Bonnie Lee explains a 1031 Exchange in the Realized article “Is a Reverse 1031 Exchange Right For You?”. Check it out!
Taxpertise: Bonnie Lee, E.A.
Bonnie Lee explains a 1031 Exchange in the Realized article “Is a Reverse 1031 Exchange Right For You?”. Check it out!
I received the following question:
Bonnie the news outlets are reporting that Trump may have gotten away with not paying taxes for 18 years. Is this a loophole or the IRS not doing there (sic) job?
Some Facts About Hilary’s 2015 Income Tax Return:
Hilary Clinton has made public her income tax returns. I’ve reviewed her 2015 income tax return which is filed jointly with her husband Bill Clinton. The Clinton’s derived most of their income from self-employment activities – speech making and book sales. Only a modest amount of income was earned from passive activities – interest. No dividends or capital gains. Therefore, they did not have the advantage of the capital gains rate. In fact, due to having to also pay the self-employment tax, their effective tax rate was 35.2%.
Income: Total income for the year is $28,336,212 and is comprised of:
Deductions: The Clintons filed Schedule A with their income tax return claiming itemized deductions of $5,159,242, rather than taking the standard deduction. The deductions claimed were:
Please note: I am neither endorsing or denouncing any Presidential candidate. I am simply attempting to explain the implications of their promises about tax reform.
Donald Trump has sketched out a tax plan that he promises “will reduce taxes for everyone.” Individual rates will be trimmed to three brackets: 12%, 25%, and 33% replacing the seven current rates of 10%, 15%, 25%, 28%, 33%, and 39.6%. According to his plan, those in the lowest bracket will pay an additional 2 points or 20% while those in the highest bracket will enjoy a reduction of 6.6 points or a decrease of 18%. This is hardly a reduction “for everyone.” It appears the top one percent will benefit rather than those in the middle or lower income levels.
At the top of the list was the eye-catching promise to reduce corporate rates to 15%. Interesting. Only three points higher than the projected lowest rate for low income individuals. And the same basic rate (although thanks to Obama it could be at 20% depending on various factors) for capital gains. Capital gains tax is levied on stock and other asset profits, interest, and dividends, which is the main form of income for the wealthy. This is why Romney as well as many others in the top one percent enjoy an effective tax rate of only 13.6%.
Hardly seems fair does it?
Well, Trump believes a 15% corporate tax rate will stimulate the economy. Trickle down and all that. But historically, tax breaks for big business have only increased the gap between the top one percent and the lower income classes. Think about it; are you feeling the trickle down?
‘Stimulating investment’ by lowering taxes for the wealthy is the mantra of the wealthy. Does anyone really buy this? I’m no economist, just a lowly tax professional, but c’mon, common sense dictates that tax considerations are not the chief motivating factor in making investment decisions. The primary consideration is “Am I going to make money off this venture?” Tax implications come into play only when projecting net gain or loss. Let’s face it; the rich will always be investors. The tax rate is not the end-all for making that choice. What else are they going to do with their money? Sit on it? Only a few eccentrics will choose to hide their money in a mattress or stick it in a low paying bank account. The rest will play the stock market, develop real estate, buy bonds, become part of the Shark Tank, going for the bigger returns. If these investors make a hundred thousand dollar profit, they will pay taxes on it. Why should they enjoy paying a mere 15% on that profit while every other American making the same amount or less working for the man pays their taxes at a much higher rate?
Ultimately, it is Congress, not the President that determines changes to or creation of tax law.
Perhaps Congress should consider eliminating the capital gains tax rate and charge those profits according to the tax brackets for ordinary income. Perhaps they should leave corporate taxes at a max rate of 35% and get rid of corporate loopholes that allow larger corporations to pay zero. And maybe Congress should lower the tax rates for the middle class who seem to bear the brunt of the tax obligation. Maybe it should be our turn. Shall we call it the “trickle up” effect?
Happy New Year! We extend our best wishes to you for a healthy, happy, and prosperous New Year.
Tax season is here! The IRS has already begun accepting electronically filed tax returns for corporations and partnerships. On Tuesday, January 19th they will begin accepting electronic filing of individual income tax returns. When calling for pricing, make sure you provide a complete listing of the schedules we prepared for you to get an accurate comparison. This listing is available on our invoice.
The tax extenders bill passed legislation in December resulting in $650 billion in tax savings. More than 50 tax extenders were approved, 22 of which were made permanent. Permanency of a tax law is a good thing! It takes the guesswork out of year end tax planning, as these extenders are always left to December for renewal. Some of the more common extenders that may apply to your situation include:
Low Income: California has passed a bill to provide an earned income tax credit for low income individuals with children.
Five tax incentives for charitable giving are in the bill, including a provision that allows individuals that are at least 70.5 years old to exclude distributions to charities from their Individual Retirement Accounts. This will be helpful for you if you do not itemize deductions. Contact us for more details.
A number of business tax breaks are extended without an expiration date, including the research and development tax credit, the increased maximum amount that businesses can immediately expense for property described in section 179 of the tax code, which is increased to $500,000. This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2015, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2015.
The due date for filing returns is moved to April 18 this year. If you cannot meet the deadline, contact us to file an extension for you. REMEMBER: an extension is only an extension of time to file, not time to pay. If you anticipate owing taxes, you must pay them with the extension form by April 18.
If you have questions about any tax issues, please give us a call.
The holiday season is upon us but before you go into party mode, sit back a moment and reflect upon your year. Financially, that is. Especially if you encountered a lot of financial changes – lost a job, got a new job, bought a house, sold a house, moved, got married or divorced, had a baby, went back to school, took an early distribution from a retirement plan, started a business or closed a business – then you need to crunch those numbers and see what kind of tax liability has been created. After all, better to know now than have that deer-in-the-headlights look in your eyes next April 15. And because the year isn’t over, you may likely counter some of the damage with additional tax planning to staunch the bleeding.
And who knows? After compiling your data, you may be pleasantly surprised. Maybe a financial event has gone in your favor tax-wise and you may be anticipating a refund.
Whatever the case, a projection of your anticipated liability is in order which may involve a visit to your tax pro. A review of your numbers might elicit some excellent advice for warding off the tax man and minimizing your tax liability.
Some things to consider:
Right now is an excellent time to contact your tax professional. Final extensions for the year were due October 15, so your tax pro has had time to unwind and is not enduring as hectic a schedule. There is still time to implement a tax plan with the very little time we have left in this year. Once you have that out of the way… Party on!
If you have children, you will be happy to learn that the tax code favors you. Whether you are single or married, there are benefits for folks with offspring. The child tax credit gives you a nice break of $1,000 per child subtracted from your tax liability. The Dependent Care Credit and the Earned Income Tax Credit for low income filers, which was enhanced several years ago to cover three or more children rather than two, provides even more of a tax break.
Here are some other tips parents should know:
The Valley Fires in Middletown have wreaked havoc upon the landscape. We lost our home in Middletown and so did many of our friends.
The area has been declared a National Disaster area. According to a press release I received from FEMA, “the Regional Administrator for FEMA Region IX Office determined that the Valley Fire threatened such destruction as would constitute a major disaster. California’s request was therefore approved on September 12, 2015 at 21:30 PDT. Fire Management Assistance Grants provide federal funding for up to 75% of eligible firefighting costs.”
And help is on the way from the Internal Revenue Service as well. The IRS has always gone to bat to help taxpayers affected by disasters. For one thing, filing deadlines are generally extended. I anticipate the October 15, 2015 deadline for filing 2014 individual income tax returns will be extended likely to January 15, 2016, though at this late date, nothing has come down yet.
Many who lost their paperwork to the fires will need time to reconstruct their data. If you find yourself in this situation, request a transcript of your tax documents from the Internal Revenue Service. Your W2s, 1099s, K-1s and other third party documents have been provided to the IRS and are available to you. You can make the request online at IRS Website – Get Transcript.
For data not provided to the IRS, such as payments you’ve made for property taxes, DMV fees, charitable contributions, medical expenses, and deductions, get copies of your bank statements to retrieve the amounts paid.
If you are self-employed, perhaps your data is being safely stored in the Cloud or in an on-line version of accounting software. If not, you will need to reconstruct your books to create a profit and loss statement suitable for reporting on your tax return.
There are specific guidelines in place to help those residing in the Middletown area or for anyone involved in a declared federal disaster. Refer to IRS Publication 547 to discover what you need to know with regard to your loss and your taxes.
Highlights from this publication specific to federally declared disasters:
Timing: Normally, you write off your losses in the year it occurred. “However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. If you make this choice, the loss is treated as having occurred in the preceding year.”
The reason the IRS allows this is because the loss will lower your tax liability for the previous tax year thus generating a refund which can be used to help rebuild.
Profit: If a reimbursement from your insurance company to repair or replace your main home results in a capital gain (ask your tax pro to crunch the numbers), you will be allowed to postpone the capital gain if you use the money to repair or replace that main home. Naturally, this break is fraught with rules so check out the section under “Gains Realized on Homes in Disaster Areas” in the Instructions for Form 4684.
Home made unsafe by disaster. According to Publication 547 “If your home is located in a federally declared disaster area, your state or local government may order you to tear it down or move it because it is no longer safe to live in because of the disaster. If this happens, treat the loss in value as a casualty loss from a disaster. Your state or local government must issue the order for you to tear down or move the home within 120 days after the area is declared a disaster area.” Here again, it is a good idea to ask your tax professional to crunch the numbers to accurately determine your loss. It will be reported on Form 4684.
My thoughts, and prayers go out to those who have lost everything.
From time to time every taxpayer will go head to toe with the Internal Revenue Service. Whether you are setting up an installment agreement, facing the auditor from hell, resolving a misunderstanding, or dealing with collectors on the phone or worse yet, on your doorstep, please heed the following suggestions.
1. You get more flies with honey. Remember what Mom used to say! Dealing with bureaucracy can be very frustrating. Especially now when the IRS has experienced so many budget cuts that customer service is at an all time low. Blame Congress not the overworked agent on the other end of the line. Park your bad attitude and anger at the door. Take a deep breath, demonstrate a cooperative attitude, and proceed in an orderly fashion. This will give you an advantage in resolving your issue. In my long career of dealing with the IRS, I have found that most IRS personnel are compassionate humans that will bend over backwards to find ways to resolve issues and help taxpayers. It’s true! It’s not like you won’t ever run into that power-hungry, condescending, or surly agent from time to time. If you do, you can always trade up to a more understanding and respectful model. Just ask for the manager.
2. Use IRS lingo. When you use IRS lingo the person you are speaking with will find you knowledgeable and may treat you with a little more respect. Here is some verbiage you may find useful:
a. Ask for penalties to be “abated” rather than removed.
b. Tell them, if it’s the case, that your failure to (pay or file or comply with a document request) was due to “reasonable cause.” Use this term if you didn’t just flake and have a good reason, which could include such things as unemployment, losing your records, losing your home, health problems, etc.
c. If you can’t pay a tax bill because you are suffering financial reversals you can ask to be deemed “Currently not collectible.” If you are granted this status, they will leave you alone while you get it together.
d. If you feel a spouse or former spouse should be responsible for a tax matter, ask to be treated as an “Innocent spouse.” There are certain criteria to determine if you qualify for this status. Do some research or discuss the issues with your tax pro to find out if you qualify. Because if you do, the IRS will not attempt to collect from you and instead will go after your former spouse.
e. If defending business deductions during an audit, the term “ordinary and necessary” business expense will help – but only if that’s really the case.
f. If you owe a lot of money, perhaps you qualify for the “Fresh Start” program. This program helps taxpayers resolve their liabilities by using more lenient guidelines.
3. Don’t talk too much. IRS agents are trained to draw as much information from you as possible. Answer questions truthfully, but keep your answers short, succinct, and to the point. There is no need to elaborate or discuss your personal life or disclose too much. This will only lead to misunderstandings and possibly investigations.
4. Always tell the truth. Lies have a way of uncovering themselves. Once you are caught in a lie, you will always be suspect. And when you are suspect, you lose the cooperation you would normally receive. Don’t hide assets, don’t run for cover. There are many ways to resolve tax problems using a straightforward and honest approach. Bear in mind that lies can lead to jail time.
5. Only make promises you can keep. This is especially true when it comes to paying your liability. If an IRS agent asks you if you can pay $200 per month on a tax balance and you know damn well that you can only afford $100, tell him so. Indicate that you will try to pay extra when you can. But you are not going to set yourself up for failure by promising more than you are able. If it’s the case, then add that you have always timely filed and paid liabilities in the past and now you need a break. Note that this will not work if their analysis of your financial situation indicates you can pay more.
6. Go to them before they come at you. If you are unable to keep a promise you make, call them and let them know immediately. They are usually so happy with the cooperation they will likely grant you the extensions you need. The collections department notes your file whenever you or your representative calls.
7. Stop the Interview. If at any time during an audit or a phone conversation you feel intimidated, disrespected, or out of your depth, simply say so and end the interview. Tell the IRS that you will be seeking representation and will get back with them soon. This will give you a chance to take a deep breath and discuss the matter with your tax pro. If you felt disrespected, you can always request a different agent. Or if it was a matter of a surly customer service rep you were speaking with on the phone, you can back in hopes of getting someone kinder or a little more understanding.
Will it ever happen?
I’ve made taxation a career for more than thirty years. Over the years, my hopes have been raised by promises and proposals by Presidents and Congress of an end to the complicated maze of tax regulations that burden business and individuals. An end to complexity. The ushering in of simplification.
Milton Friedman introduced a flat tax in 1962. It didn’t take.
This concept was also proposed in 1994 when Congressman Dick Armey (R-TX) introduced a flat tax of 17% for individuals as well as businesses. Virtually all deductions, credits, exclusions, and exemptions would have been eliminated. Dividends, interest, and capital gains would have been excluded from taxable income in order to encourage savings, investments, and capital formation. The tax return would be the size of a post card. Businesses would be allowed to take deductions for certain expenses against income. Everyone was excited about it. But the legislation failed to pass.
Shortly after taking office President Obama organized an economic coalition to study tax reform and recommend a new tax system. Under discussion was the elimination of income tax deductions accompanied by a reduction across the board of income tax rates. What everyone had in mind was a flat tax. Did it happen? No, of course not.
In 2011, Paul Ryan (R-WI) was set to introduce remarkably similar legislation with a transition period in which taxpayers could choose the current system or his proposed system for the next ten years. Rather than an across-the-board 17% tax rate, Ryan proposed a rate of 10% for incomes up to $100,000 and 25% for incomes above that level. A generous standard deduction and personal exemption (totaling $39,000 for a family of four) would have replaced the deductions and tax credits formerly enjoyed. The alternative minimum tax and the death tax would be eliminated.
Ryan’s plan included reform for the corporate income tax, currently the second highest in the industrialized world. It would have been replaced with a border-adjustable business consumption tax of 8.5 percent. This new rate is roughly half that of the rest of the industrialized world.
Jim DeMint (R-SC) planned to introduce a flat tax in 2012 – pretty much the same principal – one rate and a postcard size tax return.
None of these proposals have received any serious consideration.
Let’s face it; the current system needs to be burned to the ground. We’ve got approximately 100,000 pages of confusing, unfair, and contradictory tax code mired in shades of gray with the word “generally” used way too many times. According to the IRS, 47% of Americans pay no income tax whatsoever. Many of these “non-taxpayers” claim the Earned Income Tax Credit (EITC) and receive refunds of upwards of $6,000 depending upon family size and income level. According to statistics gathered from 2009 income tax returns, more than 25 million people claimed more than $57 billion in EITC refunds. Are there really that many people entitled to what we call a “reverse-welfare system?”
We all recognize that behind tax legislation is a motivation for certain societal behaviors. For example, if the tax code allows a deduction for charitable contributions, then more Americans will donate to worthy causes. A deduction for property taxes and mortgage interest propel Americans into the American dream of home ownership. The IRA deduction encourages people to save for retirement.
Imagine what would happen if these deductions were suddenly removed. Many nonprofits would cease to exist for lack of funding. The housing market may experience another decline. Why not be a renter and let someone else repair the leaky roof and dripping faucets? And with society becoming more mobile – the necessity of moving for work, renting has become attractive. And if taxpayers did not make IRA contributions would they reach old age only to live in poverty, relying on Social Security and the generosity of family to survive?
And what has happened with the IRS over the years? Because of severe continuing budget cuts along with the added burden of administering Obamacare, customer service has become a joke. As a practitioner I had become accustomed to calling the practitioner hot line and getting an IRS agent on the second ring. Now there are layers of menus followed by hold times of usually more than one hour. And oftentimes after holding that long the IRS disconnects before I’m able to speak to anyone at all. And practitioners supposedly enjoy priority service. I feel bad for my fellow Americans who probably have to hold for even longer periods of time.
To effect change, please write your Congressman!