In this Holiday Season, I’ve been seeing lots of requests to give through GoFundMe. Whenever money changes hands the Government is not far behind seeking its cut. So, let’s tax example. Missy needs a new liver and the surgery will cost $500,000. She has no insurance and asks her friends to help through a GoFundMe site. She has some very generous friends and receives $200,000. So, how does the IRS view this largess.
Is it a tax deductible gift? No. Its akin to passing the hat at the funeral.
Is it subject to gift tax? If the amount given is in excess of $14,400, then it you have to file a gift tax return not that you would owe any such taxes.
Is it subject to income taxes? That’s the tricky part. The amounts given were probably gifts given out of generosity or out of love and affection. But, in some cases the IRS has taken the position that it is income. A couple of things you has to be wary of.
First, I would not recommend deducting medical expenses on your tax return if they were financed out of a GoFundMe account. That’s double dipping.
Second, if the GoFundMe money is not used for a deductible purpose, it might be income. If it is used for lawyer’s fees or rent or it in essence replaces a lost wage because you lost your job or to fund a project from which you will use funds to live on, then perhaps its income.
One other question, is who set up the GoFundMe page in the first place? If it was the recipient, then the Service may take the position that it was income and not only income but earned income subject to self-employment taxes. For example long term disability payments are considered earned income. If they were used for medical, report the receipt and then deduct the medical, that way, you avoid the potential of being audited later.
Hopefully, the IRS will clarify the rules on this. The mantra is be careful.
Thanksgiving and Charitable Giving
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?
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.
Section 512 amendment Much Ado about Nothing
Some tax practitioners have alerted churches and other non-profits of the risks of allowing employees to park on church property as a fringe benefit. This in the language of the act could create unrelated business income where none exists and create a tax to the church. Many are asking for a legislative fix. The amendment to Section 512 is specifically targeted to qualified transportation benefits and qualified parking. The Act refers to Section 132 (the section which provides exclusion for fringe benefits). Section 132 is a laundry list of exclusions from income for benefits given to employees. Among them are “no cost added” benefits (which are not unrelated business income). Specifically listed in the regulation are transportation benefits (free air fare for airline employees who fly stand-by). Reg. 1.132-2T. The other problem is that the Section 132 analysis speaks to the value of the qualified parking. Except for urban churches (who rent out their parking lots on weekdays), most churches have free open parking lots used by commuters on rainy days when they catch a bus, parking to talk on a cell phone or to eat lunch, smooching with your love on a dark evening, drinking Ripple so mom and dad don’t see you. In other words the value of the parking is zero. Further, it’s also a “no cost added” fringe benefit in that the parking lot is not used. Additionally with most suburban churches, the cost of street parking is free as well. So, you are not saving anyone anything by allowing them to park there.
So, this section applies only to churches that essentially already have unrelated business income from charging for their parking or who pay the parking of their employees or pay their bus fare and the like. It does not apply in my view to churches that simply have acres of parking which are never filled to capacity and never rented.
Wayfair v. South Dakota
The Supreme Court ruled that states can now collect sales taxes on internet sales. So, how is a small business person with an internet business going to survive?
45 states have a sales tax regime. 24 of them have passed legislation to opt into the Streamlined Sales and Use Tax Agreement. See, http://www.streamlinedsalestax.org/. Some states have exemptions for small sales. Some states have exemptions for “occasional sales” but when you look at the definition of occasional sales, the exemption invariably only applies to charity sales, garage sales, and bulk sales of business inventory.
So, small internet businesses have to now make a few tough choices. (1) They can limit states they sell to (for example only those state who have signed the streamlined sales tax agreement); (2) They can apply to pay sales tax in each jurisdiction; or (3) lobby hard with Congress to write a law. The problem for small internet businesses is that there are small brick and mortar businesses which are also lobbying Congress to make sure these internet businesses pay taxes. Stay tuned for more as events occur.