Tag: tax planning

Time to Gather All Your Papers for Taxes

Posted by Maria T. Rollins on

Time to gather your paperwork for Tax TimeGet started organizing paperwork now to make tax time less stressful.

Most of the papers you need to document the income, interest and withheld taxes you report arrive in your mailbox in January, with investment-related 1099s often coming in February. Get ready for their arrival by creating print and online folders. It’s a good idea to create a paper and an email tax folder for messages relating directly to tax information.

Email announcements that documents are available online will land in your inbox. The postal service may deliver your W-2s in your physical mailbox — although some companies post them on a secure site for downloading. Mortgage providers, banks and other financial institutions often post important 1099 forms on your online account.

Paperless banking may have turned shoe boxes into receipt relics of the past, while your online statements often contain key backup records for such potential deductions as:

  • Charitable donations
  • Outlays for health care
  • Gambling winnings and losses
  • Property tax expenditures

Many of us ignore the line items on these statements until we start our annual tax-filing ritual. However you may save time by taking a few extra minutes each month to jot down tax-related information, like:

  • Expense title
  • Check numbers
  • Payee names
  • Dollar amounts
  • Dates

Create a spreadsheet dedicated to tax records. Throughout the year, consider downloading and printing online documents that will be available for only a limited time.

Keeping track of everything

Here are some of the documents you should have handy:

  • Documents related to life events — marriage, death of a spouse or divorce, deductible alimony payment records, adoption papers, and child custody agreements should all be saved.
  • Paperwork related to childbirth. You’ll want the newborn’s Social Security card, childcare receipts and details on college savings plans.
  • Home ownership information. Keep such paperwork as closing documents — it’s good to keep closing documents in case you paid real estate taxes or points when you closed that don’t appear on your year-end mortgage interest statement. Save annual mortgage statements.

Other documents to consider:

  • Last year’s taxes, both federal and state. These are handy as good refreshers of what you filed and documents you’ll need.
  • Retirement account contributions. Keep track of your contributions to a traditional IRA or a self-employed retirement account. Keep this information handy for tax time.
  • Education expenses. Documents help your deduction claim here.
  • State and local taxes. Save these documents so that they can be easily retrieved.

The value of a tax return doesn’t end on April 15. You’ll need to provide this document to get a mortgage, apply for student loans and check the status of your refund. Generally, the IRS can audit you for three years after a filing date, and in some cases, even longer. Hold on to your return copies and supporting documents just in case. The IRS can audit you years after you file, so be prepared.

We’ve got your back

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

Understanding the Mortgage Interest Deduction after the Tax Cuts and Jobs Act

Posted by Simon Filip on

Understanding the Mortgage Interest Deduction after the Tax Cuts and Jobs ActThe TCJA modified the mortgage interest deduction for homeowners. Here’s what you need to know about the changes.

Home ownership has long been the American dream.  Mortgage loans have made it possible for the majority of American homeowners to afford buying a home. The government has encouraged home-ownership by offering tax breaks linked to mortgages, but recent changes in tax law changes how much a typical homeowner-taxpayer will benefit from the deductions. In 2018, the Tax Cuts and Jobs Act (TCJA) changed the rules on how much mortgage interest can be deducted from taxable income.

Mortgage limits

Mortgage interest was one of the biggest deductions that tax law allowed. Unlike interest in borrowing for personal expenses, mortgage interest on a taxpayer’s residence can be deducted as an itemized deduction.

TCJA modified the mortgage interest deduction in several ways. The change that garnered the most attention was the reduction in the amount of interest that you’re allowed to deduct. Going forward, taxpayers will only be able to deduct interest on up to $750,000 of mortgage debt, down from $1 million under prior law.

The old $1 million mortgage limit is grandfathered in for existing mortgages, but if a taxpayer obtains a new mortgage post-TCJA, they will be subject to the lower limit. Taxpayers obtaining new mortgages exceeding $750,000are still eligible for a mortgage deduction, however, it will only be on the portion of interest attributable to the first $750,000 borrowing.

Home equity debt

Under old law, taxpayers could deduct interest on up to $100,000 of home equity debt. This allowed taxpayers to do whatever they wanted with the money, including paying down other types of debt (credit card, student loan, auto loans, etc.) or spending on things unrelated to their residence while still able to deduct the interest.

Tax reform under TCJA partially took away the ability to deduct interest on home equity debt. The interest is still tax deductible if the loan is used to buy, build, or improve your home and doesn’t bring the total outstanding mortgage above the new $750,000 limit. If the home equity debt was used for other purposes, it is no longer deductible. Unlike other changes, existing home equity loans were not grandfathered in.

Refinancing

It is important for taxpayers to understand how refinancing an existing mortgage will work for income tax purposes. When a taxpayer takes a mortgage to buy or build a home, it counts as home acquisition debt and is capped at $750,000. A mortgage for other purposes is treated as a home equity debt and now receives no interest deduction. When a taxpayer refinances a mortgage they originally counted as home acquisition debt, the refinanced mortgage will also count as home acquisition debt as long as it is in the same amount. If there is excess borrowed in the refinancing, the extra portion of cash pulled out will be treated as home equity debt, so that portion of the interest you pay won’t be deductible unless it is used to improve the home.

Key takeaways

  1. Interest payments are deductible on mortgage debt up to $750,000 (formerly $1 million).
  2. Deduction for other home equity debt (HELOCs and second mortgages eliminated (formerly $100,000).

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.

Qualified Joint Venture between Spouses

Posted by Simon Filip on

Qualified Joint Venture between SpousesAn unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. However, in 2007, there was an addition to the Internal Revenue Code that excludes from partnership status a Qualified Joint Venture (“QJV”) conducted by a married couple who file a joint return. This was enacted by Congress to alleviate what was considered an unnecessary burden of filing partnership returns where the only members of a business joint venture are a husband and wife filing a joint income tax return.

Definition of a Qualified Joint Venture

QJV is defined as any joint venture involving the conduct of a trade or business if:

  1. the only members of the joint venture are married;
  2. both spouses materially participate;[1] and
  3. both spouses elect the application of QJV treatment.

A qualified joint venture, for purposes of the provision enacted in 2007, includes only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity (including a limited partnership or limited liability company). If the business is owned and operated by spouses as co-owners, it will not qualify for the election. There are special rules for married couple state law entities in community property states.[2]

Filing requirements for qualified joint ventures

As a result of utilizing the QJV election each spouse should file a separate Schedule C reporting his or her respective share of the items of the venture. There is no prescribed form for making the election.  The election is deemed made on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between each spouse in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Profit or Loss from Business).

QJV implications for real estate

Now that you have the basics of a QJV, you might be thinking, “isn’t this a real estate blog?”

You’re correct, this is a real estate blog.

If you and your spouse each materially participate as defined under the at-risk and passive activity limitations and you file a joint return for the tax year, you may elect to be taxed as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 Return of Partnership Income, for any year the election is in effect and will instead report the income and deduction directly on your joint return.

To make this election for a rental real estate business, check the “QJV” box on line 2 for each property that is part of the qualified joint venture.

The confusion surrounding a QJV typically arises in non-community property states, including New Jersey and New York, where spouses jointly own interests in an LLC.  The LLC purchases a rental property, which now needs to be reported on a partnership return instead of Schedule E of the individuals’ 1040s. As noted above, the QJV will not apply to a venture that is in the name of a state law entity.

We’ve got your back

If you are considering not filing a partnership return because of the QJV election, you should contact your preparer to review the rules, especially related to rentals owned by LLCs where spouses are the only members.

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.

[1] IRC Section 469(h).

[2] Rev. Proc. 2002-69.

Tax Implications on Sale of a Partnership Interest

Posted by Simon Filip on

In determining gain or loss on sale of a partnership interest, taxpayers are often surprised to find they have a taxable gain.

For income tax purposes gain or loss is the difference between the amount realized and adjusted basis of the partnership interest in the hands of the partner.

Amount Realized

The amount the partner will realize will include any cash and the fair market value of any property received.  Further, if the partnership has liabilities, the amount realized will include the partner’s share of the partnership liabilities. If the partner remains liable for the debt, the amount realized will not include the partner’s share of the liability.Tax Implications on Sale of a Partnership Interest

Examples of Amount Realized:

Example 1 – Sale of Partnership interest with no debt:

Amy is a member in ABC, LLC which has no outstanding liabilities. Amy sells her entire interest to Dave for $30,000 of cash and property that has a fair market value of $70,000. Amy’s amount realized is $100,000.

Example 2 – Sale of partnership interest with partnership debt:

Amy is a member of ABC, LLC and has a $23,000 basis in her interest. Amy’s membership interest is 1/3 of the LLC. When Amy sells her 1/3 interest for $100,000 the partnership has a liability of $9,000. Amy’s amount realized would be $103,000 ($100,000 + ($9,000 x 1/3).

Gain Realized

Generally, a partner selling his partnership interest recognizes capital gain or loss on the sale. The amount of the gain or loss recognized is the difference between the amount realized and the partner’s adjusted tax basis in his partnership interest.

Example 1 (from above)- Sale of Partnership interest with no debt:

Assume Amy’s basis was $40,000. Amy would realize a gain of $60,000 ($100,000 – $40,000).

Example 2 (from above) – Sale of partnership interest with partnership debt:

Amy’s basis was $23,000. Amy would realize a gain of $80,000 ($103,000 realized less $23,000 basis).

Character of Gain

Partnership taxation establishes the general rule that gain on sale a partnership interest receives favorable capital gain treatment.  However, gains attributable to so-called “hot assets,” which include inventory, depreciation recapture, and accounts receivable of a cash basis partnership are taxed at less favorable ordinary income rates.

To the extent that a sale is attributable to the selling partner’s share of the hot assets, the resulting gain or loss is taxed at ordinary income rates. When real estate is sold to the extent the gain on sale is attributable to depreciation deductions, the resulting gain is treated as unrecaptured IRC §1250 section gain. §1250 gain is taxed at a flat 25% rate.

Like-Kind Exchange

It is important to note that in IRC §1031 (like-kind exchange), non-recognition treatment does not apply to exchanges of partnership interests.

We’ve Got Your Back

If you’re selling your partnership interest, we can help you plan the sale so that you pay no more tax than necessary. Contact Simon Filip, the Real Estate Tax Guy, at sfilip@krscpas.com or 201.655.7411 today.

R&D Tax Credits for Food & Beverage Companies

Posted by Sean Faust, CPA on

Certain research expenses can help your food or beverage company save on taxes.

Companies operating in the food and beverage industry are constantly facing increased costs in raw materials, fuel, and regulatory changes while trying to keep pricing competitive and gain market share. Rising costs can be related to research and development (R&D), which include developing new products related to food safety, reducing costs, natural ingredients, dietary guidelines, and sustainable resources.
R&D Tax Credits for Food & Beverage Companies
Luckily, federal and state governments offer R&D tax credits to reduce some of these expenses. The credit allows companies to receive tax breaks on costs associated with technological research performed in the United States. These costs do not have to be the direct cause of a new product or process, but rather activities they already perform.

Activities eligible for R&D credits

Activities that may qualify could fall into numerous categories including food, processes, packaging, and sustainability. A few examples are:

  • Improving taste, texture, or nutritional content of food product formulations
  • Developing techniques that will reduce costs and/or improve product consistency
  • Improving machinery and equipment to ensure safe handling of food
  • Create new packaging to improve shelf life, durability, and/or product integrity
  • Switching to a more environmental friendly packaging
  • Costs associated with being more energy efficient
  • Creating new methods for minimizing contamination, scrap, waste, and spoilage

The credits can be as much as 20 percent of qualified research expenses, which include, but are not limited to, wages, supplies, and contract expenses. Remember, the R&D credit is not a deduction against income, but rather a dollar-for-dollar credit against taxes owed or taxes paid.

There are changes to the tax credits under the new tax law. Prior to the Tax Cuts and Jobs Act (TCJA), the corporate AMT tax rate was 20 percent, regardless of credits or certain deductions. Post-TCJA, AMT tax is eliminated and C Corporations will now be taxed at 21 percent, allowing corporations to take greater advantage of these tax credits. However, one limitation still applies. If a corporation has over $25,000 in regular tax liability, they cannot use R&D tax credits to offset more than 75 percent of their regular tax liability.

Under the TCJA, companies will no longer be able to expense costs that are related to research after 2021. These costs will be capitalized and amortized over a five-year period. Expenses for research activities performed outside the United States would be amortized over a fifteen-year period.

We’ve Got Your Back

As a tax advisor in the food and beverage industry, we ensure that our clients take full advantage of these tax credits. If you would like to learn if your company is eligible for these credits, please contact Sean Faust, CPA of KRS CPAs’ Food and Beverage Practice at 201-655-7411 or sfaust@krscpas.com.

The New Tax Law’s Impact on Law Firms

Posted by Maria T. Rollins on

New tax rules that apply to law firms are complicated

Lakeland Bank Breakfast presentation
Breakfast with Lakeland Bank: The Impact of the Tax Cuts and Jobs Act on Law Firms. Neil Gordon and Ottilia Stura from Lakeland Bank, with Maria Rollins and Jerry Shanker

KRS partner Jerry Shanker and I discussed the impact of the Tax Cuts and Jobs Act on law firms at a Breakfast with Lakeland Bank on June 12.

From working with our law firm clients and associates, we realized that many firms are still scrambling to come to grips with the tax code changes and develop tax planning strategies around them. The attendees at our Lakeland Bank talk had similar concerns.

While many businesses stand to benefit from the tax code overhaul, when it comes to the Act’s impact on law firms and their partners and associates – it can get complicated.

These key provisions of the Act affect law firms and their members:

  • Reduction in individual and corporate income tax rates
  • $10,000 annual limit on deduction of state and local income taxes (SALT). This includes deduction for real estate taxes
  • No deduction for miscellaneous itemized deductions Increased standard deductions
  • Introduction of new Code Section 199A, which provides for a tax deduction of 20% of qualified business income, subject to limitations and exclusions

Free Guide for Law Firms

We’ve summarized several other key changes in the tax code that impact law firms in a downloadable guide, “The Tax Cuts and Jobs Act of 2017 – Considerations for Law Firms.”

TCJA Considerations for Attorneys
Law firms need to develop new tax planning strategies so they don’t pay more tax than necessary under the new tax laws.

If you are a managing partner or executive at your law firm, understanding the factors covered in the Guide will help you and your firm determine the best strategy for optimizing your firm’s and your partners’ tax positions. By downloading this guide, you will learn:

  • How the choice of business entity – C-Corp, S-Corp, or pass-throughs – is impacted by the updated code
  • New rules for specified service businesses
  • Changes that impact entertainment and fringe benefit expenses
  • Code Section 179 changes that impact expense deductions
  • New limitations on business interest and excess business loss
  • Key changes to Section 199A deductions that impact individual W-2 wage earners.

Download the Guide

We’ve got your back

At KRS, we’re working to help our clients understand and navigate the new tax law changes – and those affecting law firms are particularly complicated. Because each law firm’s and individuals’ taxable income and deductions are unique, each individual set of facts and circumstances must be reviewed.  We’re happy to help you with yours. Contact me at mrollins@krscpas.com or 201.655.7411 for an initial consultation.

Estate Tax Implications for Foreign Investors in US Real Estate

Posted by Simon Filip on

Estate taxes for US persons

An estate of a US citizen or resident alien is subject to an estate tax based upon the value of the worldwide property, owned or subject to certain rights or powers by the decedent on the date of death. The estate tax rate for 2018 is 40% for taxable estates in excess of an $11.18 million exemption, which is adjusted annually for inflation.Estate Tax Implications for Foreign Investors in US Real Estate

A US estate may also deduct from the taxable estate a marital deduction equal to the value of property left to a surviving spouse. The amount of lifetime taxable gifts during the decedent’s life is also included in calculating the gross estate.

Non-resident aliens and their estate taxes

While US citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, non-residents (persons who are neither US citizens nor US domiciliaries) are only subject to the US estate tax on property that is situated, or deemed situated, in the United States.

The gross estate of a Non-Resident Alien (“NRA”) includes all tangible and intangible property situated in the US, in which the decedent has an interest at the time of his death or over which he has certain rights or powers.

The taxable estate of an NRA is taxed at rates up to 40% of the value of estate in excess of a $60,000 exemption. Additionally, the estate of an NRA is generally not allowed a marital deduction unless the surviving spouse is a US citizen.

US property included in an NRA’s estate includes US real property owned or under his control and interests in US partnerships (including those holding positions in real property).

It is important to note the US does have estate tax treaties with multiple countries including Canada, France, Germany, Greece, Italy, Japan, and the UK, amongst others. These treaties may provide estate tax relief to residents of treaty jurisdictions.

Non-citizen spouse

When your spouse is not a US citizen, the unlimited marital deduction is unavailable. This is true regardless of whether or not the decedent is an American citizen. The result is the $11.18 million exemption is unavailable and the entire estate transferred to a non-citizen spouse would be subject to estate tax. With advance planning, the non-citizen spouse estate tax implication can be reduced or eliminated.

Planning to reduce estate taxes

There are several structures that will avoid or minimize the US estate tax of a Non-Resident Alien:

  1. The property can be held in the name of a foreign corporation.
  2. The property can be held in an irrevocable trust or a trust whose assets would not be included in the settlor’s gross estate for US estate tax purposes.
  3. The title can be held in a two-tier structure with the property in the name of an American company (US real property Holding Corporation) whose shares are held by an offshore company.

Although these structures are intended to avoid the US estate tax, the structures may result in the unintended consequence of higher taxes on sale, rental income, and, in some jurisdictions, franchise taxes.

We’ve got your back

If you are a Non-Resident Alien, we can help you plan so that your estate pays no more tax than necessary, while avoiding those unintended consequences. Contact Simon Filip, the Real Estate Tax Guy, at sfilip@krscpas.com or 201.655.7411 today.

The Importance of a ‘Paycheck Checkup’

Posted by Maria T. Rollins on

The Importance of a Paycheck CheckupThe Internal Revenue Service is urging taxpayers to do a “paycheck checkup.”

To help understand the implications of the Tax Cuts and Jobs Act, the IRS unveiled several new features to navigate the issues affecting withholding in their paychecks. The effort includes a new series of plain language Tax Tips which detail the importance of reviewing withholding as soon as possible.

The new tax law could affect how much tax you should have your employer withhold from your paycheck. To help with this, taxpayers can use the IRS’ Withholding Calculator. The Withholding Calculator can help prevent you from having too little or too much tax withheld from their paycheck. Having too little tax withheld can mean an unexpected tax bill or potentially a penalty at tax time next year. With the average refund topping $2,800, some taxpayers might prefer less tax withheld up front and receive more in their paychecks.

Individuals can use the Withholding Calculator to estimate their 2018 income tax. The Withholding Calculator compares that estimate to your current tax withholding and can help you decide if you need to change your withholding with your employer.  When using the calculator, it’s helpful to have a completed 2017 tax return available.

Those who need to adjust their withholding must submit a new Form W-4 to their employer. If you need to adjust your withholding, doing so as quickly as possible means there’s more time for tax withholding to take place evenly during the rest of the year. If you wait until later in the year, it could have a bigger impact on each paycheck and your 2018 return.

The Tax Cuts and Jobs Act increased the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions, and changed the tax rates and brackets. Those who should especially check their withholding are:

  • Two-income families
  • People working two or more jobs or who only work for part of the year
  • People with children who claim credits such as the Child Tax Credit
  • People with older dependents, including children age 17 or older
  • People who itemized deductions in 2017
  • People with high incomes and more complex tax returns
  • People with large tax refunds or large tax bills for 2017

We’ve got your back

At KRS, we’re working to help our clients understand and navigate these tax law changes. We strongly encourage all taxpayers to do a paycheck checkup to ensure they’re having the right amount of tax withheld for their unique personal situation. Contact managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 for a complimentary initial consultation.

2018 Pension Plan Limitations Not Affected by Tax Cuts and Jobs Act

Posted by Maria T. Rollins on

2018 Pension Plan Limitations Not Affected by Tax Cuts and Jobs Act

The Internal Revenue Service announced that the Tax Cuts and Jobs Act of 2017 does not affect the tax year 2018 dollar limitations for retirement plans announced in IR 2017-177 and detailed in Notice 2017-64.

The tax law provides dollar limitations on benefits and contributions under qualified retirement plans, and it requires the Treasury Department to annually adjust these limits for cost of living increases. Those adjustments are to be made using procedures that are similar to those used to adjust benefit amounts under the Social Security Act.

As the recently enacted tax legislation made no changes to the section of the tax law limiting benefits and contributions for retirement plans, the qualified retirement plan limitations for tax year 2018 previously announced in the news release and detailed in guidance remain unchanged. This is good news for individuals contributing to their qualified retirement plans.

Cost of living adjustments

The tax law also specifies that contribution limits for IRAs, as well as the income thresholds related to IRAs and the saver’s credit, are to be adjusted for changes in the cost of living using procedures that are used to make cost-of-living adjustments that apply to many of the basic income tax parameters.

Although the new law made changes to how these cost of living adjustments are made, after taking the applicable rounding rules into account, the amounts for 2018 in the news release and the guidance remain unchanged.

We’ve got your back on the new tax code

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Check out the New Tax Law Explained! For Individuals page, then contact KRS managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 to discuss your situation.

What You Need to Know About Individual Tax Extensions

Posted by Simon Filip on

What You Need to Know About Individual Tax ExtensionsBasic Rules for Individuals

For individual taxpayers, the Internal Revenue Service (IRS) grants a six month extension to file your taxes each year as long as you complete Form 4868.

Filing an extension does not remove a taxpayer’s obligation to pay their income tax by April 15th. Taxpayers are expected to pay income tax to the IRS on time or they will be subject to late fees, penalties, and interest. This means taxes owed should be remitted by April 15th, regardless of an extension request.

Taxpayers have a few extra days this filing season. April 15th falls on a Sunday and Emancipation Day in the District of Columbia is observed on April 16th, resulting in a due date of April 17, 2018 for 2017 returns.

The extension allows taxpayers to gather all information needed to file a complete and accurate return without being assessed a late filing penalty. Taxpayers with complicated tax returns and those who have invested in partnerships or S Corporations and do not receive their K-1s until after the original April 15th due date should request extensions. The entities may have extended their own due dates, resulting in returns not being required to file until September 15th, with extensions.

A Federal income tax extension is good for six months, which extends an individual taxpayer’s filing deadline from April 15th to October 15th.

Penalties

Regardless of when an individual files a tax return, if the tax owed is not paid by the original  filing deadline (April 15th for individuals), the IRS will assess penalties.  The IRS will charge 0.5% each month of the amount of tax owed after the deadline.

When a taxpayer fails to file a return by the extension date, the penalty increases to 5 percent per month and subject to a maximum penalty of 25 percent.

State Extensions

The rules on state extensions are similar to those of the Federal. If the taxes are not paid by the original due date, there may be late payment penalties and interest. Some states do not require a separate extension to be filed if there is no tax due. For example, New Jersey grants an automatic extension of 6 months if there is no balance due and a Federal extension is filed. New York, on the other hand, requires an extension filing even if there is not a tax due with the return.

If you’re interested in learning more about how to manage your taxes, contact KRS today for a complimentary initial consultation.