Monthly Archives: February 2017

How to secure casualty and theft loss deductions

No one enjoys picking up the pieces after a natural disaster or when some other calamity destroys personal property like a home or car. But at least you may be in line for some tax relief. If you qualify, you can deduct part of your unreimbursed losses from casualties and thefts on your 2016 tax return. However, there are a couple of obstacles to overcome.

First, you must reduce the loss eligible for the deduction by any insurance reimbursements. If your insurance coverage “makes you whole,” you get no deduction. Second, you can only deduct the excess loss above 10% of your adjusted gross income (AGI) for the year, after you subtract $100 for each event. For example, if you suffer a single loss of $15,000 in a year in which your AGI is $100,000, your deduction is limited to $4,900.

Furthermore, deductions are available for most, but not all, casualties and thefts. The event must be “sudden, unexpected or unusual.” Typically, you will qualify if you suffer a loss from a natural disaster like a hurricane, flood or blizzard, or you’re victimized by a home burglary. Similarly, damage to your car in an accident counts. But you can’t write off a loss resulting from deterioration over an extended period of time, like damage due to a drought or termites.

Deductions are normally claimed in the year in which the loss is sustained. But there’s a special exception for victims in federally-declared disaster areas. For these losses, you can elect to obtain quick relief on the tax return for the year preceding the loss. In other words, if you suffer a disaster-area loss early in 2017, you can deduct the loss on your 2016 tax return.

Finally, don’t leave matters to chance. Obtain a professional appraisal for personal property damage in case the IRS ever challenges your deduction.

Income or sales tax — you have a choice on your 2016 tax return

When you itemize your deductions, you can deduct either state and local income taxes or general state and local sales taxes on your 2016 tax return. But you can’t have it both ways — it’s one or the other.

Typically, you might write off your state and local income taxes. This includes amounts withheld from your paychecks and estimated taxes paid during the year such as quarterly installments for self-employed individuals. If you live in a high-tax state like California or New York, this deduction is often one of the biggest — if not the biggest — on your return.

However, there’s an alternative that might appeal to some taxpayers. In lieu of state and local income taxes, you can deduct the sales taxes you’ve paid this year. This option is especially attractive to taxpayers residing in the handful of states that don’t impose any state income tax.

This alternate deduction for state sales taxes has expired and been reinstated several times in the past. Finally, the Protecting Americans from Tax Hikes (PATH) Act in 2015 made this option a permanent part of the tax code.

If you itemize your deductions, there are two ways to deduct sales taxes:

  • Option 1: Claim the actual amount of sales tax paid during the year. This requires you to keep receipts or other documentation of purchases.
  • Option 2: Use the state-by-state table provided by the IRS. The deduction is based on your state, your income and the number of exemptions on your tax return.

Often, the table amount is lower, but more convenient. But, you can add to this sales tax table calculation by amounts paid for the lease or purchase of a vehicle; the purchase of a boat or aircraft; and the purchase of substantial home additions or renovations. In some cases, the extra tax for these “big-ticket items” may push you to use this as an alternative to the state income tax deduction.

Give Carl Heinemann, your Chattanooga CPA, a call. We can help you make sure you have all the information needed to make the optimal choice on your 2016 tax return.

There’s a lot to like about like-kind exchanges

If you own real estate that has appreciated in value, you may owe a sizeable capital gains tax when you sell. But tax law provides a way to postpone the tax. Here’s how: Instead of a sale, you can swap your property for another property of a similar character in a transaction called a “like-kind exchange.” To qualify, you’ll need to meet specific conditions, such as completing the transaction within a certain period of time and making sure the property qualifies.

Two of the timing requirements are strict. First, you must identify or actually receive the replacement property within 45 days of transferring legal ownership of the relinquished property. And second, you must receive title to the replacement property by the earlier of 180 days or your tax return due date, plus extensions, for the tax year of the transfer. Be aware of the second rule if the exchange will straddle tax years. Why? When you relinquish real estate late in the year, you might want to apply for a filing extension if you need more time to wrap things up.

The rules are fairly lenient as to what constitutes “like-kind property.” As an example, you might exchange an apartment building for a warehouse or raw land. However, both the relinquished and replacement real estate must be used as investment or business property. The like-kind tax break doesn’t apply to swaps involving a personal residence.

Like-kind exchanges may involve multiple parties, as it’s unusual for you and a single real estate owner to each own property the other wants. In some cases, you might arrange for an individual who is in the business of making these exchanges work (known as a “qualified intermediary”) to help consummate the deal. The end result is the same: You give up property and receive like-kind property in exchange.

Keep in mind that you’ll generally owe tax on any excess value, called “boot,” that you receive in the deal. Boot can be more than just cash — for instance, it might represent partial forgiveness of a mortgage. If you’re the one giving the boot, you realize no taxable income.

If you think you can benefit from a like-kind exchange, contact Carl Heinemann, your Chattanooga CPA, for more information.

TIPS can offer a prudent long-term investment alternative

Rising inflation poses a significant risk to fixed-income investments such as bonds. Treasury inflation-protected securities (TIPS) can be a good alternative to diversify your portfolio and protect your retirement funds from the risk of rising inflation.

TIPS were introduced by the U.S. Treasury Department as a special type of savings bond designed to protect against higher-than-expected inflation and are offered with terms of 5, 10, and 30 years. A normal bond with a fixed face value loses its purchasing power if the rate of inflation is higher than the amount of its annual return, also called its coupon. In contrast, the face value of a TIPS adjusts to inflation. For example:

Assume you purchase a TIPS with a $1,000 face value and a 3% coupon. If inflation was 10% during the year, the face value of the TIPS would increase by 10% to $1,100. The coupon, based on higher face value, would be $33. So, the interest payments are protected against inflation and you also receive the higher face value when the bond matures, which helps to counteract the effects of inflation.

However, there are some downsides to TIPS. The security against higher-than-expected inflation comes at the cost of a lower coupon compared with equivalent Treasury bonds. That means if you expect inflation to fall or stay the same rather than rise, standard bonds make more sense than TIPS. Second, TIPS have tax consequences. If a TIPS face value adjusts upwards because of high inflation, that adjusted amount has to be reported to the IRS as income. However, you can avoid this by buying TIPS through a mutual fund or within a tax-deferred retirement account.

TIPS can be a good investment, but they can also be complicated. Consider your options before deciding if they are right for you.

Bolster your company’s cyber security

Workers routinely and unintentionally put their employers at risk by engaging in sloppy computer security practices. In one recent study, a research team placed 200 USB thumb drives in high-traffic public places in Chicago, Cleveland, San Francisco, and Washington, D.C., and tracked what happened to them. Nearly one in five of these small devices were plugged into someone’s computer. Imagine if one of these USB drives belonged to your company and contained highly sensitive information.

Fortunately, you don’t need expensive hardware upgrades or new software applications to bolster cyber security at your office. Here are four relatively low-cost suggestions.

  • Employee education. When new employees join your team, make sure they’re trained in strong security procedures. They should be trained to avoid using weak passwords; sharing login credentials; installing unauthorized applications on work computers; uploading company files to unencrypted devices; and being careless with emails. Use ongoing training to reinforce your company’s computer security policies and expectations.
  • Single Sign-On (SSO) service. Most people find it difficult to manage the overabundance of business and personal passwords. So they cope by making easy-to-access Excel spreadsheets or placing sticky notes within reach of their computers. A long list of unsecured passwords can easily be stolen or misplaced. Instead, use an SSO to allow employees to access multiple work-related applications with a single strong password, reducing the need for less secure workarounds.
  • Monitor access. According to one study, 89 percent of workers who leave a company continue to have access to one or more of their former employer’s computer applications. Be sure to create a procedure to immediately revoke access to all company databases and applications when an employee resigns or is terminated. Bottom line: always know who can get into your company’s databases and applications, and develop the ability to shut off access quickly when warranted.
  • Make reporting easy. Employees should know how to report suspicious behavior or security concerns. Consider adding a link to your email platform that allows staff to forward questionable emails directly to your IT department or management team.

Cyber criminals are always trying to find new ways to access sensitive data of companies like yours. Implementing a few of these suggestions could keep your company safe from a security breach.