What you should know about capital gains and losses

Transcription

1 Ray Petkovsek, CPA Dave Moran, CPA Tina Lough Nelson, CPA February 2016 What you should know about capital gains and losses Synopsis - This article offers facts about capital gains and losses, discussing concepts such as long- vs. short-term losses, carryover losses, deductible losses, net capital gain, and more. Full Article - When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses: Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset. Net investment income tax (NIIT). You must include all capital gains in your income, and you may be subject to the NIIT. The NIIT applies to certain net investment income of individuals who have income above statutory threshold amounts $200,000 if you are unmarried, $250,000 if you are a married jointfiler, or $125,000 if you use married filing separate status. This tax rate is 3.8%. Deductible losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use. Long- and short-term. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is longterm. If you held it one year or less, the gain or loss is short-term. Net capital gain. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Tax rate. The capital gains tax rate, which applies to long-term capital gains, usually depends on your taxable income. For 2015, the capital gains rate is zero to the extent your taxable income (including long-term capital gains) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). The maximum capital gains rate of 20% applies if your taxable income (including long-term capital gains) is $464,850 or more for married joint-filing couples ($413,200 for singles); otherwise a 15% rate applies. However, a 25% or 28% tax rate can also apply to certain types of long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates. Limit on losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return. Carryover losses. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you were not able to deduct to next year s tax return. You will treat those losses as if they happened in that next year. Also, carryover losses can be used to offset future capital gains.

2 Road rules: Deducting business travel expenses Synopsis - Those who travel for business want to ensure that the expenses they incur while doing so are tax deductible. IRS rules are strict, and improperly substantiated deductions can be costly. This article explains the away from home rule, which expenses may qualify for a deduction and how an employeroffered accountable plan generally works. Full Article - If you travel for business, you ll want to ensure that the expenses you incur while doing so are tax deductible. IRS rules are strict, and improperly substantiated deductions can cost you. Away from home rule Generally, ordinary and necessary expenses of traveling away from home for work are deductible. For the expenses to qualify, you must be away from your tax home your regular place of business substantially longer than an ordinary day s work and need to sleep or rest to meet the work demands while away. You don t necessarily have to stay away from home overnight to satisfy the rest requirement. If you travel for business purposes throughout the day but return home that night to sleep, you may still be considered away from home for tax purposes. In this case, expenses you incur for such trips are still deductible. Also, the trip must be primarily for business purposes. If your trip involves both business and personal activities, a portion of the travel expenses may be nondeductible personal expenses. Deductible travel expenses Airfares, taxis, rental cars, lodging, meals (with exceptions), tips and business phone calls are generally tax deductible. But you can t write off lavish or extravagant travel expenses, so be prepared to prove that your patronage of a high-end restaurant or five-star hotel was reasonable under the circumstances. Generally, only 50% of business-related meal and entertainment expenses are deductible. If your employer reimburses you under an accountable plan (see below), the 50% limit applies to your employer rather than you. You must substantiate deductions for lodging and for other travel expenses greater than $75 with adequate records. These include credit card receipts, canceled checks or bills. Records should indicate the amount, date, place, essential character of the expense and business purpose. Be accountable If your employer reimburses your travel expenses, an accountable plan enables the company to deduct the reimbursements, but the reimbursements aren t included in your income as salary and aren t subject to FICA and other payroll tax obligations. Although you may still be able to deduct some or all business travel expenses without an accountable plan, such deductions are available only if you itemize deductions on Schedule A and your expenses plus other miscellaneous deductions exceed 2% of your adjusted gross income. For reimbursed expenses to qualify under an accountable plan, you must have paid or incurred them while on company business and reported the expenses to your employer within a reasonable time (usually within 60 days). You also must return any excess reimbursements usually within 120 days after they were paid or incurred.

3 Generally, to be reimbursable on a tax-free basis, your travel must meet the away from home rule discussed earlier. However, your employer can reimburse local lodging expenses if the lodging is temporary and necessary for you to participate in or be available for a bona fide business meeting or function. The expenses involved must be otherwise deductible by you as a business expense (or be expenses that would otherwise be deductible if you paid them). Exceptions happen As with most IRS rules, there are exceptions to which travel expenses you can deduct. If you re unsure about some expenses, give us a call. Good eats, tax breaks: Deducting employee meal costs Synopsis - One thing about human resources they need to eat. Just about every employer encounters situations in which it needs to provide meals to its employees. This article discusses the latest tax rules for deducting these costs. Full Article - Different tax rules apply to different purposes for these expenses. We also look at the advantages and tax impact of establishing an employee cafeteria. Claim half or all Generally, a business may deduct only 50% of the cost of business meals for federal tax purposes. But food provided to employees may be fully deductible in circumstances such as when meals: Are provided as additional compensation (and thus included in employees taxable income), or Qualify as tax-free de minimis fringe benefits. You may also write off food, and exclude it from employees income, if it s furnished for your convenience and on your premises. Furnish with a purpose Under IRS regulations, the convenience of the employer test is met only if meals are furnished for a substantial noncompensatory business purpose. Whether meals pass this test depends on the facts and circumstances of each case. The IRS has given examples of a number of acceptable circumstances. For instance, food provided to keep employees available for emergency calls during the meal period generally qualifies for the full deduction. But such calls must actually occur or be reasonably expected to occur. Another example is when the nature of the employer s business tends to shorten a meal to, say, 30 to 45 minutes. The furnishing of meals, however, isn t considered to be for a substantial noncompensatory business purpose if a meal period is shortened in order to allow employees to leave early. A third instance is when employees cannot otherwise secure proper meals within a reasonable period. The regulations state that meals are fully deductible under this test if there aren t enough eateries near the workplace.

4 Important note: Under the current tax rules, if more than 50% of employees fed on the premises are furnished meals for the employer s convenience, then all meals furnished on premises are treated as furnished for the employer s convenience. Therefore, these meals are excludable from employees income, regardless of whether every employee meets the convenience test. Enjoy your meals From a tax perspective, providing meals to employees can be deceptively simple. On their face, the rules seem straightforward, but many exceptions and caveats apply. Stay apprised of the latest IRS guidance and double-check your company s meal deductions every year. Considering a company cafeteria? Years ago, only the largest companies had on-site cafeterias. But some midsize businesses are now establishing them, too. There are a number of potential advantages to doing so. Keeping employees on your premises can cut down on excessively long lunch breaks and foster collaboration among team members. A good cafeteria could also attract better job candidates. From a tax perspective, an employer-operated eating facility is usually considered a de minimis fringe benefit. So the costs of providing meals there are generally 100% deductible as long as the cafeteria is located on or near your premises. But there are a number of complex rules involved. For instance, the eating facility s revenue must normally equal or exceed its direct operating costs. We would be glad to work with you to ensure that the facility qualifies for tax-advantaged treatment when established and on an annual basis. Reacquainting yourself with the Roth IRA Synopsis - When looking into retirement planning, many people read about Roth IRAs. But the timing isn t always right to take on one of these arrangements. This article recommends getting reacquainted with the Roth IRA including its concept, contribution limits and conversion rules. Full Article - If you ve looked into retirement planning, you ve probably heard about the Roth IRA. Maybe in the past you decided against one of these arrangements, or perhaps you just decided to sleep on it. Whatever the case may be, now s a good time to reacquaint yourself with the Roth IRA and its potential benefits, because you have until April 18, 2016, to make a 2015 Roth IRA contribution. Free withdrawals With a Roth IRA, you give up the deductibility of contributions for the freedom to make tax-free qualified withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes plus a 10% penalty if you re under age 59½ at the time of the distribution. With a Roth IRA, you can withdraw your contributions tax-free and penalty-free anytime. Withdrawals of account earnings (considered made only after all your contributions are withdrawn) are tax-free if you make them after you ve had the Roth IRA for five years and you re age 59½ or older. Earnings withdrawn before this time are subject to ordinary income taxes, as well as a 10% penalty (with certain exceptions) if withdrawn before you are age 59½. On the plus side, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions (RMD) starting after age 70½ for traditional IRAs.

5 Limited contributions For 2015 and 2016, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however. In 2016, the contribution limit phases out for married couples filing jointly with MAGIs between $184,000 and $194,000. The 2016 phase-out range for single and head-of-household filers is $117,000 to $132,000. Conversion question Regardless of MAGI, anyone may convert a traditional IRA into a Roth to turn future tax-deferred potential growth into tax-free potential growth. From an income tax perspective, whether a conversion makes sense depends on whether you re better off paying tax now or later. When you do a Roth conversion, you have to pay taxes on the amount you convert from your traditional IRA. So if you expect your tax rate to be higher in retirement than it is now, converting to a Roth may be advantageous provided you can afford to pay the tax using funds from outside an IRA. However, if you expect your tax rate to be lower in retirement, it may make more sense to leave your savings in a traditional IRA or employer-sponsored plan. Estate planning consideration The net value of assets in your estate exceeding the lifetime exclusion ($5,450,000 in 2016) are subject to estate tax. This includes a Roth IRA. But a major advantage of the Roth IRA is that your beneficiary can inherit this income tax-free. In contrast, an inherited traditional IRA is taxable to the beneficiary. Retirement radar Roth IRAs have become a fundamental part of retirement planning. Even if you re not ready for one just yet, be sure to keep the idea of opening one on your radar. Why flip real estate when you can exchange it Synopsis - Those who own real estate for investment purposes may focus on flipping it when an adequate gain has been reached. But there s another option: exchanging it under Section 1031 of the Internal Revenue Code. This article explains how such like-kind exchanges work, warning also of the complex rules and potential risks. Full Article - There s no shortage of television shows addressing real estate these days. Many of these programs emphasize flipping properties when an adequate gain has been reached. But, if you re ready to move one of your investments, you might prefer to exchange it rather than flip it. Reviewing the concept Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a like kind. In fact, these arrangements are often referred to as like-kind exchanges. The tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property. Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it s business or investment property. Executing the deal

6 Although an exchange may sound quick and easy, it s relatively rare for two investors to simply swap properties. You ll likely have to execute a deferred exchange, in which you engage a qualified intermediary (QI) for assistance. When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer. An alternate approach is a reverse exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days. Proceeding carefully The rules for like-kind exchanges are complex, so these arrangements present many risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to call us when exploring an IRC Section 1031 exchange and particularly before executing any documents Petkovsek & Moran, LLP