Learn about the COVID-19 precautions we’re taking and some of the latest news and tips for enduring the pandemic and saving you money on your taxes.
Right now, times are uncertain with the spread of COVID-19.
Unpredictable emotions are running high, with massive changes forced on your everyday routines due to the Coronavirus.
But the human race is resilient and we are in this together as a global community.
In times like this, when things seem rather bleak, there is always a silver lining to be found.
We look forward to doing our part at Donnelly Tax Law to help you see those good things this tax season.
We know this year will be like no other and the last thing we want to add to your worry is interruptions to completing your taxes.
So, while we all learn to deal with this new COVID-19 pandemic together, we want to let you know you can continue to count on your tax family here at Donnelly Tax Law to get you through this trying time.
Practices That Make Us Strong During COVID-19
We are putting your safety above all else in the upcoming weeks.
As the COVID-19 pandemic forces changes in our everyday routines, our priority at Donnelly Tax Law is to ensure the safety of our staff and to solve the tax concerns of our customers.
Donnelly Tax Law was built intentionally for a robust operation that is resilient to virus threats, both medical and electronic.
Our work will not be slowed down by the pandemic. Even in normal times, we automatically file extensions for our clients so that the April 15th deadline is extended until October 15th. Read further for more information about the filing and payment deadlines being extended by the IRS.
Donnelly Tax Law is a team of remote workers and therefore we are not exposed to the health risks of a typical shared physical office. We will continue to work on your behalf, even with regional lockdowns.
Precautions We Are Taking During COVID-19
We are implementing quarantine procedures for deliveries we receive. This safety measure will add a couple of days to the paper return filing procedure, but it will keep us working happily and healthily on your returns.
All of our systems and data are cloud-based on highly-secure systems.
All data is encrypted.
All of our systems require two-factor authentication for extra security.
We are in communication with our vendors to make sure all critical systems remain available. We do not expect any unplanned outages.
COVID-19 Resources and How to Save A Lot Of Money With Your Tax Returns
We are still working hard for you! Donnelly Tax Law has a staff of eight people. We have always worked remotely, so the pandemic has not disturbed our business processes.
We also have a staff backup strategy, so that if any team member, including myself, needs to take sick leave, we have a backup so the work can continue.
Save 20% By Paying Your Invoice With Bitcoin
From now until April 15th, we are offering a 20% discount to current and future clients for any portion of your invoice that you pay or prepay with Bitcoin.
Our team is standing by to get you more details on how to take advantage of that special pricing.
Due To COVID-19, IRS Delay Filing And Paying By Three Months
To help cope with the COVID-19 Coronavirus, the IRS has delayed payments and filing by three months. July 15th is now the new due date for filing individual tax returns and making the final payment on 2019 taxes. There is no penalty for extra interest because of the three-month delay. We already automatically extend the filing deadline to October 15th for all of our customers.
The good news is that now there is extra time to pay!
If you are a client and your tax payment is scheduled already for auto-debit and you want to delay it, you will need to cancel the debit following the instructions in this link.
If you are part of our tax community, you can take advantage of the extra free time to finish gathering all your tax documents and crypto records.
Once completed, upload them to your secure ShareFile folders and let our client manager know so we can proceed with preparing your taxes.
You can also use this time to learn more about US expat taxes and cryptocurrency taxes with the various ebooks I’ve written about each topic. Visit our online ebook store and discover additional crypto tax tools at our site CryptoTaxAudit.com.
Learn about other important COVID-19 news from our blog. If you haven’t already, you can subscribe to our newsletter so you get notified of our latest posts.
One last note, we are excited to report that I’ve been staying at the top of crypto news this tax season. I’ve taken part in multiple interviews with several national and international crypto podcasters, such as crypto pioneer Charlie Shrem, Brad Kimes, Ivan on Tech and more.
The Families First Coronavirus Response Act (H.R. 6201) has been signed into law to provide Coronavirus relief to many. Read more to learn the latest.
The Families First Coronavirus Response Act (H.R. 6201) is now law, and attorneys, accountants, and other professionals are poring over it. What are its main provisions, and how might this coronavirus relief affect you?
The law provides 12 weeks of qualifying family and medical leave at two-thirds of their salary when employees can’t work because their minor child’s school or child care service is closed due to a public health emergency.
Those on the payroll for at least 30 calendar days are eligible. Benefits are capped at $200 a day (or $10,000 total) and expire at the end of the year.
Paid Sick Leave From Coronavirus Relief
Employers have to provide 80 hours of paid-sick-leave benefits in various scenarios, including a situation in which an employee has been ordered by the government to quarantine or isolate or has been advised by a health care provider to self-quarantine. The payment is capped at $511 a day and expires at year-end.
Covered employers that are required to offer emergency FMLA or paid sick leave are eligible for refundable tax credits. Employers with fewer than 50 workers can apply for an exemption from providing paid family and medical leave and paid sick leave if it “would jeopardize the viability of the business.” According to the SHRM, “Gig-workers and other self-employed workers will be eligible for a tax credit to cover the benefits.”
A notable exemption is companies with more than 500 employees. The thinking on Capitol Hill was that such companies are capable of providing benefits without direct government help.
They are also covered. According to the New York Times, such employees will receive the amount they typically earn in a two-week period. The self-employed — from freelance writers to Uber drivers — “should calculate their average daily self-employment income for the year, then claim the amount they take as a tax credit (they can reduce their estimated quarterly tax payments in the meantime).“
There are a lot of rumors floating around about everyone getting a relief check. The government is still working on who gets a check and how much — and how to get the money to everyone who is eligible. As these proposals take a more solid form, we’ll have more details.
For now, keep in mind that the legal situation can change as quickly as the health situation, and ruling and reinterpretations of laws can change suddenly, modifying the advice in this article. We’ll be keeping an eye on authoritative sources in the coming days.
There is a lot of confusion for American expats when it comes to reporting US taxes while living abroad.
Most Americans living abroad aren’t aware that they must file US tax returns on their worldwide income and that they must report their foreign financial accounts and assets.
And it’s not their fault because even most domestic tax preparers are unaware of the requirements for US expat tax.
So, where should Americans living abroad turn when filing their tax returns? We at Donnelly Tax Law are here to help.
I wrote the book Expat Tax Overview to help Americans living abroad understand how they are taxed, to understand US expat tax preparation risks, and to explain how to benefit from credits and exclusions. It comes from the years of experience I have filing complex tax returns for Americans living abroad.
The following extractions came from the book “Expat Tax Overview”, by Clinton Donnelly of Donnelly Tax Law. It’s the handy overview that every American living abroad should have to understand how they are taxed.
Do I have to file my US tax return while living abroad?
Yes, The US is unique in this way from other countries.
All US citizens and permanent residents are subject to taxation on their worldwide income regardless of where they live in the world, and even though they may be filing another tax return in a foreign country.
It’s possible to have a foreign country tax your worldwide income if you are a resident or present for six months or more.
However, tax havens do exist with special incentives.
But each foreign country or US territory does it differently.
Puerto Rico is technically a territory of the US, but it has unique tax incentives that have been luring back American expats and crypto traders.
Learn why crypto traders should move to Puerto Rico to cash in on special tax incentives and how to take action now to take advantage of these tax benefits.
You are an American crypto trader who is currently sitting on a ton of cryptocurrency. You've been at this long enough to see your potential to cash in on millions is right around the corner if you play your cards right by 2021.
You have big and very realistic dreams of being a millionaire sitting at your fingertips as many crypto analysts anticipate the next potentially epic bull run is on its way.
At the same time, you have been terrified by all of the hype regarding the IRS crackdown on cryptocurrency.
You are being advised not to take this crackdown lightly, and you have enough wits to know you must take these warnings very seriously by educating and preparing yourself for what's to come.
But, knowing that you may not have reported your past earnings correctly is sending you into a full-blown panic most days.
You are worried about the IRS coming after your crypto earnings. And, you're looking to save money on your 2020 tax bill.
However, your biggest concern is making it big when the time comes to cash in your crypto.
If you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.
We are going to explain why crypto traders should move to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits.
Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico's tax opportunity and how to prepare for it as of today.
Tell me more about why crypto traders should move to Puerto Rico.
The chances are high that you've heard about the fantastic opportunity for U.S. citizens relocating to Puerto Rico to reduce their corporate tax to 4% and to reduce their personal income tax on capital gains to 0%.
You have a general understanding that Puerto Rico could be your golden ticket to savings on your 2020 tax bill.
And you are beginning to see that the tax-free benefits of that big crypto cashout everyone is anticipating could lead to early retirement if you are living in Puerto Rico when the next bull run hits.
Still, you are not exactly sure how you qualify for this tax saving act.
You are also unclear about the severe lifestyle changes that will need to be considered.
And most importantly, you have no idea how to prepare.
Read on to find out how you can qualify, the lifestyle changes that you will need to consider, and how to start preparing now to make it a reality.
I want to understand how I qualify to save money on my crypto taxes in 2020 and beyond.
How do I save money on my 2020 crypto tax bill?
If you're looking to save money on your 2020 tax bill, you might want to consider relocating to Puerto Rico no later than July 2, 2020, to qualify for the year.
Because while you may not be unable to change how government regulators will decide to tax cryptocurrencies, you can change your tax future!
Moving to Puerto Rico will allow you to take advantage of Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019), formerly known as Act 22, to pay no federal income tax from here out.
And, we know that saving money on your taxes is about one of the most substantial risk-adjusted returns there is.
Can I move to Puerto Rico to avoid taxes?
You can avoid tax by moving to Puerto Rico through one of the tax programs, formerly named Act 22 (now referenced as Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019). This Act requires that you have NOT lived in Puerto Rico during the previous 15 years. And, therefore, allowing you to take advantage of a 4% income tax rate, 0% dividend rate, and 0% capital gains tax rate.
Please be aware that BOTH YOU and YOUR BUSINESS need to make a literal move to Puerto Rico. It has to become your "tax home." More on this later, when we talk about making closer connections to Puerto Rico than the United States.
Why should crypto traders move to Puerto Rico?
Act 22 was born as the Resident Individual Investor Act. It was enacted in Puerto Rico in 2012 to promote the relocation of high-net-worth individuals to Puerto Rico. The law's goal was to provide attractive incentives to encourage investors to relocate to Puerto Rico.
It has since been updated and bundled with other popular tax incentives and now called Act 60-2019, replacing the name Act 22 into law on July 1, 2019 with an effective date of January 1, 2020.
*Please also note that new applicants will be subject to the most recent requirements from January 1, 2020.
Puerto Rico has a very unique tax status.
It is a territory of the U.S. but it is viewed as a "foreign country" for U.S. federal income tax purposes.
Therefore an individual tax applies to its residents along with tax incentives geared to promote its economic development that may be very luring for U.S. Crypto Traders.
If both you (as a bona fide resident) and your business (as your tax home) move to Puerto Rico, then all your future capital gains on stocks, bonds, andother assets (as defined to include commodities, currencies, and any other digital asset or blockchain technology, a.k.a. crypto) become tax-free. In short, all your dividends, interest, and royalties you may receive from Puerto Rican sources become tax-free. (1)
What was Puerto Rico's Act 22, and what is it called now?
Puerto Rico's Act 22 was the Act to Promote the Relocation of Individual Investors to Puerto Rico. It has since been updated and bundled with other popular tax incentives and now called the Puerto Rico Incentives Code (Act 60-2019) referenced in Chapter two. Replacing the name Act 22 with Act 60-2019 as the law on July 1, 2019, with an Effective Date of January 1, 2020.
*You will be obliged to follow the most recent requirements applying as a new bona fide resident.
Its intention was to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all interest and dividends earned after the individual becomes both a bona fide resident of Puerto Rico. Along with filing their business in Puerto Rico, as their tax home.
What are the benefits of chapter two of Act 60-2019 (formerly known as Act 22)?
100% tax exemption on interest and dividends derived, AFTER becoming a resident of Puerto Rico and through December 31, 2035. (2)
100% tax exemption from Puerto Rico income taxes on all capital gains accrued, AFTER establishing residency. (2)
100% tax exemption concerning gains from the sale of property acquired AFTER the individual becomes a bona fide resident of Puerto Rico if the sale takes place before January 1, 2036. (2)
Investment income accrued before becoming a bona fide resident of Puerto Rico will be taxed at 10% if realized within ten years after residency is established. If the gain is achieved after the ten years, but on or before December 31, 2035, the tax is 5%. (2)
Capital gains appreciation on investments that occur after becoming a bona fide Puerto Rico resident can allocate to Puerto Rico.
Special rules apply to the gain from the sale of securities acquired before the establishment of residence in Puerto Rico.
Any appreciated property acquired in the US and later sold while a resident in PR will still have US tax implications. For US tax purposes, virtual currency is treated as property and US Regulation Section 1.937-2(f) provides that any gain may be subject to an allocation based on holding period (bifurcation rule).
Juan Robles, CPA Partner, Etrends Group
What is Act 60-2019?
"The Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60‐2019 (the "Incentives Code"). In general, the Incentives Code compiles into a single code many of the Puerto Rico tax incentives laws used to promote the island's economic development, with some modifications, in order to establish a new transparent and efficient process for granting and overseeing all the incentives afforded under the Puerto Rico's incentives laws. The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including Act 20, the Promotion of Export Services Act, and Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico." (3)
I want to understand the lifestyle changes that I need to consider by moving to Puerto Rico.
I'm not a crypto billionaire. Do Puerto Rico's tax incentives still make sense for me?
Yes! You may not be a crypto billionaire yet, but plenty of you are sitting on a lot of crypto that you want to sell when it's worth it. Many crypto traders are going to Puerto Rico with the anticipation of becoming a crypto billionaire.
Cryptocurrencies and other crypto assets are explicitly included as eligible for tax exemption.
And, there is no better risk-adjusted return than saving money on taxes. Gain an extra 30% return on investment without the risk by saving on your taxes. Compounded over your lifetime, that is a considerable amount of savings for changing nothing but the place you legitimately call home. (4)
Do you have to file taxes if you live in Puerto Rico?
Yes, residents of Puerto Rico pay federal payroll taxes, such as Social Security and Medicare taxes.
PR (Puerto Rico) source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion).
Any PR resident that has US source income must file federal taxes.
They must thoroughly understand residency compliance and how to form a closer connection to Puerto Rico than to the U.S. For more information, consult the Etrends Group in Puerto Rico. Here at Donnelly Tax Law, we partner them by providing the crypto calculations for them to file a crypto trader's taxes in Puerto Rico.
How can you prepare for this move?
You must become a bona fide resident of Puerto Rico.
You must prepare to unload your crypto (You have to turn it over.) Meaning, you will sell it and immediately repurchase it as a bona fide resident of Puerto Rico.
You must create closer connections. Meaning, you must create "closer connections" to Puerto Rico than the United States.
Does a trader have to rebuy his inventory of coins upon becoming a bona fide resident?
The short answer is YES if he wants to enjoy PR's 0% capital gains rate. Under Act 22, the 0% cap gain tax rate only applies to assets bought AFTER becoming a bona fide resident of PR. Assets acquired before to receive a 15% tax rate.
What does this mean to the potential crypto trader considering moving to Puerto Rico?
The 0% rate only applies to assets purchased after becoming a bona fide resident. That is the date that you receive the official designation from Puerto Rico of long term residence status and after the 183 days of residence have been completed.
If, after that date, the trader sells his inventory of coins and repurchases them promptly, he will incur the Puerto Rico 15% tax on any capital gains realized in this sale. It is possible that the trader might pay some hefty capital gains taxes this first year in Puerto Rico.
Hey, the US long term capital gains tax is 15% (for everyone except those in the highest tax bracket). You don't need to move to Puerto Rico to get that rate. Of course, there is a 3.8% Net Investment Income Tax (NIIT).
This repurchase is NOT a requirement of US tax law. Under US law 26 CFR 1.862-1. Personal property sold in Puerto Rico is considered Puerto Rico income as far as the US is concerned.
Why do crypto traders have to move to Puerto Rico by June 2, 2020, to take advantage of the particular Act 22 treatment?
If you expect to sell crypto and avoid taxes in 2021, you need to act in 2020 because you must establish yourself as a bona fide resident of Puerto Rico to qualify yourself for the 2020 tax year.
You will need the time (and a good amount of money) to apply to become a bona fide resident. Prepare to give yourself about six months.
Give yourself a week's time, in order to complete the basic information on your application and get your criminal record issued from the state.
Give yourself an additional five months for the government portion (but please be rest assured that your residency status is back-dated to the original filing date).
How long do you have to live in Puerto Rico to be a bona fide resident?
Generally, you must reside there for at least 183 days a year. There are many grey areas and nuances that you want to be clear on if you are going to take this step, so be sure to position yourself with a team of crypto and Puerto Rico tax experts from the start. You also have to do the paperwork, applying with the tax authority there.
The application for an Act 22 Decree must include the payment of a $750 filing fee, but do expect to invest thousands more into applying and relocating yourself here.
What is a bonafide resident of Puerto Rico?
A bona fide resident of Puerto Rico can exclude their Puerto Rico source income from U.S. federal tax. Generally, under IRS §937 and the regulations thereunder a bonafide resident of Puerto Rico is an individual who:
You must qualify as a bona fide resident of Puerto Rico FOR THE ENTIRE TAXABLE YEAR for purposes of the US IRC and (2) the income must constitute Puerto Rico source income under the US IRC.
Please note the wording to qualify for the exclusion for a taxable year. You must be a bona fide resident of Puerto Rico for the "Entire Taxable Year."
This text is why you must be living in Puerto Rico no later than July 2, 2020, if you want to cash in on the next epic Bull run predicted for 2021.
You will have to have been in Puerto Rico one full taxable year.
Again generally, you must be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year.
You must not have a tax home outside of Puerto Rico during the taxable year.
You must pay an annual charitable contribution for a non-profit entity of $10,000. It must be paid annually under the new Act 60-2019.
You must purchase property in Puerto Rico within two years of obtaining the decree under the new Act 60-2019.
This property must be your primary residence throughout the validity of the decree. You must hold exclusive and complete ownership of the residential property for the duration of the decree. Joint ownership with your spouse qualifies.
You cannot rent the property out to someone else.
The determination of whether or not an individual is a bona fide resident of Puerto Rico for a taxable year is made according to rules outlined in the regulations issued under Section 937(a) of the US IRC.
You must not have a closer connection to the United States or a foreign country than to Puerto Rico.
How do I create closer connections to Puerto Rico?
Where is your bank account?
Where is your driver's license?
Where are your relevant documents located?
Where is your high school diploma? Your college degree?
Where are your wife/husband and children living?
Where does your mail go?
Where are your investments?
Where do you own your house?
If you have answered the U.S., you have not created closer connections to Puerto Rico than the U.S. Make sure that you are moving your real life to Puerto Rico.
There are various factors, all of which must be met by the individual to qualify as a "bona fide resident of Puerto Rico."
They can be extremely intensive and a variety of factors will be considered. Therefore, individuals seeking to take advantage of these benefits should schedule a consultation with us and Puerto Rico Tax Experts Etrends for clarity and guidance through the process.
What does $97 a year do to protect you from the IRS in Puerto Rico and on the mainland?
Just because you are in Puerto Rico doesn't mean you are exempt from U.S. audits. As long as you are a U.S. citizen, you do not escape the eye of the IRS.
Regardless of where you live in the world, you need to file an income tax return with the U.S. as a citizen of the United States. So, going to Puerto Rico doesn't mean you don't have to file a U.S. income tax.
If you make less than 12,000, you don't have to file a tax return. But, if you are still making an income above 12,000 worldwide after subtracting Puerto Rican income, you will have to file a tax return in the U.S.
Therefore you want assurance that you have crypto representation should you get the dreaded letter from the IRS.
Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation year-round should you need representation with the IRS.
Protect yourself today with crypto tax audit defense for only $97 for the year!
Well done! By reading this post, you have already taken the first step toward understanding an excellent solution to protect your crypto earnings in light of the current IRS crackdown on virtual currency. Now you know plenty of reasons why crypto traders should move to Puerto Rico and how.
You have also come one step closer to having an action plan to realize your dreams of becoming a crypto millionaire when the next potential epic bull run hits.
You are ready to play your cards right. And, clearly see your potential to cash in on millions is right around the corner if you play your cards right by 2021.
Remember, if you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.
Our goal is to help get you in front of this problem/opportunity by using tools like CryptoTaxAudit to provide you with representation should you need it with the IRS.
Donnelly Tax Law is the leading US tax firm for preparing complex U.S. tax returns for Americans, including crypto traders and people with foreign assets.
We are currently partnering with the Puerto Rican tax and accounting firm Etrends Group for Act 22 clients.
As we age, the importance of financial planning becomes a greater priority. Learn about the many factors that affect retirement planning.
With age, the focus often turns from planning for the purchase of a bigger home to planning to have enough income to live well after retirement. Many factors contribute to this calculation, but following are four common considerations:
Do I need an income portfolio for retirement?
Spending down the money you’ve saved and planned for over your working life is a concept that makes many of us uncomfortable. It may mean going below whatever benchmark figure we struggled to achieve. It takes a mental leap to realize that what you really saved for is spending down. The primary consideration isn’t whether you need an income portfolio, but rather is whether you have a tax-efficient, diversified income fund that will give you the income you need to maintain the lifestyle you want to have.
Because your ultimate goal is having the income you need on an annual basis, the answer is that you need a mix so that you can maximize the inflation-adjusted after-tax return on your investments. As has been obvious recently, the stock market can be erratic. High-quality bond rates stay stable even when stocks fall. That’s why financial advisers recommend having both in your portfolio. The percentage of each fluctuates with factors, such as age and risk tolerance.
Maybe. It depends on your goals. But here’s something to consider: will you make more by paying down your mortgage and investing that money than you will by paying a mortgage? The calculation to consider is whether your mortgage rate is higher or lower than the value of the tax deduction for your mortgage.
Should I buy long-term care insurance?
This can be a tricky question, in part because the thought of not having a plan in place feels so unsettling. But here are some facts to think about: Most women who need long-term care need it for about 2.5 years; men need it for about 1.5 years — which means you will need at least $300,000 (in today’s dollars) to fund this expense.
High-net worth individuals can plan to self-fund; those with few assets will have to rely on Medicaid and other government programs. People in the middle can choose to use assets like the sale of their homes to fund their care, or they can purchase a long-term care or hybrid life/long-term care product — each of which offers advantages and disadvantages.
Any money you spend on long-term care will decrease the amount you can leave to your heirs.
These are but a few of the questions that need to be answered as you plan for your financial future. Many factors affect the answers that are right for you as you plan for a comfortable, stress-free retirement, but having a plan that addresses these four issues is a good start. For other considerations and guidance, contact us today.
Understand the aspects of the rental real estate safe harbor and which expenses meet the standard for qualified business income for rental properties.
When the Tax Cuts and Jobs Act of 2017 added the qualified business income (QBI) deduction (also called the Section 199A deduction), it didn’t clarify when a rental activity rises to the level of a qualified trade or business. On September 24, 2019, the Internal Revenue Service (IRS) finalized a limited safe harbor for taxpayers who are direct and indirect owners in rental real estate enterprises (Rev. Proc. 2019-38).
Subject to certain limitations, taxpayers who qualify for the safe harbor are eligible for the 20% QBI deduction. If your enterprise is profitable, taking this deduction may be a good tax strategy — at least through 2025 when it is set to expire if Congress does not extend it.
The enterprise can include multiple properties in the same general category, either commercial or residential. To be eligible under the safe harbor rules, the rental real estate enterprise must meet the following requirements:
Perform 250 or more hours of rental services each year. Enterprises that have been in existence for more than four years, must meet this requirement in three of the last five years. Owners, employees, agents or independent contractors can perform these hours.
Maintain separate books and records for each rental real estate enterprise. These records should document the hours and dates of all services performed, provide a description of all services performed and include a list of who performed the services. (Beginning in 2020, these records will have to be maintained contemporaneously.)
Submit a signed statement stating that all of the tests have been satisfied for each year this deduction is claimed.
For purposes of the safe harbor rule, rental services include the following: daily operations, maintenance, repairs, rent collection, payment of expenses, provision of services to tenants and efforts to rent the property (such as advertising). They do not, however, include financial or investment management services, arranging financing, procuring property, reviewing financial statements or operating reports or time spent traveling to and from the rental property.
The following types of rental properties are specifically excluded from claiming the QBI deduction:
Property used as residence for any part of the year, such as a vacation home.
Property subject to a triple net lease.
Property rented to a business with common ownership.
Property where a part is treated as a specified service business excluded from claiming the QBI deduction.
How Do Losses Affect The Reduction?
Remember that if your rental property generates losses, the QBI deduction may not be the best tax strategy for your enterprise to pursue. Those losses would reduce the 20% deduction. For some rental real estate enterprises with losses, claiming the QBI deduction can cost thousands. It may make more sense to simply deduct your losses against your ordinary income. As with any tax planning strategy, you need to evaluate the pros and cons in your specific situation.
Good tax planning is a year-round activity that requires knowing your options and keeping good records. Easily stay on top of it with these great tips.
Benjamin Franklin once said “to fail to plan is to plan to fail.” This adage certainly applies to tax planning.
Although the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated many deductions outright, there are exceptions. Certain deductions still exist but are being phased out, whereas others will expire after a set time. This means good tax planning remains an important aspect of good financial health.
Following are six steps you can take right now to prepare for your future taxes:
1. Adjust Withholdings
Determine whether you are someone who takes out more taxes every pay period so that you get a tax return, or whether you want the benefit of having the cash on hand right now. Adjust your withholding accordingly by filing a new Form W-4.
2. Organize Receipts
Start organizing your receipts now so you don’t accidently miss a deductible expense or a tax credit. Check the standard deduction for your situation, and consider whether you might need to itemize.
Having your receipts ready eases the tax preparation process. You should have the following categories of receipts and other documents handy:
Last year’s federal, state and local tax returns
Receipts/statements/cancelled checks for medical and drug costs, health savings account contributions, charitable contributions, contributions to retirement plans
Business travel and meal expenses (including a mileage log)
Receipts related to your home, including mortgage and line-of-credit expenses, repair and renovation expenses, real estate and school taxes (not all of these will be deductible, but they may help reduce your basis when you sell your home)
Any receipts related to a home purchase or sale
Receipts related to life events like marriages, divorces, births and deaths
Short-term investments (those held 12 months or less) don’t get special treatment, but long-term investments (those held longer than one year) are typically taxed less.
4. Review Your Charitable Contribution Strategy
If you make large contributions, it may make sense to alternate the years in which you make the contribution so you can exceed the threshold for the standard deduction.
5. Evaluate Tax Credits
Consider whether you’re eligible for any tax credits so you can take full advantage of them. Tax credits are important because they are dollar-for-dollar reductions in the amount of taxes you owe. These credits may be refundable or nonrefundable. Refundable tax credits can reduce your tax liability below zero, while a nonrefundable credit cannot.
6. Review Your Estate Plan
No one knows what is going to happen in the future. TCJA changed many deductions related to gifts and estates; take this time to review the changes and make sure your estate plan reflects your wishes and is current. Keep in mind that some of the provisions now in effect are due to sunset in 2025.
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