Home Buying, Selling, and Taxes

Spring is a popular time for selling a home. Knowing how to calculate tax basis is vital. It can help reduce your gain when you sell. And learning the rules even before you buy a home will make the process of figuring taxes much easier when you do decide to eventually sell your place.

Lots of home sale profit isn’t even taxed. That’s because of the home sale exclusion. If you have owned and lived in your primary home for at least two out of the five years before the sale date, up to $250,000 of the gain…$500,000 for joint filers… is tax-free. Gain in excess of these amounts is taxed at long-term capital gains rates.

Many homeowners won’t crack the $250,000/$500,000 gain exclusion limits. But those living in pricey areas or who’ve owned their homes a long time may. If you’re in this boat, you should know what counts toward your home basis so you don’t pay more tax than necessary. In calculating gain or loss from a home sale, start with the selling price and subtract selling expenses and the adjusted tax basis of the home. As you can see, the higher the tax basis, the lower the gain from the sale.

Figuring tax basis starts out easy. Begin with what you paid for the home, including the mortgage if you financed the purchase, and add in certain settlement fees. Tracking these costs is simple if you kept your settlement sheet from the purchase.

Your home’s tax basis doesn’t stay static over the years that you own it. Here are common adjustments to tax basis: Additions and improvements. The cost of additions made to your home and improvements that add to its value, prolong its useful life, or adapt it to new uses will increase your home’s basis. Examples of big-ticket items include adding a room, installing new air-conditioning, renovating a kitchen, finishing a basement, or putting in new landscaping or a pool. Smaller-ticket capital improvements also hike basis. These include new doors and windows, duct and furnace work, built-in appliances, water heaters and more. Repairs, maintenance and improvements that are necessary to keep your residence in good condition but don’t add value or prolong its life generally don’t hike tax basis.

Eco-friendly upgrades: If you are putting in energy-saving improvements that qualify for tax credits or subsidies, you must first reduce the cost of the system by the tax credit or subsidy that you received before increasing your home’s tax basis.

Prior depreciation write-offs. You must reduce the tax basis in your home by any depreciation deductions you were eligible for if you used a room or other space exclusively or regularly for business or if you rented out your home in the past.

Homeowners who keep good records will find it easier to calculate tax basis. It’s best to keep all your major home improvement receipts and invoices in one folder. If you didn’t keep these records, estimate the costs by looking at old bank statements, or call the company that originally did the remodeling or put in the upgrade.

We hope this helps.

Tax Questions Answered

Clients are interested in taxes this spring…

Judging by the number of your questions. Here are some popular questions with answers.

My employer offers a pet insurance benefit. Can I pay for this with pretax wages?

No. Unlike employer-paid health insurance for workers, which isn’t included in taxable wages, the value of employer-paid pet insurance is taxable income. Most employers who offer pet insurance benefits don’t subsidize the cost, and employees who opt in pay their share through post-tax payroll deductions.

Can I use 529 funds to pay for a college student’s studies abroad?

In many cases, yes. A 529 plan can be used for any college that participates in the U.S. federal student aid program. If a student is enrolled in a U.S. college and chooses to study abroad through the school’s program for a semester or two, the study-abroad program will be 529-eligible, provided the U.S. college is eligible and the college accepts the study-abroad credits. If the child decides to enroll in a non-U.S. college for their full college education, then that foreign university must participate in the U.S. federal student aid program. And, believe it or not, many foreign colleges do participate and would therefore qualify as eligible schools for 529 purposes. Tuition, books, fees, and room and board can be paid with 529 funds.

I own a residential rental property and put a new roof on it last month. Can I fully deduct the cost of the roof on Schedule E of my 2024 Form 1040?

No, but you can depreciate it over 27.5 years. The new roof you installed is treated as an improvement to the rental property and is treated separately from the underlying property for depreciation purposes. This means the roof’s cost is depreciated over 27.5 years, the same as residential rental property. The beginning depreciation year would be 2024, the year you put on the new roof.

I am planning to take out a reverse mortgage on my primary residence. Will I owe federal income tax on the money I receive in the transaction?

No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds. Note that if you itemize, you cannot deduct on Schedule A of the 1040 the interest you eventually pay. That’s because you are not using the reverse mortgage proceeds to buy, build or substantially improve the home that is securing the mortgage.

My business just received the employee retention tax credit for 2021 wages. Must my firm amend its 2021 income tax return to reflect the ERTC refund?

Yes, if your business previously deducted the wages on that return. The ERTC reduces the wages-paid deduction on the employer’s income tax return. Since your firm got the ERTC after filing its 2021 return, it must amend that return to reduce the wages deduction by the ERTC received. You can’t treat the ERTC refund as income in 2024, the year you received it. Note that examiners at the Service are looking at this issue very closely because it’s a common ERTC compliance error.

Times Up

Big tax changes are likely coming in 2026. The culprit is the 2017 tax reform law. Most individual tax provisions were temporary. They expire after 2025. Unless extended by Congress, the provisions will revert automatically on Jan. 1, 2026, to the rules in effect for 2017.

We will look at key expiring provisions.

Tax brackets. The individual income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% will return to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, with different income-level break points than now.

Bigger standard deductions. The 2017 law more than doubled these breaks.

Higher child credits. Prior to 2018, it was $1,000. Now, it’s $2,000. Plus the $500 credit for each dependent who is not a qualifying child. Alternative minimum tax. The higher exemption amounts and phaseout zones after 2017 have resulted in far fewer individual taxpayers having to pay the AMT.

The 20% qualified business income deduction for self-employeds and people who own interests in S corps, partnerships, LLCs and other pass-through entities.

The adjusted-gross-income limitation on cash donations to qualified charities was increased from 50% to 60% under the 2017 tax legislation, helping big donors.

The larger lifetime estate and gift tax exemption. People who die this year have a $13,610,000 exemption. Compare this with $5,490,000 for 2017 deaths.

The cutback on high itemizations for upper-income taxpayers would return.

Restrictions on popular deductions also end after 2025. Among them:

Personal exemptions. In 2017, filers could take a deduction of $4,050 for themselves and each of their dependents. For example, a family of three claimed a $12,150 personal exemption deduction. The 2017 law eliminated this. The $10,000 cap on deducting state and local taxes on Schedule A of the 1040. This would be welcome relief for folks paying high property tax and/or state income tax. The curbs on deducting home mortgage interest. Under the 2017 law, interest can be deducted on up to $750,000 of home acquisition debt…down from $1 million.

Miscellaneous deductions on Schedule A subject to the 2%-of-AGI threshold. The 2017 law eliminated this category of itemized deductions through 2025. This includes unreimbursed employee expenses (travel, meals, education, etc.), brokerage and IRA fees, hobby expenses, and tax return preparation fees.

Theft and casualty losses. Under current law, only casualty losses arising in a federally declared disaster area can be deducted on Schedule A.

Job-related moving expenses. Now, only members of the military get the break.

2025 is also the last year for two tax breaks not in the 2017 law:

The expansion of the Obamacare health premium credit to more individuals who buy insurance through a marketplace.

And most student loan debt forgiven from 2021 through 2025 is exempt from federal income tax, which is an exception to the general rule that income from the cancellation of indebtedness is taxable.

To Itemize or Not

As you’re filling out your 2023 Form 1040…

You may ask whether you should itemize on Schedule A or take the standard deduction. Most filers take the standard deduction because it’s higher than their total itemizations. But not all. Take people with big medical bills. Itemizers can claim medical expenses not reimbursed by insurance, for themselves, spouse and dependents. The cost must be incurred primarily to alleviate or prevent a physical or mental disability or illness. But there is a floor. Medical expenses are deductible only to the extent the total exceeds 7.5% of your AGI.

The list of eligible medical expenses is broader than most people think.

It includes the basics, such as out-of-pocket payments to doctors, dentists, optometrists and other medical professionals; mental health services; hospital stays; health insurance and Medicare premiums; prescription drugs; glasses and hearing aids. Amounts paid for in vitro fertilization qualify as medical expenses. Ditto for medical driving. The 2023 standard mileage rate is 22¢ per mile.

The cost of treatment for drug use or alcoholism is a medical expense.

Among other health and wellness costs that qualify as deductible medicals: A smoking cessation program. Nutritional counseling for a doctor-diagnosed disease. A weight-loss program and certain special food to help with the treatment of obesity, hypertension, heart disease or other physical illness diagnosed by a physician. But most food, weight loss supplements or low-calorie beverages aren’t eligible. Neither is a weight-reduction program or cosmetic surgery to improve your appearance, or gym membership fees. Teeth whitening and hair transplants don’t count either. A bipartisan group of federal lawmakers want to expand the deduction to include up to $1,000 of the cost ($2,000 for spouses) of gyms and other fitness activities.

If you, your spouse or your dependent requires long-term care…

You may be able to deduct the unreimbursed costs as medical expenses. Long-term-care expenses include the costs of assisted living, in-home care and nursing home services. The long-term care must be medically necessary for one who is chronically ill. The costs of meals and lodging at an assisted living facility or a nursing home count as medical expenses for people mainly there for medical care. Premiums you pay for a long-term-care policy are deductible medicals, too. But the deduction is capped based on age. The older you are, the greater the write-off.

Also eligible:

Certain home improvements to adapt to a disability or illness. For instance, ramps, wide doorways or entrances, railings and wheelchair lifts. Plus veterinary costs and food for a service dog to aid people with disabilities. The cost of the dog also qualifies. An emotional support animal counts if needed primarily for the owner’s medical care to alleviate a mental disability or illness. For more details on these and other medicals, see IRS Publication 502.

Tax Changes Part 4

First-year bonus depreciation isn’t as valuable in 2024.

Last year, businesses could deduct 80% of the cost of new and used qualifying business assets with lives of 20 years or less. This year, the 80% write-off decreases to 60%. But expensing is higher. $1,220,000 of assets can be expensed in 2024. This limit phases out dollar for dollar once more than $3,050,000 of assets are put into use in 2024. Note that the amount of business assets expensed can’t exceed the business’s taxable income. Bonus depreciation doesn’t have this rule.

A key dollar threshold on the 20% deduction for pass-through income rises in 2024.

Self-employeds and owners of LLCs, S corporations and other pass-throughs can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $383,900 for joint filers and $191,950 for all others.

More companies can use the cash method of accounting.

For taxable years beginning in 2024, C corporations with average annual gross receipts of $30 million or less over the previous three years can use the cash method. This threshold also applies to partnerships and LLCs that have C corporations as owners.

The 2024 standard mileage rate for business driving is 67 cents per mile.

The mileage allowance for medical travel and military moves is 21 cents per mile in 2024. The charitable driving rate is fixed by law and stays put at 14 cents a mile

Certain clean-energy credits in the Inflation Reduction Act can be monetized.

Businesses may elect to transfer 11 of the credits to unrelated third parties for cash. State and local government and their instrumentalities and tax-exempt organizations can elect to treat 12 of the energy-savings credits as a payment of federal income tax and receive an income tax refund for the amount that exceeds any taxes they owe.

A new beneficial ownership reporting regime for small firms begins in 2024.

It’s run by the Financial Crimes Enforcement Network. Certain corporations, LLCs and other entities must report information about themselves and their beneficial owners to FinCEN. There are lots of exceptions to reporting, including one for operating firms with over 20 full-timers, over $5 million in gross receipts, and a U.S. physical office. Entities in existence before 2024 have until Dec. 31, 2024, to file their report. Entities formed after 2023 have 90 days after the date of formation to comply. Reporting will be done electronically through FinCEN’s website. Although this isn’t a tax rule, businesses and tax professionals should be aware of it.

As always, we’ll report on tax changes from IRS, Congress and the courts… and how you’ll be affected. And in an election year, we’ll delve further into the tax plans of the leading candidates for president. 2024 promises to be a very interesting year.

Tax Changes Part 2

PAYROLL TAXES

The Social Security annual wage base for 2024 is $168,600, an $8,400 hike. The Social Security tax rate on employers and employees remains 6.2%. Both pay the 1.45% Medicare tax on all compensation, with no cap. Individuals also pay an additional 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers.

The nanny tax threshold is $2,700 for 2024, a $100 increase from 2023.

TAX BRACKETS

The income tax brackets for individuals are much wider for 2024 because of inflation during the 2023 fiscal year. Tax rates are unchanged.

STANDARD DEDUCTIONS

Standard deductions are higher for 2024. Married couples get $29,200, plus $1,550 for each spouse 65 or older. Singles can claim $14,600…$16,550 if age 65 or up. Heads of household get $21,900 plus $1,950 once they reach 65. Blind people receive $1,550 more ($1,950 if unmarried and not a surviving spouse).

CAPITAL GAINS

Tax rates on long-term capital gains and qualified dividends do not change.

But the income thresholds to qualify for the various rates go up for 2024. The 0% rate applies at taxable incomes up to $94,050 for joint filers, $63,000 for household heads and $47,025 for singles. The 20% rate starts at $583,751 for joint filers, $551,351 for household heads and $518,901 for single filers. The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

MINIMUM TAX

AMT exemptions rise for 2024 to $133,300 for couples and $85,700 for singles and household heads. The exemption phaseout zones start at $1,218,700 for couples and $609,350 for others. The 28% AMT rate kicks in above $232,600.

KIDDIE TAX

The kiddie tax has less bite in 2024. The first $1,300 of unearned income of a child under age 19…under age 24 if a full-time student…is tax-free. The next $1,300 is taxed at the child’s rate. Any excess is taxed at the parent’s rate.

Taxes and The Election

The tax stakes are high in next year’s election.

Much of the 2017 tax law expires after 2025. Former President Trump’s tax reform legislation slashed individual tax rates and estate taxes and permanently lowered tax rates on corporations. Most provisions impacting individuals and estates, such as the tax rates, higher standard deductions, higher child credit, the $10,000 SALT write-off cap, and larger lifetime estate and gift tax exemption, end after 2025. Unless lawmakers extend the changes, they will revert to the rules that were in effect for 2017.

The next president will have to deal with these expiring tax provisions.

President Biden wants to raise taxes on people with incomes over $400,000. It seems he would try to extend the tax rates in the 2017 law for other individuals. The leading Republican candidates have their own ideas, as shown here.

Start with Donald Trump.

He wants to make the 2017 tax law permanent and take it further, with even lower tax rates for individuals and businesses. For example, he has proposed lowering the 21% corporate tax rate, maybe to 15%. He also talks about imposing a 10% tariff on all imports coming into the U.S. And he’s mentioned paying a cash rebate or dividend to each American household.

Nikki Haley has lots of tax proposals on her agenda.

On individual taxes, she advocates lower tax rates for working families, repeal of the itemized deduction for state and local taxes, and making permanent the popular 20% write-off for qualified business income of self-employeds and owners of pass-through entities. She calls for ending the green-energy tax breaks in last year’s Inflation Reduction Act. And she supports getting rid of the long-standing 18.4¢-per-gallon federal gas tax.

Ron DeSantis has some interesting ideas.

In addition to his view that the 2017 tax law should be extended. For example, he favors tax abatements for businesses to incentivize the repatriation of capital from China. He doesn’t say what this exactly means, but some have referred to it as a repatriation tax holiday. He wants permanent 100% bonus depreciation. And he calls for abolishing the IRS.

Turn to Chris Christie.

Surprisingly, the former governor of N.J., a state with one of the highest real property taxes in the country, doesn’t advocate for an end to the $10,000 cap on deducting state and local taxes on Schedule A. He instead says he’s against repeal of the cap, although he may support a higher limit.

All the GOP candidates vow to extend or make permanent the 2017 tax law…

Except for Vivek Ramaswamy. He has stayed silent on this topic so far. He wants to reduce taxes, especially for the wealthy, and is opposed to an estate tax. In the past, he has favored a 12% flat tax, though it is unclear whether this refers to a 12% income tax or sales tax. And like DeSantis, he would eliminate the IRS.

The Skinny on HSA

As you ponder health insurance for 2024…

One option is a health savings account. HSAs are tax-advantaged arrangements used to manage deductibles and out-of-pocket costs and let you save for future health care expenses. Many employers have an HSA option. If your employer doesn’t offer it, check with your brokerage company or bank on whether you meet all the requirements to fund and keep an HSA for yourself or your family.

Some basics:

Eligibility for HSAs is restricted. You must have a high-deductible health plan to qualify. The minimum allowable deductible for 2023 is $3,000 for family coverage and $1,500 for self-only coverage. And out-of-pocket costs, including copayments, can’t exceed $15,000 a year for family coverage and $7,500 for individual coverage. For 2024, these amounts are $3,200, $1,600, $16,100 and $8,050, respectively.

Expenses for preventive care can be covered dollar-for-dollar by HDHPs, even if the deductible hasn’t been met. Alternatively, preventive medical costs can be covered by a lower deductible, depending on the terms of the policy. Some services and drugs for a range of chronic illnesses can be covered by HDHPs. Also, beginning in 2020, IRS allowed the costs of testing for and treating COVID-19 to be covered dollar-for-dollar by HDHPs, even if the deductible hasn’t been met, or a lower deductible may apply. This COVID easing applies through the end of 2024.

People eligible for Medicare can’t contribute to HSAs. If you have a balance in an existing HSA, once you turn 65, you can use that money on a tax-free basis to pay monthly Medicare Part B and D premiums. And you can take tax-free payouts from your HSA for your out-of-pocket medical costs, even if you are on Medicare.

HSAs have several major federal tax advantages that owners can enjoy.

Contributions are deductible or are from pretax wages. But there’s a limit. For 2023, the annual cap on deductible or pretax HSA contributions is $3,850 for self-only coverage and $7,750 for family coverage. For 2024, these amounts rise to $4,150 and $8,300. People who are 55 or older can put in an additional $1,000.

Earnings inside an HSA build up tax-free for the account owner. HSAs don’t have a use-it-or-lose-it rule, unlike flexible spending accounts. And any withdrawals that are used to pay medical expenses aren’t taxed. You needn’t take out the HSA funds in the same year you incur the medical cost. If you keep receipts, your HSA can reimburse you in a later year. Tax-free HSA funds can also be used to buy over-the-counter medicine and menstrual care products.

We’re following two House bills covering HSAs:

One would let people with subscription-based primary care become eligible to fund an HSA. Additionally, it would allow HSA eligibility for an individual whose spouse is enrolled in an FSA. This proposal was OK’d by the House Ways & Means Com. on a bipartisan basis. A second bill, with only Republican support, would provide a number of easings, the biggest being an increase in the amount of deductible HSA contributions.

Student Loan Repayment

It’s finally fall. Leaves are changing color.

Children and some adults are awaiting trick-or-treat and we are working hard filing tax returns for clients on extension. And student loan payments have resumed… Putting a dent in a lot of people’s wallets after a three-year halt on repaying college debt ended. But these tax breaks can help ease the pain.

There’s a deduction for student loan interest.

And taxpayers needn’t itemize to take this write-off. Up to $2,500 of interest paid each year can be claimed as a deduction on Schedule 1 of the Form 1040. For 2023, the break begins to phase out for single filers with modified adjusted gross incomes above $75,000…$155,000 for joint filers. It ends for taxpayers with modified AGIs over $90,000 and $185,000, respectively. Parents who help a child repay student loans generally can’t take the write-off unless they are also legally liable on the loans. But, even if a parent paid the loan, a child who meets the modified AGI limits can still take the interest deduction, provided he or she isn’t eligible to be claimed as a dependent on the parents’ return. IRS treats this as if the parents gifted money to the child, who then paid the debt.

Most student loan debt forgiven in 2021 through 2025 is tax-free for federal income tax purposes.

This relief, enacted in the March 2021 stimulus law, is an exception to the general rule that cancellation of indebtedness is taxable. IRS has instructed lenders and loan servicers to not issue Form 1099-C to borrowers whose student loans are forgiven during this time period, and the discharged debt is excluded from income. Some states have different rules, which can be confusing.

Up to $10,000 from 529 accounts can be used to help pay off college debt of the account beneficiary without having to pay income tax on the withdrawals. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.

Employers that offer qualified educational assistance programs can help. These programs can be used to pay down up to $5,250 of an employee’s college loans each year through 2025. Payments are excluded from workers’ wages for tax purposes.

Starting in 2024, relief can be offered through workplace retirement plans.

A new law will allow employer 401(k) matches conditioned on student loan repayments made by employees. IRS blessed such a program in a 2018 private letter ruling. In that situation, the firm contributed to its 401(k) plan on behalf of employees paying down their college debt. The employer matches took place regardless of whether employees also paid in. Participation was voluntary, and employees had to elect to enroll in the program. Employers have been lobbying Congress for years to enact a statute to allow them to do this without seeking a private ruling from the Service, and lawmakers obliged them last year in the SECURE 2.0 law.

How long to keep tax returns and records?

How long to keep tax returns and records?

Great question. The answer depends on the type of document and the kinds of transactions you engage in. Keep your tax returns at least three years. That’s generally how long IRS has to question items on your return and to bill you for any additional tax. It’s also the timeframe to file an amended return to seek a refund. IRS can go back up to six years if your return omits more than 25% of income. If fraud is proved, there is no limit. State tax returns may have to be retained for a longer time period.

Don’t automatically throw out all returns and records after three years.

Look over old documents to see if you might need any parts of them in the future. Hold on to records that help establish the adjusted basis of real estate. Save your settlement sheet whenever you buy real property, including your home. And don’t throw away receipts or invoices for improvements made to the property. Taxpayers who keep good records will find it easier to calculate the adjusted basis of their real estate investments compared with people who don’t maintain records. If you have multiple real estate properties, it’s best to have separate folders for each.

Retain the files until at least three years after you dispose of the property.

Ditto for securities transactions. Be sure to keep your purchase documents for taxable mutual funds, stocks and the like. Among other records to maintain: Those showing stock splits, dividend reinvestments and nontaxable distributions. If you invest in bonds or Treasury bills or notes, track when these securities mature.

If you’ve made nondeductible payins to IRAs or post-tax payins to 401(k)s…

Save records until three years after the accounts are depleted. File Form 8606 with your return for the year you make a nondeductible IRA contribution. If you don’t, those contributions will be treated the same as deductible payins when withdrawn. Retain copies of Form 8606 and your 1040s for each year that such payins are made. Also hold on to Form 5498 or similar statements reflecting the amount of IRA payouts.

If you inherit property or receive property as a gift, heed this advice:

For inheritances, you’ll need to know date-of-death value. For gifts…the donor’s cost. So keep documentation of these figures until three years after you sell the asset.

Businesses….

Should hang on to payroll tax records for a minimum of four years after the due date for filing the Form 941 for the fourth quarter of a particular year. Among the information to be retained: Wage amounts, payment dates and employee data, such as names, employment dates and Social Security numbers. Periods for which workers were paid while absent because of sickness or injury. Copies of all W-4 forms and payroll returns, and amounts and dates of tax deposits. Plus records of tips earned by workers and fringe benefits provided to employees. Records on cost of assets, depreciation, etc., should be retained for decades.

IRS Enforcement

IRS’s efforts at combating individual tax identity theft are paying off…

Thanks in large part to antifraud measures IRS uses to filter out returns. For the 2023 filing season, the agency has been using 236 computer software filters to identify potential identity theft returns and prevent payment of fraudulent refunds. Compare this with 168 filters used for the 2022 filing season. As of March of this year, IRS computers flagged 1.1 million individual returns with refunds totaling $6.3 billion for additional review as a result of those identity theft filters. Not all those returns will be confirmed as fraudulent after verifying the filer’s identity, but some will.

The Service continues to fall behind on policing the tax rules on alimony.

Taxpayers who deduct alimony must include the recipient’s Social Security number and the original date of the divorce or separation agreement on Schedule 1 of the 1040. Treasury inspectors found that the agency isn’t reviewing cases with invalid SSNs. And IRS is allowing some alimony deductions on returns showing an agreement date after 2018. Remember, alimony paid under post-2018 divorce or separation agreements isn’t deductible, and ex-spouses aren’t taxed on alimony they get under these pacts. (Older divorce agreements can be modified to follow these rules if both parties agree.) IRS says it will update its internal guidance but won’t reject noncompliant returns.

Returns claiming improper dependent care credits also vex IRS.

This break, taken by families who are working or looking for a job, helps to offset some expenses of paying for the care of children under age 13 and qualifying relatives. Taxpayers use Form 2441 to calculate the credit and must report the provider’s tax ID number on the 2441. Treasury inspectors had previously recommended several ways that IRS could improve its filters to screen erroneous credits taken on 1040 returns. In response, the Service made some changes, but it hasn’t yet gone far enough. Returns with patently invalid care-provider tax ID numbers on the 2441 sneak through.

Tax Q & A

We’ve received lots of tax questions. Here is just a sampling…and our answers.

Will the charitable write-off be expanded?

It’s possible. Under present law, only filers who itemize on Schedule A can deduct donations they make to charity. A bipartisan group of lawmakers wants to make the deduction available to everyone. More specifically, they would let non itemizers deduct charitable contributions in an amount equal to as much as one-third of standard deductions for 2023 and 2024, meaning the write-off could spike to $4,617 for single filers and $9,233 for couples for 2023 returns filed next year. The odds are low this year of passing legislation with such high deductible amounts. But there’s a bit better chance of reviving the $300/$600 write-off for non itemizers.

Can I gift an I bond before it matures and avoid an income tax hit?

No. Like most people, you’ve likely deferred reporting for federal income tax purposes the interest that you earned on the savings bond. Gifting away EE or I bonds to someone else before those bonds mature will accelerate the interest reporting. It doesn’t matter whether the bonds are reissued in the recipient’s name. You still owe U.S. tax on all the previously deferred interest in the year of the gift.

Can I get a 20% QBI deduction for the income I earn on my rental property?

It depends. Self-employed individuals and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $364,200 for joint filers and $182,100 for single taxpayers and head-of-household filers. Schedule E rental income may be eligible for the write-off in some cases. But applying the QBI rules to income from rentals of real estate is thorny. IRS regs say the rental activity must generally rise to the level of a trade or business, a standard which is based on each taxpayer’s particular facts and circumstances. Alternatively, there is a safe harbor if at least 250 hours a year of qualifying time are devoted to the activity by the taxpayer, employees or independent contractors. Time spent on repairs, collecting rent, negotiating leases, and tenant services counts. Hours put in driving to and from the real estate aren’t included for this purpose. Taxpayers who use the safe harbor must meet strict record-keeping requirements and attach an annual statement to their tax returns. Meeting the safe harbor will let you treat the rental activity as a trade or business for QBI purposes.

I am self-employed and pay state and local property taxes in my business. Can I deduct them on Schedule C?

Yes. Schedule A itemized deductions for state and local taxes are capped at $10,000. However, property and sales taxes are fully deductible for individuals engaged in a business or a for-profit activity. Self-employeds can write off these taxes in full on Schedule C. Farmers can take them on Schedule F. And landlords can deduct on Schedule E property taxes paid on realty.

Tax Debts

Making an offer with IRS to settle your tax debt at less than what you owe?

There are two payment options: Lump-sum cash, which requires 20% of the total offer amount to be paid up-front, with the remaining balance to be paid in five or fewer installments within five months of the date your offer is accepted. Periodic payment requires that your first payment be made with the offer, with the remainder remitted in monthly installments over a period of six to 24 months. Be sure you’ve filed all required tax returns before submitting your offer. Otherwise, the Revenue Service will return your application and the filing fee and apply any initial payment included with your submission to your tax debt. Individuals or businesses in bankruptcy can’t apply for a compromise offer. Check out IRS’s newly updated Form 656-B booklet for rules and forms. Also, IRS has an online tool for individuals to check preliminary eligibility for filing a compromise offer. Go to irs.treasury.gov/oic_pre_qualifier for details.

Beware of “offer in compromise mills,”

IRS’s term for firms and promoters that hawk tax-debt-relief plans with promises to settle your debts at steep discounts, even pennies on the dollar. Many advertise on radio and TV, charge big upfront fees and churn out applications for relief that some of their clients can’t even qualify for.

IRS gets its wrist slapped for being too inflexible about collecting a tax bill

A couple who racked up $33,000 in back taxes offered to settle their debt for $1,629. They claimed they couldn’t pay more money because they were in their mid-sixties, the husband was retired, they had lots of debt, and their finances were impacted by the COVID pandemic. But the IRS settlement officer and appeals officer wouldn’t bite, finding that the couple had enough income and home equity to pay the bill in full. The Tax Court ruled that IRS abused its discretion in outright rejecting the offer and sent the case back to the agency’s appeals office (Whittaker, TC Memo. 2023-59).

1099-K New Reporting Rules

New 1099-K reporting rules begin this year…

Unless Congress acts to thwart the changes. In 2021, Congress enacted more information reporting. Third-party settlement networks, such as PayPal, Square, Venmo and eBay, must send Form 1099-K to payees who are paid over $600 a year for goods or services. The rules first kick in for 2023 1099-Ks sent out in 2024. They were supposed to take effect for filings this year, but IRS delayed the changes.

More people than ever will receive 1099-Ks because the new rules greatly lower the threshold for 1099-K filings. Under the old rules, these 1099-Ks were sent only to payees with over 200 transactions, who were paid over $20,000.

Taxpayers will have to figure out how to report the amounts on their 1040s

Say you sell a washing machine on eBay in 2023 for $800, and you paid $1500 for it. eBay should send you a 1099-K in late Jan. 2024, reporting the $800 sales price. Even though you don’t have income, and you can’t deduct this personal loss, you’ll still have to report the transaction on your 2023 1040 that you file next year. You’d report the $800 as other income on Schedule 1, line 8z, and as other adjustments on Schedule 1, line 24z, so the two amounts offset. Say StubHub sends you a 1099-K for selling $1,600 tickets that you paid $400 for. You’d report $1,200 of capital gain on Schedule D. People in business would generally report their income on Schedule C.

The 1099-K reports only the gross amount of payments from the entity

It doesn’t account for offsets, such as fees, refunds or chargebacks. If you pay fees to an online marketing place, you would increase your cost basis in the item sold by the fee amount when figuring any gain or loss. So be sure to keep good records. Payments from families and friends should not be reported on 1099-Ks. The new reporting rules apply only to payments for sales of goods and services. So, for example, if you pay for plane tickets for two of your friends, and they use Venmo to reimburse you $900 for their share of the cost, Venmo shouldn’t send you a 1099-K.

The 1099-K changes don’t alter the taxation of the underlying transactions

Even if you don’t receive a 1099-K for moneys received through a website or an app for selling goods or services, you’re still taxed on the gain or income. However, IRS knows many people won’t report the amounts, absent receiving a 1099 form. The income misreporting rate for taxpayers who don’t get a W-2 or a 1099 is 55%.

Relaxing the 1099-K reporting rules has bipartisan support in Congress

Although it’s unlikely that the new changes will be repealed in their entirety, as many Republicans desire, the odds are better for some sort of compromise. For instance, increasing the annual monetary threshold to $5,000 or $10,000 and/or perhaps delaying the start date of the changes for another year or two. Lawmakers and taxpayer advocacy groups worry how IRS will handle the influx of 1099-K forms and the abundance of phone questions if the law isn’t tempered.

Taxes and Capital Gains

Let’s discuss the taxation of capital gains

In light of the president’s proposal to impose more taxes on the rich, including higher tax rates on their gains and subjecting some unrealized gains to income tax.

Long-term capital gains get favorable rates

Gains from the sale or exchange of capital assets held over a year are generally taxed at 0%, 15% or 20%. There’s also the 3.8% surtax on net investment income of single filers with modified adjusted gross income of more than $200,000…$250,000 for joint filers.

The rates are based on set income thresholds, which are adjusted annually for inflation

For 2023, the 0% rate applies to individuals with taxable income up to $44,625 on single returns, $59,750 for household heads, and $89,250 on joint returns. The 20% rate starts at $492,301 for single filers, $523,051 for heads of household and $553,851 for married couples filing jointly. The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

The rules are set to change after 2025

When most of the provisions affecting individuals under former President Trump’s Tax Cuts and Jobs Act expire. Unless lawmakers act, starting in 2026, the rules will revert to those in place in 2017. Under pre-2018 law, long-term capital gains were taxed at 0%, 15% and 20% rates, with the rates based on your income tax bracket. The 0% rate applied to taxpayers in the 10% or 15% tax bracket, the 20% rate hit filers in the 39.6% top bracket, and the 15% rate was for people who landed in the other brackets. The 3.8% tax on NII of upper-incomers also applied under the same rules that are now in effect. GOPers want to extend the tax law changes, while Dems want higher rates on the rich.

If President Biden got his way, the wealthy would pay more capital gains tax

• First, he would tax long-term capital gains at ordinary rates up to 37% for taxpayers with taxable incomes over $1 million…$500,000 for separate filers.

• Second, he would hike the 3.8% surtax on net investment income to 5% for taxpayers with more than $400,000 of income. More specifically, the tax would rise by 1.2 percentage points on the lesser of NII or modified AGI over $400,000.

• Third, he would impose a 25% minimum income tax on the ultrarich… people with at least $100 million in wealth. The tax would apply to taxable income plus unrealized capital gains, meaning the gain on appreciated assets not yet sold or disposed of. The proposal defines wealth as the value of assets minus liabilities.

• Fourth, he would tax unrealized gains at the time of gift or death. This idea isn’t new. Biden pushed hard for it in 2021 in his failed Build Back Better plan. He’d essentially treat death or a gift as a realization event for income tax purposes… a deemed taxable sale of assets at fair market value…with a lifetime gain exclusion of $5 million. There are lots of exceptions in Biden’s proposal. Household furnishings and personal effects are exempt. Ditto for transfers to spouses or to charity. Family-owned businesses and farms would escape tax, provided heirs run them. And the gain exclusion of $250,000/$500,000 on home sales would continue to apply.

Crypto and Taxes

Let’s talk Crypto and Taxes

With the rise in popularity of cryptocurrency…

We decided to delve into the taxation of crypto. Virtual currency is treated as property for tax purposes. This includes bitcoin, ether and other forms of similar digital representations of value that act as a substitute for real currency.

Let’s first look at sales or exchanges.

People who sell crypto that they hold for investment will recognize capital gain or loss. That gain or loss is long-term for crypto owned more than 12 months before the sale. Otherwise, it is treated as short-term.

People who sell crypto at a loss needn’t worry about the wash-sale rule.

This rule bars a capital loss write-off if you buy substantially identical securities up to 30 days before or after a sale, with the disallowed loss added to the tax basis of the replacement securities. But the definition of securities for this purpose doesn’t include crypto. So, for example, if you own crypto that sharply falls in value, you can sell it, recognize a capital loss and buy the same digital currency the next day.

If your crypto becomes worthless, you can’t take a worthless securities write-off on your return.

That’s because crypto isn’t a security, so the capital loss write-off for worthless securities isn’t available to individuals who invest in cryptocurrency. IRS recently released a memo on this topic. If you receive crypto for services, you will have ordinary income that you report as wages if employed, or as Schedule C income if you are in business for yourself. The amount of income you report is the crypto’s value in U.S. dollars on the day you receive it, regardless of whether you get a W-2 or 1099 from the payer.

A hard fork of crypto may be taxable.

A fork occurs when there’s a change to the blockchain’s underlying protocol. In a hard fork, those software changes result in a complete blockchain overhaul that causes a split in the cryptocurrency, leading to new crypto. If that new crypto following the hard fork is airdropped or otherwise transferred to you, meaning you receive new crypto units, then there is a taxable event resulting in ordinary income. If, on the other hand, you don’t receive new crypto in an airdrop, etc., then you won’t have income. A soft fork is not a taxable event because it doesn’t result in new crypto.

One open issue is the taxation of staking awards, specifically the timing of when the rewards should be taxed…when they’re created or when they are sold.

This was at the heart of a 2022 court case, in which a couple filed a refund claim alleging that token awards they received through staking are created property that is not taxed on receipt, but instead on disposition. The court tossed the case on procedural grounds without even addressing the substantive tax matter. A 2022 Senate bill would clarify that crypto rewards received through staking are taxed when sold. But that proposal, even if reintroduced in the current Congress, isn’t likely to gain much traction. So it’s up to IRS to issue guidance in the area.

IRS Update

IRS vows better service this filing season.

This isn’t that difficult a promise to make, given that the 2021 and 2022 tax filing seasons were absolute nightmares, with refunds delayed for months on end, dismal telephone service, and lengthy delays on processing of paper returns and returns claiming COVID-related tax breaks.

The agency’s recent hiring spree will help.

It hired 5,000 customer service operators to answer phones. Last year, only 13% of callers reached a live person. This very low level of service was due in part to a near-record number of callers asking about COVID credits, other COVID-related tax law changes, delayed refunds and suspected identity theft.

Treasury Secretary Janet Yellen vowed to increase IRS’s phone service to 85% and cut in half a caller’s wait time on hold.

Is this too optimistic? It’s too soon to tell. We are, however, hearing anecdotal evidence from tax pros about shorter wait times on the agency’s Practitioner Priority Service phone line. More operators to answer phones is one reason. Another is due to IRS’s efforts to weed out robodialers and autodialers on the PPS line. A speech recognition system now requires callers to repeat phrases before being transferred to an operator. Also enabling a smoother filing season: No new, late-year tax changes from Congress. IRS didn’t have to quickly revise tax forms, retrain employees on new tax law or rejigger its computer systems to account for retroactive changes.

Another thing that will make this filing season a bit easier than first thought: IRS’s decision to delay a change to the 1099-K reporting rules.

In 2021, Congress enacted a law requiring third-party settlement networks, such as PayPal, Amazon and Square, to send Form 1099-Ks to payees who are paid over $600 a year for goods or services. This reporting threshold, which is much lower than in prior years, was slated to kick in for 1099-Ks for 2022, which meant that more people than ever would have gotten 1099-K forms that they’d use when filling out their 2022 1040s. This would have included, for example, someone who sold tickets to a sporting event or concert on StubHub for far more than cost, or people selling valuable toys on eBay.

The new rules will now kick in for 2023 1099-K forms sent out in 2024.

1099-Ks are still required to be sent this year to payees with over 200 transactions or who were paid more than $20,000 in 2022. Note that even if you don’t get a 1099-K for a sale of goods or services through a website or app, you’re still taxed on any gain.

Many people are facing a somber shock when filing 2022 returns this year:

Lower refunds or maybe even a tax bill, when compared with the recent past. The main culprit is the end of COVID tax breaks, which expired after 2021. Among the lapsed COVID-related breaks: The higher and fully refundable child credit. The higher earned income credit for workers without children. Stimulus payments. The $300 or $600 charitable contribution deduction for people who don’t itemize on Schedule A. Plus the larger child and dependent care credit for working parents.