A Hidden Price Tag on That Lavish Gift – The Gift Tax

A Hidden Price Tag on That Lavish Gift – The Gift Tax

by | Oct 11, 2019 | Business Tax, Individual Tax

Did you know a special tax exist on the transfer of high-value gifts like luxury vehicles? The Gift Tax applies to these large transactions. While most people may not likely have to encounter them for their personal tax filings, it is worth gaining some insight on what triggers a gift tax and how it operates.

Gift Tax

The Gift Tax applies to transfers of property as a gift unless it is:

  • Valued below the annual exclusion limit of $15,000.
  • A deduction for a qualified charitable gift.
  • A qualified transfer to the donor’s spouse, otherwise known as the marital exclusion.

For example, Tim, a wealthy business owner, gives his nephew a pristine-condition vintage 80s sports car currently valued at $20,000. Surpassing the exclusion limit, Tim will have to file Form 709 and report the transfer of that car and pay the gift tax associated with it.

Exclusions & Deductions

Certain items qualify as exclusions and deductions towards the calculation of the gift tax. In addition to the annual exclusion, any gift amounts paid directly to a medical provider or education organization are excludable. So for example, a rich aunt that pays a university for her niece’s first year of college tuition would be an excludable gift amount. However, any amounts paid for boarding are not excludable. The marital deduction allows spouses to transfer property to each other an unlimited amount. Charitable deductions are calculated based on the FMV of the donation minus the annual exclusion.

Gift Tax Formula

In short, the gift tax is calculated as:

 

Value of gift amount

     – Exclusions (such as the $15,000 exclusion)

    – Deductions (such as charitable deductions)

= Taxable gift for the current year

     + prior year taxable gift amounts

 = Taxable gift amount to date

      x Tax rate

= Tentative gift tax

     – (prior year gifts x current tax rates) – (unified credit)

 = Gift Tax Liability

 

Ok, so maybe it’s not that short. But this formula takes into account any previous taxable gift amounts and liabilities.

Most taxpayers will not have to worry about the gift tax, but business owners who may consider transferring gratuitous amounts of property to families and loved ones should take heed of potentially incurring that gift tax. Having a knowledgeable tax and accounting team to provide guidance on such matters for business owners can prevent a lot of future complications. Just like us here at MiklosCPA. We are a California-based accounting firm that helps many small and emerging businesses with their tax and accounting needs. Schedule a chat with us to learn more about our services, and please subscribe to our social media channels for future useful pieces of accounting and tax knowledge!

Is Your Budding Business Considered A Hobby or A Business? – An Overview

Is Your Budding Business Considered A Hobby or A Business? – An Overview

by | Sep 25, 2019 | Business Tax, Individual Tax

Do you have a hobby you’re so passionate about that you’ve started to build a business around it, such as making arts & crafts and selling it at street fairs? Unless you devote much effort into it and consistently turn a profit, the IRS may determine your venture as a hobby and not a business.

Hobby or Business?

When determining hobby or business operations, the IRS primarily looks at if the business is actively engaged in making a profit. They generally look to see if the business made profit in consecutive years otherwise it may fall under the category of a hobby. Here are some additional factors to consider when determining if your business is a hobby:

  • Is the business carried out in a business-like manner with complete and accurate books & records?
  • How much time and effort is put into the business to make it profitable?
  • Does your livelihood depend on income from this business activity?
  • Is this business activity profitable in some years?

Hobby Deductions

While being considered a hobby activity disallows access to several small business expense deductions you would see on the Schedule C, there are some allowable hobby deductions. For example, Ordinary and necessary expenses related to your hobby venture are still available. However, those deductions are all limited up to the income of your hobby venture. Deductible losses beyond that cannot be claimed. For example:

Deb runs her artisan artichoke dip business on the side. She runs it only on weekends due to her regular job during the week. It doesn’t do too well in its first few years and she decides to close it. It barely earns $1500 in income, but cost her $2500 in expenses to start up and operate. Deb can only claim up to $1500 in allowable hobby deduction losses.

 

Claiming Hobby Losses

Hobby losses are claimed on Schedule A, just like other itemized deductions that you would claim for your individual tax filing. By having enough itemized deductions such as hobby losses, you can potentially lower your taxable income.

While starting up a hobby-based business is often a passion project, elevating it into a full-blown business operation can take time and a proper support team. Good accounting is necessary for any growing business. Look no further for that. MiklosCPA is a California-based CPA firm that supports many small and emerging businesses with their tax and accounting needs. Consider giving us a call, and follow us on our social media for more upcoming “good-to-know” pieces.

 

Get IT (Your Taxes) IN with the ITIN – Individual Taxpayer Identification Number

Get IT (Your Taxes) IN with the ITIN – Individual Taxpayer Identification Number

by | Sep 10, 2019 | Expat Tax, Individual Tax

A complex, globally-interdependent economy like what we have in the United States can sometimes yield complicated situations for its taxpayers. How can non-citizens, such as resident aliens, comply with US laws and pay their taxes when the Form 1040 and other filings require a social security number (SSN)? The solution to that is the “Individual Taxpayer Identification Number” (ITIN) issued by the IRS.

What’s the ITIN?

An ITIN helps individuals who are not eligible to obtain SSNs comply with federal tax filing requirements. They can’t be used for things such as claiming social security benefits or the earned income credit. ITINs are issued regardless of immigration status due to the fact that resident and nonresident aliens may have a requirement to file for US tax purposes.

For example, Fredo, a citizen of Italy, inherits property from a deceased sister in New York City. The property turns out to be a high-rise apartment generating rental income. Fredo now is on the hook for any US taxes related to that rental income! By obtaining an ITIN, Fredo can meet his tax obligations without having set foot in the USA.

Obtaining an ITIN

To obtain an ITIN, applicants must complete the W-7 form and submit it to the IRS by mail. The form asks for things such as name, foreign address, and original documents such as a passport. Processing time typically takes 4-6 weeks. Within that time frame, a mailed notice gets sent out to the applicant notifying that their ITIN has been assigned, OR their application was rejected and a notification why it was rejected.

The IRS authorizes “Certifying Acceptance Agents” (CAAs) to assist with the processing of ITINs. Utilizing a CAA can help applicants navigate the sometimes-complicated ITIN process and also avoid mailing sensitive identifying documents, such as passports. Interested in learning more about CAA services? Look no further. MiklosCPA, an IRS Certifying Acceptance Agent, has helped applicants obtain their ITIN number and also assist with any tax-related questions for their US tax filings. Contact us and learn how we can assist you, and follow us on our social media pages for future informative tax write-ups.

Show Some Interest – Reporting Interest & Ordinary Dividend Income on Schedule B

Show Some Interest – Reporting Interest & Ordinary Dividend Income on Schedule B

by | Aug 27, 2019 | Individual Tax

Having an additional source of income is a fairly common practice for taxpayers. Often, it may be income earned from interest accrued on savings accounts or dividends paid out from owning stocks or mutual funds. As you may expect, it needs to be reported on your annual income tax filing as well. Depending on certain conditions, that means filing the Schedule B in addition to your regular Form 1040.

Do I need to file the Schedule B?

Individuals will be required to file Schedule B if they meet certain conditions. Some common ones include:

  • Having more than $1,500 in taxable interest or ordinary dividends.
  • Accruing interest from a bond.
  • Claiming the exclusion of interest from series EE or I US savings bonds after 1989.
  • Financial interest in a financial account in a foreign country or receiving distributions from a foreign trust.

Schedule B in Part

There are three major parts to the form: Interests, Dividends, and “Foreign Accounts & Trusts.”

  • Part I – Interest – Report all taxable interest income in this section, such as interest income from savings accounts, bonds, and certificates of deposits (CDs).
  • Part II – Ordinary Dividends – Put all income from ordinary dividends and securities in this section. Examples include stock dividends, employee stock purchasing plans, and mutual funds.
  • Part III – Foreign Account Reporting – This section is a bit unique. Indicate yes or no if the questions asked in regards to foreign accounts and trusts apply to you. You may need to file additional forms such as FBAR (for FinCEN), Form 8938, and Form 3520 if these questions apply to you.

For more information about FBAR, check our article here. Schedule B is important for taxpayers with interest income, but it can potentially get complicated for those with complex sources of interest income. Sometimes business owners may not have the time to gather the needed documents to report interest income, because their main priority is growing their business. We at MiklosCPA understand that need and are here to help. We have helped various small to medium-sized businesses of assorted industries with their tax and accounting needs. Let us know how we can help out by reaching out. Please also check out our social media pages for future tax blog articles like this one and other “good-to-know” tax tidbits we share regularly.

What’s your (filing) status? – Finding the Right Status for Your Tax Filing

What’s your (filing) status? – Finding the Right Status for Your Tax Filing

by | Aug 5, 2019 | Individual Tax

The starting point to filing taxes is figuring out your filing status. It can determine the tax bracket you may fall under, what deductions and credits may be available to you, and ultimately what you may end up owing in taxes.

Status Update

Generally, your filing status hinges upon the last day of the tax year. So for example, despite being single for the majority of the tax year, if you get married on December 31st, you can file as a married couple for that tax year. There are 5 filing status types available to use for your tax filing: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow/Widower.

  • Single – Perhaps the most straightforward. Generally you are considered this if you do not meet any of the other statuses such as married or qualifying widower.
  • Married Filing Jointly (MFJ) – You and your spouse agree to file jointly, which has the advantages of combining income and other benefits like a higher standard deduction and different tax brackets.
  • Married Filing Separately (MFS) – Spouses also have the option to file separately, which means your income and any connected deductions or credits are handled separately. The standard deduction is also lower. It may be advantageous in certain taxpayer situations though.
  • Head of Household (HOH) – To qualify for this, you must be considered unmarried (single) on the last day of the year, pay more than half of the cost of upkeep for a home for the year, and a qualified dependent lives with you for at least more than half of the year. Allows access to a slightly higher standard deduction and different tax brackets than single.
  • Qualifying Widow/Widower – If your spouse dies within the tax year, you are allowed to file MFJ for that year, otherwise you may be a qualifying widow/widower. This status can be claimed for two years following the spouse’s death. You must also have a qualified dependent under you. Qualifying Widow/Widower has benefits similar to MFJ, such as access to the higher standard deduction.

In some cases, you may qualify for more than one status. Generally, you want to select the one that provides the best tax benefit available, such as opting to file as a qualifying widow/widower rather than head of household (assume you meet both statuses).

Determining which filing status benefits you can get complicated, especially if you happen to be running a business as well. A trusted back-office team to handle tax questions like this and the accounting can free you up to run your business properly. MiklosCPA, a California-based tax and accounting firm, has helped many small businesses of assorted industries with their tax and accounting needs. If you want to learn more of our services, drop us a line! Also, follow our social media pages to stay updated on future “good-to-know” posts.

Rising from the Ashes – Casualty, Disaster, and Theft Losses

Rising from the Ashes – Casualty, Disaster, and Theft Losses

by | Jul 15, 2019 | Individual Tax

Disasters are never easy to handle. They come by surprise and the personal feelings that follow it are immeasurable. Fortunately, there are tax provisions that allow individuals to ease the painful costs that follow experiencing disasters like floods and wildfires. By claiming disaster losses on Form 4684, then reporting them as a deduction on your Schedule A for your individual 1040 filing, you can potentially lower what you owe in taxes.

Call it a Disaster

The Tax Cuts and Jobs Act of 2017 upended a lot of what everyone knew about the tax code. Casualty, disaster, and theft losses were no exception. Starting from 2018 through 2025, in order to be able to claim the casualty loss deduction, the President of the United States must officially declare a “federal disaster” in order for casualty losses to qualify. This is usually applied to large-scale natural disasters like wildfires and hurricanes that periodically hit states and regions.

Figuring the Loss

Once an official federal disaster is declared, you are now able to claim any related casualty losses, such as a damaged or lost car. Here’s a sample scenario:

Paul lives in Red Creek, CA, which was recently declared a federal disaster zone due to wildfires. His car, valued at $5000, was destroyed but fortunately firefighters were able to save his home. He also noticed his entire Knight Rider VHS collection was stolen by looters while the fire was raging. Insurance paid out to him $2000 for his lost vehicle, but did not cover his loss of his VHS collection.

He can only deduct for casualty losses the remainder of what is not covered by insurance. So Paul can claim up to $3000 in casualty losses. Theft-related losses are limited to the adjusted basis (aka the original cost) and not the fair market value (FMV) of the lost item. So even if his Knight Rider VHS collection may have commanded a high FMV from collectors, Paul can claim no more than what he paid for the tapes, which in this case was probably a paltry few bucks from a garage sale.

Loss Limitations

Of course there are limits to claiming casualty, disaster, and theft losses. A “$100 rule” applies for each casualty loss incident claimed which reduces the loss claim by $100. The total loss deduction is then subtracted against 10% adjusted gross income (AGI) of the individual. However, these rules do not apply to business property losses.

So, going back to the previous example, Paul’s wildfire and all losses related to it are considered one incident ($100 rule). After insurance reimbursement, his loss is $3000. Paul has an AGI of $32,000 for the year. Applying loss limitation rules, unfortunately we find out Paul cannot claim a casualty loss deduction because his loss is less than 10% of his AGI ($3,000 – 100 = $2,900, 10% of his AGI is $3,200, $2,900 – $3,200 = (300)).

 

Calculating casualty losses can get complicated. Busy owners may not have the time. Having a tax-savvy accounting support staff like us at MiklosCPA can ease that burden.  We are a California-based accounting firm that helps small business clients of assorted industries with their accounting and tax needs. Reach out to us if you want to learn more of our services, and also follow us on our social media pages for more future “good to know” articles like this one.

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