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Tax Consequences When Selling Your Home

Kathleen Hargrove on May 23, 2016

home sale taxe As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put a home on the market. After all, in many locales, summer is the best time of year to sell a home! But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

Gains

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

Losses

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Learn more

If you’re considering putting your home on the market, please contact Whalen & Company to learn more about the potential tax consequences of a sale.

Can summer day camp save you taxes?

Kathleen Hargrove on May 19, 2016

child care tax credit Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?

The Power of Tax Credits

Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Rules to Know

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Are You Eligible?

These are only some of the rules that apply to the child and dependent care credit. So please contact Whalen & Company to determine whether you’re eligible.

CLIENT ALERT: Final Overtime Rule Will Affect 4.2 Million Workers

Kathleen Hargrove on May 18, 2016

The United States Department of Labor (DOL) issued the final update to its proposed “Overtime Rule” this week, a revision to the Fair Labor Standards Act.

The salary threshold for white collar exemptions will be increased to $47,476 from the current threshold of $23,660, effective December 1, 2016, affecting 4.2 million U.S. workers. Vice-President Joe Biden is in Columbus, Ohio today to share this announcement.

Key Overtime Rule Changes:

Full-time salaried workers earning less than $47,476 annually will be eligible for overtime pay (previous threshold was $23,660).

The Highly Compensated Employee (HCE) annual compensation threshold will be increased to $134,004 from $100,000 for full-time salaried workers.

Employers have six months to prepare for the change, which will be effective December 1, 2016.

Bonuses, commissions and incentive pay for non-HCE employees may be counted toward 10% of the threshold if paid at least quarterly.

The overtime salary threshold will be updated every three years based on wage growth, to be posted by DOL 150 days before effective date.

Duties test for white collar salaried workers will remain unchanged.

The DOL is proposing the following ways for businesses to comply with these changes:

Pay salaried employees earning less than $47,476 annually time-and-a-half for overtime work.
Raise workers’ salaries above the new $47,476 annual threshold.
Limit hours worked for salaried employees earning less than the threshold to 40 hours per week.

Webinars on the new overtime rule will be conducted by the DOL in May and June. See the scheduled webinars and register here.

According to the DOL, this exemption threshold has not been updated since 2004 and was due to be revised as “President Obama directed the Secretary of Labor to update the FLSA’s overtime pay protections and to simplify the overtime rules for employers and workers alike.”

For more details on this update rule, check out the DOL’s Overview and Summary and Small Business Guide.

We hope this information has been helpful to you. If you have questions about how the proposed overtime rule affects your business, please contact your Whalen & Company representative.

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When should you start tax planning?

Kathleen Hargrove on April 21, 2016

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When should you start tax planning Now that the April 18 income tax filing deadline has passed, it may be tempting to set aside any thought of taxes until year end is approaching. But don’t succumb. For maximum tax savings, now is the time to start tax planning for 2016.

More opportunities

A tremendous number of variables affect your overall tax liability for the year. Starting to look at these variables early in the year can give you more opportunities to reduce your 2016 tax bill.

For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

More certainty

In recent years, planning early has been a challenge because there were a lot of expired tax breaks where it was uncertain whether they’d be extended for the year. But the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks through 2016, or, in some cases, later. It also made many breaks permanent.

For example, the PATH Act made permanent the deduction for state and local sales taxes in lieu of state and local income taxes and tax-free IRA distributions to charities for account holders age 70½ or older. So you don’t have to wait and see whether these breaks will be available for the year like you did in 2014 and 2015.

Getting started

To get started on your 2016 tax planning, contact Whalen & Company. We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.

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What 2015 tax records can you toss once you’ve filed your return?

Kathleen Hargrove on April 14, 2016

The short answer is: none.

You need to hold on to all of your 2015 tax records for now. But this is a great time to take a look at your records for previous tax years and determine what you can purge.

The 3-Year Minimum Rule

At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss most records related to tax returns for 2012 and earlier years. Note: Three years is the minimum amount of time you should retain these documents; Whalen & Company recommends keeping records related to tax returns for seven years as a rule of thumb.

What to Keep Longer

You’ll need to hang on to certain records beyond the statute of limitations:

Keep tax returns themselves forever, so you can prove to the IRS that you actually filed. (There’s no statute of limitations for an audit if you didn’t file a return.)
For W-2 forms, consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.
For records related to real estate or investments, keep documents as long as you own the asset, plus three years after you sell it and report the sale on your tax return.

Just a Starting Point

This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact Whalen & Company.

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