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Lighthouse Tax & Business Consulting
April 2015
LIGHTHOUSE MONTHLY
Tax Strategies & Tips for Small Businesses, Individuals and the Self Employed
6803 Whittier Avenue, Suite 200
McLean, VA 22101
phone: 703.847.2626
fax: 703.847.0855
email: [email protected]
Estimated Tax Payments
Recently, several new tax
laws and changes took
effect that add complexity
to estimating one’s tax
liability, including: higher
ordinary tax rates, higher
capital gains tax rates, the
phase out of exemptions
and itemized deductions for
higher income taxpayers,
the 3.8% tax on net
investment income, and
.9%
increase
in
selfemployment tax for upperincome
self-employed
individuals, not to mention
a myriad of sun setting tax
provisions.
Where’s My Refund
Where’s My Refund? is an
interactive tool on the IRS
web site.
Whether you
split your refund among
several accounts, opted for
direct deposit into one
account, or asked the IRS
to mail you a check,
Where’s My Refund? will
give you online access to
your refund information
nearly 24 hours a day, 7
days a week.
Education Tax Benefits
The tax code includes a number of incentives that, with
proper planning, can provide tax benefits while you, your
spouse, or children are being educated. Which of these
options will provide the greatest tax benefit depends on
each individual’s particular circumstances. The following is
an overview of the various possibilities.
Student Loans - A major planning issue is how to
finance your children’s education. Those with substantial
savings simply pay the expenses as they go while others
begin setting aside money far in advance of the education
need, perhaps utilizing a Coverdell account or Sec. 529
plan. Others will need to borrow the funds, obtain
financial aid, or be lucky enough to qualify for a
scholarship. Although student loans provide one ready
source of financing, the interest rates are generally higher
than a home equity debt loan, which can also provide a
longer repayment term and lower payments.
When choosing between a home equity loan or student
loan, keep in mind the following limitations: (1) Interest
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Lighthouse Tax & Business Consulting
April 2015
on home equity debt is deductible only if you itemize, and then only on the first $100,000 of
debt, and not at all to the extent that you are taxed by the alternative minimum tax; and (2)
student loans must be single-purpose loans—the interest deduction is available even if you do
not itemize but is limited to $2,500 per year, and the deduction phases out for joint filers with
income (AGI) between $130,000 and $160,000 ($65,000 to $80,000 for unmarried taxpayers).
Gifting Low Basis Assets - Another frequently used tax strategy to finance education is to
gift appreciated assets (typically stock) to a child and then allow the child to sell the stock to
pay for the education. This results in transferring any gain on the stock to the child at a time
when the child has little or no other income; tax on the gain is avoided or is at the child’s low
rate.
With the lowest of the long-term capital gains rates currently being zero, Congress
curtailed income shifting to children by making most full-time students under the age of 24
subject to the “kiddie tax.” This effectively taxes their unearned income at their parents’ tax
rates and makes the gifting of appreciated assets to a child less appealing as a way to finance
college expenses.
Education Credits - The tax code provides tax credits for post-secondary education tuition
paid during the year for the taxpayer and dependents. Currently, there are two types of
credits: the American Opportunity Credit, which is limited to any four tax years for the first
four years of post-secondary education and provides up to $2,500 of credit for each student
(some of which may be refundable), and the Lifetime Learning Credit, which provides up to
$2,000 of credit for each family each year. The American Opportunity Credit is phased out for
joint filers with incomes between $160,000 and $180,000 ($80,000 to $90,000 for single
filers). The 2015 phaseout ranges for the Lifetime Learning Credit are $110,000–$130,000 for
married joint and $55,000–$65,000 for others. Neither credit is allowed for married individuals
who file separately. Careful planning for the timing of tuition payments can provide substantial
tax benefits.
Education Savings Programs - For those who wish to establish a formalized long-term
savings program to educate their children, the tax code provides two plans. The first is a
Coverdell Education Savings Account, which allows the taxpayer to make $2,000 annual
nondeductible contributions to the plan. The second plan is the Qualified Tuition Plan, more
frequently referred to as a Sec. 529 plan, with annual nondeductible contributions generally
limited to the gift tax exemption for the year ($14,000 in 2015). Both plans provide tax-free
earnings if used for qualified education expenses. When choosing between a Coverdell or Sec.
529 plan, keep the following in mind: (1) Coverdell accounts can be used for kindergarten
through post-secondary education and become the property of the child at age of majority, and
contributions are phased out for joint filers between $190,000 and $220,000 ($95,000 and
$110,000 for others) of income (AGI); and (2) Sec. 529 plans are only for post-secondary
education, but the contributor retains control of the funds and there is no phase out of the
contribution based on income.
Educational Savings Bond Interest—There is also an exclusion of savings bond interest for
Series EE or I Bonds that were issued after 1989 and purchased by an individual over the age
of 24. All or part of the interest on these bonds is exempt from tax if qualified higher education
expenses are paid in the same year that the bonds are redeemed. As with other benefits, this
one also has a phase-out limitation for joint filers with income between $115,750 and
$145,750 ($77,200 and $92,200 for unmarried taxpayers, but those using the married filing
separately status do not qualify for the exclusion). The exclusion is computed on IRS Form
8815, Exclusion of Interest from Series EE and I U.S. Savings Bonds Issued After 1989.
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Lighthouse Tax & Business Consulting
April 2015
Tax Break For Sales of Inherited Homes
People who inherit property are often concerned about the taxes they will owe on any gain
from that property’s sale. After all, the property may have been purchased years ago at a low
cost by a deceased relative but may now have vastly appreciated in value. The usual question
is: “Won’t the taxes at sale be horrendous?”
Clients are usually pleasantly surprised by the answer—that special rules apply to figuring the
tax on the sale of any inherited property. Instead of having to start with the decedent’s original
purchase price to determine gain or loss, the law allows taxpayers to use the value at the date
of the decedent’s death as a starting point (sometimes an alternate date is chosen). This often
means that the selling price and the inherited basis of the property are practically identical,
and there is little, if any, gain to report. In fact, the computation frequently results in a loss,
particularly when it comes to real property on which large selling expenses (realtor
commissions, etc.) must be paid.
This also highlights the importance of having a certified appraisal of the home to establish the
home’s tax basis. If an estate tax return or probate is required, a certified appraisal will be
completed as part of those processes. If not, one must be obtained to establish the basis. It is
generally not acceptable just to refer to a real estate agent’s estimation of value or comparable
sale prices if the IRS questions the date of death value. The few hundred dollars it may cost for
a certified appraisal will be worth it if the IRS asks for proof of the basis.
Another issue is whether a loss on an inherited home is deductible. Normally, losses on the
sale of personal use property such as one’s home are not deductible. However, unless the
beneficiary is living in the home, the home becomes investment property in the hands of the
beneficiary, and a loss is deductible but subject to a $3,000 ($1,500 if married and filing
separately) per year limitation for all capital losses with any unused losses carried forward to a
future year.
In some cases, courts have allowed deductions for losses on an inherited home if the
beneficiary also lives in the home. In order to deduct such a loss, a beneficiary must try to sell
or rent the property immediately following the decedent’s death. In one case, where a
beneficiary was also living in the house with the decedent at the time of death, loss on a sale
was still deductible, when the heir moved out of the home within a “reasonable time” and
immediately attempted to sell or rent it.
This treatment could change in the future, however. The President’s Fiscal Year 2016 Budget
Proposal includes a proposal that would eliminate any step up in basis at the time of death and
would require payment of capital gains tax on the increase in the value of the home at the time
it is inherited.
If you have questions related to inheritances or home sales, please give this office a call.
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Lighthouse Tax & Business Consulting
April 2015
Writing off Start-up Expenses
Business owners – especially those operating small businesses – may be helped by a tax law
allowing them to deduct up to $5,000 of the start-up expenses in the first year of the business’s
operation. This is in lieu of amortizing the expenses over 180 months (15 years).
Generally, start-up expenses include all expenses incurred to investigate the formation or
acquisition of a business or to engage in a for-profit activity in anticipation of that activity
becoming an active business. To be eligible for the election, an expense must also be one that
would be deductible if it were incurred after the business actually began. An example of a start-up
expense is the cost of analyzing the potential market for a new product.
As with most tax benefits, there is always a catch. Congress put a cap on the amount of start-up
expenses that can be claimed as a deduction under this special election. Here’s how to determine
the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the
first year, plus you can amortize the balance over 180 months. If the expenses are more than
$50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up
expenses that exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off
would be limited to $1,000 ($5,000 – ($54,000 – $50,000)).
The election to deduct start-up costs is made by claiming the deduction on the return for the year
in which the active trade or business begins, and the return must be filed by the extended due
date.
Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were
paid or incurred to operate an existing active business in the same field as the new business and
the cost is paid or incurred before the day the active trade or business begins. Not includible are
taxes, interest, and research and experimental costs. Examples of qualified start-up costs include:
•
•
•
•
•
Surveys/analyses of potential markets, labor supply, products, transportation facilities,
etc.;
Wages paid to employees and their instructors while they are being trained;
Advertisements related to opening the business;
Fees and salaries paid to consultants or others for professional services; and
Travel and other related costs to secure prospective customers, distributors, and
suppliers.
For the purchase of an active trade or business, only investigative costs incurred while conducting
a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer
decide whether to purchase a new business and which one to purchase) are qualified start-up
costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated
as start-up costs.
If you have a question related to start-up expenses, please give this office a call.
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Lighthouse Tax & Business Consulting
April 2015
Employee Financial Wellness at Work Programs Gaining
Popularity
Along with 401(k) plans, Health & Wellness plans have historically been the main benefit focal point
for employers. “Obamacare” has dominated the HR industry bulletins. In addition to our search and
acceptance of affordable healthcare, our definition of healthcare has shifted to include much more
than our annual exam, pediatric care for our children, prescription costs, and major medical
coverage. Employers also realize that the aspects of mental health play a huge role in the
productivity of every employee, the overall costs of healthcare, and thus the productivity and
profitability of the employer.
As employees, we may come to realize that the balance of work and non-work life can become
more and more intertwined. Our personal success, or lack thereof, usually has an impact on our
career and employment success. This includes our personal financial success. According to the
American Psychology Association, 7 out of 10 American workers say financial stress is their most
common cause of stress*. And we are bringing that stress into the workplace every day. According
to SHRM (Society For Human Resource Management), 7 out of 10 HR professionals indicated that
personal financial challenges have a large or some impact on their employees’ performance. Almost
half state that employee stress and the ability to focus on work are the aspects of employee
performance most negatively affected by personal financial challenges.
For these reasons, and many more, Financial Wellness Programs may be coming to your employer
soon! These programs are not only focused on unbiased and sound financial planning, but more
importantly focus on changing and constantly improving an individual’s financial habits and
behaviors. As an on-going program, offered both in group seminar environments during the
workday, as well as individually tailored programs, these employer sponsored programs cover all
aspects of proper financial wellness such as budgeting, immediate, short-term and long-term
savings goals, navigating healthcare packages, wills, estate planning, and more. It’s not about
what products are out there, it’s about changing and improving our habits, gaining critical
education, and taking action on a plan that is understood with confidence.
Another aspect of these programs is that we have three primary, and very different, generations of
employees in the workforce. According to SHRM, the Baby Boomers are most concerned with
Retirement Planning, and whether are not they can retire when and how they want to. The
Generation X’ers are more interested in Investment Planning, with budgeting number three on
their “needs” list, while the Millennial generation places almost equal needs with Investment and
Budget Planning.
As the way we look at our Employers continues to evolve, Financial Wellness At Work has become
much more than your 401(k) benefit plan. Sound mind and sound body, we’ve all heard it before,
are both important. Stress impacts all of us in different ways. Employers large and small are
looking to Financial Wellness programs to bring education and assistance to everyone.
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