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Where’s My Refund? July 29, 2020

Posted by bradstreetblogger in : 2019 Taxes, tax changes, Tax Rules, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

                     

Due to the COVID-19 pandemic, IRS live phone assistance is extremely limited. People are encouraged to first check the Where’s My Refund? tool on the IRS website and the IRS2Go app. Taxpayers can also review the IRS Services Guide (PDF) which links to additional IRS online services.

The IRS issues 9 out of 10 refunds in less than 21 days, and the fastest way to get a refund is to use IRS e-file and direct deposit. Taxpayers should also know they can have their refunds divided into up to three separate accounts.

Please note: Ordering a tax transcript will not speed delivery of tax refunds nor does the posting of a tax transcript to a taxpayer’s account determine the timing of a refund delivery. Calls to request transcripts for this purpose are unnecessary. Transcripts are available online and by mail at Get Transcript.

A few necessary items

To use the “Where’s My Refund” tool, taxpayers will need to enter their Social Security number, tax filing status (single, married, head of household) and exact amount of the tax refund claimed on the return.

Taxpayers who file electronically can check “Where’s My Refund” within 24 hours after they receive their e-file acceptance notification. The tool can tell taxpayers when their tax return has been received, when the refund is approved and the date the refund is to be issued.

Some refunds may take longer

While the IRS continues to process electronic and paper tax returns, issue refunds, and accept payments, there are delays in processing paper tax returns due to limited staffing. If a taxpayer filed a paper tax return, the return will be processed in the order in which it was received. Do not file a second tax return or call the IRS.

Many different factors can affect the timing of a refund. In some cases, a tax return may require additional review. It is also important to consider the time it takes for a financial institution to post the refund to an account or for a refund check to be delivered by mail.

Taxpayers who owe

The IRS encourages taxpayers who owe to do a Paycheck Checkup every year to ensure enough tax is withheld from their pay to avoid an unexpected tax bill.

This week’s article – From IRS.gov – Click Here

– Tammy

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

– until next week.

Two New Employer Tax Credits July 15, 2020

Posted by bradstreetblogger in : Business consulting, Business Consulting, COVID, COVID-19, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

July 15, 2020                         

Many businesses that have been severely impacted by Coronavirus (COVID-19) will qualify for two new employer tax credits – the Credit for Sick and Family Leave and the Employee Retention Credit.

Sick and Family Leave – Credit for Sick and Family Leave

An employee who is unable to work (including telework) because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, is entitled to paid sick leave for up to ten days (up to 80 hours) at the employee’s regular rate of pay, or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day, but no more than $5,110 in total.

Caring for someone with Coronavirus

An employee who is unable to work due to caring for someone with Coronavirus, or caring for a child because the child’s school or place of care is closed, or the paid child care provider is unavailable due to the Coronavirus, is entitled to paid sick leave for up to two weeks (up to 80 hours) at two-thirds the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day, but no more than $2,000 in total.

Care for children due to daycare or school closure

An employee who is unable to work because of a need to care for a child whose school or place of care is closed or whose child care provider is unavailable due to the Coronavirus, is also entitled to paid family and medical leave equal to two-thirds of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to ten weeks of qualifying leave can be counted towards the family leave credit.

Credit for eligible employers

Eligible employers are entitled to receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through December 31, 2020.  The refundable credit is applied against certain employment taxes on wages paid to all employees. Eligible employers can reduce federal employment tax deposits in anticipation of the credit.  They can also request an advance of the paid sick and family leave credits for any amounts not covered by the reduction in deposits. The advanced payments will be issued by paper check to employers.

Employee Retention Credit

Eligible employers can claim the employee retention credit, a refundable tax credit equal to 50 percent of up to $10,000 in qualified wages (including health plan expenses), paid after March 12, 2020 and before January 1, 2021.  Eligible employers are those businesses with operations that have been partially or fully suspended due to governmental orders due to COVID-19, or businesses that have a significant decline in gross receipts compared to 2019.

The refundable credit is capped at $5,000 per employee and applies against certain employment taxes on wages paid to all employees.  Eligible employers can reduce federal employment tax deposits in anticipation of the credit.  They can also request an advance of the employee retention credit for any amounts not covered by the reduction in deposits. The advanced payments will be issued by paper check to employers.

Need more information on how to apply? Click here

This week’s article – From IRS.gov – Click Here

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

Correction/Update to an earlier Tax Tip of the Week regarding municipal income taxes.  A local Income Tax Administrator was kind enough to send the below information to us as follows:

“H.B. 197 sets aside 718.011 of the Ohio Revised Code, stating:

…during the period of the emergency declared by Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, any day on which an employee performs personal services at a location, including the employee’s home, to which the employee is required to report for employment duties because of the declaration shall be deemed to be a day performing personal services at the employee’s principal place of work.

That said, employees who were sent home to work during the pandemic are still considered to be working at their principal place of work and not their city of residence.  That’s why employees should not have had a change in their municipal withholding from pre-pandemic times.  There are those that question the constitutionality of the executive order, so I’m sure that the State or others will address this at a later time.  Unfortunately, due to ORC Section 718, municipalities cannot pass legislation to override H.B. 197 or any section of 718.”

– until next week.

-Mark

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

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

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

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

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

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

This week’s Author – Mark Bradstreet

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

– until next week.

Your Age-by-Age Checklist to Prepare for Retirement Conversations June 24, 2020

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

June 24, 2020

The question isn’t at what age I want to retire, it’s at what income.                      -George Foreman

Never have times been so interesting. Never has change occurred so fast.  We all know that time moves faster as we grow older.  However, it may not make sense to bend over backwards in an effort to fund your retirement at a young age.  But neither may it be ignored completely either.  
                           -Mark Bradstreet

What should you and your loved ones be doing to prepare for a retirement when and how you want? While the answer partially depends on whether your own personal finish line is just around the corner or decades away, there’s one thing that everyone should be doing, no matter your age: talking.

It’s important to have conversations about retirement planning early and often, but not everyone knows what to talk about or how to get started. These age-based guidelines can serve as discussion points with your loved ones to make sure you’re on track for the retirement you want.

Preparing for retirement in your 30’s

• Don’t let student loans prevent you from saving for retirement. It’s usually a mistake to think that student loan debt should be fully paid off before putting aside money for retirement. Your retirement savings need time to grow so you can achieve your goals, and investing early will pay off in the long run — even if you can’t save as much as you’d like.  The right balance will likely include payments toward both goals, with the exact amounts depending on factors like interest rates and expected returns. 

• Make sure you’re maxing out your company’s 401(k) matching contributions. Employers often match up to a certain amount of your contributions; it’s essentially free money that you could be taking advantage of! 

• Don’t leave your job without taking vesting into consideration. Many companies tie their retirement contributions to a requirement that you stay with the company for a minimum amount of time, known as the vesting period. If you leave before the allotted period of time, be aware of the financial repercussions. 

• Revisit your 401(k) contributions each time you get a raise or promotion. If you’ve set up automatic contributions, it’s important that you don’t fall into the trap of sticking to those levels indefinitely.

• Understand the power of compounding returns. The earlier you begin investing, the more time your money will have to grow. Don’t delay. 

Preparing for your retirement in your 40’s

• Prioritize paying down your high-interest debt. Whether you have credit card debt, a car loan or a home mortgage, paying interest can eat away at your ability to save money for retirement. Prioritize your highest interest debt first and work your way down until you’re debt free. 

• Don’t fall behind. Your 40’s can be a stressful time financially. Many people in today’s “sandwich generation” are squeezed by the needs of children getting ready for college and elderly parents with dwindling reserves. Try to at least keep pace with your previous level of retirement savings. 

• Start running the numbers. Making some quick calculations can help show you where different savings scenarios are likely to lead you. If you’re not sure where to start, try Lincoln Financial’s retirement calculators.

• Talk to a financial advisor to make sure you’re on the right track. “Meeting with a financial advisor can help alleviate some of the stress surrounding retirement by helping savers create a plan,” said Jamie Ohl, Executive Vice President, President, Retirement Plan Services, Lincoln Financial Group. “People who have a plan are more confident and better prepared for retirement.”

Preparing for retirement in your 50’s

• Don’t let your spending get out of control. People often find that their disposable income increases in their 50’s as they become empty nesters and their salaries peak. Instead of letting your spending increase in tandem, increase the amount of money you put into your retirement accounts and practice frugality — getting accustomed to a more luxurious lifestyle can make it more difficult to retire.

• Ask your employer about catch-up contributions. Most companies allow workers who are age 50 and above to contribute an extra $6,000 annually to their 401(k) on top of the regular contribution limits. 

• Don’t count on an “average” lifespan. “People are living longer than ever before, and they may not factor that into their retirement planning,” said Will Fuller, Executive Vice President, President, Annuities, Lincoln Financial Distributors and Lincoln Financial Network. “That makes outliving your savings a real concern for the millions of households in America that do not have any kind of income protection in place.”

• Consider purchasing an annuity to protect against uncertainty. Annuities provide you with a guaranteed income for life, safeguarding you against longevity risk and stock market risk. 

• Get your financial advisor to align with your expected retirement age. You may have an ideal retirement age in mind, but your financial advisor is best situated to help you determine whether it’s realistic and what you need to do to get there. 

Tips like these will make sure that you’re heading in the right direction, but there’s no substitute for talking through your own personal circumstances with a financial advisor every step of the way. You’re never too young or too old to get help from a professional — and if you’ve already followed the steps above, it will be easy for them to take you across the finish line.

Today’s author – Mark Bradstreet

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

– until next week.

Unraveling Conflicting Tax Rules for Active vs. Passive Income February 26, 2020

Posted by bradstreetblogger in : 2019 Taxes, Business consulting, General, Tax Rules, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

February 26, 2020

Few topics in the office cause more arguments than the tax definition of active versus passive.  The answer affects your income taxes vastly more than one would ever guess.  And, not in just one area of tax but often involving a multitude of seemingly unrelated areas.  At times, both parties in our office scuffles will have written evidence to support each of their opposing views.  Taxes have many shades of gray.

                            -Mark Bradstreet

It is commonly accepted wisdom that tax rules are complicated. This belief is well supported by the conflicting tax rules that apply to business owners, depending on their participation in the business. Let me try to make some sense of these conflicting rules.

Overview

Business owners may be active in their business. This means they are hands-on and are involved in day-to-day activities. Other business owners may be mere investors, adding their capital but not their labor. The following are various rules that take into account whether owners do or do not work in their businesses.

Qualified business income deduction

The 20% deduction for qualified business income (QBI) applies to owners of pass-through entities. There is no requirement that they do or do not participate in the daily operations of the business in order to claim this personal deduction based on their share of business income. If they participate (e.g., they are an S corporation shareholder who receives a salary), this factors into the QBI determination. For example, salary to an S corporation shareholder is not an item allowed in determining QBI, but the salary does count as wages for purposes of W-2 wages used in the formula for the QBI deduction.

Net investment income deduction

The 3.8% net investment income (NII) tax depends entirely on an owner’s participation in the business. Only income from a business in which the taxpayer does not materially participate is treated as investment income and potentially subject to the NII tax. The determination of material participation is made using the passive activity loss rules (below).

Passive activity loss rules

Under the passive activity loss rules, losses from a business activity in which an owner does not materially participate, and has no passive income, are not currently deductible (sorry for the double negative but it’s the best way to explain this limitation). Suspended losses can be carried forward and used to offset passive activity income in the future.

The determination of whether an owner is passive or active is based on 7 tests. An owner is treated as materially participating (i.e., active) and is exempt from the passive activity loss rules if he or she meets any of these tests:

1.    The owner participated in the activity for more than 500 hours.
2.    The owner’s participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
3.    The owner participated in the activity for more than 100 hours during the tax year, and he or she participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
4.    The activity is a significant participation activity, and the owner participated in all significant participation activities for more than 500 hours (i.e., participation for more than 100 hours during the year and in which the owner didn’t materially participate under any of the material participation tests).
5.    The owner materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
6.    The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
7.    Based on all the facts and circumstances, the owner participated in the activity on a regular, continuous, and substantial basis during the year.

Note: When it comes to rental real estate activities and the passive activity loss rules, an owner’s participation doesn’t entitle him or her to claim losses. Owners of rental real estate activities can escape the passive activity loss rules only by demonstrating that they are real estate professionals (part of the definition of a real estate professional is based on material participation).

Self-employment tax

Sole proprietors pay self-employment tax on their net self-employment income. This is so whether they run their business or are totally in the background, relying on a full-time manager to handle the business.

General partners are subject to self-employment tax on their distributive share of self-employment income, plus any guaranteed payments. In contrast, limited partners are exempt from self-employment tax (other than for any guaranteed payments they receive for personal services rendered for the partnership).

Members in limited liability companies may or may not be subject to self-employment tax. There is no firm IRS guidance on this matter. However, tax professionals have argued that where members are mere investors (i.e., they act like limited partners), they should be treated like limited partners who are exempt from self-employment tax on their distributive shares.

Bottom line

Whether you sweat each day in your endeavors or are an investor who watches the books determines the tax rules that apply to you. Discuss your status with your CPA or other tax advisor.

Credit given to:Barbara Weltman

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

Today’s author – Mark Bradstreet

–until next week.

Energy Tax Credit: Which Home Improvements Qualify? February 19, 2020

Posted by bradstreetblogger in : 2019 Taxes, Taxes, Taxes, Uncategorized , add a comment

Updated for Tax Year 2019

Taxpayers who upgrade their homes to make use of renewable energy may be eligible for a tax credit to offset some of the costs. Through the 2019 tax year, the federal government offers the Non-business Energy Property Credit. The renewable energy tax credits are good through 2019 and then are reduced each year through the end of 2021. Claim the credits by filing Form 5695 with your tax return.

Residential Renewable Energy Tax Credit

Equipment that qualifies for the Residential Renewable Energy Tax Credit includes solar, wind, geothermal and fuel-cell technology:

Renewable energy tax credit details

According to the U.S. Department of Energy, you can claim the Residential Energy Efficiency Property Credit for solar, wind, and geothermal equipment in both your principal residence and a second home. But fuel-cell equipment qualifies only if installed in your principal residence.

Non-business Energy Property Tax Credit
(Extended through December 31, 2019)

Equipment and materials can qualify for the Non-business Energy Property Credit only if they meet the standards set by the Department of Energy. The manufacturer can tell you whether a particular item meets those standards.

For this credit, the IRS distinguishes between two kinds of upgrades.

The first is “qualified energy efficiency improvements,” and it includes:

The second category is “residential energy property costs.” It includes:

Details of the Non-business Energy Property Credit
(Extended through December 31, 2019)

You can claim a tax credit for 10% of the cost of qualified energy efficiency improvements and 100% of residential energy property costs. This credit is worth a maximum of $500 for all years combined, from 2006 to its expiration.  Of that combined $500 limit;

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

–until next week.

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

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

February 12, 2020

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

                                -Mark Bradstreet

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

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

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

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

Is it a hobby, or is it a business?

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

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

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

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

You must declare hobby income

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

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

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

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

Hobby expenses

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

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

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

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

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

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

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

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

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

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

Bottom line

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

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

Credit Given to: Christy Rakoczy Bieber

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

Today’s author – Mark Bradstreet

–until next week.

Tax Tip of the Week | How to do 1031 Exchanges to Defer Taxes February 5, 2020

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

Like-kind tax free exchanges aka Internal Revenue Code Section 1031 are one of the most valuable yet underutilized sections of the IRC (the last major tax law change eliminated 1031 exchanges for anything but real estate).  We have prepared thousands of individual income tax returns and only a very small fraction of those with commercial and residential real estate sales use Section 1031.  Why?  I speculate lack of 1031 education is the primary culprit.  Also, the people that are aware simply don’t wish to tackle its complexities.  Its rules are unforgiving and the deadlines are engraved in stone as the accompanying article discusses.  However, it benefits may be significant.

                                    -Mark Bradstreet 

The Definition of Like-Kind Properties Has Changed Over the Years

The time-worn saying “Nothing is certain but death and taxes” is only half true for a savvy American taxpayer who is planning the sale of an investment or business property. Since capital gains tax on your profits could run as high as 15 percent to 30 percent when state and federal taxes are combined, why not take the necessary steps to avoid this loss? A big tax bite could wipe out money you could use for future investments.

Enter the 1031 tax-deferred exchange. To many taxpayers, this is like money dropping from the skies.

1031 Exchanges Defer Taxes

The 1031 Exchange has been cited as the most powerful wealth-building tool still available to taxpayers. It has been a major part of the success strategy of countless financial wizards and real estate gurus. Taking its name from Section 1031 of the Internal Revenue Code, a tax-deferred exchange allows a taxpayer to sell income, investment or business property and replace it with a like-kind property.

Capital gains on the sale of this property are deferred or postponed as long as the IRS rules are meticulously followed. It is a wise tax and investment strategy as well as an estate planning tool. In theory, an investor could continue deferring capital gains on investment property until death, potentially avoiding them all together.

1984 Legislation Changed Some Aspects

In the early days of “like-kind exchanges,” the term was taken quite literally and often posed difficulties. For instance, if you owned a three-story brick apartment building that you wanted to sell through a 1031 exchange, you would have to find another three-story brick apartment building whose owner wanted to swap. Then the two of you would meet, and the exchange would take place.

3 Saving Habits to Steal and 3 to Skip

In the past, there were no time constraints on the exchange. The IRS demanded stricter controls on the process, which resulted in Congress passing in 1984 Section 1031(a). This legislation limited deferred exchanges, further defined “like-kind” property and established a timetable for completing the exchange.

Qualifying

Real estate property held for business use or investment qualifies for a 1031 Exchange. A personal residence does not qualify and, generally, a fix-and-flip property also doesn’t qualify because it fits into the category of property being held for sale. Vacation or second homes, which are not held as rentals do not qualify for 1031 treatment; however, there is a usage test under Paragraph 280 of the tax code that may apply to those properties. A tax expert should be consulted in this case.

Land, which is under development, and property purchased for resale do not qualify for tax-deferred treatment. Stocks, bonds, notes, inventory property, and a beneficial interest in a partnership are not considered “like-kind” property for exchange purposes.

To qualify as a 1031 exchange today, the transaction must take the form of an “exchange” rather than just a sale of one property with the subsequent purchase of another. First, the property being sold and the new replacement property must both be held for investment purposes or for productive use in a trade or a business. They must be “like-kind” properties.

The following types of real estate swaps fit the requirement for a qualified exchange of “like-kind” property:

•    An office in exchange for a shopping center
•    A shopping center in exchange for land
•    Land in exchange for an industrial building
•    An apartment building in exchange for an industrial building
•    A single family rental in exchange for a tenants in common (TIC) property

Today, you could exchange that brick apartment building for raw land, a warehouse, or a small office building. However, there are strict time constraints which must be met, or the 1031 Exchange will not be allowed, and tax consequences will be imposed.

Prior to 1984, virtually all exchanges were done simultaneously with the closing and transfer of the sold property (Relinquished Property), and the purchase of the new real estate (Replacement Property). In addition to the problems encountered when trying to finding a suitable property, there were difficulties with the simultaneous transfer of titles as well as funds. Not so today.

The delayed 1031 Exchange avoids those pre-1984 problems, but stricter deadlines are now imposed. A taxpayer who wants to complete an exchange, lists and markets property in the usual manner. When a buyer steps forward, and the purchase contract is executed, the seller enters into an exchange agreement with a qualified intermediary who, in turn, become the substitute seller. The exchange agreement usually calls for an assignment of the seller’s contract to the Intermediary. The closing takes place and, because the seller cannot touch the money, the Intermediary receives the proceeds due to the seller.

Exchanges Carry Time Restrictions

At that point, the first timing restriction, the 45-day rule for Identification, begins. The taxpayer must either close on or identify in writing a potential Replacement Property within 45 days from the closing and transfer of the original property. The time period is not negotiable, includes weekends and holidays, and the IRS will not make exceptions. If you exceed the time limit, your entire exchange can be disqualified, and taxes are sure to follow.

Types of Replacement Properties to Identify:

1.    Three properties without regard to their fair market value.
2.    Any number of properties as long as their aggregate fair market value at the end of the identification period does not exceed 200 percent of the aggregate fair market value of the relinquished property as of the transfer date.
3.    If the three-property rule and the 200 percent rule is exceeded, the exchange will not fail if the taxpayer purchases 95 percent of the aggregate fair market value of all identified properties.

What Is Boot?

Realistically, most investors follow the three-property rule so they can complete due diligence and select the one that works best for them that will close. Generally, the goal is to trade up to avoid the transfer of “boot” and keep the exchange tax-free.

“Boot” is the money or fair market value of any additional property received by the taxpayer through the exchange. Money includes all cash equivalents, debts, liabilities to which the exchanged property is subject. It is “non-like-kind” property, and the rules governing it during the exchange are complex. Suffice it to say, without expert advice, receiving “boot” can result in taxes.

Subject to the 180-Day Rule

Once a replacement property is selected, the taxpayer has 180 days from the date the Relinquished Property was transferred to the buyer to close on the new Replacement Property. However, if the due date on the investor’s tax return, with any extensions, for the tax year in which the Relinquished Property was sold is earlier than the 180-day period, then the exchange must be completed by that earlier date. Remember, a portion of this period has already been used during the Identification Period. There are no extensions and no exceptions to this rule, so it is advisable to schedule the closing prior to the deadline.

Since the law requires that the taxpayer not touch the proceeds from the first transaction, the Qualified Intermediary acquires the Replacement Property from the seller at closing and after the transaction is completed, then transfers it to the taxpayer.

Are Not for Do-It-Yourself Investors

It is a basic description of how a successful 1031 Exchange works. Depending upon the taxpayer’s situation, the type of property relinquished, and the characteristics of the Replacement Property, other aspects of the Exchange may be involved. Its completion may become complex, and experts should always be consulted. This is no task for a “do it yourself” investor.

Using the power of the 1031 Exchange to build and preserve wealth and assets, generate cash flow from investments, restructure, diversify and consolidate real estate holdings is the right of every owner of investment property in the United States. American taxpayers should never have to pay capital gains taxes on the sale of their investment property if they intend to reinvest those proceeds in more investment property.

Today’s author – Elizabeth Weintraub

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

–until next week.

Ohio Income Tax Updates January 29, 2020

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

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

Change in Tax Brackets:

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

Ohio Earned Income Credit:

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

Modified Adjusted Gross Income (MAGI):

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

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

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

This week’s author – Josh Campbell

Tax Tip of the Week | Tax Considerations for Working Kids September 18, 2019

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

When we file children’s income tax returns, nasty surprises are not commonplace BUT on the other hand they are not rare either. Some not so pleasant surprises may result from the Form W-4 that children will complete for their tax withholdings. Being over withheld may create a larger tax refund but a smaller net payroll check each pay period. On the other hand, withholding too little makes each net payroll check look awesome but may create a tax balance when the income tax return is filed. Another surprise situation may occur when the child receives a Form 1099 (no withholding) instead of a Form W-2 (has withholdings). In this instance, their income tax world immediately becomes more complicated as tax estimates will most likely be needed along with accounting for their income and expenses. As soon as you discover that your child will receive a Form 1099, you should contact your CPA for further information concerning estimated amounts and various tax deadlines. Please remember that not making any required estimated income tax payments may create interest and penalties along with the potential for a large balance due with the tax return.

The below article by Bill Bischoff of MarketWatch drills down further into some of my comments above and discusses some additional ones.  

                            -Mark Bradstreet

5 questions and answers about kids and money

Is your kid earning money from a summer job or some other activity? If so, what are the tax implications? And BTW, what kid-related tax breaks can you collect? Good questions. Here are some answers.

Does my kid need to file a tax return?

Maybe. For 2019, a dependent child must file a federal income tax return on Form 1040 in any of the following situations:

* The child has unearned income of more than $1,100. If your child has more than $2,200 of unearned income, he or she may be subject to the dreaded Kiddie Tax. More on that later.

* The kid’s gross income exceeds the greater of: (1) $1,100 or (2) earned income up to $11,650 plus $350.

* The child’s earned income exceeds $12,200.

* The kid owes other taxes such as the self-employment tax or the alternative minimum tax (AMT). Relatively unlikely, but it happens.

The good news is your child can shelter his or her income with the standard deduction. For 2019, the standard deduction for a dependent kid with only investment income is $1,100. If your child has earned income from summer jobs or whatever, the standard deduction equals the lesser of: (1) earned income plus $350 or (2) $12,200. So up to $12,200 of earned income can be sheltered with the standard deduction. Good.

Key Point: Even if no return is required for your child, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. Filing a return is also necessary to benefit from certain beneficial tax elections, such as the election to currently report accrued Savings Bond income that would be sheltered by your kid’s standard deduction.

Who is responsible for filing the kid’s return?

According to IRS Publication 929 (Tax Rules for Children and Dependents), a child is generally responsible for filing his or her own federal income tax return on Form 1040 and for paying any tax, penalties, or interest. If a child cannot file for any reason, the child’s parent, guardian, or other legally responsible person must file for the child. If the child can’t sign the return, a parent or guardian must sign the child’s name followed by the words “By (signature), parent (or guardian) for minor child.” Your child may also need to file a state income tax return. If so, that probably winds up on your plate too.

Key Point: If you sign a return on your child’s behalf, you can deal with the IRS on all matters related to the return. In general, a parent or guardian who doesn’t sign can only provide information concerning the return and pay the child’s tax bill.

Can’t I just report the kid’s income on my own return?

Probably. If your child will be under age 19 (or under age 24 if a full-time student) as of 12/31/19 and his or her only income is from interest and dividends, including mutual fund capital gain distributions, you can generally choose to report the kid’s income on your return by including Form 8814 (Parents’ Election To Report Child’s Interest and Dividends) with your Form 1040. Read the Form 8814 instructions to see if you qualify for this option. If you do, it may or may not result in a lower tax bill for the kid’s income.

What’s that ‘Kiddie Tax’ I’ve heard about?

Good thing you asked. For 2018-2025, the Tax Cuts and Jobs Act (TCJA) revamped the Kiddie Tax rules to tax a portion of an affected child’s or young adult’s unearned income at the higher rates paid by trusts and estates. Those rates can be as high as 37% or as high as 20% for long-term capital gains and dividends. Before the TCJA, the Kiddie Tax rate equaled the parent’s marginal rate–which for 2017 could have been as high as 39.6% or 20% for long-term capital gains and dividends.

If your kid is a student, the Kiddie Tax can potentially be an issue until the year the child turns age 24. For that year and future years, your child is finally Kiddie-Tax-exempt.

To calculate the Kiddie Tax, first add up the child’s net earned income and net unearned income. Then subtract the child’s standard deduction to arrive at taxable income. The portion of taxable income that consists of net earned income is taxed at the regular rates for a single taxpayer. The portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold ($2,200 for 2019) is subject to the Kiddie Tax and is taxed at the higher rates that apply to trusts and estates.
Unearned income for purposes of the Kiddie Tax means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. So, among other things, unearned income includes capital gains, dividends, and interest. Earned income from a job or self-employment is never subject to the Kiddie Tax.

Calculate the Kiddie Tax by completing IRS Form 8615 (Tax for Certain Children Who Have Unearned Income). Then file Form 8615 with your kid’s Form 1040. Beware: the Kiddie Tax rules are complicated

Here are the most-common ones.

$2,000 tax credit for under-age-17 child

For 2018-2025, the TCJA increased the maximum child credit to $2,000 per qualifying child (up from $1,000 under prior law). Up to $1,400 can be refundable, meaning you can collect it even when you don’t owe any federal income tax. Under the TCJA, the income levels at which the child tax credit is phased out are significantly increased, so many more families now qualify for the credit.

$500 tax credit for over-age-16 dependent child

For 2018-2015, the TCJA established a new $500 tax credit that can be claimed for a dependent child (or young adult) who is not under age 17 and who lives with you for over half the year. Dependent means you pay over half the child’s support. However, a child in this category must also pass an income test to be classified as your dependent for purposes of the $500 credit. According to IRS Notice 2018-70, your over-age-16 dependent child passes the income test for 2019 if his or her gross income does not exceed $4,200.

Two higher education tax credits

The American Opportunity credit can be worth up to $2,500 during the first four years of a child’s college education. The Lifetime Learning credit can be worth up to $2,000 annually, and it can cover just about any higher education tuition costs. Both credits are phased out as your income goes up, but the Lifetime Learning credit is phased out at much lower income levels than the American Opportunity credit.

Head of household filing status

HOH filing status is preferable to single filing status because the tax brackets are wider and the standard exemption is bigger. HOH status is available if: (1) your home was for more than half the year the principal home of a qualifying child for whom a personal exemption deduction would be allowed under prior law and (2) your paid more than half the cost of maintaining the home.

Student loan interest deduction

This deduction can be up to $2,500 for qualified student loan interest expense paid by a parent, subject to phase-out for higher-income parents.

The bottom line

There you have it: most of what you need to know about kids and taxes. As always, kids are a chore and an expense. But they usually turn out to be worth it in the end. Fingers crossed.

Credit given to:  Bill Bischoff  of MarketWatch. Article is titled “When kids make money at a summer job, who files their taxes?”

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

This Week’s Author – Mark Bradstreet, CPA

–until next week.