Category Archives: income tax

Thanksgiving and Charitable Giving

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As you’re giving thanks, this is the time of year when people start thinking about those in need. As you plan those charitable gifts, consider a few thoughts. Under the new Tax Act, you will now have a larger standard deduction. This means that your charitable gifts while noble may no longer give you any tax benefit. If you’re single you have a standard deduction of $12,000 and if you also are over 65 its a whopping $13,600. For married filing jointly, its $24,000 and for those over 65 its $1,300 per geezer.

So you have to consider your package of deductions. If you have a mortgage the interest is still for the most part deductible (unless debt exceeds $750,000 then its pro-rated). Taxes are capped at $10,000. Medical 7.5% of adjusted gross income. You get no miscellaneous itemized deductions (that includes home office if you are a salaried employee). So, add up your deductions so far and you’ll see if the charitable deductions help get you over the thresholds above. If they don’t help you there are some ways to save. For example, you can take money and have it paid directly out of your IRA to charity (Qualified Charitable Distribution – QCD). Doing so, gets money to the charity without having to pay taxes on it first. And if your over 70 1/2, these payments qualify toward your Required Minimum Distributions. You can give appreciated assets and avoid the capital gains on those assets while getting a charitable deduction.

Additionally charitable gifts no longer are much benefit relating to Estate Taxes as the Federal Government limit is $10 Million per individual or $20 Million per couple. They may do you some good if you live in a state which retained its estate or inheritance tax. However the rates on those taxes are less than 10%, so the other 90% that you gave away, does not go to your family.

The key is to still give, just run the numbers to project the best way to give. Have a blessed Thanksgiving.

Can a rental property also be a second home?

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In watching the testimony during the Manafort case, the prosecution seems to be attempting to make the case that Mr. Manafort defrauded banks by calling his rental property as a second home?
If you rent out your beach house 1 day a year, on your tax return you have to allocate your expenses between Schedule A (home mortgage) and Schedule E (rental property) based upon usage.
For example let’s say that you rent out your beach house through AirBnB for 100 days per year and the rest of the year either you use it or its sits available for you to use. Is it a vacation home or a rental property. The IRS would view it as both and in fact vigorously make sure that you properly allocated as many deductions as you could to Schedule E (rental property expense) where deductions are limited.
Under Banking Regulations, the lines blur to some degree. Some lenders don’t want their purchasers to rent out the property at all. Others look to the primary intent, does the debtor intend to reside in this property periodically or to use it to make money. But generally, if you reside in it periodically after you get the loan, it should qualify as a second home.

YEAR END STRATEGIES WITH A TAX BILL LOOMING

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So, you have two versions of a tax bill, its in conference committee and if history tells us anything, you’ll never know what will come out of it. However, we know a few things that MAY happen. It is highly doubtful that any bill will be effective for tax year 2017.
1. Removal of state income tax deduction. While there may be transitional rules, this is Congress’s chance to give high tax democrat states a big razzberry. So, if you can do so, it would be advisable to pay your 2017 state estimated tax before 12/31/17. That way if the state income tax deduction is repealed for 2018, at least you get a deduction in 2017. And who knows the refund may not be deductible under the new act.
2. If you live in a state with no income taxes, make that large purchase now. The sales tax deduction may not be there in 2018. There are usually great deals the last week of the year at car dealerships who have to pay personal property tax on inventory held on 1/1.
3. Defer any sales of stock if you don’t have to do so. With potential repeal of AMT and lowered capital gains rates, it makes sense to defer.
4. Go see the doctor or dentist in 2017. If you have something that will require a large co-pay (like tooth implants), get it done in 2017 while you still have a deduction.
5. Use Qualified Charitable Donation out of your retirement plan for 2017 it might not be around in 2018.

Adkins v. United States

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Your author was lead counsel on the above case argued before the Court of Appeals in the Federal Circuit. The Federal Circuit ruled that the regulations regarding Section 165 theft losses. In particular the Court ruled that the regulations section dealing with reasonable likelihood of recovery and reasonable certainty that recovery would not be forthcoming have to be read together if the deduction is in the year following the year of loss. The trial court had a more bright line rule that all proceedings had to be abandoned prior to allowance of the deduction. The link to the opinion is attached hereto.

http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/16-1961.Opinion.5-5-2017.1.PDF

Presidents and releasing tax information

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No President prior to Franklin Roosevelt released tax returns. Since that time, Presidents Eisenhower, Kennedy, Johnson did not. President Ford disclosed information, not the returns. A couple of thoughts about tax returns and their publicity.
The IRS has a strict policy against disclosure by the Service of individuals tax return data. Such a disclosure carries a $5,000 penalty against the Government if willful and possible criminal sanctions (as well as administrative) against the employee who does it. The concept is that people will be less than honest on their returns if their information is disclosed to the public. People might pay too much in taxes by padding incomes, or too little by failing to disclose business arrangements that might be shady (mobsters for example).

In our history there have been two schools of thought on this as pointed out in a 2012 IRS study.

“The arguments for and against disclosure of individual income tax information haven’t changed much over time. Former President Benjamin Harrison (his term ended in 1893) said this,in making the case for disclosure in an 1898 speech:

“Each citizen has a personal interest, a pecuniary interest in the tax return of his neighbor. We are members of a great partnership, and it is the right of each to know what every other member is contributing to the partnership and what he is taking from it.”

For an alternative view, here’s Secretary of the Treasury Andrew Mellon, commenting in the aftermath of the 1924 income tax disclosures:

“While the government does not know every source of income of a taxpayer and must rely upon the good faith of those reporting income, still in the great majority of cases this reliance is entirely justifiable, principally because the taxpayer knows that in making a truthful disclosure of the sources of his income, information stops with the government. It is like confiding in one’s lawyer. … There is no excuse for the publicity provisions except the gratification of idle curiosity and filling of newspaper space at the time the information is released.””
This leads to two points of view about Presidential candidates disclosing their tax returns. One view is that we are electing a President and that person should tell the world everything about him or herself, so that we can make a decision about the character and background of the person. The other view is that we already have trouble attracting candidates from the business world as opposed to the political class. Do we want to exacerbate that divide?

As James Madison penned in Federal Paper #10:
“…the smaller the number of individuals composing a majority, and the smaller the compass within which they are placed, the more easily will they concert and execute their plans of oppression. Extend the sphere, and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens[.]” (No. 10)”

This inevitably leads to the question that all citizens should ask themselves. Would you want the world to see you tax return? The answer from most people is “no”. In a country with 300 Million people who have to decide who should be their leader and without the ability to conduct a person interview with the candidate, do we want the comfort in knowing more about the candidate?

Did Richard Nixon’s tax return disclose his paranoia that led to the Watergate break in? No. Did Bill Clinton’s tax returns disclose his past dalliances with women? No. Did knowing the fact that Mitt Romney gave a greater portion of his income to his church and charity than Barak Obama have any real effect on the outcome of the election? Did not knowing John Kennedy’s or Lyndon Johnson’s taxes have any impact their respective histories?

So, in the end, releasing tax information by candidates seems to have no effect on their qualifications for office, their electability, or their performance when they get there. In other words, its ” the gratification of idle curiosity and filling of newspaper space at the time the information is released.”