Time Limit to Correct Social Security Earnings Statement Before It’s Too Late!

Here’s a link to an important article about keeping a eye on your social security earnings records.

There are strict time limits on fixing any errors in your social security earnings record that you need to be aware of. Not correcting the error(s) in a timely fashion could cost you benefits for a lifetime.

http://socialsecurityintelligence.com/check-your-social-security-earnings-statement-before-its-too-late/

If you have any questions about this please feel free to call me.

Bob
Robert W Craig, EA Tax Services
(805) 264-3305

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The Unpardonable Sin in an IRS/FTB Audit

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really must keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records, and not having a good log is the biggest unpardonable sin of an IRS/FTB audit. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

  Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method).

  The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

  Technology & APP’s: With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

  If you would like an example of what a mileage log should look like, feel free to contact Bob at (805) 264-3305.

Robert W Craig, EA Tax Services
431 2nd Street, Suite 3
Solvang, CA 93463
email: rcraig1044@aol.com

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How To Handle a Traditional IRA Inherited from a Non-Spouse

Traditional individual retirement accounts (IRAs) became available in 1974 and have been around ever since. This makes your odds of inheriting a traditional IRA pretty good.  

The purpose of this letter is to look at some of the rules that apply when you inherit an IRA from someone other than your spouse.

  Traditional IRA Inherited from a Non-spouse

  Death after start date. If you inherit an IRA from an owner who dies upon attaining age 70 1/2 or later, the IRA must distribute any assets that remain to you (the beneficiary) over the longer of your expected life span or the deceased owner’s expected life span (before death).

  With the exception of separate accounts, if there is more than one beneficiary, the rule requires distribution of the deceased owner’s traditional IRA over the longer designated beneficiary’s life expectancy or the owner’s life expectancy. For this tax rule, the beneficiary with the shortest life expectancy (usually the oldest person) is the designated beneficiary.

  If the owner divided the IRA into separate accounts for the beneficiaries, the accounts act as separate IRAs for distribution purposes.

  Death before start date. If the owner dies before his or her required start date (age 70 1/2), the IRA must distribute any remaining assets under either

 

  • the five-year rule, which requires that the IRA distribute the assets within five years after the death of the owner, or
  • the life expectancy rule, which requires that all remaining assets be distributed over the life span of the designated beneficiary.
 

As you receive the monies from the inherited traditional IRA, you pay taxes at ordinary income rates.  

Planning Strategy  

To minimize taxes for your beneficiaries, aim to stretch out the distributions for as long as possible. This makes the five-year plan rarely a good idea. But it does shine the light on youth. The younger the surviving beneficiaries, the more stretch you create.  

By stretching out non-spouse inherited IRA distributions for as long as possible, you can turn a potential tax danger into a tax benefit. IRA stretching is a proven and widely used method in estate planning. It also allows the IRA’s assets to continue to grow tax-deferred, so with wise investments you could create your own legacy.  

You likely need to know the basic rules that apply to inherited IRAs because you have high odds of both inheriting a traditional IRA and leaving one to your named beneficiaries.  

If you would like to discuss IRAs in more detail, simply give me a call.  

Sincerely,

Bob Craig
Robert W Craig, EA Tax Services
431 2nd Street, Suite 3, Solvang, CA, 93463
(805) 264-3305
email: rcraig1044@aol.com

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How to Help Your Adult Child Buy a Home – the Tax-Friendly Way

I was asked about a parent helping a child buy a home, and that triggered the following five thoughts.

 

  1. Gift. You and your spouse can each gift $14,000 to your child and to the child’s spouse for a down payment. This gives you a tax-free gift of $56,000 using the gift exclusion, and your child and his or her spouse have $56,000 for the down payment.
  The gifts should be in four separate checks.

 

  1. Lend the money. If you lend money to your child to purchase a home, the child can deduct the mortgage interest that he or she pays you.
  You can create a really favorable interest rate for your child. Simply charge your child interest equal to the applicable federal rate. The rate for a long-term loan with monthly payments beginning in December 2016 was 2.24 percent a month.

 

  1. Create equitable ownership. Perhaps your child cannot qualify for a loan but can make the mortgage payments. So you buy the home and take out the mortgage in your name, and your child makes the payments.
  Your child can deduct the mortgage interest if he or she can show that he or she is the equitable owner. Equitable ownership and legal ownership are two different concepts under the law.   This can get complicated, so if this approach appeals to you, please call me and I’ll walk you through it.

 

  1. Joint ownership. For tax deduction purposes, this is easy to make work. Your child can deduct the full amount of the mortgage interest that the child actually pays, even though the child is only a partial owner of the home.
 

  1. Shared equity. If you prefer a more businesslike arrangement in helping your child achieve home ownership, the shared equity program could be the ticket. Under this arrangement, you create a rent-to-own program with your child.
 

I’m happy to guide you through any of the possibilities for helping your child buy that home.

  Sincerely,

  Bob 

Robert W Craig, EA Tax Services
(805) 264-3305

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When it comes to tax advice, be careful whom you trust…

There is some remarkably bad and wrong and hazardous-to-your-health information out there that—despite being repeatedly debunked—just will not go away. Some of those ideas are clearly erroneous, but others can snag even very bright people.

  Consider the case of Carter White Rae, a dentist in Michigan. He followed some bad advice and ended up with a bill from the government for over half a million dollars—plus a 45-month jail sentence.

  Remember: You may be a logical person, but tax law is not always logical. Even if something makes sense to you—or sounds like it’s the way the law should work—it may still be completely wrong.

  That’s why you have me in your corner. And that’s why you should ask me before you take an action that seems too good to be true.

  The most dangerous tax strategies are the ones that lead you to believe you do not have to pay any tax at all. Known in IRS lingo as “tax protestor” arguments, they claim that by virtue of little-known quirks in the law or because of never-correctly-ratified amendments, you can somehow sidestep all U.S. tax requirements.

  No matter how intricate those arguments can be, they all suffer from the same problem: The IRS and courts reject them. The government has already ruled against them, and if you use one of those arguments, the government will eventually catch up with you and demand its money. It’s a question of when, not if.

  Take It from the IRS  

The IRS was nice enough to compile a list of arguments that it has heard before and will categorically reject:

 

  1. The filing of a tax return or the payment of federal income tax is voluntary.
  2. Taxpayers can reduce their federal tax liability by filing a “zero return” that reports zero income and zero tax liability.
  3. Compensation received for personal services isn’t income.
  4. Military retirement pay isn’t income.
  5. Only foreign-source income is taxable.
  6. The IRS isn’t a U.S. agency.
  7. The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes.
  8. The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes.
  9. Various constitutional amendments permit the taxpayer to avoid taxes.
  10. Form 1040’s instructions and regulations don’t have an OMB control number as required by the federal Paperwork Reduction Act.
 

Penalties and Prison  

The IRS believes that tax protestor claims are “frivolous” and will have no mercy on you if you rely on one to avoid paying taxes. The courts tend to agree and uphold those penalties—and sometimes impose prison time as well.   Whenever you “willfully attempt to evade or defeat” your taxes, you’re looking at fines of up to $100,000 ($500,000 for corporations) and prison time of up to five years. That’s on top of having to pay the taxes due, the prosecution’s costs, and any other penalties.  

How to Spot Bad Strategies

  With tax law as complicated as it is, how are you supposed to tell the difference between a legitimate tax reduction strategy and a baseless idea that will get you in trouble?

  The main problem with tax protestor arguments is that they claim to let you ignore the plain language of the law—simply by saying that the IRS isn’t legitimate or that you aren’t subject to the rules.

  Real tax strategies work within the law, finding deductions or ways to reduce your income that the tax code or IRS have explicitly blessed—rather than going around the law or ignoring it.

  Sincerely,

  Bob

Robert W Craig, EA Tax Services

431 2ndStreet, Suite 3

Solvang CA 93463

(805) 264-3305

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5 Arrested in IRS Impersonation Scam

Five suspects have been arrested for involvement in a growing IRS impersonation scam that has bilked an estimated $36.5 million from 6,400 victims nationwide, federal officials said Tuesday.

I have personally received many calls from clients and others saying that they have been contacted by the IRS to “pay up or go to jail”. As these are being reported to the IRS by us and taxpayers, it’s good to know some progress is being made. To read more click the link below…

http://www.usatoday.com/story/money/2016/05/24/five-arrested-irs-impersonation-scam/84874934/

If you or anyone you know has received these threatening calls, please refer them to the following link: http://www.bobcraig.biz/irs-and-phishing-scams/

Thank you,
Bob

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IRS and Phishing Scams

Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, headlining the annual “Dirty Dozen” list of tax scams for the 2016 filing season, the Internal Revenue Service announced today.

The IRS has seen a surge of these phone scams as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season.

“Taxpayers across the nation face a deluge of these aggressive phone scams. Don’t be fooled by callers pretending to be from the IRS in an attempt to steal your money,” said IRS Commissioner John Koskinen. “We continue to say if you are surprised to be hearing from us, then you’re not hearing from us.”

“There are many variations. The caller may threaten you with arrest or court action to trick you into making a payment,” Koskinen added. “Some schemes may say you’re entitled to a huge refund. These all add up to trouble. Some simple tips can help protect you.”

The Dirty Dozen is compiled annually by the IRS and lists a variety of common scams taxpayers may encounter any time during the year. Many of these con games peak during filing season as people prepare their tax returns or hire someone to do so.

This January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of roughly 896,000 contacts since October 2013 and have become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam.

“The IRS continues working to warn taxpayers about phone scams and other schemes,” Koskinen said. “We especially want to thank the law-enforcement community, tax professionals, consumer advocates, the states, other government agencies and particularly the Treasury Inspector General for Tax Administration for helping us in this battle against these persistent phone scams.”

Protect Yourself
Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via a phishing email. Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.

Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.

Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.

The IRS will never:
Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.

Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.

Require you to use a specific payment method for your taxes, such as a prepaid debit card.

Ask for credit or debit card numbers over the phone.

Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:
Do not give out any information. Hang up immediately.

Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.

Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:
Call the IRS at 800-829-1040. IRS workers can help you.

Here’s a YouTube video that you may want to watch:
https://www.youtube.com/watch?v=a2kBGBpsfWI&feature=em-subs_digest

Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

Bob
(805) 264-3305

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Crazy Tax Rules for Recreational Gamblers

Gambling is an ever-popular pastime, but did you know that gambling can have very serious tax implications?  These are crazy and in my opinion are unfair, but they are in the tax law and courts have had their say to uphold them.

Theoretically, the full amount of gambling winnings (unless you qualify as a professional gambler, which this post assumes that you are not) must be reported on the miscellaneous income line of Form 1040, page 1.  Winnings include cash, prizes, jackpots, lottery winnings, raffles, as well as installment payments on winnings.

For most types of gambling at legitimate gaming facilities, you’ll receive a Form W-2G if you win over certain amounts.  These must be reported on the miscellaneous income line.  When you get one of these forms remember that the IRS also gets a copy of the form, and the IRS computers will be looking for these amounts on your tax return.  If they don’t find them, the computer will spit out a notice of tax deficiency.

Many people think that just because they might win some jackpots, but lose money overall they do not need to report the winnings.  This is not true, they must show these winnings.

That being said, you may (assuming you’ve kept the required proof and documentation) deduct your gambling losses but only to the extent of gambling winnings.  This deduction is taken on Schedule A in the miscellaneous itemized deduction section.  Now gamblers who may not have enough Schedule A deductions itemize cannot get a tax deduction for these losses.

You can see the problem here.  Even though there is technically a deduction for losses to extent of winnings, a taxpayer may not get the deduction and even if they do get to take it, they may not get full benefit due to mathematical computations that have to be made.

In addition, since you must include the entire amount of winnings on page 1, this increased your Adjusted Gross Income (AGI) and this could devastating effects on your taxes since there are a good number of limitations that are driven by AGI.  For example, taxable Social Security benefits are driven higher by a higher AGI figure.  Rental real estate losses are phase out by higher income.  The child tax credit, education credits and other items are potentially reduced or eliminated by higher AGI.  Also any allowable medical deduction on Schedule A is reduced as AGI increases.  These are some but there are more, but you get the idea.

Documentation Wagering Losses: The IRS allows players to simply record the net winning or net loss from each gambling session.  A session is deemed to end when a player cashes out or runs out of money.  At this point it’s possible to calculate how much was won or lost during that particular session.  The taxpayer/player then reports the sum of all the net winning sessions on page 1 of the tax return, and the net sum of all the losing sessions on Schedule A miscellaneous itemized deductions.  Care must be taken to assure that the total net winning session totals are greater than or exceed the total of Forms W-2G’s received and make adjustments to assist the IRS computers in matching the numbers, or there will be a letter from them.

Gambling losses must be adequately documented to be deductible.  Under IRS Revenue Procedure 77-29, an amateur gambler must record the following information in a log or similar record:

  1.  Date and type of specific wager or wagering activity,
  2. Name and location of the establishment,
  3. Amount won or lost
  4. Names of any other people present with you at the gaming establishment,
  5. Slot machine #, table #,
  6. Winning statements and unredeemed tickets,
  7. Bank withdrawal slips, ATM advances and such with the dates showing the source of the ‘gambled’ funds.

    For a handy Gambling Log and info, click below and print out the handout:

    Gambling Log

    There’s no place for gambling when it comes to preparing your federal and state tax returns. Play it safe and take this article to heart if you plan to hit the casino or racetrack. The IRS and courts require that these records are kept in close proximity in time to the gambling trip so don’t wait to recreate the required records, do them now.

    If you have questions on how to do this or think you may have an issue in this area, please call me at (805) 264-3305. Also I have a Gamblers Handout and Log Record available for the asking.

    Thanks for reading. Bob

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Tax Tips for Real Estate Investors

Tips For Real Estate Investors

If you are a real estate investor I’m sure you are familiar with a number of tax laws and strategies that real estate investors encounter frequently and not so frequently. Things like:

*Tax Rules and Solutions at Purchase and During Ownership of Real Estate *Living With the Passive Loss Regulations *Taxation at the Time of Sale *1031 or Like-Kind Exchanges *Real Estate in Troubled Times

More Specifically:

-Passive Loss Limitations may limit the amount of losses you can deduct each year -Depreciation – how to compute and what is the long term effect on my situation -Capital Gains versus Ordinary Gains -Exclusion Rules for Gain on the Sale of a Principal Residence -Converting a Principal Residence to a Rental or Vice Versa -Installment Sales of Real Estate -Office In Home Rules -Repossessions, Cancellation of Debt and Bankruptcy

As an investor you may or may not have a detailed understanding of how these areas affect your taxes and investment. But you should have at least a basic understanding of how different rules affect the types of investments you have. Details on the above are obviously beyond the scope of this text, but feel free to contact us if you feel less than confident in any of the areas or if you are thinking of buying, selling, renting, exchanging, executing a short sale, etc.

Here are some areas I get a number of questions about. If you have any other areas that you have questions, please use the ‘Ask a Tax Question’ button to the right on any page of this website.

1. Repairs versus Improvements – There is a distinct tax difference between “repairs” to a property and “improvements” to a property. On one hand, the cost of repairs made by a business is deductible. On the other hand, the cost of improvements must be capitalized and written off over time via depreciation deductions.

Check out this handout, click here: Is it a repair or improvement?

The life of improvements to a residential rental building is generally 27.5 years. On a nonresidential building it is generally 39 years. A real long time in either case.

A good strategy is to separate repairs from improvements when work is done on a business or rental building. For example, don’t lump standard repairs with a major renovation. If that occurs, it will take longer to write off the cost of the repairs.

Fix the broken window, replace the doorknobs, fix the leaky faucet and the like prior to the more renovation type of work.

A repair keeps the property in good operating condition over the course of its life. Conversely, an improvement extends the useful life of the property, increases its value or adapts it for a different use.

But check this out:

But even the Internal Revenue Manual that tells IRS agents how to audit you admits that distinguishing repairs from improvements is a gray area. You’d think that replacing a roof is pretty clearly an improvement, right? Common sense tells you it adds value and prolongs the property’s life. But a recent tax court case ruled that an investor could deduct a roof as a repair because it just helped keep the property in good operating condition over the course of its existing expected life.

Remember, this strategy is for business property, like rental properties. Personal home improvements are not deductible at all so, in the case of your home or vacation homes, it would be better to lump all little repairs in with a major renovation so it can be added to the cost basis of the property when sold.

2. Cost Segregation

The IRS says your clients can “depreciate” their property over a “class life” intended to approximate its useful life.

Residential property depreciates over 27.5 years. If they have an apartment house worth $500,000, they write off $16,666 per year. Not bad . . . .

Nonresidential property depreciates over 39 years. If they have, say, a medical office worth$500,000, they write off $12,820 per year. Not as good as the apartment – but still not bad.

But all real estate includes specific, identifiable components that depreciate faster.

For example, land improvements depreciate over 15 years. These include paving, landscaping, underground utilities, and site lighting.

And personal property depreciates even faster – just 5 to 7 years. For residential property, this includes flooring, cabinets and countertops, appliances, window treatments, and wall coverings. For commercial and industrial property, add equipment foundations, exhaust and ventilation systems, security systems, and electrical distribution systems.

If we just take the 27.5 or 39 year depreciation we could be wasting thousands in tax deductions we can take today.

A “cost segregation study” is an in-depth analysis, performed by specially-trained experts, that lets them identify and reclassify costs that qualify for faster depreciation.

Faster depreciation translates into immediate tax savings.

The best part is, new IRS rules let owners “catch up” any deductions they missed as far back as 1987. Without even amending old returns! You can do that simply by filing IRS Form 3115. And you can claim those savings in a single year.

That makes cost segregation the closest you’ll come to a real “tax time machine”! It’s all court-tested and IRS-approved. In fact, the IRS offers a 136-page Audit Techniques Guide that details exactly what to do and how to do it. It’s not for everyone but it can make a big difference in the right situation.

3. Depreciation Recapture

Remember that when a property is sold, all depreciation taken over the life of the investment will reduce your cost basis increasing the gain on the sale.

4. Converting Personal Residence to a Rental

You can convert a personal residence to a rental property and if time limits are adhered to, you can still take at least a portion of your tax exclusion for the sale of a personal residence. If you rent it out after 2008 there will be a proration of the exclusion. This can get complex so check it out with an your tax advisor or call us.

You can also go the other way and convert a rental property to your residence and if you live and own it for a long enough period you may be able to exclude some of the gain. Again, a complex issue, call us if you need help.

5. Inherited Property

If the owner of real property passes away, be sure to get an appraisal of the value of the property at the date of death. This will be the new basis for gain or loss on sale and for depreciation. You should get this appraisal even if there is no estate tax return (706) filing requirement.

Also important is if you own property with your spouse make sure that title is held as community property with right of survivorship (if you’re in a community property state such as California). This way the property will get a full step up in basis on the death of the first spouse. If you have a living trust, be sure to run this by your attorney or tax person to ensure it is setup properly.

Call me if you wish to discuss any of these issues. Thank you, Bob (805) 264-3305

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