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Our offices will be closed on December 24, December 25, and January 1.
Friday, December 27, is the last day of our winter hours, with offices closing at noon MST.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices will be closed on December 24, December 25, and January 1.
Friday, December 27, is the last day of our winter hours, with offices closing at noon MST.
Most of us have more than enough to do. We’re on the go from early in the morning until well into the evening — six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.
A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.
When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.
The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there.
This leads us to a couple of important points.
One final thought regarding beneficiary designations: While you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.
Accounting for rental income might at first seem like a simple concept, but in practice it may not be so simple. What is the difference between “rental income” and “advance rent”? How does one account for a security deposit, or property or services received in lieu of rent? How is personal use of a vacation home or other rental property treated? This article addresses those questions.
Rental income is any payment received or accrued for occupancy of real estate or the use of personal property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned.
Advance rent is any amount received before the period that it covers. Landlords are required to include advance rent in rental income in the year received, regardless of the period covered or the accounting method used by the taxpayer. An amount received by a landlord from a tenant for cancelling a lease constitutes income in the year in which it is received since it is essentially a substitute for rental payments.
Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.
Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.
If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income for the landlord and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income as well. Landlords should include the fair market value of the property or services provided by the tenant in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary. There are specific rules related to leasehold improvements so please contact your tax advisor prior to entering into these transactions.
Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.
If you have questions about how to treat expenses and income related to your rental property, our tax advisors would be happy to assist you.
Colorado offers a conservation easement tax credit program that could save you money while at the same time help preserve Colorado’s natural treasures. Landowners who permanently preserve part of their land for agriculture, scenic views or wildlife habitat can generate Colorado income tax credits that can then be sold to taxpayers.
Purchasing these tax credits could be an excellent strategy if you have a Colorado income tax liability of at least $10,000. The tax credit is not a tax deduction, but rather is a dollar-for-dollar reduction of state tax liability.
Landowners who desire to conserve the special qualities of their land — for example, its productive farm soils, scenic beauty or valuable wildlife habitat – can choose to place a conservation easement on all or a portion of it. Conservation easements give people the assurance that the places they love will be protected forever. A conservation easement is a legal agreement that runs with the land, in perpetuity. Conservation easements may or may not allow public access to the protected property. Over two percent of the land in Colorado is protected by conservation easements, including land in every county.
Colorado requires a conservation easement holder (typically a land trust) to have the responsibility of stewardship for the land. Landowners retain full ownership of the land. Once the easement is in place, the landowner receives Colorado conservation easement tax credits which can be used against their Colorado tax liability or sold to a third party.
Individuals and entities with Colorado state income tax liability may purchase tax credits. There is no limit to the amount of tax credits that any individual or entity may purchase.
The major benefit of purchasing conservation easement tax credits is that they can be purchased at a discount, often at a savings of 10-14%. For example, if you have a $100,000 state income tax liability, you can purchase $100,000 worth of tax credits for between $86,000-90,000, thereby saving $10,000-14,000.
Here is an example to illustrate how purchasing conservation easement tax credits could benefit you:
First, it’s good idea to have an idea of what your Colorado tax liability will be for the upcoming year. Your tax advisor can assist you in this.
Secondly, although not a requirement, it is advisable to purchase tax credits through a reputable broker. Brokers know this process intimately and can efficiently guide a buyer through each step. There are some risks involved when purchasing conservation easement tax credits; these can be greatly minimized by using a reputable broker.
A tax credit broker will match you up with a conservation easement seller and will verify the validity of the credits. The broker also prepares the documents to transfer the credits from the seller to the buyer.
In addition to conservation tax credits, Colorado also offers environmental remediation (Brownfield) tax credits and historic preservation tax credits. If you think you have a Colorado tax liability of at least $10,000 and would like more information on tax credits, please contact our office to discuss the details of your specific situation. Tax credits are in high demand and as a result some brokers have waiting lists already forming, so do not hesitate for long.
Until recently, estate planning strategies typically focused on minimizing federal gift and estate taxes, with less regard for income taxes. Today, however, the estate and income tax law landscape is far different. What does this mean for estate planning? For many people — particularly those who expect to have little or no estate tax liability — it means shifting their focus to strategies for reducing income taxes.
For many years, the combination of relatively low estate tax exemption amounts and high marginal rates could easily devour more than half of an estate’s value. Popular estate planning techniques often had income tax implications, but in general any income tax consequences were eclipsed by the estate tax savings.
Now that has changed. For one thing, since 2001, the federal exemption has grown from $675,000 to $5.45 million. And, unlike before 2013, the exemption isn’t scheduled to drop in the future. In fact, it will continue to gradually increase via annual inflation adjustments. Estate tax rates have also decreased significantly, from 55% to 40%. And the 40% rate has no expiration date.
For many people, this new gift and estate tax law regime means federal gift and estate taxes are no longer an issue.
At the same time that potential gift and estate tax liability has disappeared for many, individual income tax rates have increased. In 2001, the top federal income tax rate was 39.1%, substantially lower than the top federal estate tax rate of 55%. Now the top income tax rate has grown to nearly as high as the current top estate tax rate.
Taxpayers with taxable income of more than certain annually adjusted levels (for 2016, $415,050 for single filers, $441,000 for heads of households, and $466,950 for joint filers) are now subject to a 39.6% marginal rate.
Capital gains rates also have increased. Currently, the top rate is 20% (up from 15%) — 23.8% for taxpayers subject to the Affordable Care Act’s 3.8% net investment income tax (NIIT). It applies to certain net investment income — including dividends, taxable interest and capital gains — earned by taxpayers whose modified adjusted gross income tops $200,000 ($250,000 for joint filers, $125,000 for separate filers). The NIIT thresholds aren’t annually adjusted.
Fortunately, many estate planning strategies are available that can help reduce income taxes. Consider the family limited partnership (FLP). A properly structured and operated FLP allows parents to shift income to children or other family members in lower tax brackets by giving them limited partnership interests. But watch out for the kiddie tax, which can undo the benefits of income shifting if you transfer FLP interests to dependent children under the age of 19 (age 24 for certain full-time students).
The heightened importance of income taxes also means that there may be an advantage to holding assets until death rather than giving them away during your life. If you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains taxes should he or she turn around and sell it.
When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So, from an income tax perspective, there’s an advantage to retaining appreciating assets until death rather than giving them away during your lifetime.
For those with large taxable estates, however, this advantage may be outweighed by estate tax concerns. From an estate tax perspective, it’s preferable to remove appreciating assets from your estate — through outright gifts or contributions to irrevocable trusts — as early as possible. That way, all future appreciation in their value will be shielded from estate tax.
If your net worth is safely within the estate tax exemption, retaining assets until death will minimize the impact of built-in capital gains on your heirs. Alternatively, if you want to share your wealth with your children or other family members, consider using an estate defective trust, which provides current income to your beneficiaries without removing the trust assets from your estate. (See below under “Have your cake and eat it.”)
Higher income taxes can also have a big effect on charitable giving strategies. If your estate plan includes charitable bequests, for example, it makes sense to fund those bequests with assets that otherwise would generate “income in respect of a decedent” (IRD).
IRD is income that a deceased person earned but never received, such as IRA or qualified retirement plan distributions. Unlike other inherited assets, which are income-tax-free to the recipient, IRD assets can trigger a significant tax bill. But you can avoid these taxes by donating the assets to charity.
If your estate is within the exemption, it’s preferable to make charitable gifts during your lifetime. This is because, if you have no estate tax liability, charitable bequests won’t yield any tax benefits. But lifetime donations can generate valuable income tax deductions.
Identifying the right estate planning strategies for you and your family is in part a matter of running the numbers. Projecting your income and estate tax liabilities — including state as well as federal taxes — will help you determine whether it’s better to focus on reducing estate taxes or income taxes.
Have your cake and eat it
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If you’ve been bitten by the net investment income tax (NIIT) in the past three years, you may now be ready to explore strategies that avoid or reduce your exposure. This surtax can affect anyone with consistently high income or with a big one-time shot of income or gain.
Let’s review the basics of the NIIT. Congress passed the 3.8% Medicare surtax on investment income in 2012 to help pay for the Affordable Care Act. The surtax became effective for tax years beginning after December 31, 2012. The NIIT affects taxpayers with modified adjusted gross income (MAGI) above $200,000 for a single person, above $250,000 for a couple, and above $125,000 for a married person filing separately. (MAGI is generally the last number on page 1 of your Form 1040 – your gross income less certain allowable deductions.) Notably, a marriage penalty is built into this surtax and the surtax threshold levels are not indexed for inflation going forward.
The amount of net investment income subject to the NIIT is the lesser of (1) your net investment income or (2) the amount by which MAGI exceeds the threshold discussed above.
What income is subject to the NIIT? Generally net investment income includes the following:
Strategies to Reduce Your Net Investment Income:
Strategies to Reduce Your Modified Adjusted Gross Income:
As you can see, higher income taxpayers with investment income have some planning options when it comes to limiting the impact of the surtax, but in many cases, there may not be a way to avoid it. Bottom line? The NIIT is complex and all strategies should be discussed with your tax and investment advisors before implementation to avoid other unintended tax consequences.
As the calendar dates begin to move ever closer to tax filing time, the anxiety may also begin to build. Most people do not eagerly anticipate the task of gathering their information for their taxes. For that reason, we have put together some steps that many of our clients have used that not only streamline the process for your tax preparer, but more importantly increase your efficiency and reduce the amount of stress associated with tax filing season.
Develop a filing system that works best for you. It could be a simple folder or a multi-file box. When you receive tax documents, place them in the filing system to keep them all in one place and avoid misplacing any of your tax information.
Tax forms typically come through the mail. Some issuers, however, are now offering the option to access your year-end tax forms online or via email. If you receive your forms electronically, you should set up a folder on your computer to gather and organize tax documents. This creates a similar system to the one discussed above for paper documents.
If you itemize deductions, you will need to gather additional documentation. The major categories of itemized deductions include:
Stockman Kast Ryan + Co mails tax organizers to all of our tax clients during the month of January. If you are a client and we prepare your Form 1040, but you have not received a 2015 tax organizer, please contact your tax preparer and we will make sure that you receive a copy of the tax organizer. The organizer contains questions about current year taxable events, and it also lists the detail for income and expenses from the prior year tax return. Using the prior year tax return information is a great starting point to to see if anything was overlooked while collecting tax forms. We also suggest updating any information that is no longer applicable to your particular tax situation and using the questionnaire portion of the organizer to help identify any events during the year that would have tax implications.
As you begin to collect tax documents and review the prior year information in the tax organizer, it is a good idea to develop a list of missing items. While you work on gathering the missing items, you should go ahead and schedule your tax appointment with our firm. It is better to do this early on because we can discuss any additional documentation that might be necessary for the current tax year and also determine if your tax return should be extended. Extending the tax return while waiting for missing items may provide peace of mind.
In today’s world, criminals are finding new ways to steal a person’s personal information and eventually their identity. Tax forms contain personal information and should be transmitted with care when sent electronically. AT our firm, we have a secure email system that allows you to send us files securely. You can access this feature directly from our website, www.skrco.com, on the Contact tab here. Please feel free to ask your tax professional if you need help with this feature or to inquire about a client portal.
By following the previous four steps, gathering your tax documents and submitting them to our firm will be less of a burden. Not only will you feel more organized, but your tax preparer will appreciate your effort!
With year end right around the corner, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The act extended numerous tax breaks that had expired December 31, 2014, and the President signed it into law December 18.
The new law is more significant than some tax “extenders” legislation in recent years because, in addition to extending relief, the PATH Act makes quite a few tax breaks permanent and also enhances some breaks. Let’s take a look at some of the breaks that may help you save tax on your individual and business returns in 2015 and beyond.
Sec. 179 of the Internal Revenue Code (IRC) allows businesses to elect to immediately deduct — or “expense” — the cost of certain tangible personal property acquired and placed in service during the tax year, instead of recovering the costs more slowly through depreciation deductions. However, the election can only offset net income; it can’t reduce it below zero dollars to create a net operating loss.
The election is also subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively.
The new law makes the 2014 limits permanent, indexing them for inflation beginning in 2016. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Sec. 179 limit beginning in 2016. Qualified real property includes qualified leasehold-improvement, restaurant and retail-improvement property.
Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units to the list.
If your business is eligible for full Sec. 179 expensing, you might obtain a greater benefit from it than from bonus depreciation (discussed below) because the expensing provision can allow you to deduct 100% of an asset acquisition’s cost. Moreover, you can use Sec. 179 expensing for both new and used property.
The news is mixed on bonus depreciation, which allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. It’s been extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019.
The provision continues to allow businesses to claim unused AMT credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits that may be claimed increases.
Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold-improvement property. Beginning in 2016, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation.
Note that, if you qualify for Sec. 179 expensing, it could provide a greater tax benefit than bonus depreciation. (See above.) But bonus depreciation could benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement.
The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), qualified restaurant property and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period.
This is especially welcome news for restaurants and retailers, which typically remodel every five to seven years. If eligible, they may first apply Sec. 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Sec. 179 limit.
The research credit (commonly referred to as the “research and development” or “research and experimentation” credit) provides an incentive for businesses to increase their investments in research. But businesses have long complained that the annual threat of extinction to the credit deterred them from pursuing critical research into new products and technologies.
The PATH Act permanently extends the credit. Additionally, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability, and certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax.
While the credit is complicated to compute, the tax savings can prove significant.
The American Opportunity credit (a modified version of the Hope credit) allows eligible taxpayers to take an annual credit of up to $2,500 (vs. the Hope credit maximum of $1,800) for various tuition and related expenses for each of the first four years of postsecondary education (vs. the first two years with the Hope credit). The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation.
The American Opportunity credit was scheduled to revert to the Hope credit after 2017, with the $1,800 and first-two-years limits and lower MAGI phaseout thresholds. The PATH Act makes the more beneficial American Opportunity credit permanent.
The PATH Act extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn’t exceed $80,000 ($160,000 for joint filers).
You can’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you’re eligible for all, the American Opportunity credit will typically be the most valuable in terms of tax savings. But in some situations, the AGI reduction from the deduction might prove more beneficial than taking the Lifetime Learning credit because the deduction ends up saving more tax than opting for the credit.
The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRA to qualified charitable organizations up to $100,000 per tax year. The taxpayers can’t claim a charitable or other deduction on the contributions, but the amounts aren’t deemed taxable income and can be used to satisfy an IRA owner’s required minimum distribution.
To take advantage of the exclusion from income for IRA contributions to charities on your 2015 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31, 2015. Donor-advised funds and supporting organizations are not eligible recipients.
The law makes other tax benefits related to charitable giving permanent, too, including the enhanced deduction for contributions of real property for conservation purposes.
The itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. The deduction is especially valuable for individuals who live in states without income taxes. It can also benefit taxpayers in other states who purchase major items, such as a car or boat.
You don’t have to keep receipts and track all the sales tax you actually pay. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually pay on certain major purchases.
The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energy-efficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel.
The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500. If you’ve been thinking about investing in some energy upgrades, you’ll want to do it before the end of next year.
The PATH Act’s temporary and permanent extensions of numerous valuable tax breaks for individuals and businesses provide significant tax planning opportunities. We’ve only touched on some of the most popular here; the new law may include other extensions and enhancements that can benefit you. We can help you identify the ones that will minimize your taxes for 2015 and chart the best course in future years.
On December 18, the Senate passed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), which the House had passed on December 17. Many popular tax breaks had expired December 31, 2014, so for them to be available for 2015, Congress had to pass legislation extending them. But the PATH Act does more than that.
Instead of extending breaks for just a year or two, which had been Congress’ modus operandi in recent years, the PATH Act makes many popular breaks permanent and extends others for several years. The PATH Act also enhances certain breaks and puts a moratorium on the Affordable Care Act’s controversial medical device excise tax.
It’s not all good news for taxpayers, however. For example, while the PATH Act does extend bonus depreciation through 2019, it gradually reduces its benefits. And it extends some breaks only through 2016.
Here is a quick rundown of some of the key breaks that have been extended or made permanent that may benefit you or your business.
Many of the PATH Act’s provisions provide an opportunity for taxpayers to enjoy significant tax savings on their 2015 income tax returns — but quick action (before January 1, 2016) may be needed to take advantage of some of them. If you have questions about what you need to do before year end to maximize your savings, please contact us.