Tag: tax planning

What Changes With the New Taxpayer First Act?

Posted by Maria T. Rollins on August 8, 2019

The Taxpayer First Act of 2019 is redesigning how the IRS works with taxpayers, even though it may take a while for many of the provisions to take effect.

Some experts have highlighted the following aspects of the bill as especially important:

An independent appeals process. Taxpayers and small businesses will be able to challenge the IRS’ position without undertaking the cost and expenses of court. IRS Appeals will be an independent unit that grants taxpayers access to case files. Taxpayers will be able to protest if denied an appeal.

Innocent spouse treatment. The new law requires the U.S. Tax Court to take a fresh look at innocent spouse cases without taking previous decisions into account.

Modification of procedures for issuance of third-party summons. This is an important protection for taxpayers, especially small-business owners. It discourages the IRS from bypassing the taxpayer and contacting third parties — such as financial institutions — instead for information. The IRS should give taxpayers a meaningful opportunity to provide the information it is seeking prior to its contacting third parties. In practice, the IRS should provide the taxpayer with an understanding of what the issue is, what information is being requested and how the requested information relates to the issue.

Office of the National Taxpayer Advocate. The Taxpayer First Act has taken a strong approach with the Advocate’s issuance of Taxpayer Advocate Directives, which focus on systemic problems taxpayers deal with. Once they are issued by the Advocate, the IRS should comply within 90 days. The Advocate Annual Report will identify any TAD that is not honored by the IRS.

Credit card payments. The IRS is now allowed to directly accept credit and debit card payments for taxes; the taxpayer must pay any processing fees. The Act also requires the IRS to try to minimize processing fees when entering into contracts with the credit card companies.

Whistle blower reforms. The Act provides protections from retaliation and allows for better communication with whistle blowers about the status of their claims.

Cyber-security and identity protection. The IRS will now have to let taxpayers know whether it suspects there is evidence of identity theft. The Agency will explain to taxpayers how to file a report with police and how to protect themselves against additional harm resulting from the identity theft.

Taxpayer Act levels the playing field

Rep. Kevin Brady, R-Texas, ranking member of the Ways and Means Committee, was quoted as saying the Act “levels the playing field to ensure taxpayers have the same information as the agency, better protects our taxpayers’ information, and reins in past IRS abuses to guarantee families and local businesses never have to fear having their accounts and property seized without fair and due process.”

As with many new laws, it will take some time to see what specifically the effects are. The legal provisions are complex and will require interpretation over time. We’ll be keeping an eye on the developments.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Contact KRS managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 to discuss your situation.

Tax Rules for Vacation Home Rentals

Posted by Simon Filip on July 23, 2019

Get the most from your vacation home rental property by knowing the tax rules

Summer is the time of family vacations, sun, sand and beaches. It’s also the time when a vacation home may be used to generate additional cash flow through rental.

Part-time landlords need to remember that, in many cases, the Internal Revenue Service expects them to report the extra income.

Short-Term Rentals

In general, if a taxpayer rents their vacation home for fewer than 14 days out of the year, the income is tax free and the property is considered a personal residence. Under this scenario, taxpayers are not required to report any rental income on their tax return. However, expenses attributable to the rental cannot be deducted, such as cleaning fees or rental commissions.

More than 14 Rental Days

If a taxpayer’s rental days are above the 14-day threshold, the income is required to be reported. Under this scenario, a taxpayer can also deduct a variety of direct rental expenses such as licenses, advertising and rental commissions.

Other expenses such as repairs, mortgage interest, property taxes and utilities are deductible on a prorated basis based upon the number of days a taxpayer rented the home out.

Claiming Expenses on Rental Property

When filing taxes on a rental property, an individual will use IRS Schedule E: Supplemental Income and Loss. The IRS provides an extensive listing of deductions in Publication 527, however common expenses include:

Real Estate/Property Taxes
Insurance
Cleaning
Repairs and Maintenance
Depreciation
Legal and Professional Fees
Advertising
Utilities
Commissions

We’ve got your back

For additional information on the taxability of your vacation home rental, contact Simon Filip, the Real Estate Tax Guy, at sfilip@krscpas.com or (201) 655-7411.

Home Office Expense Deduction for a Self-Employed Taxpayer

Posted by Sean Faust, CPA on July 17, 2019

Does your home office qualify for a tax deduction?

If you’re self-employed and work out of an office in your home and you satisfy certain strict rules, you will be entitled to favorable “home office” deductions. These deductions against your business income include the following:

Direct expenses of the home office – for example, the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
Indirect expenses of maintaining the office – for example, the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest and real estate taxes.

In addition, if this office is your “principal place of business” under the rules discussed below, the costs of traveling between it and other work locations in your business are deductible transportation expenses, rather than nondeductible commuting costs.

Tests to determine home office deductibility

You may deduct your home office expenses if you meet any of the three tests described below: (1) the principal place of business test, (2) the place for meeting patients, clients, or customers test, or (3) the separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

Principal place of business

You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

Home office used for meeting patients, clients, or customers

You’re entitled to home office deductions if you use this office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the office.

Separate structures

You’re entitled to deductions for a home office, used exclusively and on a regular basis for business, if it is located in a separate unattached structure on the same property as your home – for instance, an unattached garage, artist’s studio, workshop, or office building.

Space for storing inventory or product samples

If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

How much can you deduct?

The amount of your home office deduction is based on the amount of square footage allocated to your office space. There are two methods to choose from; Simplified Method and Regular Method.

Simplified Method

The simplified method for determining this deduction is straightforward: You receive a deduction of $5 per square foot, up to 300 square feet (the deduction can’t exceed $1,500).

Regular Method

You determine the deduction by figuring out the percentage of your home used for business. Then apply the resulting percentage to the total direct & indirect expenses discussed above.

To demonstrate, if your home is 2,000 square feet and your home office is 500 square feet, you use 25% of your home for business. You’re allowed to deduct 25% of the above-mentioned expenses against your income. The remaining 75% of qualified expenses carry over to Schedule A, if you itemize. These costs include property taxes and mortgage interest.

Someone with a larger office and higher expenses might benefit from the regular method of determining the home office deduction compared to the standard method.

We’ve got your back

At KRS, our CPAs can help you utilize the home office deduction to maximize potential tax savings. Give us a call at 201.655.7411 or email me at sfaust@krscpas.com.

What You Need to Know to Deduct Medical Expenses

Posted by Sean Faust, CPA on June 25, 2019

Deducting expenses for medical and dental care is easier when you know the rules

If you itemize your deductions for a taxable year on Form 1040, Schedule A Itemized Deductions, you may be able to deduct unreimbursed expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income in 2018 and 10% beginning in 2019.

What qualifies as a medical expense?

Qualifying costs, which include many items other than hospital and doctor bills, often amount to much larger figures than expected. Below are some items you should take into account in determining your medical expenses:

Health insurance premiums

The cost of health insurance is a medical expense. This item, by itself, can total thousands of dollars a year. Even if your employer provides you with health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included in medical expenses, subject to specific dollar limits based on age. However, pre-tax insurance premiums paid by an individual are not deductible medical expenses.

Transportation

The cost of getting to and from medical treatment is a deductible medical expense. This includes taxi fares, public transportation, or the cost of using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019 (18¢ a mile for miles driven in 2018), plus tolls and parking. Alternatively, you can deduct your actual costs, such as for gas and oil (but not your general costs such as insurance, depreciation, or maintenance).

Therapists, nurses, etc.

The services of individuals other than doctors can qualify as long as the services relate to a medical condition and aren’t for general health. For example, costs of physical therapy after knee surgery would qualify, but not costs of a fitness counselor to tone you up. Amounts paid for certain long-term care services required by a chronically ill individual also qualify as deductible medical expenses.

Eyeglasses, hearing aids, dental work, psychotherapy, prescription drugs

Deductible medical expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling, and other ongoing expenses in connection with medical needs. Purely cosmetic expenses (e.g., a “nose job”) don’t qualify. Prescription drugs (including insulin) qualify, but over the counter items such as aspirin and vitamins don’t. Neither do amounts paid for operations or treatments that are illegal under federal law (such as marijuana), even if state or local law permits the procedure or drug.

Smoking-cessation programs

Amounts paid for participation in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible medical expenses. However, non-prescription nicotine gum and certain nicotine patches aren’t deductible.

Weight-loss programs

A weight-loss program is a deductible medical expense if undertaken as treatment for a disease diagnosed by a physician. The disease can be obesity itself or another disease, such as hypertension or heart disease, for which the doctor directs you to lose weight. It’s a good idea to get a written diagnosis before starting the program. Deductible expenses include fees paid to join the program and to attend periodic meetings. However, the cost of low-calorie food that you eat in place of your regular diet isn’t deductible.

Dependents and others

You can deduct the medical costs paid on behalf of dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as an elderly parent or grandparent, who would qualify as your dependent except that he has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them, regardless of who gets the dependency exemption.

We’ve got your back

At KRS, our CPAs can help you identify deductible medical expenses to maximize potential tax savings. Give us a call at 201.655.7411 or email me at sfaust@krscpas.com.

SALT Workarounds Squashed

Posted by Simon Filip on June 14, 2019

$10k Limit on SALT Deductions Stands

On Tuesday the Treasury Department issued final regulations that officially prohibit high-tax states like SALT Workarounds Squashed New Jersey, New York, and Connecticut from utilizing workarounds to evade the new $10,000 limit on state and local tax (“SALT”) deductions.

The 2017 Tax Cuts and Jobs Act capped at $10,000 the amount of state and local tax payments that taxpayers could deduct from their federal returns. In response, a number of state governments enacted or proposed workarounds to find a way to remove the economic pain of the cap.

In the workaround, a state resident could, instead of paying state property taxes, choose to donate to a state-created charitable fund, for example, $40,000. The resident would then get to write off the $40,000 as a charitable donation on his or her federal taxes and receive a state tax credit for some of that donation, easing the burden of the lower write-off for their SALT levy.

The regulations will allow taxpayers to receive a tax write-off equal to the difference between the state tax credits they receive and their charitable donations. That means the taxpayer who makes a $40,000 charitable donation to pay property taxes and receives a $25,000 state tax credit would only be entitled to a charitable write off of $15,000 on his or her federal tax bill.

The Treasury indicated it would continue to evaluate the issue and release further guidance if necessary.

We’ve got your back

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and keep you up to speed on the latest tax developments. Contact him at sfilip@krscpas.com or 201.655.7411 today.

Real Estate in Your IRA: A Good Idea?

Posted by Simon Filip on April 22, 2019

Real estate can be a great investment, and many people don’t know they can also put the property into their IRAs.

real estate and your ira However, they have to be careful: one small mistake and an IRA’s tax advantages disappear.

So what are the rules to follow to have a qualified real estate purchase?

You can’t mortgage the property.
You can’t work on the property yourself — you’ve got to pay an independent party to do any repairs.
You don’t get the tax breaks if the property operates at a loss. You can’t claim depreciation either.
All costs associated with the property must be paid out of your IRA and all income deposited into the IRA. You can find yourself in a bind if there isn’t enough cash in the IRA to deal with a major property expense.
You can’t receive any personal benefit from the property — you can’t live in it or use it in any way. It has to be strictly for investment purposes. So that vacation property you’re considering buying or a house to rent to your kids — not allowable.

More rules for real estate in IRAs

Any investment made by your IRA must be considered an arm’s-length transaction: You can’t use money in your IRA to buy or sell real estate to or from yourself or family members. You can’t receive any indirect benefit either — you can’t pay yourself or a family member to be the property manager.

For a traditional IRA, you must take required minimum distributions at 70 1/2 and that applies with real estate as well. It can be awfully hard to sell real estate off in portions, so then how do you cover the required distributions without cash? These are problems you need to solve before you start your retirement investing. However, you can roll over money from the sale of one property to the purchase of another without any tax consequences, inside the IRA.

Three more points to weigh when thinking about investing in real estate IRAs:

Your IRA cannot purchase a property that you currently own. IRS regulations don’t allow transactions that are considered self-dealing. They don’t allow your self-directed IRA to buy property from or sell property to any disqualified person — including yourself.
A real estate investment needs to be titled in the name of your IRA, not to you personally. All documents related to the investment must be titled correctly to avoid delays.
Real estate in an IRA can be purchased without 100 percent funding from your IRA. You can use undivided interest and partnering with others.

For more, see my post, “Using a Self-Directed IRA to Buy Real Estate.”

We’ve got your back

There are a lot of working parts to keep in mind if you want to hold real estate in your IRA, and it might not be right for everyone. With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at sfilip@krscpas.com or 201.655.7411 today.

Put Your Children on Your Payroll and Reduce Taxes

Posted by Sean Faust, CPA on February 28, 2019

One tax reduction strategy that most business owners do not take advantage of is putting their children on payroll.

This can help reduce the overall family tax bill and transfer assets to children without introducing gift tax implications.

As a business owner, you can deduct wages paid to children, while the child can offset those wages with their own standard deduction. In addition to the standard deduction, you could setup pre-tax retirement accounts that would allow taxpayers to deduct more, while the child saves for retirement.

For partnerships and disregarded entities, if your child is under 18, the company does not have to pay employment taxes such as Social Security, Medicare and Workers’ Compensation Insurance. You can also avoid Unemployment taxes until the child turns 21. But for S-Corps and C-Corps, Social Security and Medicare taxes are paid regardless of age. These payroll taxes amount to 15.3% of wages earned, your share and child’s share.

Potential tax savings

With that in mind, let’s review a sample of potential tax savings. Starting in 2019, the standard deduction is $12,000 for single filers. The maximum contribution to a traditional IRA is $6,000 (if modified adjusted gross income is less than $64,000 for single filers in 2019). Additionally, taxpayers can draft a 401(k) plan that includes no age limitations, which will allow younger children to contribute $19,000 of pre-tax dollars to their 401(k). The example below illustrates the potential tax savings if the taxpayer’s entity is an S-Corporation.

Save taxes by putting your children on your payroll If the entity is an LLC instead of an S-Corp, and your child is under 18, add back the payroll taxes of $5,585 to get your tax saving potential.

One other benefit you could produce is a safe harbor 401(k) plan or profit sharing/matching system that could increase your child’s retirement account and provides a deduction for your business. This strategy has plenty of scenarios to take into consideration which provide an opportunity to save even more money in taxes.

There are some rules you need to be aware of when using this strategy:

Keeping detailed employment records, including timely tracking of weekly hours and wages that correspond to services provided
Issuing paychecks as you would a normal employee (e.g., bi-weekly)
Documenting that the services are legitimate and considered ordinary and necessary for the business
Ensuring the services provided do not include typical household chores

If your child is not treated like any other employee in a similar position, the IRS could potentially deem their wages as not ordinary and necessary, and disallow them as a deductible expense.

We’ve got your back

At KRS, our CPAs can help you strategize setting your children up on payroll to maximize potential tax savings. Give us a call at 201.655.7411 or email me at sfaust@krscpas.com.

Filing Taxes as a Married Couple

Posted by Lance Aligo on February 19, 2019

If you were married this past year, congratulations!

Getting married is a big step in your life and along with it comes many changes. One change is filing taxes as a married couple for the first time. This advice can help you get started.

First, you must determine your filing status. Your status depends on your marital status on the last day of the year. If you were legally married as of December 31, you are considered to be married for the full year and must either file a Married Filing Joint or Married Filing Separate tax return. Filing status is important for determining your standard deduction, whether you qualify for various deductions and credits, and the amount of tax is owed.

Filing Alternatives

If you choose to file a Married Filing Joint tax return, you must include all your and your spouse’s income, deductions, and credits on one tax return. The standard deduction in 2018 for filing a Married Filing Joint tax return is $24,000. If you choose to file a Married Filing Separate tax return, each of you will report your respective income, deductions, and credits on separate tax returns.

The standard deduction for a Married Filing Separate tax return is $12,000 each. Married Filing Separate will rarely produce a lower tax liability. Most tax preparing software will provide you with an analysis on whether filing separately makes sense. If using a self-preparing software or if you work with a tax preparer, be sure to ask which way produces a lower liability for your family.

When filing a separate tax return, there are some tax deductions that may be unavailable to you:

If you itemize your deductions, your spouse must also itemize their deductions. You may not mix and match the itemized deduction and the standard deduction.
The Earned Income Credit is unavailable.
The Child and Dependent Care Credit is generally unavailable.
You cannot deduct interest paid on student loans.
Adoption Credit is generally not allowed.
Reduction of Child Tax Credit is unavailable.

Considerations for Working Couples

For couples who both work, both spouses will need to adjust the tax withholding from their paychecks. One of the biggest mistakes of newlywed couples and taxes is the under withholding of income tax from their paychecks. Because your income will be taxed together, this may push you into a higher tax bracket and when it’s time to file your tax return, there will be a surprise balance due. Be sure to sit down with your spouse and properly fill out each of your Form W-4s Employee’s Withholding Allowance Certificate correctly. Form W-4 worksheets are available to walk you through the process of matching tax due with withholdings. The goal here is to match these as close as possible so that there is not a large balance due or large refund. This way you have the most money in your pocket all year long.

Name and Address Changes

One other thing to keep in mind is filing with the correct names and addresses. If there are any name changes, be sure to use the correct name on your married tax returns. If there is an address change, you should change your address with the IRS by filing Form 8822 Change of Address and mailing it to the address on the form. You should also update your address with your local post office. If you have any children, be sure to include them as well on your tax return with their full name and social security number. Retirement accounts and beneficiary information should also be updated accordingly if your spouse is the beneficiary.

Considerations for Home Sales

Planning on selling your home? Your taxable gain exclusion on your personal residence doubles from $250,000 to $500,000 once you are married. This is only the case if you own the home and both you and your spouse have lived in the home the past 2 out of 5 years. If you sold your home before you were married, the $250,000 would still apply.

Keeping these tips in mind can help make your first tax season together go a bit more smoothly.

Lance Aligo, CPA, MSA, is a senior accountant at KRS CPAs, LLC, Paramus, NJ. You can reach him at laligo@krscpas.com or 201-655-7411. Check out KRSCPAS.com for more tax tips, checklists, blogs, and other resources to help you succeed.

How to Handle Bad Debt and Taxes

Posted by Maria T. Rollins on December 4, 2018

When can you use bad debt to reduce business income?

How to Handle Bad Debt and Taxes Even when you take the customer to court and you still don’t get your money, there’s a way to make lemonade from this lemon of a customer.

If your business has already shown this amount as income for tax purposes, you may be able to reduce your business income by the amount of the bad debt. Look at bad debt as an uncollectible account—a receivable owed by a customer, client or patient that you are not able to collect.

Bad debt may be written off at the end of the year if it is determined that the debt is in fact uncollectible.

According to the IRS, bad debt includes:

Loans to clients and suppliers
Credit sales to customers
Business loan guarantees

How do you write off bad debt?

Your business uses the accrual accounting method, showing income when you have billed it, not when you collect it.

If your business operates on a cash accounting basis, you can’t deduct bad debt because you don’t record income until you’ve received the payment. If you don’t get the money, there’s no tax benefit to recording bad debt. You only record the sale when you receive the money from the customer.

Under accrual accounting, manually take the bad debt out of your sales records before you prepare your business tax return.

You must wait until the end of the year, just in case someone pays.

Prepare an accounts receivable aging report, which shows all the money owed to you by all your customers, how much is owed and how long the amount has been outstanding.
Total all bad debt for the year, listing all customers who have not paid during the year. Only make this determination at the end of the year and only if you’ve made every effort to collect the money owed to your business.
Include the bad debt total on your business tax return. If you file business taxes on Schedule C, you can deduct the amount of all bad debt. Each type of business tax return has a place to enter bad debt expenses.

It makes sense in any kind of business—no income recorded, no bad debt.

Collection efforts are important

A business bad debt often originates as a result of credit sales to customers for goods sold or services provided. The best documentation is likely to be a detailed record of collection efforts, indicating you made every effort a reasonable person would in order to collect a debt.

Take some solace by claiming a bad business debt deduction on your tax return. Not exactly a guarantee because you need to show that the debt is worthless, but it’s good to know there may be some relief.

We’ve got your back

The tax experts at KRS can help you with important accounting issues such as bad debt. Contact us today at 201.655.7411. And did you know that KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources? Check it out today!

Understanding IRC Code Section 1033

Posted by Simon Filip on November 20, 2018

Understanding IRC Code Section 1033 Unfortunately, 2018 has been another year of major disasters due to hurricanes, fires, and floods. As taxpayers turn to the process of restoring property, some may be considering whether a 1033 exchange is more relevant than a 1031 exchange.

This blog entry examines some of the key aspects of the 1033 exchange.

What is an IRC 1033 exchange?

A section 1033 exchange, named for Section 1033 of the Internal Revenue Code, applies when you lose property through a casualty, theft or condemnation and realize gain from the insurance or condemnation proceeds. If your accountant or tax advisor believes you will realize gain from the insurance or condemnation proceeds, you may be able to defer that gain using a 1033 exchange.

Compared to IRC 1031

Internal Revenue Code Section 1031, commonly referred to as a “like-kind exchange,” does not allow a taxpayer to hold or benefit from the proceeds during the exchange period. It also requires the replacement property be identified within 45 days and acquired within 180 days after the closing of the relinquished property. If a taxpayer is deferring gain in a 1033 exchange, he can hold the proceeds until the acquisition of the replacement property and an intermediary is not required.

Replacement property

Another difference between a 1031 and a 1033 exchange is the standard that is used to limit what you can buy as replacement property. In general, the standard is more restrictive under 1033 than the like-kind standard under IRC 1031. Section 1033 provides the replacement property must be “similar or related in service or use” to the property that was lost in the casualty or condemnation. It is important to note the Tax Cuts and Jobs Act of 2017 eliminated tax-deferred like-kind exchanges of personal property, but allows exchanges of business and investment real estate.

Time period

The time period allowed for the taxpayer to acquire the replacement property is much more liberal than Section 1031 exchanges. The period begins at the earlier of when the taxpayer first discovers the threat or imminence of condemnation proceedings or when the condemnation or other involuntary conversion occurs. The period ends either two or three years after the end of the tax year in which the conversion occurs. The time period is three years for real property held for business or investment and two years for all other property. If the taxpayer has lost property in a federally declared disaster area, Section 1033 gives the taxpayer a two year extension on the replacement period, granting a total of four years in which to replace the lost property.

Taxpayers having lost their property due to casualties or those facing condemnation should consult with their tax advisors to take advantage of the tax deferral afforded under Section 1033 if they wish to replace their lost property.

We’ve got your back

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at sfilip@krscpas.com or 201.655.7411 today.