Passive Vs Active
March Madness is upon us and if you are business owner or investor, your company’s tax return was probably filed a few weeks ago unless it was extended. For those of you who didn’t extend the return to September, you should have received your Schedule K-1.
Some of the biggest tax issues and confusions I consistently see each year are due to the receipt of the K-1. I could spend days talking about what each line item means. This week, however, I wanted to focus on the Material Participation Test. This test affects each recipient of a K-1 as it determines if you have active or passive income/loss. Each year you need to go through the following tests and pass just one of them:
Once you figure out your status, now what do you do? Well, now the real fun begins! There is another set of tests that you will need to consider before reporting the K-1 on your taxes.
If you received a K-1 and do not have a tax advisor, please feel free to forward me your questions. Since the 7/15 filing deadline will be here before you know it, I would be happy to answer them for you!
As the year winds to a close, tax professionals have the opportunity to look at their clients’ tax situations to identify tax savings or deferral options that may help decrease their tax liability. Here is a summary of various tax law provisions and related, year-end tax planning tips.
Itemized deductions. Under the Tax Cuts and Jobs Act(TCJA), the standard deduction doubled beginning in 2018 ($24,400 for joint filers in 2019), which drastically reduces the number of taxpayers who itemize deductions on Schedule A. With this newer, elevated threshold, taxpayers may consider bunching their deductions every other year to produce a higher deduction over a two-year period. In other words, taxpayers could prepay some deductible expenses, such as state estimates, before year-end, or defer and pay after year-end.
Property taxes. Under the TJCA, the deduction for state and local taxes is now capped at $10,000. This is something to take this into account as you help clients plan on paying expenses and deductions. When prepaying property taxes, remember that they are only deductible in the current year if the tax is assessed by the governing body in the same year; otherwise they are deductible in the following year.
Charitable contributions. If you’re age 70½ or older and hold an IRA account, clients may be able to benefit by making a qualified charitable distribution to possibly reduce their above-the-line income. In addition, with a donor-advised fund, the taxpayer receives an immediate tax deduction and recommends grants from the fund over time.
Retirement contributions. Planning for retirement typically makes financial sense – and there are a variety of plans available to individuals that allow a tax-favored way to save for retirement. It’s smart to consult with a financial planner before deciding on a plan that best suits the individual. Lower income taxpayers may be eligible for the Retirement Savings Contribution Credit, or saver’s credit.
Two types of plans for individuals include:
College planning. Similar to planning for retirement, saving for a college education is very expensive; fortunately, many of your client probably have many years to plan for it. The smart way to go about it is to start early, save a little money each year and let the money grow. The government provides tax incentives through the following plans. Remember to tell clients to withdraw money attributed to education expenses before year-end.
Kiddie tax. Under the TCJA, unearned income for anyone under age 19 or full-time students between ages 19-23 is now taxed at estate and trust tax rates over the $2,200 threshold. Advise clients to be careful with transferring income-generating investments to their children because their tax could go up under the new rules.
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