Tag Archives: taxes

Tax Reform and Your Taxes

Well, the Tax Cuts and Jobs Act (H.R. 1) has passed, mainly starting in 2018. Are you confused by tax reform and your taxes, and how this new law will impact you? You’re not alone. As has become the norm for Congress, it played brinksmanship and waited to almost the end of the year, in the midst of the holidays, to pass this very extensive tax bill, providing little time for anyone to plan for 2018.

So that you have an idea about how these changes might affect individual taxpayers like yourself, we have put together some of the key points of the new law. As a suggestion, pull out your 2016 federal return and follow along to get a better understanding of these changes. Continue reading

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Gambling With Healthcare Premiums?

Everyone likes to gamble, play the lottery or Bingo every once in a while. Even a recreational gambler, will come across that quirk in the tax law. What quirk you wonder? That glitch that can actually cause you to pay more for your health insurance if you have gambling winnings. Yes, even if the overall result from gambling for the year is actually a loss. How on earth can this be, you wonder?  Continue reading

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Surviving Spouse Estate Tax Exclusion

What is an Estate Tax?

The estate tax is a tax on the transfer of property after a person dies. It consists of an account of everything the decedent owned or had interest in on the date of death. This includes cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. The tax is based on the fair market value of these assets (less certain exclusions). This is generally as of the day the decedent died. Continue reading

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Owe Taxes, Can’t Pay?

owe taxes, can't payDo you owe taxes to the IRS or your state but you do not have the money to pay your taxes? You are not alone.

The IRS wants you to pay the full amount of your tax liability on time. In fact, the IRS imposes significant penalties and interest on late payments if you don’t. Ideally, it is in your best interest to estimate what you may owe and then build that into your family or business budget.  Okay, so you didn’t do that. Continue reading

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Is Your Hobby a For-Profit Endeavor?

2015_07_23 Hobby or business photographer 13113978_071b7938fbWhether an activity is a hobby or a business may not be apparent to the customers of the endeavor. However, distinguishing the difference is necessary for tax purposes. Why? Because the tax treatments are substantially different. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or if it is engaged in as a hobby.

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

This article provides information that is helpful to determine if an activity qualifies as an activity engaged in for profit. It also addresses what limitations apply if the activity was not engaged in for profit.

Is your hobby really an activity engaged in for profit?

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be engaged in for profit if it makes a profit in at least three of the last five tax years. This includes the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Hobby Deductions

If it is determined that your activity is not for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of the three categories:

  • Expenses that a taxpayer would otherwise be allowed to deduct, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that do not result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories.

Do you have questions about your endeavor, if it is a hobby or a business?

If you have questions related to your specific business or hobby circumstances, please give please give Alex a call at 781-848-7200. You are also welcome to leave a comment below or on our Facebook or Google+ page. Either way, Alex can help you sort through the tax treatments for what you do.

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photo credit: diego pablo via photopin (license)

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Winning the Lottery, What is the Best Payment Option?

2015_05_20 Lottery2Did you win the lottery? If you are reading this, I will assume you did. You are asking yourself whether to take the lump sum or the 20 year payout option. Our Weymouth office is on the opposite end of Columbian Street Lottery office so we get more than our fair share of lottery winners around our office. To be fair, most are lost and looking for directions.

Lottery Payment Options

If you won a large sum, say $1M or more, you have the option of taking a lump sum or a 20 to 30 year payout on your winnings depending on the lottery and state involved. I believe Massachusetts offers a 20 year payout. The 20 years are guaranteed so if you die, someone else gets to spend it.

Lump Sum

The pros to the lump sum include a boatload of money right now! The cons are that you won’t get the full prize. You might get 60% of the prize money. In addition, you will be thrown into a higher tax bracket, This means a bigger chunk of money will go to taxes.

Annual Installment

In this case, if you take annual payments, you do not have a boatload of money burning a hole in your pocket. You will eventually receive the full prize. And, you may save a chunk on money on taxes.

Which one is better?

On smaller prizes, say $1M to $3M, you may be better off with the payment option. It is very easy to spend the lump sum of money and paint yourself into a corner financially with a house and grown up toys that are too expensive to maintain. They payment option can provide an income stream for many years after your prize. Additionally, because the annual payments are smaller, they will be likely be taxed at lower rates.

On larger prizes, say greater than $20M, you may be better off with the lump sum. Even the reduced amount is difficult to spend down and should be able to provide an income stream on its own. Because the annual payments are larger, the tax becomes more equalized between the lump sum and the payment options.

I crunched a few numbers on a $2M prize and a $50M prize. I also made the following assumptions: 5% rate of return, $20K spent per year on the small prize and $120K per year spent on the larger prize. On the $2M prize, the payment option is better after year 13. On the $50M prize, the payment option does not catch up until year 16. That being said, the greater the rate of return, the better the lump sum is.

Other Lottery Considerations

How old are you? Remember, you cannot take it with you.

Do you still want to work? Are you working for the weekend, do you have a meaningful career, or would you prefer neither?

How responsible are you? Are you going to make it rain like you are insane in the brain, or would Homer chide you as ‘Boring!’?

Do you have questions about Winning the Lottery?

WorthTax can help you work through all the IRS and State rules. If you have any questions, please call Alex at 781-849-7200 and make an appointment today.

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Bartering and Snowpocalypse 2015

By: Alex Franch, BS EA

bartering, snowpocalypseDo you feel like you are in a Snowpocalypse this year? If this winter keeps going as it has been and Massachusetts grinds to a halt, we might be reminded of a simpler time. Those olde tyme days when we might considering bartering by trading a bushel of wheat for a couple of chickens.

Nowadays, it might instead be agreeing to shovel or snowblow your neighbor’s driveway in exchange for designing a website. Just when you thought Snowpocalypse 2015 could not get any scarier, consider this: that type of exchange is barter income. Bartering is both reportable and taxable.

What is Bartering?

Bartering is an exchange of property or services. You must include the fair market value of the goods or services exchanged as income. Barter income can be taxed in a number of different ways. If you exchange a capital asset, the barter income could be taxed as a capital gain – think classic car for example. If the exchange of services involves your business or profession, it can fall into the self-employment category and thus be subject to Federal Income Tax, payroll taxes, and state taxes. If the exchange falls outside the scope of your typical business or profession, it might be reportable as ‘other income’ on line 21 of the 1040 Form. To learn more you can read IRS Topic 420 – Bartering Income.

Next time you are thinking about clearing out some snow for your 95 year old WW2 veteran neighbor, ask yourself this: Is the IRS watching?

Questions About Bartering and Snowpocalypse?

Did you have a bartering agreement with anyone last year?  If you have questions, thoughts or concerns regarding how to file bartering income, WorthTax can review your taxes for you and advise you what is best for your tax filing status. We guarantee our pricing so you will never pay more than was discussed. Please feel free to contact us, leave your comments below or post to on our FacebookGoogle+ or LinkedIn pages.

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Tax Season is Here!

Time flies! Before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment. Learn about our client discounts here. See our locations.

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