Wednesday, July 23, 2014

Should you ask the cost of a gift?

Should you ask the cost of a gift?

Imagine this scenario. Your wealthy Uncle John is something of an art collector, buying paintings and sculptures from promising young artists. When he retires, he moves into a small condo in a retirement community and has to downsize his art collection. He gives away much of his art to family members, and you receive an abstract painting. He tells you that he paid $5,000 for it only two years ago.

A few years later Uncle John passes away, and soon after that you decide to sell the painting. You're delighted when an art dealer offers you $12,000 for the painting. Unfortunately the IRS audits your tax return for that year and informs you that you owe capital gains tax on the sale.

How much do you owe? In theory, you received Uncle John's cost basis in the picture when you received it as a gift. Your taxable gain would be $7,000 ($12,000 sales price less his $5,000 cost basis). But unless you can document the purchase price, the IRS might well claim that you owe tax on a $12,000 gain.

When you sell property you received as a gift, the general rule is that your basis is the donor's cost basis. If you sell at a loss, your basis is the lower of the donor's basis or the fair market value on the date you received the gift. There are adjustments to these numbers in some cases. But the important point is that without cost records, you have no way of proving the donor's basis and no way of disputing an IRS claim.


While it might seem embarrassing to ask for records of the cost when you receive a gift, it could save you a significant amount of taxes in the future. And if you have received valuable gifts in recent years, it might be worth going back to recover the cost records before they're lost forever. On the other hand, if you're the one making the gift, give the cost records at the same time. If you don't, you may end up giving a gift to the IRS in the form of unnecessary taxes.

Monday, July 21, 2014

Worthless stock and tax timing

Worthless stock and tax timing

In the last few years, you may have purchased stock in a dot-com that's now out of business, or in another company whose share price is now just pennies. Does this mean you can take a tax loss for a worthless security? Here's a quick look at the rules.

First, the stock must be completely worthless before you can claim a loss. For example, if it's a publicly traded company and the share price is as low as a penny, it still doesn't qualify as worthless. (If this is the case, you may be better off selling it to your broker for a penny and taking a regular capital loss.)

If it is worthless, you must be able to identify an event that caused it to become worthless and a date for that event. For example, even if a company declares bankruptcy, the stock may not be worthless if there's a chance it will reorganize and emerge from bankruptcy. But if it becomes clear at a bankruptcy hearing that the creditors will own the reorganized company, you can consider your stock worthless at that time.

You must claim a worthless security's loss in the tax year it became worthless. Because this is sometimes not obvious until later, the IRS allows you to go back seven years to file an amended return claiming the loss.

Because these are general rules and because it is often a judgment call to decide that a stock is worthless, we encourage you to contact our office with any questions you have

Friday, July 18, 2014

Consider tax filing status if you're divorcing

Consider tax filing status if you're divorcing


It's difficult enough to think about taxes under normal circumstances. Finding yourself amid a divorce action can make this task even more daunting. A little planning, however, may ease this burden. Consider, for example, the following ideas about your tax filing status if your divorce isn't final by December 31, 2014.

Advantages of filing a joint tax return. It is often better, tax-wise, to file a joint return because of certain benefits that are available to joint filers. Benefits such as the earned income credit, the credit for the elderly, and certain other tax credits and deductions are reduced or unavailable for married taxpayers who file separate returns.

Advantages of filing a separate tax return. Filing a separate return may make sense in a situation where your spouse isn't cooperating with you. This could especially be true if your bank requires a tax return before they'll approve a loan. Another reason for filing a separate tax return may be that you suspect that your spouse has unreported income. Filing separate returns in these situations may be a practical solution.

Sometimes it makes sense to file a separate return because you'll owe less tax. An example is where medical expenses are not deductible because your joint income is too high. With a separate return, you may be able to claim a deduction.

Can you change your mind about your filing status after your return has been filed? You can change from separate to joint filing status by filing an amended return. However, once a joint return has been filed, you may not change to separate filing status after the return's due date.

The bottom line: You should calculate your tax liability under both joint and separate filing choices to see which results in a lower tax. Numerous other tax and financial issues could be affected by your divorce. If you'd like tax planning assistance, give us a call. We can work with your attorney to help you make informed choices that take taxes into account.

Tuesday, July 15, 2014

IRS posts "Taxpayer Bill of Rights"

IRS posts "Taxpayer Bill of Rights"

The IRS has just issued a "Taxpayer Bill of Rights" that you should be aware of.

The Rights are divided into ten main categories. According to this "cornerstone" document you have The Right:

*  to be informed
*  to quality service
*  to pay no more than the correct amount of tax
*  to challenge the IRS's position and be heard
*  to appeal an IRS decision in an independent forum
*  to finality
*  to privacy
*  to confidentiality
*  to retain representation

*  to a fair and just tax system

Friday, July 11, 2014

INVENTORY YOUR DOCUMENTS

Inventory your documents

Maintain a current list of all your important papers. Where are insurance policies located? Who is your current insurance agent? Where are your original wills? Who is your attorney and accountant? Keeping your inventory of documents and advisors current can be a real help to anyone who needs to assist you should you become incapacitated or die.

Tuesday, July 8, 2014

Summertime tax tip

Summertime tax tip


If you itemize tax deductions on your income tax return, you can deduct the mortgage interest and property taxes paid for your vacation home. A boat or RV can qualify as a vacation home if it has sleeping quarters, cooking facilities, and a bathroom. If a vacation home also serves as a part-time rental, you can control your tax deductions by changing the number of days you use it yourself.

Summertime tax tip




Summertime tax tip


If you itemize tax deductions on your income tax return, you can deduct the mortgage interest and property taxes paid for your vacation home. A boat or RV can qualify as a vacation home if it has sleeping quarters, cooking facilities, and a bathroom. If a vacation home also serves as a part-time rental, you can control your tax deductions by changing the number of days you use it yourself.