This tax season, we’ve worked through many cases involving transactions like the Scale AI restructuring and Meta-related investments. In particular, one pattern keeps coming up. Clients receive a Form 1099-DIV with a large number in Box 3, and that amount is often much higher than what they originally paid for their shares.

Naturally, the first reaction is confusion. Many clients ask: “I didn’t sell anything… so why is there tax?”

Understanding what Box 3 actually means

First, it’s important to clarify that Box 3 is not dividend income. Instead, it represents a nondividend distribution.

In practice, the IRS applies a simple rule. You recover your original cost first. Then, any remaining amount becomes capital gain. Therefore, the tax outcome depends heavily on your basis.

Walking through a simple example

Let’s look at a straightforward example.

You exercised ISOs earlier:

• Shares: 10,000
• Exercise price: $2.00
• Total cost (basis): $20,000

Later, as part of a transaction like Scale AI / Meta:

• You receive: $150,000 cash
• You still hold all your shares

Now, the math becomes clear.

First, you recover your $20,000 basis. After that, the remaining $130,000 becomes capital gain:

$150,000 − $20,000 = $130,000

Even though you didn’t sell any shares, the IRS treats the excess like a sale.

Adding the AMT layer

Next, we need to consider AMT, especially if your shares came from ISOs.

At the time of exercise:

• Fair market value: $6.00
• Exercise price: $2.00
• Spread: $4.00 per share

As a result, the AMT adjustment equals:

10,000 × $4.00 = $40,000

You report this amount as additional income under AMT, even though you didn’t sell anything.

Why AMT shows a different gain

Because of the ISO adjustment, AMT uses a different basis.

• Regular basis: $20,000
• AMT basis: $60,000

Now, when we recompute the gain:

$150,000 − $60,000 = $90,000 AMT gain

So, you end up with two different results.

• Regular gain: $130,000
• AMT gain: $90,000

The difference is $40,000.

How this appears on your tax return

This difference flows through Form 6251.

• Line 2i shows +$40,000 from the ISO spread
• Line 2k shows −$40,000 from the lower AMT gain

Together, they offset. This outcome is expected and reflects the correct mechanics.

Why this surprises so many people

On one hand, you didn’t sell shares. On the other hand, you received a large amount of cash. Because your original basis was low, most of that cash becomes taxable gain very quickly.

As a result, many clients feel caught off guard by the size of the tax impact.

Common patterns we’ve observed

Across many cases this season, we’ve consistently seen:

• Large Box 3 distributions
• Low exercise cost from early equity
• Significant capital gains without an actual sale
• AMT adjustments layered on top

Final takeaway

In summary, these transactions are not simple income events. Instead, they follow a sequence:

• First, basis is recovered
• Then, capital gain is triggered
• Finally, AMT adjustments are applied if ISOs are involved

If you received a large Box 3 amount, it’s important to review how your basis and AMT were handled. Small differences in calculation can lead to significant changes in tax.

If you’re seeing something similar on your return, you can check with your tax advisor, or feel free to reach out to us. We’ve worked through many of these cases this season and are happy to help review your situation.

#ScaleAI #Meta #StockCompensation #ISO #AMT #CapitalGains #StartupEquity #TaxPlanning #PrivateEquity

The post Scale AI / Meta Transaction — What That Cash Dividend Actually Means for Your Taxes (Simple Breakdown + Case Study) appeared first on Flex Tax and Consulting Group (FTCG).

Understanding the OBBBA Changes

Many high-earning individuals focus on mortgage rates when buying a house. However, few realize that tax law timing can have a six-figure impact on their real after-tax cost of ownership.

The One Big Beautiful Bill Act (OBBBA), effective July 2025, introduced several key adjustments affecting homeowners and real estate investors. Consequently, understanding how these new provisions interact with income, property value, and filing status is critical for effective planning.

Key Changes

Scenario: High-Income California Buyer

Profile:

• Annual Income (W-2 + bonus): $500,000
• Filing Status: Married Filing Jointly
• Home Purchase: $2,000,000 primary residence in Los Angeles
• Down Payment: $500,000
• Mortgage: $1,500,000 at 6% interest
• Annual Property Tax: 1.2% of value = $24,000
• State Income Tax (CA): ~9.3% marginal = $46,500
• Other Itemized Deductions (charity, etc.): $5,000

Before OBBBA (Old Rules)

1. SALT Deduction Cap

• Combined CA income tax ($46,500) + property tax ($24,000) = $70,500
• SALT deduction capped at $10,000
• Result: $60,500 in lost deduction potential

2. Mortgage Interest Deduction

• Interest on first $750,000 of mortgage debt deductible
• Mortgage = $1,500,000 → 50% of interest deductible
• Annual interest = $90,000 × 50% = $45,000 deductible

3. Total Itemized Deductions

Effective Federal Tax Benefit:
$60,000 × 37% = $22,200 reduction in federal tax liability

After OBBBA (New Rules)

1. SALT Deduction Cap Raised

• New cap = $40,000, phased out for AGI > $500K
• In this case, assume partial phase-out allows $30,000 deduction

2. Mortgage Interest Deduction

• Rule unchanged ($750K limit), but made permanent
• Still $45,000 deductible

3. Total Itemized Deductions

Effective Federal Tax Benefit:
$80,000 × 37% = $29,600 reduction in federal tax liability

Net Difference

Over a 10-year mortgage horizon, that’s roughly $74,000 in additional tax savings purely from timing and deduction differences.

Strategic Takeaways

1. Buying after OBBBA is not automatically better — it depends on income, state, and timing.
   For AGI over $500K, the SALT cap benefit begins to phase out.
   For those below, the new $40K limit offers substantial relief.
2. Property-tax prepayment and mortgage structuring are now bigger levers than interest rates.
3. For mixed-use properties, entity-level PTE elections can bypass individual SALT limits.
4. Accelerate qualifying energy improvements before 2025 year-end to maximize remaining credits.
5. Maintain digital documentation of all property-related payments and lender reports to prevent audit exposure.

Conclusion

For high-earning individuals, real estate isn’t just an investment — it’s a strategic tax tool.
The One Big Beautiful Bill Act widened opportunities for deduction recovery, especially through the expanded SALT cap and clarified entity rules, while also tightening compliance.

In practice:
A $2 million home in California now produces roughly $7,400 more in annual federal tax savings under the new law.
Combined with proper income and entity planning, this can result in over $70,000 in additional long-term savings.

At Flex Tax & Consulting Group, we help clients structure real estate purchases and ownership plans to align with the latest tax legislation — ensuring every major financial decision maximizes after-tax results.

Don’t just buy a home. Structure it — the right way, the first time.

The post Buying a Home Before vs. After OBBBA: How the Rules Change for High-Income Individuals appeared first on Flex Tax and Consulting Group (FTCG).

• Pinpoint their AMT exposure

• Complete the right IRS forms

• Optimize cash flow around quarterly payments

• Understand the difference between selling ISOs in the same year versus holding them

The Client’s Equity Exercise

Grants Exercised:

• 3,000 ISOs at $10 strike when FMV was $50 → $120,000 AMT preference item

• 500 NSOs at $10 strike when FMV was $50 → $20,000 ordinary income

Without planning, this client faced an estimated $35,000 AMT bill in April—on top of their regular tax. Here’s how we transformed that looming liability into a clear, manageable plan.

Step 1: Calculate Your NSO Liability

1. Compute the “Bargain Element”
   (FMV − Strike Price) × # Shares
   → ($50 − $10) × 500 = $20,000 of ordinary income

2. Report on Form W-2

   • Box 1: +$20,000 wages

   • Boxes 2, 4 and 6: Withholding for federal income tax and FICA/Medicare

3. AMT Impact
   NSO income flows through your regular tax—no AMT adjustment on Form 6251

Step 2: Unpack Your ISO AMT Exposure

A. Compute the AMT Preference Item

(FMV − Strike Price) × # Shares → ($50 − $10) × 3,000 = $120,000

B. Complete Form 6251 (Alternative Minimum Tax)

• Line 2i: Enter $120,000

• Line 11: Subtract the AMT exemption (for 2025, $126,500 for married filing jointly)

• Lines 26–28: Apply the 26% and 28% AMT rates to calculate the tentative minimum tax

C. Compare vs. Your Regular Tax

• AMT Due = Tentative Minimum Tax − Regular Tax (reported on Form 1040 Schedule 2, Line 1)

• In this case, the difference was $35,000

Step 3: Understand ISO Disposition Scenarios

• Same-Year Sale Example:
  Exercise 3,000 ISOs at $10 (FMV $50) → $120K preference; sell at $60

  • $40/share × 3,000 = $120K ordinary income on W-2

  • $10/share × 3,000 = $30K short-term capital gain

• Hold Beyond Year-End:
  No extra W-2 income. All gain is long-term capital gain when sold, and the AMT paid initially can generate a credit (Form 8801) to reduce future regular tax.

Step 4: Align Your Estimated Tax Payments

Because ISOs have no withholding, cover your AMT liability through Form 1040-ES vouchers. We recommended:

• Increase quarterly vouchers by the estimated $35,000

• Time payments to coincide with known income events, preserving cash flow

Results & Key Takeaways

• Zero surprise: Proactive AMT projection eliminated a $35,000 shock

• Optimized cash flow: Quarterly payments timed to income reduced liquidity strain

• Reusable process: This 30-minute framework works for every future ISO/NSO exercise

Ready to Avoid Your Own AMT Headache?

Flex Tax & Consulting Group specializes in Bay Area equity-compensation tax planning. In a 30-minute consultation, our experts will:

• Model your ISO/NSO tax liability (Form 6251 and Form 1040)

• Map out quarterly estimated-tax strategies (Form 1040-ES)

• Show you how to bank AMT credits for future use (Form 8801)

Talk to a Bay Area Tax Advisor

At Flex Tax and Consulting Group, we specialize in Solo 401(k) planning, entity structuring, and tax reduction strategies for independent contractors, consultants, and small business owners across the San Francisco Bay Area, especially in Castro Valley and San Francisco.

We offer personalized consultations to evaluate whether an S-Corp is right for you, how to structure your compensation, and how to legally minimize your tax burden.

Schedule a consultation today:
https://flextcg.zohobookings.com/#/taxadvisory

About Flex Tax and Consulting Group

Flex Tax is a full-service tax advisory firm based in the Bay Area. We support professionals, founders, and investors throughout San Francisco, Castro Valley, and beyond with proactive, year-round planning beyond just filing returns.

Related Post:

California Equity-Based Compensation Guidelines – Move from CA to Other States

The post Case Study: How to Calculate AMT on ISOs & NSOs: Equity Compensation Tax Guide appeared first on Flex Tax and Consulting Group (FTCG).

Restricted Stock Units (RSU)

Let’s say; for example, you were granted 4,000 RSU with a four-year vesting schedule and a one-year cliff. Then, six months after the grant, your company transferred you out of California.

After your first year, 25% of your RSU vest, To know what you owe the state of California for this, you’ve to understand how many days you performed services in the state of California from the grant date to the vesting date. 

If the recipient was a resident of California when the RSUs were granted, they might still be liable for California state tax on the RSU income even if they move to another state. The allocation ratio, calculated based on the number of workdays spent in California between the grant date and vesting date, should be used to determine the amount of RSU income allocable to California.

*Allocation Ratio = (total workdays in CA between the grant date and vest date)/ (total workdays between the grant date and vest date)

If the recipient moves to a state with no income tax, such as Texas or Washington, they will only be taxed by the state of residency when the RSUs vest or are sold. However, if the recipient moves to a state with an income tax, such as Massachusetts, they may be double taxed by both states for the same income.

Incentive stock options (ISO), Non-Qualified Stock Options (NSO)

Regarding ISO and NSO, it will be the same allocation, but use the exercise date instead of the vesting date to calculate the ratio. 

Employee Stock Purchase Plan (ESPP) 

If you exercise an option under an employee stock purchase plan while a California resident or nonresident and later sell the stock in a qualifying or disqualifying disposition while a nonresident, California will tax the resulting ordinary income to the extent you performed services in California from the grant date to the exercise date. Any capital gain had a source in your state of residence when you sold the stock.

Example:

On February 1, 2022, your employer granted you options under an employee stock purchase plan. On February 1, 2022, you exercised these options. From the grant to the exercise, you were a California resident and performed 50 percent of your services in California. On June 1, 2022, you permanently moved to Nevada, and on January 15, 2013, you sold the stock at a gain.

Because you sold the stock before meeting the one-year holding period requirement, the difference between the stock’s fair market value on the date of exercise and the option price is taxable as wages. Since you performed 50 percent of your services in California from the grant date to the exercise date, 50 percent of the wage income would be taxable by California. Any capital gain resulting from the increase in value over the fair market value on the exercise date would have a source in Nevada, your state of residence when you sold the stock.

On top of the taxation discussion above, our clients always have questions about residency determination as CA taxes full-time residency worldwide. Also, you should contact your employer to adjust your home state residency record. There are other ways to allocate the income on the tax returns manually, but it may trigger an IRS audit in the future. Due to the complexity of the paper record and the higher IRS audit possibility, we always recommend our client schedule a consultation with us.

Click to Download: California Equity-Based Compensation Summary Table

For questions and request to write on specific topics, please email support@flextcg.com.
For partnership and collaboration, please email info@flextcg.com.

The post California Equity-Based Compensation Guidelines – Move from CA to Other States appeared first on Flex Tax and Consulting Group (FTCG).

The post How to Reduce Your Taxes on Salary Income appeared first on Flex Tax and Consulting Group (FTCG).

You may have taken some extra rooms for your business use. Is that okay?

Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.

The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.

The Mills Case

Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.

The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.

Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.

The Hefti Case

Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.

Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.

Insights

The deductible portion of your home for an office includes the area used exclusively and regularly for business.

Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the file area in connection with that daily work.

Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.

But Not This

“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.

Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.

Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).

He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.

The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.

To be better understand the home office allocation detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post How Many Whole or Partial Rooms Can You Use for Your Home Office? appeared first on Flex Tax and Consulting Group (FTCG).

If so, is your S corporation salary

• nonexistent?
• too low?
• too high?
• just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Here’s an example of how the cost approach works to support a $71,019 salary as reasonable compensation for this S corporation owner whose corporation had $3.5 million in revenue and 19 employees:

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

To be better understand the S Corporation Salary’s detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Avoid Trouble: Don’t Let the IRS Set Your S Corporation Salary appeared first on Flex Tax and Consulting Group (FTCG).

1. Tenants who can’t pay the rent.
2. Tax losses they can’t deduct.

We’ll start with the tenants and then move on to the rental property tax-loss issues.

For the first time in U.S. history, residential landlords are subject to a sweeping nationwide federal moratorium on evictions for nonpayment of rent through the end of 2020.

There is no moratorium on landlords’ responsibility to pay their bills. Thus, landlords need to prepare for some of the rockiest times in decades.

The Federal Moratorium on Residential Evictions

The Centers for Disease Control and Prevention (CDC) and the Department of Health & Human Services issued the latest federal moratorium on evictions. It is an emergency health measure intended to help prevent the spread of COVID-19.

The CDC order is effective September 4, 2020, through December 31, 2020. The order replaces an eviction moratorium put in place on March 27, 2020, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act that expired July 24, 2020.

The CDC order generally bars residential landlords from evicting tenants for nonpayment of rent if a tenant’s estimated 2020 income is no more than $99,000 (single) or $198,000 (married, filing jointly).

Unlike the CARES Act moratorium, which applied only to multifamily rental properties with rental subsidies or federally backed mortgages, the CDC order applies to all types of residential rentals: houses, duplexes, apartment buildings, mobile homes, and mobile home spaces. There is no requirement that the rental be federally financed or rent subsidized.

The CDC order does not apply to commercial properties, including motels and hotels. Nor does it apply to guesthouses rented to temporary guests or seasonal tenants—this presumably excludes most Airbnb and similar short-term rentals.

To prevent an eviction, a tenant need only give the landlord a declaration signed under penalty of perjury providing that the tenant

• has used his or her best efforts to obtain all available government assistance for rent or housing;
• falls within the income restrictions ($99,000 or $198,000 in income for 2020);
• is unable to pay the full rent due to substantial loss of household income, loss of work or wages, or extraordinary out-of-pocket medical expenses;
• is using his or her best efforts to make partial payments that are as close to the full rental payments as the tenant’s circumstances permit; and
• would likely become homeless or forced to move into and live in close quarters or a shared living space.

Tenants need not provide their landlord with any proof that the statements in the declaration are true. The CDC has created a form declaration for tenants to use.

There is no time limit on when tenants must provide this declaration to their landlord—they can do so anytime before or after receiving a termination notice.

Individual landlords who violate the CDC order are subject to a fine of up to $100,000 and up to one year in jail, if the violation does not result in a death.

The fine goes up to $250,000 if the violation results in a death (it’s unclear how the government could prove an eviction caused a tenant’s death).

The fines are doubled for organizations such as LLCs, corporations, and REITs.

Help Tenants Get Help

The CDC order requires tenants to seek government aid to help pay their rent. But they need not seek help from nongovernment sources such as churches or private charities.

It is to your advantage to help your tenants obtain such aid. After all, you would like the rent to get paid. And you likely would want to keep the tenant—assuming this is a good tenant. Links to government programs providing financial assistance for renters are available at https://legalfaq.org.

Work Out a Payment Plan

Try to work out payment plans with struggling tenants. This is in their best interests as well as your own. Be sure to get the terms in writing.

For example, if a tenant’s income has declined by 20 percent, you could agree to accept a 20 percent rent reduction through the end of the year and require the tenant to pay the balance due over 2021. Make it clear that this is a partial rent payment and does not satisfy the tenant’s full rental obligation.

You are under no obligation to offer a tenant a permanent rent reduction or any form of rent forgiveness.

And keep in mind that your government is not going to reward your generosity. You get no tax deduction or other tax benefit for reducing or forgiving rent. This doesn’t mean you shouldn’t do it. Just don’t expect the tax code to reward your generosity.

Unpaid Rent Is Not Tax-Deductible

Bad news. Unpaid rent is not a tax-deductible rental expense. Rather, it is a debt owed to you by your tenant. You get no tax deduction for the unpaid rent even if tenants never pay the rent they owe.

Good news. On the plus side, unpaid rent is not taxable as income, is not reported on your tax return, and increases the chances that you will have a rental property tax loss (deductible, we hope). This assumes you are a cash-basis taxpayer, as virtually all residential landlords are.

Deducting Rental Property Tax Losses

You have a rental loss if the total annual expenses you incur for your rentals (mortgage interest, taxes, utilities, insurance, maintenance, depreciation, and other expenses) exceed your total rental income (which does not include unpaid rent).

It’s likely that many landlords who ordinarily have profitable rentals will suffer rental losses for 2020 because their tenants failed to pay all or part of their rent.

The dreaded passive activity loss rules prevent many landlords from deducting all or part of their rental losses from their non-rental income.

Rental losses are always classified as passive losses. Subject to two important exceptions, the general rules are as follows:

• Passive losses are deductible only from passive income—income from rental activities and from businesses in which you do not materially participate.
• Passive losses are not deductible either (a) from ordinary income such as salary and self-employment earnings, or (b) from investment income such as dividends or interest.

Exception 1. $25,000 Allowance for Rental Real Estate

The tax law takes pity on landlords with a relatively modest income and permits them to deduct a limited amount of rental losses from non-rental income.

If your modified adjusted gross income for the year is under $100,000, you may deduct up to $25,000 in total annual rental losses from your nonpassive income, provided that you actively participate in the management of your rentals (an easy standard to meet).

Exception 2. Real Estate Professional Exemption from Passive Loss Rules

There’s another way you may be able to deduct your rental losses from non-rental income no matter how high your income: the real estate professional exemption from the passive loss rules.

If you qualify as a tax law–defined real estate professional and materially participate in your rental activity, you may treat rental losses as nonpassive and deduct them from all other nonpassive income without limit for 2020.

Either you or your spouse will qualify as a real estate professional for the year if one of you spends

• more than half your personal service work time in real property trades or businesses in which you materially participate, and
• more than 750 hours of your personal service work and investment analysis time in real property trades or businesses in which you and/or your spouse materially participate.

In addition to the standard described above, you and/or your spouse must materially participate in a rental activity to enable the tax loss deduction against your other income. There are various methods for establishing material participation. The two most common are working more than 500 hours in a tax law–grouped multi-rental activity and working more than 100 hours more than anyone else on individual non-grouped properties.

People with a full-time job outside the tax law–defined real estate industry can rarely qualify as real estate professionals.

Non-deductible Rental Losses Become Suspended Passive Losses

You don’t lose rental losses you can’t deduct because of the passive loss rules. Instead, the losses become suspended passive losses. They are carried forward indefinitely and deducted from passive income each year until they are used up.

You may also deduct your suspended passive losses if you sell or otherwise dispose of substantially all your interest in your rental property in a taxable transaction.

To be better understand the Government to landlords’ detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Government to Landlords: Drop Dead! appeared first on Flex Tax and Consulting Group (FTCG).

Ah, new tax deductions!

Yep. Say you don’t claim a home-office deduction but now you are working at home and sitting in the fancy chair you inherited from your grandmother.

Let’s say you use the fancy chair 85 percent for business purposes. Can you depreciate 85 percent of that chair?

Yes.

Let’s say that grandma’s estate was appraised and this chair had a value of $10,000 when you inherited it about a year ago. It’s an antique, so it’s not gone down in value since you inherited it.

Depreciating a Formerly Personal Asset

When you convert the fancy chair to 85 percent business use, the law sees you as placing the item in service in your business at that time. That means you can begin depreciating the asset and claiming your tax deductions.

To determine the basis to use for depreciation, use the lesser of

• fair market value on the date of conversion from personal to business use, or
• adjusted basis of the property (generally the amount you paid for the asset plus the cost of any improvements).

With the fancy chair, your adjusted basis is the inherited value.

But say you bought the chair for $8,000. Suppose it was worth $10,000 when you converted it to personal use. You would use the $8,000 figure to determine your depreciation deductions.

Bonus Depreciation and Section 179 Expensing

Unfortunately, unlike assets directly purchased for your business, you may not use Section 179 to immediately expense assets that you convert from personal to business use.

Bonus Depreciation Is a Different Story

If you acquire bonus depreciation qualified property for personal use after September 27, 2017, and convert it to business use this year (or anytime before 2027), you must use 100 percent bonus depreciation if you don’t elect out of it.

Example. You purchased an antique clock for $9,300 in January 2018. Yesterday, you placed the clock in business service by moving the clock from your entryway to your home office. If you don’t make a formal election in your tax return to elect out of bonus depreciation, you must claim a $9,300 depreciation deduction on the antique clock this year.

Basis When You Sell

There’s a trick to basis when you sell converted property—you use a different rule for calculating losses than you do for calculating gains:

• Losses. To calculate losses, use your adjusted basis (conversion basis as discussed above minus depreciation).
• Gains. To calculate gains, use original cost basis minus post-conversion depreciation. In most cases, original cost gives you a higher basis and thus less tax. So don’t accidentally use adjusted basis.

Note. For inherited assets, your cost basis is the estate value (generally, the date of death value).

Clarifying Examples

Let’s say you bought a personal use desk/credenza/bookcase set for $8,000 and then converted it to business use when its fair market value had fallen to $6,000. Here are the tax consequences for three different sales scenarios (to make the examples clear, we ignored depreciation):

• Loss. If you sell the desk/credenza/bookcase set for $4,000, you have a $2,000 deductible loss ($6,000 – $4,000). Note. This is much better than if you sold the desk/credenza/bookcase set as a personal asset, which would create a zero deductible loss.
• Gain. If you sell the desk/credenza/bookcase set for $10,000, you have a $2,000 gain ($10,000 – $8,000).
• Gray area. If you sell the set for $7,000, you have neither gain nor loss on the sale. That’s a decent result—it means no taxes for you (but no deductible losses either).

To be better understand the home office deduction. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Non-resident foreigners can also apply this exclusion. However, because non-resident aliens are not eligible to submit a joint return, each person designated as a non-resident alien needs to share its share of the national resident exclusion tax in a separate tax return. In practice, this means that if the sale proceeds exceed $250,000, each filer will need to 1) be eligible to apply for the exemption of the primary residence on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return and state the ownership share of the principal residence.

According to the ” Foreign Investment in Real Property Tax Act ” (“FIRPTA”), non-resident foreigners should also pay additional tax other. For primary residences where the realized amount of sale (usually the sale price) is less than $300,000, no withholding is required; for sales between $300,000 and $1,000,000, the withholding tax rate is 10%; if the sales exceed $1,000,000, The withholding rate is 15%. Non-resident foreign taxpayers may find themselves eligible to claim the exclusion of the primary residence stipulated in IRC § 121, so FIRPTA withholding taxes will exceed his/her highest tax liability in the transaction. In this case, the taxpayer can request the US Internal Revenue Service to provide proof of withholding tax to the buyer, indicating that the withholding tax rate they owe is low or not at all. Since the primary residence exclusion in IRC § 121 does not constitute a non-recognition provision within the meaning of FIRPTA (non-recognition provision makes FIRPTA not applicable at all), unless the purchaser obtains a withholding certificate, the buyer must withhold the appropriate tax rate.

Tax treatment for gain from sale of principal residence can be tricky. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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The IRS defers stating or foreign law to determine whether you have a valid marriage. In most cases, a marriage in a foreign country is valid for U.S. tax purposes.

“Can I File Single if Married to Non-Resident Alien?”

Generally, no, you can’t file single if you’re married to a non-resident alien. Married individuals are not allowed to file under the single filing status, and when you are married to a non-resident alien (referred to as a nonresident spouse), you are also unable to file a joint return unless a separate election is made to do so.

Here are the options when you are married to a non-U.S. citizen. You should consider the options carefully, as each will have a different effect on your tax and reporting requirements.

1 – Filing Married Filing Separately

The default filing status for a U.S. citizen married to a nonresident alien spouse is Married Filing Separately (MFS). While the MFS filing status does not pose any additional hurdles for getting your return easily filed, it does come at a cost.

The biggest downsides to married filing separately for a resident or U.S. citizen spouse is the loss of some potential tax credits and deductions and overall higher tax rates. If you are married to a nonresident spouse and do not have any dependents to claim, this may be the only filing status available to you.

2 – Filing Head of Household

The more beneficial option is available if you do have a dependent is to file using the Head of Household filing status. To file as Head of Household, you must have a qualifying person for head of household purposes and meet the tests to use Head of Household status.

In order to use this filing status, you must:

• Be considered unmarried, and
• Maintain as your home a household for the qualifying person for more than half of the year, or
• Maintain a home for your parent you can claim as a dependent. Your parent does not have to live with you.

You cannot claim your spouse who lives overseas as a dependent, but you can claim other people who are U.S. citizens, U.S. nationals, or U.S. residents or residents of Canada or Mexico. The qualifying person must meet all the rules or Head of the Household status is unavailable.

In many cases, this is the most beneficial status available when you are married to a nonresident spouse because it is accompanied by lower tax rates and additional deductions. Just remember, this status also requires your dependent to have a valid social security number or ITIN.

3 – Filing Married Filing Jointly

The final option is to make an election to treat your nonresident spouse as a U.S. resident for tax purposes. Making this election allows you and your spouse to file a Married Filing Jointly (MFJ) tax return. Filing MFJ will allow you both to take advantage of lower tax rates and deductions that are otherwise not available to MFS filers. However, it will also subject your spouse’s entire income to U.S. taxation and possibly subject your spouse to other information reporting requirements. FBAR and Form 8938 filing is required if you file MFJ.

Practically speaking, this status is most beneficial if your spouse does not earn any income or otherwise has any accounts or investments that may cause negative tax consequences from the U.S. side.

One additional hurdle for choosing this option will be the requirement for your spouse to obtain an Individual Taxpayer Identification Number (ITIN) if they’re not eligible for a Social Security number. So, both spouses need to have either an SSN or ITIN. (Applying for an ITIN requires you to gather additional documentation that must be sent to the IRS. It could also cause delays in the processing of your return.)

Marrying a Non-U.S. Citizen? Get Help

Hopefully, questions like “Can I claim my wife who lives overseas?” and other tricky tax questions about marrying a non-U.S. citizen are answered in this post. But, before you file your return, discuss the best filing status for your particular situation with a tax advisor. The experts at Flex Tax s can assist you with this decision. To set up a free consultation, please visit www.flextcg.com/remote.

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You can use the actual expenses method to calculate your mileage deduction, which requires adding up all of the money spent operating your vehicle and multiplying it by the percentage that you used it for business. Or, you can use the standard mileage method, which requires adding up all of the miles you drove for business during the year and multiplying it by the standard mileage rate set by the IRS for that year.

Here’s a closer look at how to calculate your business mileage deduction using each of these two methods.

Using the Actual Expenses Method

To calculate your business mileage deduction using this method, you must keep careful track of all the money you spend related to the operation of your vehicle during the year. You should check with your accountant to find out what’s covered in your state, but in general, these expenses can include:

• Lease payments
• Insurance payments
• Regular maintenance (oil changes, tire rotation, etc.)
• Repairs
• New parts (tires, windshield wipers, lights, etc.)
• Fees (registration, inspection, etc.)
• Depreciation

Once you add these expenses together, you multiply the total by the percentage you use your vehicle for business. For example, if you spent $10,000 related to the operation of your vehicle during the year, and you used it 30% of the time for business and 70% for personal use, you’d deduct $3,000 (10,000 x .30 = 3,000).

You should be able to produce receipts or proof of payment for each of these expenses, as well as a mileage log for business use. Otherwise, the IRS can more easily disallow your claim.

Using the Standard Mileage Method

This is considered the more simple of the two methods because it does not take into account the operating costs for your vehicle. It only requires you to track your mileage for business use. You can do this by creating a log that includes the dates and times you drove, descriptions of your business activity, and odometer readings for each trip. You can do it by hand, on a spreadsheet, or with a mobile app.

Once you add up the miles you’ve driven for business over the year, you multiply the total by the standard mileage rate determined by the IRS for the year. For example, if you drove 5,000 miles for work during 2019 when the standard mileage rate was 58 cents per mile, then your deduction would be $2,900 (5,000 x .58 = 2,900).

Deciding Which Calculation to Use

If your employer doesn’t reimburse you for business miles driven in your vehicle, or if you’re self-employed, then you’re entitled to a business mileage deduction on your taxes.

Each method of calculating your mileage deduction offers advantages and disadvantages, and those can change depending on your situation. For example, the actual expense method may end up being best for you if you had a lot of vehicle costs, such as repairs, during the year.

You may want to try calculating your deduction using both methods to find out which one will give you the larger payoff. However, it’s best to consult with a tax professional to determine the type of mileage deduction calculation that’s right for you each year.

The post How to Calculate Mileage Deductions on Your Tax Return appeared first on Flex Tax and Consulting Group (FTCG).

The relief applies to individuals who relinquished or will relinquish their U.S. citizenship after March 18, 2010, and meet several other criteria listed below. Native-born or naturalized U.S. citizens generally may voluntarily relinquish their citizenship for reasons and under procedures listed at 8 U.S.C. Section 1481(a).

Under the Code, expatriates must comply with all federal tax requirements for the year of expatriation and the five immediately prior tax years. Also, Sec. 877A imposes a tax on “covered expatriates” that deems most property as sold for its fair market value on the day before the day of expatriation. The resulting net gain over $725,000 (for 2019) is includible in their income. A covered expatriate is one who, under Sec. 877(a):

• Has an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount ($168,000 for 2019);
• Has a net worth of $2 million or more; or
• Cannot certify under penalty of perjury that he or she has met all applicable tax requirements for the five preceding tax years or fails to submit evidence of compliance the IRS may require. This certification can be made with Form 8854, Initial and Annual Expatriation Statement.

In other words, even expatriates with income tax liabilities and net worths below these thresholds may still be covered expatriates if they cannot make the certification.

Under the relief procedures announced Friday, individuals who meet specified requirements will not be considered covered expatriates for purposes of Sec. 877A and will not be liable for any unpaid taxes and penalties for the year of expatriation and previously, the IRS stated. As noted above, the expatriation must have occurred after March 18, 2010.

Also, for the six tax years at issue (the year of expatriation and the five immediately prior years), any failure to file required tax returns and pay taxes and penalties for the years at issue must have been due to the taxpayer’s nonwillful conduct. Required tax returns include income, gift, and information returns (the latter including Form 8938, Statement of Specified Foreign Financial Assets), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR. Nonwillful conduct is that which is due to negligence, inadvertence, mistake, or a good-faith misunderstanding of legal requirements.

Besides, to be eligible for relief, the individual must:

• Have no filing history as a U.S. citizen or resident (not including Form 1040NR, U.S. Nonresident Alien Income Tax Return, under a good-faith but mistaken belief that the individual was not a U.S. citizen);
• Meet the above income tax liability limits for covered expatriates for five tax years ending before the date of expatriation and meet the $2 million-net-worth limit at the time of expatriation and when applying for the relief;
• Have an aggregate tax liability of no more than $25,000 for the six tax years at issue (after application of all applicable deductions, exclusions, exemptions, and credits, including foreign tax credits, but excluding penalties, interest, and the exit tax of Sec. 877A); and
• Agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns.

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The final regulations also provide definitions of “federally declared disaster,” “federally declared disaster area,” “disaster loss,” “disaster year,” and “preceding year,” for these purposes.

Under the prior rules before 2016 (Regs. Sec. 1.165-11(e)), a taxpayer had to make the election to take a loss in an earlier tax year by the unextended due date for the taxpayer’s return, generally April 15. This short period to decide whether to elect relief put undue pressure on taxpayers and required the IRS to issue several extensions of time to make the election after large natural disasters.

Under the final rules, the deadline for the election to claim the loss on the prior year’s tax return is six months after the due date for filing the taxpayer’s federal income tax return for the disaster year (determined without regard to any extension of time to file). The regulations also extend the period for revoking the election to 90 days after the due date for making the election.

The procedures for making or revoking the election are described in both the final regulations and in Rev. Proc. 2016-53, which contains additional rules to ensure consistent return positions by taxpayers so they take a loss in only one tax year, and are not affect by the final regulations.

The final regulations, which are effective for elections and revocations made on or after the date they are published as final in the Federal Register, also remove Temp. Regs. Sec. 1.165-11T.

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Many amounts will increase in inflation in 2020. The standard deduction will increase to $24,800 for married individuals filing joint returns or surviving spouses. The $18,650 for heads of household, and $12,400 for unmarried individuals (other than surviving spouses). And the married individuals filing separate returns.

The maximum amount of the earned income tax credit (for taxpayers with three or more children) will increase in 2019.

The maximum amount of the adoption credit will increase to $14,300 up from $14,080 in 2019. That is also the maximum amount that will be excludable from an employee’s gross income for qualified amounts paid. Or expenses incurred by an employer under an adoption assistance program.

The 2020 exemption amounts for the alternative minimum tax will be $113,400 for married individuals filing joint returns and surviving spouses, $72,900 for unmarried individuals (other than surviving spouses), $56,700 for married individuals filing separate returns, and $25,400 for estates and trusts, all increased from 2019.

The Sec. 179 amount for tax years beginning in 2020 will be $1,040,000 with a phaseout threshold of $2,590,000, slight increases from 2019.

The qualified business income threshold under Sec. 199A(e)(2) will increase to $326,600 for married individuals filing joint returns. And $163,300 for married individuals filing separate returns, single individuals, and heads of household, all increased from 2019.

The Sec. 911 foreign earned income exclusion amount will increase to $107,600 from $105,900 in 2019.

The basic exclusion amount for determining the unified credit against the estate tax will be $11,580,000 for decedents dying in the calendar year 2020, up from $11,400,000 in 2019. The annual gift tax exclusion amount remains at $15,000. But the gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen will increase to $157,000 in 2020 from $155,000 in 2019.

Various penalty amounts for failure to file tax and information returns or furnish payee statements are also being adjusted for inflation for 2020.

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Deciding Between an Asset Sale or Entity Sale

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Compare standard versus itemized deductions — Your current or planned 2019 itemized deductions might be more than your standard deduction. If so, you’ll save tax dollars by itemizing.

If your itemized deductions are close to your standard deduction in 2019, consider shifting some of your deductions to 2020. At that time, you might be able to itemize more. Conversely, you might know you won’t have as many itemized deductions in 2020 as you do in 2019. If so, consider shifting some deductions from next year to this year. Here are some examples of how shifting deductions can work in your favor:

• You can’t itemize in 2019 but can in 2020. So, consider making your annual charitable donation in January instead of December.
• You’re itemizing in 2019 and can pay real-estate tax in two installments. So, consider making the payment in 2019 that would normally be due in early 2020.

Remember your miscellaneous itemized deductions — Your total miscellaneous itemized deductions subject to 2% of your adjusted gross income (AGI) might be close to or more than 2% of your AGI. If so, consider if you need any items in this category.

Then, buy those items before the end of the year.

However, the total of these expenses might not be close to or more than 2% of your AGI. If so, postpone these expenses until 2019, if possible.

To learn which items are in this category, see Publication 529: Miscellaneous Deductions at www.irs.gov.

Make flexible spending work for you — Make sure you have enough medical expenses in 2019 to meet the amount you set aside in your flexible spending account. If you don’t, you’ll lose the money. If you have extra money in the flexible spending account to spend, you might want to:

• Schedule end-of-year appointments
• New prescription glasses and contact lenses
• Hearing aids
• Medicines you need in 2020

Submit your receipts for eligible expenses within the time required by the plan. Some plans allow you an extra 2 1/2 months after the end of the year to use the unspent amount. Check with your plan administrator.

Review your medical costs — Keep track of your unreimbursed medical expenses all year long. You can deduct them if they’re more than7.5% of your AGI if you’re under 65 (7.5% if you’re over 65). If so, you might consider having an elective or necessary procedure before year-end.

Check that the procedure is among the qualifying deductible expenses. Many elective procedures don’t qualify for this deduction.

Get serious about retirement — One way to lower your taxable income for the year is to contribute to a retirement plan, like a:

• 401(k)
• 403(b)
• Deductible IRA
• SIMPLE IRA
• SEP

You have until Dec. 31 to make contributions to 401(k)s and 403(b)s for 2018. You have until April 16 to make contributions to IRAs and some other plans.

Adopt a charitable attitude — Donate clothing and household goods to charities before Jan. 1, 2020. It’s also deductible on your 2019 return. Get a receipt from the organization you’re donating to. The deduction is limited to the item’s current fair market value (FMV) — what you could sell it for at a garage sale.

Sell off securities — If you have a large net capital gain so far this year, you might want to sell some stock to generate a loss before year end. Doing so could reduce the amount of tax you pay this year. However, if you sell stock to generate a loss, you’re prohibited from purchasing substantially similar stock. This is 30 days before or after the sale that generated the loss.

However, if the securities you sell are mutual-fund shares, you might be able to:

• Reinvest the proceeds in a similar — but not identical — fund
• Maintain your investment strategy,
• Deduct the loss

Whatever you do, don’t let possible tax savings cause you to make a decision contrary to your investment interests.

Investigate before buying mutual funds — If you’re planning to invest a large amount in a mutual fund, find out when the fund declares its dividend. Confirm that the fund isn’t declaring a large amount of dividends in December. If you buy shares before the dividend is declared, you’ll increase your income by the amount of the dividend. This is true even if you reinvest the dividend in new shares. You can get this information at the fund company’s website.

Give the gift of cash –You can give a gift up to $14,000 to any one person free of gift tax. If you’re married, you each can give a person up to $14,000 tax free — $28,000 in total.

In most cases, the gift isn’t complete until the recipient of a check cashes or deposits it. So, confirm the recipient does this by the end of the year.

Don’t let extra money sit around — Consider investing in a short-term CD or a U.S. Treasury bill that matures in 2020 if you:

• Have a large amount of cash to invest
• Want to shift some of your income to 2020

It is not too late to talk to your tax planner to plan about the tax saving plan in 2019. If you would like to schedule a time to talk, feel free to reach out to us.

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• Mortgage interest deductions capped
  In the past, homeowners who took itemized deductions could count interest payments on debt related to buying, building or “substantially improving” a home — on debt up to $1 million. That’s been capped at $750,000 and applies to homes purchased after Dec. 15, 2017. Homes bought prior to the new law are grandfathered, but this may impact people’s decision to look for new homes, as they could see a reduction in the mortgage interest they can claim going forward.
• SALT deductions capped
  State and local taxes (SALT), no matter how much of them you had to pay, aren’t the same caliber of deduction anymore. You can now only claim deductions on the first $10,000 in SALTs—unwelcome news if you live in a high-tax state.

Do I Even Want to Itemize at All?

While some may feel crimped with the loss or limitation of deductions related to mortgage debt and taxes, others may find that the more generous standard deductions offered by TCJA Cuts & Job Act) of 2017 may hold some relief.

If you took a bigger-than-expected hit when you filed in 2019, you might want to see if taking the standard deduction, rather than itemized deductions, is worth a shot. Under the TCJA, standard deductions jumped to $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers (tax brackets may have shifted in your favor, too). It might be a simpler and cheaper option than trying to get over the now-higher bar for itemized deductions.

Make a Strategy for 2020 (And Get Help if You Need It!)

If you found your pockets lighter after your first go-round with the TCJA’s new limitations, now is the time to start finding ways to offset some of the damage. Some years you may want to itemize, while in others you go for the standard deduction. If you regularly make and track your charitable deductions, there may be ways to bundle your giving so that you can maximize your writeoffs (we’ll explore this one in more detail in an upcoming post). While the standard deduction scenario has become simpler, itemizing can more complicated. It’s usually a good idea to spend a few minutes talking with your tax preparer or financial planner so you can better navigate the new landscape of restrictions when it’s time to file for tax year 2019.

The post INVESTMENT-SPECIFIC INTEREST AND TAXES appeared first on Flex Tax and Consulting Group (FTCG).

But with some careful record-keeping and organization, you can take away some of that stress and make filing next year’s tax return just a little bit easier.

Here are a few tax tips for organizing your tax records after you file and being better prepared when 2020’s taxes are due.

1. Create a file for this year’s tax return

As soon as you’ve filed your return, take time to create a single location for storing all physical forms, documents, schedules, and other records of this year’s taxes—as well as a clear, visible label that makes finding that folder easy in the future.

This not only makes the process of filing your taxes a little faster when your taxes are due; but it also makes it easier to locate last year’s records should the tax collector choose your return for an audit.

2. Store your records online

There’s little that hasn’t gone digital these days. So why should your tax preparation records be any different?

Saving past tax returns on your computer can make it easy to access when your 2020 taxes are due. If you use a safe, secure cloud service, all tax documents you scan or upload onto your device are backed up automatically, ensuring these records never get lost and can be pulled anytime you need from one convenient location.

If you’re the type that likes to keep paperwork to a minimum, storing your tax records digitally can also be a great way to manage your tax bracket information while making clutter disappear.

3. Be a tax preparation pro by keeping your receipts

Itemizing your deductions can be a great way to reduce your tax burden when your 2020 taxes are due. And taking full advantage of itemized deductions means keeping all your receipts, and documents that become extremely valuable during the tax preparation season.

Making a habit of keeping and storing every receipt—especially those related to large purchases like cars, house remodeling materials, etc.—can save you money on your next tax return while providing the tax collector the documentation they need to verify your deductions. 

4. Start organizing now

It’s never too early to organize your tax records for the 2020 tax season. Being proactive in your tax preparation not only helps alleviate the stress of filing next year’s return, but it also provides the opportunity to face the tax collector with confidence—and to minimize the potential for mistakes once the new year rolls around.

Creating a new file now to hold tax documents and receipts is a good place to start while gathering information on any new credits or deductions you’re likely to claim next year can make it easier to complete related forms in the future. You can also begin to estimate the tax bracket you’re likely to fall within when taxes are due, as well as any steps you can take to mitigate your expected tax burden.

The post FOUR TAX PREPARATION TIPS TO CONSIDER FOR 2020 appeared first on Flex Tax and Consulting Group (FTCG).

Earning More Than the Minimum Income Requirement

The IRS doesn’t tax income that is equal to or less than the amount of the standard deduction. Tax-exempt income is not include in this calculation. So if you don’t earn more in annual income than the standard deduction. And you aren’t claim as a dependent by another taxpayer, then you don’t have to file a tax return. As an example, if you’re single, younger than 65, and earn at least $12,000, the total of the tax year 2018 standard deduction for a single taxpayer. You must file a tax return. A free, simple-to-use tax calculatorcan help determine the need to file a tax return for other individual scenarios. The IRS also lists the minimum income requirement amounts to file a tax return on page 2 of Publication 501.

Dependents Earning Income

No matter whether they’re an adult or a child, those claimed as a dependent by a taxpayer on a separate tax return held to different IRS filing requirements. Because a dependent cannot claim their own exemption, when their earned income is more than the standard deduction for a single taxpayer, which in tax year 2018 is $12,000, then they required to file a tax return. But when the dependent’s income unearned, such as from interest or stock dividends, the minimum income requirement to file drops to above $1,050.

Affordable Care Act (ACA) Subsidies

For a qualifying individual to receive their tax subsidy for purchased health insurance coverage under ACA, they required to provide their income level. The government verifies this income information via the individual’s federal tax return. Even if you have never filed a tax return before, which may be the case if you didn’t make enough money, you may requir to file one to receive a tax subsidy for health insurance.

Getting Tax Refund

If you’re earning a paycheck and excessive federal taxes are being withheld, you need to file a tax return to get your refund. So let’s say you’re a single taxpayer earning $5,000 annually and $600 is being withheld for federal tax. While you are not legally require to file a tax return because you earned less than the standard deduction ($12,000), you are entitle to a refund of the entire $600. Since the IRS doesn’t issue refunds unless a tax return is filed, if you want your refund, start filing!

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Fortunately, the investment tax and interest deduction worksheet may provide a way to offset some of that cost. Help ensure more of that money stays in your pocket.

Start by Learning What is Deductible

If you’ve borrowed money to buy property to invest, you’ve likely paid interest on that loan. According to the IRS, that interest now qualifies as an “investment interest expense,” which may be deductible on the investment tax and interest deduction worksheet.

For example, if you’ve taken out a loan against, say, the equity in your home, and used that money to buy stock, you paid investment interest. And this expense may now be used to reduce your tax burden.

The investment interest deduction applies only to paid interest on money used to buy an investment property. It will produce investment income, be it through interest, annuities, or dividends. When the investment property generates nontaxable income—such as tax-exempt bonds—the interest deduction is not allowed.

You may also deduct any investment interest expenses that were disallowed during the previous year, taking a little more sting out of your upcoming tax bill.

How Much Tax Will I Pay?

So, how much tax will you pay on your net investment income? When it comes to investments purchased with borrowed money. This depends not only on how much loan interest you paid over the last year. And also on the net income the investment property happened to create.

Once you’ve calculated your net investment income and your investment interest expense paid (current + disallowed). Your tax and interest deduction worksheet will ask for a smaller number. This will be your total deduction and the amount ultimately affecting how much tax you’ll pay.

Is There Anything I Can’t Claim?

Generally, any interest paid for investments in “passive activities” won’t qualify for the interest expense deduction. This includes holding an ownership stake in a business that you’re not materially involved in running.

For instance, borrowing $10,000 to buy a stake in a friend’s company is undoubtedly an investment. But if you aren’t involved in the daily operation of that business in any way, you’re engaged in a passive activity. And any interest you paid on the original loan can’t be claimed as an investment interest expense.

Using the Investment Tax and Interest Deduction Worksheet

You can claim investment interest expenses only if you itemize your deductions, which is typically done on your Schedule A. You may also be required to complete Form 4952, which lays out your deduction in more detail.

You’re exempt from filling out the latter form if you meet these three conditions:

• Your investment income from interest and ordinary dividends minus qualified dividends is more than your investment interest expenses.
• You don’t have any other deductible investment expenses.
• You have no disallowed investment interest expenses from the previous year.

The post USING THE INVESTMENT TAX AND INTEREST DEDUCTION WORKSHEET appeared first on Flex Tax and Consulting Group (FTCG).

Fortunately, there’s the W4 tax from, which allows a bit of latitude when it comes to what your employer can withhold each new payday.

Claiming W4 allowances is one of the biggest ways you can not only affect your tax bill but also how much you get to take home. Making it important to know what allowances do and how to make them work best for your unique tax situation.

What Is Tax Withholding?

Any time you start a new job, you fill out a W4. Known in tax-pro speak as the Employee’s Withholding Allowance Certificate. This form essentially lets your new employer know how much of each paycheck you want to be set aside for the IRS.

Employers required to withhold taxes in every state, though there are numerous state and local governments across the country that do so as well.

The amount withheld from your check depends mostly on:

1) how much you make

2) how many W4 allowances you claimed at the beginning of your tenure. Claiming more allowances means fewer withholdings and bigger paydays.

What Exactly are W4 Allowances?

Allowances are more or fewer exemptions from paying a certain amount of federal tax. When you qualify for an allowance, you can legally claim that exemption on your W4—and a little less will withheld from your paycheck.

Each W4 provides a brief explanation for each allowance available to the taxpayer. The number you can claim depends on your particular tax situation.

Allowances may claimed:

• For yourself, if no one can claim you as a dependent.
• You’re the head of the household.
• If you married and filing a joint tax return at the end of the year.
• Or if you married with one or more dependents.

How Many Should I Claim?

Determining the ideal number of allowances based not only on how many you qualify for but also on your financial situation, your short- and long-term needs and the tax bill you don’t mind facing at the end of the year.

For instance, claiming too many allowances may put more money in your pocket now, but it will also lead to less being sent to the IRS—meaning you will likely owe more taxes and possible IRS penalties when next April rolls around.

On the other hand, claiming too few allowances may help you stay caught up with the IRS throughout the year, but it also results in smaller paychecks. This, in turn, means less to pay bills and spend on items you might otherwise afford.

Can I Update My W4?

Absolutely. The IRS recommends doing so any time you experience a major life event. This can include anything from getting married and having a child to you or your spouse getting or losing a job. The things that directly affect the tax you owe at any point during the year. The IRS also recommends updating your withholding allowance any time tax reforms enacted, ensuring that you’re not surprise when completing your taxes.

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