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Archives for June 2017

Common Questions Regarding Charitable Remainder Trusts

Do I have to take the income now?

You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you.

 

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

 

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized.

Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts.

 

Sounds great for me. But if I give away the asset, what about my children?

If you are concerned about replacing the value of the assets that you place into the charitable remainder trust for your children you can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust (ILIT) or what is referred to as a Wealth Replacement Trust. The trustee of the insurance trust could then purchase enough life insurance to replace the full value of the asset, or more, for your children or other beneficiaries from the income generated.

 

What are my income choices?

You can receive a fixed percentage of the trust assets which is referred to as a unitrust. The amount of your annual income will fluctuate depending on investment performance and the annual value of the trust.

The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income could increase assuming the value of the trust grows.

Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.

You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

Who can receive income from the trust?

Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.

The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone’s lifetime, the trust can also exist for a set number of years (up to 20).

Do I have to take the income now?

No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

What kinds of assets are suitable?

The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won’t qualify, either, but you might consider paying off the loan.) Cash can also be used.

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.

 

For more information on charitable remainder trusts, or questions about getting CPA tax help in Charlotte, give us a call today.

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Cryptocurrencies and Wash Sales

Since cryptocurrencies are generally classified as property, wash sale regulations should not currently be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter at a bargain. Today, wash sales only apply to stocks and securities, so traders are operating in a gray area for now until further IRS clarification is issued.

Since cryptocurrencies have not been labeled a stock or security, the IRS can only tax traders for non-economic substance transactions under property rules. These transactions are similar to wash sales, considering the volatility of crypto markets and the potential argument that investors made late trades in response to market-moving news as opposed to tax motivations, traders have a legitimate position on the matter.

Camuso CPA PLLC offers comprehensive services to develop and tailor a first-rate tax plan for your business needs.  Reach out to our team regarding any questions about Cryptocurrencies or establishing a comprehensive tax plan. Few other forms are offering their services for cryptocurrency taxes in Charlotte; give us a call and get a licensed CPA in your corner.

Contact Us Today: https://www.camusocpa.com/contact/#/

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Tax Efficient Way to Purchase Home For Children

There are several ways to approach purchasing a second home for a child to temporarily live in. This is very common for parents with children who are going to college or transitioning into a new stage of life.

With simple planning, your children can gain immediate access to their home and you gain some new tax deductions.  You can rent the home that you purchase to your children and treat the property as a rental for tax purposes.  Courts have ruled that landlords can reduce their fair-market rent by 20% when renting to relatives, the lower rent reflects the savings in maintenance and management costs.

If your children cannot afford rent or you do not wish to burden them with a rent payment, you can claim fair market value rent and claim the amount they don’t pay as a gift from you to them.

This year the gift exclusion not subject to gift tax is $14,000 per taxpayer.  By renting the home to your children, you can take all of the common tax deductions and tax breaks associated with a rental property. You will still need to consider your income level and classification as an investor, but the tax benefits may be significant.  ( https://www.camusocpa.com/real-estate/real-estate-professional-status-a-cpas-perspective/#/)

At Camuso CPA we encourage families to plan their finances and taxes as a whole, considering the situations of all family members. We can help you with the transfer of property from parent to child with our Charlotte CPA services.

Camuso CPA PLLC  offers a series of services to develop and tailor a first-rate tax plan for your investment portfolio.  Reach out to our team regarding any questions about tax planning or retirement planning.

Contact Us Today: https://www.camusocpa.com/contact/#/

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What is my cost basis for my Cryptocurrencies Investments?

Reporting and enforcement regarding the taxation for cryptocurrencies presents many challenges for the IRS and taxpayers. The IRS requires that taxpayers report the fair-market value of their coins on the date that the currency is received. Taxpayers must determine fair-market value in a “reasonable manner which is consistently applied”.

Generally, the fair-market value reported by a taxpayer disposing of cryptocurrencies should serve as the additional cost basis for the new taxpayer acquiring the currency. This is a classic example of “easier said than done” since there is no way to ensure consistent reporting, and many taxpayers may report conflicting cost basis that maximize personal tax advantages. Often it may not be possible to accurately determine a fair cost basis especially for newly created currencies.

In early IRS rulings, the agency provided guidance separating traded “convertible” virtual currencies such as Bitcoin from other virtual currencies, noting that only convertible virtual currencies that have an “equivalent value in real currency, or that acts as a substitute for real currency” will be considered taxable.

There are generally two tests to determine a virtual currency’s convertibility. First taxpayer’s should determine whether a currency is “listed on an exchange and the exchange rate is established by market supply and demand,” which would make it convertible to another “real currency” like the U.S. dollar.

This presents a gray area for virtual currencies that are thinly traded on exchanges and only trade with respect to other convertible virtual currencies. Be aware the IRS has made it clear it plans to tax gains on successful convertible virtual currencies retroactively.

The second test is to determine whether taxpayers can buy anything tangible with the currency, or if its value is instead driven by speculation. The IRS outlined, “The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” If a currency isn’t valuable in commerce there is a true question as to whether this will be treated by the IRS as convertible.

Traders are permitted to calculate their cost bases using different methodologies. Since currencies are considered private property from a tax perspective, investors have the option to sell their assets on a first-in-first-out (FIFO) basis, a last-in-first-out (LIFO) basis, or to sell those specific tax lots that are most efficient under the “specific share identification” method used for stocks. The choice of cost basis directly impacts long-term and short-term capital gains tax liabilities.

Trading platforms may automatically incorporate FIFO or LIFO tracking methods but neither of these options may present the most tax efficient method for a taxpayer. Generally specific share identification offers the greatest tax planning opportunities and benefits.

This is most likely the tax advantaged approach to tracking a taxpayers cost basis but it currently costly to do and often times not possible. Even the top exchanges and hosted wallets currently lack the accounting software needed to ensure trades are executed in on a share by share basis. Individuals must track their own sales which creates a high level of complexity and time commitment.

Camuso is one of the pioneering CPA firms offering tax services for cryptocurrencies, including Bitcoin and Etherium . Our services can help you get ahead of the game, and save you money where other firms may not have the knowledge or capital to do so.

Camuso CPA PLLC offers comprehensive services to develop and tailor a first-rate tax plan for your business needs.  Reach out to our team regarding any questions about Cryptocurrencies or establishing a comprehensive tax plan, and one of our Charlotte CPAs will assist you.

Contact Us Today: https://www.camusocpa.com/contact/#/

 

 

 

 

 

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Tax Implications for Cryptocurrency Investors

The first IRS tax guidance for cryptocurrencies was introduced March 2014, few CPAs have done comprehensive analyses of the record-keeping and enforcement challenges that will arise from the IRS designation of Bitcoin as property rather than currency.

The sale or exchange of a convertible virtual currency has tax implications, the nature of which depends on the investment and business activity.

If you hold cryptocurrencies as a capital asset, you must treat them as property for tax purposes. General tax principles applicable to property transactions apply. Long-term gains and losses will be taxed at the taxpayer’s applicable capital gains rate which are much more favorable than ordinary income rates.

If the coins are held as a capital asset any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.

This is favorable for miners and long-term investors, since they will capture a much more favorable marginal rate. Active traders who have short-term capital gains may still face ordinary income rates.

This categorization is also unfavorable to investors with trading losses since it will be much more difficult to write off losses due to their categorization as a property rather than currency.  The IRS limits the amount of property losses that can be claimed on personal tax returns to $3,000 per year for both married and single filers. Short-term trading losses in excess of this amount will be carried forward for future years.

Camuso CPA PLLC offers comprehensive services to develop and tailor a first-rate tax plan for your business needs.  Reach out to our team regarding any questions about Cryptocurrencies or establishing a comprehensive tax plan. We are one of the only Charlotte CPA tax firms that handle cryptocurrency taxes.

Contact Us Today: https://www.camusocpa.com/contact/#/

 

 

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Tax Implications for Cryptocurrency Earnings and Payments

The first IRS tax guidance for cryptocurrencies was introduced March 2014, and few CPAs have done comprehensive analyses of the record-keeping and enforcement challenges that will arise from the IRS designation of Bitcoin as property rather than currency.

The sale or exchange of a convertible virtual currency has tax implications, the nature of which depends on the investment and business activity.

If you are an employer paying with a cryptocurrency, you must report employee earnings to the IRS on W-2 forms.

You must convert the cryptocurrency value to U.S. dollars as of the date each payment is made and keep careful records. Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.

Employees must report their total W-2 wages in dollars, even if earned as cryptocurrency. Self-employed individuals with cryptocurrency gains or losses from sales transactions also must convert the virtual currency to dollars as of the day earned, and report the figures on their tax returns.

The best entity structure for individuals in this regard has been covered in previous articles regarding entity structure choices:  https://www.camusocpa.com/tax/is-s-corporation-structure-right-for-your-business/#/

 

Camuso CPA PLLC offers comprehensive services to develop and tailor a first-rate tax plan for your business needs.  Reach out to our team regarding any questions about Cryptocurrencies or establishing a comprehensive tax plan. Our firm is a pioneer in cryptocurrency taxes, and can offer you knowledgeable tax guidance for cryptocurrency in Charlotte.

Contact Us Today: https://www.camusocpa.com/contact/#/

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Single Member LLC’s (SMLLC)

Single-Member LLC’s offer significant benefits to their owners’; whether such an entity is beneficial for your business depends on the details of your own personal situation.

As the name implies, a Single-Member LLC is a limited liability company with only one owner.

Single-Member LLCs protect personal assets from the liabilities associated with the business conducted by the LLC.  If you use an LLC to hold rental property, and a tenant sues that plaintiff will be required to sue the LLC, not you personally.  If the plaintiff wins the lawsuit, they will only be able to come after the assets owned by the LLC, not the owner.

Single-Member LLCs are treated as disregarded entities for federal income tax and its profit or loss will be reported on an individual member’s Schedule C as if it were a sole proprietorship. This will save the member time and money for tax preparation of tax returns, since the separate LLC is not required to file an additional tax return.

A Single-Member LLC is beneficial if you own one or only a few rental properties. As the number of your rental properties grow, it is easy and cost effective to establish a Multi-Member LLC or Multi-Entity Structure from this original structure.

Single-Member LLCs are beneficial for operational businesses that are just beginning or recently established.  As the business grows the Single-Member LLC can convert to an S-Corporation when your income reaches a level to justify the cost/benefit analysis: https://www.camusocpa.com/tax/is-s-corporation-structure-right-for-your-business/#/

https://www.youtube.com/watch?v=rmVq5OSDCNA

 

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for Charlotte business finance and tax planning, and get your company in orderhttps://www.camusocpa.com/contact/#/

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Steps to Establishing An LLC

The requirements for establishing an LLC can vary from state to state, but there are commonalities across states. The name of your LLC must comply with the rules of your state’s LLC division.

  • the name cannot be the same as the name of another LLC on file with the LLC office
  • the name must end with an LLC designator, such as “Limited Liability Company” or “Limited Company,” or an abbreviation of one of these phrases (such as “LLC,” “L.L.C.,” or “Ltd. Liability Co.”),
  • the name cannot include certain words prohibited by the state, such as Bank, Insurance, Corporation or City

You also must ensure that the name you choose does not violate another company’s trademark. Further, you will want to reserve the website domain for your new business entity and confirm that it is available.

After choosing a name, the next step is to prepare and file the articles of organization with your state’s LLC filing office.

You will be required to list the name and address of a person, usually one of the LLC members, who will act as your LLC’s registered agent which means the person designated to receive legal papers in any future lawsuit involving your LLC.

https://www.youtube.com/watch?v=ca2XWhNtajg

Operating agreements are not required to be filed with the LLC filing office and are rarely required by state law, but it is essential that you create one. In an LLC operating agreement, owners set out rules for the ownership and operation of the business.

A typical operating agreement includes:

  • the members’ percentage interests in the business
  • the members’ rights and responsibilities
  • the members’ voting power
  • how profits and losses will be allocated
  • how the LLC will be managed
  • rules for holding meetings and taking vote

Some states require the newly established company to publish a notice in a local newspaper, stating that you intend to form an LLC. Owners are required to publish the notice several times over a period of weeks and then submit an affidavit of publication to the LLC filing office.

After completing the steps above, owners must obtain the licenses and permits that all new businesses must have to operate. These may include a business license, a federal employer identification number, a sellers’ permit, or a zoning permit.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients. If you are setting up a business in Charlotte, you can save a lot of money enlisting our help establishing an LLC.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

 

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Tax Planning For S-Corporation Health Insurance Deductions

If you are a more than 2 percent shareholder of an S corporation, you must take the correct measures to capture a health insurance deduction.

The first step is for the S-corporation to pay the insurance company directly for the cost of the health insurance. Next, the S-corporation includes the cost of the health insurance as additional compensation to the shareholder-employee on the employee’s W-2 which is subject to income tax withholding but exempt from Social Security, Medicare, and unemployment taxes. The W-2-reported health insurance is treated as a cost of self-employed health insurance. This amount is deducted on page 1 of Form 1040.

This is an area where tax planning is imperative. The S-corporation must reimburse you for all medical insurance that you pay for yourself and your family. This includes Medicare and accident and health premiums paid to schools and athletic programs to cover your children.

S-corporation owners can pay health insurance costs personally. In this case, the owner must have the S corporation reimburse the cost of the insurance to the owner-employer to qualify for the health insurance tax deduction.

Taxpayers may have to pay payroll taxes on the amount included in wages for your insurance premiums If the corporation does not provide health insurance to your non-owner employees, then you are exposed to payroll taxes. If the corporation does provide health insurance to your non-owner employees, you are not exposed to payroll taxes. If the corporation has no other employees, you are not exposed to payroll taxes.

If you are eligible to participate in an employer-subsidized health plan maintained by either you or your spouse’s employer, you may not claim the self-employed health insurance deductions for the months when you were eligible to participate in an employer plan.

If a taxpayer pays for the health insurance themselves and does not submit it to the corporation, the  cost of health insurance becomes an itemized deduction suffering from both  the 10 percent of adjusted gross income floor and  the phaseout of itemized deductions, possibly completely eliminating the deduction.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

 

 

 

 

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Tax Planning for S-Corporation Fringe Benefits

S-corporation owners are disallowed certain fringe benefits. There are three methods taxpayers can use to deal with this loss of fringe benefits depending on the benefit. For fringe benefit purposes, S corporations have two types of employees:

  • Owners: Employees who own more than 2 percent of the S corporation’s stock
  • Non-owners: Employees who own 2 percent or less of the stock

If you are an owner-employee, you lose some of your fringe benefits. This is because the law treats owner-employees as if they were partners in a partnership which limits the fringe benefits that are available to partners.

For purposes of fringe benefits, the IRS treats your family as owning the same amount of stock that you do; this includes your spouse, children, grandchildren and parents.

If you are considered an owner you are not permitted to the following tax-free fringe benefits:

  • Amounts paid to an accident or health plan
  • Group term life insurance
  • Meals or lodging furnished for the employer’s convenience
  • Tax-free benefits provided under a cafeteria plan

The following fringe benefits are available to a partner in a partnership and, therefore, available to the more than 2 percent owner employee:

  • Employee achievement awards
  • Qualified group legal services plans
  • Educational assistance programs
  • Dependent care assistance programs
  • No-additional-cost services
  • Qualified employee discounts
  • Working condition fringe benefits
  • De minims fringe benefits
  • On-premises athletic facilities
  • Medical savings accounts

Taxpayers have three tax choices for how to treat the disallowed fringe benefits:

  • W-2 compensation to the owner-employee
  • Distribution to the owner-employee
  • Reimbursement by the owner-employee to the S corporation

W-2 Compensation

The S corporation may treat the disallowed fringe benefit as W-2 compensation to the owner-employee.  The corporation can deduct the fringe benefit as compensation to the owner-employee and the owner-employee will receive the fringe benefit as taxable compensation.

This is the most common approach when dealing with health insurance benefits.  The W-2 recognition of the S-corporation’s payment of the owner-employee’s health insurance is not subject to FICA or Medicare while W-2 recognition of the disallowed fringe benefits other than medical is subject to FICA and Medicare taxes.

As a result, this is not the most common approach on non-medical disallowed fringe benefits to prevent exposure to FICA and Medicare taxes.

 

 Distribution

The S corporation can also make disallowed fringe benefits a distribution by the corporation to the owner-employee. If this approach is utilized, the S corporation has no tax deduction and the owner-employee has no taxable income.

The disallowance of the fringe benefit  will trigger any additional loss because of payroll taxes. This is not advantageous for health insurance fringe benefits because the owner of the S corporation will lose the medical deduction on their personal tax return.

When there is only one-owner in the S corporation, there are no complications in using the distribution strategy for disallowed fringe benefits other than medical benefits. If the S corporation has multiple owners, the S corporation distributions need to avoid preferential dividend treatment that could create a second class of stock and terminate the S corporation’s election.

 

Reimburse the S Corporation

The final option for the owner-employee is to reimburse the corporation for the cost of the fringe benefits.  If the reimbursement is employed, the owner-employee pays for the fringe benefit personally. The reimbursement method avoids FICA and Medicare taxes and works for disallowed fringe benefits other than medical benefits.

S corporation owners who do not have previously taxed earnings in the S corporation adequate for a distribution should consider this method.  If you are using the reimbursement method, you need to ensure settlement by December 31 or record the outstanding amount as a loan receivable by the corporation from the owner-employee.

The loss of some fringe benefits with the S corporation status is a component that should be taken into consideration when analyzing which entity structure is best suited for your business needs.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

 

 

 

 

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