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Plan for Estate tax NOW!

What will happen if a different president is elected? Due to the Trump Administration, the estate tax exemption was increased as of 1/1/2018 – up to $10,000,000 per taxpayer.  This goes up annually and for 2019, the estate tax exemption is $11,400,000.   So, a married couple would get a combined total of $28,000,000.  Any estates above this amount are taxed at a Federal tax rate of 40%.  This is a LARGE amount, and one should seriously focus on utilizing the estate tax exemption before it changes.  The estate tax exemption amount is scheduled to expire at the end of 2025, after which it would be reduced to $5MM per taxpayer. Consider that even though the estate tax exemption is high, it expires AND it could change.  There seems to be more and more conversation about increasing tax on the wealthy, but we also have the United States national debt to consider.  If political parties change in power, there could be a push to increase taxes on the wealthy and thus lower the estate tax exemption.  Recently, the IRS issued the following Proposed Regulation https://www.federalregister.gov/documents/2018/11/23/2018-25538/estate-and-gift-taxes-difference-in-the-basic-exclusion-amount, which explains that if a taxpayer uses the larger estate tax exemption rules and when they die the estate tax exemption is lower, the estate tax calculation will not claw back or recalculate to the lower estate tax at death.  Thus, we recommend that wealthy individuals review using the larger estate tax exemption while it is still law. As always, income tax and estate tax can be very complex and individual taxpayers need to work with their tax adviser to customize an approach that will work for them.  There are many different strategies to consider, and each strategy should be reviewed in detail with the proper professionals. Vertical Advisors is a boutique CPA, Accounting, and Business Advisory firm that focuses primarily on privately held businesses and their owners.

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You may have to pay tax on Social Security benefits

During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed. If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.) Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates. Calculate provisional income To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules: If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed. If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income. If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income. Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket. For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result. Avoid a large tax bill If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax […]

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Cryptocurrency US Tax laws and Foreign Reporting Requirements.

Is Cryptocurrency (i.e. Bitcoin) reportable if held in a foreign jurisdiction under the Foreign Bank and Financial accounts (FBAR) regulations? The quick answer is NOT CURRENTLY.  However, be prepared for possible changes. Ever since the creation of cryptocurrency, income tax and reporting laws have been confusing, changing and a lot of people might not want to accept the laws.  Internal Revenue Service (IRS) Notice 2014-21 stated that the following highlights: Virtual currency may be used to pay for good and services or held for investments but does not have legal tender status in any jurisdiction. Virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency is referred to as “convertible” virtual currency. The sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy has tax consequences that may result in a tax liability. The IRS treats virtual currency as property.  Thus, if property is mined, income should be reported at the FMV of the property less the mining expenses.  A mining operation may trigger income subject to self-employment tax. If virtual currency is received as payment for goods or services, the taxpayer must report the payment based on the FMV. Does a taxpayer have gain or loss upon the exchange of virtual currency for other property?  The IRS says yes. Do payments in virtual currency require information reporting using W-2’s and 1099’s?  Yes, if payment is considered wages or 1099 reportable, then those documents are required. Notice 2014-21 didn’t really take a position on the question about reporting virtual currency in a foreign account, so fortunately there is updated information. Just recently, the AICPA contacted the Treasury Financial Crimes Enforcement Network (FinCEN) to ask if virtual currency in a foreign account would need to be reported on form FATCA and 8938, Statement of Specified Foreign Financial Assets.  FinCEN informed the AICPA that currently, virtual currency held in an offshore account is not reportable pursuant to 31 C.F.R Reg. 1010.50(c).  FinCEN did state that the discussion with IRS on this issue continues to be evaluated. Vertical Advisors, LLP is a boutique accounting and tax firm, that has experience with virtual currency and taxation.  Please contact us if you have additional questions.

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2019 Vehicles, Auto Depreciation Limits, and Amounts

The IRS has released the depreciation deduction amounts which are pursuant to Internal Revenue Code (IRC) Section 280F. This code section discusses the depreciation deduction limits for passenger automobiles (including trucks and vans) first placed in service during 2019. For passenger autos acquired before 9/28/17 and placed in service during 2019, the depreciation limits are $10,100 for the first year ($14,900 with bonus depreciation), $16,100 for the second year, $9,700 for the third year, and $5,760 for each succeeding year. Typically bonus depreciation is taken by default for tax year 2019. If a taxpayer is leasing a car, there are also lease inclusion amounts which is really giving the lease expense a haircut. This is discussed in Rev. Proc. 2019-26. Most small business owners use their auto’s for business. However, one needs to be careful in how they deduct the expense and depreciation of the vehicles. There are also additional considerations for luxury autos, and automobiles that weigh over 6,000 lbs., which allow for larger deductions. Clients often ask us – “is it better to lease or purchase?” The answer is, well, it depends. Here are some quick thoughts. If you drive a lot of miles, say over 12,000 miles a year, you will typically have to pay more or get a penalty for too many miles under a lease. However, if you like to get a new car often, then a lease might work out. Purchasing a car generally allows a business owner to deduct a large amount in the first year using accelerated depreciation, but one still needs to navigate through the depreciation limitations above. However, depreciation for vehicles above 6,000 gross vehicle weight may allow for more. Now, most of this discussion is regarding passenger auto’s and SUV’s, so if you purchase commercial vans or trucks for your business the depreciation rules and deductions are generally much larger as they are viewed as not being passenger autos. Anyway, as one can see there are specific rules and considerations for deducting your vehicle. The IRS doesn’t allow for deductions for personal use, and personal use technically can also include commuting to and from work. So, discuss this topic with your tax advisor and make sure you understand your plan, your deductions and your risk. For passenger autos acquired after 9/27/17 and placed in service during 2019, the depreciation limits are $10,100 for the first year ($18,100 with bonus depreciation), $16,100 for the second year, $9,700 for the third year, and $5,760 for each succeeding year. Also, the IRS has released the lease inclusion amounts for lessees of passenger autos first leased in 2019. Rev. Proc. 2019-26.

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Donating your vehicle to charity may not be a tax-wise decision

You’ve probably seen or heard ads urging you to donate your car to charity. “Make a difference and receive tax savings,” one organization states. But donating a vehicle may not result in a big tax deduction — or any deduction at all. Trade in, sell or donate? Let’s say you’re buying a new car and want to get rid of your old one. Among your options are trading in the vehicle to the dealer, selling it yourself or donating it to charity. If you donate, the tax deduction depends on whether you itemize and what the charity does with the vehicle. For cars worth more than $500, the deduction is the amount for which the charity actually sells the car, if it sells without materially improving it. (This limit includes vans, trucks, boats and airplanes.) Because many charities wind up selling the cars they receive, your donation will probably be limited to the sale price. Furthermore, these sales are often at auction, or even salvage, and typically result in sales below the Kelley Blue Book® value. To further complicate matters, you won’t know the amount of your deduction until the charity sells the car and reports the sale proceeds to you. If the charity uses the car in its operations or materially improves it before selling, your deduction will be based on the car’s fair market value at the time of the donation. In that case, fair market value is usually set according to the Blue Book listings. In these cases, the IRS will accept the Blue Book value or another established used car pricing guide for a car that’s the same make, model, and year, sold in the same area and in the same condition, as the car you donated. In some cases, this value may exceed the amount you could get on a sale. However, if the car is in poor condition, needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide won’t set the car’s value for tax purposes. Instead, you must establish the car’s market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage. You must itemize In any case, you must itemize your deductions to get the tax benefit. You can’t take a deduction for a car donation if you take the standard deduction. Under the Tax Cuts and Jobs Act, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you donate a car to charity, you may not get any tax benefit, because you don’t have enough itemized deductions. If you do donate a vehicle and itemize, be careful to substantiate your deduction. Make sure the charity qualifies for tax deductions. If it sells the car, you’ll need a written acknowledgment from the organization with your name, tax ID number, vehicle ID number, gross proceeds of sale and other information. The […]

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IRS updates rules for personal use of employer-provided vehicles

The IRS recently announced the inflation-adjusted maximum value of an employer-provided vehicle under the vehicle cents-per-mile rule and the fleet-average value rule. Employers can use the rules to value an employee’s personal use of such a vehicle for income and employment tax purposes. The new values reflect vehicle-related amendments in the Tax Cuts and Jobs Act (TCJA) and the IRS’s intent to make the rules more widely available to employers. The IRS is also temporarily loosening some of the consistency requirements for 2018 and 2019. Valuation methods for personal use When an employer provides an employee with a vehicle that’s available for personal use, it must include the value of the personal use in the employee’s income. Employers generally have four methods available to value an employee’s personal use of a company car: General valuation rule. This involves the fair market value (FMV), which is defined as the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle. Commuting valuation rule. This is the amount of each one-way commute, from home to work or from work to home, multiplied by $1.50. (This method’s availability is subject to stringent requirements, including having a written policy limiting the employee’s use to commuting and “de minimis” personal use.) The cents-per-mile rule. Employers can use the business standard mileage rate (58 cents for 2019, less up to 5.5 cents if the employer doesn’t provide fuel) multiplied by the total miles the employee drives the vehicle (including cars, trucks and vans) for personal purposes. The automobile annual lease valuation rule. With this method, employers use the annual lease value of the automobile (including trucks and vans) — as specified by an IRS table that bases annual lease value on an automobile’s FMV — multiplied by the percentage of personal miles out of total miles driven by the employee. This amount also is subject to a fuel adjustment. The fleet-average value rule allows employers operating a fleet of 20 or more qualifying automobiles to use an average annual lease value for every qualifying vehicle in the fleet when applying the automobile annual lease valuation rule. The fleet-average value rule or the simple cents-per-mile rule isn’t available, though, if the FMV of the vehicle exceeds a certain base value, adjusted annually for inflation, on the first date the vehicle is made available to the employee for personal use. In 2017, the maximum value for the cents-per-mile rule was $15,900 for a passenger automobile and $17,800 for a truck or van. The maximum value for the fleet-average value rule that year was $21,100 for a passenger automobile and $23,300 for a truck or van. The role of the TCJA The base values were raised significantly earlier this year, in IRS Notice 2019-08, to reflect amendments made by the TCJA. The law changes the price inflation measure for automobiles (including trucks and vans). It also substantially increases the maximum annual […]

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It’s a good time to check your withholding and make changes, if necessary

Due to the massive changes in the Tax Cuts and Jobs Act (TCJA), the 2019 filing season resulted in surprises. Some filers who have gotten a refund in past years wound up owing money. The IRS reports that the number of refunds paid this year is down from last year — and the average refund is lower. As of May 10, 2019, the IRS paid out 101,590,000 refunds averaging $2,868. This compares with 102,582,000 refunds paid out in 2018 with an average amount of $2,940. Of course, receiving a tax refund shouldn’t necessarily be your goal. It essentially means you’re giving the government an interest-free loan. Law changes and withholding Last year, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the TCJA — including the increase in the standard deduction, suspension of personal exemptions and changes in tax rates. The new tables may have provided the correct amount of tax withholding for some individuals, but they might have caused other taxpayers to not have enough money withheld to pay their ultimate tax liabilities. Conduct a “paycheck checkup” The IRS is cautioning taxpayers to review their tax situations for this year and adjust withholding, if appropriate. The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions. You can access the IRS calculator at https://bit.ly/2aLxK0A. Situations where changes are needed There are a number of situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you: Adjusted your withholding in 2018, especially in the middle or later part of the year, Owed additional tax when you filed your 2018 return, Received a refund that was smaller or larger than expected, Got married or divorced, had a child or adopted one, Purchased a home, or Had changes in income. You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payment is due on Monday, June 17.) We can help Contact us to discuss your specific situation and what you can do to remedy any shortfalls to minimize taxes due, as well as any penalties and interest. We can help you sort through whether or not you need to adjust your withholding. © 2019

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Selling your home? Consider these tax implications

Spring and summer are the optimum seasons for selling a home. And interest rates are currently attractive, so buyers may be out in full force in your area. Freddie Mac reports that the average 30-year fixed mortgage rate was 4.14% during the week of May 2, 2019, while the 15-year mortgage rate was 3.6%. This is down 0.41 and 0.43%, respectively, from a year earlier. But before you contact a realtor to sell your home, you should review the tax considerations. Sellers can exclude some gain If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax. To qualify for the exclusion, you must meet these tests: The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date. The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.) In addition, you can’t use the exclusion more than once every two years. Handling bigger gains What if you’re fortunate enough to have more than $250,000/$500,000 of profit when selling your home? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate. Other tax issues Here are some additional tax considerations when selling a home: Keep track of your basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible. If you’re selling a second home (for example, a vacation home), be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss. Your home is probably your largest investment. So before selling it, make sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have about your situation. © 2019

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Plug in tax savings for electric vehicles

While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.) However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit. Tax credit basics You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify. A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer. The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount. How the phaseout rule works The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020. The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019. Powering forward Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page. Contact us […]

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