Tax Deadline Looms

Originally published in the Cedar Street Times

April 4, 2014

If you have been hibernating through the winter months, it is time to awaken from your slumber and complete your tax returns for 2013.  As a tax professional it is interesting to see how each tax season seems to take on a flavor of its own.  This year I found that many clients did not come in early, but delayed gathering their tax information, and came in much later.  Another professional in the area called me last week and said he was experiencing the same issue.  Compressing an already compressed time frame certainly makes for long hours, and will probably lead to more extensions as well.

Over the past few years, new rules have been phasing-in which force financial companies to report cost basis in the stock they sell on your behalf.  (Generally I like this new requirement as I have to repaint my ceiling much less frequently as clients are no longer staring at it so intently to come up with the basis in the stock they inherited  thirty years ago.)  I recall last year, we had many clients with revised 1099 financial packages being issued well into late March.  Although I did not see a lot of late issued/revised financial packages this year, I have a feeling that has something to do with why many people opted to bring in their information later.

Technically, you are supposed to file an amendment if additional information surfaces that was not reported on your original returns.   This can be cost prohibitive, however, especially if it consists of minor changes.  If these items are missed, sometimes the IRS will just send a proposed adjustment and basically rework the tax return for you and propose a balance to pay.  California’s Franchise Tax Board will typically follow-up as well once they get wind of the issue from the IRS..

If you cannot get your returns completed on time, then you may wish to file an extension.

If you are filing your own extension for your personal tax returns with the IRS use Form 4868.  Be sure to get some kind of proof of delivery and make a copy of the extension.  Even with delivery confirmation it is difficult to prove what you sent.  The best way is to e-file the extension through home-use tax software or by using a tax professional that e-files and obtains an electronic submission ID (the new modernized e-file system replaces the old declaration control number system with submission IDs).  What about California?  In the midst of a tiresome sea of nonconformity with the IRS, I continue to applaud California for this one act – you need not file a form to be granted an automatic extension! After you have filed your federal extension you have until October 15, 2014 (six months) to file your California personal return as well.

BEWARE!!  Just because you file an extension does not grant you additional time to pay!  The tax you calculate on the return you are going to prepare and file by October is still due by April 15.  So if you think you might not have enough tax withheld, you need to make some good estimates and send in some checks.  You may want to hire a tax professional to help with this calculation.  You can send the federal check with Form 4868.  For California, you can use FTB Form 3519 to send with your check.  There are also electronic options for paying both of these.

If you do not pay your tax or file your return on time, interest and penalties are calculated based on any amount of tax you come up short. Interest varies with market changes (currently three percent a year for the IRS and California).

If you file an extension, but do not pay in enough tax by April 15, you will pay late payment penalties and interest.  The IRS late payment penalties are a half-percent of the balance each month (up to 25 percent).  California will charge you five percent up front plus another half percent of the balance each month (up to 25 percent).

If you fail to file an extension or file after the extended due date, the IRS and California penalties are each five percent of the balance each month (up to 25 percent).  California has an additional trick.  If you extend your return and then file late, they go all the way back to the original due date to calculate penalties and interest owed as if you never had an extension.

You may also incur underpayment of estimated tax penalties depending on your circumstances.

One other nice thing to know: if you owe no tax, you will owe no penalties, even if you file late.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Property Taxes on Equipment, Furniture, Tools, Etc. Due April 1

Originally published in the Cedar Street Times

March 7, 2014

Many people starting up a small business for the first time are surprised to learn that there are business personal property taxes due each year on the value of everything from the chair they sit in, to their computer, to the pads of paper in the supply closet.  Most people are familiar with property taxes assessed on their home each year, but a business is also taxed on all of its personal property.  When I say personal property, I mean anything that is tangible, but is not real property (real estate).  Intangible assets like copyrights, patents, goodwill, or even software are generally not subject to tax.

This business property tax is established in the California Constitution and the Revenue and Taxation Code.  It falls under the jurisdiction of the California Board of Equalization (the same group that handles sales tax), but it is administered by and filed with the assessor’s office of each county.  For most businesses, the form to file is BOE-571-L (BOE-571-A for agricultural businesses), and it is due on April 1st of each year.  Even though the form is due on April 1st, there is a grace period, and you technically have until May 7th to postmark the form so it will not be delinquent.  (This is much appreciated by CPAs that are working to get income tax returns completed by April 15!)  It is also important to note that the reporting covers your property that existed as of January 1st, and not as of the date you fill out the form.

Maybe you have been in a business for a few years, or maybe 20 years in unusual cases and have never seen a request for this form.  Are you in trouble?  There is an interesting rule that states if the total cost of your business personal property is under $100,000, you do not have to voluntarily start filing the form.  That would cover a lot of small businesses.  However, if you receive a request from the assessor’s office to file the form, you must file every year going forward.  As information sharing has become more mainstream among various government agencies, it is fairly common to get a request in the first year or two you operate, even as a tiny sole proprietor.

The BOE-571-L asks you to break down your property into various categories and by year of purchase.   As the property gets older, it is assessed less each year.  (Tip: retain a copy of your submitted form for reference when filing for the next year.)  Each form is processed by hand.  The assessors appreciate having attached lists that identify more specifically the property you list in the various categories and years.  As you will see on the form, it is not always clear which category to put things in.  For instance, the word equipment is used in four different categories, and you might not be sure where it should be included.  Categories are assessed and depreciated at different rates, so the assessor has a better chance of assessing you the correct tax if you provide more information.  If you have questions, you can call the Monterey County Assessor’s office at 831-755-5035 and ask for the business property tax department.  They are generally available to answer any questions you may have.

It is probably fairly obvious that computers, printers, copiers, furniture, equipment, machinery, and tools are assessed.  In addition, the supplies you have on hand for your business are assessed.  If you do not have a good idea of this value, one approach, or instance, may be to take your office supplies account in your accounting records and divide by 12 if you think you keep about a month of supplies on hand.

Leased property such as a copy machine, is an area that people sometimes overlook.  Your lease agreement will indicate whether you, or the company you lease from is responsible for the property taxes.  If you are responsible, you need to report it on your BOE-571-L.  Licensed vehicles through the Department of Motor Vehicles (DMV) do not need to be reported here whether owned or leased, as they are being taxed through the DMV.

Structural improvements, fixtures, land improvements, construction in progress, and land development are required on the form as well.  Generally, however, structural improvements, land improvements, and land development information is not assessed by the business property tax division and is passed along to the real property division for them to decide whether or not to assess it, or wait for the next time the property as a whole is assessed. Construction in progress would be assessed by the business property tax department: i.e. – you have spent $200,000 in construction on a building that is not complete at the end of the year.  Once the building was completed, the business property tax department would stop assessing it, and the real property department would start assessing it.

Fixtures such as counters, sinks, lights, bolted down equipment, etc. would generally be assessed by the business property tax department.  If you are a tenant and pay for any leasehold improvements, you should report and will be assessed on those as well.  Most leases are written that the property becomes the landlord’s after the tenant moves out of the space.

One final issue that often comes up in an audit is whether or not the business has property that was purchased and immediately expensed on its books and tax returns, and therefore do not show up on depreciation schedules, which is often the main source for reportable property.  In the code, there is no immateriality exclusion for something as small as a stapler, but in practice the auditor is not going to assess you on those items.  You should look for more significant items, however, such as the $400 in books you bought for your business library.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Relief if You Paid Tax on a Short-Sale 2011-2013

Originally published in the Cedar Street Times

February 21, 2014

Hopefully we are nearing the end of the short-sale and foreclosure saga that has continued since 2008.  My litmus test based on tax return filings is indicating that things are much closer to being back on track.  Prior to 2008, it was all about 1031 exchanges.  Those turned off like a faucet when the markets crashed, and then short-sales and foreclosures took center stage.  I have seen those tapering off over the last couple years, and I am starting to see 1031 exchanges again.  The cycles continue!

But before we leave short-sales and foreclosures in the dust, there is a possible silver-lining handed down by the IRS and FTB in the last few months.  Taxpayers that generated income tax as a result of a short-sale in California on their principal residence, retroactive to January 1, 2011, may be entitled to a refund.

California Code of Civil Procedure Section 580b has been dubbed California’s “anti-deficiency laws” for years.  It had a positive effect on homeowners because it basically said if you had never refinanced your home and you lost it in a short-sale or foreclosure that you could not be pursued for the balance you still owed (the deficiency), and the remaining debt would not be taxable income to you because the debt was considered nonrecourse debt.

This, however, left many people out in the cold that had refinanced.  Suddenly, it was a different ball game if you had done a refinance (and who didn’t during the run of good years up through 2007!?), and the debts were then allowed by lenders to be treated as recourse debts and they could pursue your personal assets.  Alternatively they could cancel the debt if it was not worth pursuing, leaving you with taxable income for the amount cancelled.

Congress stepped in (and California generally conformed) during the housing crisis and enacted favorable legislation which said you could exclude cancellation of debt income generated by your personal residence.  The catch, however, was that the debt had to be “qualified debt.”  In short, if you lived off the equity in your house by refinancing to pull cash out and did anything with it other than improve the property, then you were not eligible for the exclusion on that portion and would still have to pay tax.

Then, a few years ago, California passed Senate bills 931 and 458 which were codified into law as California Code of Civil Procedure Section 580e as of January 1, 2011.  This resulted because some unscrupulous lenders were entering into short-sale agreements to allow sellers to go through with the sale of their property for less than the amount owed to the bank, but then still pursuing the seller for the remaining debt after the fact (often a big surprise to the seller).  California’s enactment of this law was good news for homeowners because it basically said, even if you had refinanced, but had entered into a short-sale agreement with a lender, then you could not be pursued for the remaining balance owed and that lenders would basically have to cancel the debt.  Of course, cancelling the debt could mean tax was owed, but that was still better than being pursued for the remaining balance!

Finally, in November 2013 a letter from the Office of the Chief Counsel at the IRS written to Senator Barbara Boxer, due to an inquiry from her, stated that the IRS would treat any debt pursuant to California’s 580e as nonrecourse debt!  The Chief Counsel’s office at California’s Franchise Tax Board followed up with their own letter a month later saying they will conform to the IRS interpretation.

This means that anyone who filed a tax return in 2011 or 2012, or even this year, and reported cancellation of debt income related to the short sale of a principal residence, should consider filing an amendment for a possible refund.  It is still possible to have income tax, primarily if you did not live in the house for two of the last five years prior to your short-sale.  The reason is that when a home is disposed of with nonrecourse debt, the total amount of debt outstanding at the time of the short-sale becomes the sales price of the home.  You then subtract your cost basis, and the difference is your gain on sale.  However, if you lived in the home for two of the last five years, then you get a $250,000 gain exclusion for filing as a single status, and $500,000 gain exclusion if married filing jointly, pursuant to IRC Section 121.

You need to act on this during the next year if your short sale was in 2011 as the statute of limitations expires three years after filing.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Aren’t All Tax Returns Created Equal?

Originally published in the Cedar Street Times

February 7, 2014

There is a belief by many people that a tax return is a bit of a commodity – basically you are going to get the same results no matter if you or anybody else prepares the return.  If that were true, your only goal would be to find the absolute cheapest tax preparer in town (or do it yourself).

A number of years ago Money magazine used to annually send out the same hypothetical family’s tax return to be prepared by 45-50 tax preparers across the country.  The surprising result was that it was rare in any year to have even two tax returns prepared the same way.  The most recent one that I could find resulted in only 25 percent of the preparers coming within $1,000 of the theoretical correct answer.  That means 75 percent missed the mark by more than $1,000.  This certainly speaks to the complexity of the tax code, and why you really need to have someone with as much relevant experience, education, and training as possible to navigate the tax terrain.  You may think you are being savvy by saving $200-$300 by getting a deal on your tax preparation, but what did you get?  Maybe you overpaid your tax by a $1,000 in the process of saving $300.  And how would YOU ever know.

When it comes to hiring someone to prepare your returns, credentials are not everything, but they certainly are a measuring stick of the education, training, testing, and commitment required.  Here are your options:

Do-It-Yourself Software (i.e. TurboTax) - Tax software, whether for professionals or amateurs is certainly a requisite tool to bring any measure of accuracy or efficiency to preparing a tax return.  Computers are quick at math and very accurate at crunching numbers (that is the part that is “guaranteed” to be accurate by do-it-yourself software providers), but if you provide the wrong input, or your software is not even programmed to ask you or accept all the variables you might need, then you will get a wrong answer every time (that part they don’t guarantee).

In addition, without an understanding of the forms and tax law, you will have no idea if there is a glaring error staring you in the face when you are ready to submit the forms.  I have seen countless returns butchered through the use of tax preparation software over the years.  I am currently amending three years of tax returns for a family that overpaid their taxes by $1,000 a year for the past twelve years due to a simple mistake that the software was not able to point out to them.  Unfortunately the statute of limitations has run out on the first nine years and they cannot get a refund at this point.

RTRP -”Registered Tax Return Preparer” - This is the current basic credential required by the IRS to prepare tax returns for pay.  There is no formal high school or college education required, no professional class and exam process to become licensed, and no continuing education requirement.  You just pay $65 to the IRS and you can prepare tax returns professionally!  This designation was created in the last few years with the intent of having a basic exam and some continuing education, but the testing and education requirements have been put on hold pending legal challenges to the requirements. RTRPs have limited practice rights before the IRS.

CRTP – “CTEC Registered Tax Preparer”- (CTEC stands for CA Tax Education Council) – This is the current basic credential required by California to prepare tax returns for pay.  Again, there is no formal high school or college education required.  There is a 60 hour professional class (equivalent to three or four semester units in college – one class) that is offered by many providers in person, on the internet or by self-study with an exam on the material covered.  There is 20 hours of continuing education each year, and a $5,000 bond.  This is the license that the vast majority of preparers hold in California at chains such as H&R Block, Liberty Tax Service, and Jackson Hewitt.  CRTPs also have limited practice rights before the IRS.

EA – “Enrolled Agent” - This is the highest of the two designations offered by the IRS, and EAs can practice in any state.  Again there is no formal high school or college education required, and there is no required professional class (although an intensive prep course is generally taken).  There is a 10.5 hour proctored three-part exam with 100 question each – one on individual, one on business returns, and one on practice procedures and ethics with essentially 24 hours of continuing education each year.  EAs have unlimited practice rights before the IRS.

CPA – “Certified Public Accountant” - Licensed by each state (although there is reciprocity to practice with nearly every state now).  California requires a college degree with 150 semester units (five years) including 24 semester units of accounting and 24 semester units of business related courses in taxation, economics, finance, management, etc., 10 semester units of ethics, and another 20 semester units of accounting studies which a masters of taxation or masters of accountancy would satisfy.  You must then work for a year under the direct supervision of a CPA.  If you want to be able to sign audit reports, you have to have 500 supervised audit hours.  You must also pass a 14 hour proctored four-part national exam and then a CA ethics exam.  California also requires a LiveScan background check and fingerprinting of all applicants.  There is essentially 40 hours of continuing education required each year for California CPAs.  CPAs have unlimited practice rights before the IRS.  Although CPAs are trained in, and can do a lot more than just your tax returns, most small CPA firms focus on tax preparation.

Attorney - Licensed by each state. We won’t discuss the requirements to become an attorney, as attorneys rarely prepare tax returns.  Some attorneys that specialize in tax will prepare tax returns, although most of those are focused on estate tax returns.  Attorneys that do prepare tax returns will often have obtained a CPA license also.  Attorneys have unlimited practice rights before the IRS.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

SIMPLE IRA Salary Deferrals Due Jan. 30 for Self-Employed

Originally published in the Cedar Street Times

January 24, 2014

One commonly used retirement plan by small business owners is a SIMPLE IRA plan.  SIMPLE IRA is simply an acronym for “Savings Incentive Match Plan for Employees Individual Retirement Account.”  The plan is, well, fairly simple to set up and operate as well.  You simply fill out the simple SIMPLE form by October 1 and find a custodian such as Vanguard, Schwab, Fidelity, or others to handle the money and you are in business.

There are generally no costs or nominal costs to setup and operate the plan, depending on the custodian and amounts invested, and there are no required annual plan filings with the government.  This has made them appealing for many small companies with employees compared to a 401(k).  For 2013, participants can defer up to $12,000 of their earned wages plus another $2,500 catch-up contribution if over age 50.

The employer also agrees to make a three percent maximum matching contribution.  For example, if the employee defers nothing into the plan from his or her salary, then the employer has no match requirement.  If the employee defers two percent, the employer has to contribute two percent.  If the employee defers three percent, then the employer has to match three percent.  If the employee defers more than three percent, the employer still only has to contribute three percent. (The employer also has the option to select a two percent nonelective contribution in lieu of the three percent match.  This means the employer contributes two percent whether or not the employees contribute anything.)

The employer match portion is in addition to the $12,000 salary deferral and possible $2,500 catch-up contribution.  The three percent match also has a salary cap of $255,000.  So the maximum employer match is $7,650.  I know what most of you are thinking right now…”Gee, that means I will only get a match on the first third of my salary. What a rotten deal!”  Ha!  If you have one of those jobs paying over $750,000 a year, your company is in the wrong plan!

The employer has to remit the employee’s salary deferral portion to the SIMPLE custodian as soon as reasonably can be done, but  in any case no later than thirty days after the end of the month in which the employee’s paycheck was dated.  If the deferral is sent to the custodian within seven days of the paycheck date, it is a safe harbor and will always be considered timely deposited.  The employer match portion, however, can be paid as late as the tax return due date for the employer, including extensions.

So how does it work with the business owner and his or her deferrals?  What about the match?  If the business is setup as an entity such as a corporation and the owner receives a paycheck like any other employee, then the same rules apply that apply to the other employees.

If the owner is self-employed however, such as a sole proprietorship, the net earning for the entire year are considered earned/paid on the last day of the year, and the owner must remit the salary deferral portion to the custodian by January 30th (30 days after month end) of the following year.  So 2013 salary deferrals for a self-employed individual are due in six days.  (This includes the $12,000 plus the $2,500 catch-up if applicable.)

The three percent match is not due until the tax return due date for the owner (generally April 15), including any extensions filed (generally October 15).  The employer match of three percent for the owner is calculated based on the amount of Schedule SE, section A, line 4, or Section B, line 6, before subtracting any contributions to the plan for the owner.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Do you Run a Business…or a Hobby?

Originally published in the Cedar Street Times

January 10, 2014

I remember a number of years ago preparing a tax return for a woman who was employed part-time, but who also had a side business as an artist – a painter as I recall.  When I was preparing her Schedule C for the art business there were lots of expenses – art supplies and tools, framing expenses, office expenses, vehicle expenses, postage, dues and subscriptions, a home office deduction, meal and entertainment expenses, and lots of travel expenses.  In all it came to over $35,000.  When I got to the revenue side, however, only $400 was listed.  I thought it was a mistake – maybe missing a few zeroes on the end, so I gave her a call.  She said she just had a bad year and sold hardly anything.  “Okay,” I thought, “that is a pretty bad year. I wonder what a good year looks like for her?”

As the story unraveled, there was a history of growing expenses from $10,000 to $35,000 a year and a history of revenues in bad years of $0 to a few thousand dollars in the “good years.”   I could clearly see now what was going on – she must have had about the same natural talent for painting as me and her paintings were so ugly that they wouldn’t be hung in a dumpster, much less purchased.  Actually, that is not what I thought.  I believe she had a hobby as an artist, she loved to travel, and she developed an addiction for tax deductions when she married her art and travel on a Schedule C tax form!

The IRS is very much aware of this phenomenon, and section 183 of the Internal Revenue Code and its related regulations deal specifically with this area.  The rules are known affectionately as “hobby loss rules.”  The basic rule is that if you are not truly engaged in an activity for profit, then your deductions will be limited to your revenue.  This takes all the fun out filing a Schedule C in situations like this, since losses generated are disallowed and cannot offset other income on your tax returns.  If you get audited on the issue and lose, the IRS can go back and disallow the losses from past years, and then assess the tax you should have owed along with stiff penalties and interest that accrue dating back to the dates you should have paid the tax originally.  This can get very ugly.

So how can you safely assume you are engaged in an activity for profit?  Section 183 plainly tells us that if you are profitable in three out of every five consecutive years (two of seven for horse breeding), you are generally presumed to be engaged in an activity for profit.  Of course, if you have a pattern of reporting $200 of income for three years and then $100,000 of losses for the next two, they will not be that graceful towards you.

The meat of their determinations lie in a list of nine characteristics (albeit non-exhaustive) which they apply to your facts and circumstances.  The nine factors are: 1) are you carrying on the business in a business-like manner – records, formalities, changing tactics that don’t work, 2) do you have or did you hire necessary expertise – not only in your subject matter, but in running a successful business, 3) what percentage of your time is devoted to the business (more important with activities that do not have substantial personal or recreational aspects), 4) reasonable expectation that the assets may appreciate in value and offset the expenses, 5) the history of success in similar or dissimilar activities, 6) the history of the activity’s income and losses, 7) if you have occasional profits, how substantial are they, 8) do you have other sources of income, and is this activity providing tax benefits, and 9) how much personal or recreational pleasure is involved in the activity.

People in the arts have a higher level of scrutiny due to the common personal and recreational pleasure often involved.  In a 1977 court case (Churchman v. Commissioner) the court said, “[A] history of losses is less persuasive in the art field than it might be in other fields.”  They also concluded that music falls in their definition of arts.

As you are preparing for your tax returns this year, and if you know you have a business with a pattern of losses, you may want to examine yourself in light of these nine factors.  Keep in mind, however, that even if you lose money for a long time, as long as you can demonstrate over these characteristics, you can still be okay.  Oh, and regarding the client I worked with years ago – once I did a calculation and showed her the potential penalties and back taxes she could owe, she completely dropped the Schedule C altogether.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Gifts Given and Received – Taxable?

Originally published in the Cedar Street Times

December 27, 2013

I remember when I was growing up, every year for Christmas, my grandfather would send a check to my brother and I for $75 each.  That seemed like an incredible amount of money to me at the time, and it really boosted my treasury each year!  One of those years, I can remember going to the bank with my mom to cash the check, and wanting to see what $75 felt like in my own two hands; I asked the teller to give it to me…all in ones.  She smiled, pulled some crisp ones from under her drawer, and counted them out for me.  I had never felt a wad of bills like that in my hands!  I tried folding them over, but I could not get them all in my pocket it was so thick, so I put them in lengthwise, and they just about stuck out the top of my pants pocket – I was a rich man!

After a week or so, we came back and deposited about half of them back into my bank account.  My dad had always encouraged us to save half of whatever we received or earned when we were growing up.  I admit, that ratio did not quite remain when I got into high school, and discovered a new and expensive hobby called, girls, but saving was ingrained in me.  When I left for college I had a measurable chunk of change in my bank account.

Throughout those years, it never occurred to me to wonder about the tax implications of the gifts I received.  Now, however, I think a lot about those things!

I do not know anyone that would hesitate to put a gift of $75 into his or her bank account.  But if you throw two or three zeroes on the end, then I definitely get questions from people wondering if it they will have to pay tax.  As the recipient of a gift, whether it is $75 or $75 million dollars, you do not have to pay taxes or report the receipt of the gift (with one exception that I can think of to be explained later).  If you receive something other than cash, such as stocks, real estate, or tangible property, you could have tax if you sell it.  The catch is that when you receive noncash gifts, you also receive the giftor’s cost basis, and when you sell you have taxable gain on the difference between the sales price and the cost basis.  For example, if someone gives you a share of stock worth $100, and that person bought it for only $10, you have to pay tax on the $90 gain if you sell it.

If you put yourself in the shoes of the person giving the gift, there are different rules you need to follow.  As long as you give less than $14,000 (2013 and 2014) a year in combined cash or noncash items to any one person, you have nothing to worry about, except providing the person evidence of your cost basis if the items are noncash items.  (You are doing a disservice if you do not provide proof of cost basis, since the person you give the noncash items to could potentially be held liable for tax on the entire amount of the gift if they sell it, and cannot prove your cost basis – this is often overlooked.)  You could give $14,000 to every person on earth each year and not have to file a gift tax return.

If you give $14,001 to just one person, then you have to file a Form 709 United States Gift Tax Return.  The portion in excess of $14,000 per person is then subtracted from your combined gift and estate tax exemption (currently $5.25 million and indexed for inflation).  For most people this is just an informational filing as they will never reach the limits, but it is required (and limits have gone up and down in the past).  If you exceed the limits, however, the person giving the gift has a tax liability at a rate as a high as 40 percent.  The only possible time I can think of that the IRS could pursue the recipient of a gift for taxes would be if the giftor gave away so much money that he or she had a tax liability and could not pay it.  The IRS in that case, could pursue the person receiving a gift for tax.

Keep in mind that a gift is different from inheriting when someone passes away.  You generally do not have tax on inherited amounts either, with the exception of tax liability on any earnings the assets you are entitled to accumulate between the date of the peron’s passing, and the date you receive the property.  Your cost basis with inherited assets is also generally more favorable as the cost basis you receive is typically the fair market value at the date the person passed away, and not their old, often lower, cost basis.

Crafty minds will sometimes think of schemes to call income a gift since gifts are not taxable.  Be careful of this – substance over form will rule the day.  Yes, it would be nice if I would do your tax preparation for free, and you also happen to be kind enough to give me money, but it ain’t gonna fly!

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Health Insurance Tax Credit for 2014

Originally published in the Cedar Street Times

December 13, 2013

You have probably heard that there is a possible tax credit for the new health insurance requirement that takes effect January 1, 2014.  If you have health insurance available through your employer that does not exceed 9.5% of your household income (for your single coverage alone, exclusive of your family), or you have certain government plans like Medicare or Medicaid, you are not eligible for the credit.  For others that can go through Covered California, our state health insurance exchange, your income will determine your eligibility.  It is important to know the income thresholds for your family size because the poorly designed structure of the credit could mean the complete loss of the credit if you are even $1 over the threshold.

For instance, a family of four which includes a mother and father age 45 and two children in high school with total household income of $94,199 (using 2013 figures) in Pacific Grove, California, would qualify for a $629 per month tax credit, or $7,548 for the year.  If they made $1 more of income, $94,200, they would receive absolutely nothing.  This being the case, they would be better off taking an extra three or four weeks of unpaid time off from work, just to be able to qualify for the credit!

The credit is available to households making as much as four times the federal poverty line.  If you make under the poverty line you are not eligible for the credit, but eligible for Medicaid (MediCal in California) instead.  If you make between 100% and 400% of the federal poverty line, the credit is determined on a nice sliding scale based on your income, age, zip code, and family size.  The problem is that there is a cliff once you get over 400% that makes you completely ineligible for the credit.  The 2014 poverty line figures are not yet released, but can be found at when available.

Using 2013 information, the critical thresholds at 400% are as follows based on the number of members in the family: one family member – $45,960, two family members – $62,040, three family members – $78,120, four family members – $94,200, five family members – $110,280, and adding $16,080 for each additional family member.  California residents can visit and enter in their family size, age of adults, zip code, and expected household income to determine the tax credit and premium options for the state healthcare exchange very easily.

The family size includes you, your spouse, and your dependents (whether or not actually related).  Household income includes the income for you and your spouse (if married, you must file a joint return to get the credit), as well as any income of dependents IF those dependents had a filing requirement ($6,200 of earned income or $1,000 of unearned income in 2014).  Although there is not a lot of clear guidance by the IRS at this point, it appears if they are under the filing requirement, none of their income is counted (this is another cliff!).  This means you would need to make sure your dependents do not make over these amounts if it would push you over the threshold.  More specifically the income included for you and your dependents is your adjusted gross income modified to include any tax-exempt income, nontaxed Social Security benefits, and any foreign earned income excluded.

Based on your 2012 income, you may be eligible to receive advance payments on your credit.  However, this will be reconciled on your 2014 tax return, and you will either have additional funds paid to you, or worse, have to pay back (subject to a cap) some or even all of the credit if it turns out you were ineligible based on your actual income in 2014.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

New Tax Impacts for Trusts with Capital Gains – Part III

Originally published in the Cedar Street Times

November 29, 2013

During the past two columns I laid the groundwork of some of the basics on revocable and irrevocable trusts, I discussed the new tax rates that affect many trusts, and I discussed the distinction between income and principal transaction and their relations to capital gains.

In a short summary of the past two articles, revocable trusts such as the common revocable living trust most people use for estate planning is disregarded for tax purposes as separate from the owner – in other words all of the income generated by its assets gets reported on your personal 1040 tax return.  Irrevocable trusts, such as a bypass trust commonly used in estate planning, or a gifting trust, are treated as separate tax paying entities, get their own taxpayer identification number, and file their own tax returns.  There are commonly two types of beneficiaries of irrevocable trusts: 1) current beneficiaries – who often receive the trust accounting income (and principal to an extent if needed) during their lifetime, and 2) remainder beneficiaries – who receive the principal upon the death of the current beneficiary.

The trust document has the power to define what type of revenues get classified to trust accounting income or principal, thus determining which beneficiary ultimately receives the money.  If the trust document does not define how a particular revenue is to be treated, as is often the case with capital gains, then the state’s principal and income act governs.  In California this means capital gains are considered a principal transaction and would not go to the current beneficiary. Federal tax rates on the highest income bracket earners have effectively risen by up to 8.8% on capital gains and 4.6% to 8.4% on other types of income. For irrevocable trusts, the highest bracket sets in at only $11,950 of income, so taxation to the trust is not generally desirable!

Picking up from that point in the last article, we can now discuss how that affects taxation.  If trust accounting income is supposed to go to the current beneficiary, then for tax purposes that income will be “pushed out” of the trust and reported on the tax returns of the current beneficiary instead of the trust.  To the extent that revenues are considered principal transactions, and are therefore slated for the remainder beneficiaries down the road, the trust pays the taxes instead.  Capital gains used to be taxed at the same rate whether the income was pushed out to the current beneficiary, or taxed in the trust.  Now, with the potential 8.8% additional tax on capital gains taxed to the trust, it matters a lot!

If there is a genuine concern that the remainder beneficiary should ultimately receive the money from gains due to appreciation, then the 8.8% additional tax would be worth it.  For many grantors that set up trusts, however, a big concern is minimizing the tax impact, and they would rather structure the trust to distribute the gains to the current beneficiary to save taxes.  This would be especially true when there is a close relation between the current beneficiary and the remainder beneficiary, such as a parent and a child, and even more so if there is a presumption that the parent will eventually give the money to the child anyway either during life or upon death.

If you are in the process of setting up a trust, I think this subject is an essential conversation that should be had between you, your attorney, and your tax professional.  The attorney can draft language to allow the trustee the power to allocate the gains on sales to trust accounting income.  It is worth mentioning that the underlying Treasury Regulation 1.643(a)-3 examples and Private Letter Ruling 200617004 place heavy emphasis on consistency by the trustee.  In other words, you cannot flip back and forth each year between allocating capital gains to income or principal; you pick a method and stick with it. I think there will be resistance from some attorneys out of habit, or rote concern for the remainder beneficiaries in considering something like this.  It is true, it may not always be the right choice, but I think given the changed landscape, it could be right for many people.

If you already have a trust, but have no explicit language in the trust document allowing for capital gains allocation to income, Treasury Regulation 1.643(a)-3 provides some leeway to do so anyway if done consistently.  But it is questionable whether you can begin treating capital gains as income if you have not been doing so in the past.  Perhaps a one-time change with a signed statement by the trustee of the intent from that point going forward would add credence.  Another approach would be to amend the trust document providing the power to allocate capital gains to income from that point forward.  If the grantor is still alive and consents to the change along with all of the beneficiaries, amending the “irrevocable trust” should not generally be a problem.  If the grantor is not living, but all the beneficiaries agree, you may be able to successfully petition the court.

Of course you do all this, and the tax rates could just change again.

Please keep in mind there are many other rules and exceptions surrounding the ideas discussed in this article which I have not space to mention.  Consulting with qualified professionals regarding your specific situation is always your best course of action.

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.


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