Source: https://www.diversifiedassetmanagement.com/blog/tag/tax+deductions
Timestamp: 2019-07-16 09:21:37
Document Index: 432642359

Matched Legal Cases: ['§1031', '§1031', '§1031', '§1031', '§1031', '§501', '§1031']

tax deductions — Blog — Diversified Asset Management
1031 and Done: The Collector’s Curse
Changes in the rules for personal property under §1031 will limit many collectors, but those changes don’t mean all sellers now have to realize tax on their sales.
The Federal long-term capital gains tax rate for real property is 20 percent, but it’s 28 percent for tangible personal property.
Add state income tax and the loss of itemized deductions for most tax payers, selling collectibles just got much more onerous….but you still have options.
The landmark 2017 Tax Cut and Jobs Act contains sweeping changes to the entire tax system. Corporate, personal and estate taxes have been revamped entirely. Taxpayers and their CPAs are scrambling to adapt to the new rules. Simply understanding the changes and working through the variations of scenarios as they play out is a monumental chore. One important change that’s not attracting much attention, despite its potentially significant impact, are the revisions to §1031. This code section refers to “like kind” exchanges of property.
Essentially, a properly executed §1031 exchange allowed a property owner to defer the recognition of a gain until the property that it was exchanged for was ultimately sold. For many investors, like kind exchanges have been a very smart method for swapping their way to significant gains by delaying the taxes the owe. In the past, like kind included both real property and personal property. While the majority of the value of §1031 exchanges were in real property, those who collect valuable assets such as fine art, collector automobiles and antiques also utilized the §1031 exchange to enhance their collections. And, while the Federal long-term capital gains tax rate for real property is 20 percent, for tangible personal property it is 28 percent. Add state income tax and the loss of itemized deductions for most tax payers, selling collectibles just got much more onerous.
Certainly, collectors are passionate about their collections and often buy or sell in the heat of the moment. While this may be necessary at times, there are still planning considerations that can be implemented, especially before a planned sale. First, there are several charitable techniques that could be considered. One option is a Flip Charitable Remainder Unitrust (Flip CRT). With this technique, the owner creates a special trust and transfers his or her collectible to the trust prior to any sales transaction taking place. The trust then sells the asset and receives cash from the sale. At the time of the sale the donor will receive a charitable income tax deduction based on a number of factors: The donor’s age, the payout rate of the trust, the cost basis of the asset transferred and several other technical factors.
Note, with personal property donated to these types of trusts the income tax charitable deduction is limited by what the owner paid for the item (cost basis) [ }not its fair market value (what it sells for). Further, the deduction for personal property is limited to 30 percent of the donor’s Adjusted Gross Income (AGI) in any given year. However, any unused deduction is available to be carried over for five additional years until it is fully utilized. In this transfer, there is no capital gains tax realized at the time of the sale. However, the donor no longer has access to the cash or the asset but rather will receive and income stream for life based on the what the property sold for and how the trust payout is structured.
Yet another opportunity for tax savings is the “young” Pooled Income Fund (PIF). Similar to the aforementioned Flip CRT, a PIF is a vehicle for avoiding the capital gains tax on the sale of personal property while creating a charitable income tax deduction. Unlike the Flip CRT, the PIF must be established and maintained by a public charity recognized under §501(c )(3). So, it is important to identify the charity that will cooperate with this complexity. One of the major advantages of the PIF strategy is the size of the charitable income tax deduction, which in most cases is many times larger than can be accomplished via a CRT.
The reasons for this are many and unnecessary to explain here. Just know that since the deduction is likely to be much larger, there is more planning flexibility. Consider, for example, that it might be possible to contribute only 50 percent of the asset or less, and still receive enough deduction to make it worthy of consideration. Indeed, with good planning, it may be possible to leave an income stream for the next generation after the donor is deceased--all while avoiding the long term capital gains tax completely.
Ultimately, money left in the CRT or the PIF will transfer to charity, so make sure you and your advisor do some analysis before entering into either of these arrangements. An additional, non-charitable strategy is the monetized installment sale. While not widely known, a monetized installment sale allows the seller to sell and defer taxes for 30 years while receiving more than 90 percent of the sales proceeds. Unlike the aforementioned charitable strategies, the monetized installment sale can take place even after an agreement to sell has been negotiated and agreed to--something that’s prohibited with charitable planning. And while there is no income tax deduction available, the seller does retain the funds for personal use.
While changes in the rules for personal property under §1031 will limit many collectors, they don’t mean that all sellers will now have to realize tax on sales. For those who own their collectibles for more than a year, the long term capital gains tax can be deferred or eliminated. To do so simply requires different planning and well informed advisors.
Tagged: tax deductions, tax basis, tax benefits, investment mistakes, investing
Small Business Owners, Retirement, Wealth Management
Maximizing Small-Business Tax Deductions
How small-business owners can take advantage of Section 199A
The Tax Cuts and Jobs Act (TCJA) passed in December 2017 offers a wealth of opportunities to small-business owners. Among the most notable provisions is Section 199A, which provides for qualified business income (QBI) deductions. These deductions are available to taxpayers who are not corporations, including S corporations, partnerships, sole proprietorships and rental properties.
While Section 199A provides a huge tax break for small-business owners, determining who is qualified can be complicated. In addition to eligibility requirements, there are income thresholds after which deductions are phased out. Here’s a look at who is eligible to use Section 199A, as well as strategies business owners above phase-out thresholds can use to recapture QBI deductions.
In general, small-business owners may qualify for QBI deductions if they meet one of the following criteria:
No matter the type of business, if a business owner’s taxable income falls below $157,500 for single filers or $315,000 for joint filers, that business owner is eligible for a QBI deduction. That deduction is equal to the smaller of 20% of their qualified business income or 20% or their taxable income.
Businesses that offer specified service—such as lawyers, accountants, athletes, financial services, consultants, doctors, performing artists, and others with jobs based on reputation or skill—may have deductions phased out if they make too much money. If your income is above $207,500 for single filers or $415,000 for joint filers, you can no longer claim the QBI deduction.
If you own a business that is not a service business or a specialized trade, the QBI deduction is partially phased out if your taxable income is above $157,500 for single filers or $315,000 for joint filers. The deduction is limited to the lesser of either 20% of qualified business income or the greater of the following: 50% of W-2 wages paid, or the sum of 25% of W-2 wages paid by the business generating the income plus 2.5% times the cost of depreciable assets
If your income is above the phase-out limits, you can preserve your full deduction by making smart use of retirement plans. Here’s a look at a few examples of ways to strategically employ retirement plans to reduce your income and recapture a QBI deduction:
Example 1: A couple, age 50, with a specified service business
A couple, each 50 years old, has a specific service business in the form of an S corp that pays W-2 wages of $146,000 and pass-through income of $254,000, for a total income of $400,000. The couple claims the standard deduction of $24,000, making their adjusted gross income $376,000. Because of their high earnings, the couple’s QBI deduction is only $19,812 due to QBI phase-outs. Their total income is $356,188.
The couple can capture their full QBI deduction by setting up and funding a 401(k) plan. They can set up an individual 401(k) plan, deferring $24,500 as an employee contribution and contributing 25% of salary, or $36,500, as a profit sharing contribution. The deferral and profit sharing max out their individual 401(k) plan with a total contribution of $61,000. In this way, their W-2 wages are reduced to $121,500, and their pass-through income is reduced to $217,500 after the profit sharing contribution. Their total income after the standard deduction is $315,000.
As a result, the couple can claim their full QBI deduction of $43,500 (20% of 217,500), and their income is now $271,500. With a $61,000 contribution to a 401(k), the couple was able to effectively reduce their income by $84,688. In other words, this couple was able to get 1.39 times the income reduction for every dollar they contributed to a retirement plan.
Example 2: A couple, age 55, with a higher-income specified service business,
Business owners who earn higher income may need to deploy additional retirement plans to capture their QBI deduction. Consider an S corp that pays W-2 wages of $146,000 to the couple, and pass-through income of $317,500 for a total income of $463,500. They claim the standard deduction of $24,000 and their adjusted gross income becomes $439,500. The couple does not receive a QBI deduction because their high income results in a complete phase-out. Their total income therefore remains $439,500.
However, this couple can still take advantage of a QBI deduction by setting up an individual 401(k) plan and deferring $24,500 as an employee contribution. They also can add a defined benefit (DB) plan or a cash balance (CB) plan and contribute even more to a retirement plan. Suppose they set up a DB or a CB plan and the actuaries calculated they could contribute $100,000 to the plan for a total combined contribution of $124,500. In this case, their W-2 wages are reduced to $121,500 and their pass thru income is $217,500.
The couple’s total income after the standard deduction is $315,000. Their QBI deduction is $43,500 (20% of $217,500) and their income is now $271,500. With $124,500 in contributions to their individual 401(k) plan and DB or CB plan the couple received a $168,000 income reduction. This couple was able to get 1.35 times of income reduction for every dollar they contributed to a retirement plan.
This material is for educational purposes and is not intended to provide tax advice. Talk to your tax professional to find out how QBI deductions may apply to your financial situation.
To learn more about how to maximize your QBI deduction, please email us at rpyle@diversifiedassetmanagement.com or call (303) 440-2906.
Tagged: small business, tax deductions, Retirement, business owner, CEG, DB Plans, defined benefit plan, 199A
Here is a nice article provided by Kevin McCormally of Kiplinger:
If you're not sure what your basis is, ask the fund for help. Funds often report to investors the tax basis of shares redeemed during the year. I n fact, for the sale of shares purchased in 2012 and later years, funds must report the basis to investors and to the IRS.
3. Out-of-Pocket Charitable Deductions
Gen erally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child's student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest paid by Mom and Dad each year. And he or she doesn't have to itemize to use this money-saver. (Mom and Dad can't claim the interest deduction even though they actually foot the bill because they are not liable for the debt.)
If you're among the millions of unemployed Americans who were looking for a job in 2016, we hope you were successful . . . and that you kept track of your job-search expenses or can reconstruct them. If you were looking for a position in the same line of work as your current or most recent job, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Qu alifying expenses can be written off even if you didn't land a new job. But such expenses can be deducted only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. (Job-hunting expenses incurred while looking for your first job don't qualify.) Deductible costs include, but aren't limited to:
For 2016 travel, the rate is 54 cents a mile, plus what you paid for parking fees and tolls. You may claim this deduction even if you use the sta ndard deduction rather than itemizing. (The rate falls to 53.5 cents a mile for 2017 travel.)
9. Child-Care Credit
You can't double dip. Expenses paid through a plan can't also be used to generate the tax credit. Bu t get this: Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. That would cut your tax bill by at least $200.
Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $40,000 to the estate-tax bill. You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If y ou withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28% bracket.
But how do you do it? There's no line on the Form 1040 labeled “jury fees.” Instead, the write-off goes on line 36, which purports to be f or simply totaling up deductions that get their own lines. Include your jury fees with your other write-offs and write "jury pay" on the dotted line.
If the credit exceeds your tax liability, it can trigger a refund. (Most credits are “nonrefundable,” meaning they can reduce your tax to $0, but not get you a chec k from the IRS.)
16. Those Blasted Baggage Fees
Airlines seem to revel in driving travelers batty with extra fees fo r baggage, online booking and for changing travel plans. Such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you're self-employed and traveling on business, be sure to add those costs to your deductible travel expenses.
Your 2016 return is the last chance to claim a tax credit for installing energy-efficient windows or making similar energy-saving home improvements. You can claim up to $500 in total tax credits for eligible improvements, based on 10% of the purchase cost (not installation) of certain insulation, windows, doors and skylights. The credit is subject to a lifetime cap, so if you’ve already pocketed the max, you’re out of luck. But there’s no such limit on the much more powerful incentive for those who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbi nes in 2016. Your credit can be 30% of the total cost (including labor) of such systems.
18. Bonus Depreciation ... And Beefed-Up Expensing
There are several exceptions to the penalty, including a little-known one that can protect taxpayers age 62 and older in the year they retire and the following year. You can request a waiver of the penalty—using Form 2210—if you have reasonable cause, such a s not realizing you had to shift to estimated tax payments after a lifetime of meeting your obligation via withholding from your paychecks.
Since alimony i s taxable income, you can deduct the part of the lawyer’s fee that is attributable to setting the amount. You can also deduct the portion of the fee that is attributable to tax advice. You must itemize to get any tax savings here, and these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Still, be sure your attorney provides a detailed statement that breaks down his fee so you can tell how much of it may qualify for a tax-saving deduction.
23. Don’t Unnecessarily Report a State Income Tax Refund
Even if you did i temize, part of it might be tax-free. It’s taxable only to the extent that your deduction of state income taxes the previous year actually saved you money. If you would have itemized (rather than taking the standard deduction) even without your state tax deduction, then 100% of your refund is taxable—since 100% of your write-off reduced your taxable income. But, if part of the state tax write-off is what pushed you over the standard deduction threshold, then part of the refund is tax-free. Don’t report any more than you have to.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up o r individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
Tagged: tax deductions, tax breaks, Uncle Sam, tax basis, tax savings