I was asked about a parent helping a child buy a home, and that triggered the following five thoughts.
- 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.
- 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.
- 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.
- 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.
- 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.
Robert W Craig, EA Tax Services
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:
- The filing of a tax return or the payment of federal income tax is voluntary.
- Taxpayers can reduce their federal tax liability by filing a “zero return” that reports zero income and zero tax liability.
- Compensation received for personal services isn’t income.
- Military retirement pay isn’t income.
- Only foreign-source income is taxable.
- The IRS isn’t a U.S. agency.
- The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes.
- The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes.
- Various constitutional amendments permit the taxpayer to avoid taxes.
- 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.
Robert W Craig, EA Tax Services
431 2ndStreet, Suite 3 Solvang CA 93463
Solvang CA 93463
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…
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/
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.”
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:
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.
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:
- Date and type of specific wager or wagering activity,
- Name and location of the establishment,
- Amount won or lost
- Names of any other people present with you at the gaming establishment,
- Slot machine #, table #,
- Winning statements and unredeemed tickets,
- 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:
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
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
-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
Many people don’t think about start-up expenses as potentially deductible. Others think they are deductible just like day to day business operating expenses.
Start-up expenses can be thought of as “thinking about getting into business expenses” and your “getting your business started expenses.”
A key concept is that you must be ‘open for business’ to deduct your ordinary and necessary business expenses. When are you considered open for business?
When the Open Sign is out and customers can come in. When your website is up and running, surfers can find you and can buy from you and you can deliver. When you are ready, willing and able to transact business, sell products and services.
What about pre-opening expenses? Before I opened I…
• Traveled to meet with and learn from others in the business
• Went to lunch, dinner, movies, and played golf with friends and business people to research the viability of the business concept
• Took classes to learn about the business
• Spent money analyzing the market
• Bought books and magazines to find information about the market
• Used my car to make prospecting and other calls to get started
• Advertising for the opening of the new business
• Paid salaries and wages for employees I had to train
• Travel and other costs for securing prospective distributors, suppliers or customers
• Fees for lawyers, accountants, and consultants
Good news, these expenses usually qualify as start-up expenses. In the tax law there is a provision to deduct these expenses. Under old, old law you had to amortize these over 60 months. Then lawmakers gave us a special $5,000 write-off that taxpayers had to know to make a special election on their tax return for. Then they took away the requirement to have to make a special election, we could just write them off on our taxes.
With a 2010 tax change we can now write off up to $10,000 of start-up costs on our tax returns. If your expenses are more than the $10,000, the balance can be written off over 180 months. If your start-up costs are more than $60,000, the $10,000 deduction is reduced dollar for dollar until it’s zero. That is, if your start-up costs were $66,000 you’d only get to deduct $4,000 the first year and amortize the balance of $62,000 over 180 months.
A word of caution here. If you do not qualify to be in business or the law prohibits you from starting the business, you are not in business. A suspended insurance broker could not deduct his expenses. Also the expenses you are trying to deduct cannot qualify you to start your business as a minimum requirement to enter the field.
Example: Mr. Duecaster, a high school teacher, tried to deduct his law school tuition and other costs as start-up expenses for his law practice. Wrong! The court ruled that he gets no deduction for the educational expenses because the education was necessary to qualify him to practice law, not start a business. The law school expenses were personal.
That being said, there have been cases where graduate school expenses were deemed deductible. Advanced stuff so if you think it applies, get professional assistance.
For a handy little handout on start a business, click here: Starting a Business
This can get a bit tricky, so don’t hesitate to call me when thinking about starting a business.
November 18, 2014
Year End Tax Planning Update for Individuals
From: Robert W. Craig, E.A. Tax Services
Dear Client or Subscriber,
It’s that time of year where we should think about preparing an estimate of your current year tax liability and see if we can reduce that liability.
There are several things to consider when doing year-end tax planning: taking advantage of expiring tax provisions, deferring income into next year, or accelerating income into the current year (and doing the opposite with expenses). The proper strategy depends on whether or not you anticipate a significant change in income or expenses next year.
With respect to expiring provisions, many taxpayer-favorable provisions expired at the end of 2013. Congressional gridlock has prevented these provisions, known as the “tax extenders,” from being enacted into law for 2014. Earlier this year, the Senate Finance Committee passed the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Bill of 2014, which would extend a number of these expired provisions to 2014 and 2015. Many believe that Congress is just waiting until after the November elections to move forward on this Bill. Alternatively, any movement on the Bill may not come until 2015. Congress has been known to pass legislation in a tax year after the year to which the legislation applies and make that legislation retroactive. The Bill includes the following items which may impact your total tax for 2014:
(1) Deduction for expenses of elementary and secondary school teachers – This provision allows teachers and other school professionals a $250 above-the-line tax deduction in 2014 and 2015 for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.
(2) Mortgage debt forgiveness – Under this provision, up to $2 million of forgiven mortgage debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015.
(3) Increased exclusion from income for employer-provided mass transit and parking benefits – This provision would increase, for 2014 and 2015, the monthly exclusion from income for employer-provided transit and vanpool benefits from $130 to $250, so that it would be the same as the exclusion for employer-provided parking benefits. The provision also modifies the definition of qualified bicycle commuting reimbursement to include expenses associated with the use of a bike sharing program.
(4) Deduction for mortgage interest premiums – Under this provision, for 2014 and 2015, taxpayers would be able to deduct the cost of mortgage insurance on a qualified personal residence. The deduction would be phased-out ratably by 10 percent for each $1,000 by which adjusted gross income (AGI) exceeds $100,000. Thus, the deduction would be unavailable for a taxpayer with an AGI in excess of $110,000.
(5) Deduction for state and local general sales taxes – This provision would extend for two years the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes.
(6) Special rules for contributions of capital gain real property made for conservation purposes – This provision would extend for two years the increased contribution limits and carry-forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.
(7) Above-the-line deduction for higher education expenses – This provision would extend an above-the-line tax deduction for qualified higher education expenses. The maximum deduction, for 2014 and 2015, would be $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns).
(8) Tax-free distributions from individual retirement plan for charitable purposes – This provision would allow an individual retirement arrangement (IRA) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 for 2014 and 2015 in distributions made directly from the IRA to certain public charities.
Income Subject to Top Tax Rate
For 2014, the amount of income subject to the top tax rate of 39.6 percent increased from the 2013 amounts to $457,600 (married filing jointly), $406,750 (single individuals), $432,200 (head of household) and $228,800 (married filing separately).
Net Investment Income Tax
The net investment income tax is a 3.8 percent tax on net investment income that took effect in 2013. Besides applying to investment income, the tax also applies to income from trades or businesses of the taxpayer that are passive activities. An activity is not generally considered passive if the taxpayer materially participates. If you are engaged in an activity which may be considered passive and thus has the potential to trigger the net investment income tax, we should evaluate the seven factors that determine material participation to see if your business can escape the net investment income tax.
Affordable Care Act (‘Obamacare’)
Beginning in the 2014 tax year, most individual taxpayers will be required to obtain health insurance, either through their employer or independently on a health insurance exchange marketplace, or risk facing a tax penalty. In 2014 the penalty is either $95 per adult ($47.50 per child) or 1% of income, whichever is higher. In some situations, the amounts of these penalties will increase in 2015. If you or your family members do not have health insurance, it may make sense for us to evaluate your options by comparing the amount of the potential penalties with the cost of obtaining coverage.
Alternative Minimum Tax
If you are subject to the alternative minimum tax (AMT), your deductions may be limited. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under the AMT.
In 2014, the waiting-period rule on IRA rollovers changed, and not to your benefit. While the rule used to be that the one-year waiting period between rollovers applied on an IRA-by-IRA basis, the courts and IRS determined that it applies on an aggregate basis instead. This means that you cannot make a tax-free IRA-to-IRA rollover if you’ve made such a rollover involving any of your IRAs in the preceding one-year period. This new rule applies beginning in 2015. However, the rule does not affect your ability to transfer funds from one IRA trustee directly to another, because such a “trustee-to-trustee transfer” is not a rollover and, therefore, is not subject to the one-waiting period.
Self-directed IRAs have become increasingly popular in recent years because they allow an IRA owner to have more control over the type of investments that will be held in the IRA. This higher degree of flexibility in choosing IRA investments allows the IRA owner to invest in assets with greater wealth-building potential. However, the large amount of money held in self-directed IRAs makes them attractive targets for fraud promoters. Thus, self-directed IRA can be costly if not properly managed. In addition, because of the types of investments taxpayers with self-directed IRAs are able to make, taxpayers have a greater risk of running afoul of the prohibited transaction rules. The prohibited transaction rules impose an excise tax on certain transactions – such as sales of property, the lending of money or extension of credit, or the furnishing of goods, services, or facilities – between an IRA and a disqualified person. If you have a self-directed IRA, we need to review the specifics of your arrangement.
If you are self-employed and your business has shown losses for the past several years, there is a danger that the IRS will consider your business a hobby and disallow deductions in excess of revenue. If you are in this situation, there are certain steps we can take to mitigate this potential. For example, we can ensure there is appropriate documentation as to the business-like manner in which the business is carried on, including the adoption of new techniques or the abandonment of unprofitable methods.
The IRS has issued new rules on the capitalization and expensing of tangible property used in a trade or business. If tangible property is a part of your business, these rules will most likely impact your current year taxes and may require certain actions by year end. For example, if you acquired numerous small dollar items, a de minimis safe harbor rule may apply to allow you to deduct all items below a certain threshold. Or, if you incurred significant repair and maintenance costs for heavy machinery, a routine maintenance safe harbor may be used to increase current deductions.
Estate/Gift Tax Considerations
There is still time to reduce your estate by gifting amounts to relatives or friends, free of the gift tax that normally applies. For 2014, you can gift up to $14,000 to each donee without having to file a gift tax return.
Charitable Remainder Trusts
If you are in the top tax bracket, have appreciated assets that would be subject to capital gains tax if sold, and would like to make a significant gift to a favorite charity while reducing estate or gift taxes, you may want to think about utilizing a charitable remainder trust (CRT). A CRT, which has an income interest part and a remainder interest part, can allow you to sell appreciated assets tax free, while providing you with a current income tax deduction that can offset all forms of income in addition to providing a charity with a substantial donation. Please let me know if you would like more information on this option.
Other Steps to Consider Before the End of the Year
The following are some of the additional actions we should review before year end to see if they make sense in your situation. The focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.
Accelerating Income into 2014
Depending on your projected income for 2015, it may make sense to accelerate income into 2014 if you expect 2015 income to be significantly higher. Options for accelerating income include:
(1) harvesting gains from your investment portfolio;
(2) if you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year;
(3) taking IRA distributions this year rather than next year;
(4) selling stocks or other assets with taxable gains this year;
(5) if you are self employed with receivables on hand, trying to get clients or customers to pay before year end; and
(6) settling lawsuits or insurance claims that will generate income this year.
Deferring Income into 2015
There are also scenarios (for example, if you think that your income will decrease substantially next year) in which it might make sense to defer income into the 2015 tax year or later years. Some options for deferring income include:
(1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2015;
(2) if you are considering selling assets that will generate a gain, postponing the sale until 2015;
(3) delaying the exercise of any stock options you may have;
(4) if you are selling property, considering an installment sale;
(5) consider parking investments in deferred annuities;
(6) establishing an IRA, if you are within certain income requirements; and
(7) if your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year end.
Deferring Deductions into 2015
If you anticipate a substantial increase in taxable income, we may want to explore deferring deductions into 2015 by looking at the following:
(1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and
(2) postponing the sale of any loss-generating property.
Accelerating Deductions into 2014
If you expect your income to decrease next year, accelerating deductions into the current we can into the current year to offset the higher income this year. Some options include:
(1) consider prepaying your property taxes in December;
(2) consider making your January mortgage payment in December;
(3) if you owe state income taxes, consider making up any shortfall in December rather than waiting until your return is due;
(4) since medical expenses are deductible only to the extent they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold;
(5) making any large charitable contributions in 2014, rather than 2015;
(6) selling some or all of your loss stocks; and
(7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.
Certain life events can also affect your tax situation. If you’ve gotten married or divorced, had a birth or death in the family, lost or changed jobs, retired during the year, we need to discuss the tax implications of these events.
Finally, these are some additional miscellaneous items to consider:
(1) If you have a health flexible spending account with a balance, remember to spend it before year end (unless your employer allows you to go until March 15, 2015, in which case you’ll have until then).
(2) If you own a vacation home that you rented out, we need to look at the number of days it was used for business versus pleasure to see if there is anything we can do to maximize tax savings with respect to that property. For example, if you spent less than 14 days at the home, it may make sense to spend a few more days and have the house qualify as a second residence, with the interest being deductible. For a rental home, rental expenses, including interest, are limited to rental income.
(3) We should also consider if there is any income that could be shifted to a child so that the income is paid at the child’s rate.
(4) If you have any foreign assets, there are reporting and filing requirements with respect to those assets. Noncompliance carries stiff penalties.
Please call me at your convenience so we can set up an appointment and estimate your tax liability for the year and discuss any questions you may have.
Robert W. Craig, E.A. Tax Services Telephone (805) 264-3305
Tax Tips For Real Estate Agents
You, as a real estate broker or agent, have two ways to grow your real net income:
1. Financial Offense
2. Financial Defense
Financial offense boost your income. Get more listings, more showings, more closings, sell more expensive properties, add additional services and the like.
Financial offense is hard work! If it were easy, everyone would be doing it.
Financial defense is simply to cut costs, while maintaining the integrity of your business plan. If you are like most real estate pros, taxes are your biggest single expense—and your biggest roadblock to financial security.
A successful real estate pro can give away 40% or more of their income.
How do you stop the tax madness?
Tax planning guarantees results. You can spend hours and hours and thousands of dollars on speculative marketing efforts that take years to pay off for you. With increased income you spend $5 to net $1.
With taxes, if you save $5, you have $5 more in spendable income.
Tax planning gives you control. You can’t control the economy, interest rates, or any other external forces—but you can make sure you take advantage of every tax break the law allows.
Taking advantage of all the tax breaks and so called loopholes in the tax code is perfectly legal. But it is not all cut and dry, so it is filled with land mines and potential traps, the “red flags.”
To sum up, tax planning works. Together, both your offense and defense will govern the results you get from your business. To bring in the token sports cliché: ‘Offense sells tickets, defense wins games’. This applies to business as well.
Tips of the Month:
Tip #1. Picking the Right Broker or Agent, or How To Be The Broker/Agent That’s Right To Pick.
Do buyers actually go out and look for an agent? Probably most of the time they just stumble over them. At an open house, a cocktail or block party, a friend or relative who knows one is most likely the way we happen upon a broker or agent.
So, look at advice you may give someone on finding the best broker or agent, and make sure you are that person.
Recommendation – People look for referrals. Be out there, let people you’ve done great work for know that you did great work for them. Ask for the referral at the time you do the work when it’s fresh on their minds. And then follow up, don’t let em forget you. Get a testimonial.
Expertise – What is your expertise? Do you specialize in one area or another of real estate? This helps to nail down your target market. Then combine that with the recommendation side and hang with the people who can refer you the prospects that are most likely to own or want properties in your niche. Let them know, you are the professional who has done it before.
Commitment – How committed are you to putting the client first? This is a gut check one. People want a pro that’s totally committed. Are you that person? If not, become that person. Remind yourself each day where your bread is buttered. Fall in love with your prospects and clients. It makes the work more fun too. Are you just dabbling in real estate part-time?
Reputation – Reputations good or bad, are earned. They are earned by doing great work. Have letters of recommendation from clients and from your office managers, if applicable, for potential clients.
Drive – Kind of like commitment, but more action oriented. Drive can also be called determination. Do you have it? Are you part-time or full-time? All the drive in the world is useless if you’re not around when the client has a problem or wants to write or respond to an offer.
Flexibility – This goes somewhat with expertise, but how adept are you at sensing the right time to adjust pricing and adapting to changing real estate climates?
List/Sale Ratio – Do you close 70% or more of your listings? What is your listings average time on the market? A smart prospector may ask to see statistics, but even if they don’t, it should give you confidence in knowing the numbers. Also, if they are sub-par, it gives one a goal to work toward.
The Company You Work For – What is the company’s reputation? What is the company going to do for the client? Does your company have systems with strong marketing plans and tools, and systems to communicate these to the client? The company should have a strong reputation of backing up the client.
Bedside Manner – Maybe actually the biggest single factor for selecting a professional to represent a client is his or her bedside manner so to speak. How well do you connect? How well do you sense what the prospective client wants from you? And how willing are you to give them exactly what they want? People can sense these things so you need to have the right attitude and it will shine through.
I hope these are a help. You may have more traits that you have worked out yourself but the key is to become the real estate professional that the clients you want to work for are looking for. Then your confidence and energy will precede you in all your business dealings. These even work to improving yourself in your personal life too.
Successful agents spend more time by far, than unsuccessful agents, finding prospects proactively, presenting, and closing buyers and sellers. Therefore, these items should be priorities for the successful real estate agent.
Be able to help your clients, either with personal knowledge and experience, or by getting an outside advisor, with decisions regarding real estate investments. This helps them make buying and selling decisions quickly and makes you look good. Click Here to read my article on “Tax Tips for Real Estate Investors.”
Go get em!!!