Postpone taxes with this strategy

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can’t swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don’t qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a delayed exchange, the replacement property must be specifically identified in writing within 45 days and must be received within 180 days (or by your tax return due date, if earlier), after sale of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There’s no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.

Tax tips for that first job

Out of school and into the workforce. If the expression describes you or a family member this summer, filling out Form W-4 properly can make your first job less taxing.

Here’s why: The amount of federal income tax withheld from your wages depends on how you complete IRS Form W-4, the “Employee’s Withholding Allowance Certificate,” which tells your employer your marital status and the number of withholding allowances you’re claiming.

Withholding allowances are similar to the number of dependents you have. Claiming more allowances generally reduces the income tax deducted from your paycheck, but you can only claim the number you’re entitled to.

Think too much tax will be withheld? As long as you expect to work no more than 245 days for all employers during 2015, you might want to consider making a written request to have your federal withholding calculated using an alternative method. The “part-year employment method” of withholding can boost your net pay. Just be sure to complete a new Form W-4 next January.

Caution: Estimate your annual income carefully. Form W-4 affects only the amount of tax withheld, not the total tax that will be due with the tax return you’ll file at the end of the year.

You may also be entitled to tax breaks such as above-the-line deductions for moving expenses and student loan interest. Please call for information and advice.

Business survey identifies taxes as biggest burden

In a survey of small businesses conducted by the National Small Business Association, 59% of respondents said taxes were more of an administrative burden than a financial one. Most businesses put payroll taxes at the top of the list of taxes with the greatest administrative burden. Payroll taxes also outranked other taxes, such as income, property, and sales taxes, as the top financial burden to businesses.

IRS publishes help for ID theft

The IRS websites contain useful information on how to avoid becoming a victim of identity theft, plus steps to take if you do become a victim.

Here are the warning signs that you may have had your identity stolen:

  1. The IRS notifies you that more than one tax return was filed using your social security number.
  2. You’re notified that you owe additional tax or you’ve had collection actions taken against you for a year you did not file a tax return.
  3. IRS records indicate you received wages from an employer unknown to you.

If you become a victim, the IRS recommends that you take the following steps:

  1. File a police report.
  2. File a complaint with the FTC.
  3. Contact one of the three credit bureaus to place a fraud alert on your account.
  4. Close any financial accounts opened without your permission.
  5. Respond immediately to any IRS notice, according to the instructions given.
  6. Complete IRS Form 14039 “Identity Theft Affidavit.”
  7. Continue to pay your taxes and file your tax return, even if by paper.

IRS issues reminder on child tax credit

● Children must be under age 13 to qualify for the credit.
● The credit applies whether the childcare provider is a sitter at home or a daycare facility.
● The credit applies for up to $3,000 of expenses for one child and up to $6,000 for two or more.
● The credit can be up to 35% of qualifying expenses, depending on your income.
● Overnight camps don’t qualify; day camps do.
● Keep receipts for expenses, and get the employee ID number of the care giver.

Business Tax Tip: Calculate your basis

It’s important for S corporation shareholders to know their basis in the corporation. Basis is the key to determining whether current-year losses can be deducted by the shareholder or not. Losses in excess of basis are generally “suspended” for use in later years when the business has income. Basis is also important when shareholders plan to take nontaxable distributions. In cases where distributions exceed investment in the company, the distributions can be taxed as capital gain. Check your basis now to give yourself time to increase basis if necessary and avoid a tax surprise at year-end.

IRS announces 2016 HSA limits

The 2016 inflation-adjusted amounts for health savings accounts (HSAs) have been released by the IRS. Individuals will be allowed to contribute up to $3,350, and contributions for family coverage will be limited to $6,750. As before, an individual aged 55 or older may contribute an additional $1,000. For 2016, a “high-deductible health plan” is one with an annual deductible of not less than $1,300 for individual coverage and $2,600 for family coverage.

New ABLE accounts are now available

The Tax Increase Prevention Act of 2014 that was signed last December mainly affected the year 2014 as it extended for that year only some 50 tax breaks that had expired earlier. One provision, however, became effective in 2015. Starting this year, the law authorizes tax-favored ABLE accounts for disabled individuals. These “Achieving a Better Life Experience” accounts are exempt from income tax when the funds are used to pay for qualified expenses such as transportation, housing, education, and medical costs. Nonqualified distributions are subject to income tax, plus a 10% penalty. If you would like details about ABLE accounts, contact our office.

Electronic refunds limited to three per account

The IRS announces that, as part of its efforts to curb fraud and identity theft, it will no longer directly deposit more than three electronic refunds to a single financial account or prepaid debit card. Taxpayers who exceed the limit will receive an IRS notice and a paper refund.

The IRS also warns that direct deposit must be made only to accounts bearing the taxpayer’s name.

Not all “income” is taxable

There are several sources of revenue that are not subject to income tax.

Here are the most common sources of money that are not taxed on your federal income tax return:

*        Borrowed money such as from banks or personal loans.

*        Money received as a gift or inheritance from family or friends.

*        Money paid on your behalf directly to a school or medical facility.

*        Most life insurance proceeds.

*        Cash rebates from businesses when you buy an item.

*        Child support payments.

*        Money you receive for sustaining an injury.

*        Scholarships for tuition and books.

*        Disability insurance proceeds from a policy purchased with after-tax dollars.

*        Up to $500,000 of profit for a couple selling their personal residence.

*        Interest received on municipal bonds.

If you have included any of these on your income tax return for the past three years, you can amend your return for a tax refund.

If you would like assistance in determining what to include on your income tax return, please contact us. We are here to help you.

For more information, contact our office