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

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

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

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

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

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

This week’s Author – Mark Bradstreet

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

– until next week.

Tax Tip of the Week | America’s Richest 400 Families Now Pay a Lower Tax Rate Than the Middle Class March 11, 2020

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

March 11, 2020

Good or bad?  Only time will tell.
       -Mark Bradstreet

The U.S. tax system is supposed to be progressive, meaning that wealthier households pay a larger share of their income to the taxman than the middle class and the poor. Yet after the Tax Cuts and Jobs Act of 2017, that’s no longer the case: For the first time in a century, America’s 400 richest families now pay lower taxes than people in the middle class. 

That’s according to an analysis of tax data by two prominent economists, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley, that is a centerpiece of their book, “The Triumph of Injustice,” published on October 15, 2019. Saez and Zucman, who have worked with the noted French economist Thomas Piketty to produce seminal research on inequality, also advised Senator Elizabeth Warren on the Democratic presidential candidate’s plan to impose a wealth tax on ultra-rich families. 

The tipping point came last year when the Tax Cuts and Jobs Act, which was signed into law by President Donald Trump at the end of 2017, took effect. While Mr. Trump vowed that middle-class families would be helped by the tax overhaul, experts say most working-class families saw only a minimal benefit, while the wealthiest citizens got the lion’s share of breaks. In fact, Saez and Zucman argue, the Tax Cuts and Jobs Act turned the tax system on its head.

“In 2018, for the first time in the last hundred years, the top 400 richest Americans have paid lower tax rates than the working class,” they write. “This looks like the tax system of a plutocracy.”

Factoring in all federal, state and local taxes, those ultra-wealthy households pay a total rate of about 23% — that compares with 24.2% for the bottom half of households, which includes many in the middle class. The richest families also pay a lower rate than those in the upper middle class and even those in the top 1%, who pay closer to 30% of their income in taxes.

Why do the super-rich pay lower taxes?

Zucman and Saez, who base their analysis on income tax returns, tax audits and other data, argue that in recent decades the tax system has tilted in favor of the highest earners, with the most recent push coming from the Tax Cuts and Jobs Act. 

“In 1970, the richest Americans paid, all taxes included, more than 50% of their income in taxes, twice as much as working-class individuals,” the book notes. “In 2018, following the Trump tax reform, and for the first time in the last hundred years, billionaires have paid less than steel workers, schoolteachers and retirees.” 

Today, the tax rates enjoyed by the richest Americans are at levels last seen in the early part of the 20th century, when the U.S. government was a fraction of its current size. In 1910, many popular programs credited with keeping millions of Americans out of poverty didn’t exist, including Social Security and Medicare. 

The rich pay lower tax rates than the middle class because most of their income doesn’t come from wages, unlike most workers. Instead, the bulk of billionaires’ income stems from capital, such as investments like stocks and bonds, which enjoy a lower tax rate than income. It’s the same reason why Warren Buffett famously said his tax rate was lower than his secretary’s.

The 2017 tax law amplified that trend, according to the new analysis. The tax rate for corporations was slashed to 21% from from 35%. And business income for many taxpayers now enjoys a 20% deduction, thanks to the new tax code, which places more income out of the IRS’ reach.

“The only category of income that does not benefit from any exemption, deduction, reduced rate or any other favor is wages,” Zucman and Saez write. “At any income level, wage earners are thus more heavily taxed than people who derive income from property.”

In effect, they add, capital income “is becoming tax-free.”

Why it matters

Although advocates of low taxes argue that slashing rates on the rich and corporations boosts economic growth, there’s little evidence for that. Instead, the U.S. is facing a number of risks by shifting to a more regressive tax system, the authors say.

For one, the federal government is losing out on a massive amount of tax revenue by slashing levies on the rich. Secondly, that lost revenue must be found elsewhere, which means the middle class and poor are likely to be stuck footing the bill. 

But the most important reason, according to Zucman and Saez, is that the U.S. tax system is creating what they call an “inequality spiral.” In other words, the rich are getting richer — that allows them to shape public policies to extract further tax breaks and other benefits, boosting their wealth and political clout.

Of course, tax codes can change, which means the U.S. isn’t doomed to sink more deeply into the quagmire of inequality, Zucman and Saez write. For instance, the economists propose a new national income tax that would tax all income — whether from labor, capital or other sources — as a supplement to the existing income tax. They also favor a wealth tax.

The latter, similar to proposals from both Warren and Senator Bernie Sanders, would tax annual wealth at 2% for those above $50 million and 3.5% above $1 billion. 

“A wealth tax will never replace the income tax,” they note. “Its goal is more limited: to ensure that the ultra-wealthy do not pay less than the rest of the population.”

Credit given to – Aimee Picchi

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 | New Tough Tax Rules for Business Losses March 4, 2020

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

March 4, 2020

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

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

Net operating loss

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

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

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

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

Non-corporate excess business losses

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

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

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

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

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

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

Conclusion

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

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

Credit given to – Barbara Weltman

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

Today’s author – Mark Bradstreet

– until next week.

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 | The Most Common Tax Forms for the New Year January 1, 2020

Posted by bradstreetblogger in : Business consulting, Business Consulting, Deductions, General, Tax Planning Tips, Tax Preparation, Uncategorized , add a comment

Happy New Year!

Now it’s time to get ready for the tax filing season.

Hopefully, you followed some of the suggestions outlined in Publication 552 to organize your records. If you did, great! This will make filing your tax returns a lot easier this year. It also means that you and your tax advisor can spend more time on tax and financial planning issues for 2020 vs. looking back to 2019. 

This week we will look at some of the more common forms that you should be watching for in the coming weeks and months:

W-2:    Employers should mail these by 1/31/20. If you have moved during the year, make sure former employers are aware of your new address. Some employers provide W-2’s to their employees via a website. Be sure to login and print out your W-2 after it is available.

W-2G:    Casinos, Lottery Commissions and other gambling entities should mail these by 1/31/20 if you have gambling winnings above a certain threshold. Note:  Some casinos will issue you a W-2G at the time you win a jackpot. Make sure you have saved those throughout the year.

1098-C:    You might receive this form if you made contributions of motor vehicles, boats, or airplanes to a qualified charitable organization. A donee organization must file a separate Form 1098-C with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. All filers of this form may truncate a donor’s identification number (social security number, individual taxpayer identification number, adoption taxpayer identification number, or employer identification number), on written acknowledgements. Truncation is not allowed, however, on any documents the filer files with the IRS.

1099-MISC:   This form reports the total paid during the year to a single person or entity for services provided. Certain Medicaid waiver payments may be excludable from the income as difficulty of care payments.  A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-INT:    This form is used to report interest income paid by banks and other financial institutions. Box 13 was added to report bond premium on tax-exempt bonds. All later boxes were renumbered. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-DIV:    This form is issued to those who have received dividends from stocks. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-B:     This form is issued by a broker or barter exchange that summarizes the proceeds of sales transactions. For a sale of a debt instrument that is a wash sale and has accrued market discount, a code “W” should be displayed in box 1f and the amount of the wash sale loss disallowed in box 1g.

1099-K:    This form is given to those merchants accepting payment card transactions. Completion of box 1b (Card Not Present transactions) is now mandatory.

K-1s:    If you are a partner, member or shareholder in a partnership or S corporation, your income and expenses will be reported to you on a K-1. The tax returns for these entities are not due until 3/16/20 (if they have a calendar-year accounting). Sometimes, you may not receive a K-1 until shortly after the entity’s tax return is filed in March.

If you are a beneficiary of an estate or trust, your share of the income and expenses for the year will also be reported on a K-1. These returns will be due 4/15/20 so you might not receive your K-1 before the due date of your Form 1040.

NOTE:  Many times corporations, partnerships, estates and trusts will put their tax returns on extension. If they do, the due date of the return is not until 9/15/20 or later. We often see clients receiving K-1s in the third week of September.

If you receive, or expect to receive, a K-1 it is best if you place your personal return on extension. It is a lot easier to extend your return than it is to amend your return after receiving a K-1 later in the year.

1098:    This form is sent by banks or other lenders to provide the amount of mortgage interest paid on mortgage loans. The form might also show real estate taxes paid and other useful information related to the loan.

1098-T:    This form is provided by educational institutions and shows the amounts paid or billed for tuition, scholarships received, and other educational information. These amounts are needed to calculate educational credits that may be taken on your returns.

So start watching your mailbox and put all of these statements you receive in that new file you created!

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.

–until next week

Tax Tip of the Week | Happy Holidays & Happy New Year! December 25, 2019

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

Enjoy the Holidays!

We are going to take a break from our tax and business tips this week. Instead, the family of Bradstreet & Company would like to wish you and your family the most joyous holiday season and best wishes for 2020.

We hope you enjoy the Tax Tip of The Week. As always, your topic suggestions and questions are always appreciated.

Is the Tax Tip of the Week real?

While your kids are questioning if Santa is real, we continue to receive some interesting feedback that some of you don’t realize this is really Bradstreet & Company CPAs reaching out each week (… some suspect this is a “packaged” communication to which we add our logo.) Well, rest assured it’s us and we love to hear from you. 

Enjoy the week and, “Yes Virginia, there is a Santa Claus”.

Wishing you all great things,

The Staff at Bradstreet & Company

Tax Tip of the Week | The Tax Landmines of Lending to Family Members November 6, 2019

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

People often lend money to family members, but few think about the IRS when making the “loan”.  In the article that follows, Bob Carlson, Senior Contributor to Forbes, discusses the procedures and consequences one should consider before getting out the checkbook. If you are in this situation as a lender, or as a borrower, the following article does a great job of explaining the “rules” that you need to consider.

                                     –    Norman S. Hicks

Many people are happy to lend money to their loved ones, especially to children and grandchildren. But before stroking the check, review the tax rules. The tax consequences vary greatly depending on the terms of the loan. A small change in the terms can mean a big difference in taxes and penalty. 

Too often, family loans are informal arrangements. They don’t carry an interest rate or have a payment schedule. They essentially are demand notes. Payment isn’t due until the lending parent or grandparent demands it, and that’s not likely to happen unless the lender’s financial situation changes adversely. 

That runs afoul of the tax rules. In a family loan, when there is no interest rate or a rate below the IRS-determined minimum rate, the interest that isn’t charged is assumed to be income to the parent from the child. In other words, there is imputed interest income or phantom income. The parent is to report interest income at the IRS-determined minimum rate as gross income, though no cash is received. The borrower might be able to deduct the same amount if they qualify for the mortgage interest deduction. 

In addition, the lending parent or grandparent is assumed to make a gift of the imputed interest to the borrowing child or grandchild. In most cases, the annual gift tax exclusion is more than sufficient to prevent the gift from having any tax consequences. In 2019, a person can make gifts up to $15,000 per person with no gift tax consequences under the annual gift tax exclusion. A married couple can give up to $30,000 jointly.

To avoid these tax consequences, there should be a written loan agreement that states interest will be charged that is at least the minimum interest rate determined by the IRS for the month the agreement was signed. You can find the minimum rate for the month by searching the Internet for “applicable federal rate” for the month the loan agreement was made. The rate you use will depend on whether the loan is short-term, mid-term, or long-term and on whether interest compounds monthly, quarterly, semiannually, or annually.

The applicable federal rate is based on the U.S. Treasury’s borrowing rate for the month. That means it’s a low rate and is likely to be a lower rate than the child or grandchild could obtain from an independent lender. 

It’s a good idea for the borrower to make at least interest payments on a regular basis. Otherwise, the IRS could argue that there wasn’t a real loan and the entire transaction was a gift.

There are two important exceptions to the imputed interest rules.

A loan of $10,000 or less is exempt. Make a relatively small loan and the IRS doesn’t want to bother with it.

The second exception applies to loans of $100,000 or less. The imputed income rules apply, but the lending parent or grandparent can report imputed interest at the lower of the applicable federal rate or the borrower’s net investment income for the year. If the borrower doesn’t have much investment income, the exception can significantly reduce the amount of imputed income that’s reported.

Suppose Hi Profits, son of Max and Rosie Profits, wants to purchase a home and needs help with the down payment. Max and Rosie lend $100,000 to Hi. They charge 3.22% interest on the loan, which was the applicable federal rate in July 2019 for a long-term loan on which the interest is compounded semiannually. 

If Hi Profits doesn’t make interest payments, Max and Rosie will have imputed income of $3,220 each year that must be included in their gross income. In addition, they will be treated as making a gift to Hi of $3,220 each year. As long as they don’t make other gifts to Hi that put them over the annual gift tax exclusion amount ($30,000 on joint gifts by a married couple), there won’t be any gift tax consequences.

Hi can have the loan recorded as a second mortgage against the property. That might enable him to deduct the imputed interest on his income tax return, though he made no cash payments.

Max and Rosie have two costs to the loan. The first cost is the investment income they could have earned on the $100,000. 

The other cost is the income taxes they’ll owe on the imputed interest income. 

To avoid tax problems with a loan to a family member, be sure there’s a written loan agreement stating the amount of the loan, the interest rate, and the repayment terms. The interest rate should be at least the applicable federal rate for the month the loan is made. Simple loan agreement forms can be found on the Internet.

If the loan calls for regular payment of interest, or interest and principal, those payments should be made and should be documented. The more you make the transaction look like a real loan, the less likely it is the IRS will try to tax it as something else, such as a gift. 

A written loan agreement also can prevent any misunderstandings between the borrower and your estate or other family members after you’re gone. Your will should state whether you want the loan repaid to your estate, forgiven and deducted from the borrower’s inheritance or treated some other way.

Family loans are in wide use. Be sure you take the extra steps needed to avoid problems with the IRS.

Credit given to Bob Carlson, Senior Contributor to Forbes Media.  Bob is the editor of Retirement Watch, a monthly newsletter and web site he founded in 1990.  The above article can be found at: https://www.forbes.com/sites/bobcarlson/2019/10/16/the-tax-landmines-of-lending-to-family-members/#30802295468f.

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

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

–until next week.

Tax Tip of The Week | Did You Know All Ohio Businesses Must File An Annual Report of Unclaimed Funds? October 23, 2019

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

It’s that time of year again…

Time to report unclaimed funds! This one really gets business owners excited (sarcasm intended).

As stated by the Ohio Department of Commerce, “All businesses that are located and/or operate in the State of Ohio, or hold funds due to Ohio residents, are required to file an Annual Report of Unclaimed Funds.”

Unclaimed Funds Reports are due by November 1st.

The Ohio Treasury wants Ohioans to recover money that is rightfully theirs. Every year 200,000 Ohioans lose track of their funds. They either put money in financial institutions and forget about it, or simply cannot track it in their records.

What is the Division of Unclaimed Funds?

The Ohio Department of Commerce, Division of Unclaimed Funds exists to protect money lost by Ohioans in various financial institutions, find the people the money belongs to, and then returns it as quickly as possible. More than $1 billion currently is in the custody of the Division of Unclaimed Funds. The Ohio Treasury makes Ohioans aware of the Division of Unclaimed Funds, so that they get back money rightfully theirs. You can perform a search using the following link:

SEARCH UNCLAIMED FUNDS

What types of accounts qualify as unclaimed funds?

We have a document from the Ohio Department of Commerce that helps explain what qualifies as “unclaimed funds,” as well as how to report them, here:

 HOW TO FILE AN UNCLAIMED FUNDS REPORT

Even if you have no unclaimed funds to report, a negative report must be filed.

What happens if your Ohio-based company does not report?

According to the Ohio Department of Commerce:

“For failing to report unclaimed funds or underreporting unclaimed funds, the company may incur civil penalties of $100.00 per day. The company may also have to pay interest at a rate up to 1% per month on the balance of unclaimed funds due per Ohio Revised Code section 169.12.”

What is NAUPA?

The National Association of Unclaimed Property Administrators (NAUPA) is a non-profit organization that maintains a national database, called Missing Money, to help people find unclaimed property.

MISSING MONEY

For additional assistance, contact the Ohio Department of Commerce’s Division of Unclaimed Funds at 1-877-644-6823.

Still struggling in determining how to file an Unclaimed Funds Report?

At Bradstreet & Associates and Bradstreet & Company CPAs, we’re here to help. If you need assistance filing your report, please call our Xenia office at 937-372-3504 or our Centerville office at 937-436-3133.

A complete information booklet on Reporting Unclaimed Funds is available here:
http://www.com.ohio.gov/documents/unfd_AnnualReportOfUnclaimedFunds.pdf

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 Co-Authors – Bobbie Haines & Linda Johannes, CPA

–until next week.

Tax Tip of the Week | A Need to Know on Capital Gains Taxes September 4, 2019

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

Generally, capital assets that are held in excess of one year and sold at a profit may be taxed at three (3) possible tax rates: (1) 0%, (2) 15% or (3) 20%. For most people, the rate used depends upon their filing status and the amount of their taxable income. Gains from the sale of capital assets not held for a year are taxed as ordinary income. If capital assets are sold at a loss – generally, only $3,000 ($1,500 married filing separate) may be deducted annually unless other capital gains are available as an offset.

Everyone thinks that Congress designed the zero-percent capital gain rate just for them. That thinking is only natural since so many reporters and so many politicians have over-hyped the catchy expression of “zero-percent rate.” The truth is VERY few taxpayers will ever be in position to take advantage of the zero-percent long-term capital gain rate. To do so, for most single and married couples filing jointly, their taxable income not including the capital gains must be less than $39,375 or $78,750, respectively. Remember your taxable income might include any Form W-2s, interest and dividend income, business and rental income etc. But, it also includes the capital gain itself. So, not a very big window exists for the possibility of qualifying for using the zero-percent rate. If your income other than capital gains, less your deductions exceeds these taxable income ceilings then the window not only shuts but disappears as though it never existed. This capital gain tax calculation is not made the same as the calculation of income taxes which are calculated using the incremental tax brackets. And, depending upon the amount of your regular taxable income not including the capital gains above and beyond the amounts of $39,375/$78,750 – you will then use either the 15% OR the 20% tax bracket for the capital gains rate. Don’t forget the “net investment income tax” of 3.8% which could be an additional tax along with your particular state income tax. Ohio taxes capital gains as ordinary income. Also, technically outside the tax world – various income levels may also affect the amount of your Alternative Minimum Tax (AMT), Medicare insurance premiums and the amount of student loan repayments (if applicable).

More information and explanations follow in the article below by Tom Herman as published by the Wall Street Journal on Monday, June 17, 2019.

                            -Norm Hicks and Mark Bradstreet

By tax-law standards, the rules on capital-gains taxes may appear fairly straightforward, especially for taxpayers who qualify for a zero-percent rate.

But many other taxpayers, especially upper-income investors, “often find the tax law around capital gains is far more complicated than they had expected,” says Jordan Barry, a law professor and co-director of graduate tax programs at the University of San Diego Law School.

Here is an update on the brackets for this year and answers to questions readers may have on how to avoid turning capital gains into capital pains.

Who qualifies for the zero-percent rate?

For 2019, the zero rate applies to most singles with taxable income of up to $39,375, or married couples filing jointly with taxable income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15% rate, which applies to most singles up to $434,550 and joint filers up to $488,850. Then comes a top rate of 20%.

But don’t overlook a 3.8% surtax on “net investment income” for joint filers with modified adjusted gross income of more than $250,000 and most singles above $200,000. That can affect people in both the 15% and 20% brackets. For those in the 20% bracket, that effectively raises their top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for high net-worth individuals,” says Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

There are several other twists, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Among them: a maximum of 28% on gains on art and collectibles. There are also special rates for certain depreciable real estate and investors with certain types of small-business stock. See IRS Publication 550 for details. There also are special rules when you sell your primary residence.

State and local taxes can be important, too, especially in high-tax areas such as New York City and California. This has become a much bigger issue in many places, thanks to the 2017 tax overhaul that included a limit on state and local tax deductions. As a result, many more filers are claiming the standard deduction and thus can’t deduct state and local taxes. But some states, including Florida, Texas, Nevada, Alaska and Washington, don’t have a state income tax. Check with your state revenue department to avoid nasty surprises.

How long do I typically have to hold stocks or bonds to qualify for favorable long-term capital-gains tax treatment?

More than one year, says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. Gains on securities held one year or less typically are considered short-term and taxed at the same rates as ordinary income, she says. The rules are “much more complex” for investors using options, futures and other sophisticated strategies, says Bob Gordon, president of Twenty-First Securities in New York City. IRS Publication 550 has details, but investors may need to consult a tax pro.

The holding-period rules can be important for philanthropists who itemize their deductions. Donating highly appreciated shares of stock and certain other investments held more than a year can be smart. Donors typically can deduct the market value and can avoid capital-gains taxes on the gain. But don’t donate stock that has declined in value since you purchased it. “Instead, sell it, create a capital loss you can use, and donate the proceeds” to charity, Mr. Gordon says. You can use capital losses to soak up capital gains. Investors whose losses exceed gains may deduct up to $3,000 of net losses ($1,500 for married taxpayers filing separately) from their wages and other ordinary income. Carry over additional losses into future years.

If you sell losers, pay attention to the “wash sale” rules, says Roger Young, senior financial planner at T. Rowe Price . A wash sale typically occurs when you sell stock or securities at a loss and buy the same investment, or something substantially identical, within 30 days before or after the sale. If so, you typically can’t deduct your loss for that year. (However, add the disallowed loss to the cost basis of the new stock.) Mr. Young also says some investors may benefit from “tax gain harvesting,” or selling securities for a long-term gain in a year when they don’t face capital-gains taxes.

While taxes are important, make sure investment decisions are based on solid investment factors, not just on taxes, says Yolanda Plaza-Charres, investment-solutions director at SEI Private Wealth Management. And don’t wait until December to start focusing on taxes.

“We believe in year-round tax management,” she says.

What if I sell my home for more than I paid for it?

Typically, joint filers can exclude from taxation as much as $500,000 of the gain ($250,000 for most singles). To qualify for the full exclusion, you typically must have owned your home—and lived in it as your primary residence—for at least two of the five years before the sale. But if you don’t pass those tests, you may qualify for a partial exclusion under certain circumstances, such as if you sold for health reasons, a job change or certain “unforeseen circumstances,” such as the death of your spouse. See IRS Publication 523 for details. When calculating your cost, don’t forget to include improvements, such as a new room or kitchen modernization.

Credit given to Tom Herman. This article appeared in the June 17, 2019, print edition as ‘A Need to Know on Capital-Gains Taxes.’ Mr. Herman is a writer in New York City. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

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 & Norman S. Hicks, CPA

–until next week.