Tax

Commonly Overlooked Tax Incentives for Business Owners

How entrepreneurs can use government programs to lower tax bills while creating jobs and wealth

Key Takeaways:

  • Asset- and employee-based incentives can significantly reduce federal and state tax liabilities and provide your business with enhanced cash flow for expansion or debt reduction.

  • Useful sites for federal and state credits include www.hud.gov and www.dsireusa.org.

  • Googling the phrases “GoBiz” or “Enterprise Zone” will also provide information on state-level incentives.

Now is the time of year that many business owners are starting to ask their financial advisors for help with tax planning for year-end and beyond. As many of you are aware, there are a wide variety of federal and state tax credits and other incentives that are readily available but often overlooked by businesses and their tax advisors.

Federal, state and local tax incentives
While the vast majority of tax planning efforts are focused on the timing of taxable income and tax-deductible items (temporary or timing differences), there are literally hundreds of federal tax incentives (permanent differences) that encourage owners to invest in certain equipment, hire certain types of employees, operate in certain regions or invest in certain industries.


Most of the federal incentives are statutorily defined, so taxpayers can easily access these credits and other incentives without negotiating with the federal government before becoming eligible. However, there are also a variety of grants and exemptions that may require applications or negotiations with federal agencies.

State and local incentives, however, fall into two general categories—“Pre-Qualification” programs and “Non-Pre-Qualification” programs.

Pre-qual States typically require taxpayers to apply to state agencies in advance of starting a business or prior to expanding their operations. They must also obtain approval to participate in the state program. Examples of pre-qual states include New York (Empire Program), Texas (Enterprise Zone) and California (Enterprise Program). Again, the majority of states require advance approval for their larger incentive programs.

Non-pre-qual states simply require taxpayers to meet certain statutory criteria to be eligible for the tax incentives or other financial incentives. In many cases, simply hiring employees in certain geographic regions or purchasing designated equipment (e.g., manufacturing or environmental). Florida, Utah and Arizona are examples of states that offer certain incentives covering all or significant parts of their states. But many states do not.

Among the 40 or so State Enterprise Programs, which vary in specific incentives (but which typically have hiring and equipment credits as core program benefits), roughly two-thirds are in prequalification states.

In addition to these major state incentive programs, most states (and local jurisdictions) have a healthy variety of other statutory credits and exemptions. These benefits generally apply to corporations but occasionally extend to individual taxpayers via flow-through credits from LLCs, partnerships and S corps. In the current competitive environment for attracting and retaining businesses, states and municipalities are often open to negotiating short-term and long-term income/franchise tax holidays, property tax exemptions, sales tax rebates, low-interest loans, and even land and building transfers.

Since credits claimed often have an offsetting impact on depreciation or wage deductibility (to avoid double-dipping), the net, after-tax federal benefit can often be less than the after-tax benefit for similar credits at the state level.

The moral here is “A credit is a credit,” but don’t look down your nose at state- and local-level credits. Business owners and their advisors should explore all available federal, state and local incentives because they have significant value.

Following are examples of various federal credits available for certain asset acquisitions and new hires.

Research and Experimentation Credit

IRC Section 41 provides a relatively common credit, which is a general business tax credit for companies that are incurring R&D expenses in the United States. A taxpayer is entitled to a research credit for qualifying amounts (generally W-2 amounts paid to research-focused employees and/or for certain outsourced research). The credit is generally equal to 20 percent of the amount by which the qualified research expenses exceed a specific base amount unless a simplified method is elected. Many states also have a similar credit. This credit has been placed into permanent standing for the foreseeable future.  Furthermore, the credits can now be used to offset a most taxpayer’s Alternative Minimum Tax liabilities.


Empowerment Zone Employment Credit

IRC Section 1396 provides an incentive to businesses that are located in distressed urban and rural areas in need of economic revitalization, known as empowerment zones (EZ). The credit is available to businesses located in an EZ hiring and retaining employees who also live in an EZ. Businesses are eligible for a wage credit of up to $3,000 per eligible employee. The credit amount can be as high as $3,000 (20 percent of the first $15,000) of wages paid to the employee.

Work Opportunity Tax Credit (WOTC)
WOTC is a federal tax credit available to employers who hire and retain veterans and individuals from other target groups with significant barriers to employment. Employers generally can earn tax credits ranging from $2,400 to $9,600, depending on the classification of the employee. This credit has been extended through December 31, 2019. Therefore, employers are advised to screen and pre-certify any new qualifying employees within 28 days of hiring by filing IRS Form 8850 and ETA 9061.


Alternative Motor Vehicle Credit—Qualified Fuel Cell Vehicles

A qualified fuel cell motor vehicle is a vehicle that is propelled by power derived from one or more cells that convert chemical energy directly into electricity.

For fuel cell vehicles that weigh not more than 8,500 pounds, the base credit amount is $4,000. The amount of the credit available for heavier commercial vehicles varies from $10,000 to $40,000, depending on the weight of the vehicle.

This credit applied to vehicles purchased before January 1, 2017 and placed into service in the same year.  Additional information and guidance for the Alternative Motor Vehicle Credit can be found under IRC Section 30B.  Again, extension of these credits is expected.

Plug-In Electric Drive Vehicle Tax Credit

Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles, including passenger vehicles and light trucks. For vehicles acquired after December 31, 2009, the credit is $2,500 plus additional amounts for a vehicle that draws propulsion energy from a battery with at least 5 kilowatts. The total amount of the credit allowed for a vehicle is limited to $7,500. The credit begins to phase out for a manufacture’s vehicles when at least 200,000 vehicles have been sold in the United States.  A complete list of qualifying manufactures can be found on the IRS.gov website.  

Disabled Access Credit

IRC Section 44 provides a tax benefit for businesses that have employees with disabilities. This is a nonrefundable credit available for small businesses with earnings of $1 million or less and no more than 30 full-time employees that incur expenditures for the purpose of providing access for persons with disabilities into the taxpayers’ facilities. The credit is 50 percent of expenditures over $250, not to exceed $10,250, for a maximum benefit of $5,000. Refer to IRS Form 8826.

Barrier Removal Tax Deduction

The Architectural Barrier Removal Tax Deduction provided by IRC Section 190 encourages businesses of any size to remove architectural and transportation barriers to the mobility of persons with disabilities and the elderly. Businesses may claim a deduction of up to $15,000 a year for qualified expenses for items that normally must be capitalized.

The Medical Premium Assistance Credit

As part of the Affordable Care Act (ACA), companies that get their health insurance coverage through the Health Insurance Marketplace (through their state, not federal, exchange) may be eligible for the federal premium tax credit. This tax credit can help make purchasing health insurance coverage more affordable for low- and middle-income employees. The credit available is based on the lesser of (1) the premium for the qualified health plans in which a taxpayer or the taxpayer’s family member enrolls or (2) the excess of the adjusted monthly premium for the applicable benchmark plan over one-twelfth of the product of the taxpayer’s household income and the applicable percentage for the taxable year. See IRS Form IRC Section 36B.

The Building Rehabilitation Tax Credit

IRC Section 47(a)(1) provides the Rehabilitation Tax Credit, which offers a 10 percent credit for the rehabilitation of non-historic buildings, with an additional requirement that the building must originally have been constructed before 1936.

IRC Section 47(a)(2) provides a more valuable 20 Percent Historic Tax Credit, available for the rehabilitation of a Certified Historic Structure.

Most of these credits have their own reporting federal form; however, the credits end up flowing as a general business credit and are reported using IRS form 3800. The General Business Credit (Form 3800) is available at http://www.irs.gov/pub/irs-pdf/f3800.pdf.

Virtually all these state and federal credits require a reduction in the depreciable basis of the related assets. In addition, the credits generally can be used to reduce “regular” tax to zero, but these credits are normally not allowed to reduce Tentative Minimum Tax/ Alternative Minimum Tax.

Conclusion

Business owners and their advisors who take the time to dig into these incentives for their businesses will be pleasantly surprised by the wide variety of tax and economic benefits to which they are entitled.  State and local tax authorities may offer additional incentives and exemptions.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

A Tax-Efficient Way to Enjoy Classic Cars and other Pricey Collectibles

A Flip-CRUT can help affluent accumulators long before the euphoria of a new acquisition (or sale) wears off

Key Takeaways:

  • Collector cars are considered tangible personal property. When the property is sold for a profit, owners must pay capital gains tax at a higher rate than for marketable securities.

  • Because they are so caught up in the fun part of acquiring, collectors often overlook various planning methods they can use to reduce tax liabilities prior to the sale.

  • A Flip-CRUT is a special type of charitable trust that is suitable for holding non-income-producing assets that will be sold at a later date.

  • At some point the trust converts permanently, or “flips,” to making regular payments just like a standard CRUT.



Collectors, especially car collectors, have been of interest to us for many reasons. Not only do they tend to be HNW individuals, but they also tend to be uniquely passionate and driven by their hobby (no pun intended). At a recent collector car auction, a rare Ferrari sold for $7.5 million in less than 10 minutes of bidding. In fact, at this particular auction site, 12 cars each sold for more than $1 million, while the auction average was more than $336,000 per vehicle—serious financial commitments for all sides of the transaction indeed.

However, when you take away the passion of the frenzied bidding and the joy of the new acquirer and the relieved seller, there is a personal economic impact that must be considered. Collector cars and other collectibles are considered tangible personal property. So when they’re sold for a profit, capital gains tax is owed by the seller. Tax at the federal level is 28 percent, while state tax varies depending on the residency of the seller. Because they are so caught up in the fun part of collecting, collectors and their advisors often overlook various planning methods they could have used to reduce taxes prior to selling.

Real-world example

As an example, let’s take the $7.5 million Ferrari. The seller purchased the car for $2.3 million and invested another $600,000 in a complete ground up restoration. That means that before selling costs his tax basis is $2.9 million and thus his capital gain was $4.6 million. A nice check to the federal government of nearly $1.3 million is now owed by the seller. He nets around $3.3 million, and life goes on.

However, let’s look at an alternative approach that might make this transaction much more favorable for the seller. Prior to the auction, our 63-year-old seller and his 61-year-old wife transfer the Ferrari to a Flip Charitable Remainder Unitrust (Flip-CRUT). A Flip-CRUT is a special type of charitable trust that allows non-income-producing assets to be placed in trust, and sometime later in the future after the asset is sold, generally the trust “flips” to a Standard Charitable Remainder Unitrust (SCRUT) and begins distributing income normally to the husband and wife who established it.

What are the consequences of this transaction for the seller? First, because the balance of the trust will pass to charity when the last of the sellers dies, there is a charitable income tax deduction available. The amount of the gift is based on the current value of the property, not on what it will be worth in the future. Because this is tangible personal property, the deduction is calculated on the tax basis of the contributed property, not on the full fair market value.

In this case, we know the basis was $2.9 million. This produces a charitable income tax deduction of a little more than $683,000. Even in the 35 percent income tax bracket, this will save almost $240,000 in income taxes. And, like other charitable deductions, our Ferrari seller has this year and the next five years to utilize the deduction on his income tax return. Next, there is NO capital gains tax due on sale. Flip CRUTs are exempt from income tax, and therefore the sale leaves the entire $7.5 million available for reinvestment. Ultimately, this will produce an income stream for our selling couple that will continue for their lifetimes. Income from a 6 percent payout trust, which was used for this example, begins at $450,000 per year.

If all goes perfectly, the Ferrari sellers will receive more than $12 million in income from the trust over their lifetimes. They’ll save more than $1.5 million in income tax and leave a charitable gift of close to $10 million to the charities they choose. They will also remove the value of the Ferrari or its sales proceeds from their estates. And while they have done that, they have also removed it from their children’s inheritance. That issue can be resolved if they so choose, normally with the purchase of life insurance outside the estate to replace the “lost” asset.

Conclusion

While collectors pursue their passionate assets, they and their advisors must position themselves in a way that allows the collector to be better-informed about the various choices that are available for the ownership and effective disposition of their collectible assets. This may mean millions of dollars to the collector over the course of a collecting lifetime.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I make a Deductible IRA Contribution?

Contributing to a Traditional IRA can allow you to not only put away tax-deferred savings into retirement, but you could also be eligible for a tax deduction in the year of contribution.  Read on to see if you can deduct your Traditional IRA contribution this year.

Do you or your spouse have earned income?                                                           

Earned income means income from wages, salaries, or bonuses.  Examples of unearned income include investment income and inheritances.  If you do not have any earned income for 2018, you will not be able to make an IRA contribution, deductible or not.  If you do have earned income, move on to the next question.

At the end of this year, will you be age 70.5 or older?

If you answered “yes”, you will be ineligible to make a contribution to a Traditional IRA.  However, you may still be able to contribute to a Roth IRA.  Check out our “Can I make a Roth IRA Contribution?” flowchart. If you will be younger than 70.5 at the end of the year, continue reading.

Did you make a full contribution to a Roth IRA?

If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit.  If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years.  Either way, move on to the next question.

Did the divorce occur at least two years ago?

If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits.  If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.

Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Do a Net Unrealized Appreciation (NUA) Distribution?

Many companies offer company stock as a type of profit-sharing bonus in order to encourage company stock ownership for employees.  This is typically rewarded to employees within their 401(k) or other retirement account.  Unfortunately, as with all 401(k) distributions, withdrawals are taxed at ordinary income rates.  To combat this, the IRS allows for the capital appreciation of the stock to be taxed at long-term capital gains rates, as long as certain requirements are met.  Read on to see if you could qualify for a NUA.

Do you have employer issued stock in an employer retirement plan?

If you have no company stock, you won’t be eligible for an NUA distribution.  If you do have appreciated company stock in a retirement plan, read on.

Is it phantom stock or stock options?

Unfortunately phantom stock and stock options are not eligible for NUA treatment.  If you have other company stock, read on.

Do you have investments in the retirement account, other than employer issued stock (such as mutual funds)?

NUA distributions require the entirety of the account to be distributed, but non-qualified distributions from retirement funds could trigger taxes and penalties.  To avoid this, roll all non-employer stock to a Traditional IRA. 
Was part or all of the employer stock distributed in-kind to a taxable brokerage account?

To be eligible for the NUA distribution, the employer stock must be distributed directly to taxable account.  Additionally, the distribution must occur after one of the following events to be eligible: death, disability, separation from service, or reaching age 59.5.

If you meet all of the above requirements, you will be eligible for a NUA distribution.  Check out this flowchart to learn more.

NUA distributions can be complicated and difficult to coordinate with the retirement plan sponsor.  Numerous mistakes can be made in the long process that will disqualify you from receiving NUA treatment.  If you have questions regarding NUA distributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

What Constitutes a Charitable Gift?

4 key tests

Key Takeaways:

  • Regardless of its size or its benefit to a charity, any transfer that does not meet the definition of a charitable gift for tax purposes will generate no charitable deduction.

  • Giving money to a specific person—no matter how badly he or she needs it—is not considered a charitable gift for tax purposes.

  • For tax planning purposes, make sure you know the difference between the date a check is written for a charitable gift, the date the check is sent and the date it is actually received.

 

Understanding what a charitable gift is--and when a charitable gift is made--seems obvious. However, this simple concept can become quite complex. Charitable gifts can generate income tax deductions. Applying that knowledge requires knowing what constitutes a charitable gift for tax purposes. Regardless of its size or its benefit to a charity, any transfer that does not meet the definition of a charitable gift for tax purposes will generate no charitable deduction.

So let’s begin by looking at what a charitable gift is for tax purposes and then consider examples of transfers that are not charitable gifts for tax purposes.

A deductible charitable gift occurs when the donor delivers money or valuable property to a charity or agent of the charity. That’s it. There is nothing particularly complicated about the definition (except perhaps the phrase “agent of the charity,” which simply means a representative of the charity). How then could things possibly become complicated when starting with such a simple definition?

Examples of gifts that don’t qualify for tax deductions:

  1. The first example of an action that is not a charitable gift for income tax purposes is a promise to deliver money or valuable property in the future. A promise is not a gift. Even if the promise is a legally enforceable written contract, it is still just a promise. So, it is not a gift—at least not yet. Once the promise is fulfilled and the donor actually delivers money or valuable property to the charity (or agent of the charity), then—and only then—the definition of a gift is met.

  2. Another example of an action that is not a completed gift is when a donor gives money or valuable property to the donor’s agent (i.e., the donor’s representative) with instructions to deliver the gift to a charity or an agent of the charity. Because the money or valuable property is still in the hands of the donor’s representative, it has not yet become a completed gift. Once the money or valuable property is given to the charity (or the charity’s representative/agent), then—and only then—is there a deductible charitable gift.

  3. Another example that does not qualify as a charitable gift for tax purposes is when the donor delivers money or valuable property to the charity but still retains prohibited control over the money, even after the transfer to the charity. This retained control prevents the gift from being deductible until such time as the retained interests expire or are also given to the charity. This area is a bit more complicated because there are specific retained interests that are permitted by the tax code. Nevertheless, the general rule is that if a donor retains rights to control the money or get the money back, such a transfer is not (or at least not yet) a charitable gift.

  4. The last example of a transfer that is not a deductible gift is when a donor delivers money or valuable property to a charity for delivery to a specific person. A person is not a charity. Any person, even a person in serious financial or medical need, is not a charity. Giving money to a specific person is not a charitable gift for tax purposes. This fundamental rule cannot be avoided by simply giving money to a charity with the requirement that the money must then be delivered to a specific person. Such a transfer is treated as if it were a direct transfer to the person. Since a person is not a charity, the transfer is not a deductible charitable gift.


Conclusion

As with so many things in life, timing is everything when it comes to tax-efficient charitable giving. If you or someone close to you has concerns about the tax implications of their planned giving, please don’t hesitate to reach out. I’m happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

How Traveling by Cruise Ship Can Increase Your Business Deductions

Understanding the subtle intricacies of business travel deduction rules can help you save thousands of dollars. Tax the quiz.


Key Takeaways:

  • The money you spend on business travel is deductible as long as it’s used to carry out a business activity.

  • Money spent during business travel on personal activities, by contrast, is not deductible.

  • However, the normal allocation of business travel costs between business and personal expenses is not required for business travel on a cruise ship, that’s outside the 50 states for seven days or less.

  • Result: Turning a jet business trip into a cruise may not only be more relaxing, but may also make your entire trip deductible.

 

NOTE: All rules and deductions discussed in this article are accurate as spring 2019. However, always consult your tax advisor when planning to take deductions for business travel.

Situation

All the effort that your client, Ty Tannick, has spent chasing prospective billionaire client Lou Sitania is about to pay off. But before signing on the dotted line, Lou wants Ty to pay him a visit at his home in the U.S. Virgin Islands. It’s a long way from home. But doggone it, if landing a big client means leaving chilly Boston to travel to the Caribbean in mid-February, it’s a price Ty is willing to pay. So Ty books a five-day cruise to St. Thomas and brings his wife. Upon arriving in St. Thomas, Ty stays in a hotel for two days while holding meetings with Lou.

In preparing his tax return, Ty allocates the time he spent on the trip as 30 percent business, 70 percent personal.

Question

What, if anything, can Ty deduct for business travel costs?

  1. 100 percent of his total costs.

  2. 30 percent of his transportation costs and 30 percent of his costs for food and lodging.

  3. 100 percent of his transportation costs and 30 percent of his costs for food and lodging.

  4. Zero percent since the trip isn’t deductible business travel.

Answer

  1. Ty can claim deductions for 100 percent of his total costs (subject to the daily deduction limits for cruises).

Explanation

There are two kinds of deductible costs you incur when you travel on business:

  1. Business-day costs: the costs of sustaining life during a business day, including meals, snacks, drinks, cab rides and lodging; and

  2. Transportation costs: the costs of traveling to and from a business destination.

You normally have to allocate expenses between business and personal activity and can deduct only the former. But this scenario illustrates an important exception: Deductions for business travel expenses are not subject to the normal allocation between business and personal activity when you:

  • Travel to a destination outside the 50 states and the District of Columbia;

  • Travel for seven days or less (not counting the day of departure); and

  • Goes via a cruise ship.

Ty’s trip meets all three of these conditions. He could (and should) have deducted 100 percent of his total travel costs; therefore, A is the right answer.

Why the Wrong Answers (above) Are Wrong

If you answered B above—30 percent of his transportation costs and 30 percent of his costs for food and lodging—then you are wrong. That’s because deductibility of business transportation costs varies depending on two factors:

Factor 1. U.S. vs. Foreign Travel. IRS regulations distinguish between two kinds of business travel for purposes of deductible transportation costs:

  • Travel inside the 50 United States; and

  • Travel outside the 50 United States.

Ty’s trip to St. Thomas clearly qualifies as travel outside the U.S.

Factor 2. Length of Trip. For business travel outside the U.S., you must look at how long the trip lasted to determine deductibility. The key question: Did you work at least one day and travel for seven days or less, not counting the day of departure?

  • Seven days or less foreign travel: If the answer is YES, you can deduct 100 percent of the cost of your direct route transportation costs of getting to and from the business destination.

  • Seven days or more foreign travel: If the answer is NO, then you only qualify for a 100 percent deduction if you pass the 76/24 test; that is, if you spent more than 75 percent of the days on business, not excluding the day of departure.

Ty did, in fact, work at least one day and travel for seven days or less. So his direct route transportation costs are 100 percent deductible.

If you answered C to the question at the beginning of this article—100 percent of his transportation costs and 30 percent for food and lodging—then you are wrong as well. That’s because Ty’s food and lodging costs are also 100 percent deductible. As we explained earlier, Ty’s transportation costs (i.e., the costs of the cruise) are 100 percent deductible. But we also said earlier that food, lodging and the other costs of sustaining life during a business day must be allocated between personal and business purposes. So what gives?

If Ty had traveled to St. Thomas by airplane, he’d have to allocate his food, lodging and other life-sustaining expenses 70/30 and deduct only 30 percent. The reason he can deduct these costs at 100 percent is because he traveled by cruise ship.

Think about it. When you pay for a cruise, your costs include not only the transport, but meals, lodging and other costs of sustaining life (assuming, of course, these items aren’t broken out as part of the cruise’s cost). In essence, these costs become part of the costs of transportation. So if transportation is 100 percent deductible, then so are the meals, lodging and other life-sustaining costs associated with it!

The moral: In addition to being more pleasurable than flying—at least for many people—traveling to a business destination by cruise ship can significantly increase your business travel deductions.

If you answered D to the question at the beginning of this articleZero percent since the trip isn’t deductible business travelthen you are wrong again. That’s because the mode of transportation doesn’t determine deductibility. In other words, you can claim business travel deductions regardless of whether you travel to and from your business destination by car, plane, train or boat.

However, deductions for business travel by cruise ship are subject to luxury water-travel daily deductions limits.

Conclusion

The costs of business travel are deductible. But the rules are complicated and significant limitations apply—like the requirement that you allocate certain costs between business and personal use. So it’s essential that you and your financial advisors know the rules about business travel deductions.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is Your Business Still the Right Entity Under the New Tax Rule? Part 2

More tips about determining the right corporate, partnership or other structure that’s best for your business—and where you are in life.

Key Takeaways:

  • The legal structure of your business operations can have a significant impact on your annual income tax and estate planning.

  • When you and/or your heirs expect to be at or near the maximum income tax rates, you will generally want to leave appreciated and appreciating assets in the taxable estate, rather than transfer them prior to death.

  • In general, assets with the potential to appreciate in value should not be placed into an S or C Corporation.

As many of you know, The Tax Act of 2017 created a host of changes and considerations for successful business owners in their families. There are six widely used business operating structure. In Part 1 of this article we discussed Sole Proprietorships (Schedule C), Limited Liability Companies (LLC) and Limited Partnerships. Here will take a closer look at the other three entities: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

4) General Partnership

The rules are similar to LLCs and Limited Partnerships discussed above, except that all of the partners will generally have more liability exposure.

The partners are subject to self-employment taxes on most of their allocable K-1 income, other than certain rental real estate/passive/investment/portfolio income. As noted above, Partnerships are eligible for the potential 20 percent deduction against Qualified Business Income.

Estate and Gift Tax – See Limited Partnership discussion in Part 1 of this article.

5) S Corporation

An S Corp is generally the least costly and easiest type of entity to set up and operate. Like an LLC, income and losses flow to shareholders, and tax is generally paid at the owner level rather than at the entity level.

One of the biggest tax breaks in this type of structure is that the S Corp shareholders can take a portion of the profits as distributions rather than as W-2 income, and payroll tax savings ranging from a minimum of 2.9 percent to 15.3 percent can be achieved.

Company-level debt does not factor into member tax basis here. Distributions must parallel the S Corp’s stock ownership. Shares can only be owned by U.S. resident individuals and certain trusts. S Corps have many restrictive rules and care must be exercised in keeping distributions in the exact proportion as stock ownership. Also, S Corps with excess passive income from rents, royalties and investments can lose their S Corp status. Further, an S Corporation may have no more than 100 members. As noted above, S Corporations are eligible for the potential 20% deduction against Qualified Business Income.

Estate and Gift Tax – Unlike in an LLC, when an S Corp shareholder dies, his or her heirs will only receive a revaluation in the “outside ” basis in their corporate shares – not on the underlying S Corp assets. This is also an issue for any potential buyers of the entity. This can create significant income tax problems for your heirs. Furthermore, complexities of retaining S Corp status can occur if an ineligible owner comes into the mix – e.g., an ineligible trust or nonresident alien.

6) C Corporation

C Corps are similar to S Corps with respect to the reasonable cost of formation and operation. The big difference between S Corps and C Corps is that C Corps pay tax at the entity level; however, the 2017 Tax Act dramatically dropped the C Corp rates to a flat 21 percent. C Corp shareholders will still pay taxes on W-2 earnings and certain dividends and other distributions made from the C Corp– making them vulnerable to the highly tax inefficient “double taxation.”

It is important to note that “personal service” businesses such as attorneys, doctors, accountants and consultants can operate as C Corps. Unlike the pre-2018 rules, the 2017 Tax Act will allow Personal Service Corps (PSC) to benefit from the new 21-percent rate on retained taxable income, rather than the maximum individual rate imposed under the old rules.

An unlimited number of shareholders are allowed and the C Corp can generally choose any tax year-end. Most other entities are generally limited to calendar year-ends.

Estate and Gift Tax – Similar to S Corps, a negative characteristic of C Corps is that upon the death of an owner, there is a revaluation of only the stock, not the underlying assets. Lack of restrictions on ownership make C Corps more flexible from an inheritance standpoint.

Conclusion

Congrats on building such a successful and rewarding business enterprise. Make sure you and your advisors evaluate specific facts and changing life circumstances to make sure the goals you have for yourself, your family and your heirs remains on track under the new tax landscape.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Get a Step-Up in Basis for this Inherited Property?

Receiving inherited property often comes with a tax advantage: receiving a step-up in basis.  Whether you are receiving property from a spouse or family friend, you may be eligible to minimize future taxes by taking a step-up in basis. Read on to see if your inherited property qualifies:

Did you inherit property from your spouse?

If the inherited property is from your spouse and you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), then both halves of the property receive a step-up in basis as long as at least half is included in the decedent’s gross estate (full step-up in basis to FMV).  If you don’t live in a community property, skip to “Is the property an IRA, 401(k), pension, annuity, or irrevocable trust?” question.

Did you or your spouse gift the property to the decedent within one year before their death?

If you answered “yes,” then your original basis is carried over, and you will not receive a step-up.  If not, move on to the next question.

Is the property an IRA, 401(k), pension, annuity, or irrevocable trust?

If you answered “yes,” then you will not receive a step-up in basis.  If not, you will likely be eligible for either a half or full step-up in basis. 

Receiving a step-up in basis can potentially save you thousands of dollars in taxes. Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best tax strategies for your inherited property, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is Your Business Still the Right Entity Under the New Tax Rule? Part 1

What you need to know about corporations, partnerships and other structures under which you do business

Key Takeaways:

  • There are six widely used business operating structures. Each has pros and cons depending on the owner’s income and estate planning options.

  • Choosing the right legal form for your business is critical for both legal and tax purposes

  • The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) made significant changes that should be factored into your entity choice.


As many of you know, The 2017 Tax Act made significant changes to the tax code. Most significantly individual tax rates have dropped and now cap out at 37 percent (vs. prior 39.6 percent). Here are some of the other highlights:

  • The C Corp tax rate has decreased from 35 percent to 21 percent

  • Flow-Through entities and Sole Proprietors are generally eligible for 20 percent taxable income reduction which results in a maximum tax of 29.6 percent (vs. 37 percent) on up to $315,000 of Qualified Business Income.

  • Estate and gift tax rates have decreased from 45 percent to 40 percent (but only on net assets exceeding $11.18 million per spouse for 2018 – nearly doubling the prior exemption). However, most of these provisions will sunset in 2026, making long-term planning even more important – and challenging.

One of the most common questions we get from clients and friends is: “Which legal structure should is best for my new or existing business? My standard answer is: “Well, it depends on your specific facts.”

There are a multitude of legal, tax and operating issues to consider, and one size certainly does not fit all. The general choices for operating a business include the following:

1.     Sole Proprietorship – Schedule C

2.     Limited Liability Company (LLC)

3.     Limited Partnership

4.     General Partnership

5.     Subchapter S Corporation

6.     Subchapter C Corporation

There are also other legal entities that may be worth investigating for certain operations, including trusts, cooperatives and joint ventures in unincorporated form.

Following is a general summary of the pros and cons of the most common forms of operations and how structure may impact income tax and estate tax planning.

1) Sole Proprietorship

This is by far the simplest form of doing business and requires very little in the way of startup costs. While legal liability exposure is highest in this form, owners can still have employees, pay themselves a W-2 and fund various benefits in a Schedule C business. As noted above, Sole Proprietors are eligible for the potential 20% deduction against Qualified Business Income, with limitations phased in once taxable income exceeds $315,000 per taxpayer (not available to certain “specified service businesses”).

Estate and Gift Tax – Upon the death of the owner(s), the legal entities’ business and personal assets will transfer to trusts or heirs as outlined in the taxpayer’s trust and estate documents. Various minority and marketability discounts available to other legal structures are not available in a Sole Proprietorship.

2) Limited Liability Company (LLC)

LLCs are by far the most popular form of doing business for a variety of reasons, including limited legal liability for other members’ bad behavior, as well as flexibility in modifying the tax structure as your business plan evolves. There are various federal elections available to treat the entity in a variety of ways for tax purposes – see IRS Form 8832. The remaining discussion assumes a Partnership election is made.

Taxable income and losses (as well as credits) flow through to LLC members (and retain their “ordinary” or “capital” character) and member tax basis is adjusted. In addition, both partner and third-party loans can increase member tax basis. Also, moving assets and members in and out of the LLC is generally easier from a tax perspective than it is for a Corporation. As noted above, LLC’s are eligible for the potential 20 percent deduction against qualified business income, with limitations phased in once taxable income exceeds $315,000 per taxpayer (not available to certain “specified service businesses”).

Estate and Gift Tax – The most significant estate tax advantage associated with operating as an LLC that’s taxed as a Partnership is that upon the death of an LLC member, both the “outside” tax basis in the LLC units inherited and the tax basis in the assets held by the LLC on the date of death will be revalued to their fair market values. This offers a very significant advantage to your heirs when the LLC has increased in value during your lifetime. As discussed later, this “step-up” in basis of the underlying assets of an LLC is not afforded to either S Corporations or C Corporations.

3) Limited Partnership

A Limited Partnership must still have a General Partner (GP). LPs are generally not subject to self-employment tax on their K-1 income as is the case with most GP and LLC members. As noted above, Partnerships are eligible for the potential 20 percent deduction against Qualified Business Income.

Estate and Gift Tax – The value of the general and limited units will vary much more than the LLC units, based on the specific partnership terms.

Conclusion

An LLC or Limited Partnership generally provides you with the most flexible lifetime and post-mortem planning opportunities for your business. But you and your advisors must fully evaluate your specific facts and options based on the type of business operations you own and your overall estate plan. It is not uncommon for successful owners to have a variety of entities to achieve the most beneficial operational and income/ estate tax results. In Part 2 of this article we will discuss the other three common entity options: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

If you or someone close to you has concerns about the tax implications of their business structure, please don’t hesitate to at 303-440-2906 or schedule a call by clicking here.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Well-Traveled? Don’t Get Tripped Up by Taxes, Part 2

More cross-border issues for you and your advisor to remember for next tax season or extension time

Key Takeaways:

  • While total global income must be reported on the relevant lines of the 1040, some forms are specific to global tax reporting.

  • Form 8938 relating to foreign asset reporting is now in its second year.

  • PFIC reporting—Form 8621 for all foreign mutual funds and private equities held by U.S. residents and citizens—is slowly becoming important.

  • You must also declare your financial interest in foreign entities via Form 5471.

 

As we discussed in Part 1 of this article series, if you are a U.S. resident or U.S. citizen (whether NRI, PIO or OCI), you must pay taxes in the U.S. on all of your global income. Here we’ll look closer at the important forms that apply to you.

Foreign assets reporting—Form 8938


Form 8938, Statement of Specified Foreign Financial Assets, must be filed along with the income tax return.

Experts agree that Form 8938, which has been around for half a dozen years, will become a significant tool for the IRS to identify the scope of international tax noncompliance of a given U.S. taxpayer. This form requires a taxpayer to disclose more information that connects various parts of a taxpayer’s international tax compliance, including the information that escaped disclosure on other forms earlier.

Schedule B is a typical example where you may have failed to report foreign financial accounts. Moreover, Form 8938 is far more detailed and asks the opening date of a certain financial account. This can become a tricky situation if you have held a foreign account for a significantly long period of time–and haven’t disclosed it in earlier returns.

What must be reported in 8938?

Foreign financial assets that must be declared in Form 8938 include shareholdings, mutual fund holdings, insurance policy holdings, pension plans and bank balances abroad.

Specified foreign financial assets do not include physical assets such as gold and real estate. However, if you own gold is held in the form of ETFs, it should be included as a specified foreign financial asset.

Tip: Form 8938 is exhaustive and requires you and your tax advisor to enter detailed values of financial assets. Make sure you get in touch with your overseas bankers or financial companies to gather this information ASAP.

PFIC reporting—Form 8621

 

The U.S. has a peculiar reporting requirement for all foreign mutual funds and private equities held by its residents and citizens. In the U.S., these funds are considered “passive foreign investment companies” (PFICs). According to PFIC rules, any notional gains from a mutual fund or private equity fund holding must be declared every year, and tax must be paid on such notional gains.

If you fail to comply, your gains on sales will be treated under the “excessive distribution” option, which is also the default method. Suppose you did not make any election on PFICs and, throughout the holding period, did not complete Form 8621 for PFIC holdings.

Let’s say you held the PFIC units for, say, 10 years and did not receive any distributions during those 10 years. In the year of sale, let’s say you made a gain of $100. In the year of sale, gains will be distributed over the past 10 years, that is, $10 per year. It will be treated as though you did not pay tax on $10 per year, and hence in Year 10, must pay tax for each of these years plus interest on the delay. Essentially, this default method kicks in at the year of sale.

Tip: If you own foreign mutual funds, collect information such as opening and closing values. If dividends were paid, gather that information as well. It can be a long, drawn-out exercise. The sooner you begin the better.

Declaration of financial interest in Indian entities


Forms 5471 and 8865 are triggered when a U.S. resident, citizen or green card holder has financial interest in foreign corporations or foreign partnerships. So if you have a stake in an overseas company, or are a director or officer of foreign company, you may need to file Form 5471 (for companies) or 8865 (for partnerships) and declare the interest. There are certain conditions that apply to both forms. What is important is that the penalties are very high. There is a penalty of $10,000 for each year for failing to file the form.

Another form, the 926, was also introduced a few years ago. Form 926 captures information on any transfers of property or funds by a U.S. taxpayer to a foreign corporation.

Conclusion
As I mentioned at the beginning of this article series, foreign income compliance is becoming increasingly important to the IRS. As the Foreign Account Tax Compliance Act (FATCA) gathers steam, opportunities to come into compliance without facing harsh penalties will start to diminish. So the sooner you and your tax advisors act, the better.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Am I Eligible for Medicare Part A & Part B?

The Medicare program can provide healthcare for elderly or disabled individuals at a greatly reduced cost.  Medicare Part A covers hospital insurance, and Part B covers medical insurance.  Read below to see if you are eligible for Medicare.

Are you a US citizen and age 65 or older?

If you are under 65 and are not disabled, then you are not eligible for Medicare Part A or Part B.  If you are under 65 and disabled you may be eligible for Medicare benefits.  If you are over 65 and not disabled, move on to the next question.

Are you entitled to Social Security benefits (you have 40 work credits; about 10 years of work history)?

If you answered “yes,” you will be eligible for Medicare Part A & Part B.  If not, then you may still be eligible, depending on your spouse’s eligibility for Medicare and several other factors.

If you’ve made it this far, there is a good chance you are eligible for Medicare Part A & Part B.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about planning strategies that incorporate Medicare, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Delay the RMD from the Traditional IRA I Inherited?

Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth.  Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds.  Why?  Because Uncle Sam wants to collect his share.  Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.

Are you the beneficiary of a Traditional IRA from someone other than your spouse?

If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age.  Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchartIf you inherited the IRA from a non-spouse, move on to the next question.

Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?

They have reached their Required Beginning Date

This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table.  The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years.  You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years.  Keep in mind you will need to pay ordinary income tax on the whole amount distributed. 

If you take RMDs based on your life expectancy it will spread out the tax burden.

They have not reached their Required Beginning Date

You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table.  Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.

If you’ve made it this far, you may be able to delay the RMD from your inherited IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Future of Charitable Planning

Key Takeaways

  • Studies show that one in four affluent people (23%) consulted with at least one advisor about charitable donations last year.

  • A confused donor is an unhappy donor.

  • Always review your goals and check with your advisors before whipping out your checkbook

 

Generally planned giving CRTs (charitable remainder trusts) and CLTs (charitable lead trusts) immediately come to mind. We seldom think about charitable giving in the context of non-charitable trusts, but according to Al W. King III, co-founder and co-CEO of South Dakota Trust Company, the amount of wealth that high-net-worth individuals own in trusts is surprising.

  • “The top 1 percent currently have 38 percent of their assets in trusts, and

  • The next 9 percent have 43 percent of their assets in trust,” observed King.

Some families intentionally incorporate charitable planning and provisions into trusts they create. You can too by:

  • Setting a target value for the trust that will be available for family members with any growth and appreciation above that amount being directed to charity

  • Supplementing distributions to family members who work for a charitable organization

  • Matching beneficiaries’ personal charitable contributions

Families are also discovering strategies to incorporate charitable goals and objectives into trusts that were initially created with no charitable intentions. This is often achieved by changing the trust’s situs (legal jurisdiction), reforming or modifying the trust, or “decanting” in states with flexible decanting statutes that allow trustees to change the terms of an otherwise irrevocable trust, which may include adding discretionary charitable beneficiaries.

Common trusts and trust strategies that are increasingly incorporating charitable goals, objectives and planning include:

  • Dynasty trusts—Because of the long-term nature of these trusts, families often desire to make provisions and provide flexibility for both family and charitable goals and objectives.

  • Existing non-charitable trusts—Irrevocable trusts can sometimes be reformed or modified to allow for distributions to charitable organizations. Depending on the applicable state law governing the trusts, it may be necessary or helpful to change the situs of a trust to a state that has more flexible trust decanting laws.

  • Purpose trusts—Some trusts are created for a specific purpose, often to care for “something” rather than for “someone.” For example, a trust may be created to care for a pet; to maintain family property such as antiques, cars, jewelry or memorabilia; or to maintain a family residence or vacation home. Once the pet dies or the property is sold or otherwise disposed of, the remaining assets might pass to charity.

  • Health and education exclusion trusts—These trusts provide support to beneficiaries over multiple generations for certain education and health-related costs. As long as distributions to cover such costs are made directly to an educational or health care institution, then gift taxes and generation-skipping transfer taxes can be avoided indefinitely. However, in order for the vehicle to qualify as a health and education exclusion trust, one or more charitable beneficiaries must have a substantial present economic interest.

Laura Peebles, former tax director of the national office of Deloitte and a consultant to Charitable Solutions, shared these nuggets of wisdom gained from nearly four decades in the charitable planning arena:

  • The donor’s charitable intent determines whether a gift is made. However, the tax benefits can influence the fulfillment of the giver’s charitable intent in terms of the asset that is ultimately given, when the asset is given, and the manner and structure through which the asset is given.

  • A confused donor is not a happy donor.

  • Some tax aspects of charitable giving don’t have good answers, some don’t have inexpensive answers and some don’t have any answers at all.

Charitable giving with retirement benefits

According to author and attorney Natalie Choate, an estate planning and retirement benefits consultant, advisors and many charitably inclined people are well-aware of the substantial tax advantages of giving retirement benefits to charity, particularly in a testamentary capacity. In addition to avoiding any estate tax liability that might otherwise apply, the charity also avoids tax on “income in respect of a decedent” that would otherwise result in the imposition of income tax on retirement benefits received by the owner’s children or other heirs.

In some cases planning charitably with retirement benefits can be quite simple; for example, if a charity is named as the sole retirement plan beneficiary. However, other planning scenarios can involve complex issues and obstacles that must be carefully navigated. For instance:

  • When there are charitable and non-charitable beneficiaries of the same plan

  • When using formula bequests in beneficiary designations

  • When leaving retirement benefits to charity through a trust or estate

  • When using disclaimer-activated gifts to charity.

 

Conclusion


A recent study by U.S. Trust and the Philanthropic Initiative found that one in four wealthy individuals (23%) consulted with at least one advisor about charitable donations in the past year. In addition, nearly 70 percent of charitable remainder trust donors reported learning about the planning vehicle from their advisors.

These trends indicate a growing opportunity for investors and their advisors to have a regular dialogue about charitable methods that meet personal planning goals. Call us at 303-440-2906 if you or someone close to you would like to incorporate a strategic and regular giving strategy into your overall financial plan.



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Should I Inherited My Deceased Spouse’s IRA?

When a spouse is the beneficiary of the IRA of their deceased spouse’s IRA, there are several options available. Each option has its own advantages, depending on the needs of the surviving spouse.  Read below to see which option benefits you best.

Are you the sole beneficiary to your spouse’s Traditional IRA?

If you are not the sole beneficiary, your situation is a bit more complicated.  Check out our “Can I Delay the RMD from the Traditional IRA I Inherited?” flowchart here If you are the sole beneficiary, move on to the next question.

What best describes your situation:

You plan to use all the assets in five years

Consider electing the 5 year rule if you expect significant expenses over the next five years that will deplete the account.  This allows you to take distributions at any time over the next five years of any amount, provided the account is depleted at the end of five years.  Keep in mind you will need to pay ordinary income tax on all distributions in the year they are taken.

You want income and are younger than 59.5 years old

Consider inheriting the IRA, which will allow you to take distributions from the IRA penalty-free.  You will be required to take RMDs based on the IRS Single Life Expectancy table.  Of course, you can take any amount of distributions that you need as long as the distribution is greater than or equal to the RMD.

You don’t want income and/or are younger than your deceased spouse

Consider rolling over the IRA into your own IRA.  This will allow you to avoid taking RMDs until the year after you turn 70.5.  If needed, you can take distributions as soon as you hit 59.5.

 

There are a lot of factors to consider when deciding which option is best for you.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for an IRA you have inherited, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Well-Traveled? Don’t Get Tripped Up on Tax Day

Cross-border issues to remember while filing U.S. taxes (first in a series)


Key Takeaways:

  • The IRS takes the definition of “global” seriously. All global income, including employee stock option plans, must be reported.

  • There is an increased focus on offshore income tax compliance.

  • The IRS also expects to hear from all U.S. citizens and green card holders living overseas.

  • Taxpayers might be failing this compliance simply because they are not aware of the rules.

  • Make sure your advisors are staying up to date on offshore income rules. 

 

As you get ready to put the final touches on your tax return, here are some important things that you and your financial advisors should remember with respect to global income compliance.

All global income must be reported

If you are a U.S. resident or U.S. citizens (whether NRI, PIO or OCI), you must pay taxes in the U.S. on all global income. A U.S. resident is a green card holder and/or someone who has been physically present in the United States for at least 31 days during the current year and for at least 183 days during the three-year period that includes the current year and the two preceding years. To satisfy the 183-day requirement, count all the days that you were present in the current year, add one-third of the days you were present in the first year before the current year, and then add one-sixth of the days you were present in the second year before the current year.

Global income will include:

  • Any salary partly received in another country.

  • Any income received overseas for freelance or consulting work.

  • Interest on bank deposits and other securities held overseas.

  • Dividends from shares and mutual funds.

  • Capital gains from sale of assets.

  • Rent from property.

Remember, your global income will be taxed in the U.S. as per rules that apply to similar income in the U.S. For instance, while dividends may be tax-free in India, they are taxed in the U.S., and hence your dividends from India will be taxed in the U.S. The same goes for capital gains. According to U.S. law, the definition of “long term” is one year for all assets, but it may be different in other countries. When you file tax returns in the U.S., you must take into account this difference and treat overseas capital gains as per the time period specified in U.S. law.

If you have paid tax in the overseas country from which the income described above is derived, you must check the Double Taxation Avoidance Agreement to see if you are eligible to claim a foreign tax credit.

Tip: When you fill in Schedule B of your tax return Form 1040, pay close attention to line 7. Line 7 asks if the taxpayer had, during the tax year, held any financial interest in or signature authority over a foreign financial account (such as a bank account, securities account or brokerage account). Make sure you confirm that you indeed had overseas investments.

ESOP taxation

Did you exercise an employee stock option plan (ESOP) in 2017? If so, that’s one more thing you must declare on your U.S. tax return. In the U.S., the value of ESOPs granted is taxed at the time when the employee exercises the option.

You must add the total value of their ESOP compensation to your total income in the U.S. Since you may have also paid tax in the country where the ESOP originated, you will be eligible to claim a tax credit in their U.S. tax returns. You must refer to the Double Taxation Avoidance Agreement.

Tip: You can disclose this as other income in Form 1040. You can claim foreign tax credit using Form 1116.

U.S. citizens and green card holders living overseas

In this connected world, you may be constantly on the move. This is a red flag.

Regardless of where you live, all U.S. citizens and green card holders must file tax returns in the U.S. based on their total global income. You must pay taxes on such foreign income unless a treaty or statutory exclusion or foreign tax credit applies to reduce your U.S. tax liability to zero.

In such cases, if you are a U.S. citizen or a green card holder residing overseas, on the regular due date of your return, you are allowed an automatic two-month extension to file your return and to pay any amount due without requesting an extension. So this year, the automatic two-month extension goes to June 15. But remember, while no penalty is charged, interest is still charged on the balance due between April 15 and June 15.

If you are unable to file a return by the automatic two-month extension date, you can request an additional extension to October 15 by filing Form 4868 before the automatic two-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure-to-pay penalties.

Tip: Filing U.S. tax returns from overseas can be quite a challenge. Not all software is equipped to handle foreign tax issues such as earned income exclusions—Form 2555, foreign tax credit—Form 1116, Form 8938, Form 8833 and so on. In such cases, you and your advisors will need to file a paper return.

Conclusion

Foreign income compliance is becoming increasingly important to the IRS. As the Foreign Account Tax Compliance Act (FATCA) gathers steam, opportunities to come into compliance without harsh penalties will diminish. The sooner you act the better.

In the next installment of this article series, we’ll look at the various additional forms that must be included with the 1040 to be compliant with global income reporting.



DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Home Office Deductions

“Safe harbor” option may be easier, but number crunching is still worth it for many

 

Key Takeaways:

  • The IRS simplified option for home office deductions five years ago and million or taxpayers are taking advantage. Just be careful if you do.

  • This option can significantly reduce paperwork.

  • However, the annual limit is $1,500, and those with higher home office expenses may still be better off slogging through the detailed Form 8829.



According to the IRS, more than 3.4 million taxpayers claimed deductions totaling just over $9.6 billion for business use of a home, commonly referred to as the “home office deduction.”

Introduced in tax year 2013, the optional deduction is designed to reduce the paperwork and recordkeeping burden for small businesses. The optional deduction is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.

Back in 2013, the IRS announced a new, simplified method for claiming home office deductions. According to the IRS, this safe harbor method is an alternative to the existing requirement of calculation, allocation and substantiation of actual expenses, including mortgage payments and depreciation that is done in Form 8829.

Moreover, there is an annual limitation of $1,500 under this new method, thus making this a viable option for those with offices in apartments or smaller homes. Still, there is merit to understanding this option now and evaluating the best course for your business deductions.

Which method is best for me?

Before we look at the new option, let’s run through the existing method. The existing method involves several steps before you can arrive at the total for a home office deduction.

Step 1: Figure the percentage of your home used for business
Divide the total square footage of your home that you use for business by the square footage of your entire house. That percentage is what you’ll need for Step 3 below.

Step 2: Sum up all the expenses
This step involves the most paperwork. You need to list the various expenses such as rent and utilities or—in the case of ownership—mortgage interest, real estate taxes, insurance, repairs, utilities and the big one—depreciation. Lines 36 to 41 on Form 8829 involve going back and forth between the instructions several times to arrive at appropriate depreciation numbers.

Step 3: Apply the percentage from Step 1 to Step 2
You will use the percentage from Step 1 to figure the business part of the expenses for operating your entire home.

Now the new safe harbor option lets you claim a flat deduction of $5 per square foot of the home office, up to 300 square feet. That means if you use this method and have a home office of more than 300 square feet, you will be able to claim a maximum deduction of $1,500.

Some of the benefits of this method are:

  • You drastically reduce paperwork and compliance burden.

  • If you itemize deductions and use the safe harbor method, those expenses related to your home, such as mortgage interest and real estate taxes, can be itemized without allocating them between personal and business expenses.

  • You can choose either method from year to year depending on which one is beneficial in a particular year. A change from using the safe harbor method in one year to actual expenses in a succeeding taxable year or vice versa is not a change in your method of accounting and does not require the consent of the IRS.

Some of the limitations of this method are:

  • You are limited to claiming $1,500 per year irrespective of actual expenses incurred on the home office.

  • If you have a loss and cannot claim the entire deduction of $1,500 in a year, you cannot carry forward the home office expense to the following year. This would be possible if you claim actual expenses. Moreover, if you choose the safe harbor method, you cannot set off office expense carried forward from an earlier year.


The definition of what qualifies as a home office has not changed. In short, the home office

  • Must be used as your principal place of business.

  • It must be used “regularly and exclusively” for business

  • It cannot double as a place that you use for business as well as for personal purposes.

If you’re a professional, you may face various scenarios. You might be working from home for the most part of your practice, or you might be working from an office location but sometimes doing work at home. Each scenario is dealt with differently from a home office deduction point of view.

  • Home as your principal place of business: If you work from home for the most part of your business or practice, that is, you perform all important activities at this place and spend relatively more time there, then your home would be your principal place of business. In such a case, you can claim a deduction for the portion of your home that you use regularly and exclusively for your business.

  • Business at office location while doing some work at home: If you have separate office premises for conducting your business, then that would be your principal place of business. You cannot claim a deduction for use of your home during weekends or after office hours.

However, there is an important exception for professionals who also use their home for client meetings.

If you meet or deal with clients or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both of these tests:

  • You physically meet with patients, clients or customers on your premises.

  • Their use of your home is substantial and integral to the conduct of your business.

The part of your home that you use exclusively and regularly to meet clients or customers does not have to be your principal place of business. Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.

You and your tax advisor can make a decision regarding which method to choose, depending on a few pointers:

  • Do a back-of-the-envelope calculation of your home office expenses under both methods. Calculate the deduction under the safe harbor method by multiplying the area of your home office by $5 (limited to $1,500). If that is significantly less than the amount you claimed as a deduction in your most recent tax return, it might make sense to go through the trouble of filling out Form 8829.

  • If you have a loss from your business and would like to carry forward the home office expense, choose the actual expense method. If you have home office expenses from an earlier year that you would like to set off, use the actual expense method.

Conclusion

Claiming home office deductions is widely believed to be a common cause for an IRS audit. At the same time, genuine use of your home for business purposes can hand you a valuable deduction. The new method can significantly reduce paperwork and compliance burden for those with small home offices. But those with bigger spaces may want to choose the actual expense method. Cumbersome as it may seem, it might well be worth the effort.

DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Staying Organized and Financial Planning Are Keys to Success

11 tactics to make this your best year ever

Key Takeaways:

  • The beginning of a new year is a particularly good time for you and your family to review finances and to update financial plans.

  • Staying organized and planning finances are lifelong processes, and the keys to reaching and maintaining financial success.

  • Sensible financial management is more than budgeting and saving for retirement. It’s about being ready to handle a lifetime of financial challenges, needs and changes.

Happy New Year to you and your family!

The beginning of a new year is a good time to review your finances and update financial strategies and plans. This year is especially important as financially challenging times continue for many individuals and businesses, rich and poor, big and small.

Even if the 2017 Tax Cut and Jobs Act (TCJA) had not been passed, most would say that managing their personal finances is more complicated and more important than ever before. We’re living longer, but saving proportionately less. Many of us feel less secure in our jobs and homes than we did in the past. We see our money being drained by the high cost of housing, taxes, education and health care. We worry about the future, or unfortunately, in too many cases, we simply try not to think about it.

More than simply budgeting and saving

Sensible financial management means much more than budgeting and putting money away for retirement. It means being equipped to handle a lifetime of financial challenges, needs and changes; figuring out how to build assets and staying ahead of inflation; taking advantage of deflation; and choosing wisely from a constantly widening field of savings, investment and insurance options. When it comes to finances, you are faced with more pressures and more possibilities than ever before.

The good news is that as complex as today’s financial world is, there’s no real mystery to sound personal money management. What you need is a solid foundation of organization and decision-making, plus the willingness to put those two things into action. I’ll talk about those core principles in just a minute.

Effective financial management involves certain procedures that you don’t usually learn from your parents or friends—and unfortunately they aren’t currently taught in our schools. It’s more than just a matter of gathering enough information and then making a logical decision. In fact, for many people, the constant barrage of economic news, fragmented financial information and investment product advertisements is part of the problem. Information overload can be a major obstacle to sorting out choices and making wise decisions.

The Financial Awareness Foundation, a California-based not-for-profit organization developed a simple personal financial management system that’s designed to help you save time and money, while providing a systematic approach to help you better manage finances. The key is to stay organized, remain aware of money issues, and make deliberate choices about ways to spend, save, insure and invest your assets. That’s so much smarter than simply following your emotions or “going with the flow.”

Getting organized

1. Paperwork. Everyone has primary financial documents—birth certificates, marriage certificates, current year net-worth statement, retirement plan beneficiary statements, deeds of trust, certificates of vehicle title, last three tax returns, gift tax returns, insurance policies, wills, trusts, powers of attorney, passwords, digital paperwork, etc. Organize this information and keep it in a safe central location that ties into your paper and digital filing systems.

2. Net Worth. Know where you stand by inventorying what you own and what you owe. The beginning of a new year is an excellent time to do this, but you can do it any time. Just be sure to do this personal inventory at least once a year.

3. Cash Flow. Gain control of cash flow by spending according to a plan, not spending impulsively.

4. Employment Benefits. Make sure you fully understand employee benefits (the “hidden paycheck”) at your company. Maximize any dollar amounts that your employer contributes toward health insurance, life insurance, retirement plans and other benefits.

Financial planning

5. Goal Setting. Before you begin the financial planning process, ask yourself what’s really important to you financially and personally. These are key elements of planning for your future; they affect your options, strategies and implementation decisions.

6. Financial Independence and Retirement Planning. A comfortable retirement, perhaps at an early age, is one of the most common reasons people become interested in financial planning. Determine how much money is a reasonable nest egg to reach and maintain your financial independence. Then work with your advisors to determine the right strategy to make that goal a reality.

7. Major Expenditures Planning. A home, a car, and a child’s or grandchild’s college education—these are all big-ticket items that are best planned for in advance. Develop sound financial strategies early on for effectively achieving the funding you need for those big bills down the road.

8. Investments Planning. For most of us, wise investing is the key to achieving and maintaining our financial independence as well as our other financial goals. Establish and refresh investment goals, risk tolerance and asset allocation models that best fit your situation.

9. Tax Planning. Your financial planning should include tax considerations, regardless of your level of wealth. Proactively take advantage of opportunities for minimizing tax obligations.

10. Insurance Planning. Decide what to self-insure and which risks to pass off to insurance companies—and at what price you’re willing to do so.

11. Estate Planning. Develop or update your estate plan. If you get sick or die without an up-to-date estate plan, the management and distribution of assets can become a time-consuming and costly financial challenge for loved ones and survivors.

It is estimated that over 120 million Americans do not have up-to-date estate plans to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. Estate and financial planning is not just for the wealthy; it is an important process for everyone. With advance planning, issues such as guardianship of children, management of bill-paying and assets—including businesses and practices—care of a child with special needs or a parent, long-term care needs, wealth preservation, and distribution of retirement assets can all be handled with sensitivity and care and at a reasonable cost.

Conclusion

Staying organized and planning wisely are the keys to financial success. Short of winning the lottery or inheriting millions, few people can attain and maintain financial security without some forethought, strategy and ongoing management. The beginning of a new year is an excellent time for you and your family to review finances and update financial plans.


Let’s have a great 2019!

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Optimizing Your Capital Gain Treatment Part 2

It’s a new world. When it comes to carried interest, real estate and collectibles, carefully document your purpose for holding these assets

Key Takeaways:

  • Long-term capital gains associated with assets held over one year are generally taxed at a maximum federal rate of 20 percent — not the top ordinary rate of 37 percent.

  • Just be careful if you are planning to sell collectibles, gold futures or foreign currency. The tax rate is generally higher.

  • The more you can document your purpose for holding your assets (at the time of purchase and disposition), the better your chances of a favorable tax result.

  • The deductibility of net capital losses in excess of $3,000 is generally deferred to future years.

There’s no shortage of confusion about the current tax landscape—both short-term and long term—but here are some steps you can take to protect yourself from paying a higher tax rate than necessary as we march into a new normal world.

 

Carried Interest

The Tax Cuts and Jobs Act lengthens the long-term holding period with respect to partnership interests received in connection with the performance of services. Profit interests held for three years or less at the time of disposition will generate short-term capital gain, taxed at ordinary income rates, regardless of whether or not a section 83(b) election was made. Prior law required a holding period greater than one-year to secure the beneficial maximum (20%) federal long-term capital gain tax rate.

Real estate

Real estate case law is too technical for the purposes of this article. Let’s just say the courts look at the following factors when trying to determine a personal real-estate owner’s intent:

  • Number and frequency of sales.

  • Extent of improvements.

  • Sales efforts, including through an agent.

  • Purpose for acquiring, holding and selling.

  • Manner in which property is acquired.

  • Length of holding period.

  • Investment of taxpayer’s time and effort, compared to time and effort devoted to other activities.

Unfortunately, the cases do not lay out a consistent weighting of these general factors. Always check with your legal and tax advisors before engaging in any type of real-estate transaction.


Collectibles

Works of art, rare vehicles, antiques, gems, stamps, coins, etc., may be purchased for personal enjoyment, but gains or losses from their sale are generally taxed as capital gains and losses. But, here’s the rub: Collectibles are a special class of capital asset to which a capital gain rate of 28 percent (not 20%) applies if the collectible items are sold after being held for more than one year (i.e. long-term).

Note that recently popular investments in gold and silver, whether in the form of coins, bullion or held through an exchange-traded fund, are generally treated as “collectibles” subject to the higher 28 percent rate. However, gold mining stocks are subject to the general capital gains rate applicable to other securities. Gold futures, foreign currency and other commodities are generally subject to a blended rate of capital gains tax (60 percent long-term, 40 percent short-term).

Bitcoin and other cryptocurrencies are treated as “property” rather than currency and will trigger long-term or short-term capital gains when the funds are sold, traded or spent. Cryptocurrencies are NOT classified as collectibles.

The difficulties arise if you get to the point that you are considered a dealer rather than a collector, or if you are a legitimate dealer but start selling items from your personal collection. In most cases, the following factors in determining whether sales of collectibles result in capital gain or ordinary income:

  • Extent of time and effort devoted to enhancing the collectible items

  • Extent of advertising, versus unsolicited offers

  • Holding period and frequency of sales from personal collection

  • Sales of collectibles as sole or primary source of taxpayer’s income

The Tax Cuts and Jobs Act, will end any further discussion about whether gain on the sale of collectibles can be deferred through the use of a like-kind exchange. The tax bill limits the application of section 1031 to real property disposed of after December 31, 2017.

Recommended steps to preserve capital gain treatment:

  • Clearly identify assets held for investment in books and records, segregating them from assets held for sale or development.

  • In the case of collectibles, physically segregate and document the personal collection from inventory held for sale.

  • Memorialize the reason(s) for a change in intent for holding: e.g., death or divorce of principals, legal entanglements, economic changes or new alternate opportunities presented.

  • If a property acquired with the intent to rent is sold prematurely, then retain documentation that supports the decision to sell: e.g., unsuccessful marketing and advertising, failed leases, news clippings of an adverse event or sluggish rental market.

  • If a property is rented out after making substantial improvements, then document all efforts to rent, and list or advertise it for sale only after a reasonable period of rental.

  • Consider selling appreciated/unimproved property to a separate entity before undertaking development. This would necessitate early gain recognition, but may preserve the capital gain treatment on the appreciation that’s realized during the predevelopment period.

  • Consider the application of Section 1237, a limited safe harbor, permitting certain non-C Corporation investors to divide unimproved land into parcels or lots before sale, without resulting in a conversion to dealer status.

Conclusion

Characterizing an asset as ordinary or capital can result in a significant tax rate differential. It can also affect your ability to net gains and losses against other taxable activities. So you must spend the time and effort needed to document the intent of the acquisition of an asset, as well as any facts that might change the character of the asset, during the holding period.

Sure, we’re all busy. But, in today’s new regulatory and tax landscape, don’t you think it’s worth taking the time to do so in order to potentially cut your future tax rate in half?

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Withdrawal Strategies: Tax-Efficient Withdrawal Sequence

Key Takeaways:

  • Retirees’ portfolios may last longer if they incur the least amount of income tax possible over their retirement period.

  • Retirees should focus on minimizing the government’s share of their tax-deferred accounts.

  • Make sure your advisor is helping you select the appropriate dollar amount and the appropriate assets to liquidate in order to fund your retirement lifestyle.

Asset Placement Decision

A winning investment strategy is about much more than choosing the asset allocation that will provide the greatest chance of achieving one’s financial goals. It also involves what is called the asset location decision. Academic literature on asset location commonly suggests that investors should place their highly taxed assets, such as bonds and REITs, in tax-deferred accounts and place their tax-preferred assets, such as stocks, in taxable accounts.

In general, your most tax-efficient equities should be held in taxable accounts whenever possible. Holding them in tax-deferred accounts can result in the following disadvantages:

  • The potential for favorable capital gains treatment is lost.

  • The possibility of a step-up in basis at death for income tax purposes is lost.

  • For foreign equities, foreign tax credit is lost.

  • The potential to perform tax-loss harvesting is lost.

  • The potential to donate appreciated shares to charities and avoid taxation is lost.

Asset location decisions can benefit both your asset accumulation phase and retirement withdrawal phase. During the withdrawal phase, the decision about where to remove assets in order to fund your lifestyle should be combined with a plan to avoid income-tax-bracket creeping. This will ensure that your financial portfolio can last as long as possible.

Tax-Efficient Withdrawal Sequence

Baylor University Professor, William Reichenstein, PhD, CFA wrote a landmark paper in 2008 that’s still highly relevant today. It’s called: Tax-Efficient Sequencing of Accounts to Tap in Retirement. It’s fairly technical, but it provides some answers about the most income-tax-efficient withdrawal sequence to fund retirement that are still valid today. According to Reichenstein, “Returns on funds held in Roth IRAs and traditional IRAs grow effectively tax exempt, while funds held in taxable accounts are usually taxed at a positive effective tax rate.”

Reichenstein also noted that only part of a traditional IRA’s principal belongs to the investor. The IRS “owns” the remaining portion, so the goal is to minimize the government’s share, he argued.

Tax-Efficient Withdrawal Sequence Checklist

In our experience, retirees should combine the goal of preventing income-tax-bracket creeping over their retirement years with the goal of minimizing the government’s share of tax-deferred accounts.

To achieve this goal, the dollar amount of non-portfolio sources of income that are required to be reported in the retiree’s income tax return must be understood. These income sources can include defined-benefit plan proceeds, employee deferred income, rental income, business income and required minimum distribution from tax-deferred accounts. Reporting this income, less income tax deductions, is the starting point of the retiree’s income tax bracket before withdrawal-strategy planning.

The balance of the retiree’s lifestyle should be funded from his or her portfolio assets by managing tax-bracket creeping and by lowering the government ownership of the tax-deferred accounts. The following checklist can assist the retiree in achieving this goal:

  1. Avoid future bracket creeping by filling up the lower (10% and 12%) income tax brackets by adding income from the retiree’s tax-deferred accounts.

  2. If the retiree has sufficient cash flow to fund lifestyle expenses but needs additional income, convert traditional IRAs into Roth IRAs to avoid tax-bracket creeping in the future. This will also allow heirs to avoid income taxes on the inherited account balance.

  3. Locate bonds in traditional IRAs rather than in taxable accounts. This will reduce the annual reporting of taxable interest income on the tax return.

  4. Manage the income taxation of Social Security benefits by understanding the amount of reportable income based on the retiree’s adjusted gross income level.

  5. Liquidate high-basis securities rather than low-basis securities to fund the lifestyle for a retiree who needs cash but is sensitive to additional taxable income.

  6. Aggressively create capital losses when the opportunity occurs to carry forward to future years to offset future capital gains.

  7. Allow the compounding of tax-free growth in Roth IRAs by deferring distributions from these accounts.

  8. Consider a distribution from a Roth for a year in which cash is needed but the retiree is in a high income tax bracket.

  9. Consider funding charitable gifts by transferring assets from a traditional IRA directly to the charity. This avoids the ordinary income on the IRA growth.

  10. Consider funding charitable gifts by selecting low-basis securities out of the taxable accounts in lieu of cash. This avoids capital gains on the growth.

  11. Manage capital gains in taxable accounts by avoiding short-term gains.

Conclusion

You and your advisor should work together closely to make prudent, tax-efficient withdrawal decisions to ensure your money lasts throughout your retirement years. Contact us any time if you have questions about your retirement funding plans or important changes in your life circumstances.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Qualified Opportunity Funds

Impact investing—using wealth to create positive change in the world while also benefiting financially—has become increasingly popular, as the idea of “doing well by doing good” has gained traction among investors.

Now there’s a new type of impact investment—called Qualified Opportunity Funds—that is worth checking out if you’re looking to build wealth, reduce a capital gains tax, and improve communities across the country. For investors with these goals, the funds can potentially be a powerful part of an overall wealth plan.

Sparking economic growth

Qualified Opportunity Funds invest in properties in economically distressed communities categorized as Qualified Opportunity Zones, which have been targeted for economic development.

These funds, which are generally formed as partnerships or corporations, can own a broad range of properties—from apartment buildings to start-up businesses—that exist in Qualified Opportunity Zones. By investing in these funds, you can help give communities a much-needed economic boost.

The full article can be read here: Qualified Opportunity Funds

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.