Trumped on Taxes

One era ends and a new one begins, which is a happy or sad thing, depending on which side of the aisle you sit on.  Regardless of where you stand (or sit) on the prospect of Donald Trump becoming our next president on January 20^th, one thing will be sure; he’s going to look to shake up the tax code.  Depending on how much he gets his way, your 2017 tax picture could look very different from your 2016 one.  Let’s take a quick look at some possibilities.

Tax Rates – whether it’s Mr Trump or Congress, the Republican majority will look to cut tax rates in some fashion.  Lower tax rates mean that any deductions you have will get less bang for the buck, in the form of income tax savings.  For example, if you’re in a 25% marginal tax bracket and have itemized deductions of $10,000, the deductions will save you $2,500 in federal tax (deduction amount times the tax rate).  If tax rates are reduced and you drop to a 20% marginal bracket (I’m just making up that rate), your same $10,000 of deductions will only save you $2,000 in tax.  The bottom line is that for those of you who claim itemized deductions for charity, state & local taxes, and mortgage interest, a reduction in tax rates means that you’ll save less in income tax.

Charitable contributions – because tax rates could go down (and your income tax savings for making charitable contributions could be reduced), you might want to consider accelerating any donations that you were going to put off to 2017, and make them before the end of 2016.  If you have any securities that have appreciated in value, making a donation of the appreciated securities is a great way to avoid the potential capital gain income on a sale, and get a deduction for the current value of the security.

State & local taxes – I’ve personally seen less people get a tax benefit for these, as more of my clients have wound up in the Alternative Minimum Tax (AMT).  In the AMT computation, state & local taxes are disregarded as a deduction.  If you’re not in the AMT, prepaying by December 31 any state estimated tax payment that you’d otherwise make by January 15 would save a few dollars in 2016, and with possible lower rates in 2017, you’d have lower income tax savings in 2017 anyway.

Capital gains – while Mr Trump’s plan would retain the current long-term capital gains rates of 0%, 15%, and 20%, the threshold for hitting the top rate would be reached a lot faster, which means that long-term gains would be taxed at 20% starting at about $225K of taxable income on a joint return (vs about $467K now) and $112K of taxable income on a single return (vs about $415K now).  This would seem to indicate that if you’re considering selling any investments at a long-term gain, and expect to have a pretty high taxable income, it would be better to sell before the end of 2016. But…the other consideration is the current 3.8% net investment income tax, which is a tax on interest and dividend income, and capital gains.  If adjusted gross income is above certain levels, this tax kicks in.  Mr Trump and Congress both want to eliminate the net investment income tax.  It then becomes an exercise of figuring out whether gains will net out a higher total of capital gain + net investment income taxes in 2016, or possibly only capital gain tax (potentially at a higher rate) in 2017.  You gotta admit, isn’t this fun stuff?!

These are just a few points to ponder, while you’re slugging it out and standing in line at the mall this holiday season.  As always, if you need some tax number crunching done, consult your favorite CPA!

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Investing and Backdoor Taxes

It’s been a pretty good year so far for the stock market, and you may have locked in some nice capital gains on investment sales, and/or received some hefty dividends from mutual funds (or may yet receive year end fund distributions). While all of this is good stuff (more money in your pocket), the additional gains and income could put you in the position of paying even higher taxes than you may anticipate.

In my practice, this past tax season was a “perfect storm” for a bunch of my clients, who got hit with additional/higher taxes, as well as the loss of various deductions. Let me run down a few things from last year that are still lurking out there this year.

–Net Investment Income Tax – this was a new tax in 2013, and is a 3.8% tax on income such as capital gains, dividends, interest, and a few other items. Once income goes above certain levels, this additional tax will kick in.

–Personal Exemption Phaseout – while this isn’t an additional tax per se, the fact that personal exemptions (for self, spouse, dependents) can be reduced literally to zero if income is high enough, which has the effect of raising taxable income, obviously creating a higher tax.

–Itemized Deduction Phaseout – this works similarly to the exemption phaseout, in that when income is high enough, itemized deductions will be reduced. And as with the exemption phaseout, this exposes more income to taxation.

–Higher Long-Term Capital Gains Rate – for taxpayers in the top tax bracket, long-term capital gains will be taxed at 20% and not 15% for most other taxpayers.

–Alternative Minimum Tax – I’ve covered this in previous articles, but it’s something that’s also still hanging around, and shouldn’t be forgotten.

From a tax planning perspective, if you feel some or all of these could be applicable to you in 2014, and you don’t want surprises at tax time, I recommend that you contact your favorite CPA (maybe one whose name starts with “Jay The…”?) to crunch some numbers and get some additional guidance on ways to reduce the sting of some of these stealth taxes.

Mistakes on Taxes? Avoid These

It’s tax season again, yee haw! Sure as the sun comes up in the morning, the IRS has its hand out from January to April 15th (and beyond) waiting for somewhere in the area of 150 million tax returns. In spite of ever more complicated tax laws, approximately one-third of those returns will be self-prepared. Based on their own research, my competitor (ha!), H&R Blockhead says that one of every five self-preparers forgo almost $500 in taxes (e.g. lower refunds or higher balances due) because of mistakes they’ve made on their own returns. These mistakes can lead to letters from IRS, possibly with penalties or other harsher actions resulting. As a licensed tax professional, my recommendation to all taxpayers is to avoid all preparers whose names start with either “H&R” or “Turbo”, and instead engage a qualified tax professional (preferably a CPA whose name starts with “Jay the”) who understands the tax laws, and stands a way better chance than you of preparing an error free return. But…I’m not naïve enough to think that people will actually listen to me (or read this), so for those of you who still insist on going it alone, and preparing your own tax returns, pay attention now, and don’t make these mistakes.

Claiming the wrong number of dependents-IRS has publications and pages and pages of information on who can and who can’t be claimed as a dependent on your tax return. Don’t think that just because somebody lives with you or is your kid that they can be claimed as a dependent.

Failing to itemize deductions-taxpayers automatically get a standard deduction, but don’t be so fast to leave it at that. Add up how much you paid in state/local tax, personal property tax, mortgage interest, charity, and other various items, and if that total exceeds the standard deduction, you can shave a few bucks off your tax bill by itemizing.

Overstating charitable contributions-yeah yeah, you put ten bucks in the Salvation Army kettle at Christmas time, or you put money in the basket when it’s passed around in church, but can you prove it? Like dependents, IRS has all sorts of information to read, that discusses the required substantiation for deducting charitable contributions. And they’ve been increasing their audits in this area, so make sure you’ve got the correct documentation, before you claim that deduction. Another mistake to avoid is forgetting about the United Way or CFC contributions that were deducted from your paycheck.

Deducting points on a refinance-while points paid on an original first mortgage are deductible when paid, you generally cannot do the same with points paid on a refinance. Instead, you must amortize that deduction over the life of that loan.

I could go on and on about mistakes you should avoid, but I think that’s enough free advice for one article. Remember rule number 1, which is to go to a qualified tax professional to have your tax return prepared. Rule number 1(a) is that the qualified tax professional should be me. Finally, rule number 2, if you’re gonna go it alone, make sure you review everything twice before you send the return out, and if you’re not sure about something, research and read!

Have you made any good (or bad) mistakes on tax returns, and are willing to tell about it? Leave a comment, and share it with others, so that they may learn.

The Supreme Court, the Defense Of Marriage Act, and Tax Planning

If you’ve either been living under a rock or on another planet in 2013, I want to let you know about a momentous event that happened about a half year ago. The U.S. Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA), which required same-sex spouses to be treated as unmarried for purposes of federal law, was unconstitutional. Obviously there are many federal laws, and a lot that have been affected by this ruling, but I’ll try to lay out a few things to keep in mind, as they relate to tax laws and tax planning.

For Federal tax purposes, IRS will generally recognize as married, same-sex couples who were married in a state, the District of Columbia, a U.S. territory, or a foreign country that authorizes same-sex marriages. Note that the determining factor is where the couple marries, not where the couple is domiciled (generally, where they live). As an example, a same-sex couple lives in VA but gets married in DC. For federal tax purposes they will be considered married. On the flip side of this, IRS will not recognize as married, same-sex couples who have entered into a registered domestic partnership, civil union, or other similar formal relationship under state law “that is not denominated as a marriage under the laws of that state.”

O.K., you’re a same-sex couple, you’ve gotten married in a state that recognizes same-sex marriages, so for federal tax purposes, now what? Under this ruling, legally married same-sex couples will be treated as married for all Federal tax purposes, including income, gift, and estate taxes. Some of provisions that need to be considered are filing status, claiming personal and dependency exemptions, the standard deduction, contributing to an IRA, earned income tax credit, child tax credit, and many others.

I’m guessing that you’re now wondering when all of this goes into effect (did I guess correctly?). The answer is, it already did. IRS’s revenue ruling (2013-17) is generally effective on or after September 16, 2013. One thing that can be done immediately is to look back to any tax year for which the statute of limitations has not yet expired (generally three years) and determine whether amending tax returns will result in tax refunds. If it will, amended returns can be filed. Note that for 2012 or prior year “original” returns filed before 9/16/13, same-sex couples may choose (but are not required) to amend returns.

If a same-sex couple files an “original” 2012 or prior year return on or after 9/16/13, they must file the return as married filing jointly or as married filing separately. As with opposite sex couples, the date of the marriage will be the determining factor for what year married returns will start, and for which years single (or possibly head of household) would apply.

For the upcoming 2013 tax return filing season, legally married same-sex couples must file as married filing jointly or married filing separately. Single filing status does not apply, period.

Having said all of that, you now ask “what about the states”, right? The answer is, we’re not sure yet. Virginia recently issued a statement unequivocally saying that same-sex marriages are not recognized in the state. VA legally married same-sex couples (for Federal purposes) will have to file married returns for Federal purposes (joint or separate) and for VA purposes will have to file as single (or head of household, if applicable). This scenario will be the same for any state that doesn’t recognize same-sex marriages. Check your state’s laws to determine applicability.

I could go on for another 600 words, but I’ve barely scratched the surface of discussing planning points and opportunities. You should consult with your favorite tax professional (whose name hopefully starts with Jay and ends with Reiner) about details that you need to know as you move into the upcoming filing season and tax years beyond. Please send a link to this article to any friends, family, or associates who could benefit by it.

Holidays and Tax Planning

Thanksgiving is history. Black Friday’s gone. Cyber Monday’s in the books. What’s there to look forward to? The second half of Hanukkah? Christmas? Are you kidding, we’re talking tax planning, people!

That’s right, rather than thinking about ways to spend money, think about ways to save money, especially on taxes. Since there’s about a month left in 2013, you still have a little time to save a few dollars in tax before the ball drops in Times Square.

Net Investment Income Tax – starting with the 2013 tax year, taxpayers with adjusted gross income (AGI) over $200K single/$250K married filing jointly are subject to an additional tax of 3.8% on net investment income above the threshold amounts. This tax applies to income that includes capital gains, interest, dividends, rents, and others. While some of these items may be beyond your control (such as how much dividend is paid on a stock or mutual fund), you may be able to control your AGI, to keep it below the threshold where the 3.8% tax kicks in. One way is if you’re taking retirement plan (IRA etc) distributions. If you’re considering taking more than a minimum distribution, consider whether a higher distribution would put you above the level where the 3.8% tax kicks in.

Personal Exemption Phase-out – this “gem” has been (thankfully) missing from tax returns for the last three years, but has come roaring back for 2013. For AGI over $250K single/$300K joint, the deduction for personal exemptions reduces (phases out), and goes down to zero with AGI of about $372K single/$422K joint. Taxpayers closing in on the phase-out range of AGI should consider if there are ways to push off 2013 income to 2014, to keep personal exemptions intact.

Itemized Deduction Phase-out – similar to the personal exemption phase-out, the reduction of itemized deductions returns in 2013. Common itemized deductions are mortgage interest, real estate tax, charitable contributions, and others. As with the exemption phase-out, when AGI goes above the thresholds, the total allowed itemized deductions begin to reduce. Note that reduced deductions and exemptions have the effect of subjecting more income to tax, which has the effect of increasing your overall net tax rate.

As you may have concluded, the tax and phase-outs I mentioned above are driven by your level of AGI, so it’s important to look at ways to reduce your adjusted gross income. The best way to address this is to look at page 1 of your 2012 tax return, since the page 1 ends at AGI. Consider if there are ways of delaying income, taking losses on investments (which would reduce income/AGI up to $3K), switch investments to tax free municipal bonds/funds, and increasing retirement plan contributions, among other things.

While increasing itemized deductions won’t reduce your AGI, they will still probably net you some tax savings. Making additional charitable contributions could help, as would bunching medical or miscellaneous itemized deductions, both of which are subject to AGI related “floors”.

So while you’re in the middle of a tug of war with that jerk at Walmart over the last Xbox 360 on the shelf, just think about how much more fun it would be to save some money on your taxes!

How are you planning on saving on your taxes this year? Or next? Leave a comment and let me know what you’re thinking. And please forward this article to a friend or family member who might (tax) benefit from it.

Is it a Business, or is it a Hobby?

How many of you out there make really good homemade hummus? I’m typing with one hand, while I raise the other. My wife thinks that it’s better than the pre-made store bought stuff, and that I should sell it to the public. For all my clients, no, I’m not quitting my day job (yet, haha!). Aside from figuring out a catchy name for it (JayTheCPA’s hummus doesn’t quite roll off the tongue), could I really make a go of this as a business, or is it really just a hobby?

If you’ve been doing some sort of activity that you love to do (baking cakes for friends, for example), is this something that you can deduct the expenses for, and reduce your taxes? I’ll give you a big resounding maybe!

IRS has various rules to determine whether an activity is a bona fide business, or just a hobby. If an activity is an actual business, for a sole proprietor the income and expenses are shown on Schedule C, as part of your individual income tax return, and if your expenses exceed your income, the resulting loss can offset other income items on your tax return. If the activity is a hobby, expenses can only be deducted to the extent of income, so if you have no income, you can’t deduct any expenses. If you do have income, the expenses are deducted as a miscellaneous itemized deduction, subject to a floor/deductible/”haircut” of 2% of your adjusted gross income. The bottom line is that if you’ve got a hobby, you’re probably not going to get much of a tax deduction for it, if at all.

So how do you know whether your activity is a business or a hobby? Here are a few of IRS’s factors for determining the answer:

1-how is the activity carried on – IRS will look at whether the activity is being conducted in a businesslike manner. Is there a separate bank account? Are books and records being kept?

2-what is the individual’s expertise – there should be extensive knowledge of the activity, potentially showing that advice has been sought from experts.

3-time and effort on the activity – if you have a full time job and pursue the activity an hour a week, it may indicate that this is not a serious business activity for you.

4-history of income or losses from the activity – while you may be able to get away with showing a loss on Schedule C for a year or two, showing losses year after year would indicate that there’s no real profit motive for the activity, in which case IRS will deem the activity a hobby, and disallow previous losses claimed.

IRS looks at a number of other factors when making a determination of whether an activity is a business or a hobby. At this point, my hummus making (and other culinary adventures) is strictly a hobby, so I’ll keep IRS out of what’s left of my hair, and will leave the expenses off my tax return. Before you start taking deductions for your hobby, contact your friendly neighborhood CPA for advice. Do you have any interesting tax stories regarding hobbies? Please share.

To Err is Human, To Deduct Divine

I think I erred once, but it turns out I was just plain wrong! Anyhow, this article isn’t about erring, but about claiming some of those divine tax morsels, deductions!

If you’re a new small business owner, you may not know what the @#$% is deductible and what isn’t. Even if you’re not a new owner, there could still be deductions available that you may not have thought of. I’ll give you a little bit of free advice right now…contact a CPA! I have to try; after all, it is my blog. O.K., since I’m such a nice guy, I’ll give you a few ‘freebies’.

Business Meals-unfortunately only 50% of what you spend on business meals is deductible, but 50% is better than zero! The key to getting the deduction is to keep good records, which includes having an entry in your calendar or organizer showing the name of the person you’re dining with, and having a receipt with the date. I’m often asked about whether you need to keep every business meal receipt, and isn’t there a minimum amount, below which you don’t need a receipt? My answer is “don’t argue with me, just keep your receipts”. No, I’m not really that tough, but the fact is, if you’re ever audited, and you tell the auditor that all of your business meals were $20 so you didn’t keep any receipts, you’re gonna get your deduction tossed out. It’s better to be able to substantiate most of your meals than none of them, so keep your receipts; it’s really not difficult to do.

Cell Phones-or smartphones; who doesn’t use them these days? Yes, I understand that you use yours to yack with your friends, send text messages, write a five-star review of your favorite CPA on Yelp (thank you everybody!), and IRS understands it too. If you use your cell phone for business, don’t be afraid to take some sort of deduction for it.

Cost of Incorporating-if you set up a corporation or LLC, the cost of doing that (attorney fees, filing fees, etc) is deductible. There are certain rules for how much can be deducted and when, so consult a professional (another shameless plug; gotta love it).

Business Use of Car-when it comes to using your car for business, remember one thing; commuting is never deductible, so if you drive from home to the office (or vice versa), forget it. On the other hand, if you drive to a client site or to one of those business meals, that auto use is deductible. The rules to follow for claiming a business auto deduction are too numerous for this article; just know that it’s something to take advantage of.

Cabs and Public Transportation-I took the Metro last week to go to a client in DC. Am I going to take a deduction for the cost of that round trip fare? You’re damned right I’m going to. And you should too, if you’re taking a bus, train, cab, etc to a client, or to that business meal.

CPA-yes, another shameless plug, but you can write me off…as a tax deduction..that is..not as a person, or trusted advisor. Think of it as Uncle Sam paying part of my bill!

Those are but a few of the many things that you can claim as a deduction as a small business owner. Employees of others may also be able to claim some of these deductions, but there are a few more hoops to jump through to be able to do that. I hope you found this helpful, and please pass this along to somebody you think might benefit from this information. If you’ve got any favorite deductions you’d like to share with the masses, please leave a comment. Now get out there and start deducting, woo hoo!

Cliff Diving 101

Who needed to watch the ball drop in Times Square, if you were looking for New Year’s Eve excitement? We had Congress giving us plenty of excitement (and heart attacks) with their dillydallying about the “fiscal cliff”. For better or for worse, the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, and thank you very much, but I’ll stay out of any political discussion as to whether it’s good or bad for American taxpayers. What I will do is summarize a few of the key provisions of the “Act”, for your reading pleasure/misery.

Individual Income Tax Rates

The Act retains the 10%, 15%, 25%, 28%, and 33% marginal tax rates that had been in effect previously. The 35% tax bracket will end at $400K of taxable income (single) and $450K taxable income (joint). Above those thresholds, the 39.6% rate that was in effect “pre-Bush-tax-cuts” will kick in.

Estate and Trust Tax Rates

The top rate for estates and trusts rises to 39.6%, for taxable income over $11,950. As you can see, the top tax rate kicks in at a comparatively low taxable income amount, so executors and trustees are advised that whenever possible/practical, the income should be distributed out of estates/trusts to beneficiaries, especially when the beneficiaries are in a lower tax bracket than the estate/trust.

Long-term Capital Gains and Qualified Dividends

In recent tax years, long-term capital gains and qualified dividends have generally enjoyed a relatively low 15% tax rate. This will continue under “The Act”, but (always a but, eh?!) in cases where taxpayer’s taxable income (including the gains and the dividends) exceeds that magic threshold of $400K single/$450K joint, long-term gains and qualified dividends will be taxed at 20%.

15% Tax Rate Bracket for Joint Filers

The size of the 15% bracket for joint filers remains at 200% of the size of the 15% bracket for single taxpayers. Before all you single taxpayers run off to get married, keep in mind that this 200% amount does not apply to higher brackets, and remember what as I said above, about the top 39.6% bracket for joint taxpayers being only $50K higher than it is for single taxpayers, so there will definitely be some “marriage penalty” effects.

Standard Deduction For Joint Filers

The standard deduction for joint returns will remain at 200% of the standard deduction for single taxpayers, woo hoo!

Itemized Deduction Phase-Outs

This is something that we haven’t had to face for a few years, and it’s baaack! Beginning in 2013, when Adjusted Gross Income, (not taxable income) exceeds $250K single/$300K joint, itemized deductions will generally be reduced by 3% of AGI. The net effect here is to actually increase your effective tax rate. It’s been estimated that taxpayers in the 33% bracket will effectively pay 33.99%, those in the 35% bracket will effectively pay 36.05%, and those in the 39.6% bracket will effectively pay 40.79%!

There are a lot more provisions to the Act, but I think I’ve been more than sadistic enough by telling you about the items above. For CPAs like me, each of these tax acts should really be called “The Tax Preparer Job Security Act”, since it keeps all of us busy, sorting through provisions, and advising our clients.

Questions? Comments? Gripes? Feel free to leave a comment. Stay tuned for more “stupid Congress tricks”!

Gambling and Taxes

If you like to gamble, then I have a wager for you. I’ll bet that you can learn something new about gambling and taxes from this article!

Whether you’re into rolling the dice, horse racing, cards, slot machines, or even betting on the Super Bowl or playing bingo, did you know that your gambling winnings are fully taxable and must be reported on your tax return? Did I win the bet yet?

Here’s some information about gambling and taxes:

1-Gambling income isn’t just limited to casinos or horse racing, but also includes lottery winnings, raffles, and even the fair market value of prizes, such as cars and trips.

2-The payer (casino, race track, etc) is required to give you a Form W-2G (Certain Gambling Winnings) if you receive $1,200 or more in winnings from bingo or slot machines, more than $5,000 from a poker tournament, or $600 or more in other gambling winnings (and the payout is at least 300 times the amount of the wager). There are other instances where Form W-2G is required, but I’ve covered the more common ones.

3-Generally you will report your gambling winnings on the “other income” line of your tax return (Form 1040).

4-You can claim your gambling losses to the extent of your winnings, as an itemized deduction on Schedule A, under “other miscellaneous deductions”. Note that this type of deduction is not subject to the 2% adjusted gross income limitation that’s applicable to items such as tax preparation fees, safe deposit box fees, and unreimbursed employee expenses. While you may have gambling losses, you’re not allowed to net them against the income; you must report the income as I indicated in #3, and report the losses as I just described.

5-You must keep accurate records to substantiate any gambling losses. These records can include receipts, tickets, statements, a diary, and any other documentation you have. As with any tax deduction, if you’re audited and don’t have adequate substantiation, the deduction will be disallowed.

I hope you found this information useful, whether I won the bet or not. Please forward this along to any of your gambling buddies, and happy (but responsible) gambling!

Spring Cleaning, a Little Late

It’s hot as hell outside, and you just want to hibernate in the air conditioning. Trying to figure out what to do while you’re chilling out? How about organizing your tax records?! If you start organizing yourself now, come this tax season, you’ll be cool as a cucumber, and ready to make your favorite CPA’s day, with all of your organized records. IRS has some recordkeeping tips for individuals and small business owners.

What to Keep – Individuals

IRS recommends keeping records that support items on your tax return for at least three years after the return has been filed. Some of these records are bills, credit card and other receipts, invoices, auto mileage logs, canceled or imaged checks, and any other records to support deductions or credits claimed on a tax return. You should also keep records relating to property at least three years after you’ve sold or otherwise disposed of the property. Examples of this include a home purchase or improvement, stocks and other investments, IRA transactions, and rental property records.

What to Keep – Small Businesses

Similar to individuals, for small businesses, IRS recommends the three year timeframe for retention of business records. Examples of these include records that document gross receipts, proofs of purchases, expenses, and assets. These can include cash register tapes, bank deposit slips, purchase and sales invoices, credit card charges, Forms 1099-MISC, canceled or imaged checks, account statements, petty cash slips, and real estate closing statements. Electronic records can include databases, saved files, emails, faxes, and others.

IRS generally doesn’t require records to be kept in any special manner, but common sense would indicate that having a designated place to keep your tax records is a good idea. If you have all of your records in one place, it will make your job a lot easier when preparing to meet with your CPA, or if you should be one of the unfortunate souls who receives an IRS notice, or need to substantiate something for an audit.

The morale of the story is, even when it’s brutally hot and humid outside, you can be one of the coolest people around, when you have your tax records in order (at least this CPA will think you’re cool!). How organized are your tax records? Leave a comment, telling us the good, bad, and the ugly! Please forward this article along to anybody who you think needs to get their tax @#$% together.