News & Articles

Maximize the Tax Deductions Available for Your Generosity

Posted on Mon, Oct 23, 2017

The reporting requirements for claiming charitable contributions of cash on your tax return can be strict. If you don't follow them, your deductions may be disallowed by the IRS. You should also be aware that stringent rules also apply to donations of non-cash property.

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Tags: Individual Taxes, Gifts, Deductions, Charitable Donations

How a Deductible Home Office Affects a Sale

Posted on Fri, Oct 20, 2017

If you use part of your home as an office and take deductions for related expenses on your annual tax return, can you claim a valuable federal tax break when you sell? Specifically, can you claim the home sale gain exclusion of up to $250,000 for single taxpayers ($500,000 for married couples filing jointly)? In many cases, you can still take advantage of this tax benefit.

Gain Exclusion Qualification Rules

If you're single, you can potentially sell your principal residence for a gain of up to $250,000 without owing federal tax ($500,000 if you're a married joint filer) without paying federal tax. To qualify, you generally must pass these tests:

You must have owned the property for at least two years during the five-year period ending on the sale date (referred to as the ownership test).

2. You must have used the property as a principal residence for at least two years during the same five-year period (referred to as the use test).

To be eligible for the $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test.

If you excluded a gain from an earlier principal residence sale, you generally must wait at least two years before taking advantage again. For joint filers, the $500,000 exclusion is only available when both spouses haven't claimed an exclusion for an earlier sale within two years of the sale date.

What Can You Deduct?

If you qualify to take home office deductions, you can deduct part of expenses including mortgage interest, depreciation, utilities, insurance, and repairs. The office must be used regularly and exclusively as your business place, which means personal activities cannot be done there. Other tips:

    • Take photos to prove the room was used for business purposes in case of an IRS audit.
  • To figure the percentage of your home used for business, you can use two methods — square footage or the number of rooms.
  • Home office deductions can't exceed your income from the related business activity. But if they're greater, you can carry the excess deductions forward to a future year.
  • If a home office is required by an employer, it's a good idea to get a written statement from the company explaining the requirement.

As long as your deductible home office space is in the same dwelling unit as your residence, you can use the gain exclusion to shelter profit from the entire property.

In other words, you are not required to split the sale into two separate deals for tax purposes (one transaction for the sale of the residential part of your property and another for the sale of the office part).

However, you will be taxed on gain up to the amount of depreciation deductions on the office part of your property that were claimed for business use after May 6, 1997. You will owe a maximum federal rate of 25% on this profit (called unrecaptured Section 1250 gain).

However, paying tax on this portion of your profit is not really so bad, considering that you collected earlier tax savings from the office part of your property.

A Separate Dwelling

The tax outcome is less favorable when the office is not in the same dwelling unit as the residence.

For example, say you claimed home office deductions for what was formerly a carriage house, garage or finished basement with cooking and bathroom facilities and a separate entrance. In these cases, even though the office is on the same property or in the same building, it is considered to be a separate dwelling unit that is not part of the residential portion of your property.

In these scenarios, you must pass the ownership and use tests (see right-hand box) for both the office portion of your property and the residential part in order to treat the sale as a single transaction that is eligible for the gain exclusion.

If you fail the tests for the office part (for example, because it was used as a deductible office for the entire five-year period ending on the sale date), you must calculate separate gains for the office and residential portions of your property. Then, you can use the gain exclusion only to shelter profit from the residential part. Any gain on the office part is usually fully taxable.

You will generally owe a federal income tax rate of no more than 25% on gain up to the amount of post-May 6, 1997 depreciation. Any remaining profit from selling the office part of your property will be taxed at the regular capital gains rates.

Thinking about Selling?

Contact your EHTC Tax Advisor if you are contemplating the sale of property with a home office. Advance planning may be necessary to maximize your tax savings.

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Tags: Deductions, Home Office, Primary Residence, Home Office Deductions

How to Save Tax with an Installment Sale

Posted on Wed, Oct 18, 2017

Are you planning to sell real estate before the end of the year? Naturally, you hope to entice a qualified buyer who has plenty of cash on hand. But being open to the idea of an installment sale may help you seal the deal. Fortunately, installment sales also offer tax savings for sellers. Here's how these deals work.

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Tags: Installment Payments, Sales, Real Estate

Access the Coverage You Need

Posted on Mon, Oct 16, 2017

While life insurance can be purchased for a variety of purposes, one of the most common is to maintain your family's standard of living in the event of your death. To ensure that your family is adequately protected, you need to purchase an appropriate amount of insurance. You are likely to hear various rules of thumb, such as you need insurance equal to five to seven times your annual income. Be careful of these guidelines. Since they don't take into account individual circumstances, they may leave your loved ones with an inadequate amount of insurance.

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Tags: Assets, Life Insurance, Insurance

Federal Contractors Get a Minimum Wage Increase in 2018

Posted on Wed, Sep 27, 2017

The U.S. Department of Labor's Wage and Hour Division (WHD) has announced that the minimum wage rate for federal contractors will increase from $10.20 per hour to $10.35 per hour, effective January 1, 2018.

Background Information

On February 12, 2014, President Obama signed Executive Order 13658 which established a minimum wage rate for federal contractors. The executive order required parties who contract with the federal government to pay workers performing work on or in connection with covered federal contracts at least:

$10.10 per hour beginning January 1, 2015; and

    • An amount determined by the Secretary of Labor in accordance with the methodology in the executive order, beginning January 1, 2016, and annually thereafter. The rate was increased to $10.15 per hour, effective January 1, 2016 and $10.20, effective January 1, 2017.

Tipped Employees

The executive order also requires annual adjustments to the minimum cash wage rate for tipped federal contract employees. The WHD has announced that the minimum cash wage for tipped employees performing work on or in connection with a federal contract will increase from $6.80 per hour to $7.25 per hour, effective January 1, 2018.

The contractor must increase the cash wage paid to a tipped employee to make up the difference if a worker's tips combined with the required cash wage of at least $7.25 per hour don't equal the hourly minimum wage rate for contractors as noted above. Certain other conditions must also be met.

Minimum Wage for Other Employees

The minimum wage amount  listed above is only for federal contractor employees. Under the Fair Labor Standards Act (FLSA), the federal minimum wage for covered non-exempt employees who aren't employed by federal contractors is $7.25 per hour. Many states and municipalities also have their own minimum wage laws. If your business operates in a state or municipality that has a higher minimum wage than the federal level, your employees are entitled to the highest rate.

What Employers in Some States Must Pay

Some examples of states with minimum wage per-hour rates currently higher than the federal rate are Washington ($11.00), Massachusetts ($11.00), Oregon ($10.25), Connecticut ($10.10), Vermont ($10.00), Arizona ($10.00), Rhode Island ($9.60), New York ($9.70), Colorado ($9.30), Maryland ($9.25), Maine ($9.00), Michigan ($8.90), West Virginia ($8.75),South Dakota ($8.65), New Jersey ($8.44), Illinois ($8.25), Florida ($8.10) and New Mexico ($7.50).

Some states have different minimum wage rates for large and small employers and impose other requirements. For example:

  • In California, the minimum wage is $10.00 for employers with less than 25 employees and $10.50 for those with 26 or more.
  • Large employers in Minnesota (defined as enterprises with annual receipts of $500,000 or more) have a minimum wage rate of $9.50 per hour while small employers (enterprises with annual receipts of less than $500,000) have a minimum wage rate of $7.75 per hour.

  • In Ohio, employers with annual gross receipts of $299,000 or more must pay $8.15 per hour and those with annual gross receipts under $299,000 must pay $7.25 per hour.

  • In Nebraska, employers with four or more employees have a minimum wage of $9.00 per hour.
  • Nevada requires employers that provide no health insurance benefits to pay $8.25 per hour and employers that do provide health insurance benefits to pay $7.25 per hour.

Federal and State Tipped Employee Rules

An employer of a tipped employee is required to pay $2.13 an hour in direct wages if:

  • That amount plus the tips received equals at least the federal minimum wage,

  • The employee retains all tips and the employee customarily, and

  • The employee regularly receives more than $30 a month in tips.

Many states also have their own laws related to tipped employees. Again, if an employee is subject to both federal and state laws, he or she is entitled to the law that provides the greater benefits. Some states (including California, Oregon, Nevada, Montana, Minnesota and Alaska) require employees to pay tipped employees the full state minimum wage.

Contact your EHTC Payroll Advisor if you have questions about minimum wage issues in your situation.

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Tags: Minimum Wage, Payroll

Are You Ready for the New IRS Partnership Audit Rules?

Posted on Mon, Sep 25, 2017

Legislation enacted in 2015 established a new IRS audit regime for partnerships and limited liability companies (LLCs) that are treated as partnerships for tax purposes. Here's a comparison between the old and new partnership audit rules, along with a summary of recently proposed guidance to help partners prepare for the changes that are effective starting with the 2018 tax year.

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Maximize Social Security Benefits When You Retire

Posted on Wed, Sep 20, 2017

Get the most from Social Security. Younger retirees face a harsh penalty for working part-time. For every $2 earned over $16,920 in 2017 (up from $15,720 in 2016), you lose $1 in Social Security benefits. In the year you reach full retirement age, a higher earnings threshold applies. Your benefits will be reduced by $1 for every $3 of earnings only when earnings exceed $44,880 in 2017 if you reach full retirement age (up from $41,880 for 2016).

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Tags: Benefits, Retirement, Retirees, Social Security

Recent Breach Highlights the Vulnerability of Your Personal Data

Posted on Mon, Sep 18, 2017

Equifax, one of the nation's three major credit reporting agencies, recently reported a massive data breach. Are you among the 143 million U.S. consumers whose personal information was hacked? Here's how to find out — and how to help protect yourself against future breaches.

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Tags: Credit Report

Report Warns Retirees about Potential Downsides of Reverse Mortgages

Posted on Fri, Sep 15, 2017

Reverse mortgages have been around for years. But they're getting a new spin: Some senior homeowners are tapping into their home equity to "bridge the gap" until the time they're ready to apply for Social Security benefits.

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Tags: Retirees, Social Security, Consumer Alert, Mortgage

Win the Salary Game

Posted on Wed, Sep 13, 2017

Salaries are a tough expense for most businesses. You want to hold them down but reining them in too tightly doesn't always work well. Good employees can often go elsewhere and replacing them can cost your company a bundle.

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Tags: Employers, Salary