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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.
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.
If you’ve recently sought new employment, you may be able to offset some of the expenses related to the search. Expenses related to job hunting may qualify for a deduction on your individual income tax return. If you move for business or employment purposes you may be able to deduct many of the expenses incurred. Potential deductions include the cost of travel and moving your household goods and personal effects.
If you are seeking a new job in your same occupation, you may be able to deduct the following expenses incurred in your search:
It is important to remember that these deductions are only available to taxpayers seeking new employment in their current occupation, not to individuals seeking a first job in a new line of work.
When you move for business or employment purposes, many of the following expenses incurred may qualify for tax deductions:
In order to deduct moving expenses, the IRS requires that three basic tests are met. These tests are the distance test, the time test, and that your move closely relates to the start of work. These can be met as follows:
A great resource for information on the deductibility of moving expenses is IRS Publication 521.
If you have any questions on deduction, don’t hesitate to reach out to us.
Tax-related identity theft occurs when someone uses your Social Security number to file a tax return in order to claim a fraudulent refund. Generally, the identity thief will file the fraudulent tax return early in the filing season, typically during January. You will most likely be unaware you have even been victimized until you file your tax return and learn that someone has already filed using your Social Security number.
You should be on alert for possible identity theft when:
When our firm suspects an identity theft issue with your tax return (typically due to an e-file rejection by the IRS), we will contact you to inform you of the occurrence.There will then need to be follow-up with the IRS to determine if they have already issued Letter 5071C (Identity Verification Letter). This letter will inform you of two methods of providing verification of your identity. This can be accomplished by calling the Identity Verification line (1-800-830-5084) or by using the online IRS Identity Verification Service. The online service is the quickest method and will ask you multiple-choice questions to verify whether or not the return flagged for further scrutiny was filed by you or someone else. Please bear in mind that the IRS will only send Letter 5071C by mail. The IRS will never request that you verify your identity by contacting you by phone or email. If you receive such calls or emails, they are likely a scam.
If Letter 5071C has not been issued, we will likely need to prepare Form 14039 Identity Theft Affidavit for you to submit to the IRS on a paper filed tax return. Form 14039 alerts the IRS that someone has accessed your personal information and it has affected your tax account since they have filed a return using your identifying information. As an attachment to Form 14039, you will need to provide a copy of your Social Security card, driver’s license, U.S. Passport, military ID, or other government-issued ID card in order to prove your identity. Unfortunately, the filing of Form 14039 will delay the processing of your tax return as the normal processing time for an identity theft return can run 120 days or longer.
After Form 14039 has been processed by the IRS, they will generally issue you a six-digit Identity Protection pin number for you to use in filing your tax returns going forward. The IRS has stated that they will issue a new pin number each year, in December. If working with the IRS has not brought a satisfactory resolution or you do not receive your six-digit pin number, you should contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.
When someone has enough of your personal information to file a fraudulent tax return, they can use your identity to commit other crimes. In addition to alerting the IRS as described above, you should also take the following steps:
Identity theft is one of the fastest growing crimes in the United States and around the world. It is a persistent and evolving threat and the harm it causes victims cannot be overstated. Today’s thieves are a formidable enemy. They are an adaptive adversary, constantly learning and changing their tactics to circumvent the safeguards put in place to stop them. Tax-related identity theft is no longer random individuals stealing personal information. We are dealing more and more with organized crime syndicates here and around the world.
IRS Commissioner John Koskinen recently stated that no priority is higher for the IRS than making sure the tax system is secure and that they are continuing to do everything within their power to safeguard taxpayers and their personal information.
If you have any questions or concerns regarding identity theft don’t hesitate to contact us!
The wedding bells are ringing, waves are crashing onshore at your honeymoon in Hawaii, and then it hits you! How is getting married going to affect my taxes? Okay, so maybe no one is thinking about taxes on their honeymoon, but it is something that every couple should understand. The tax system of the United States is setup so that combined tax liability of a married couple may be higher or lower than their combined tax bill if the couple had remained single.
This is where the idea of marriage penalty and marriage bonus comes from. The marriage penalty often affects taxpayers that have very high and very low incomes, and the marriage bonus affects several middle-income couples who have disparate incomes. The extent to which the marriage penalty or bonus affects a given couple depends on factors such as the level of their combined income, the proportion of their individual incomes being similar, and how many children they have.
A marriage bonus typically occurs when one individual with a higher income marries and files a joint return with an individual who has a much smaller income, and the additional income is not usually enough to push the combined income into a higher tax bracket. Married couples fall into the married filing joint tax brackets, which are wider in terms of income limits and result in a lower tax bill.
A marriage penalty occurs when two individuals with equal incomes marry and relates to individuals who have very low and high incomes. A high-income couple falls into this trap because income tax brackets for married couples at the top of the income tax schedule are not twice as wide as the equivalent brackets for single filers.
An example is the 33% tax bracket, which for 2015 single filers start out at $189,301, but for married filing joint filers it starts out at $230,451. Two high incomes when combined could easily put a couple’s income into a higher bracket than filing as single, thus resulting in a penalty.
Another item to consider for the marriage penalty with high-income earners is the new 3.8% investment income tax. This tax is imposed on single filers who have adjusted gross income of $200,000 or more and for married filers with gross income of $250,000.
Two individuals who both made $150,000 would not be subject to the net investment income tax if filing as single. But if these two filed as married they would be subject to the additional tax, which is the lesser of their net investment income or the amount of their adjusted gross income over the threshold, times 3.8%.
A marriage penalty can also occur when two low-income individuals file as married. Two individuals who file single can be eligible for a large earned income credit depending on how many children they have to claim. The other advantage of claiming a dependent is the opportunity to file as head of household instead of just single. Head of household tax brackets are wider and there is also a larger standard deduction. Filing married eliminates the benefits of head of household and could potentially lower the amount of earned income credit available due to the combined incomes.
The idea of a marriage penalty or bonus causing a couple to tie the knot or to wait it out seems extraordinary, but it could affect one’s decision to work, work less, or not work at all. A married couple could have one individual who makes $40,000 and falls into the 25% tax bracket filing single, but who would fall into the 15% tax bracket filing married. The reverse could be true for the other spouse who didn’t work as single and would have been in the 0% bracket, but then married if they decided to work could possibly be in the 15% to 25% bracket.
There are ways to eliminate the marriage penalty and bonus, but it would require large changes to the US tax code. The US tax code is designed to be progressive in nature, but to also be equal in treatment among married and unmarried couples. If the United States adopted a flat tax and removed all provisions, then the marriage penalties and bonuses could be elmiminated. The United States could also eliminate the marriage penalty and bonus by keeping the progressive tax structure, but requiring everyone to file single. Without a major overhaul of the United States tax code, solutions such as widening the tax brackets for high-income earners filing joint and a permanent extension of the marriage penalty relief of the Earned Income Tax Credit will have to suffice as potential short term solutions.
Purchasers and lessee’s are potentially eligible for up to a $6,000 credit on their individual or business Colorado income tax return for purchases/lease agreements of alternative fuel and/or electric vehicles made during the 2013 tax year through tax year 2021, thanks to House Bill 13-1247, signed into law by the Colorado Legislature on May 15, 2013. The bill extends the availability of credits for certain “innovative” vehicles and simplifies the calculation of these credits.
Charitable Deductions
Individual taxpayers generally have until April 15th each year to file their tax returns and pay any income tax owed for the year. In most cases, you will not be liable for any penalties as long as you file your tax return and pay any tax due by this April 15th due date. If you fail to meet this deadline, however, or you did not pay enough taxes during the year through Federal withholding or estimated tax payments, you may be liable for IRS underpayment of estimated tax, late payment, and/or late filing penalties in addition to any tax you owe.
There are many reasons to keep household records, including keeping track of your expenses, maintaining records for insurance purposes or getting a loan. You should have the same approach to managing your tax records, even after your tax return is filed. Records you should keep include bills, credit card and other receipts; invoices; mileage logs; canceled, imaged or substitute checks; proof of payments; and any other records to support deductions or credits you claim on your return. Read our quick tips below for more detail on what to keep and for how long.
Here are some quick tips for keeping your tax return records:
You should keep copies of your tax returns as part of your tax records. In the event of your death, copies of your returns and records can be helpful to your survivor or the executor, or administrator, of your estate. You may also need tax returns from previous years for loan applications or to estimate tax withholding.
Keeping good records will help us explain any tax position we take on your return and arrive at the correct amount of tax with a minimum amount of effort on your part. If you don’t have records, you may have to spend time getting statements and receipts from various sources. In the event of an IRS audit, if you cannot produce the correct documents you may have to pay additional tax and be subject to interest and penalties.
We are happy to answer any questions you may have about what records you should keep and for how long in your particular situation. For general guidelines, you can download or print our Tax Records Retention Schedule here.
One tax topic we discuss with clients each year is the treatment of their capital gains and losses. Much of what you own is a capital asset including a home, personal use items like household furnishings, and stocks or bonds held as investments. Most people buy and sell assets without ever considering the tax consequences at the time.
For taxpayers there is an important distinction between what the IRS considers a hobby and what is considered a business. Internal Revenue Code Section 162 allows the deduction of ordinary and necessary business expenses if they result from a trade or business. On the other end of the spectrum, Code Section 183 limits the deductions for taxpayers related to activities not engaged in for profit. The expenses may only be deducted to the extent of gross income from the Section 183 activity.
Generally a business is entered into for profit. In order to be characterized as a business, there must be intent to make a profit. A hobby may be entered into for recreation, not to make a profit. The IRS has provided nine factors to help determine if a business is operated for a profit:
In addition to the nine factors listed above, the IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five years, including the current year. (An exception would be for activities that consist primarily of breeding, showing, training or racing horses, the IRS looks for a profit in at least two of the last seven years.)
The taxpayer has the burden of proof related to proving the required profit motive. A court will weigh all the facts and circumstances, with greater weight given to objective facts than to the taxpayer’s mere statement of intent.
Deductions from hobby activities are limited to the gross income from that activity. If an overall loss occurs for a hobby activity during a tax year, this loss cannot be used to offset other types of income.
The deductions for hobby activities must be claimed as itemized deductions on Schedule A of Form 1040. Therefore, a taxpayer must itemize deductions to deduct any expenses related to the hobby activities. They must be taken in the following order and only to the extent stated:
1. Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes. These may be taken in full. They should be listed on the correct lines on Schedule A.
2. Deductions that do not result in an adjustment to basis, such as advertising, insurance and wages. These may be deducted to the extent gross income for the activity is more than the deductions from the first category.
3. Deductions that reduce the basis of property, such a depreciation and amortization. These are taken last and only to the extent that gross income for the activity is more than the deductions taken in the first two categories.
Deductions in the second and third category must be claimed as miscellaneous deductions on Schedule A. That makes them subject to the 2% of adjusted gross income (“AGI”) limit. What this means is that in addition to the limits already discussed, the deductions must also be greater than 2% of a taxpayer’s AGI before any deduction can be claimed.
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.
Hobbies do not receive favorable tax treatment by the IRS, so it is important to determine if an activity will be deemed a business or a hobby for income tax purposes. To be a business, the activity must be carried on with the intent of making a profit. An activity that is not a business will have limits on the amount of deductions it can take, and any losses from the activity cannot be used to offset other types of income.
Internal Revenue Code Section 1031 exchanges have been very popular with taxpayers for many years. This Code section allows taxpayers to defer recognition of gain on the disposition of assets by participating in a like-kind exchange (“LKE”) transaction. There are several rules that a transaction must meet in order to qualify as an LKE. This article covers the basic requirements that must be met in order to defer recognition of gain on disposal of assets until a later date.
The Basics of Section 1031 Exchanges
The first hurdle for an exchange of property to qualify as an LKE is that it must involve qualifying property. Qualifying property includes property used in a trade or business and property held for investment. Property used for personal purposes, stocks, bonds, notes, inventories , and partnership interests do not qualify for a Section 1031 exchange.
In addition to the requirement that the transaction must involve qualifying property, it must also involve like-kind property. Like-kind properties are of the same nature or character, even if they differ in grade or quality. Exchanging real property for real property would qualify as an exchange of like-kind properties; however, exchanging real property for tangible personal property would not qualify as an exchange of like-kind properties. Depreciable tangible personal property needs to be either like-kind or like-class to qualify for LKE treatment. To be considered like-class properties, the assets must be within the same General Asset Class or Product Class.
The basis of the property received in an LKE transaction is generally the same as the adjusted basis of the property given up, however, see the discussion below for partially nontaxable transactions.
Deferred Exchanges
A deferred exchange involves an exchange of like-kind assets that is completed over a period of time. Deferred exchanges are more complex, and additional requirements apply. There are time limits to meet in order for a deferred exchange to qualify as a Section 1031 exchange. The first time limit provides a taxpayer 45 days from the date the relinquished property is sold to identify potential replacement properties. The identification must be in writing, signed by the seller, and delivered to a person involved in the exchange (for example, the seller of the replacement property or a qualified intermediary). The second time limit requires that the replacement property must be received and the exchange completed no later than 180 days after the sale of the relinquished property or the due date (with extensions) of the income tax return for the year in which the relinquished property was sold, whichever is earlier. It is important to note that the replacement property will not be treated as like-kind property unless these identification and the receipt requirements are met.
Additionally, if the transferor actually or constructively receives money or unlike property in full consideration for the property transferred prior to the receipt of replacement property, the transaction is treated as a sale rather than a deferred exchange. Using a qualified intermediary (“QI”) can serve as a safe harbor against actual or constructive receipt.
A qualified intermediary is a party who enters into a written exchange agreement with the taxpayer. The written exchange agreement requires that the QI:
1. Acquires the relinquished property from the taxpayer,
2. Transfers the relinquished property,
3. Acquires the replacement property, and
4. Transfers the replacement property to the taxpayer.
The written exchange agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike property held by the QI before the end of the exchange period.
Beware: Some Exchanges are Only Partially Nontaxable
If money or unlike property, referred to as boot, is received in addition to the like-kind property and a gain is realized on the transaction, the exchange will be considered only partially nontaxable. Gain must be recognized equal to the lesser of the boot received or realized gain. If a loss is realized on the transaction, no loss can be recognized.
In calculating the realized gain, any liabilities assumed by the other party must be added to the amount realized. Any liabilities of the other party assumed by the taxpayer should be subtracted from the amount realized.
Example: A taxpayer exchanges business property with an adjusted basis of $32,000 for like-kind property. The property was subject to a $4,000 mortgage. The fair market value (“FMV”) of like-kind property received was $36,000. In addition, the taxpayer received $1,500 in cash and paid $500 in exchange expenses. The other party agreed to pay off the mortgage. How much gain should be recognized on the transaction?
The recognized gain on the transaction is $5,000.
The basis of the property that a taxpayer receives (other than money) in a partially nontaxable exchange is the total adjusted basis of the property given up, with some adjustments. Add to the basis any additional costs incurred and any gain recognized on the exchange. Subtract from the basis any money received and any loss recognized on the exchange. The basis is allocated first to the unlike property, other than money, up to its FMV on the date of the exchange. The remainder is the basis of the like-kind property.
LKE Transactions Involving Related Parties
There are special rules for LKE transactions between related persons. Under the rules, if either party disposes of the property within two years after the exchange, the exchange is disqualified from LKE treatment. In that event, the gain or loss on the original exchange must be recognized as of the date of the later disposition.
Related persons include members of the taxpayer’s family, a corporation owned greater than 50% by the taxpayer, and a partnership owned greater than 50% by the taxpayer. The two-year holding period begins on the date of last transfer of property that was part of the LKE transaction.
Conclusion
As discussed in this article, it is difficult to comply with the rules of Section 1031 related to a like-kind exchange transaction. Although there are many restrictions in place to meet the requirements of a like-kind exchange transaction, the benefits of deferring gain on an exchange can be great for taxpayers. For that reason, these transactions have been very popular for a number of years.