Long Term (assets held over 1 year) Capital Gains Tax Rates for 2019

Many times clients ask me what the capital gains rate will be for a transaction they are contemplating. It is not an easy answer. There are 5 different rates and the lower 3: 0%, 15% and 20% depend on the taxpayer's taxable income. For instance taxpayers filing a joint return  with taxable income under $78,750 pay at the 0% rate in 2019. The 25% rate applies when you sell depreciated property like rental property with unrecaptured section 1250 gain. The 28% long term capital gains rate applies to the sale of collectibles which include such assets as works of art, rugs, antiques, stamps, coins, metals like gold bullion, vintage cars, and alcoholic beverages. There is another sneaky add on Obamacare tax of 3.8% on capital gains if your adjusted gross income is above $250,000 (joint) and $200,000(single).

Hobby Income and Expenses

If the IRS classifies your business as a hobby, really bad things happen such as the income is taxable as other income but you can't deduct any of the expenses. There is a presumption that your business is not a hobby if you have a profit in at least 3 out of 5 years. However if you can prove you have a profit motive through facts and circusmstances then you are still ok even if you don't meet the 3 out of 5 year test. How do you prove you have a profit motive? You have to conduct your business in a professional manner by having a business checking account, a business credit card, keeping good records, having a business license, having a business plan, and having business cards. The IRS will look at the time and effort you spend on the activity and whether the activity is a fun one. If you are having too much fun, then the presumption is it is a hobby.

More Last Minute Tax Changes (Tax Extenders)

Last month Congress passed some additional tax changes, the more important of which are included below:

1. The credit for nonbusiness energy property additions such as qualified windows, doors, skylights,  roofs, furnaces, heat pumps, and water heaters to your home has been extended through 2019. It is subject to a lifetime cap of $500. Many taxpayers have already received the maximum credit in past years when it was available.
2. Property that dispenses alternative fuels including natural gas, hydrogen, and electricity can qualify for a $1,000 credit if installed at your home. This provision has been extended through 2019.
3. The exclusion of $2,000,000 of qualified principal residence indebtedness forgiveness from taxable income has been extended through 2019.
4. Mortgage insurance premiums on your home will still be deductible in 2019 if your adjusted gross income is under $100,000.
5. The qualified tuition and related expense deduction of $4,000(adjusted gross income AGI under $130,000 for joint returns) and $2,000(AGI under $160,000 for joint returns) has come back for 2019.
6. The medical expense deduction floor of 10 percent of AGI has been dropped to 7.5 percent for 2019.

New Retirement Changes for 2020

President Trump signed the Secure Act in December 2019 which made several key changes in retirement law. The 3 most significant changes are the following:
1. Non spouse beneficiaries have to withdraw all of the funds from an inherited IRA over a ten year period instead of over their life expectancy. This change will accelerate taxable income for many taxpayers.
2. Required minimum distributions from regular IRA's won't have to start until age 72 instead of age 70 and 1/2. This is a very popular change.
3. The age limit for regular IRA contributions has been waived. It used to be you couldn't make contributions after you reached 70 and 1/2. Your contribution is still limited by the earned income of you and your spouse. Also your contribution may not be deductible if your adjusted gross income is over a certain amount.  In my opinion you should make the maximum contribution every year.