Any deductible expense is useful because it reduces the amount of income subject to tax. But for individual taxpayers, deductions that can be claimed in arriving at adjusted gross income (AGI) — referred to as “above-the-line” deductions — are especially significant. By lowering AGI, above-the-line deductions increase your chances of qualifying for various other deductions and credits.

Alimony. Generally, payments are deductible if they were made in cash pursuant to a divorce or separation instrument. Other requirements may apply.

Traditional IRA contributions. Contributions of up to $5,500 ($6,500 for individuals age 50 or older) to a traditional individual retirement account (IRA) are potentially deductible on your 2015 return. AGI-based limitations apply if you (or your spouse) are an active participant in an employer-sponsored retirement plan.

Rental property/trade or business expenses. Expenses associated with property held for the production of rents are deductible above the line on Schedule E, whereas sole proprietors deduct their trade or business expenses above the line on Schedule C.

Student loan interest. Taxpayers may deduct up to $2,500 of interest expense on qualified higher education loans, though phaseouts apply to those at higher levels of modified AGI.

Moving expenses. Subject to certain requirements, a taxpayer who moves as a result of a change in his or her principal place of work may deduct certain costs of moving and traveling to the new residence.

Health savings account contributions. The 2015 deduction limits are $3,350 for those with self-only coverage under an eligible high-deductible health plan and $6,650 for those with family coverage. An additional $1,000 deduction is available to those 55 and older who are not enrolled in Medicare.

Self-employed taxpayers. The self-employed also may be able to deduct retirement plan contributions, qualified health insurance premiums, and a portion of their self-employment taxes.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

Request your free consultation today by calling Sorenson & Company, CPA at 801-553-1120. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.

All those reports about the high cost of college can seem somewhat abstract until your child is ready to enroll. Then, paying for college becomes personal. If you currently have a college student (or prospective student) in your family, you’ll want to make use of all available tax breaks to help ease the financial burden.

Scholarships

Generally, scholarships are tax free as long as your child is a degree candidate at an accredited institution (certain other requirements apply) and the money is used for tuition, fees, books, supplies, and equipment required for coursework.

In contrast, scholarships your child receives as payment for teaching, research, or other services are taxable. So are scholarships used to cover room and board, travel, or optional equipment-related expenses.

What happens if an award covers both tuition and room and board? In that case, the amount used for tuition will be tax free, while the amount used for room and board will be taxable income.

529 Plan Withdrawals

If savings in a Section 529 qualified tuition program are used to pay college expenses, the withdrawals may be fully or partially tax free. Taxability hinges on the account beneficiary’s “adjusted qualified education expenses” for the year. To arrive at this figure:

• Add together the costs of tuition and related fees, equipment required for enrollment or attendance, room and board (if student carries at least half of a full-time course load), and books and supplies.

• Subtract costs covered by tax-free educational assistance (e.g., scholarships, fellowships, and Pell grants) and costs used to claim the American Opportunity or Lifetime Learning tax credit.

Annual withdrawals are tax free provided they are no more than the student’s adjusted qualified education expenses. Otherwise, the portion of the withdrawn amount attributable to account earnings will be fully or partially taxable.

Education Credits

Two tax credits are available for the payment of qualifying higher education expenses, including tuition and certain related expenses such as books and other required course materials. The most generous of the two, the American Opportunity Tax Credit, is available for any of a student’s first four years of college. The credit can be as much as $2,500 per student. The second credit, called the Lifetime Learning Credit, is available for each year of post-secondary education, including graduate school and eligible job training. The maximum credit is $2,000 per taxpayer return. It’s not possible to claim both credits for the same student’s expenses for the year.

The education credits are reduced or unavailable if adjusted gross income (AGI) exceeds specified limits. Ask us for the 2017 amounts.

Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.

Request your free consultation today by calling Sorenson & Company, CPA at 801-553-1120. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.

Are you concerned about being stuck with large capital gain in 2018? What if there was a way to avoid it this year? How about for the next 10 years?

If you’re facing beefy tax payments because of capital gains, a new tax break may be worth exploring. The program is part of the Tax Cuts and Jobs Act. It’s called the Opportunity Zone Tax Incentive, and along with saving you money, it’s true purpose is to promote investors to push money into low-income areas to increase their value.

Where Are These Opportunity Zones Located?

An Opportunity Zone is a community nominated by the state and certified by the Treasury Department as qualifying for this special program. Approximately 8,700 Opportunity Zones qualify nationwide. All 50 states have certified zones that qualify, as do Washington DC and US territories.

How Does The Program Work?

Taxpayers who wish to take advantage of this program because they are facing large capital gain after the sale or exchange of appreciated property have a limited amount of time in which to take action. They have 180 days from the date of the sale or exchange to invest into a Qualified Opportunity Zone Fund. The fund is a vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property.

What happens to the return of principal? Taxpayers may reinvest it along with recognized capital gain. Only the portion attributable to the capital gain will be eligible for the tax exemption on further appreciation of the Opportunity Zone Investment.

Is the Opportunity Zone Fund Similar to Other Investments?

Just as in other investments, the value of an Opportunity Zone Fund investment may increase or decrease over the holding period. The investor may pay income on this investment. Keeping in mind that the purpose of the program is to improve designated low-income areas, the fund is expected to continue investing in the improvement of the property.

What About Cash Flow?

Once the property improvements are complete, the property may be leased or sold to third parties. At this time, cash flow may occur.

Are There Any Risks?

Investing in The Opportunity Zone Tax Incentive may or may not have risks associated. It’s new, and the IRS and Treasury Department are still gathering information on how the fund will work over time. Because of this, the level of risk is difficult to assess. However certain potential risks have been identified.

Among other things, risks may include market loss, liquidity risk, and business risk. Before you make any plans, note that investment in the new tax incentive may or may not be appropriate in your case. It’s best to consult with a tax professional to determine it it’s a fit for you.

Request your free consultation today by calling Sorenson & Company, CPA at 801-553-1120. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.

The new Section 199A provides self-employed taxpayers the ability to deduct up to 20% of their Qualified Business Income (QBI) on their tax returns. In general, QBI is net income that is received from a Qualified Trade or Business. However, there are some exclusions, the most common of which are capital gains, dividend and interest income. Additionally, any guaranteed payments or “reasonable compensation” paid to owners is excluded.

How Does the New Tax Law Define QBI?

Section 199A(c) defines QBI as, “the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.” The section further states that qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income are specifically excluded from the definition of QBI.

What are “Qualified Items of Income, Gain, Deduction, and Loss?”

Qualified items of income, gain, deduction, and loss are defined as items that are connected with a trade or business that is operated in the United States and are generally included or allowed when a business determines its taxable income for the year. However, there are items that are specifically excluded:

• Short-term capital gains and losses
• Long-term capital gains and losses
• Dividends
• Interest income
• Foreign personal holding income
• Income from an annuity if not received in connection with the business

These items may not be income or deductions for purposes of calculating QBI. A basic method of viewing QBI is “ordinary” income less “ordinary” expenses. In other words, investment gains and expenses are not QBI for Section 199A purposes.

Reasonable Compensation and Guaranteed Payments

In addition to the items discussed above, any reasonable compensation paid to the taxpayer by the business, including guaranteed payments, is not QBI. For example, if you receive $50,000 in wages from an LLC that you own and your share of income at the end of the year is $100,000 – only the $100,000 would be considered QBI.

Contact Sorenson and Company, CPA, today at 801-553-1120 to schedule your free consultation and learn about our unique tax reduction services. As a thank you for scheduling your consultation, we’ll provide you with a free book, The Great Tax Escape.

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016,¹ the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or nonqualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2018).

These are just some of the potential tax issues that may arise. Consult your tax advisor regarding your specific situation.

Contact Sorenson & Company, CPA, today at 801-553-1120 to schedule your free consultation and learn about our unique tax reduction services. As a thank you for scheduling your consultation, we’ll provide you with a free book, The Great Tax Escape.

Source/Disclaimer:

¹Information Letter 2016-0036