Financial Tips

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5 QuickBooks Online Add-On Apps You May Need to Add

Not finding quite everything you need in QuickBooks Online? Here are some handy add-on apps available.

QuickBooks Online may work for you just fine as is. After all, it was designed to meet the needs of the millions of small businesses that want to manage and track their income and expenses, create records and transactions, and run reports to gauge their financial health. QuickBooks Online was also designed to grow along with your business. But there’s no need for Intuit to add internal features to do so. In fact, that would make it too expensive and unwieldy for many companies.

Instead, Intuit has partnered with other small business websites to provides add-ons–applications that extend the usefulness of QuickBooks Online in one or more areas, like accounts receivable and payable, inventory, and expense-tracking. They integrate easily to share data and do the extra work you need. Here are some of them to consider.

Bill.com

Bill.com automates your accounts receivable and payable processes. It supports electronic billing and payment, as well as multiple approval levels.

You can certainly enter and pay bills using QuickBooks Online. And you can send invoices to customers and receive payments. But adding a connection to Bill.com gives you more advanced options for accounts receivable and payable. Simply send your bills to Bill.com by scanning, emailing, faxing, or taking a picture with your smartphone. The site’s automation tools turn them into digital records and route them through your specified approvers. Once approved, they’re paid electronically or by paper check. Invoices are just as easy to process; customers can pay by using PayPal, credit card, or ACH. Bill.com’s mobile app makes it possible to keep up with invoices and bills while you’re out of the office.

Expensify

Are your employees still paper-clipping receipts to handwritten expense reports? This method is unnecessarily time-consuming – and often inaccurate. Expensify solves both problems. Your staff can take photos of receipts with their smartphones. Expensify then converts the expense information into coded digital records and submits them for approval based on your company’s policies. Credit card purchases can be automatically imported, too. All data is synchronized with QuickBooks Online in real-time and coded to reflect your preference of QBO’s expense accounts, customers/jobs, etc. Once you’ve approved a report, you can have the money deposited in the employee’s bank account the next day.

TSheets Time Tracking

TSheets employee scheduling software automates tasks that QuickBooks Online doesn’t do: scheduling and remote time-tracking for your hourly employees. Your staff no longer has to fill in paper timesheets. Instead, they can use their smartphones to track their hours and GPS location points. And while Excel is certainly better for creating schedules than paper, TSheets takes over that task, too. After you’ve approved timesheets, that information is sent over to QuickBooks, ready for use in your payroll processing.

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Your employees can easily “punch” in and out using their smartphones. TSheets also uses GPS technology so that your staff members’ locations are always known to you.

SOS Inventory

QuickBooks Online performs some basic inventory management tasks. You can create records for items and use them in transactions, and keep track of the number of items in stock so you know when to reorder (or have a sale). SOS Inventory goes well beyond those capabilities. You can create sales orders, track cost history and serial numbers, and document work-in-progress (WIP). SOS Inventory supports multiple locations and the entire pick/pack/ship process.

Insightly CRM

You can create thorough customer records in QuickBooks Online and document some of your interaction. But it doesn’t facilitate true Customer Relationship Management (CRM) nor project management. Insightly CRM does both. It lets you build exceptionally thorough customer profiles so that you can view social streams, email history, and any events, opportunities, or events related to them. Its project management features include the ability to track by pipelines or milestones, define contact roles and custom fields, and generate advanced project reporting.

QuickBooks Online Integration Key

All of these apps can work in standalone settings, but their integration with QuickBooks Online and their mobile capabilities create powerful partnerships that help you serve both your customers and your employees in ways that QuickBooks Online alone can’t.

We’re not trying to sell you applications here. Our concern is that you’re getting as much out of QuickBooks itself as you can. We can steer you toward add-on solutions if that seems necessary, but we’re always happy to work with you on getting to know QuickBooks Online better and matching its capabilities to your company’s needs.

Beware the Social Media Swamp-Learn How to Deal with Unhappy Customers

The reach of social media goes beyond sharing family photos. Shoppers are reading product reviews online before deciding what to purchase. And disgruntled customers are sharing their displeasure with anyone who will read their rants.

A New Risk

The benefit of social media to small businesses is considerable. It has leveled the playing field in many ways. But it has also introduced new risks. One of the most critical is that bad reviews or negative comments could ruin your business’s reputation — or worse.

A Proactive Approach

How can you protect your business from online attacks? Here are some suggestions:

Join the conversation. If you’ve been visible on social media, you’ll have more credibility if something erupts. But that’s not the only reason to have a social media presence. Even if your business is never involved in an online dustup, social media offers an opportunity to market and promote your business and engage with your customers. Smartphones and tablets have made it even easier for people to go online.

Pay attention. Monitor the Internet for news about your brand. Routinely check online review sites (if appropriate) and social networking sites for references to your company, and run your company’s name through a search engine.

Be prepared. You can’t draft specific responses ahead of time, but you can identify your vulnerabilities and draft a response strategy. You’ll be well ahead of the game if you do this before a crisis hits rather than during one. You’ll also be able to dial down your emotions and respond more objectively. There’s another upside to identifying your vulnerabilities ahead of time: You have an opportunity to eliminate them.

Respond. Make sure you have the facts straight before you do anything. However, things can escalate rapidly online. So if you’re going to respond, do so quickly and publicly. That said, not every attack warrants a public response. The complaint may not be legitimate or the person complaining may be a troublemaker, in which case responding may be a waste of time.

Half Full

Any time your business is under attack — online or off — try looking at it as an opportunity to change some minds and bolster your reputation.

Five Strategies for Tax-Efficient Investing

As just about every investor knows, it’s not what your investments earn, but what they earn after taxes that counts. After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced by 40% or more.

For example, if you earned an average 6% rate of return annually on an investment taxed at 24%, your after-tax rate of return would be 4.56%. A $50,000 investment earning 8% annually would be worth $89,542 after 10 years; at 4.56%, it would be worth only $78,095. Reducing your tax liability is key to building the value of your assets, especially if you are in one of the higher income tax brackets. Here are five ways to potentially help lower your tax bill.1

Invest in Tax-Deferred and Tax-Free Accounts

According to Webtaxonline tax-deferred accounts include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs), and annuities. Contributions to these accounts may be made on a pretax basis (i.e., the contributions may be tax deductible) or on an after-tax basis (i.e., the contributions are not tax deductible). More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to non-qualified annuities, Roth IRAs, and Roth-style employer-sponsored savings plans are not tax deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution.

Pitfalls to avoid: Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax but also to an additional 10% federal tax. In addition, early withdrawals from annuities may be subject to additional penalties charged by the issuing insurance company. Also, if you have significant investments, in addition to money you contribute to your retirement plans, consider your overall portfolio when deciding which investments to select for your tax-deferred accounts. If your effective tax rate — that is, the average percentage of income taxes you pay for the year — is higher than 12%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally will be taxed at your ordinary income tax rate, which may be higher than your long-term capital gains tax rate (see “Income vs. Capital Gains”).

Income vs. Capital Gains

Generally, interest income is taxed as ordinary income in the year received, and qualified dividends are taxed at a top rate of 20%. (Note that an additional 3.8% tax on investment income also may apply to both interest income and qualified (or non-qualified) dividends.) A capital gain or loss — the difference between the cost basis of a security and its current price — is not taxed until the gain or loss is realized. For individual stocks and bonds, you realize the gain or loss when the security is sold. However, with mutual funds, you may have received taxable capital gains distributions on shares you own. Investments you (or the fund manager) have held 12 months or less are considered short term, and those capital gains are taxed at the same rates as ordinary income. For investments held more than 12 months (considered long term), capital gains are taxed at no more than 20%, although an additional 3.8% tax on investment income may apply. The actual rate will depend on your tax bracket and how long you have owned the investment.

Consider Government and Municipal Bonds

Interest on U.S. government issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. An investor in the 32% federal income tax bracket would have to earn 7.35% on a taxable bond, before state taxes, to equal the tax-exempt return of 5% offered by a municipal bond. Sold prior to maturity or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may be worth less than the original cost upon redemption.

Pitfalls to avoid: If you live in a state with high state income tax rates, be sure to compare the true taxable-equivalent yield of government issues, corporate bonds, and in-state municipal issues. Many calculations of taxable-equivalent yield do not take into account the state tax exemption on government issues. Because interest income (but not capital gains) on municipal bonds is already exempt from federal taxes, there’s generally no need to keep them in tax-deferred accounts. Finally, income derived from certain types of municipal bond issues, known as private activity bonds, may be a tax-preference item subject to the federal alternative minimum tax.

Look for Tax-Efficient Investments

Tax-managed or tax-efficient investment accounts and mutual funds are managed in ways that may help reduce their taxable distributions. Investment managers may employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Pitfalls to avoid: Taxes are an important consideration in selecting investments but should not be the primary concern. A portfolio manager must balance the tax consequences of selling a position that will generate a capital gain versus the relative market opportunity lost by holding a less-than-attractive investment. Some mutual funds that have low turnover also inherently carry an above-average level of undistributed capital gains. When you buy these shares, you effectively buy this undistributed tax liability.

Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.

Pitfalls to avoid: A few down periods don’t necessarily mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. However, if your outlook on an investment has changed, you may be able to use a loss to your advantage.

Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestment so that you can properly calculate the basis of shares you own and choose the shares you sell in order to minimize your taxable gain or maximize your deductible loss.

Pitfalls to avoid: If you overlook mutual fund dividends and capital gains distributions that you have reinvested, you may accidentally pay the tax twice — once on the distribution and again on any capital gains (or under-reported loss) — when you eventually sell the shares.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.

Source/Disclaimer:

Example does not include taxes or fees. This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Important Facts About the New Laws on Mortgage Interest Tax Deduction

If you are one of the millions of Americans who own your own home, you should be thinking about how President Trump’s latest tax bill helps or dents your finances; particularly when it comes to the ever-popular mortgage interest deductions. This article should put you ahead of the subject.

First off, if you are a homeowner with no intentions of changing anything soon, your mortgage deductions are unaffected (with a couple of exceptions we deal with below).

The new laws apply only to those buying a home after 15th December 2017. If you fall into this category it boils down to understanding 3 key items:

  • There’s a cap of $750,000 (previously $1 million) on your total mortgage value (covering private and secondary homes in aggregate) that qualifies for interest deduction.
  • Discussing interest rate deduction on new home purchase goes hand-in-hand with the cap placed on Property Tax Deduction – now set at $10,000 (previously unlimited).
  • The Standard Deduction has been nearly doubled for all categories of tax filers in 2018 onward.

Logically, anyone who intends buying in expensive locations or/and locations with property taxes above $10,000 should stop to think about it:

  • High property prices of course generally call for higher mortgage financing, And it often happens that premium locations are also the ones with the highest real estate taxes – a double whammy effect if you will.
  • In situations like this, it seems that the traditional enthusiasm around interest rate deductions may become somewhat jaded. It gives a whole new meaning to the popular realtor’s mantra, “location, location, location!”

The one escape hatch is to simply forget about itemizing interest payment and property tax claims; go to the expanded Standard Deduction now provided. But then again, the apparently increased relief offered by this new provision should be viewed alongside the knowledge that individual personal exemptions have been removed – which brings family size into the equation. If you have a lot of dependents (e.g. children or elderly parents) you may find yourself after all is said and done unchanged – or worse still, going backward.

Here’s another curveball that throws the cat amongst the pigeons: irrespective of when you bought or intend to buy your home/ homes (i.e. before or after the December 2017 law, it’s all the same) interest on second mortgages and on mortgages attached to unrented vacation residences is no longer deductible. Period. Given this, and all the other considerations are drawn into the conversation (as outlined above), it is impossible to provide a quick “catch-all” solution on interest rate deductibility. We can say this, however:

  • It is likely there’ll be a homebuyer movement away from expensive property purchases for the foreseeable future, resulting in a growing tendency to relocate to tax-friendlier regions.
  • The upper-middle class homebuyers will need to analyze these new tax provisions with a fine toothcomb, and even consider renting out vacation homes for part of the year to bring interest rate deduction back into the equation.
  • Those buying at home prices under the $750,000 cap limit with under-$10,000 property tax limits should have a far easier passage.

Conclusion: It’s at times like this that astute tax advice paves the way forward and dispels doubt. As you can see there are numerous considerations, especially for larger families and those fortunate enough to own more than one home. Also, those on the cusp of relocating should be looking at all the variables as well as state taxes before making the move. Our team is geared to answer your questions on every aspect of real estate related deductions. Contacting us sooner than later may be the wisest decision you can make this year.

Not Using QuickBooks Online? What You’re Missing Out On

If you dread every minute of the time you spend on accounting, you should know how QuickBooks Online can change your outlook.

How long would it take you to determine:

  • What your total expenses for this quarter are?
  • Whether or not your business is profitable as of today?
  • How much you’ve sold every month this year?
  • Which invoices are overdue?

If you’re using QuickBooks Online, you can get answers to all those questions—and more—in the time it takes you to sign on to the website.
That’s not an exaggeration. The first thing QuickBooks Online displays is what’s called its Dashboard. This is the site’s home page, which contains an array of charts and account balances that provide a quick overview of your finances. Click on an element here—say, a checking account balance—and you’ll be able to drill down and see the details behind it (in this case, an online account register). Click on the Expense graph, and a transaction report opens.

Your First Hours with QBO

QuickBooks Online is not one-size-fits-all. Its setup tools help you customize it to meet your own company’s needs.

QuickBooks Online works like other online productivity applications you may have used. It uses toolbars and buttons for navigation, drop-down lists and blank fields for data entry, and clickable links to open new related screens to trigger actions. Which is to say, the site is easy to use once you understand its structure. We can walk you through the early steps that are required, which involves tasks like: Using the provided setup tools to customize the site. Connecting QuickBooks Online to your bank and credit card company websites so you can work with transactions. Creating records for your customers, vendors, and the products and services you sell (you’ll be able to add new ones as your business grows). Learning about QuickBooks Online’s pre-built reports. Familiarizing yourself with the site’s workflow. Making the transition from your current accounting system.

How You’ll Benefit

Once you’re comfortable using QuickBooks Online, you’ll discover what millions of small businesses have already learned, that the site helps you:
Get paid faster. You can sign up with a payment processor to accept credit cards and direct bank withdrawals, which can speed up your customers’ responses to invoices. You’ll also be able to accept payments when you’re out of the office on your mobile devices.

Minimize errors. Once you enter data, QuickBooks Online remembers it. No more duplicate data entry that can cause costly mistakes.

Find any detail in seconds. QuickBooks Online has powerful search tools that allow you to find what you’re looking for quickly.
Better service customers. Because your customer profiles include transaction histories, you’ll be able to deal with questions and problems quickly and accurately.

Bill time as well as invoice products. QuickBooks Online supports sales of time-based services with capable time-tracking tools.

Improve your customers’ and vendors’ perception of you. Your business associates will know that you’re using state-of-the-art technology by the forms you share and the customer service you provide.

Save money and time. As the accountant rotterdam has noted, it does take some time to make the transition to QuickBooks Online. But you’ll quickly make that up with the hours you’ll save on accounting tasks, and be able to concentrate on tasks that improve your bottom line.

Be prepared to grow. Because all of your financial data is organized and easily accessible, you’ll be able to quickly generate reports that help you plan for a more profitable future. Banks and investors will need some of these if you decide to seek financing.

Mobile Access

Although you may do the bulk of your accounting work on your desktop or laptop, you’ll have access to many of the site’s features on your smartphone. Your home page displays both an abbreviated version of your browser-based dashboard and a list of recent transactions. You can view, edit, and build new customer, vendor, and product or service records. Snap a photo of a receipt to document an expense and look up or create invoices, estimates, and sales receipts. Record payments, view critical reports, and add notes. Of course, your mobile data is always synchronized with the site itself.

QuickBooks Online lets you do much of your accounting work when you’re away from the office with its mobile app.

Happy to Help

QuickBooks Online was designed for small business people, not accountants. But it includes features that are best used in conjunction with our consulting services, like advanced reports, payroll, and the Chart of Accounts. In fact, the site makes it easy for us to have access to your data so we have the ability to monitor and troubleshoot.

We’ve helped countless sole proprietors and small businesses move their accounting operations to QuickBooks Online, and we’ve seen the difference it’s made in their productivity as well as their attitude toward financial management. Contact us, and we’ll be happy to do the same for you.

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Still doing your accounting manually? You’re spending unnecessary hours and experiencing needless frustration. Talk to us about QuickBooks Online.

Did you know you can do much of your accounting work and accept customer payments on your smartphone? Let us introduce you to QuickBooks Online.

Are you often away from the office? QuickBooks Online lets you handle accounting tasks from anywhere there’s an internet connection. We can tell you how.

Does your manual accounting system make it hard to keep track of customers and inventory? QuickBooks Online can organize and manage both. Contact us.

Getting Started with Accounts in QuickBooks Online, Part 1

QuickBooks Online was built to work with transactions downloaded from your online financial institutions. Here’s how to work with them.

The ability to import transactions from financial institutions into QuickBooks Online is definitely one of the best things about the site. You may have even signed up for that very reason.

By now, you’ve probably already set up at least one connection. But are you using all of the QuickBooks Online’s account tools? There’s a lot you can do once you’ve imported in data from your bank or credit card provider with the help of an accountant. Before you start managing your own money, look for Accountants to get help fast.

We’ll explore these features in this column and the next.

First Steps

If you’re a new subscriber, you may not have established these critical links yet. It’s an easy process. Start by clicking the Banking link in the left vertical navigation pane. In the upper right corner, click Add Account and enter the name of your financial institution if it’s not pictured. Then follow the instructions you’re given on the screen. These can vary depending on the bank or credit card provider, but you’re always at least asked to enter the user name and password that you use to log into each online.

Need help with this? Let us know.

Viewing Your Transactions

Once you’ve made a successful connection, you’ll be returned to the Bank and Credit Cards page. You should see a card-shaped graphic at the top of the screen for each account you’ve linked. Click on one. The table that opens is not your account register. The view here defaults to For Review, which refers to transactions you’ve downloaded. The All tab should also be highlighted; we’ll get to Recognized transactions later.

When you first download transactions into QuickBooks Online, before you’ve done anything with them, many will appear under For Review.

There’s a lot going on here, so don’t be surprised if you’re confused. Review each transaction by clicking on it. QuickBooks Online will have guessed at how it should be categorized, but you can change this by opening the list in the category field and selecting the correct one. It’s critical that you get this right since it will have an impact on reports and income taxes. If you need to split it between multiple categories, click on that button found to the right. If the transaction is Billable, check that box and choose a customer from the drop-down list. If you don’t see this box, click the gear icon in the upper right and select Account and Settings | Expenses. Check to see that Make Expenses and Items Billable is turned On (click on Off, then check the appropriate box to turn it on).

Next, determine how you want to process the transaction by clicking on one of the three buttons at the top of the transaction box. Do you want to accept it and add it to that account’s register? Do you want QuickBooks Online to Find (a) Match for it (like a payment that matches an invoice, for example)? Or, do you want to transfer it to another account? Once you’ve made one of these three selections, the transactions that you’ve added or matched will move under the In QuickBooks tab (where you can still Undo them) and will be available in the account’s register.

Other Options

You can save time by using QuickBooks Online’s Batch Actions tool or even with DPS Accounting .

Say you run across some duplicate or personal transactions that you don’t want to appear in the current account’s register. Check the box in front of each, then click the arrow in the Batch Actions box. Select Exclude Selected. They’ll then be available under the Excluded tab. You can also Accept or Modify multiple transactions simultaneously by using this tool.

So far, you’ve been viewing All your transactions. Click on Recognized to the right of it. These are transactions that are already familiar to QuickBooks Online because they’ve appeared before and/or have been matched, or because you’ve created Bank Rules for them (we’ll address that concept next month). You’ll need to address these the same way you did the transactions in the For Review section; you can either Add or Transfer them.

If you’re new to QuickBooks Online, this may all sound pretty complicated. It can be at first. But once you’ve worked with downloaded transactions for a while, you’ll understand the flow much better. If you’re not clear on the process from the start, it can lead to trouble. Contact us at your convenience. We’d be happy to sit down with you and go through it all using your own company’s data; the familiarity may help.

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If you’re new to QuickBooks Online, there’s a lot you need to understand about dealing with downloaded transactions out the gate. Let us help.

When you download transactions into QuickBooks Online, the site sometimes automatically “matches” them to existing entries. We’re here to explain and help you navigate this. Tired of reviewing downloaded transactions one by one in QuickBooks Online? Click on the Batch Actions button to explore this feature. We can show you how.

QuickBooks Online often guesses at how downloaded transactions should be categorized. You should always check these for accuracy, and we can show you how.

Installment Sale to the Rescue

You’ve finally found a buyer for the rental property, land, or business you’ve been trying to sell but the buyer doesn’t have enough cash to pay the full purchase price in a lump sum. So you agree to an installment sale. The buyer will make a partial payment now and pay you the balance over several years, with interest. The deal’s done, now what about your taxes?

Pay as You Go

Because you’ll receive the payments over more than one tax year, you can defer a portion of any taxable gain realized on the sale. You’ll report only a proportionate amount of your gain each year (plus interest received) until you are paid in full. This lets you pay your taxes over time as you collect from the buyer.

Reduce Surtax Exposure

According to Gainesville Coins the installment sale also might help limit your exposure to the 3.8% surtax on net investment income. Capital gains are potentially subject to this surtax (in addition to regular capital gains tax) but only in years when your modified adjusted gross income (AGI) exceeds a threshold amount: $200,000 if you file as a single or head of household taxpayer, $250,000 if you file a joint return with your spouse, and $125,000 if you are married and file a separate return.

If your AGI is typically under the threshold, recognizing a large capital gain all in one year could put you over the top, triggering the additional 3.8% tax. By reporting your gain on the installment method, you may be able to stay under the AGI threshold and minimize your tax burden.

Take Note

The installment sale method isn’t available for sales of publicly traded securities and certain other sales. And you have the option of electing out of installment sale treatment and reporting your entire gain in the year of sale. Electing out may be advantageous under certain circumstances: for example, if you have a large capital loss that can offset your entire capital gain in the year of sale. Contact your tax advisor for information that pertains to your particular situation.

Renting Residential Real Estat – A Tax Review for the Nonprofessional Landlord

Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

Selling Inherited Property? Tax Rules That Make a Difference

Sooner or later, you may decide to sell the property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.

Your Basis

When you sell the property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death (or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).

These basis rules can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.

For example: Assume your Uncle Harold left you stock he bought in 1986 for $5,000. At the time of his death, the shares were worth $45,000, and you recently sold them for $48,000. Your basis for purposes of calculating your capital gain is stepped up to $45,000. Because of the step-up, your capital gain on the sale is just $3,000 ($48,000 sale proceeds less $45,000 basis). The $40,000 increase in the value of the shares during your Uncle Harold’s lifetime is not subject to capital gains tax.

What happens if a property’s value on the date of death is less than its original purchase price? Instead of a step-up in basis, the basis must be lowered to the date-of-death value.

Holding Period

Capital gains resulting from the disposition of inherited property automatically qualify for long-term capital gain treatment, regardless of how long you or the decedent owned the property. This presents a potential income tax advantage since the long-term capital gain is taxed at a lower rate than short-term capital gain.

Be cautious if you inherited property from someone who died in 2010 since, depending on the situation, different tax basis rules might apply.

Deductions for Long-Term Care Insurance

Many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case. If you are thinking about buying long-term care insurance, you’ll be interested to know that, within limits, premiums paid for qualified policies are deductible as an itemized medical expense. For 2019, premiums for qualified policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses, exceed 10% of your adjusted gross income.

The typical long-term care insurance policy will pay for the nursing home, home care, or other long-term care arrangements after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.

Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2019 are:

Long-Term Care Insurance Premium Deduction Limits, 2019
Age Premium Limit
40 or under $420
41-50 $790
51-60 $1,580
61-70 $4,220
Over 70 $5,270

Source: Internal Revenue Service

These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $10,540 ($5,270 × 2). Keep in mind, however, that, for individuals under age 65, itemized medical expenses are deductible only to the extent that they, in total, exceed 10% of adjusted gross income (AGI).

As everyone’s situation is different, consider contacting your tax and legal professionals to discuss your personal circumstances.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

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