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Current news articles:

1.  Summary of the Tax Cuts and Jobs Act of 2017
2.  Do I have a business or a hobby?
3.  Proper reporting of capital gains and losses
4.  Charity is good for the pocketbook too

 

Summary of the Tax Cuts and Jobs Act of 2017

On December 22nd, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017.  According to most experts, this is biggest reform of the U.S. tax code since 1986.  The majority of these changes take effect beginning in 2018.

Among the stated goals of this legislation are, 1), to simplify the tax code, 2), to give American workers a pay raise, 3), to end incentives to ship jobs, capital, and tax revenue overseas.

From an individual taxpayers' perspective, the first major changes in this new law centers around deductions.  First, the standard deduction will roughly double - from $12,700 to $24,000 for a joint return (from $6,350 to $12,000 for a single filer).  Then, some deductions will be eliminated completely (interest on home equity loans, including unreimbursed employee expenses), while others will be scaled back (mortgage interest, property taxes, state taxes).  After these changes, The Committee on Ways and Means estimates that only 10% of U.S. households will continue to itemize using Schedule A.

Another major change reduces most tax rates (although there are still seven tax brackets).  This will mean most workers will see an increase in their paychecks as soon as withholding tables are adjusted to match the new law.

The new law also repeals the personal exemptions for dependents, while significantly increasing the child tax credit. 

Also gone are the deductions for moving expenses as well as the penalty imposed on taxpayers who do not obtain minimal essential health insurance coverage.

The alternative minimum tax has not been repealed, but the exemption amount has been significantly increased.

For any divorce or separation agreement executed after Dec. 31, 2018, the act provides that alimony and separate maintenance payments are not deductible by the payer spouse nor includible in income by the payee spouse.

Note that, to keep the cost of the bill within Senate budget rules, all of these changes affecting individuals expire after 2025.  At that time, if no future Congress acts to extend H.R. 1's provision, the individual tax provisions would sunset, and the tax law would revert to its post-2018 state.

Lastly, the corporate income tax was lowered from 35% (the highest rate in the industrialized world) to 20%.  This in theory would help in accomplishing the third goal listed above.

For a more detailed look at this new legislation, click here.

 

Business or Hobby? Answer Has Implications for Deductions

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business (with a profit motive) or a hobby (an activity not engaged in primarily for profit).

In order to educate taxpayers regarding their filing obligations, this fact sheet explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:

  • Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

 

Proper Reporting of Capital Gains and Losses

In order to educate taxpayers about their filing obligations, this fact sheet, the twelfth in a series, provides information with regard to capital gains reporting. Incorrect reporting of capital gains accounts for part of an estimated $345 billion per year in unpaid taxes, according to Internal Revenue Service estimates.

Almost everything you own and use for personal purposes, pleasure, business or investment is a capital asset, including:

Your home

Household furnishings

Stocks or bonds

Coin or stamp collections

Gems and jewelry

Gold, silver or any other metal, and

Business property

Understanding Basis

The difference between the amount for which you sell the capital asset and your basis, which is usually what you paid for it, is a capital gain or a capital loss. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis.

Your basis is generally your cost plus improvements. You must keep accurate records that show your basis. Your records should show the purchase price, including commissions; increases to basis, such as the cost of improvements; and decreases to basis, such as depreciation, non-dividend distributions on stock, and stock splits.

While all capital gains are taxable and must be reported on your tax return, only capital losses on investment or business property are deductible. Losses on sales of personal
property are not deductible. More information about increases and decreases to basis can be found in
Publication 551, Basis of Assets.

Schedule D

Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040, U.S. Individual Income Tax Return. Capital gains and losses are classified as long-term or short term. If you hold the asset for more than one year, your capital gain or loss is long-term. If you hold the asset one year or less, your capital gain or loss is short-term. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of the property.

You may have to make estimated tax payments if you have a taxable capital gain. Refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

Other Rules

Home –– If you sell your residence, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). To exclude the gain, you must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Generally, you cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude gain, you must include it in income. To determine the maximum dollar limit you can exclude and for additional information, refer to Publication 523, Selling Your Home. You cannot deduct a loss on the sale of your home.

Property outside U.S. –– U.S. citizens who sell property located outside the United States must also report gains from these sales, unless the property is exempt by U.S. law. Reporting is required whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the payer.

Installment sales –– If you sold property (other than publicly traded stocks or securities) at a gain and will receive any payments in a year after the year of sale, you generally must report the sale on the installment method using Form 6252, Installment Sale Income.  You can elect out of the installment method by reporting the entire gain in the year of sale.

Investment Transactions –– Gains from sales and trades of stocks, bonds, or certain commodities are usually reported to you on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or an equivalent statement.  Your basis, the sales price, and the resulting capital gain or loss is entered on Form 1040, Schedule D, Capital Gains and Losses. 

Gains from the sale of business property are reported on Form 4797, Sales of Business Property and flow to Form 1040, Schedule D.  See Publication 544, Sales and Other Dispositions of Assets for additional information on the sale of business property.

Capital gain distributions from mutual funds are reported to you on Form 1099-DIV, Dividends and Distributions.  Capital gain distributions are taxed as long-term capital gains regardless of how long you have owned the shares in the mutual funds.  If capital gain distributions are automatically reinvested, the reinvested amount is the basis of the additional shares purchased.

For additional information about reporting gains from investments see Publication 17, Your Federal Income Tax; Publication 550, Investment Income and Expenses; and Publication 564, Mutual Fund Distributions. Answers to Frequently Asked Questions about capital gains may also be helpful.

 

Charity is good for the pocketbook too

If you itemize your deductions, your tax bill can really benefit from your generosity.  In general, you can deduct up to 50% of your adjusted gross income (30% in the case of donations of appreciated assets and contributions to private foundations) for qualifying charitable contributions.  Keep in mind that, beginning in 2007, the IRS is requiring proper documentation for ALL charitiable contribution deductions, so whenever possible, write a check or at least get a receipt.  Here's a handy list:

Appraisal fees for donated property. You can deduct appraisal fees paid to determine the value of a donation. Instead of adding it to your charitable deduction, this is a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit.

Appreciated property. Donating appreciated property -- such as stocks, bonds, mutual funds or real estate -- can supercharge the tax-saving power of your generosity. If you have owned the asset for more than one year, you can deduct the full market value at the time of the gift, not just what you paid for it. This lets you avoid the tax you would incur if you sold the property as well as claim the deduction.

Art. Some taxpayers give a partial interest in art to museums and share ownership of the work and display rights. If you make such a contribution after August 17, 2006, and you don't give away the entire interest within ten years, or if the museum never takes possession of the item during that period, your deduction is recaptured, meaning you have to pay back the tax savings, with interest plus a penalty.

Automobile, driving for charity. You can deduct 14 cents per mile for each mile you drove while performing services for a charity in 2006. If your driving is related to Hurricane Katrina relief efforts, you can deduct 32 cents per mile. For 2007, the standard mileage rate for charitable driving is 14 cents a mile.

Automobile, donating to charity. Strict rules control your charitable deduction of a donated vehicle. In most cases, your deduction is limited to the price paid for the vehicle when it is sold by the charity to raise cash. In general, no deduction is allowed unless you receive an acknowledgment from the charity within 30 days after the date the vehicle is sold.

Bargain sales to charity. If you sell to a charity an appreciated asset you owned for more than one year, you can deduct the difference between the market value and the sales price as a charitable donation. But if the sales price is more than what you paid for the asset, you will have a taxable gain that will effectively offset part of the tax savings.

Benefits received for donations. If you receive more than a token benefit from a charity in return for your donation, you must subtract the value of that item to determine your deductible contribution. For 2006, you needn't subtract anything if you gave at least $43 and received an item costing $8.60 or less. For 2007, those figures rise to $44.50 and $8.90, respectively.

Carryovers. Generally, your deduction for donations to charity in one year cannot exceed 50% of your adjusted gross income for that year (30% in the case of donations of appreciated assets and contributions to private foundations). Any excess can be carried over for the following five tax years and applied to reduce income then. If you die before the carryover is used up, it expires and your heirs cannot claim it.

Cash contributions. You can deduct cash contributions to qualifying charities. These include churches, synagogues, other religious organizations, educational organizations and nonprofit organizations such as the Salvation Army, Red Cross, CARE, Goodwill. You need a receipt for any contribution of $250 or more; a canceled check alone is not sufficient. Starting in 2007, you also need a statement, receipt or bank record (such as a cancelled check) for smaller contributions.

Charitable lead trusts. These trusts are the opposite of charitable remainder trusts. They pay an annuity or other fixed amount to a charity for a set term of years. Any balance remaining at the end of that period is paid to the donor or another beneficiary. The donor gets to deduct in the year the trust is established the amount that's expected to go to the charity. The exact amount is computed using IRS annuity tables.

Charitable remainder trusts. These trusts pay an annuity or other fixed amount to the donor or another beneficiary for a set term or for life. Any balance remaining at the death of the donor or beneficiary is paid to a charity. The donor gets to deduct in the year the trust is established the amount that's expected to go to the charity. The exact amount is computed using IRS annuity tables.

Conservation easements. If you donate to a conservation group or a state or local government an easement to restrict development of your property, you are entitled to a tax deduction for the resulting decline in value of your property. If you make such a donation in 2006 or 2007, your deduction can offset up to 50% of your adjusted gross income instead of 30%. Any excess write-offs can be carried forward for 15 years.

Driving for charity. You can deduct 14 cents per mile for each mile you drove while performing services for a charity in 2006. If your driving was related to Hurricane Katrina relief efforts, you can deduct 32 cents per mile. For 2007, the charitable mileage rate is 14 cents a mile.

Exchange students.You can deduct up to $50 a month of the unreimbursed costs of hosting an American or foreign exchange student placed in your home by a charity. (You don't get this deduction if, at the same time, your child is living with a family in a foreign country.)

Façade easements.A donation to a qualifying charity that preserves the façade of a historic building can be deducted.

Fundraiser hosting costs.If you host a fundraising event for a charity, your unreimbursed expenses are a deductible charitable contribution.

High Holy Days tickets. Amounts you pay to a synagogue for tickets to special religious events are deductible charitable contributions.

Meals and lodging for overnight trips for charity.You can deduct the cost of unreimbursed meals and lodging you paid for while on an overnight trip for a charity.

Non-cash contributions. You are allowed to deduct the full fair market value of assets that you have owned for one year or more and donate to charity. If you give property with a total value of more than $500, you will need to file Form 8283 and give details about the assets, including a description of them and their individual values. If their value is more than $5,000, you generally will need to attach an appraisal, unless you give listed securities. Note that if you donate used clothing or household items such as furniture, appliances, linens and electronics after August 17, 2006, you cannot deduct the value of the items unless they are in good condition or better.

Out-of-pocket contributions.Expenses you incur while working for a charity -- from the cost of driving your car (at 14 cents a mile) to the cost of stamps for a fundraiser to the cost of ingredients for a casserole for a church-sponsored soup kitchen -- can be included in your charitable contribution deduction.

Patent donations. If you donate a patent to charity, you can deduct the value of the patent plus a percentage of the income that the charity earns on the patent for a period of up to ten years.

Pew rents. Amounts you pay to a church for pew rents are a deductible charitable contribution.

Preferred seating at college sports events. If you make a contribution to a university and receive the right to preferred seating at sporting events, you can deduct 80% of the donation. Any amount included for the tickets themselves must first be subtracted from the contribution.

Receipts. You must have a receipt acknowledging your contribution for every donation of $250 or more; a canceled check is not sufficient. The $250 trigger is per gift, not per recipient. If you make monthly $100 contributions to your church, for example, you don't need a receipt, even though the total for the year is $1,200. Starting in 2007, you also need a statement, receipt or bank record (such as a cancelled check) for smaller gifts.

Remainder interests in homes and farms. If you agree to give your home or farm to a charity after a term of years, you can deduct as a donation the present value of the charity's remainder interest in the property.

Time and skill. You do not get to deduct the value of your labor you contribute to charity. After all, if you charged the charity for your services, the amount you received would be taxable income. Not receiving the payment puts you in the same position, tax-wise, as being paid and then contributing the cash back to the charity for a deduction to offset the added income.

Too much generosity. See Carryovers.

Vehicle donations. Strict rules control your charitable deduction of a donated vehicle. In most cases, your deduction is limited to the price paid for the vehicle when it is sold by the charity to raise cash. In general, no deduction is allowed unless you receive an acknowledgment from the charity within 30 days after the date the vehicle is sold.



 


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