Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

January 2016 Tax Newsletter

January 2016 Tax Newsletter

 

Happy New Year!

Moskowitz LLP is in full swing and looking forward to another busy year serving you. Please review our January Newsletter and do not hesitate to contact us if you have any tax questions or concerns.

Also, remember to start gathering your tax information and make certain your 1099s are processed on time.

Warmest regards,

Steve Moskowitz, Esq.
Founding Partner

 

 

Tax Extender Act Renews Tax Breaks

In mid-December, Congress renewed a long list of tax breaks known as “extenders” that have been expiring on an annual basis. This year many of the rules are retroactive to the beginning of 2015, and you can benefit from them as you prepare your 2015 federal income tax return.

In addition, the Protecting Americans from Tax Hikes Act of 2015, which was signed into law on December 18, 2015, makes some of the rules effective through December 31, 2016. Other rules are effective through 2019 and some are effective permanently. Provisions in the Act also make changes to existing tax rules that were not part of the extenders. All of these changes will affect your tax planning for 2016 and future years. Here’s an overview of selected provisions:

  • When you’re age 70½ and over, you can make a tax-free distribution of up to $100,000 from your IRA to a charity. This provision was reinstated for 2015 and is now permanent.
  • The deduction for up to $250 of out-of-pocket eligible educator expenses is available for your 2015 return. It’s now permanent and will be indexed for inflation beginning with 2016 tax returns.
  • You can choose to claim the itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes on your 2015 return. This break is now permanent.
  • The tuition and fees above-the-line deduction for qualified higher education expenses is available for 2015 and 2016.
  • If you’re a homeowner, you can exclude mortgage debt cancellation or forgiveness of up to $2 million in 2015 and 2016. Discharges of qualified mortgage debt can also be excluded after January 1, 2017, if you have a binding written agreement in effect before that date. This tax break is only available for your principal residence.
  • The maximum Section 179 deduction for qualified business property, including off-the-shelf software, is available for 2015 and is now permanently set at $500,000 (subject to a taxable income limitation). The deduction is phased out above a $2 million threshold. Both thresholds will be indexed for inflation beginning in 2016.
  • The additional first-year depreciation deduction, known as “bonus depreciation,” is available for 2015 when you buy qualified business property. The deduction is extended through 2019.
  • You can claim the work opportunity tax credit for 2015 if you hired eligible individuals last year. This credit is extended for five years (through 2019).

Because the Act was passed so late in the year, you’ll have to review your 2015 transactions to take advantage of applicable breaks and claim them on your 2015 federal income tax return. Also, with the rules now extended through 2016 (and in some cases beyond), you can begin to update your current tax plan with some measure of certainty.

Call Moskowitz LLP for more information and to determine which changes affect you.

 

Standard Mileage Rates Reduced for 2016

  • Business - Starting January 1, the standard mileage rate for driving a vehicle for business purposes is set at 54 cents per mile. That’s down from 57.5 cents in 2015.
  • Medical and moving - The rate for medical and moving mileage decreases from last year’s 23 cents a mile to 19 cents a mile.
  • Charity - The general rate for charitable driving remains at 14 cents a mile.

 

IRS Targeting Real Estate Investors and Professionals

If you are a real estate holder, investor, or professional; take heed. FinCEN (Financial Crimes Enforcement Network) issued a targeting order that will require certain US title insurance companies to disclose high-end residential real estate all-cash transactions in Manhattan, NYC and Miami-Dade County, FL. While this is a temporary order (due to expire March 2016), the government’s goal is to identify persons utilizing limited liability companies and other entities (offshore companies) to purchase US Real Estate. Once identified, the US Government will not only conduct its investigation but will also turn over the names and identifying information to the home country of those identified.

This program foreshadows the future of the IRS and US Government's use of real estate investments to close loop holes in the computation and collection of tax. We expect individuals to be identified, and we expect the program to expand to other high value real estate markets (think California). We also predict real estate professionals, attorneys, and bankers will be targeted as accomplices and witnesses. However, be assured, it is not illegal to use a company or entity to purchase US Real Estate. In fact, there are often tax and estate advantages to doing so.

Consider carefully; consult your lawyer; and ensure your entities and real estate holdings are solid. Real Estate Professionals - contact your attorney and know what to expect so that you can continue to do your job and avoid becoming involved in any tax investigation.

 

Real Estate Investors & Professionals Updates

Refreshers on §1031 Exchanges and Real Estate Investment Losses (§469) can be found on the Moskowitz LLP blog. Take a look!

 

Be Aware of These Tax Deadlines

A new year means tax return filing season has arrived once again. Here are some of the tax deadlines you may be required to meet in the next few months:

  • January 15 – Due date for the fourth and final installment of 2015 estimated tax for individuals (unless you file your 2015 return and pay any balance due by February 1).
  • February 1 – Employers must furnish 2015 W-2 statements to employees. Payers must furnish 1099 information statements to payees. (The deadline for Form 1099-B and consolidated statements is February 16.)
  • February 1 – Employers must generally file 2015 federal unemployment tax returns and pay any tax due.
  • February 29 – Payers must file information returns (except Forms 1095-B and 1095-C) with the IRS. (March 31 is the deadline if filing electronically.)
  • February 29 – Employers must send W-2 copies to the Social Security Administration. (March 31 is the deadline if filing electronically.)
  • March 31 – Large employers must furnish Form 1095-C to employees.
  • May 31 – Forms 1095-B and 1095-C due to IRS. (June 30 is the deadline if filing electronically.)

 


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The Real Estate Professional, Part I

For the past 8 years, the IRS has been cracking down on investors who attempt to use their passive real estate investment losses to offset other income.

IRC §467 limits an investor’s ability to use passive losses to offset their ordinary or earned income. As a general rule, passive losses may be used only to offset passive income, and rental activities are generally considered passive under this code section. Taxpayers who “actively participate” in their rentals (e.g., select or approve tenants, negotiate leases, manage property repairs and capital improvements) are entitled to a maximum $25,000 offset under IRC §467(i). Note that per IRC §467(i)(3), the $25,000 loss will be reduced by 50% if the taxpayer's adjusted gross income exceeds $100,000.

Special passive loss rules for real estate professionals

IRC §467(c)(7) provides special rules regarding real estate investment losses for real estate professionals. For taxpayers who qualify, all losses connected with their real estate investments may be applied without limitation. It is no wonder that so many taxpayers with real estate interests try to fit themselves into this classification!

What is a Real Estate Professional?

IRC Sec. 469(c)(7)(C) defines a real estate professional as someone who spends the majority of their time in one or more of the following real estate trades or businesses:

 

  • Real property development or redevelopment
  • Construction or reconstruction
  • Acquisitions
  • Rental or leasing
  • Operation or management
  • Brokerage trade or business

 

Being in the business isn’t enough. Under IRC Sec. 469(c)(7)(B), to receive an unlimited real estate investment deduction, a taxpayer must also demonstrate that more than 50% of their activities, and more than 750 hours of their time, during the taxable year at issue was spent “materially participating” in a real property trade or business.

"Material participation" - a higher standard

The “material participation” standard that allows all real estate investment losses to be deducted is a much stricter standard than the “active participation” requirement for a $25,000 offset under IRC §467(i). In Part II, we will review the time tests, the requirements of “material participation” and provide some tips on how to increase the likelihood of your deductions surviving an audit.

Skilled and aggressive tax audit representation

In the area of real estate loss deductions, IRS auditors tend to cast an exceptionally wide net. If you are a real estate investor whose deductions have been disallowed and/or you are being audited, you need a highly skilled and aggressive tax attorney on your side. The tax lawyers at Moskowitz, LLP have vast experience representing thousands of clients before the IRS and state taxing agencies. We welcome your call.

 

Also see: Part II