Donating Stock

Donating appreciated stock at year end is a good tax planning strategy since it allows you to deduct the fair market value of the stock even though you don't have to report the appreciation as income. You have to have held the stock for more than a year for this to work. Donating stock less than a year old only allows you to deduct your cost or basis in the stock.

Business Start Up Costs

Costs incurred before a business starts operation can be deducted up to $5,000 and the remainder amortized over 15 years when operations begin. Business start up costs include advertising costs for the grand opening, organizational professional and consulting fees,  and investigative costs. If an individual fails in an attempt to start a new business, then none of the costs are deductible.

Path2College GA 529 Plan

GA's plan just got a lot better. For 2020, the state tax deduction just doubled to $8,000 per year per beneficiary for joint returns and $4,000 for single taxpayers. You can save $480 on GA taxes if you file jointly and do the max contribution. The contributions grow tax free and may be withdrawn tax free if used for qualified education expenses which now include tuition for elementary or secondary public, private or religious school up to $10,000 per student per year.

Reduce Your Taxes for 2019 Right Now

You have less than a month to take action. What should you do? See below for some ideas:

1. Clean out your garage and your closets. Make donations of household goods and clothing to Goodwill. Keep the receipt and the record of items donated and use the valuation guide at salvationarmyusa.org to value the donation.
2. Organize your tax documents in one file folder for 2019. Complete the tax organizer from your tax preparer. My tax organizers will go out mid January 2020.
3. Delay mailing bills to your cash basis business customers until late December so you won't get the payments until 2020.
4. Buy office supplies, stamps, and equipment for your business.
5. Increase your 401k contribution to the maximum. The employee deferral is $19,000 plus $6,000 more if you are age 50.
6. Donate appreciated stock to a charity.
7. Do a qualified direct contribution of your required minimum distribution from your retirement account to a charity.
8. Sell securities with losses to offset your capital gains.
9. Consider setting up a donor advised fund to concentrate your charitable contributions in one tax year.
10. Check to make sure all of your estimated tax payments for 2019 have been made. The final one is due January 15, 2020.
11. Consider an opportunity zone fund investment to defer the tax on capital gains for 7 years.
12. Contribute to a Georgia Path2College 529 plan for your child's education. The state deduction is $2,000 for single taxpayers per year per beneficiary and $4,000 per beneficiary for joint returns. The deductions have been doubled for 2020.
13. If you have a specified service trade or business and your individual taxable income exceeds $321,400 joint or $160,700 single, then it would be advantageous for you to take steps to reduce your income below these thresholds so you could benefit from the new 20% qualified business income deduction. Steps to take include retirement plan contributions, charitable donations, business equipment purchases, oil and gas investments, and conservation easements.
14. Consider a conservation easement to increase your charitable deductions to a maximum of 50% of your adjusted gross income. The IRS has designated conservation easements as listed transactions and is actively going after them in Tax Court so there is risk involved.
15. Invest in a health savings account if you are eligible.

Standard deduction or Itemize

The standard deduction was significantly increased to $24,000 for  2018 joint tax returns making many taxpayers decide to no longer itemize and track such deductible expenses as charitable contributions, mortgage interest and property taxes. For Georgia, you have to follow whatever you did on the federal return which caused an interesting situation where it is better to itemize overall even if it isn't better on the federal return. The break-even point on a joint return is about $20,000 in itemized deductions. If you have over $20,000 in itemized deductions, it is usually better to itemize.

Qualified Business Income Deduction for Rental Properties

You can get a 20% deduction on rental property net income if it qualifies as a trade or business. In order to be a trade or business you have to establish that the rental is a regular, continuous, and considerable activity. One very specific thing that you can do is send 1099's to those non corporate service providers that you have paid over $600 in a calendar year. This shows that you are treating the rental like a business.

Tax Inflation Adjustments for 2020

The IRS has just announced the tax year 2020 annual inflation adjustments. Some of the more important adjustments and non-adjustments include the following:
1. An increase in the standard deduction for joint returns to $24,800 and to single returns to $12,400.
2. The basic exclusion for estates is going to $11,580,000.
3. The annual exclusion for gifts is still $15,000.
4. The contribution limit for 401(k) plans is increased to $19,500 and the catch up limit for those aged 50 and above is increased to $6,500.
5. The IRA contribution limit remains unchanged at $6,000 and the catch up contribution for 50 and over remains at $1,000.

Changes to Schedule 1 form 1040 for 2019

Schedule 1 is the form where you include additional income and adjustments to income. The IRS draft form dated as of 10/10/19 has two changes for 2019. There is a question asking if you bought or sold cryptocurrencies at any time during 2019. There is also a line where you are asked to put the date of your divorce agreement if you are paying or receiving alimony. The date is important because if your divorce agreement is after 2018, then the alimony is neither taxable to the recipient or deductible by the payer.

Calculation of Income Tax for Individuals

Calculating your income tax is not a simple matter once you get to taxable income.  The reason is because we have different tax rates for ordinary income and capital gain income which includes qualified dividends. Tax rates for ordinary income range from 10% to 37%. Capital gain and qualified dividends can have the following tax rates: 0%, 15%, 20%, 25%, and 28% depending on level of income.  You have to carve out all of the different types of income getting preferential rates from taxable ordinary income and do a series of calculations. I am so grateful my tax software does this calculation for me on the schedule D tax worksheet and the qualified dividends and capital gain tax worksheet. These worksheets are so complicated that the IRS did them wrong for all 2018 returns with certain types of gains processed prior to May 15 when they caught their mistake. Please bear with me. Let me give you an example of the calculation assuming the following: taxable income of $153,818. qualified dividends of $12,433,  long term capital gain of $17,289, and unrecaptured  section 1250 gain of $120. The first calculation of capital gain tax is 12,433 + 17,289 -120=29,602 x .15=$4,440. The second calculation of ordinary income tax is 153,818-29,602=124,216 x .22 -8,121=$19,207. The tax due is the  two amounts added together  4,440 + 19,207=$23,647.

Applying for Medicare

One of my clients did not sign up for medicare when she turned 65 and lost out on reimbursement for a costly medical procedure. Don't let this happen to you. If you are already receiving social security benefits at age 65, then you will automatically be enrolled in medicare parts A and B so no problem. However, if you are not taking social security at age 65 you have to go online and apply for medicare. You should apply three months before you turn 65  to ensure your start date is not delayed. Remember too that medicare only covers about 80% of your medical costs so you will need a supplemental plan offered by a private insurance too. I recommend supplemental plan F or G instead of medicare advantage plan C, and also that you sign up for a private insurance company prescription drug plan D.

Opportunity Zone Fund vs. Section 1031

If you own some real estate that has appreciated in value, what should you do if you don't want to pay the income tax on the gain when you sell. You could defer the tax if you did a section 1031 exchange by buying like kind property with the gross proceeds from the sale. Well now you have another tool to use, the opportunity zone fund investment, which I feel is a better way to go with one exception that I will discuss later. The opportunity zone is a low income area in each state where investment is encouraged by tax advantages. The tax advantages include: deferral of tax until 2027, a 10% reduction of tax if the investment is held 5 years, a 15% reduction of tax if the investment is held 7 years, and no tax on the appreciation of the opportunity zone fund investment if held 10 years. One very big difference between the section 1031 and opportunity zones is that with opportunity zones you only have to invest the capital gain portion not the gross proceeds. The only time I would favor a 1031 section exchange would be if your intent is to hold the replacement property until death where it would get a step up in basis to fair market value.

Georgia Film Credit

Georgia allows taxpayers to buy unused tax credits from film studios doing work in Georgia and take the credit on their tax return. You buy at the market rate which is currently around 89 cents on the dollar so you can get a dollar of credit for 89 cents. You have to pay capital gains tax on the difference when you utilize the credit. If you buy too much film credit for the current year, you have a 5 year carryover to use it up.

State Tax Credits

The IRS has issued final rules on the deductibility of state tax credits like the GA scholarship program and GA rural hospital credits. The rules are retroactive to August 27, 2018. Basically, the new rules say that no federal charitable deduction is allowed for these credits. However you can deduct these amounts as state income tax payments up to the new maximum limit of $10,000. You also still get the 100% state income tax credit. This change will make these credits less attractive to taxpayers.

Income Tax History

Our current income tax regime dates to 1913 when the Revenue Act of 1913 was enacted into law by democratic President Woodrow Wilson. Before 1913 the government was financed by tariffs, and there was no income tax. The purpose of the income tax was to allow for tariff reduction which was seen by the democrats as an unfair tax on consumers. Average tariff rates did go down from 40 percent to 26 percent. The Act established a normal income tax rate of 1% on the first $17,000 for single filers and $16,000 for married filers equivalent to $374,400 and $352,300 in 2010 dollars respectively. Income between $20,000 and $500,000 was taxed at rates of 2% to 6%. Income over $500,000 was taxed at the top rate of 7%. The income tax started out as a tax just on very high income taxpayers, and only 357,588 individual returns were filed for 1913. It wasn't until the 1940's  that the income tax was expanded to torment the middle class and payroll withholding was invented.

Property Taxes on Investment Property

The IRS has a new $10,000 limit on itemized deductions for state income tax, real estate taxes on homes, and personal property taxes like the ad valorem tax on cars. However if you pay real estate tax on investment property like raw land this tax deduction is not subject to the $10,000 limit so you can deduct a 100% of it. Beginning in 2018 foreign real property taxes are not deductible  as an itemized deduction.

Estate Exemption for 2019 of $11,400,000

Estates greater than $11,400,000 have to pay estate tax at a top rate of 40%. All or part of the exemption amount is also portable to the surviving spouse if you file form 706 which is the estate tax return form. The executor now has to also report the values of property transferred to beneficiaries to the IRS in a taxable estate.

Georgia Title Ad Valorem Tax

If you buy a new or used car in Georgia, you have to pay this tax which is a substantial 7% of the fair value of the vehicle. You also have to pay it if you bring a car into Georgia from another state and you want to get a Georgia tag. By paying this tax you no longer have to pay the annual ad valorem tax or any sales tax. From an income tax standpoint the title ad valorem tax is a nondeductible cost which adds to the basis of the vehicle.

529 Plan

A 529 Plan is a great way to put aside funds for your kids' college expenses for tuition, fees, books, supplies, and equipment. You don't get a tax deduction for contributions but the accounts grow tax free. You can also now use up to $10,000 per year from the 529 plan for kindergarten through 12th grade tuition per student. Contributions are not limited by taxpayer income and are considered gifts to your children. Georgia gives you a tax deduction for up to $4,000 per year per beneficiary for joint income tax returns if you invest in the Georgia Path2college 529 plan.

Social Security Wage Base for 2019

The social security wage base for this year is $132,900 meaning the max amount withheld from your paycheck will be $8,239.8 (132,900 x .062) for social security(FICA) up from $7,960.80 for 2018. The 2020 wage base will be $136,800. To show you how far this has grown, the initial social security wage base from 1937 to 1949 was $3,000 and the tax rare was only 1% for a big $30 a year.

Secure Act of 2019

The House of Representatives passed this act in May 417-3. It has not been passed by the Senate yet. This act increases the mandatory age for required minimum distributions (RMD) for retirement accounts from age 70 and 1/2 to age 72. The down side to this act is that it requires non spouse beneficiaries of inherited retirement accounts to take distributions over a ten year period instead of over their life expectancy. This means that the account will not be allowed to grow tax free over a long period of time like it is now. I hope it doesn't go through in its present form.

Capital Loss Carryover from a Deceased Spouse

A deceased spouse's capital loss carryover from their own separate property can't be used after the final joint return. The capital loss carryover dies with the deceased. If the capital loss came from jointly owned property, then the surviving spouse can claim half of the loss carryforward. This is another reason for spouses to hold property in joint ownership.

More Opportunity Zone Info

If you are an individual partner in a pass through entity, you have the option of investing your capital gains into an opportunity zone investment within 180 days of the entity's gain realization or 180 days after the year end of the entity. This gives you a lot of flexibility in tax planning which is always a good thing.

Dealing with the State of Georgia

If you get a notice from GA about your tax return, the first thing to do is send it to me to review. You can also go online to the Georgia Tax Center and respond to the notice there and even upload supporting documents. It is very difficult to get someone on the phone at the Georgia Department of Revenue, but if you have to call, the number is 1-877-423-6711.

Dealing with the IRS

What should you do if you get a notice from the IRS about your tax return? The first thing to do is call me and send me a copy of the notice. The worst thing you can do is just throw the notice in a drawer and ignore it. The IRS uses a progression of steps each one becoming more harsh to deal with taxpayers who don't respond. It may be better for  you to call the IRS as they won't talk to me unless I have a signed power of attorney from you.  If you do call, be prepared to wait about an hour before you get to a person. Call on a Tuesday or Wednesday for quicker results. They will have to verify that you are who you say you are by asking for your social security #, birth date, and address. Have your tax return in front of you when you call. This data unlocks your file and allows them access so they can discuss your issue.  I have also found that IRS agents treat me with courtesy and really do try to help.

Substantiation of Business Expenses for Vehicles

The IRS requires you to document your business use of your car in order to get a tax deduction through the use of a daily log, expense report, account book, trip sheet, or some other contemporaneous record. I use the tracking function in Quickbooks for my own business mileage. Estimating business auto expenses cannot be used for tax deductions. However if you have a vehicle that qualifies as a nonpersonal use vehicle, then you don't need to track business mileage as the IRS assumes all expenses are tax deductible. A nonpersonal vehicle can be a truck or van that has been modified so that it is unlikely to be used much for personal reasons like only a front bench for seating, shelving filling the cargo area loaded with equipment or merchandise, and with advertising on the side.

Path2College 529 Plan for Georgia

A 529 plan is a great way to save for college. Georgia wants to encourage residents to contribute to the Georgia plan by giving a $4,000 deduction per child per year for joint returns and $2,000 for all other filing statuses.

Opportunity Zone Fund Investment vs. 1031 Exchange

In my opinion the opportunity zone fund investment (OZ) is a superior method to defer taxes on capital gains for the following reasons:

1. Deferral of taxes via OZ lasts until 12/31/26.
2. 15% of gain is completely eliminated if the OZ investment is held for 7 years. The 1031 exchange has no similar provision.
3. In a 1031 exchange it has to be like kind real property. There is no like kind property requirement in an OZ as it can be real or personal or even a business.
4. There is no requirement to identify replacement property in 45 days in an OZ.
5. There is no need for a financial intermediary to handle the proceeds from a sale of property in an OZ like there is in a 1031 exchange.
6. In a 1031 exchange you have to reinvest the entire proceeds from the sale to avoid taxes. In an OZ, you only have to reinvest the gain within 180 days of the sale.
7. If you hold the OZ for 10 years, then none of the gain of the sale of the OZ is taxable. 

Foreign Tax Credit

The foreign tax credit is limited to the ratio of foreign taxable income to total taxable income and is calculated on form 1116. However, you don't need to use this form to claim a credit if your total foreign taxes paid for foreign passive income like dividends don't exceed $300(single) or $600(joint).

Alternative Minimum Tax (AMT)

The AMT is an alternative tax system based on fewer deductions and more taxable income. You pay the higher of AMT or regular tax.  For example no deduction for state and local taxes is allowed for AMT. The new tax law limited state and local taxes to $10,000 and eliminated miscellaneous itemized deductions which were also not allowed for the AMT. The new tax law also increased the AMT exemption amounts for 2018. So far this tax season I have not seen any of my clients paying the AMT which is great news. I hope it continues.

Equitable owner

You can deduct the real estate taxes on a home and the mortgage interest for a home loan even if you are not the legal owner of the home or directly liable for the debt. You have to be considered the equitable owner by the IRS to take the deductions. An equitable owner is one who through facts and circumstances enjoys the economic benefits by living in the house and burdens of ownership such as paying for repairs, taxes and the mortgage.

Unpaid Tax at 4/15/2019

The IRS and Georgia will punish you if you haven't paid in enough tax by the due date of the 2018 tax return. They will really punish you if there is unpaid tax and no tax return or extension filed. The IRS failure to file penalty is 5% of the unpaid taxes per month or part of a month up to a max of 25%. The Georgia failure to file penalty is the same. The IRS and Georgia late payment penalties are 1/2 of 1% per month or part of a month on any unpaid tax balance. The IRS annual interest rate on unpaid taxes is currently 6%. The Georgia interest rate is the federal reserve prime rate plus 3% (8.5%) and can be adjusted every January.

Fulton County Senior Homestead Exemption

You have until April 1 to apply for a senior homestead exemption in Fulton County. This is a new law that gives homeowners that are age 65 and over another $20,000 in exemption regardless of income. To qualify you have to go in person to one of the 5 Fulton County Board of Assessors' offices and fill out a 1 page application. You need to bring with you your driver's license, current registration for all vehicles of owner and spouse, and your last property tax bill. I went last week to the North Fulton Service Center room 210 and it took about an hour.

Miscellaneous Itemized Deductions

The tax reform act eliminated miscellaneous itemized deductions such as employee business expenses and investment expenses. However there are still some left that are fully deductible you might not know about including the following: gambling losses to the extent of gambling winnings, job related expenses of the handicapped, estate taxes imposed on taxable income, and the unrecovered cost of annuities on a decedent's final return.

Corporate and Partnership Tax Returns

The due date for 2018 corporate and partnership tax returns is Friday, March 15, 2019. This also happens to be the Ides of March when Julius Caesar was assassinated and Rome started going downhill. You can extend the filing of the returns for six months until September 16, 2019.

Converting Your Home to Rental Property

When you make this transition you need to depreciate your old home that you have converted to rental property. How do you do that? Do you use the fair market value at time of conversion or something else? The answer is you use the lower of your cost or fair market value at the time you make it rental property. In a rising market for real estate most homeowners have to use their original cost plus the cost of significant improvements. Another step you have to take is to determine how much of your original cost should go to land if you have a single family home since land cannot be depreciated. Most property tax bills will tell you what % of the bill is for land vs the house so use that ratio to allocate an amount to land. Absent that information I allocate at least 20% of the original cost to land. If the rental is a condo,  I usually allocate all of the original cost to the building to depreciate.

Should you file a tax return for your child?

There are five situations where a federal tax return is needed for your dependent child:

1. If your child receives a 1099 showing non employee compensation over $400, a return is needed because self employment tax is due.
2. W-2 wages over $12,000
3. Dividends, interest, and capital gains over $1,050
4. Gross income greater than the larger of $1,050 of unearned income or wages up to $11,650 plus $350
5. Your child had federal withholding on his W-2 and you want to get it refunded.

In certain circumstances a child's income can be reported on the parent's return but it is usually better to file a separate return. 

Standard Mileage Rates for 2019

The business mileage rate increases to 58 cents per mile from 54.5 cents per mile for 2018. Medical and moving mileage goes to 20 cents a mile from 18 cents a mile. Charitable mileage remains at 14 cents a mile. Also for 2019, taxpayers cannot claim a deduction for unreimbursed employee travel expenses, and only the armed forces are allowed moving expenses now.

Obamacare

You will still be subject to a penalty if you don't have qualified health insurance during 2018 which will be calculated on the 2018 tax return. However for 2019, the penalty has been reduced to 0 because of the changes in the tax law which is very good news for taxpayers.

Investment Fees

Beginning in 2018 investment fees on brokerage managed accounts are no longer deductible as an itemized deduction. This will be a significant change from the 2017 tax return for many taxpayers.

Medicare Premiums for 2019

If your 2017 adjusted gross income is less than $170,000 joint or $85,000 single, then your monthly premium for Part B is $135.50. Above that adjusted gross income and your monthly premium can increase from $189.60 up to $460.50. You also have to pay an additional monthly amount of between $12.40 to $77.40 for Part D prescription drug coverage if your 2017 adjusted gross exceeds the $85,000/$170,000 thresholds. In calculating the adjusted gross income you have to add back tax exempt interest income.

1099's and W-2's

The season of 1099's and W-2's is now here for 2018. You are supposed to receive them by the end of this month. Also look out for form 1095-A showing your health insurance subsidy from Obamacare. Make sure you save all of these tax documents as they have been reported to the IRS and you will be subject to penalties if you don't report the same amounts on your return. Give these documents to me for your 2018 tax return, and I will make a copy for your file in case you get a notice from the IRS in the future.