‘Tis the season for making resolutions and setting goals. Try exploring these three areas to dig deeper into QuickBooks Online.
By now, many New Year’s resolutions have already been made – and broken. Though they’re usually created with the best of intentions, they’re often just too ambitious to be realistic.
For example, you might decide to learn more about QuickBooks Online and keep up with your accounting chores more conscientiously in 2019. That’s hard to quantify. How will you know if you achieved that goal?
Instead, why not pick three (or more) specific areas and focus on them this month? We’ll get the ball rolling for you by making some suggestions.
Explore the QuickBooks Online mobile app:
Yes, QuickBooks Online itself is already mobile; you can access it from any computer that has an internet connection and browser. But you probably don’t always lug a laptop around when you’re away from the office, and you’re sometimes at locations were using it wouldn’t be practical. But you can always pull out your smartphone and fire up the QuickBooks Online app, available for both iOS and Android.
No matter how small your smartphone (this image was captured on an iPhone SE), you can still do your accounting tasks using QuickBooks Online’s app.
QuickBooks Online’s app replicates a surprising percentage of the features found on the browser-based version. You can create, view, and edit invoices, estimates, and sales receipts for example, as well as see abbreviated customer and vendor records. Your product and service records are available there, including tools for recording expenses on the road.
Create a budget for one month:
Budgets are intimidating. That’s one reason why some small businesses don’t create them. So instead of trying to estimate what your income and expenses will be for an entire fiscal year, just build a budget for one month. In QuickBooks Online, you’d click the gear icon in the upper right, then select Budgeting. Click Add budget in the upper right to open the New Budget window.
Give it a name, like “February Budget,” and select FY2019. Leave the Interval at Monthly, and open the Pre-fill data? menu to click on Actual data – 2018 (if you have data from last year). Then click Create Budget in the lower right corner. Look at last year’s February numbers and estimate how they might change in 2019. Replace the old numbers with your new ones.
Creating a framework for a budget in QuickBooks Online is easy.
We’re suggesting you try it for just one month, so you get a feel for how this tool works. And that experiment will probably leave you with some questions. We can help you go further and complete an annual budget.
Customize your sales forms:
Every piece of paper and email you send to your customers contributes to their impression of you. Are you presenting an attractive, consistent image of your business to them? QuickBooks Online can help with this. It offers simple (for the most part) tools that allow you to modify the boilerplate forms offered on the site – without being an experienced graphic designer.
Start by clicking on the gear icon in the upper right and selecting Your Company | Custom Form Styles. Unless you’ve done some work in this area before, the screen that opens will have just one listed entry: your Master form, the one that comes standard in QuickBooks Online. To see what you can do, click Edit at the end of that line. Your four options are:
- Design. This section contains links to modifications you can make to your sales forms’ visuals. You can, for example, add a logo or color and change the default fonts.
Want to change your logo or other elements of your sales forms? QuickBooks Online has the tools.
- Content. Do you want to add or remove the standard columns (Date, Quantity, etc.) displayed on your invoices? You can do so by checking and unchecking boxes.
- Emails. QuickBooks Online sends email messages with forms; you can edit them here.
- Payments. This is a reminder that QuickBooks Online supports online payments, which can help you get paid faster.
There’s more you can do to make your sales forms look professional and polished. We can help you with these tools – and any others you want to explore to expand your use of QuickBooks Online. It’s a new year, and who knows what might come your way over the next 12 months? Contact us if you want to prepare for the new accounting challenges that 2019 might present.
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Did you resolve to grow your understanding of QuickBooks Online in 2019? We can help you explore new features.
Go mobile in 2019: Download the QuickBooks Online app for your smartphone. You’d be surprised at how much it can do for you while you’re on the go.
How are things going with your 2019 budget? If you don’t have one yet, let us show you how QuickBooks Online simplifies this critical task.
QuickBooks Online’s sales forms (like invoices) may work fine for you. Do you know, though, how they can be customized to fit the image of your business? Ask us.
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
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.
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.
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.
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.
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.
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.
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.
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|
|40 or under||$420|
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.
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Individuals who plan to take distributions of appreciated employer stock from their tax-qualified retirement plan accounts may receive favorable tax treatment by using a “net unrealized appreciation” (NUA) strategy.
This strategy involves taking a “qualifying” lump-sum distribution of employer stock from a qualified plan upon separation from service or another “triggering event” (such as reaching age 59½) and paying ordinary income taxes on only the plan’s cost basis in the stock. NUA is the difference between the shares’ cost basis and their market value at the time of distribution.
When the stock is eventually sold, taxes will be due on the appreciation at distribution at long-term capital gains rates (currently a maximum of 20% for those in the top regular tax bracket) regardless of how long the employer securities may have been held in the plan. Any further appreciation is taxed at either the short-term or long-term capital gains rate, depending on the holding period.
If your plan assets consist primarily of employer stock, consider using the NUA strategy for part of the distribution and rolling over the remaining shares to an IRA. You could then sell the shares in the IRA and buy a more diversified mix of investments.
A Few Considerations
Could you benefit from the NUA strategy? While it can reduce the taxes you pay, it’s not appropriate for everyone. Think about these factors as you make your decision.
Time frame. This strategy provides the most benefit when stock won’t be sold for several years.
Taxes. The NUA strategy may be less beneficial if tax rates change or your tax rate declines in retirement.
Diversification. No matter which strategies you employ, it’s important to maintain an adequately diversified portfolio.
To learn more about tax rules and regulations for investments, give us a call today. Our knowledgeable and trained staff is here to help.
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If you are a mutual fund* investor, chances are you will receive a capital gain distribution notice in the next few weeks. Distributions represent your share of gains the fund earned when it sold investments. While gains are welcome, the taxes on them are not. Since gains are a form of income, they’re taxable to you. The exception: Taxes on distributions from mutual funds you hold in a retirement plan won’t be due until you begin taking money out of those accounts.
Capital gain can still occur even if the fund has performed poorly. This happens when a fund manager sells stocks that may be down for the year but that haveincreased in value since their purchase, resulting in a net capital gain. The trend of fund managers to trade holdings frequently in an effort to increase their fund’s return adds to the likelihood that you’ll owe capital gains tax.
In most cases, capital gain distributions from mutual funds held in taxable accounts are taxed as long-term gain, even for investors who have held a fund for less than a year.
Here are a few ways to reduce the taxes on capital gain distributions.
Offset gains with capital losses. Losses from one investment may be used to offset capital gains from another, dollar for dollar.
Consider tax-efficient funds. A fund that holds its investments is less likely to generate taxable gains than a fund that buys and sells assets frequently. Before you buy, consider the types of investments a fund holds and the fund’s investment philosophy.
Don’t buy a fund immediately before it makes a capital gains payout. You’ll essentially get back a part of your investment in the fund and be taxed on it. Wait until the distribution has been made.
To learn more about capital gains and how they affect your taxes, give us a call today. Our staff of professionals are always happy to help.
*Mutual funds are sold by prospectus, which includes information on charges, expenses, and risks. To receive a current prospectus, please contact your registered representative. You should read the prospectus carefully before investing.
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Do you invest in mutual funds? Unless you hold your investment in a tax-deferred account, you’ll want to consider taxes when you look at a fund’s returns. After all, it’s not what your fund earns but what you keep that counts.
Distributions of Fund Income
Mutual funds are required to distribute almost all of their income — including realized capital gains, dividends, and interest
— to their shareholders each year. The tax bite from these distributions reduces the fund’s total return to the investor.
Capital gains. The tax rate on long-term capital gains is capped at 15% for most taxpayers, and 20% for those with higher incomes. However, if a fund sells a security at a gain before meeting the more-than-one-year holding period for long-term capital gain treatment, the gain is considered short term and is taxable to you when distributed at your regular tax rate.
Regular individual tax rates currently range as high as 37%.
Dividends. The tax rates on qualifying dividends mirror the long-term capital gains rates. These rates apply to qualifying dividends a mutual fund receives on stocks in its portfolio and distributes to shareholders. Dividends that don’t qualify for a favorable rate are taxable to you at your regular tax rate.
Interest. Distributions of interest a fund earns on bonds, certificates of deposit, and other interest-bearing investments are generally taxable to you at your regular tax rate. However, interest you receive from a municipal bond fund is generally exempt from federal income taxes (and possibly state taxes as well).
Note that a 3.8% surtax on net investment income may also apply to your capital gains, dividends, and interest from mutual fund investments if your income exceeds a tax law threshold. And you must pay taxes on taxable fund distributions whether or not you reinvest the distributions in additional shares of the fund.
Sales of Fund Shares
When you sell shares in a mutual fund, you’ll typically have a gain or loss to report on your tax return. If the securities in the
fund’s portfolio have gone up in value during the period the fund has owned them, this appreciation is reflected in the share price. Similarly, if the value of the fund’s holdings has dropped, the share price will reflect the loss in value.
Your gain or loss on a sale of fund shares is figured by comparing the amount you realize on the sale to your cost basis in
the shares you sold. If you sell all the shares you own, figuring your taxes is easy. You just add up all the investments you’ve
made, including reinvested dividends and other distributions, and compare that amount to the net sale proceeds to determine whether you have a gain or loss. However, if you don’t sell all your shares at once, you must use an IRS-approved method for figuring your cost basis.
Taxes can have a significant effect on your mutual fund returns. Be sure to consider them in evaluating your investments.
When you sell securities in a taxable investment account, you have to know your “basis” in the securities to determine whether you have a gain or a loss on the sale — and the amount — for tax purposes. Generally, your basis is the price you paid for the investment, adjusted for the costs associated with that purchase, any share splits, reinvested dividends, or capital gain distributions.
Although the cost basis calculation sounds straightforward enough, there’s more to the story.
Inherited and Gifted Securities
Though basis is usually derived from cost, inheritances are treated differently. Generally, the basis of inherited securities is reset at their date-of-death value. This reset is sometimes referred to as a “step-up in basis.”
With gifted securities, the person receiving the securities generally takes the basis of the person who gave them. However, if gift tax was paid, a basis adjustment may be necessary. And, if the securities’ fair market value on the date of the gift is less than their original cost, you use that lower value to determine any loss on a subsequent sale.
Stock Dividends and Splits
Instead of distributing cash dividends, companies sometimes distribute stock dividends. Stock dividends are generally not taxable. However, a basis adjustment needs to be made. If the new stock you receive is identical to the old stock — for example, you receive two new shares of XYZ common stock for each share of XYZ common stock you own — you simply divide the basis of your old stock by the total number of shares held after the distribution to arrive at your new basis for each share.
Stock splits also result in basis adjustments. For example, if a company has a “two-for-one split” of its stock, the original basis must be divided between the two new shares. Conversely, companies sometimes have “reverse splits,” such as when three shares are exchanged for one, in which case the basis in the original three shares is now the basis of the new share.
Keeping track of share basis through a series of mergers, spinoffs, etc., can be very complicated. Often, taxpayers must research the terms of the relevant transactions by contacting the company directly or logging on to the company’s website.
Selling Less Than Your Entire Holding
If you sell less than your entire holding in a particular stock and can adequately identify the shares you sold (“specific identification”), you may use their basis to determine your gain or loss. Adequate identification involves delivering the stock certificates to your broker or, if your broker holds the stock, telling your broker the particular stock to be sold and getting a written confirmation. If you can’t adequately identify the shares you sell, you may use the FIFO — “first in, first out” — method to determine your basis.
With mutual funds, you are also allowed to elect to use the “average basis” method of accounting for shares sold. With this method, the total cost of all the shares owned is divided by the total number of shares owned.
Tax-Deferred and Tax-Exempt Investments
Cost basis is generally not an issue with securities held in tax-deferred investment accounts, such as traditional individual retirement accounts (IRAs) or employee retirement accounts. With these accounts, you are not taxed on capital gains but will be taxed at ordinary income tax rates on distributions you receive. (Qualified Roth distributions are an exception.) Also note that though interest on municipal bonds may be tax exempt, any gain realized from selling such bonds could be taxable, so it’s important to keep the information you’ll need to determine your basis.
You sold one of your stock investments at a profit, so now you’ll have to report a capital gain on this year’s income tax return. Since another stock you own has been losing ground lately, you’re thinking of selling it to claim a capital loss on your return to offset your gain.
However, because you believe the company will bounce back eventually, you’re reluctant to part with your stock. What would happen if you sold your stock to claim the loss and then bought it back again right away?
At first glance, it might appear to be the perfect plan. But it won’t work because of the tax law’s wash-sale rules. These rules prevent you from claiming a capital loss on a securities sale if you buy “substantially identical” securities within 30 days before or after the sale. If you want to claim the loss, you’ll have to wait more than 30 days to repurchase stock in the company.
Gone for Good?
Wondering what happens to wash-sale losses you can’t deduct? They don’t just disappear from your tax calculations. Instead, you’re allowed to add the losses to the cost basis of the shares you reacquire. This increase in cost basis will mean a smaller capital gain (or a larger loss) when you eventually sell your shares.
Keep track of any share purchases you make through a stock dividend reinvestment plan or by having mutual fund distributions automatically reinvested. Selling shares of the same stock or mutual fund at a loss within 30 days of the automatic purchase (before or after) will trigger the wash-sale rules, and part of your loss will be disallowed.
Is There a Plan B?
Is there any way you can take your tax loss and still maintain your position in the stock? You may be able to double up on the loss securities, then wait 30 days and sell your original securities at a loss. Be sure to consult your tax advisor before taking this, or any, action.