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Archives for Tax Tips

Are You Trading in Cryptocurrency

The Internal Revenue Service issued a reminder Friday to taxpayers that they need to report any income from gains they get from virtual currency transactions on their tax returns.

The move comes after the IRS forced one of the largest cryptocurrency exchanges in the world, Coinbase, to send information on 13,000 of its users to the IRS last month after a legal battle involving the use of “John Doe” summonses.  That mean if you have engaged in transactions involving Bitcoin, Ethereum, and other digital currencies, you are expected to report those gains to the IRS.

The IRS pointed out that virtual currency transactions are taxable by law, similar to transactions involving other personal property.  The IRS issued guidance in 2014 in Notice 2014-21 spelling out the agency’s position on digital currency transactions for taxpayers and tax preparers.

The IRS warned Friday that taxpayers who do not properly report the income tax consequences of their cryptocurrency transactions fact the possibility of tax audits, and could even be liable for penalty and interest charges when appropriate.

Under Notice 2014-21, virtual currency is treated as property for federal tax purposes, so the general principles that apply to property transactions also apply to the 1,500 or so known varieties of cryptocurrency.  That means reporting payments made with virtual currency.

Payments made to independent contractors and other service providers are also taxable and self-employment tax rules apply. Have you been trading in cryptocurrency?

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No One Is Sure Who Qualifies For The New 20% Tax Deduction

Congress created a juicy new tax break for business owners when they rewrote the U.S. Tax Code in December.  Three months later, many U.S. Employers still do not know if they qualify for the deduction.

The Internal Revenue Service has said it will provide guidance detailing exactly who is allowed to take the “pass-through” deduction.  With billions of dollars at stake, business groups are lobbying for the Service to “open the doors” as widely as possible.

Some high-earning proprietors could be excluded if the IRS writes the rules too narrowly.  The agency plans on issuing guidelines by June but we shall see if that happens.

The 20 percent deduction is aimed at pass-through businesses, whose income is reported on their owners’ personal tax returns.  Congress tried to bar wealthy owners of service businesses from getting the break. This may exclude many doctors, lawyers, accounting firms and or financial services unless they can find a loophole. The challenge for the IRS will not be easy.  The agency must write coherent rules and then be ready to make judgements on every business in the U.S. The IRS may then be challenged by some of these businesses or second-guessed by courts.

This much is clear: if you are a pass-through business owner who earns less than $157,500 (or $315,000 for a married couple), you get full access to the deduction no matter what you do.  Above these thresholds, the deduction fades for certain “service” businesses including health, law, consulting, athletics, financial and brokerage services.  So, are Veterinarians considered “healthcare”?

Just as puzzling to us is another phrase in the law.  Any firm where the “principal asset” is the “reputation or skill of one or more employees” are also excluded. Who does this include? If you advertise that you are the best “baker” in town, does this then exclude bakers? The final version of the law took “engineers and architects” off the list of service providers. Very interesting how the final Regulations will read….stay tuned!

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Home Mortgage Interest With The New Tax Law

Clients are asking about the deductibility of home mortgage interest and equity lines under the Tax Cuts and Jobs Act that takes effect in January 2018.

Under the former rules, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire your principal residence and a second home.  Qualifying home equity debt (HELOC) was limited to the lesser of $100,00 or the taxpayer’s equity in the home.

The New Tax Law states you can deduct interest on a mortgage of up to a total $750,000. However, for acquisition debt incurred before December 15, 2017, the higher pre-Act limit applies.  The higher pre-Act limit also applies to debt arising from refinancing pre December 15, 2017 to the extent the debt from the refinance does not exceed the original debt amount.  This means you can refinance up to $1 million of pre-December 15, 2017 acquisition debt in the future and not be subject to the reduction limitation as long as the refinance does not exceed the original debt.

And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt.  This applies regardless of when the home equity debt was incurred.  Accordingly, if you are considering incurring home equity debt in the future, you should take into consideration that the interest you pay is not deductible.

Both of these changes last for eight years, through 2025. In 2026, the pre-Act rules are scheduled to come back into effect unless Congress extends the Law.

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How To Avoid Tax Traps with Inherited IRAs

An  inherited Individual Retirement Account (IRA) can be a tremendous boon to the beneficiary.  Who can’t use extra money in retirement!  Most inherited IRAs are cashed out within six months of the death of the family member.  If you do cash it out, there is no way for planning tax strategies! Without proper planning, federal and state taxes can take a sizable bite from the proceeds!

Options for Inherited IRAs:

  •  Take a lump sum distribution of the entire balance
  •   Roll the inherited IRA over into a new account and take the distributions over the longer of the life expectancy of the beneficiary or the decedent.

If the account owner died before reaching the date for RMDs (Required Minimum Distributions), the beneficiary has a third option of withdrawing all the funds by the end of the year containing the fifth anniversary of the decedent’s death (The Five Year Rule). In this case, the life expectancy of the beneficiary must be used.

Keep the Beneficiary Designation Up To Date!

Marriage, divorce and the birth of children can change estate plans.  The IRA will pass by beneficiary designation and not the Will.  Please make sure you keep the beneficiary as you want it.

Titling An Inherited IRA:

An inherited IRA must be titled with both the name of the decedent and the beneficiary plus the word “inherited”. For example, one might title an inherited IRA as “Jane Doe, deceased September 30, 2017, F/B/O Jimmy Doe, beneficiary”.  If you just change the name on the IRA, that is a “cash out” so DO NOT just retitle the inherited IRA to the beneficiary. Retitling the account is best done at the brokerage where the decedent held the IRA before the beneficiary rolls it over to his or her own brokerage.

If Decedent Had Turned 70 1/2 Years of Age and Started RMDs:

If the decedent had already turned age 70 1/2 and started taking required minimum distributions, the beneficiary MUST take the required minimum distribution before the end of that year or there is a 50% penalty and you still must take the distribution.


Consider the beneficiary’s age and if there are already ample retirement sources, converting the inherited IRA to a ROTH may be the way to go.

Please call our office BEFORE just cashing out the inherited IRA!


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Charitable Giving of your IRA Required Minimum Distribution

If you are age 70 1/2 or more and are required to take an “RMD” (Required Minimum Distribution) from your IRA, are you taking advantage of the option of donating that distribution to your favorite charity? Many of us make charitable contributions during the year.  If you have an IRA and are required to take a distribution because of your age, you can use a QCD (Qualified Charitable Distribution) and eliminate that income.  This QCD option applies only to IRA and not any company plans.  It also applies to inactive SEP and SIMPLE plans.

With a QCD, your Required Minimum distribution can go directly from your IRA to the charity.  This direct transfer takes care of the RMD but it is not included in your taxable income for that year.  There is no charitable deduction since you did not include it the income from the distribution.  Excluding these amounts from income can reduce adjusted gross income (AGI) as well as taxable social security and any itemized deductions that may be limited by that AGI

This QCD option became a permanent part of the Tax Law in 2015. There can be no benefit back to you because of the giving.  If you receive tickets or some small token of appreciation, it could disallow your benefit of the direct transfer so be careful when using this option.  If you have questions or want to learn more on this topic, please call our office.

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