Category Archives: Tax Deductions

Senate Passes the Tax Bill, What’s Next?

Why is it so important that Senate Passes the Tax Bill?

Tax Cuts and Jobs Act Heads To Reconciliation

So, Senate passes the tax bill. Yes, the Senate GOP finally brought their version of the Tax Cuts and Jobs Act out of committee and before the full Senate. Tax Reform, another name for the bill, passed by a narrow margin of 51-49 down party lines. The only dissenting Republican Senator was Bob Corker of Tennessee, who tweets that he reluctantly cast his vote as “no” over long-term fiscal issues. Continue reading

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Early Year-End Tax Planning To Take Advantage Of Possible Tax Reform

Wouldn’t you like to know about early year-end tax planning to take advantage of possible tax reform?

So, why do we think early tax planning is appropriate this year? Actually, with the prospect of major tax reform on the horizon, some strategies can be put into place before the end of the year that can substantially reduce your 2017 tax bill. That would be nice.

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Year-End Tax Strategy: Do You Have One?

Year-End is Just Around the Corner, Do You Have a Year-End Tax Strategy?

Do you have a year-end tax strategy? Year-end and the holidays are just around the corner. It is time to think about what you can do at the last-minute to improve your tax situation. Year-end tax planning is probably something you will want to deal with before the holiday season crush. Here are some tax tips and a year-end tax strategy to help you. Continue reading

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Alternative Minimum Tax

When looking over your tax return, do you notice an amount on line 45? That amount is because you are subject to the alternative minimum tax. The Alternative Minimum Tax or AMT is an income tax that does not allow some of the tax preferences and deductions that regular tax computation allows. Basically, a punitive tax. When an AMT computation results in a higher tax, the higher tax applies. The additional tax from the Alternative Minimum Tax is added on line 45 of your return. Continue reading

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Are Olympic Champs Taxed?

Have you been following the Olympic Games? It is amazing the skill these athletes have. And, kudos to Michael Phelps for breaking a 2000 year old plus record! If you haven’t heard, the record that Michael Phelps broke is 2,168 years old to be exact. Think of him as breaking records from all the way back to 152BC. Continue reading

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Made a Tax Mistake? File an Amended Tax Return

Did you forget something when you filed your tax return? Maybe overlooked something? Alimony income? Tip Income? Maybe another item of income? Maybe you forgot to claim a deduction or credit? It’s not too late! The good news! File an amended tax return. Continue reading

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Mortgage Interest Deductible or Not?

house-186400_640Mortgage Interest and Home Mortgage Tax Deduction is not all it may seem. One of the current IRS audit initiatives is checking to see if taxpayers are deducting too much home equity debt interest. Taxpayers are allowed to deduct the interest on up to $1 million of home acquisition debt. This debt includes debt incurred to make improvements, but not repairs. It also includes the interest on up to $100,000 of home equity debt. Equity debt is debt not incurred to acquire or improve the home. Taxpayers often exceed the equity debt limit. They fail to adjust their interest deduction accordingly.

The best way to explain this interest deduction limitation is by example. Let’s assume you have never refinanced the original loan that was used to purchase your home, and the current principal balance of that acquisition debt is less than $1 million. However, you also have a line of credit on the home. The debt on that line of credit is treated as equity debt. If the balance on that line of credit is $120,000, then you have exceeded the equity debt limitation. This debt is only 83.33% ($100,000/$120,000) of the equity line interest. It is deductible as home mortgage interest on Schedule A. The balance is not deductible unless you can trace the use of the excess debt to either investment or business use. If traceable to investments, the interest you pay on the amount traceable would be deductible as investment interest. This is deducted on Schedule A but is limited to an amount equal to your net investment income (investment income less investment expenses). If the excess debt was used for business, you could deduct the interest on that excess debt on the appropriate business schedule.

Secured or Not Secured

On the other hand, the IRS allows you to elect to treat the equity line debt as “not secured.”. This allows the interest on the entire equity debt to be traced to its use, as well as, if it was deducted on the appropriate schedule. For instance, you borrow from the equity line for a down payment on a rental. If you make the “not secured” election. The interest on the amount borrowed for the rental down payment would be deductible on the Schedule E rental income and expense schedule. But it would not be subject to the home equity debt limitations.

However, one of the rules that allows home mortgage interest to be deductible is it must be secured by the home. If the unsecured election is used, none of the interest can be traced back to the home itself. What if the equity line was used partly for the rental down payment and partially for personal reasons? The interest associated with the personal portion of the loan would not be deductible since you elected to treat it as not secured by your home.

Using the unsecured election can have unexpected results in the current year and in the future. You should use that election only after consulting with this office. We admit, it can get confusing for people who are not familiar with the complicated rules associated with home mortgage interest. They may think that the interest shown on the Form 1098, issued by their lenders at the end of the year, is fully deductible. In many cases, when taxpayers have refinanced or have equity loans, that may be far from the truth. It could result in an IRS inquiry and potential multi-year adjustments. In fact, for Forms 1098 issued after 2016 (thus effective for 2016 information), the IRS will require lenders to include additional information, including:

1) the amount of the outstanding mortgage principal as of the beginning of the calendar year,
2) the mortgage origination date, and
3) the address of the property securing the mortgage

This information will provide the IRS additional tools for audits.

When in doubt about mortgage interest rules, ask:

When in doubt about how much interest you can deduct.  Or, if you have questions about how refinancing. Or, questions about taking on additional home mortgage debt and how it will impact your taxes? Please call Alex for assistance.

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Are Legal Fees Tax Deductible? Part 1

unpaid debt, debt, delinquent debt, past due debt, legal fees, Often the question comes up are legal fees deductible? The answer to that question can be both yes and no. It’s complicated and depends on the nature of the legal expense. This two part blog will discuss:

  • Legal Fees Associated With Personal, Living, or Family Issues
  • Legal Fees Associated With Business and the Production of Taxable Income
  • Examples of Legal Fees and Their Deductibility
  • The Tax Benefit of Legal Fee Deductions
  • What does the Internal Revenue Code say About Legal Fees?

The Internal Revenue Code (IRC) is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created. The IRC tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses. The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year:

  • For the production or collection of taxable income;
  • For the management, conservation, or maintenance of property held for the production of income; or
  • In connection with the determination, collection, or refund of any tax.

IRC Provisions for Legal Fees

Applying those IRC provisions will allow you to determine whether a legal expense you have incurred is deductible or not. The application can sometimes be complicated. It must take into account the Internal Revenue Service’s (IRS’s) interpretation of the law through rulings and regulations as well as the courts’ opinions on all of the above. Here are some situations that may involve legal expenses to be paid and how they should be handled:

Divorce – Legal costs, such as attorney fees and court costs, connected with divorce, separation, or support are non-deductible personal expenses. Non-deductible extends to legal fees incurred in disputes over money claims. However, legal and accounting fees paid for tax advice in connection with the divorce are deductible. This is provided the amounts for those services are clearly marked on the legal firm’s billings.

Taxable Alimony – The part of legal fees that qualify as producing taxable alimony is deductible by the person who receives the alimony. The attorney’s statement or invoice should stipulate what part of the fee relates to alimony. This ensures a deduction for the alimony recipient. Legal fees paid by the payer of the alimony are not deductible. Because child support payments are not taxable, fees paid to get those payments are not deductible.

Damages for Personal Injury or Sickness – In some cases, damages for personal injury or sickness can be excluded from income. Thus, the legal fees paid to secure such income are not deductible if the damage award is not taxable. However, to the extent that the damage award is taxable or accrued interest is paid on the settlement funds, the legal fees are deductible. Where the funds are partially taxable and partially excludable, the legal expenses have to be prorated in the same ratio as the income is.

Relating to Insurance Proceeds – Legal fees to collect on a claim related to a taxpayer’s business are currently deductible. Legal fees related to a personal loss are not deductible. However, where a loss is associated with a capital asset, such as a taxpayer’s personal home, the related expenses can be added to the home’s tax basis. This means that they can be used to offset any taxable gain in the future.

Producing or Collecting Taxable Income – Attorney fees, court costs, and similar expenses are deductible if incurred during the production or collection of taxable income. A reasonably close connection must exist between the legal expense and the production or collection of the taxable income.

Will and Trust Document Preparation – The cost of legal fees for preparing a will is considered a personal expense that is not deductible. In most cases, the legal cost of creating a living trust is similarly treated as a personal, nondeductible expense. However, if the attorney who prepares the trust on the billing statement the amount of the fee that is for tax planning or tax advice, the tax-related portion of the fee is deductible.

In our next blog, Part 2, we will talk about more business-related issues with debt. In the meanwhile, if you have any questions, you can call Alex Franch, BS EA  at 781-849-7200.

 

 

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Does Uncle Sam Have a Birthday Gift for You This Year? Ages 50+

birthday, surprises, giftsIn our last post we talked about, ages 0-49 birthday surprises from Uncle Sam. This week, ages 50 and up get to discover their birthday gifts or surprises from the IRS when you file your tax return next tax season. As we mentioned, in some situations the gift may not be because you reached a certain age, but will be the result of the age your dependent(s) or spouse turned this year. Unfortunately, not all of Uncle Sam’s gifts will be welcomed on this birthday, because some birthdays mark the end of eligibility for certain credits or exclusions of income. Others signal the start of needing to include retirement benefits in income.

A Birthday Over 50

Age 50 – Are you a qualified public safety employee, such as a police officer or fireman who separates from service after age 50? Did you take a distribution from your government employer’s defined benefit pension plan? You should know that the 10% early withdrawal penalty will not apply.

Age 55 – If you take a distribution from your employer’s qualified retirement plan after separation from service in or after the year you reach age 55, the distribution is not subject to the 10% penalty that usually applies when distributions are taken before age 59-1/2. To qualify for this exception to the penalty, you must be age 55 or older, and then separate from employment. This provision does not apply to IRAs.

Age 59-1/2 – The half birthday is just as important to pay attention to. Once you have reached age 59-1/2, distributions from your qualified retirement plans and traditional IRAs are no longer considered to be early distributions. Therefore, the distributions are not subject to the 10% early withdrawal penalty. However, in most cases, all of the distribution amount is included as your income and will be taxed.

Age 62 – Many individuals opt to start receiving their Social Security benefits on this birthday. The benefit will be at a reduced amount than if they had waited until they reached full retirement age. Full retirement is when they first become eligible to receive the payments, generally at age 62. If this is your first year for collecting SS benefits, whether at age 62 or another age, you may be surprised to learn that part of the benefits may be taxable. Depending on your other income and filing status, 50% to 85% of the benefits may be taxable.

Age 65 – As mentioned above, starting with the year you reach age 65, you are eligible for an additional standard deduction amount. For 2015, the extra amount is $1,550 for a taxpayer filing as single or head of household or $1,250 for those filing married joint, married separate or a qualifying widow or widower. There is no extra deduction if you itemize your deductions. If you file a joint return for you and your spouse, if he or she is also age 65 or older, you are each allowed the additional amount.

Through 2016, if you itemize deductions and either you or your spouse, filing a joint return, and you are age 65 by the end of the year, you need to reduce your medical expenses by only 7.5% of adjusted gross income. This is instead of the 10% reduction rate that applies to other taxpayers. If you are subject to the alternative minimum tax, only medical expenses exceeding 10% of your regular AGI are deductible for the AMT computation.

If you have been claiming the earned income credit without having a dependent child, you will no longer be eligible for the credit starting in the year you turn 65.

Contributions to a health savings account (HSA) are not permitted once you are entitled to benefits under Medicare. This means you are eligible for and have enrolled in Medicare. Most individuals become Medicare eligible and enroll at age 65. Contributions to the HSA may continue until the month you are actually enrolled in Medicare.

Age 70-1/2 – Remember that half birthday comment above? If you turned 70-1/2 in 2015, distributions from your traditional IRA must begin by April 1, 2016. Otherwise, a minimum distribution penalty can apply. You must continue to take distributions annually. Not only must you take distributions after turning 70-1/2, the law specifies how the minimum distribution is to be calculated. You may take a larger distribution, but the amount in excess of the required minimum distribution amount cannot be used to reduce future required distributions. You are considered age 70-1/2 on the date that is 6 calendar months after the 70th anniversary of your birth.

In general, if you are or were an employee whose employer has a qualified plan, distributions from the qualified plan must begin no later than April 1 of the year following the year in which you reach age 70-1/2 or (except if you are a 5 percent owner), if later, you retire. This “retirement, if later” exception does not apply to IRAs.

If you were required to take your first distribution in 2015 but delay the withdrawal until April 1 of 2016, you will then have two distributions to include in your 2016 income, since the regular 2016 distribution must be taken by December 31 of that year. You cannot make a contribution to a traditional IRA for the year in which you reach age 70 1/2 or for any later year. Contributions to Roth IRAs, however, are allowed regardless of age on your birthday, provided you have wages, self-employment income or alimony income.

Are you Celebrating a Birthday Milestone?

If you or a member of your tax family celebrated a milestone birthday (or half-birthday) this year and you have questions as to how the tax implications of that event will affect your return, please give Alex Franch, BS EA  a call at 781-849-7200.

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