is documentation of your intent in the event an error occurs in processing.”

Also, Brewton recommends asking someone to sit with you while you file – a friend, spouse, or family member. “It will help you get a second set of eyes on the questions and your answers,” she says.

Make a mistake? If you discover that you made a mistake during the filing process, the sooner it is addressed, the better. Unfortunately, a correction isn’t easy to pull off and requires substantial documentation, says Brewton. “I recommend that clients who file in person or on the phone get the name of the person who assisted with the filing and have that person read the questions and answers back to the consumer,” she says.

Brewton recommends documenting conversations with dates and times. “I do believe that, given the number of Social Security beneficiaries, actual errors are few,” she says. But they do happen from time to time and they can be significant.

Landis also notes that the SSA will contact you if they have any questions about your application. However, the SSA, just like the IRS, will not email you. “Be aware of scammers trying to get your Social Security number,” says Sarenski.

Ultimately, says Brewton, the best defense against errors is a good offense – a smart claiming strategy that is written down. “If a consumer doesn’t feel heard by the SSA, or if the SSA is trying to convince them that a claiming strategy isn’t possible, the best bet is to walk away and get professional assistance. You can always file later.”

Filing for Social Security disability is the hardest. Those filing for Social Security Disability Insurance tackle it in stages, starting online at www.ssa.gov. “The SSA needs to know all your doctors and hospitals that have information about your medical condition,” says Landis. But here’s a trick of the trade that will save you a ton of work: “If one doctor or hospital has all your records, just list that source and say they have everything,” Landis says. “Then be prepared to wait—it takes months to decide a disability claim. The sooner you start, the sooner it will be done.”

Filing a survivor claim? Most claims can be filed online. Not this one. If you’re filing a survivor claim (widow, widower, or surviving child), you can’t do it online, says Landis. Start by calling 800-772-1213 for a claims appointment.

Don’t be late. Every type of claim has a time limit, especially Medicare, says Landis. “You can file up to three months before you want benefits, he says. “Delaying? Not advised.”

What can you expect after you file? You should be aware of and plan for the fact that Social Security benefits are paid one month in arrears, says Czarnowski. “For example, say someone retires at the end of June and intends to start collecting Social Security benefits effective with the month of July,” he says. “That person won’t receive his/her first payment until August.”

Also note, says Czarnowski, that anyone born between the 1st and the 10th of the month is always paid on the 2nd Wednesday of the month; anyone born between the 11th and the 20th of the month is always paid on the 3rd Wednesday of the month; and anyone born between the 21st and the end of the month is always paid on the 4th Wednesday of the month. “And by ‘paid’ I mean that their payment is ‘direct deposited’ into their bank account on that date,” he says. “This is something that people need to understand and anticipate, and in my experience, many of them don’t.”

Examine your documents. Sarenski suggests examining your “introductory” letter and all other correspondence immediately upon receiving it in the mail from the SSA. “It is best to correct any errors as soon as you know of them,” he says.

More on what you’ll need to complete the process can be found in this downloadable PDF .”

MORE POWELL:
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal, TheStreet and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.

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

This Week’s Author – Mark C Bradstreet, CPA

–until next week