Author Archives: support52

Social Security Changes

Social Security recipients get a 1.3% increase in their benefits in 2021. The earnings test limits are heading up. Individuals who turn 66 next year will not lose any benefits if they earn $50.520 or less before they reach that age.

Individuals who are 62 through 65 by the end of 2021 can make up to $18,960 before they lose any benefits. There is no earnings cap once a beneficiary turns 66.

The Social Security wage base rises next year to $142,800, a $5,100 hike. The Social Security tax rate on employers and employees stays pat at 6.2%. Both will continue to pay the 1.45% Medicare tax on all compensation, with no cap.

Individuals also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers.

The Kiplinger Tax Letter
October 2020

Virtual Currency Tax Update

Covid-19 has stifled the IRS’s enforcement arm. Many of the agency’s audit activities were curbed from mid-March to July 15 because of the pandemic, and the IRS is slowly stepping back into doing exams. But the IRS hasn’t lost focus of its key priorities. On that list are virtual currency transactions. According to the IRS Commissioner Charles Rettig, the IRS remains very active in increasing tax compliance in emerging areas such as virtual currency.

Virtual currency is treated as property for tax purposes. This includes bitcoin and other forms of similar digital representations of value that act as a substitute for real currency. Taxpayers who sell or exchange virtual currency will recognize gain or loss on the transaction. The profit or loss will be capital gain or loss if the bitcoins were held for investment, similar to stocks or bonds. If you held the virtual currency for more than one year before selling or exchanging it, then the capital gain or loss is long-term and subject to preferred tax rules. Otherwise, it is short-term.

Taxpayers who accept bitcoin as pay for service have ordinary income equal to the value in the U.S. dollars on the date of receipt. Your tax basis in bitcoin is that same value. Employers that pay wages with bitcoin or other cryptocurrency report the U.S. dollar value on W-2s. Ditto for businesses that send out 1099 forms.

The IRS issued further guidance on the taxation of virtual currency last year. Among the topics addressed was donating or gifting cryptocurrency, determining tax basis and holding period in virtual currency received for services or the sale of property, and tax consequences when the currency is split into two as a result of certain software changes, commonly referred to as hard fork. Plus tax return reporting. The IRS has a set of FAQ’s on its website with more details.

The Kiplinger Tax Letter
October 2020

Seek Tax Aid for Medical Dependent

Suppose you help support an elderly parent or another qualifying relative. Under the Tax Cuts and Jobs Act (TCJA), you cannot claim a dependency exemption deduction for a dependent relative for 2018-2025. But keep reading.

Pay your dependent qualifying relative’s medical expenses. You can add those expenses to your own medical expenses for the year. For 2020, you can write off as an itemized deduction medical expense to the extent they exceed 7.5% of your adjusted gross income (AGI).

Expenses paid for a dependent qualifying relative could put you over the 7.5%-of-AGI deduction threshold. You must pay over half of your qualifying relative’s support for the year for the relative to be classified for the year as your dependent for itemized medical expense deduction purposes.

Caution: To deduct a dependent qualifying relative’s medical expenses, you must make direct payments to medical service providers. Simply reimbursing your relative for expenses that he or she already paid will not get you any deduction.

Example: For 2020, Mom’s total support is $30,000. You give her $1,500 a month for rent, utilities, and groceries, for a total of $18,000 which exceeds 50% of her $30,000 of support. Mom has $2,000 in medical bills that she intends to pay out of her retirement savings.

Better idea: Pay the $2,000 for Mom. Make payment directly to the medical service providers. If necessary, you can reduce the amount you pay for Mom’s rent, utilities, and groceries for the rest of the year by $2,000. Or not, if you can spare the extra $2,000. Either way, you can add the $2,000 of medical bills paid for Mom to your own medical expenses for the purpose of clearing the 7.5%-of-AGI itemized medical expense deduction threshold on your 2020 Form 1040.

Tip: Mom cannot deduct medical expenses that you pay, but she probably claims the standard deduction instead of itemizing. If so, she would not be able to claim any medical expense write off anyway.

Small Business Tax Strategies
August 2020

Reap Tax Windfall From Your Home

As Dorothy said in the classic film The Wizard of Oz, “there’s no place like home.”

Don’t sleep on the tax breaks associated with home ownership. Not only can you benefit while you are living there, you can reap a tax windfall when you finally sell the place.

Here are six ways to go over the rainbow.

  • Cash in on a home sale. Start with one of the biggest tax breaks on the books. If you meet certain requirements you can pocket hundreds of thousands of dollars from a home sale without paying a penny of federal income tax on your gain. Notably, you must have owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date. The maximum exclusion is $250,000 for single filers and $500,000 for joint filers.

Tip: If you are forced to sell the home due to health reasons, an employment change, or other unforeseen circumstances, you may be in line for a partial exclusion.

  • Max out on property taxes. Prior to the Tax Cuts and Job Acts (TCJA), taxpayers could generally write off the full amount of property taxes paid on a principal residence if they itemized. But the TCJA limits the annual deduction for state and local tax (SALT) payments, including property taxes, to $10,000 for 2018 through 2025. Nevertheless, you still derive some tax benefits, especially if your other SALT payments are relatively low or nonexistent. There is no tax reward if you do not itemize.
  • Key in on mortgage interest. The TCJA also modified the deduction for qualified residence interest for 2018 through 2025. Previously, you could deduct interest on home acquisition debts up to $1 million, but the TCJA lowered the threshold to $750,000 (although debts for pre-December 16, 2017 loans are grandfathered). In addition, the deduction for interest paid on the first $100,000 of home equity debt is generally suspended for 2018-2025. However, if you take out a home equity loan and use the proceeds for a home improvement, it can potentially qualify as home acquisition debt, subject to the $750,000 limit when combined with other home acquisition debt. Voila! You may be able to deduct interest on the home equity loan, subject to the $750,000 limit on home acquisition debt.

Note: As with property taxes, you must itemize to benefit from this technique.

  • Prescribe a medical deduction. Itemizers may be in line for another tax break from home improvements. If you arrange an improvement for a medical reason (e.g., you install a pool to help alleviate a child’s asthma), the cost is added to your other deductible medical expenses (minus the increase in the value to our home). You should have a medical doctor’s note to support the expenditure as necessary. To qualify for an itemized medical expense deduction, your unreimbursed medical expenses must exceed 7.5% of your adjusted gross income (AGI). You can only deduct the excess.
  • Be a landlord. When you own a home used as a rental property, you are entitled to deduct depreciation, plus other expenses related to the rental like insurance, repairs, property taxes, mortgage interest, etc. These deductions can help offset tax on the rental income. Note, however, that special rules apply to a “vacation home” you rent to others and use personally. If your personal use exceeds the greater of 14 days or 10% of the days the home is rented out, you cannot claim a rental tax loss for the year.
  • Do your homework. If you are self-employed and use part of your home for business purposes, you may be eligible for home office deductions. To qualify, you must use the office regularly and exclusively as your principal place of business or a place where you meet or deal with clients, patients, or customers in the normal course of business. Assuming you meet this test, you can write off the allocable portion of expenses like utilities, insurance, and repairs, as well as the expenses directly attributable to the home office.

Small Business Tax Strategies
August 2020

Juice Up Your Company’s FSA Plan

Due to COVID-19 pandemic, many employees have incurred unexpected health and dependent care costs that go far beyond the usual run-of-the-mill expenses.

Give your employees more flexibility. Amend your company’s flexible spending account (FSA) plan to take advantage of liberalized rules.

The IRS has just issued new guidelines for FSAs in 2020. (IRS Notice 2020-29, 5/12/20).

Like a 401(k) plan, an FSA is funded with pre-tax dollars, so there are significant tax savings for employees. Employees direct employers to allocate part of their wages to their accounts, within certain limits, to be used to pay for qualified expenses.

Furthermore, the employer does not have to pay Social Security and Medicare (FICA) taxes or federal unemployment (FUTA) tax on amounts contributed to FSAs. Those benefits may offset some or all the cost of administering the plan. Plus, FSAs are good for employee morale. Result: It’s a win-win for employees and employers.

An FSA can be funded to provide for either healthcare or dependent care expenses. Some companies offer both types of FSAs. Although the rules vary slightly between the two, the basic premise is the same. Distributions paid for qualified expenses – for example, to have LASIK eye surgery or to pay a daycare center – are tax free. But withdrawals made for nonqualified expenses are fully taxable.

The annual contribution limit for a dependent care FSA is $5,000. Note: This figure is not indexed for inflation. Be aware, however, of the “use-it-or-lose-it rule.” If a participant does not empty out his or her account by the end of the plan year, the unused balance is generally forfeited. However, an employer can choose to allow a grace period of as long as 2½ months following the end of the plan year. In other words, the grace period for the 2020 plan year can extend through March 15, 2021, if the plan allows that.

Alternatively, an employer can allow FSA participants to carry over up to $500 of unused funds to the following year. Any excess is forfeited. For example, if an employee carried over $500 from 2019 and used an extra $400 in 2020, he or she loses $100.

An employer can allow the grace period or the carryover, but not both. The employer is not required to allow either.

Generally, an election relating to an FSA must be made before the first day of the plan year and is irrevocable. However, regulations allow for extenuating circumstances. Due to the COVID-19 health crisis, the new IRS notice allows employees participating in an FSA to revoke an election, make a new election or decrease or increase an existing election.

Election changes are usually prospective, but the IRS is allowing employees to benefit from these changes retroactive to January 1, 2020.

In addition, the new notice provides an option for employees to use leftover balances from the 2019 plan year to pay for expenses incurred after March 15, 2020. Finally, the IRS will now index the allowable carryover amount for inflation. The inflation adjusted carryover limit for 2020 is $550. If an employer decides to go along with these changes, it will require significant amendments to the plan.

Small Business Tax Strategies
August 2020

Salvage Tax Break for Property Damage

Does your business have property that has been damaged recently by a natural disaster or vandalism? You don’t have to wait until your company fields its 2020 tax return to obtain tax relief.

Amend your company’s 2019 tax return. Under a special tax code provision you can elect to claim a casualty loss for business property in the tax year before the casualty occurred.

As with casualty loss deductions for personal property, the business property must be located in a federal disaster area to qualify for this election. However, there are no special tax law limits on the deduction amount for business property.

Prior to the Tac Cuts and Jobs Act (TCJA), you could claim losses for either personal or business property for damage that was “sudden, unexpected or unusual.” But the deduction for personal property loss (minus insurance proceeds) was limited to the excess loss above 10% of your adjusted gross income (AGI) after subtracting $100 for each casualty or theft event. In contrast, unreimbursed business property losses were deductible in full.

The TCJA suspends the deduction for personal property losses for 2018 through 2025 except for losses in an area officially declared as a federal disaster area. However, business owners can continue to deduct losses without any limitation.

To speed up recovery of a tax refund, a business owner may make a special election. Normally, you can only claim a casualty loss deduction in the tax year if it suits your needs.

For example, if you own a store in a designated downtown area that was ransacked in June and you’ve already filed your 2019 return, you can amend the return. Or, if you have received a filing extension to October 15, you can claim the loss on your initial 2019 return.

The election is also available to individuals suffering losses in a federal disaster area.

Small Business Tax Strategies
August 2020

6 Steps to Contest Property Taxes

Do you pay an exorbitant amount of property tax on your home? You don’t have to accept the status quo.

First, find out if your city, town, or county is providing relief due to the COVID-19 outbreak. Some have already extended deadlines or made other adjustments. Others are expected to follow.

But that’s not the entire story. Whether or not your city, town, or county provides any relief in 2020, your home may be overvalued, causing you to pay more property tax than you really should. And, with deductions for property taxes strictly limited or nonexistent, depending on your situation, you are even further behind the eight ball.

Fortunately, you can generally appeal a property tax assessment if you have reasonable grounds for doing so. The National Taxpayer Union (NTU), an independent advocacy group, has estimated that about 60% of property in the U.S. is over-assessed. If your appeal is successful, your property tax bill will be reduced.

However, you must move quickly. Usually, you will have 90 days after receiving your current tax bill to initiate an appeal, but in some cases, it is only 30 days. Here are six practical suggestions for completing the process in time.

  1. Verify the dimensions. Examine the property tax notice to see if it overstates your home’s dimensions. If your house has less square footage or fewer rooms than the notice states, chances are it has lower value, too.
  2. Look for mistakes. Some Assessors do not even look at the property. Instead, they compare descriptions of the home with seemingly similar ones in our neighborhood. Even if the numbers are accurate, it’s possible that your home is overvalued. It could be located near a busy highway, or in a flood zone, which lowers its value.
  3. Check the comps.  On the other hand, this is often the easiest way to prove that your home is overvalued. Find assessment numbers on homes like yours – in terms of size, age, and location – from your local assessors’ office or online. Compare at least a half dozen comps to see if most assessed values are lower than yours.
  4. Cut through the red tape. If your assessment seems high for any of those reasons, contact your assessor’s office. Supply them with all the relevant information, including photos, data on comps and so on.
  5. Seek an appeal. Don’t automatically concede if this doesn’t result in a change. You can still lodge a formal appeal with the local assessment board. (Before your appeal, view somebody else’s public hearing, if possible. You will learn how the board works and get a sense of the best arguments.)
  6. Hire a pro. If you don’t have the time or inclination to fight city hall alone, consider hiring a property tax consultant or attorney to do the legwork. Fees may be charged by contingency (e.g., 25%-50% of the amount saved in the first year), by a flat rate or hourly.

Is it worth all the trouble? Probably. Don’t forget that the savings in the first year will compound over time.

Small Business Tax Strategies
August 2020