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Essential Year End Tax Moves You Can’t Afford to Miss

by with No Comment Uncategorized

As the year draws to a close, it’s crucial to take stock of your financial situation and make strategic moves to minimize your tax liability. With a little planning and foresight, you can take advantage of various tax-saving opportunities. Here are some last-minute strategies to consider before the year ends.

Itemizing Deductions and Medical Expenses – If you itemize deductions, you can potentially lower your taxable income by paying outstanding medical bills, if the total of all medical expenses paid for the year will exceed 7.5% of your adjusted gross income (AGI). Even if you don’t have the cash on hand, you can pay these bills with a credit card before year-end and still deduct them for the current tax year. This strategy can be particularly beneficial if you’ve had significant medical expenses throughout the year.

Prepaying Property Taxes – Consider prepaying the second installment of your property taxes. This can increase your itemized deductions for the current year. However, be mindful of the $10,000 cap on state and local tax (SALT) deductions, which includes property taxes. If you’re already close to this limit, prepaying may not provide additional tax benefits.

Charitable Contributions and Bunching Deductions – Making charitable contributions is a great way to reduce your taxable income while supporting causes you care about. If you marginally itemize each year, consider “bunching” your deductions. This involves concentrating your charitable contributions and other deductible expenses in one year to exceed the standard deduction threshold, allowing you to itemize. In the alternate year, you can take the standard deduction.

Required Minimum Distributions (RMDs) – For 2024, if you’re 73 years or older, you must take required minimum distributions (RMDs) from your retirement accounts by December 31, 2024, to avoid hefty penalties. Failing to take the RMD can result in a penalty of 25% of the amount that should have been withdrawn. Ensure you meet this requirement to avoid unnecessary costs.

If 2024 is the year you turned 73, you can delay the first RMD until April 1, 2025. This can be beneficial if you have substantial income in 2024, and expect less income the following year. By delaying the distribution, you might be able to reduce your tax liability by taking the distribution in a year when you are in a lower tax bracket.

However, if you choose to delay the first RMD, you must take two distributions in the second year: the delayed first RMD by April 1 and the second year’s RMD by December 31.

Did You Know You Can Make Charitable Deductions from Your IRA Account? – Those who are age 70½ or older are allowed to transfer funds to qualified charities  from their traditional IRA without the transferred funds being taxable, provided the transfer is made directly by the IRA trustee to a qualified charitable organization. The annual limit for these transfers has been $100,000 per IRA owner, but the law was changed so that the annual maximum is inflation adjusted. This means for 2024, an IRA owner can make qualified charitable distributions of up to $105,000. If you are required to make an IRA distribution (i.e., you are age 73 or older), you may have the distribution sent directly to a qualified charity, and this amount will count toward your RMD for the year.

Although you won’t get a tax deduction for the transferred amount, this qualified charitable distribution (QCD) will be excluded from your income, with the result that you may get the added benefit of cutting the amount of your Social Security benefits that are taxed. Also, since your adjusted gross income will be lower, tax credits and certain deductions that you claim with phase-outs or limitations based on AGI could also be favorably impacted.

If you plan to make a QCD, be sure to let your IRA trustee or custodian know well in advance of December 31 so that they have time to complete the transfer to the charity. Your QCD need not be made to just one charity – you can spread the distributions to any number of charities you choose, so long as the total doesn’t exceed the annual limit. And don’t forget to have the charity you’ve donated to provide you with a receipt or letter of acknowledgment for the donation.   

If you have contributed to your traditional IRA since turning 70½, the amount of the QCD that isn’t taxable may be limited, so it is a good idea to check with this office to see how your tax would be impacted.

Maximizing Retirement Account Contributions – Maximize your contributions to retirement accounts like IRAs and 401(k)s. Contributions to these accounts can reduce your taxable income, and the funds grow tax-deferred. For 2024, the contribution limit for a 401(k) is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and over. For IRAs, the limit is $7,000 plus an age-50 or older $1,000 catch-up contribution.

Tax Loss Harvesting – If you have underperforming stocks, consider selling them to realize a loss. This strategy, known as tax loss harvesting, can offset capital gains and reduce your taxable income. Be mindful of the “wash sale” rule, which disallows a deduction if you repurchase the same or a substantially identical security within 30 days.

Reviewing Paycheck Withholdings and Estimated Taxes – Review your paycheck withholdings and estimated tax payments to ensure you’re not underpaying taxes. If you find that you’ve under-withheld, consider increasing your withholdings for the remaining pay periods or making an estimated tax payment to avoid or minimize underpayment penalties. The advantage of withholdings is they are treated as paid ratably throughout the year and can make up for underpayments earlier in the year. Other withholding strategies are available, contact this office for details. 

Managing Health Flexible Spending Accounts (FSAs) – if you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year.  The maximum contribution for 2025 is $3,300.

If you have a balance remaining in your employer’s health flexible spending account (FSA), make sure to use it before the year ends. FSAs typically have a “use-it-or-lose-it” policy, meaning any unused funds may be forfeited. The amount you haven’t used in 2024 that may be carried to 2025 is $640 and must be used in the first 2½ months of 2025. Any unused portion is lost.

Did You Become Eligible to Make Health Savings Account (HSA) Contributions This Year? – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In short, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are
tax-deferred, and distributions are tax-free if made for qualifying medical expenses.

Prepaying College Tuition – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2024. If it is not the maximum allowed for computing the credits, you can prepay 2025 tuition if it is for an academic period beginning in the first three months of 2025. That will allow you to increase the credit for 2024. This is especially effective for students just starting college who only have tuition expenses for part of the year.

Is Your Income Unusually Low This Year? – If your income is unusually low this year, you may wish to consider the following:

  • Converting your traditional IRA into a Roth IRA – The lower income likely results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount. Also, if you have stocks in your retirement account that have had a significant decline in value, it may be a good time to convert to a Roth.
  • Planning for Zero Tax on Long-Term Capital Gains – Lower-income taxpayers and those whose income is abnormally low for the year can enjoy a long-term capital gain tax rate of zero, which provides an interesting strategy for these individuals. Even if the taxpayer wishes to hold on to a stock because it is performing well, they can sell it and immediately buy it back, allowing them to include the current accumulated gain in the sale-year’s return with no tax while also reducing the amount of taxable gain in the future. Since the sales results in a gain, the wash sale rule doesn’t apply.

To determine if you can take advantage of this tax-saving opportunity, you must determine if your taxable income will be below the point where the 15% capital gains tax rate begins. For 2024, the 15% tax rates begin at $94,051 for married taxpayers filing jointly, $63,001 for those filing as head of household and $47,026 for others.  

Example: Suppose a married couple is filing jointly and has projected taxable income for 2024 of $50,000. The 15% capital gains tax bracket threshold for married joint filers is $94,051.  That means they could add $44,050 ($94,050- $50,000) of long-term capital gains to their income and pay zero tax on the capital gains. 

Additionally, if the taxpayer has any loser stocks, he or she can sell them for a loss, and thereby allow additional long-term capital gains to take advantage of the zero-tax rate.

Contact this office for assistance in developing a plan to take advantage of the zero capital gains rate.

Don’t Forget the Annual Gift Tax Exemption – Though gifts to individuals are not tax deductible, each year, you are allowed to make gifts to individuals up to an annual maximum amount without incurring any gift tax or gift tax return filing requirement. For the tax year 2024, you can give $18,000 ($19,000 in 2025) each to as many people as you want without having to pay a gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $18,000, or any unused part of it, over into 2025. Such gifts need not be in cash, and the recipient need not be a relative. If you are married, you and your spouse can each give the same person up to $18,000 (for a total of $36,000) and still avoid having to file a gift tax return or pay any gift tax.

By implementing these strategies, you can optimize your financial outcome and minimize your tax liability. Remember, tax planning is a year-round activity, and these last-minute moves are just one part of a comprehensive tax strategy.  

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Beware: The Dangers of Underpayment Penalties That Could Cost You Big This Tax Season

by with No Comment Tax, Advisory

Tax planning is a crucial aspect of financial management, yet it often remains underestimated by many taxpayers. One area that frequently causes confusion and potential financial strain is the management of estimated tax payments and the associated penalties for underpayment. Understanding the intricacies of estimated tax safe harbors, the requirement for payments to be made ratably, and the strategies to mitigate penalties can significantly impact a taxpayer’s financial health. This article delves into these topics, offering insights into how taxpayers can navigate these challenges effectively.

Understanding Underestimated Penalties – Underpayment penalties can catch taxpayers off guard, especially when they fail to meet the required estimated tax payments. The IRS imposes these penalties to encourage timely tax payments throughout the year, rather than a lump sum at the end. The penalty is essentially an interest charge on the amount of tax that should have been paid during the year but wasn’t. This penalty can be substantial, especially for those with fluctuating incomes or those who experience a significant increase in income without adjusting their estimated payments accordingly. While most wage-earning taxpayers have enough tax withheld from their paychecks to avoid the underpayment penalty problem, those who also have investment income or side gigs may find their withholding isn’t enough to meet the prepayment requirements to avoid a penalty.

Estimated Tax Penalty Amount – The IRS sets the interest rates for underpayment penalties each quarter.  It is equal to the federal short-term interest rate plus 3 percent. With the recent rapid rise in interest rates the underpayment interest rate for each quarter of 2024 is a whopping 8%, the highest it has been in almost two decades. Something you should be concerned about if you expect your withholding and estimated tax payments to be substantially underpaid.   

Estimated Tax Due Dates – For individuals, this involves using Form 1040-ES to make the payments, generally on a “quarterly” basis. 

The estimated tax payment schedule for individuals and certain other taxpayers is structured in a way that does not align with the even quarters of the calendar year. This is primarily due to the specific due dates set by the IRS for these payments. For 2024, the due dates for estimated tax payments are as follows:

  1. First Quarter: Payment is due on April 15, 2024. This payment covers income earned from January 1 to March 31.
  2. Second Quarter: Payment is due on June 17, 2024. This payment covers income earned from April 1 to May 31. Note that this period is only two months long, which contributes to the uneven nature of the quarters.
  3. Third Quarter: Payment is due on September 16, 2024. This payment covers income earned from June 1 to August 31.
  4. Fourth Quarter: Payment is due on January 15, 2025. This payment covers income earned in the four months of the period September 1 to December 31.

 Note, these payment due dates normally fall on the 15th of the month. However, whenever the 15th falls on a weekend or holiday, the due date is extended to the next business day.  

Estimated Tax Safe Harbors – To avoid underpayment penalties and having to make a projection of the expected tax for each payment period, taxpayers can rely on safe harbor rules. These rules provide a guideline for the minimum amount that must be paid to avoid penalties. Generally, taxpayers can avoid penalties if their total tax payments equal or exceed:

  • 90% of the current year’s tax liability or 
  • 100% of the prior year’s tax liability.

However, for higher-income taxpayers with an adjusted gross income (AGI) over $150,000, the safe harbor threshold of 100% increases to 110% of the prior year’s tax liability.

Ratable Payments Requirement – One critical aspect of estimated tax payments is the requirement for these payments to be made ratably throughout the year. This means that taxpayers should aim to make equal payments each “quarter” to avoid penalties. However, income is not always received evenly throughout the year, which can complicate this requirement. For instance, if a taxpayer receives a significant portion of their income in the latter part of the year, they may find themselves underpaid for earlier quarters, leading to penalties.

Uneven Quarters and Computing Penalties – The challenge of uneven income can be addressed by understanding how penalties are computed. The IRS calculates penalties on a quarterly basis, meaning that underpayments in one quarter cannot be offset by overpayments in a later quarter. This can be particularly problematic for those with seasonal or sporadic income. To mitigate this, taxpayers can use IRS Form 2210, which allows them to annualize their income and potentially reduce or eliminate penalties by showing that their income was not received evenly throughout the year.

Workarounds: Increasing Withholding and Retirement Plan Distributions

  • Increase Withholding – One effective workaround for managing underpayment penalties is to increase withholding for the balance of the year. Unlike estimated payments, withholding is considered paid ratably throughout the year, regardless of when the tax is actually withheld. This means that increasing withholding later in the year can help cover any shortfalls from earlier quarters.
  • Retirement Plan Distribution – Another strategy involves taking a substantial distribution from a retirement plan such as a 401(k) or 403(b) plan, which is subject to a mandatory 20% withholding requirement. The taxpayer can then roll the distribution back into the plan within 60 days, using other funds to make up the portion of the distribution which went to withholding. Tax withholding can also be made from a traditional IRA distribution, but this approach requires careful planning to ensure compliance with the one IRA rollover per 12-month period rule.
  • Annualized Exception – For taxpayers with uneven income, the annualized exception using IRS Form 2210 can be a valuable tool. This form allows taxpayers to calculate their required estimated payments based on the actual income received during each quarter, rather than assuming equal income throughout the year. By doing so, taxpayers can potentially reduce or eliminate underpayment penalties by demonstrating that their income was not received evenly.

Managing estimated tax payments and avoiding underpayment penalties requires careful planning and a thorough understanding of IRS rules and regulations. By leveraging safe harbor provisions, understanding the requirement for ratable payments, and utilizing strategies such as increased withholding and retirement plan distributions, taxpayers can effectively navigate these challenges.

If you are expecting your pre-payment of tax to be substantially underpaid and wish to develop a strategy to avoid or mitigate underpayment penalties, please contact this office.  But if you wait too late in the year, it might not provide enough time before the end of the year to make any effective changes. 

There are special rules for qualifying farmers and fishermen, who may have different requirements and potential waivers for underpayment penalties; contact our office for details.

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Top Year End Tax Strategies to Boost Your Business Bottom Line

by with No Comment Tax, Advisory

As the year draws to a close, small business owners have a unique opportunity to implement strategies that can significantly reduce their tax liability for the upcoming year. By taking proactive steps in the final months, businesses can not only minimize their tax burden but also streamline their financial operations. Here’s a comprehensive guide on actions you can take to optimize your tax situation for 2024.

1. Accelerate Business Expenses

One of the most effective ways to reduce taxable income is to accelerate business expenses. Consider purchasing office equipment, machinery, vehicles, or tools before the year ends. By doing so, you can take advantage of Section 179 expensing or bonus depreciation.

  • Section 179 Expensing: This allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. For 2024, the deduction limit is again substantial, allowing businesses to deduct up to $1,220,000 of eligible property. This can include machinery, office furniture, and certain business vehicles. That limit phases out dollar-for-dollar once the amount of section 179 property placed in service during the tax for year exceeds $3,050,000. This means that a business can no longer claim section 179 expensing in 2024 if it places in service $4,270,000 or more of expense-eligible property. Property eligible for 179 expensing includes:

 •   Generally, machinery and equipment, depreciated under the MACRS rules, regardless of its depreciation recovery period,

•    Off-the-shelf computer software,

•    Qualified improvements to building interiors, and

•    Roofs, HVAC systems, fire protection systems, alarm systems, and security systems.

  • Bonus Depreciation: In addition to Section 179, businesses can use bonus depreciation to write off a significant portion of the cost of new and used business assets. For 2024, the bonus depreciation allows 60% of an asset’s cost to be expensed. That is down from 80% in 2023 and will further reduce to 40% for purchases in 2025.

Qualifying property includes tangible property depreciated under MACRS with a recovery period of 20 years or less and most computer software.   

2. Review and Adjust Payroll

If you have employees, reviewing your payroll can provide additional tax savings. Consider the following:

  • Reasonable Compensation for S-Corporation Shareholders: If you are a shareholder in an S-Corporation, ensure that you are paying yourself a reasonable salary. This affects your Section 199A deduction and payroll taxes. The IRS requires that S-Corporation shareholders receive reasonable compensation for services provided.
  • Year-End Bonuses: Consider issuing bonuses before the year ends. Bonuses are deductible in the year they are paid, reducing taxable income. However, year-end bonuses are considered supplemental wages and are subject to payroll taxes and withholding. Ensure that bonuses are processed through payroll to account for withholding taxes.

3. Manage Inventory and Cost of Goods Sold

For businesses that maintain inventory, managing your year-end inventory levels can impact your taxable income. Consider the following strategies:

  • Inventory Write-Downs: If you have obsolete or unsellable inventory, consider writing it down. This reduces your taxable income by increasing the cost of goods sold.
  • Year-End Inventory:  From a tax perspective, the value of your ending inventory affects your taxable income. A larger ending inventory increases your taxable income because it reduces the cost of goods sold (COGS), while a smaller ending inventory decreases taxable income by increasing COGS. Therefore, if your goal is to reduce taxable income, you might prefer to have a smaller inventory at year-end.

4. Optimize Retirement Contributions

Contributing to retirement plans is a powerful way to reduce taxable income while planning for the future. Consider the following options:

  • SEP IRAs and Solo 401(k)s: If you are self-employed, you can contribute up to 25% of your net earnings to a SEP IRA, with a maximum contribution limit of $69,000 for 2024. Solo 401(k) plans also offer significant contribution limits, allowing both employee and employer contributions.
  • Catch-Up Contributions: If you are over 50, take advantage of catch-up contributions to increase your retirement savings and reduce taxable income.
  • Contribution Due Dates: SEP IRA contributions must be made by the due date of your business’s tax return, including extensions.

For 401(k) contributions, employee elective deferrals must be made by the end of the calendar year (December 31, 2024) to count for that tax year. However, employer contributions, such as matching or profit-sharing contributions, can be made by the due date of the employer’s tax return, including extensions, for the 2024 tax year.

5. Charitable Contributions

Making charitable contributions before the end of the year can provide tax benefits. C corporations can directly deduct charitable contributions on their corporate tax returns. The deduction is generally limited to 10% of the corporation’s taxable income.

However, Sole Proprietorships, Partnerships, and S Corporations can not directly deduct charitable contributions as business expenses. Instead, the deduction is passed through to the individual owners, partners, or shareholders, who can then claim the deduction on their personal tax returns if they itemize deductions. Thus, they do not reduce the   business’s taxable income or income of the owners that’s subject to Social Security or self-employment tax.

For 2024, individuals can deduct cash contributions up to 60% of their adjusted gross income.

6. Business Advertising

Advertising expenses are generally considered ordinary and necessary business expenses. As such, they are fully deductible on a business’s tax return. This includes costs associated with promoting the business through various media, sponsorships, and events where the primary intent is to advertise the business.

However, the distinction between advertising and charitable contributions can be unclear. Business advertising is defined as an expense to promote the business and generate revenue. Whereas charitable contributions are made with the intent of supporting a charitable cause or organization without expecting a direct business benefit in return. 

Example: If a business donates money to a local food bank without receiving any advertising or promotional benefit, this is considered a charitable contribution. The business does not expect to receive a direct financial return from the donation.

7. Filing Obligations and Compliance

As you prepare for year-end, ensure that you are compliant with all filing obligations:

  • Beneficial Ownership Reporting: If your business is required to report beneficial ownership information, ensure that you have gathered the necessary details. This includes information about individuals who own or control the company.

The FinCEN Beneficial Ownership Information (BOI) report filing has specific due dates depending on when a business is created or registered. For existing businesses that were in operation before January 1, 2024, the initial BOI report must be filed by January 1, 2025. For new businesses created or registered between January 1, 2024, and December 31, 2024, the report is due within 90 calendar days from the date the business receives actual or public notice of its creation or registration. Starting January 1, 2025, newly created or registered businesses have 30 calendar days from the effective date of their creation or registration to file their initial BOI reports. These deadlines are crucial for compliance and avoiding potential penalties.

  • Information Returns: Prepare for filing information returns, such as Form 1099-NEC for non-employee compensation. Ensure that you have collected Social Security Numbers (SSNs) or Taxpayer Identification Numbers (TINs) from all independent contractors. Independent Contractors should be required to complete Form W-9 before beginning work. If that was not done originally, make sure to collect them so the 1099-NEC forms can be properly and timely filed in January.
  • Estimated Tax Payments: If you or your business is required to make estimated tax payments, ensure that these are up to date to avoid penalties.

8. Tax Credits and Incentives

Explore available tax credits and incentives that can reduce your tax liability:

  • Research and Development (R&D) Tax Credit: If your business engages in research and development activities, you may qualify for the R&D tax credit. This credit can offset income tax liability and, in some cases, payroll tax liability.
  • Energy Efficiency Credits: Consider investing in energy-efficient equipment or renewable energy systems. Federal and state governments offer credits for businesses that make energy-efficient upgrades.

9. Employee Gifts

Employee gifts are a common practice in many organizations, especially during the holiday season or as a token of appreciation for hard work and dedication. However, when it comes to gifting employees, businesses must consider the tax implications of such gestures.  Generally, they are deductible by the business but may or may not be included in the wage income of the employee, as explained here:

  • Cash Bonuses: These are often the most appreciated form of gift, as they provide employees with the flexibility to use the money as they see fit. However, cash bonuses are considered taxable income and are subject to payroll taxes and withholding.
  • Gift Cards and Certificates: These are popular because they offer a degree of choice to the recipient. However, if they are easily convertible to cash, they are also considered taxable income.
  • Non-Cash Gifts: Items such as company merchandise, holiday baskets, or event tickets can be considered de minimis fringe benefits if they are of low value and given infrequently, making them non-taxable.

10. Disaster Loses

A disaster loss refers to a financial loss incurred by a taxpayer due to a federally declared disaster. Taxpayers who experience such losses in 2024 have the option to make an election to deduct the loss on their 2023 tax return instead of waiting to claim it on their 2024 return. This election can provide quicker financial relief by potentially generating a tax refund for the prior year.

It your business or you personally were affected by any of many disasters in 2024, that can impact your year-end strategies and your overall tax planning for 2024.  

By implementing these strategies in the final months of the year, small businesses can significantly reduce their 2024 tax liability. From accelerating expenses to managing inventory and exploring tax credits, there are numerous opportunities to enhance your tax efficiency. Stay proactive, remain compliant with filing obligations.

If you would like to explore how these year-end strategies might benefit your business, please consult with our office.

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What to Expect from Potential Tax Changes Under President Trump’s New Term – and How to Prepare

by with No Comment Tax, Advisory

As tax professionals, we know that changes in leadership often bring shifts in tax policy, affecting everything from deductions and exemptions to estate taxes and business regulations. With President Donald Trump’s recent re-election, we may see updates to tax policy based on his prior administration’s actions and new proposals. For individuals and businesses alike, understanding these changes and planning ahead could make a substantial difference in tax savings and financial efficiency.

In this article, we’ll explore what tax policies may be on the horizon, including proposed extensions of the Tax Cuts and Jobs Act (TCJA) and potential new deductions and exemptions. Keep in mind that while these policies aren’t yet set in stone, we’re here to provide insight and preparation strategies for our clients. As always, we encourage you to contact our office with any questions on tax planning and potential impacts on your situation.

1. Extending the Tax Cuts and Jobs Act (TCJA) Provisions for Individuals

The TCJA introduced significant tax cuts in 2017, benefiting both individuals and corporations. However, many of these provisions are set to expire after 2025. President Trump’s recent policy stance suggests a priority to make these individual tax cuts permanent, which could mean continued benefits for many taxpayers, especially those in middle to high-income brackets. Some key areas that could be impacted if the TCJA provisions are extended include:

  • Itemized Deductions: This could mean the ongoing suspension of certain itemized deductions, including the phase-out of the deduction limit for specific items, as well as limitations on deductions for personal casualty losses.

  • Charitable Contributions: The increased percentage limit for cash contributions to public charities (from 50% to 60%) may remain, offering more generous opportunities for tax savings through charitable giving.

  • Home-Related Deductions: The qualified residence interest deduction could see changes, with limits on home equity interest deductions continuing.

  • Student Loan Assistance: Extended provisions could retain exclusions for certain student loan discharges and employer-provided student loan assistance, helping borrowers manage debt with some tax relief.

How to Prepare: Individuals can start by reviewing their deductions and contributions, especially if charitable giving or homeownership is part of their financial strategy. Planning around these extended provisions could help you maximize deductions and reduce taxable income.

2. Changes to Exemptions and Exclusions

Trump’s proposals include expanding certain exclusions and exemptions, aiming to simplify tax calculations and provide relief for specific income sources. Here are a few areas that may see changes:

  • Social Security Benefits, Tips, and Overtime Pay: A proposed exemption for these income sources could reduce taxable income for many taxpayers, especially those nearing retirement or working in overtime-intensive industries.

  • Increased Estate and Gift Tax Exemptions: This change would further raise the threshold for estate and gift tax liabilities, benefiting high-net-worth individuals and families looking to pass on wealth without a significant tax burden.

How to Prepare: Consider incorporating these potential exemptions into your income planning strategy. For high-income earners, this could mean updating estate plans and exploring additional wealth transfer strategies to maximize potential tax savings.

3. Eliminating the SALT Cap

One of the more contentious aspects of the TCJA was the $10,000 cap on state and local tax (SALT) deductions, which many argue disproportionately impacted taxpayers in high-tax states. Trump’s new policy proposals include a complete removal of this cap, allowing taxpayers to deduct the full amount of their state and local taxes from their federal taxable income.

How to Prepare: If the SALT cap is lifted, taxpayers in high-tax states may see a notable decrease in taxable income. Adjusting your withholding and revisiting your quarterly tax estimates could be beneficial if this change comes into effect.

4. Business Deductions Restored

For business owners, several deductions that have been phased out or limited may make a comeback:

  • 100% Bonus Depreciation: This popular provision, which allows businesses to deduct the entire cost of eligible assets in the year they’re placed in service, is currently phasing out. A potential extension would allow business owners to continue taking full deductions, increasing cash flow, and incentivizing investment in new equipment.

  • R&D Expensing: Returning this deduction in full could help companies that invest heavily in innovation by allowing them to immediately expense their R&D costs, rather than amortizing them over several years.

  • Interest Deduction (EBITDA-Based): By returning to a more favorable interest expense deduction tied to EBITDA (earnings before interest, taxes, depreciation, and amortization), more businesses may be able to deduct interest costs, especially in capital-intensive industries.

How to Prepare: Business owners should consider the potential cash flow benefits of these restored deductions and plan their purchasing and financing strategies accordingly. Speaking with our office can help determine the optimal timing for asset purchases and other significant expenditures.

5. New Import Tariffs

A notable addition to Trump’s tax policies includes a proposed 20% universal tariff on all U.S. imports, which could affect businesses that rely on imported goods and materials. While this tariff is primarily aimed at boosting domestic production, it could also mean increased costs for companies that rely on foreign suppliers.

How to Prepare: For businesses with an international supply chain, now is the time to evaluate options for sourcing domestically or working with U.S.-based suppliers. This could mitigate the impact of higher costs due to import tariffs.

6. Additional Potential Deductions and Credits

Several additional provisions aim to provide taxpayers with more deductions and credits, such as an auto loan deduction and enhanced employer benefits, including tax-free student loan payments. These provisions could provide relief for specific spending areas and reduce taxable income for certain taxpayers.

How to Prepare: These deductions could offer substantial benefits, especially for families with college expenses and those managing large debts. Working with our experts to incorporate these into your tax plan could lead to considerable savings.

Start Planning Now for Potential Tax Changes

Navigating tax policy changes can be complex, but proactive planning can make all the difference in maximizing benefits and minimizing liabilities. At our office, we stay informed about upcoming tax developments to help clients make well-informed financial decisions.

If you’re interested in how these potential tax changes might affect your personal or business taxes, we’re here to help. Contact our office today to discuss tailored tax planning strategies that keep you ahead of the curve.

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Essential Year End Stock Strategies for Savvy Investors

by with No Comment Tax, Advisory

As the year draws to a close, taxpayers with substantial stock holdings have a unique opportunity to engage in strategic planning to optimize their tax positions. This article explores various strategies, including understanding the annual loss limit, navigating wash sale rules, recognizing gains and losses, donating appreciated securities, managing employee stock options, dealing with worthless stock, leveraging the zero capital gain rate, and netting gains and losses.

Annual Loss Limit – The Internal Revenue Service (IRS) allows taxpayers to offset capital gains with capital losses. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) can be deducted against other income. Any remaining losses can be carried forward to future years. This annual loss limit is crucial for taxpayers with significant stock holdings, as it provides a mechanism to reduce taxable income and potentially lower tax liability.

Navigating Wash Sale Rules – The wash sale rule is designed to prevent taxpayers from claiming a tax deduction for a security sold at a loss and then repurchased right away. A wash sale occurs when a taxpayer sells a security at a loss and repurchases the same or substantially identical security within 30 days before or after the sale. If a wash sale is triggered, the loss is disallowed for tax purposes and added to the cost basis of the repurchased security. To avoid this, taxpayers should plan sales carefully, ensuring that any repurchase occurs outside the 61-day window surrounding the sale date.

Recognizing Year-End Gains and Losses – Timing is critical when recognizing gains and losses. Taxpayers should evaluate their portfolios to determine which securities to sell before year-end. Selling securities at a loss can offset gains realized earlier in the year, reducing overall tax liability. Conversely, if a taxpayer expects to be in a higher tax bracket in the future, it might be advantageous to recognize gains in the current year when the tax rate is lower.

Donating Appreciated Securities – Donating appreciated securities to a tax-exempt organization can be more beneficial than selling the securities and donating the cash proceeds. By donating the securities directly, taxpayers can avoid capital gains tax on the appreciation and claim a charitable deduction for the fair market value of the securities. This strategy is particularly advantageous for taxpayers who have held the securities for more than one year, as it maximizes the tax benefits associated with charitable giving.

Managing Employee Stock Options – Taxpayers with unexercised employee stock options should consider year-end strategies to optimize their tax outcomes.

  • Non-qualified stock options (NSOs) – Exercising NSOs before year-end can accelerate income recognition, potentially taking advantage of lower tax rates. For example:
  • Zero Capital Gains Rate:
  1. If your taxable income is low enough to fall within the 0% long-term capital gains tax bracket, you can potentially sell appreciated assets, such as stocks acquired through exercising options, without incurring any capital gains tax. This is particularly advantageous if you have held the stock for more than a year, qualifying it for long-term capital gains treatment.
  2. This strategy requires careful planning to ensure your total taxable income remains below the threshold for the 0% rate. It’s important to consider all sources of income and deductions to accurately project your taxable income for the year.
  3. Lower Income Year:
  1. In a year where your income is unusually low, perhaps due to unemployment, reduced work hours, or other factors, you might find yourself in a lower tax bracket. This can be an opportune time to exercise stock options because the income from exercising options will be taxed at a lower rate.
  2. Additionally, if you have any capital losses, they can be used to offset capital gains, further reducing your tax liability.
  3. Exercising Options in Smaller Batches:
  1. Instead of exercising all your stock options at once, consider doing so in smaller batches over multiple years. This approach can help you stay within lower tax brackets each year, minimizing the overall tax impact.
  2. By spreading out the exercise of options, you can manage your taxable income more effectively, potentially keeping it within the limits for lower tax rates.
  3. Incentive Stock Options (ISOs) – Exercising ISOs and holding the shares for more than one year can qualify for long-term capital gains treatment. However, taxpayers should be mindful of the alternative minimum tax (AMT) implications associated with ISOs.

Dealing with Worthless Stock – If a stock becomes worthless, taxpayers can claim a capital loss for the entire cost basis of the stock. To qualify, the stock must be completely worthless, with no potential for recovery. Taxpayers should document the worthlessness of the stock and claim the loss in the year it becomes worthless. This strategy can provide a significant tax benefit by offsetting other capital gains or ordinary income.

Leveraging the Zero Capital Gain Rate – For most taxpayers in the 10% or 12% ordinary income tax brackets, the long-term capital gains tax rate is 0%. This presents an opportunity to realize gains on appreciated securities without incurring any tax liability. Taxpayers should assess their income levels and consider selling securities to take advantage of this favorable tax treatment, particularly if they anticipate moving into a higher tax bracket in the future.

Netting Gains and Losses – Netting gains and losses is a strategic approach to minimize tax liability. Taxpayers should review their portfolios to identify opportunities to offset gains with losses. If losses exceed gains, the excess can offset up to $3,000 ($1,500 for married filing separate taxpayers) of other income, with any remaining losses carried forward to future years. This strategy requires careful planning and record-keeping to ensure compliance with IRS regulations.

There are also tax advantages to matching long-term gains with short-term losses or vice versa. Here’s how it works:

  1. Offsetting Gains and Losses:
    • Short-term capital gains are taxed at ordinary income tax rates, which are typically higher than the rates for long-term capital gains.
    • Long-term capital gains benefit from lower tax rates, generally capped at 20%.
  2. Tax Strategy:
    • If you have short-term capital losses, you can use them to offset short-term capital gains first. This is beneficial because it reduces income that would otherwise be taxed at higher ordinary rates.
    • Similarly, long-term capital losses can offset long-term capital gains, which are taxed at lower rates.
  3. Optimal Matching:
    • Ideally, you want to use long-term capital losses to offset short-term capital gains. This strategy maximizes your tax benefit because it reduces income taxed at higher rates.
    • Conversely, using short-term losses to offset long-term gains is less beneficial because it reduces income taxed at lower rates.

By strategically matching your gains and losses, you can potentially lower your overall tax liability. However, it’s important to consider your entire financial situation. 

In conclusion, year-end strategic planning offers taxpayers with substantial stock holdings a range of opportunities to optimize their tax positions. By understanding the annual loss limit, navigating wash sale rules, timing the recognition of gains and losses, donating appreciated securities, managing employee stock options, dealing with worthless stock, leveraging the zero capital gain rate, and netting gains and losses, taxpayers can effectively manage their tax liabilities and enhance their financial outcomes.

Contact our office to tailor these strategies to individual circumstances and ensure compliance with tax laws.

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Kelly Crow Named Chair of the Tennessee Society of CPAs

by with No Comment Firm News

We are thrilled to share the exciting news that RBG’s very own Kelly Crow, CPA, has been appointed as the new Chair of the Tennessee Society of CPAs (TSCPA). This esteemed position underscores Kelly’s remarkable contributions to the accounting profession and her unwavering dedication to advancing the interests of CPAs across the state.

A Leader of Distinction

Kelly’s elevation to the role of Chair is a testament to her extensive experience and exceptional leadership within the accounting industry. The TSCPA’s decision to entrust her with this role reflects their confidence in her ability to guide the organization to new heights. Throughout her career, Kelly has consistently demonstrated a commitment to professional excellence, outstanding client service, and active involvement in various industry groups.

A Visionary Approach

As she takes on the role of Chair, Kelly Crow is poised to lead the TSCPA with a forward-looking vision. Her focus will be on strengthening member engagement, spearheading educational initiatives, and addressing critical issues facing the accounting profession today. Kelly’s leadership will be instrumental in navigating the challenges and seizing the opportunities that lie ahead for CPAs in Tennessee, ensuring that the TSCPA continues to be an invaluable resource for its members.

Dedication to Growth and Service

Kelly’s career has been characterized by her deep commitment to professional development and community service. Her leadership philosophy is grounded in collaboration, innovation, and fostering a supportive environment for all. Under her stewardship, we are confident that the TSCPA will continue to uphold its mission of promoting the value and importance of the accounting profession throughout Tennessee.

Anticipating a Bright Future

Kelly Crow’s appointment as Chair marks an exciting chapter for the TSCPA and its members. Her leadership is expected to bring fresh perspectives and strategic initiatives that will benefit not only the organization but also the broader accounting community. At RBG, we eagerly anticipate a dynamic and impactful term under Kelly’s guidance.

Please join all of us at Reynolds, Bone, & Griesbeck in congratulating Kelly Crow on her new role as Chair of the Tennessee Society of CPAs. We are confident that her tenure will be marked by significant growth and positive change for the organization and the profession at large.

Family enjoying vacation in log cabin

Boost Your Income: How Renting Your Vacation Home Can Maximize Your Earnings and Minimize Your Taxes

by with No Comment Tax, Real Estate, Private Wealth

The Employee Retention Credit (ERC) was introduced as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to help businesses keep employees on their payroll during the COVID-19 pandemic. The credit was designed to provide financial relief to businesses that experienced significant declines in revenue or were forced to suspend operations due to government orders. However, the complexity of the ERC and aggressive marketing by some promoters have led to a significant number of erroneous claims being filed.

The IRS has been diligently working to identify and address these improper claims. A recent review has revealed that a substantial portion of the claims submitted show a high risk of being improper. As a result, the IRS has announced new measures to ensure compliance and protect taxpayers.

IRS’s Current Position on ERC Claims – In a recent announcement (IR-2024-169), the IRS outlined its plans to deny tens of thousands of high-risk ERC claims while resuming the processing of low-risk claims. This decision comes after months of digitizing information and analyzing data to assess the validity of over 1 million ERC claims, representing more than $86 billion.

  • High-Risk Claims – The IRS has identified that between 10% and 20% of the ERC claims fall into the highest risk category. These claims exhibit clear signs of being erroneous, or even fraudulent in some cases, and fall outside the eligibility guidelines established by Congress. The IRS will be denying these high-risk claims in the coming weeks. This group includes filings with warning signals such as:
    • Claims that significantly deviate from the established eligibility criteria.
    • Claims submitted by businesses that do not meet the revenue decline or suspension of operations requirements.
    • Claims that appear to be inflated or fraudulent.
  • Medium-Risk Claims – In addition to the high-risk claims, the IRS estimates that between 60% and 70% of the claims show an unacceptable level of risk. These claims will undergo additional analysis to gather more information and improve the agency’s compliance review. The goal is to speed up the resolution of valid claims while protecting against improper payments. Taxpayers with claims in this category may experience delays as the IRS conducts further investigations.
  • Low-Risk Claims – Approximately 10% to 20% of the ERC claims are considered low-risk, showing no eligibility warning signs. The IRS will prioritize the processing of these claims to ensure that eligible taxpayers receive their refunds promptly. Businesses with low-risk claims can expect to see their refunds processed in the coming months, provided there are no additional issues identified during the review.

 

Generally, the IRS will work on the oldest claims first, but no claims received after September 14, 2023, when the IRS’s moratorium on processing claims began, will be processed at this time. The IRS has emphasized that businesses with pending ERC claims should not call the service’s toll-free numbers as information on the status of the processing of claims isn’t available to the phone assisters.

 

Availability of a Voluntary Withdrawal Program – The IRS has also introduced a special ERC Withdrawal Program to help businesses that may have submitted improper claims. This program allows taxpayers to withdraw their ERC claims voluntarily, avoiding future compliance issues and potential penalties. The withdrawal process is particularly beneficial for those who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Who should consider withdrawal:

  • Businesses with Unprocessed Claims – If your ERC claim has not yet been processed by the IRS, you can use the withdrawal program to request that the IRS not process your claim. This will prevent any future compliance issues and potential penalties.
  • Businesses with Uncashed Refund Checks – If you have received an ERC refund check but have not yet cashed or deposited it, you can still withdraw your claim. The IRS will treat the claim as though it was never filed, and no interest or penalties will apply.
  • Businesses with Concerns About Claim Validity – If you are concerned about the validity of your ERC claim and believe it may not meet the eligibility criteria, it is advisable to consider the withdrawal program. This will help you avoid potential audits and compliance actions by the IRS.

 

How to Withdraw an ERC Claim:

To take advantage of the claim withdrawal procedure, follow the special instructions provided by the IRS at IRS.gov/withdrawmyERC. Here is a summary of the steps:

  • Consult with Your Payroll Company: If your professional payroll company filed your ERC claim, consult with them. Depending on how the claim was filed, the payroll company may need to submit the withdrawal request on your behalf.
  • Submit a Withdrawal Request: If you filed your ERC claim yourself and have not received, cashed, or deposited a refund check, you can fax your withdrawal request to the IRS using a computer or mobile device. The IRS has set up a special fax line to receive these requests, enabling the agency to stop processing before the refund is approved.
  • Mail the Withdrawal Request: If you are unable to fax your withdrawal request, you can mail it to the IRS. However, this method will take longer for the IRS to receive and process.
  • Respond to Audit Notices: If you have been notified that your ERC claim is under audit, you can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.
  • Return Uncashed Refund Checks: If you have received a refund check but have not cashed or deposited it, you can still withdraw your claim. Mail the voided check along with your withdrawal request using the instructions provided by the IRS.

 

The IRS’s recent actions to deny high-risk ERC claims and resume processing low-risk claims are part of a broader effort to ensure compliance and protect taxpayers. Businesses that have submitted ERC claims should carefully review their eligibility and consider the voluntary withdrawal program if they have any concerns about the validity of their claims.

It is strongly advised that all businesses exercise caution and seek professional guidance when dealing with ERC claims. The complexity of the ERC and the aggressive marketing tactics used by some promoters have led to a significant number of improper claims. By taking proactive steps, such as withdrawing questionable claims and ensuring compliance with IRS guidelines, businesses can avoid potential audits, penalties, and other compliance actions.

 

If you have any questions or need assistance with your ERC claim, please do not hesitate to contact our office. We are here to help you navigate this complex process and ensure that your business remains in compliance with IRS requirements.

AdobeStock_131610852 (1)

Breaking News: The IRS Has Just Updated Their Position Related to Denying or Paying Employee Retention Credit (ERC) Claims

by with No Comment Tax, Employee Benefit Plans

The Employee Retention Credit (ERC) was introduced as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to help businesses keep employees on their payroll during the COVID-19 pandemic. The credit was designed to provide financial relief to businesses that experienced significant declines in revenue or were forced to suspend operations due to government orders. However, the complexity of the ERC and aggressive marketing by some promoters have led to a significant number of erroneous claims being filed.

The IRS has been diligently working to identify and address these improper claims. A recent review has revealed that a substantial portion of the claims submitted show a high risk of being improper. As a result, the IRS has announced new measures to ensure compliance and protect taxpayers.

IRS’s Current Position on ERC Claims – In a recent announcement (IR-2024-169), the IRS outlined its plans to deny tens of thousands of high-risk ERC claims while resuming the processing of low-risk claims. This decision comes after months of digitizing information and analyzing data to assess the validity of over 1 million ERC claims, representing more than $86 billion.

  • High-Risk Claims – The IRS has identified that between 10% and 20% of the ERC claims fall into the highest risk category. These claims exhibit clear signs of being erroneous, or even fraudulent in some cases, and fall outside the eligibility guidelines established by Congress. The IRS will be denying these high-risk claims in the coming weeks. This group includes filings with warning signals such as:
    • Claims that significantly deviate from the established eligibility criteria.
    • Claims submitted by businesses that do not meet the revenue decline or suspension of operations requirements.
    • Claims that appear to be inflated or fraudulent.
  • Medium-Risk Claims – In addition to the high-risk claims, the IRS estimates that between 60% and 70% of the claims show an unacceptable level of risk. These claims will undergo additional analysis to gather more information and improve the agency’s compliance review. The goal is to speed up the resolution of valid claims while protecting against improper payments. Taxpayers with claims in this category may experience delays as the IRS conducts further investigations.
  • Low-Risk Claims – Approximately 10% to 20% of the ERC claims are considered low-risk, showing no eligibility warning signs. The IRS will prioritize the processing of these claims to ensure that eligible taxpayers receive their refunds promptly. Businesses with low-risk claims can expect to see their refunds processed in the coming months, provided there are no additional issues identified during the review.

Generally, the IRS will work on the oldest claims first, but no claims received after September 14, 2023, when the IRS’s moratorium on processing claims began, will be processed at this time. The IRS has emphasized that businesses with pending ERC claims should not call the service’s toll-free numbers as information on the status of the processing of claims isn’t available to the phone assisters.

Availability of a Voluntary Withdrawal Program -The IRS has also introduced a special ERC Withdrawal Program to help businesses that may have submitted improper claims. This program allows taxpayers to withdraw their ERC claims voluntarily, avoiding future compliance issues and potential penalties. The withdrawal process is particularly beneficial for those who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Who should consider withdrawal:

  • Businesses with Unprocessed Claims – If your ERC claim has not yet been processed by the IRS, you can use the withdrawal program to request that the IRS not process your claim. This will prevent any future compliance issues and potential penalties.
  • Businesses with Uncashed Refund Checks – If you have received an ERC refund check but have not yet cashed or deposited it, you can still withdraw your claim. The IRS will treat the claim as though it was never filed, and no interest or penalties will apply.
  • Businesses with Concerns About Claim Validity – If you are concerned about the validity of your ERC claim and believe it may not meet the eligibility criteria, it is advisable to consider the withdrawal program. This will help you avoid potential audits and compliance actions by the IRS.

How to Withdraw an ERC Claim:

To take advantage of the claim withdrawal procedure, follow the special instructions provided by the IRS at IRS.gov/withdrawmyERC. Here is a summary of the steps:

  • Consult with Your Payroll Company: If your professional payroll company filed your ERC claim, consult with them. Depending on how the claim was filed, the payroll company may need to submit the withdrawal request on your behalf.
  • Submit a Withdrawal Request: If you filed your ERC claim yourself and have not received, cashed, or deposited a refund check, you can fax your withdrawal request to the IRS using a computer or mobile device. The IRS has set up a special fax line to receive these requests, enabling the agency to stop processing before the refund is approved.
  • Mail the Withdrawal Request: If you are unable to fax your withdrawal request, you can mail it to the IRS. However, this method will take longer for the IRS to receive and process.
  • Respond to Audit Notices: If you have been notified that your ERC claim is under audit, you can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.
  • Return Uncashed Refund Checks: If you have received a refund check but have not cashed or deposited it, you can still withdraw your claim. Mail the voided check along with your withdrawal request using the instructions provided by the IRS.

The IRS’s recent actions to deny high-risk ERC claims and resume processing low-risk claims are part of a broader effort to ensure compliance and protect taxpayers. Businesses that have submitted ERC claims should carefully review their eligibility and consider the voluntary withdrawal program if they have any concerns about the validity of their claims.

It is strongly advised that all businesses exercise caution and seek professional guidance when dealing with ERC claims. The complexity of the ERC and the aggressive marketing tactics used by some promoters have led to a significant number of improper claims. By taking proactive steps, such as withdrawing questionable claims and ensuring compliance with IRS guidelines, businesses can avoid potential audits, penalties, and other compliance actions.

If you have any questions or need assistance with your ERC claim, please do not hesitate to contact our office. We are here to help you navigate this complex process and ensure that your business remains in compliance with IRS requirements.

WRC Group

RBG’s 2024 Day of Service

by with No Comment Firm News, Giving Back

On Monday, June 24th, RBG held its annual Day of Service, an event dedicated to giving back to the Memphis community. This day is a cherished tradition for our firm, reflecting our core value of community. The office was closed to allow full participation, and our team members enthusiastically engaged in various volunteer activities throughout the day.

RBG employees partnered with several remarkable organizations on the morning of the 24th, each offering unique opportunities to make a positive impact:

At the Emmanuel Center, our volunteers engaged with children and families from South City Memphis through games and arts and crafts. The Emmanuel Center’s mission to support spiritual, physical, and educational growth was highlighted as we spent quality time fostering social and emotional development with the kids.

Another group of volunteers dedicated their morning to the Wolf River Conservancy. They spent time gardening at the native tree and plant nursery, contributing to the conservancy’s goal of preserving and enhancing the Wolf River and its watershed as a sustainable natural resource.

At AngelStreet, volunteers cleaned the facility, spent time mentoring the girls, and sponsored lunch. This organization inspires and mentors girls as creative leaders through music, ensuring that young women in Memphis have access to the arts and leadership opportunities.

In the afternoon, all participants gathered at Mid-South Food Bank where volunteers sorted through donated food items from retail partners, inspecting items for quality and dates, classifying them, and packing them into boxes on pallets. The Mid-South Food Bank is dedicated to providing nutritious and wholesome food to those facing food insecurity within the community. We are thrilled that our volunteers could contribute to their mission of delivering millions of pounds of food to children, seniors, and families in need!

The day was a resounding success, with RBG employees coming together to support and uplift the Memphis community. We are proud of our team’s dedication and the meaningful impact they made. Thank you to everyone who participated and helped uphold our commitment to our community!

Happy couple buying new home and receiving house keys form real estate agent.

Understanding the Tax Implications of Inheriting or Receiving a Home as a Gift

by with No Comment Tax, Real Estate, Private Wealth

A frequent question, and a situation where taxpayers often make tax mistakes, is whether it is better to receive a home as a gift or as an inheritance. It is generally more advantageous tax-wise to inherit a home rather than to receive it as a gift before the owner’s death. This article will explore the various tax aspects related to gifting a home, including gift tax implications, basis considerations for the recipient, and potential capital gains tax implications. Here are the key points that highlight why inheriting a home is often the better option.

RECEIVED AS A GIFT 

First let’s explore the tax ramifications of receiving a home as a gift. Gifting a home to another person is a generous act that can have significant implications for both the giver (the donor) and the recipient (the donee), especially when it comes to taxes. Most gifts of this nature are between parents and children. Understanding the tax consequences of such a gift is crucial for anyone considering this option.  

Gift Tax Implications – When a homeowner decides to gift their home to another person (whether or not related), the first tax consideration is the federal gift tax. The Internal Revenue Service (IRS) requires individuals to file a gift tax return if they give a gift exceeding the annual exclusion amount, which is $18,000 per recipient for 2024. This amount is inflation adjusted annually. Where gifts exceed the annual exclusion amount, and a home is very likely to exceed this amount, it will necessitate the filing of a Form 709 gift tax return.

It’s worth mentioning that while a gift tax return may be required, actual gift tax may not be due thanks to the lifetime gift and estate tax exemption. For 2024, this exemption is $13.61 million per individual, meaning a person can gift up to this amount over their lifetime without incurring gift tax. The value of the home will count against this lifetime exemption. 

Note: The lifetime exclusion was increased by the Tax Cuts and Jobs Act (TCJA) of 2017, which without Congressional intervention will expire after 2025, and the exclusion will get cut by about half.   

Basis Considerations for the Recipient – For tax purposes basis is the amount you subtract from the sales price (net of sales expenses) to determine the taxable profit. The tax basis of the gifted property is a critical concept for the recipient to understand. The basis of the property in the hands of the recipient is the same as it was in the hands of the donor. This is known as “carryover” or “transferred” basis. 

For example, if a parent purchases a home for $200,000 and later gifts it to their child when its fair market value (FMV) is $500,000, the child’s basis in the home would still be $200,000, not the FMV at the time of the gift. If during the parent’s time of ownership, the parent had made improvements to the home of $50,000, the parent’s “adjusted basis” at the time of the gift would be $250,000, and that would become the starting basis for the child.

If a property’s fair market value (FMV) at the date of the gift is lower than the donor’s adjusted basis, then the property’s basis for determining a loss is its FMV on that date.

This carryover basis can have significant implications if the recipient decides to sell the home. The capital gains tax will be calculated based on the difference between the sale price and the recipient’s basis. If the home has appreciated significantly since it was originally purchased by the donor, the recipient could face a substantial capital gains tax bill upon sale.

Home Sale Exclusion – Homeowners who sell their homes may qualify for a $250,000 ($500,000 for married couples if both qualify) home gain exclusion if they owned and used the residence for 2 of the prior 5 years counting back from the sale date. However, when a home is gifted that gain qualification does not automatically pass on to the gift recipient. To qualify for the exclusion the recipient would have to first meet the 2 of the prior 5 years qualifications. Thus, where the donor qualifies for home gain exclusion it may be best taxwise for the donor to sell the home, taking the gain exclusion and gift the cash proceeds net of any tax liability to the donee.  

Of course, there may be other issues that influence that decision such as the home being the family home that they want to remain in the family.  

Capital Gains Tax Implications – The capital gains tax implications for the recipient of a gifted home are directly tied to the basis of the property and the holding period of the donor. If the recipient sells the home, they will owe capital gains tax on the difference between the sale price and their basis in the home. Given the carryover basis rule, this could result in a significant tax liability if the property has appreciated since the donor originally purchased it. Capital gains are taxed at a more favorable rate if the property has been held for over a year. For gifts the holding period is the sum of the time held by the donor and the donee, sometimes referred to as a tack-on holding period.

Special Considerations – In some cases, a homeowner may transfer the title of their home but retain the right to live in it for their lifetime, establishing a de facto life estate. In such situations, the home’s value is included in the decedent’s estate upon their death, and the beneficiary’s basis would be the FMV at the date of the decedent’s death, potentially offering a step-up in basis and significantly reducing capital gains tax implications, i.e., treated as if they inherited the property.

AS AN INHERITANCE

There are significant differences between receiving a property as a gift or by inheritance.  

Basis Adjustment – When you inherit a home, your basis in the property is generally “stepped up” to the fair market value (FMV) of the property at the date of the decedent’s death. However, occasionally this could result in a “step-down” in basis where a property has declined in value. Nevertheless, this day and age, most real estate would have appreciated in value over the time the decedent owned it, and the increase in value will not be subject to capital gains tax if the property is sold shortly after inheriting it. 

For example, if a home was purchased for $100,000 and is worth $300,000 at the time of the owner’s death, the inheritor’s basis would be $300,000. If the inheritor sells the home for $300,000, there would be no capital gains tax on the sale.

In addition, the holding period for inherited property is always considered long term, meaning inherited property gain will always be taxed at the more favorable long-term capital gains rates. 

Note: The Biden administration’s 2025–2026 budget proposal would curtail the basis step-up for higher income taxpayers.  

In contrast, if a property is received as a gift before the owner’s death, the recipient’s basis in the property is the same as the giver’s basis. This means there is no step-up in basis, and the recipient could face significant capital gains tax if the property has appreciated in value, and they decide to sell it. 

Using the same facts as in the example just above, if the home was gifted and had a basis of $100,000, and the recipient later sells the home for $300,000, they would potentially face capital gains tax on the $200,000 increase in value.

Depreciation Reset – For inherited property that has been used for business or rental purposes, the accumulated depreciation is reset, allowing the new owner to start depreciation afresh on the inherited portion and since the inherited basis is FMV at the date of the decedent’s death, the prior depreciation is disregarded. This is not the case with gifted property, where the recipient takes over the giver’s depreciation schedule.

Given these points, while each situation is unique and other factors might influence the decision, from a tax perspective, inheriting a property is often more beneficial than receiving it as a gift. However, it’s important to consider the overall estate planning strategy and potential non-tax implications. 

Please contact this office for developing a strategy that is suitable for your specific circumstances.