Tax Wealth Network, service of Boston Tax Planners

How to Legally Avoid Taxes When Selling Investment Real Estate

2020-08-04

Over the nearly thirty years of practice in financial planning and banking, I have been approached by many clients seeking to avoid paying taxes on highly appreciated real estate investments. There are a few options available to investors and some are better than others. It all depends on the facts presented and the goals of the client. In other posts, I’ve spoken about some alternative strategies. Now, I’ll focus on one of those options. Here’s how to legally avoid paying taxes when selling investment real estate. [By the way, this strategy may be used when selling highly appreciated businesses, stock portfolios, and other assets, not only real estate.]

There are several options including 1031 Exchanges, Installment Sales, newer options like Opportunity Zone bonds, and various trusts. Here, we’ll focus on one trust strategy: Charitable Remainder Unitrust (CRUT) as described in the Internal Revenue Code Section 644.

While 1031 Exchanges are a good way to defer taxes, they do not offer the opportunity to get out of real estate entirely. It is a “replacement” strategy with a way to defer taxes. But deferral is not avoidance and you still end up owning real estate even if you’re trying to get out of the business of dealing with toilets, tenants, and trash. Other options provide the ability to get out of real estate and even avoid paying taxes.

CRUT Strategy

Not all CRUTs are created equal. There are six players in the CRUT strategy: the donor, the trustee, the income beneficiary, the remainder beneficiary, the trust administrator, and the investment manager.

An Example of the CRUT in Action

Let’s use the example of a $1,000,000 piece of property with a basis of only $100,000. The potential tax the client is facing is about $300,000 by the time he factors in federal and state capital gains taxes leaving him only $700,000 to invest.

First, the Donor. If the property is owned individually or jointly there is no problem. In cases where it was owned by different family members and with larger dollars, then you’ll use different CRUTs or make gifts of an undivided interest.

Second, the Trustee. The Trustee could be any charity or university or non-profit and all are eager to fulfill that role. Here is a crucial “no-no.” Never go this route because all control will be lost. The IRS has no problem with a self-trusteed CRUT as long as you cross the “t”s and dot the “i”s properly. It’s easier to make the Trustee the client and his wife jointly. Later, as years go on, the ability to have either sign makes an adviser’s life easier. But you could have the spouse be successor Trustee if you wanted.

Third, the Income Beneficiary. This should be the husband and the wife. The period of the CRUT can be a number of years or a single life or joint lives. The best practice is to use “lives” so the CRUT will continue paying income for the life of his wife even if the donor dies soon after the gift. So, now the owner of the property has given the property to himself as Trustee, and instructed the Trustee (he and his wife) to pay an income stream to the Income Beneficiary (he and his wife) until the last one dies. Also, since the CRUT is legally a split-interest trust paying income to a human and the principal to a charity, the Trustee (himself) can sell the $1,000,000 property to the buyer totally tax-free. The CRUT functions like any church or university as the seller.

Fourth,the Remainder Beneficiary. This can be any non-profit found on the IRS list. It can be multiple charities. But here again, is a “no-no” to watch out for. When the Donor creates the Trust document, he should never make the Beneficiary irrevocable. Instead, the donor should always give the Trustee the power to change the Beneficiary from one charity to another. Personally, I prefer to even make the Remainder Beneficiary a Donor Advised Fund which we call a Perpetual Family Foundation to be advised by his children, grandchildren, and future heirs making gifts to all the non-profits the Donor had in his heart.

Fifth, the Administrator. It may seem to be too good to be true. We have a way to sell his real estate 100% tax free by giving it to himself as Trustee and instructing himself to choose whatever investments to diversify he wants and the pay himself an income stream for life. Then even after his death, he is leaving it to a so-called “Family Foundation” to be administered on behalf of his family by his children and grandchildren. Again, the IRS has no problem with the self-trusteed CRUT as long as you continue to cross the “t”s and dot the “i”s prudently. So, the Trustee is given instruction/power to hire an independent Administrator to report all transactions and produce the tax return. Of course, make sure your Trustee has the power to also change administrators if needed.

Sixth, and last, is the Investment Manager. This can be any Registered Investment Adviser like Clear View Wealth Advisors, LLC. But the Trust document gives the Trustee the power to fire and replace the Investement Manager. Now, the $1,000,000 property was sold and the $1,000,000 is in cash in the CRUT Money Market fund. A fiduciary investment adviser, like Clear View Wealth Advisors, can make suitable recommendations for this portfolio. Maybe the $1,000,000 is invested in 6 or 7 conservative mutual funds, or maybe 7 mutual funds and a non-traded income producing REIT. Or perhaps one of the MarketFlex Model Portfolios of Exchange Traded Funds and Dividend-Paying Stocks that Clear View Wealth Advisors oversees. This is an effective strategy for many different investors and situations from as small as $500,000 to as large as $30,000,000.

But the keys takeaways for clients are these:

Clients Get 100% Tax Avoidance,
Clients Get More Safety of Investments Through Diversification, and
Clients Never Give Up Any Control.

This is how to legally avoid taxes when selling investment real estate or any other highly appreciated asset through proper use of a CRUT trust strategy.

To discuss how a CRUT strategy may fit into your plans, call the fiduciary advisers at Clear View Wealth Advisors, LLC at 617-398-7494.

How to Legally Avoid Taxes When Selling Investment Real Estate

2024-01-27

Over the nearly thirty years of practice in financial planning and banking, I have been approached by many clients seeking to avoid paying taxes on highly appreciated real estate investments. There are a few options available to investors and some are better than others. It all depends on the facts presented and the goals of the client. In other posts, I've spoken about some alternative strategies. Now, I'll focus on one of those options. Here's how to legally avoid paying taxes when selling investment real estate. [By the way, this strategy may be used when selling highly appreciated businesses, stock portfolios, and other assets, not only real estate.]

There are several options including 1031 Exchanges, Installment Sales, newer options like Opportunity Zone bonds, and various trusts. Here, we'll focus on one trust strategy: Charitable Remainder Unitrust (CRUT) as described in the Internal Revenue Code Section 644.

While 1031 Exchanges are a good way to defer taxes, they do not offer the opportunity to get out of real estate entirely. It is a "replacement" strategy with a way to defer taxes. But deferral is not avoidance, and you still end up owning real estate even if you're trying to get out of the business of dealing with toilets, tenants, and trash. Other options provide the ability to get out of real estate and even avoid paying taxes.

A CRUT strategy can eliminate taxes on the sale. Assuming that a property doesn't have a mortgage on it (or can have the mortgage paid off from other resources prior to the property's sale), then the CRUT can be a powerful tool.

CRUT Strategy

An Example of the CRUT in Action

Let's use the example of a $1,000,000 piece of property with a basis of only $100,000. The potential tax the client is facing is about $300,000 by the time he factors in federal and state capital gains taxes leaving him only $700,000 to invest.

First, the Donor. If the property is owned individually or jointly there is no problem. In cases where it was owned by different family members and with larger dollars, then you'll use different CRUTs or make gifts of an undivided interest.

Second, the Trustee. The Trustee could be any charity or university or non-profit, and all are eager to fulfill that role. Here is a crucial "no-no." Never go this route because all control will be lost. The IRS has no problem with a self-trusteed CRUT as long as you cross the "t"s and dot the "i"s properly. It's easier to make the Trustee the client and his wife jointly. Later, as years go on, the ability to have either sign makes an adviser's life easier. But you could have the spouse be successor Trustee if you wanted.

Third, the Income Beneficiary. This should be the husband and the wife. The period of the CRUT can be a number of years or a single life or joint lives. The best practice is to use "lives" so the CRUT will continue paying income for the life of his wife even if the donor dies soon after the gift. So, now the owner of the property has given the property to himself as Trustee, and instructed the Trustee (he and his wife) to pay an income stream to the Income Beneficiary (he and his wife) until the last one dies. Also, since the CRUT is legally a split-interest trust paying income to a human and the principal to a charity, the Trustee (himself) can sell the $1,000,000 property to the buyer totally tax-free. The CRUT functions like any church or university as the seller.

Fourth,the Remainder Beneficiary. This can be any non-profit found on the IRS list. It can be multiple charities. But here again, is a "no-no" to watch out for. When the Donor creates the Trust document, he should never make the Beneficiary irrevocable. Instead, the donor should always give the Trustee the power to change the Beneficiary from one charity to another. Personally, I prefer to even make the Remainder Beneficiary a Donor Advised Fund which we call a Perpetual Family Foundation to be advised by his children, grandchildren, and future heirs making gifts to all the non-profits the Donor had in his heart.

Fifth, the Administrator. It may seem to be too good to be true. We have a way to sell his real estate 100% tax free by giving it to himself as Trustee and instructing himself to choose whatever investments to diversify he wants and the pay himself an income stream for life. Then even after his death, he is leaving it to a so-called "Family Foundation" to be administered on behalf of his family by his children and grandchildren. Again, the IRS has no problem with the self-trusteed CRUT as long as you continue to cross the "t"s and dot the "i"s prudently. So, the Trustee is given instruction/power to hire an independent Administrator to report all transactions and produce the tax return. Of course, make sure your Trustee has the power to also change administrators if needed.

Sixth, and last, is the Investment Manager. This can be any Registered Investment Adviser like Clear View Wealth Advisors, LLC. But the Trust document gives the Trustee the power to fire and replace the Investment Manager. Now, the $1,000,000 property was sold and the $1,000,000 is in cash in the CRUT Money Market fund. By using this strategy there is more to invest because less was lost to taxes.

A fiduciary investment adviser, like Clear View Wealth Advisors, can make suitable recommendations for this portfolio. Maybe the $1,000,000 is invested in 6 or 7 conservative mutual funds, or maybe 7 mutual funds and a non-traded income producing REIT. Or perhaps one of the MarketFlex Model Portfolios of Exchange Traded Funds and Dividend-Paying Stocks that Clear View Wealth Advisors oversees. Or, better yet, we can use a dividend-income model based on higher-yielding Closed-End Funds to generate 5%, 6%, 7% or more in dividend income. This is an effective strategy for many different investors and situations from as small as $500,000 to as large as $30,000,000.

But the keys takeaways for clients are these:

Clients get 100% tax avoidance,
Clients get more safety of investments through diversification, and
Clients never give up any control.

This is how to legally avoid taxes when selling investment real estate or any other highly appreciated asset through proper use of a CRUT trust strategy.

To discuss how a CRUT strategy may fit into your plans, call the fiduciary advisers at Clear View Wealth Advisors, LLC at 617-398-7494.

Tax Angles of Husband-Wife Partnerships

2020-03-26

Husband-Wife Partnerships: The Tax Angles

When both members of a married couple participate in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not. Figuring out the answer is important because it can have a huge impact on the couple’s self-employment tax situation.

Husband-wife partnerships must also file annual federal returns on Form 1065 along with the related Schedules K-1. As you know, partnership returns can be a pain. For these reasons, you generally want to avoid husband-wife partnership status when possible.

When Does the Husband-Wife Partnership Actually Exist for Tax Purposes?

Good question. As you can see from the preceding example, the self-employment tax can make the husband-wife partnership an expensive proposition. Of course, the IRS would love it if you had to treat it that way.

Not surprisingly, several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business activity usually creates a partnership for federal tax purposes.

IRS Publication 334 (Tax Guide for Small Business) says the following:

If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.

In other words, you don’t have to believe that you have a husband-wife partnership to have a husband-wife partnership for tax purposes.

Similarly, IRS Publication 541 (Partnerships) says:

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065.

But in many (if not most) cases, the IRS will have a tough time prevailing on the husband-wife partnership issue. Consider the following direct quote from IRS Private Letter Ruling 8742007:

Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise.

The following factors, none of which is conclusive, are evidence of this intent:
The Agreement of the Parties and Their Conduct in Executing Its Terms;
The Contributions, if Any, That Each Party Makes to the Venture;
Control Over the Income and Capital of the Venture and the Right to Make Withdrawals;
Whether the Parties Are Co-proprietors Who Share in Net Profits and Who Have an Obligation to Share Losses; and
Whether the Business Was Conducted in the Joint Names of the Parties and Was Represented to Be a Partnership.

In many (if not most) real-life situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship, or in an activity that has been operated using a disregarded single-member LLC that has been treated as a sole proprietorship for tax purposes, only some of the five factors listed in Private Letter Ruling 8742007 will be present. Therefore, in many such cases, the IRS may not succeed in making the husband-wife partnership argument.

Regardless of the presence or absence of the other factors listed above, the husband-wife partnership (LLC) argument is especially weak when (1) the spouses have no discernible partnership agreement and (2) the business has not been represented as a partnership to third parties (for example, to banks and customers).

Beat the Unfair $10,000 SALT Cap with a C Corporation

2020-03-23

C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.

But for some of you, the C corporation could provide the best tax outcome because it bypasses the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA).

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:

Income Taxes
Real Property Taxes
Personal Property Taxes
Foreign Income and Real Property Taxes

Tax reform took two direct actions against your Form 1040 itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,

You Can’t Deduct Foreign Real Property Taxes, and
Your Combined State and Local Income, Real Property, and Personal Property Tax Deductions May Not Exceed $10,000 ($5,000 on a Married Filing Separate Return).

Your Combined State and Local Income, Real Property, and Personal Property Tax Deductions May Not Exceed $10,000 ($5,000 on a Married Filing Separate Return).

C Corporation Loophole

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Form 1040, Schedule A. The limit does not apply to C corporations.

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.

Can I Claim My Boyfriend As a Dependent When Filing Taxes?

2018-02-26

As a tax preparer, I hear questions like this from time to time.

The short answer to you claiming your boyfriend as a tax dependent is: No.

While I like the way you’re thinking, it’s not possible. Your boyfriend is awfully lucky to have your help and support but the IRS is not going to provide you with a tax benefit for your relationship.

The IRS has a seven-part test for dependency. And someone has to qualify by answering ‘yes’ to all of them.

The first three apply to everyone:

To Claim Another Person as a Dependent, the Taxpayer Cannot Be Eligible to Be Claimed as a Dependent on Someone Else’s Return
A Person Cannot Be Treated as a Dependent if He or She Files a Joint Return With a Spouse.
The Person Claimed as a Dependent Must Be Either a Us Citizen, Us National, or a Resident of the United States, Canada, or Mexico.

Now, the next four tests depend on whether the prospective dependent is a “qualifying child” or a “qualifying relative”.

As your boyfriend is not a child, then you have to use the “qualifying relative” tests.

The Relative Must Be a Son, Daughter, Foster Child, or a Descendant of Any of These (Such as a Grandchild), a Brother or Sister or Child Off These, a Parent or Grandparent, a Close Inlaw or Step-sibling, or “any Other Person Other Than the Taxpayer’s Spouse Who Lived With the Taxpayer All Years as a Member of the Taxpayer’s Household if the Relationship Does Not Violate Local Law”.

The “relative” Must Not Be a Qualifying Child of Any Other Taxpayer.
The Relative Must Have Gross Income of Less Than $4,050 in 2017.
The Taxpayer Must Have Provided Over Hald of the Relative’s Support in 2017.

I think you’ll be hard-pressed to have your boyfriend qualify as a relative even if you stretch the “any other person who lived with the taxpayer” test above.

If you need help filing your taxes, reach out to Steve Stanganelli, CFP(r) of Boston Tax Planners.

Are Withdrawals from a Roth IRA Taxable?

2018-02-26

Have you taken money out of a Roth IRA? At this time of year, it is common for tax preparation clients to ask me about Roth IRAs and taxes. So, are withdrawals from a Roth IRA taxable?

Let’s say you withdrew $10,000 from a Roth IRA and you’re trying to prepare your taxes on your own. How do you calculate the taxable amount if any?

Before I can answer this, we need to know some of the background. So let’s meet Dan.

Dan has had a Roth IRA account for three years. He withdrew $10,000 from this account to pay off some debt. He was taxed on 10% of the total amount, which left him a balance of only $9,000. Currently, Dan lives in Texas which has no state income taxes. He received a Form 1099-R showing a taxable amount in Section 2A of the form as blank. How can he calculate the taxable amount? His 1099-R form has his prior Washington, DC address, but as a member of the military he has been relocated to Texas now.

Boston Tax Planner Answer:

You only pay taxes on the gains above what you invested. Your initial and subsequent investments into the Roth IRA form your basis. I recommend that you go back to your statements to calculate the amount of your investments. If you need help, reach out to the investment custodian (the folks who prepared the 1099). They should also be able to tell you what the amount invested was.

It’s possible that you have no taxable gain and this is why there is no taxable amount listed on the 1099. For example, if you invested $10,000 and withdrew $1,000, then for tax purposes you received a partial return of your principal. There is no tax on this in a Roth IRA.

When you contact the custodian you should update your address information. But it should not be a problem for filing your federal income taxes. Since you live in Texas where there is no state income tax, you shouldn’t have to worry about that either. Whether or not you need to file a different state tax return will depend on which state and how long you lived there.

If you are like Dan and need help with your taxes, please contact Steve Stanganelli, CFP(r) at BostonTaxPlanners.com.

Ways to Avoid Capital Gains Taxes on Sale of Rental Property

2018-02-25

There may come a time when you want to sell your rental property. After putting in all the time dealing with toilets, tenants, and trash, you’re looking to cash in and relax. But there’s one problem: Taxes. Despite common wisdom, you may be able to avoid them. While death is inevitable, there actually are two ways to avoid capital gains taxes on the sale of rental property.

Meet Wayne and Marcia

Let’s meet Wayne and Marcia. Back in the 1980s shortly after getting married, they decided to buy a place of their own to raise a family. Prices were rising as were interest rates. The $60,000 they paid for a four bedroom home seemed like a lot but they figured they could manage it. For several years they lived in the home raising their three children. Eventually, they decided they needed more space so they bought a new home and decided to rent out their first one. Interest rates had dropped so they refinanced a few times. The neighborhood was near good schools and in demand. The cash flow from the rent was steady.

Now with the kids grown and out of the house, Wayne is getting tired of spending weekends fixing up the property. And the kids are looking to buy their own piece of the American Dream. Both Wayne and Marcia want to help them out.

What’s Next?

When they arrived in their advisor’s office, they wanted to know how they could best sell the rental property now and split the profits between their children so that they could have money for down payments.

Wayne, as a resourceful guy, had done some research that started his mind to thinking of options. He came across IRS Publication 523 that discusses taxes and selling your property. He figured that he could add one or more of their kids to the rental property’s title. Perhaps one or more of the adult children could even live in the property and make it their primary residence.

But he was fuzzy on the details and had some questions that he asked:

If One of the Kids is Added to the Title and Lives in the Property for Two Years, Will the Sale of the House Be Exempt From Capital Gains Taxes?
Does the Adult Child Need to Own the Property for at Least Five Years and Live in the Property for Two Years to Exempt the Sale From Capital Gains Taxes?
Wayne and Marcia Are Still on the Title of the Property. Do They Have to Make the Property Their Primary Residence?

Picking Apart Wayne’s Plan

As an owner of investment real estate, you’ve decided to sell. But unlocking the value and turning it into cash can also result in a large tax bill especially if your asset has appreciated since your initial investment back in the 1980s.

First things first: Since Wayne and Marcia no longer occupy the property as their primary residence, they cannot use the Section 121 exemption of $500,000 over basis (married filing jointly) to shield themselves from a capital gain tax liability.

Second, he is correct that he could add someone to the title and that person would need to occupy as his primary residence for two of the last five years. But, no, he wouldn’t need to live there for five years to take advantage of the Section 121 exclusion.

Third, if they choose not to live in the property while their son does, they each must apply Section 121 individually. If they and a joint owner other than a spouse sell a jointly owned home, each of the co-owners must figure their own gain or loss according to their ownership interest in the home. Each applies the rules on Section 121 found in IRS Publication 523 on an individual basis. So, unless they move back into the property for at least two years out of the past five, then Wayne won’t be sheltering any of the gain for his portion of the property.

Now, you may think it’s hopeless and you should just pay the tax. While that is an option there are innovative strategies available to you if you want to lower your income tax bill when you sell and investment property (or business for that matter).

Ways to Avoid Capital Gains Taxes on Sale of Rental Property

The first way to avoid capital gains is to not sell the property but die. Why? Because when you die, those who inherit your property get a “step up in basis”. Instead of inheriting the property at the $60,000 that they originally paid back in the 1980s, the children would inherit at current market value. Let’s say that is $600,000. If they decide to sell the property that they inherit for $600,000, they will pay no taxes on the sale.

Great news. But you first have to die for this to happen.

So, what better ways are there to sell now and avoid capital gains taxes? And are there any ways to free up cash that can be used now for investment in other properties or even stocks?

Typically, when a business or real estate owner sells they will need to deal with capital gains tax, state taxes, depreciation recapture and, in some cases, the alternative minimum tax. But through savvy tax and estate planning, you can take advantage of opportunities in the tax code to minimize your current tax liability while allowing you the flexibility to control the sale proceeds.

1031 Exchanges, Installment Sales, or Trusts

Real estate investors can use a 1031 Exchange, a provision of the Internal Revenue Code which allows an owner to relinquish property and replace it with a similar type of asset without recognizing gain and deferring taxes.

While a 1031 Exchange offers tax deferral, it is ONLY a replacement option. You must replace income-producing property with other income-producing property but you may not receive cash upon the sale without paying tax on the gain. You can keep selling and exchanging property into other properties for as long as you live. Eventually when you die, your estate will inherit the last property at a stepped-up basis and then they can sell and not pay any capital gains taxes. See above.

Other options offer even more flexibility to sell highly appreciated assets like stock in a privately-held business or ownership of residential rental or commercial real estate while also controlling use of the cash that is freed up from the sale. These include strategies like a Opportunity Zone Fund investing or a type of irrevocable trust or a “structured installment sale.” (NOTE: A previous option known as a “monetized”” or “collateralized” installment sale is no longer a valid option for non-agricultural property after IRS guidance released in mid-2021).

In a structured installment sale, cash is directed to a trust that buys US Treasury bonds and in turn pays out interest to the original buyer. Since the bonds are of high quality with low risk of default, the payout may be low. A variation on this might be to have the trust also hold higher-yielding Treasury inflation-protected securities (aka TIPs) to mitigate inflation risk. The payout to the initial seller is over time and only a portion of capital gains is paid out and subject to tax with each installment.

Opportunity Zone Funds were created as part of the federal tax overhaul package for 2018. By investing in real estate projects sponsored in select zones, the taxpayer will defer taxes. And if the investment is held in the fund for a certain period of time, then the taxes on the capital gains from the original transaction that generated all the proceeds used for the OZ Fund investment will be waived.

By using a certain type of irrevocable trust, you may be able to defer taxes while increasing the amount of cash proceeds for investment. This option requires the use of a specialized network of tax attorneys, trustees, and investment advisers. But the costs may provide an investor with greater flexibility on types of investments while significantly reducing taxes on the sale of any type of assets (not just real estate).

The Opportunity Zone and irrevocable trust options offer you a chance to salvage a failed 1031 Exchange which can occur if a seller of a property cannot locate a suitable replacement property or a closing fails to occur within the 180 days required by law. In addition to deferring taxes while freeing up cash that can be used today, they may also offer you a great estate planning tool. This is because of the discount that an estate receives for something called ‘lack of marketability.’

Next Steps for Sellers

Any one of these strategies may be an effective way to defer taxes, but typically requires a professional tax advisor’s assistance. To learn more about setting up one or more of these strategies and how they may fit into your broader financial, estate and tax plan, contact Steve Stanganelli, CFP® at Clear View Wealth Advisors /Boston Tax Planners at 617-398-7494 or steve@ClearViewWealthAdvisors.com.

If My Bitcoin Investment Climbs, What Will I Pay in Taxes?

2018-02-12

Investment styles may come and go but the taxman will always be there ready to share in your wealth. As Bitcoin and other block chain investments have attracted lots of attention, there is an inevitable question I get during tax season: If my Bitcoin investment climbs, what will I pay in taxes?

Bitcoin has been around since 2009. Before 2011, Bitcoin value bounced around in the spare change range: $0.05 to $1. During 2011 it “soared” to nearly $20 before it then fell back to under $5 by the end of 2011. By 2013 a Bitcoin could be bought for somewhere between $100 and $300. To see a chart of Bitcoin values and historical events, check this link to 99Bitcoins.com.

What You Will Pay in Taxes for Your Bitcoin Gains

Let’s say that you’ve been making about $50,000 per year but you were one of the first to see the potential of Bitcoin when it was first introduced. So, you scrounged around the house and came up with some pocket change or money you found in between the sofa cushions. Your investment in Bitcoin may have been a mere fifty dollars if you were lucky enough to buy in back in March 2013. In tax terms, that’s what we call your basis. Capital gains (and losses) are figured as the difference between what you realize upon sale and what you paid when you got into the investment.

Now what would happen if that one Bitcoin you bought in March 2013 at about $50 soared to $100,000?

A lot depends on your tax bracket, your tax filing status (married versus single versus head of household), and how long you owned that Bitcoin.

Let’s say you’ve earned less that $50,000 per year. Under the old tax law, you’d be in a pretty low tax bracket with a marginal rate of 15%. Effective for tax year 2018, you’ll be in the new, lower 12% tax bracket. For investors in these brackets, long-term investment gains for investments held for longer than one year have a capital gains tax of 0%.

If you’re in this tax bracket and have owned that Bitcoin since 2013 and sell when it hits $100,000 with a $$99,950 profit, you’d be in the same 0% capital gains tax bracket.

Congratulations, you’ve won the lottery. All things being equal, the short answer to the question about taxes is that you’d probably owe $0 in taxes. But tax laws and brackets could change. But assuming that they don’t you’ll likely have no capital gain to tax.

The new law retains the previous law’s maximum tax rates on net capital gains and qualified dividends (0%, 15%, and 20%) for those who fall into the lowest two brackets. The thresholds for the brackets will depend on your filing status (married filing jointly, married filing separately, filing as a single taxpayer). So, if your combined adjusted gross income is at or below $77,000 for joint filers or $38,500 for single filers, then you’ll likely fall into one of the two lowest tax brackets qualifying for the 0% capital gain formula.

To qualify for this special capital gains tax rate, you’d have to be sure to stay under these thresholds. If your investment was soaring, you may be tempted to quit your job to save on taxes. But don’t take that leap just yet.

Now, whether or not you have any gain from a speculative investment is an entirely separate matter. After peaking at nearly $19,000 per Bitcoin in mid-December 2017, the value has dropped back to about $8,200 on February 12, 2018.

If you’re looking for a more integrated look at how your investments will impact your tax bill, reach out to Steve Stanganelli at Clear View Wealth Advisors / Boston Tax Planners.

Are Gifts to Parents Tax Deductible?

2017-12-23

Raise your children well. They may choose your nursing home and may even provide support you with financial support in your old age. If you’re lucky to have a child who turns the tables on you and provides you with support, you may get a question like I did: Are gifts to parents tax deductible?

A taxpayer sends a portion (about $1,500 each month) of his income to his parents who live overseas. While he is employed, his wife is not. So, when he sends money to the parents, is is considered a gift and is it tax deductible? In his case, his parents live overseas but the response is still the same.

Are Gifts to Parents Tax Deductible?

I can only hope that my children will be as generous to us in our later years as you are with your parents. Your gift is probably greatly appreciated by your parents and helps them enrich their quality of life. While your monthly payment can technically qualify as a gift, it has no impact on your personal income taxes under current tax rules.

Technically, you and your spouse may gift a maximum amount of $14,000 per year per person. This would equal a total gift of $28,000 by your wife to your parents. Add that to the $14,000 per year per person that you can gift. That means you can gift a total of $56,000 from your household to their household. But this gifting only makes a real difference when calculating gifts to reduce the total of a taxable estate for estate tax purposes. If your personal estate is worth less than the federal exemption (currently about $5.2M and possibly a non-issue next year if the tax bill winding its way through Congress is finalized), then it’s not likely to be an issue.

On the other hand, if your parents could qualify as dependents and you paid for their medical services directly, then you could find that some or all of your cash transfers may qualify as itemized medical deductions.

After January 1, 2018 the new tax law will be in effect. Based on what I see, this itemized medical deduction option may be moot as there will be a lower incentive to itemize after the standard deduction increases.

If you’d like an objective second opinion about your taxes and are looking for a road map on how to live better by planning well, please reach out to Steve Stanganelli, CFP^®, CRPC^®, AEP^® at Boston Tax Planners, a service of CVWA LLC. Email him at Steve@BostonTaxPlanners.com.

Is Monthly Income from Divorce Taxable?

2017-07-13

As part of my divorce planning practice, I often work with clients to help them chart out their cash flows and projected tax issues to help reduce surprises. Sometimes folks can be confused about what is taxable income.

In one case, a woman asked if the monthly benefit she received from her ex-spouse’s military pension was taxable since it was considered “property” in the divorce decree in the state in which she lived.

For reference, alimony received is considered taxable income. But this is clearly not alimony and wasn’t listed as alimony in her divorce decree. Nonetheless, the monthly income she is receiving from her ex-spouse’s pension may very well be taxable.

Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income based on a variety of tests.

It sounds to me like this is retirement pay (and not part of any disability) so this will be added to her total adjusted gross income.

Whether or not it becomes taxable will depend on how much her total income is and home much of this income (from this and all other sources) may be offset by deductions (itemized or standard) and exemptions.

If you’re receiving any military retirement income you will likely receive a Form 1099-R from the US Office of Personnel Management each year detailing what was received and what portion is ‘taxable’.

Taxpayers may want to plan ahead and calculate whether they may have any tax owed and how much, if any, quarterly estimated tax payments that they may want or need to make. Speak with a qualified tax professional or tax adviser to help figure out this detail. Call us and we’ll be happy to help.