Volume 2 – 2017
In Volume 2 of our 2017 Newsletter, we highlight:
- Property Acquired by Gift or Through Inheritance
- Medicare Part B Cost
- New Retirement Plan Determination Program
- Would a State Auditor Uncover These Findings in Your City?
- Vacation Home
- Profit Motive for Business
Property Acquired by Gift or Through Inheritance
Receiving a gift or a bequest or other inheritance carries with it a unique set of tax rules that must be observed. Knowing what the rules are will help you prepare for any tax consequences that may ensue upon the ultimate sale or other disposition of the property.
Generally, the recipient of a gift or a bequest pays no gift or estate tax. Those taxes, if they are due, are payable by the donor (the person making the gift) or the estate in the case of a decedent. Generally, no gift tax is due for gifts to any one person that do not exceed $14,000 for 2017 ($28,000 if the gift is given jointly by a husband and wife). Gift tax payable over those amounts can also be avoided by the donor using the unified estate and gift tax lifetime exclusion currently at $5.49 million and is adjusted for inflation annually.
The basis of property received by gift or bequest is used by the recipient to determine whether there is gain or loss on a subsequent sale or other disposition of the property. These rules can be complex.
If property has been acquired by gift, the gain basis to the donee (the recipient) for income tax purposes is the same as it would be in the hands of the donor. However, the basis for loss is the lower of the carryover basis or the fair market value of the property at the time of the gift. In some cases, there is neither gain nor loss on the sale of property received by gift because the selling price is less than the basis for gain and more than the basis for loss.
In the case of a gift on which gift tax is paid, the basis of the property is increased by the amount of gift tax attributable to the net appreciation in value of the gift. The net appreciation for this purpose is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.
Property, real estate, and securities received from a decedent under a will or by operation of law generally enjoy a “stepped-up” basis set at the property’s fair market value at date of death (or several months thereafter at the election of the executor). Most recipients of property from an estate find the stepped-up basis advantageous since it lowers the potential amount of capital gain tax due upon the sale of the asset.
Depending upon the age of the donor, the advantage of stepped-up basis, therefore, can figure significantly into planning whether to give gifts during a lifetime or wait to pass property through your estate.
If you have any questions on this topic, or how the rules apply to your specific situation, please do not hesitate to call.
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“Progress is impossible without change, and those who
cannot change their minds cannot change anything.”
George Bernard Shaw
Medicare Part B Cost
Most individuals who are enrolled in Medicare Part B pay approximately $109 on average per month. You may have to pay more than that in a few situations. There are five situations in which you will be billed a higher monthly charge, starting at $134 per month.
- You first enroll in Part B in 2017
- You do not get Social Security benefits
- You have both Medicare and Medicaid and Medicaid pays your premium
- You pay your Part B premiums directly
- Your modified adjusted gross income from 2 years ago (2015 income for 2017 premiums) is above a certain level
The following chart shows the amount you will pay based upon your income level.
If your yearly income in 2015 (for what you pay in 2017) was:
|Individual Tax Return||Joint Tax Return||Married Filing Separate Tax Return||You Pay Each Month (in 2017)|
|$85,000 or less||$170,000 or less||$85,000 or less||$134.00|
|Above $85,000 up to $107,000||Above $170,000 up to $214,000||Not Applicable||$187.50|
|Above $107,000 up to $160,000||Above $214,000 up to $320,000||Not Applicable||$267.90|
|Above $160,000 up to $214,000||Above $320,000 up to $428,000||Above $85,000 up to $129,000||$348.30|
|Above $214,000||Above $428,000||Above $129,000||$428.60|
If you have Medicare Part D coverage, there may also be an increase in your monthly fee for that coverage. You may want to keep this in mind when your income spikes in a particular year.
New Retirement Plan Determination Program
Effective January 1, 2017 new rules have been issued concerning individually-designed tax-qualified retirement plans in relation to required amendments and request for a determination letter.
A required amendment list will now be issued after October 1st of each year. The required amendments must be adopted by December 31st of the second calendar year after the list is published. All individually-designed plans must adopt these amendments in order to retain their qualified plan status.
Determination letters will only be issued under certain circumstances:
- An initial plan qualification
- Upon plan termination
- IRS makes special exception
These changes will make it easier to determine what amendments are required to be made and relieve the need to be submitting the individually-designed plans for approval every five years.
Would a State Audit Uncover These Findings in Your City?
By: Victoria Dailey, CPA
Recent audits by the State Auditor have given a few cities failing grades due to issues that can be easily avoided. These issues include segregation of duties, use of restricted monies, and allocation of property taxes. It’s important that cities and those governing the cities understand these issues fully and determine how they can overcome them.
Proper segregation of duties helps ensure all transactions are accounted for properly and assets are adequately safeguarded. For example, the same person should not be handling cash if they are entering the transaction in the city’s accounting system. One State audit found the City Clerk and two Deputy City Clerks all were able to receipt in and deposit monies and post transactions to the accounting system, including adjustments to customer account balances. The City Clerk was primarily responsible for making purchases, preparing checks, and reconciling the bank accounts. No reviews of the detailed accounting and bank records were performed by other city personnel or Board members. If proper segregation of duties cannot be achieved, documented independent or supervisory reviews of accounting and bank records should be performed.
Cities receive money that is restricted for certain purposes. For example, motor vehicle sales tax, gasoline tax, and road and bridge tax, in general, are to be used to improve the city’s streets. Cities should have a process to track those funds. If the money is receipted in the General Fund, amounts should be spent out of the General Fund for the restricted purpose, restricted in fund balance if not spent that year, or transferred to another fund to be spent on the restricted purpose. Cities can get in trouble when these funds get mixed up with other General Fund monies. For example, one of the cities the State audited receipted some restricted street monies in the General Fund, rather than the Street Fund, did not track these monies within the General Fund, and did not spend any money during the current year from the General Fund for street purposes. The State audit recommended that these revenues should be posted to the Street Fund to ensure they are spent for appropriate purposes.
Approved property tax rates are used to allocate the property taxes received. One State audit found that a city did not accurately allocate property taxes among various city funds. The city received property taxes for General Revenue, Parks and Recreation, Library, and Public Health Funds. Annually the city sets the tax levies and the County Collector collects and remits the property taxes to the city. City personnel should allocate the property taxes to the various city funds using each fund’s tax levy as compared to total tax levies. The State audit found that this city’s personnel did not update the formula and allocated 2015 property taxes received based on the 2013 tax levies, which had changed, causing errors in the allocation of property taxes among the various funds. It is essential the city properly allocate property tax revenues among funds to ensure restricted revenues are spent for approved purposes.
It is very important that city personnel fully understand these findings and take the necessary steps to ensure that city funds are properly accounted for and spent on the purpose intended.
This time of year many charities are having dinner auctions. It is common to find individuals donating the use of their vacation home or condo. This right to use your property is not a deductible contribution. There is no direct cost in allowing someone to use your property. Had you rented the property, you would have shown this as income on your return. You may consider the lack of reporting any income during the use by the charity as generous, but it is not a deduction.
If your vacation home is reported as rental property, then your expenses are limited for any personal use over 14 days per year. Any donated usage is counted as part of the 14 personal days of use by the owner.
There are many complex rules related to rental property. Please give us a call if you have any questions directly concerning these issues or any other questions about your rental activities.
Profit Motive for Business
The IRS has rules that limit the deductibility of expenses and losses from a hobby or activity not engaged in for-profit. If the IRS determines that an activity is not profit-driven, deductions from the activity are limited to the amount of income the activity generates. Losses from such activities cannot be used to offset other income, such as salary or investments.
You must be prepared to show that an activity that generates deductions is a business from which you intend to profit. It is not necessary that the activity actually earns a profit, so long as a profit is one of the motives for participating in the activity.
The IRS assumes that an activity is carried on for-profit if it makes a profit during at least three of the last five tax years, including the current year, or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses. Otherwise, the IRS applies nonexclusive tests and factors to the surrounding facts to judge whether activities are more like a business with a profit motive, or are for personal satisfaction.
If you would like assistance in determining if your business is at risk of being challenged as a hobby, please give us a call.