Lately, it feels like everyone is talking about moving for tax reasons.

Lower income taxes. Friendlier states. A fresh start that supposedly comes with a smaller tax bill.

And on the surface, it sounds simple. You move. Your taxes go down. Done.

Except… that’s rarely how it works.

Before boxes are packed or homes are listed, there’s a conversation that needs to happen. Actually, two of them:

1. One with your family
2. One with your tax advisor

Because moving for taxes isn’t just a relocation decision. It’s a long-term financial strategy. And like any strategy, the details matter.

The Big Misnomer: “Once You Move, You’re Done”

One of the most common assumptions we hear goes something like this:

“As long as I move and spend enough time in the new state, I’m fine.”

People often believe there’s a simple rule. Six months and a day. Cut ties. Change addresses. Problem solved.

In reality, some states are far more aggressive than people realize. Having any meaningful presence in your former state — a home, a business, time spent there, even patterns of behavior — can complicate things quickly.

This isn’t about doing anything wrong. It’s about understanding that residency, domicile, and tax exposure don’t always line up neatly with where you sleep most nights.

That’s why this isn’t just a moving decision. It’s a planning decision.

Lower Income Taxes Don’t Always Mean Lower Taxes

Another surprise for many people? Lower income tax rates don’t always translate to a lower overall tax burden.

Here’s why.

When income taxes go down, something else often goes up.

Property taxes. Sales taxes. Local fees. Insurance costs. Even healthcare access and costs can shift dramatically depending on where you land.

For someone on a fixed income or nearing retirement, this matters more than headline tax rates.

If your taxable income is relatively modest, the progressive nature of income taxes may mean you weren’t paying as much as you thought to begin with. In those cases, a jump in property taxes or cost of living can outweigh any income tax savings.

In other words, you might “win” on paper and lose in real life.

This Is a Family Conversation, Not Just a Financial One

Moving for taxes isn’t just about numbers.

It affects:

• Where you spend your time
• Access to family and support systems
• Healthcare providers
• Lifestyle and long-term comfort

These are family conversations first, financial conversations second.

And the financial side needs to support the life you’re trying to live — not force tradeoffs you didn’t anticipate.

Why This Is an Advisory Conversation (Not a Checklist)

There’s no universal rulebook for moving safely and smartly for tax reasons.

What does matter is understanding:

• How states evaluate residency and presence
• How income, property, and other taxes interact
• How your specific income sources are taxed
• How timing and documentation affect your position

There are strategies to reduce risk. There are ways to structure a move thoughtfully. There are also situations where moving for taxes simply doesn’t make sense once everything is considered.

But none of that comes from assumptions or internet advice. It comes from planning.

The Bottom Line

Moving for tax reasons can absolutely make sense. For some people, it’s a smart and strategic move.

For others, it’s more complicated than expected. And in some cases, it’s not cheaper at all.

That’s why the most important step isn’t choosing a destination. It’s having the right conversation first.

If you’re thinking about moving and wondering how it could impact your taxes — or whether it actually helps — don’t go it alone.

This is one of those decisions where a conversation with your tax advisor can save you from surprises later and help you build a game plan that truly works for your life.

Because when it comes to taxes and relocation, clarity upfront beats regret down the road.

The post Thinking About Moving for Taxes? This Is a Conversation You Need to Have First first appeared on Wellman Tax & Business Advisors, Inc..

The personal health challenges of drug & alcohol addiction are complex. Navigating the tax implications of addiction is also a significant hurdle. As individuals strive towards recovery, understanding the intricate web of tax issues becomes crucial in managing the economic impact of addiction. This includes the potential for deducting treatment expenses, understanding the implications of unemployment and disability benefits, and leveraging employer- critical support systems. By shedding light on these tax nuances, those affected by addiction—along with their families and employers—can better navigate the path to recovery with informed financial strategies, helping to alleviate some of the burdens associated with this widespread social issue.

Medical Expenses: Alcoholism and drug addiction are treated as medical ailments for tax purposes. People with addictions often cannot quit on their own; addiction is an illness that requires treatment. Generally, treatment expenses are tax deductible as itemized deduction medical expenses subject to the 7.5% of AGI deduction floor. Possible deductible expenses include the costs of:

• Doctors
• Prescribed medications
• Laboratory testing
• Psychological services
• Treatment programs
• Inpatient treatment at a therapeutic center for alcoholism or drug abuse, including meals and lodging furnished as necessary incident to the treatment
• Counseling
• Behavioral therapies

To claim these expenses for someone other than the taxpayer, the person must have been the taxpayer’s dependent or spouse either at the time that the medical services were provided or at the time that the expenses were paid.

Medical Dependent: Tax law does include a special provision that allows medical expenses to be deducted for an individual who does not meet all the requirements to qualify as a dependent. A person generally qualifies as a “medical” dependent for purposes of the medical expense itemized deduction if:

1. That person lived with the taxpayer for the entire year as a member of the household (temporary absence to obtain medical treatment is an exception) OR is related to the person,
2. That person was a U.S. citizen or resident or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and
3. The taxpayer provided over half of that person’s total support for the calendar year.

The medical expenses of any person who meets these qualifications may be included even if he or she cannot be claimed as a dependent on the taxpayer’s return.

Thus, the dependent’s age and income are not limiting factors in determining whether an individual is a dependent for purposes of deducting their medical expenses.

For example, suppose an adult child has an addiction problem. Even though the child is an adult and generates an income, a parent may still be able to deduct medical expenses that he or she pays for the adult child if the three requirements above are met. The parent must pay the medical service providers directly and not just give the money to the dependent to pay the bills.

In the case of divorced parents, if either parent qualifies to claim a child as a dependent, then each parent can deduct the medical expenses each paid for the child. However, consider the limitations (discussed below) that might preclude any deduction for one of the parents, and plan payments accordingly.

Two situations will prevent a taxpayer from deducting otherwise eligible addiction-related medical expenses. The first is that medical expenses are only allowed as an itemized deduction to the extent that total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI). The second hurdle is that if the taxpayer’s standard deduction amount is greater than the total of all allowed itemized deductions, there’s no tax benefit to itemizing, and therefore, no medical expenses would be deductible. For 2025 and 2026, the standard deduction amounts are:

A taxpayer, and spouse if married, age 65 and older, or blind, is allowed an additional standard deduction amount:

For 2025: $2,000 for single and head of household status; $1,600 for married (either joint or separate) and qualifying surviving spouse.

For 2026: $2,050 for single and head of household status; $1,650 for married (either joint or separate) and qualifying surviving spouse.

As you can see, these and other tax rules related to medical deductions can become complicated. If you need assistance in planning medical expenditures for maximum tax benefits or determining whether you can deduct certain expenses, please call.

Employment Issues: Substance addiction affects individuals’ ability to maintain consistent employment, which in turn impacts their financial stability. Understanding the interplay of unemployment benefits, disability, and worker’s compensation is crucial for those navigating recovery and the fiscal challenges it brings.

• Unemployment Benefits – Unemployment benefits serve as a critical financial lifeline for individuals who have lost their jobs. However, eligibility and applicability for those struggling with drug or alcohol addiction can be complex. Generally, to qualify for unemployment benefits, an individual must have lost their job through no fault of their own. If an individual is terminated due to substance abuse, eligibility may be jeopardized unless they can demonstrate efforts toward rehabilitation.
  
  In some cases, if an addiction causes temporary loss of employment but the individual is actively seeking treatment, they may still qualify for unemployment benefits. This scenario underscores the importance of pursuing a documented treatment plan, which not only aids recovery but also demonstrates to unemployment agencies the commitment to rejoining the workforce.
  
  Unemployment compensation is taxable for federal purposes, but some states do not tax this type of income.
• Disability Benefits – Disability benefits become relevant when substance addiction leads to severe health issues, rendering an individual unable to work. Programs such as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) can provide support, contingent upon meeting specific criteria.
  
  o    SSDI – For SSDI eligibility, the addiction itself must not be the primary reason for the disability claim; rather, it must result in long-term physical or mental impairments. Conditions like liver disease or severe mental health disorders stemming from substance abuse may qualify an individual for these benefits, provided thorough medical documentation is presented. SSDI, like regular Social Security income, may be federally taxable depending on the individual’s total income. Some states do not tax Social Security income.
  
  o    SSI – SSI, on the other hand, is need-based and requires that the disability be separate from the addiction itself. Both programs necessitate a solid medical history that articulates how the addiction-induced condition inhibits the capacity to work. SSI is not taxable.
• Worker’s Compensation – Worker’s compensation offers another avenue of financial relief, primarily in the context of workplace injuries or conditions exacerbated by addiction. It typically covers medical expenses and lost wages due to work-related injuries or illnesses. However, if substance use is found to be a significant factor contributing to a workplace accident or injury, the claim may be denied. Generally, worker’s compensation payments are not taxable, but if the payments are received for non-occupational injuries or sickness, they would be taxable. Also taxable are salary continuation payments and certain retirement benefits if they are not strictly for a work-related injury.

Employers and insurers often scrutinize worker’s compensation claims involving substance use more critically. Nevertheless, if an addiction can be shown to have developed because of job-related stressors or untreated mental health conditions exacerbated by work environments, it may still be possible to navigate a successful claim. Legal counsel specializing in worker’s compensation is often beneficial in such complex cases.

Employee Assistance Programs (EAPs): Are workplace-based intervention programs designed to support employees dealing with personal issues, including addiction to drugs or alcohol, that might impact their job performance, health, and overall well-being. Employers offering EAPs that focus on mental health and support can deduct costs associated with these programs as business expenses.

• Confidential Support Services – EAPs offer confidential support services, providing a safe space for employees to seek help without fear of stigma or job loss. These programs typically include access to counseling services, where individuals can discuss their struggles with addiction and receive professional guidance. This confidentiality is crucial in encouraging employees to seek help early, thereby preventing the escalation of addiction-related issues.
• Education and Prevention Programs – In addition to direct support for those currently dealing with addiction, EAPs often conduct educational workshops and training to inform all employees about the risks of substance abuse and methods of prevention. These programs can help cultivate a healthier workplace culture that proactively addresses substance use issues before they develop into significant problems.

Charitable Contributions:

• Cash Contributions – Contributions to qualified addiction support groups or charities are deductible, offering indirect financial support for both donors and beneficiaries. Starting after 2025, a new law allows nonitemizers to deduct up to $1,000 ($2,000 for joint returns) for cash contributions to qualified charities. This deduction is claimed in calculating taxable income, but does not reduce the donor’s AGI.
• Volunteering and In-kind Contributions – While donating time is not tax-deductible, out-of-pocket expenses incurred during volunteer activities, such as travel costs to and from addiction support centers, can be deducted when itemizing deductions.

Contact this office with questions or assistance.

The post The Tax Implications of Addiction first appeared on Wellman Tax & Business Advisors, Inc..

In addition, the recovery rebates are actually a refundable tax credit on the 2020 tax returns, so to meet the Congressional mandate, the IRS issued the rebates in advance based upon each family’s makeup and income on their 2019 tax return. However, because a significant portion of the population had yet to file their 2019 return, especially because the April 15 due date for the 2019 return had been extended to July 15, 2020, the IRS then turned to the information on the 2018 returns on which to base the rebates.

Example: Phil and Karla are married with one dependent. They are always slow in getting their returns filed, so the IRS based their rebate on their 2018 tax return. The AGI was $162,000, making them subject to the rebate phaseout. From the table above, their phaseout threshold is $150,000. Their phaseout is $600 (($162,000 ? $150,000) x 5%). Without the phaseout, they would have been entitled to an EIP of $2,900. Because of the phaseout, their payment was $2,300 ($2,900 ? $600).

Complicating the IRS’s ability to quickly issue the EIPs was the fact that the higher standard deduction included with the 2018 tax reform meant that a significant portion of the population did not even have to file a 2018 (or 2019) tax return. So, the IRS then used data from the Social Security and Veterans Administrations to determine non-filers who were entitled to a payment.

Another issue was that, unlike during the 2008 financial crisis, when stimulus payments were allowed to those who had passed away, the IRS took a hard stand with the pandemic EIPs and required that those payments be returned, which complicated issues for surviving spouses when the check was payable jointly.

Many individuals were entitled to EIPs who were not receiving Social Security, Railroad Retirement, or Veterans benefits and were not required to file a return. They were required to go to the IRS’s website and register in order to get a payment. The IRS initially did not issue EIPs to inmates (the CARES Act was silent as to whether or not these individuals qualified), but a federal court later overruled the IRS.

As you can see, what Congress envisioned would be a simple credit on the 2020 return quickly became complicated as a result of the mandate to issue payments in advance of the 2020 return being filed. Many individuals are still waiting for their rebates or are entitled to more than they received.

If you are among those eligible for a rebate who haven’t received a payment, or the amount you received is less than what you are allowed, take heart. Since it is really a credit on the 2020 tax return, you can claim your missing or additional rebate amount when you file your 2020 return. But this means that if you wouldn’t normally have to file a return, you will need to do so in order to get your recovery rebate credit.

However, here is yet another potential problem: when you claim the rebate credit on your 2020 return, it will be based upon your 2020 AGI and family makeup, which may or may not be to your benefit. Here are some situations that you may encountered:

Example #1A – You had a dependent child in 2019 who had since become emancipated in 2020. If you received an EIP in 2020, it would have included the dependent’s rebate amount. However, if it is based on the 2020 return, it will not. On the bright side, your dependent will be eligible for a $1,200 rebate in their 2020 return if it is not phased out. More good news: you aren’t required to repay the dependent portion of the EIP you received.

Example #1B – You are divorced and claimed your 10-year-old son as a dependent on your 2019 return, and based on your 2019 return, you received a $1,700 EIP ($1,200 for yourself and $500 for your son). Your ex-spouse will claim your son as a dependent on your ex-spouse’s 2020 return. Your ex-spouse will claim the dependent portion of the recovery rebate credit on their 2020 return. You will not be required to pay back the $500 dependent portion of the EIP that you received.

Example #2 – The IRS used your 2018 AGI to figure your rebate, and because it was over the threshold, it was partially phased out, and the payment you received was $800 instead of $1,200. Your 2020 AGI is below the phaseout threshold, so you will be able to receive the $400 as a credit on your 2020 tax return.

Example #3 – The opposite of example #2: when you file your 2020 return, the amount of the rebate you receive will be larger than what you are entitled to on your 2020 return. You will not have to pay back the difference.

These are only examples of the many situations that a change in filing status, dependents, and/or AGI can create with regard to the recovery rebate credit when filing your 2020 tax return. One good thing is that Congress wrote the law so that if the EIP you received was larger than the recovery rebate credit you are entitled to on your 2020 return, you will not have to pay back any of the difference. On the other hand, if your EIP was less than what’s allowed on your 2020 return, you can claim the difference as a credit on the 2020 return.

Be sure to keep the confirmation that the IRS sent you showing the amount of your advance rebate (the EIP); we’ll need it when preparing your 2020 return.

This office will automatically take care of reconciling the advance rebate with the amount determined on your 2020 return. Please call if you have other questions.

The post Didn’t Get Your Economic Impact Payment? You Can Claim It on Your 2020 Return. first appeared on Wellman Tax & Business Advisors, Inc..

In spite of (or in some cases, because of) the COVID-19 pandemic, and with near-record-low home mortgage interest rates, the housing market has been booming. September 2020 existing home sales were up 9.4% from August 2020 and 20.9% from 2019, according to the National Association of Realtors. If you sold your home this year or are thinking about selling it, there are many tax-related issues that could apply to that sale. To help you prepare for reporting the sale you may have already made or make you aware of what issues you may face if you are in the “thinking about” stage, this article covers the tax basics and some special situations related to home sales and the home-sale gain exclusion.

Home Sale Exclusion – For decades, Congress has encouraged home ownership, including by providing a tax break for taxpayers selling their homes. Under the current version of the tax code, you are allowed an exclusion of up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you owned and lived in it for at least 2 of the 5 years previous to the sale. You also cannot have previously taken a home-sale exclusion within the 2 years immediately preceding the sale. There is no limit on the number of times you can use the exclusion as long as you meet these time requirements; however, extenuating circumstances can reduce the amount of the exclusion. The home-sale gain exclusion only applies to your main home, not to a second home or a rental property.

2 out of 5 Rule – As noted above, you must have used and owned the home for 2 out of the 5 years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date. Vacations, short absences and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for 2 out of the 5 years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of $500,000.

Although this situation is quite rare, if you acquired the home as part of a tax-deferred exchange (sometimes referred to as a 1031 exchange), then you must have owned the home for a minimum of 5 years before the home-gain exclusion can apply.

If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation would be if you were required to sell the home because of extenuating circumstances, such as a job-related move, a health crisis or other unforeseen events. Another rule extends the 5-year period to account for the deployment of military members and certain other government employees. Please call this office if you have not met the 2 out of 5 rule to see if you qualify for a reduced exclusion.

Business Use of the Home – If you used your home for business and claimed a tax deduction—for instance, for a home office, storing inventory in the home or using it as a day care center—that deduction probably included an amount to account for the home’s depreciation. In that case, up to the extent of the gain, the claimed depreciation cannot be excluded.

Figuring Gain or Loss from a Sale – The first step is to determine how much the home cost, combining the purchase price and the cost of improvements. From this total cost, subtract any claimed casualty loss deductions and any depreciation taken on the home. The result is your tax basis. Next, subtract the sale expenses and this tax basis from the sale price. The result is your net gain or loss on the sale of the home.

If the result is negative, the sale is a loss; losses on personal-use property such as homes cannot be claimed for tax purposes. If the result is a gain, however, subtract any home-gain exclusion (discussed above) up to the extent of the gain. This is your taxable gain, which is, unfortunately, subject to income tax. If you owned the home for at least a year and a day, the gain will be a long-term capital gain; as such, it will be taxed at the special capital-gains rate, which ranges from zero for low-income taxpayers to 20% for high-income taxpayers. Depending on the amount of all of your income, the gain may also be subject to the 3.8% net investment income surtax that was added as part of the Affordable Care Act. The tax computation can be rather complicated, so please call this office for assistance.

Another issue that can affect your home’s tax basis (discussed above) applies if you purchased your home before May 7, 1997 after selling another home. Prior to that date, instead of a home-gain exclusion, any gain from a sale was deferred to the replacement home. Although this is now rare, if it matches your situation, the deferred gain would reduce your current home’s tax basis and add to any gain for the current sale.

Prior Use as a Rental – If you previously used your home as a rental property, the law includes a provision that prevents you from excluding any gain attributable to the home’s appreciation while it was a rental. The law’s effective date was the beginning of 2009, which means that you only need to account for rental appreciation starting in that year. This law was passed to prevent landlords moving into their rentals for 2 years so that they could exclude the gains from those properties. Prior to the law change, some landlords had done this repeatedly.

Form 1099-S – Usually, the settlement agent—typically an escrow or title company—prepares IRS Form 1099-S, Proceeds from Real Estate Transactions, which reports the home seller’s name, tax ID number, proceeds of the sale, date of the sale, etc. This form is provided to both the IRS and the seller. Note that this form only includes information from the sale; it doesn’t provide any basis information to the IRS. Sometimes, sellers think that if the home sale gain exclusion eliminates all of their gain from the sale of their home, they don’t need to report the transaction on their tax return. Unfortunately, this thinking could lead to correspondence (i.e., a bill for tax due) from the IRS as it attempts to match the sales price shown on the 1099-S to the seller’s tax return. To avoid this interaction with the IRS, you should report the home’s sale on your income tax return for the year of the sale; in doing so, you will be including your basis and exclusion information for the IRS.

Records – Assets worth hundreds of thousands of dollars, including your home, need your attention, particularly regarding records. When figuring your gain or loss, you will, at a minimum, need the escrow statement from the purchase, a list of improvements (not maintenance work) with receipts, and the final escrow (settlement) statement from the sale. If you encounter any of the issues discussed in this article, you may need additional documentation.

A few other rare home-sale rules are not included here. As you can see, home-sale computations and tax reporting can be very complicated, so please call this office if you need assistance.

The post Sold or Thinking of Selling Your Home? first appeared on Wellman Tax & Business Advisors, Inc..

Are inheritances taxable? This is a frequently misunderstood taxation issue, and the answer can be complicated. When someone passes away, all of their assets (their estate) will be subject to estate taxation, and whatever is left after paying the estate tax passes to the decedent’s beneficiaries.

Sound bleak? Don’t worry, very few decedents’ estates ever pay any estate tax, primarily because the tax code exempts a liberal amount of the estate’s value from taxation; thus, only very large estates are subject to estate tax. In fact, with the passage of the Tax Cuts & Jobs Act (tax reform), the estate tax exemption has been increased to $11,580,000* for 2020 and will be inflation-adjusted in future years. That generally means that estates valued at $11,580,000* or less will not pay any federal estate taxes, and those in excess of the exemption amount only pay estate tax on the excess amount. Of interest, there are less than 10,000 deaths each year for which the decedent’s estate exceeds the exemption amount, so for most estates, there will be no estate tax and the beneficiaries will generally inherit the entire estate.

* Note that, as with anything tax-related, the exemption is not always a fixed amount. It must be reduced by prior gifts in excess of the annual gift exemption, and it can be increased for a surviving spouse by the decedent’s unused exemption amount.

Of course, once a beneficiary (also referred to as an heir) receives the inherited asset, any income generated by that property—be it interest from cash, rent from real estate, dividends from stocks, etc.—will be taxable to the beneficiary, just as if the property had always been the beneficiary’s.

Because the value of an estate is based upon the fair market value (FMV) of the assets owned by the decedent on the date of their death (or in some cases, an alternative valuation date six months after the decedent’s date of death, which is rarely used), the beneficiaries will generally receive the inherited assets with a basis equal to the same FMV determined for the estate. What this means to a beneficiary is that if they sell an inherited asset, they will measure their gain or loss from the inherited basis (FMV at date of death).

Example #1: Joe inherits shares of XYZ Corporation from his father. Because XYZ Corporation is a publically traded stock, the FMV can be determined by what it is trading for on the stock market. Thus, if the inherited basis was $40 per share and the shares are later sold for $50 a share, Joe will have a taxable gain of $10 ($50 – $40) per share. In addition, the gain will be a long-term capital gain, since all inherited assets are treated as being held long-term by the beneficiary. On the flip side, if the shares are sold for $35 a share, Joe would have a tax loss of $5 per share.

Example #2: Joe inherits his father’s home. Like other inherited property, Joe’s basis is the FMV of the home on the date of his father’s death. However, unlike the stock, the FMV of which could be determined from the trading value, the home needs to be appraised to determine its FMV. It is highly recommended that a certified appraiser perform the appraisal and that it be done reasonably close in time to the decedent’s date of death. This is frequently overlooked and can cause problems if the IRS challenges the amount used for the basis.

This FMV valuation of inherited assets is frequently referred to as a step up in basis, which is really a misnomer because the FMV can, under some circumstances, also be a step down in basis.

If the decedent was married at the time of death and resided in a community property state, and if the property was held by the couple as community property, the beneficiary spouse will generally receive a basis equal to 100% of the FMV of the property, even though the spouse will have only inherited the deceased spouse’s share.

Not all inherited assets received by the beneficiary fall under the FMV regime. If the decedent held assets that included deferred untaxed income, those assets will be treated differently by the beneficiary. Examples of those include inherited:

Traditional IRA Accounts – These are taxable to the beneficiaries, but special rules generally allow a spouse beneficiary to spread the income over the surviving spouse’s lifetime, while the distribution period is capped at 10 years for most non-spouse beneficiaries if the decedent died after 2019. Previously, the rules allowed most non-spouse beneficiaries of decedents who died prior to 2020 to use a lifetime distribution method.

Roth IRAs – Qualified distributions are not taxable to the beneficiary.

Compensation – Amounts received after the decedent’s death as compensation for their personal services.

Pension Payments – These are generally taxable to the beneficiary.

Installment Sales – Sometimes taxpayers will structure sales, usually of real property, so that the buyer pays the seller for the purchase with interest over several years. This is referred to as an installment sale. Whoever receives an installment obligation as a result of the seller’s death is taxed on the installment payments the same as the seller would have been, had the seller lived to receive the payments.

This is just an overview of issues related to being the beneficiary of an inheritance. If you have questions related to the tax ramifications of a potential or actual inheritance, please give this office a call.

The post Is That Inheritance Taxable? first appeared on Wellman Tax & Business Advisors, Inc..

What is an Asset Sale?

When selling a business as an asset sale, the important thing to understand is that the seller actually retains possession of the legal entity that represents the business. What the buyer is purchasing are the individual assets that the company holds. Those can include things like equipment and fixtures, but also extends all the way up to trade secrets, telephone numbers of customers and business contacts, inventory items and more.

An asset sale usually does not include any cash-based assets and the seller actually retains any long-term debt obligations that the business holds along with the legal entity of the business itself. However, normalized net working capital is also usually one of the assets that is handed over from seller to buyer in this type of a sale. This can include certain elements like accounts receivable, accounts payable, accrued expenses and more.

What is a Stock Sale?

With a stock sale, on the other hand, the buyer is really purchasing the shareholder’s stock of the seller directly. Even though the assets and liabilities that are transferred as a result of this type of sale tend to be very similar to an asset sale, the seller is also getting the legal entity or stake in the business at the exact same time. In a stock sale, any particular asset or liability that the buyer doesn’t expressly want will either be distributed (in the case of assets) or paid off entirely (in the case of liabilities) prior to the sale being completed.

An important difference between an asset sale and a stock sale is that in a stock sale, no separate conveyance of individual assets is required for the sale itself to be completed. This is largely due to the fact that the original title of each asset rests within the corporation, meaning that both are transferred from seller to buyer at the exact same time.

Who Benefits From Each Type of Sale?

Once you understand a little more about the differences between an asset sale and a stock sale, you must also understand which benefits in each type of situation. As is common with most business decisions, the different parties involved will usually favor one or the other depending on which side of the fence they fall on. Buyers tend to prefer asset sales, for example, as it affords them certain tax benefits that they won’t get from a stock sale. Sellers, on the other hand, tend to prefer stock sales because it often makes them less responsible for certain future liabilities that may present themselves like product liability claims, employee lawsuits and even benefit plans.

Perhaps the biggest reason why an asset sale is preferred from the point of view of the buyer is because the company’s depreciable basis regarding its assets is highly accelerated. An asset sale typically gives a higher value for assets that depreciate quickly. A particular piece of equipment that the business owns, for example, likely has a three- to seven-year shelf life. At the same time, lower values are given to certain assets that amortize much more slowly. Goodwill, for example, is generally considered to have a 15-year shelf life. This generates additional tax benefits on behalf of the buyer, doing a lot to reduce taxes as quickly as possible and thus improving the overall cash flow of the company during the first few years of its life. Buyers also tend to prefer asset sales because it’s much, much easier to avoid any potential liabilities like contract disputes or product warranty issues as a result.

This doesn’t mean that asset sales are universally easier for buyers, however. Certain types of assets are inherently hard to transfer due to certain issues like legal ownership and any third party consent that may be required. Intellectual property, for example, would likely require the seller to obtain some type of consent that can slow down the process of a sale dramatically.

One of the major reasons why sellers tend to prefer stock sales is because all of the proceeds they get from the sale are taxed at a much lower capital gains rate. When dealing with C-corporations, corporate level taxes are avoided entirely. Also, in a stock sale the seller is usually less responsible for any future liabilities – a products liability claim officially becomes the problem of the buyer at that point.

The Popularity of Asset Sales versus Stock Sales

According to research, approximately 30 percent of all business sales in the last few years were stock sales. It’s important to keep in mind, though, that this number varies wildly based on the size of the company that is being sold. Larger companies have a much higher chance of being stock sales than asset sales.

Regardless of whether you’re a buyer or a seller, it is always important to consult with your business partners, your legal representatives and your accounting professionals throughout all points of the process to help make sure that you’re making the most informed decision possible. The need to understand exactly what you’re buying, how you’re buying it and what it means for the future is of paramount importance, regardless of which party you belong to.

The post Asset Sales Versus Stock Sales: What You Need to Know first appeared on Wellman Tax & Business Advisors, Inc..

• Predicting Social Security Income
• Planning for the Future
• Employer Retirement Plans
• Tax Incentive Retirement Savings Plans

Are you ignoring your future retirement needs? That tends to happen when you are younger, retirement is far in the future, and you believe you have plenty of time to save for it. Some people ignore the issue until late in life and then have to scramble at the last minute to fund their retirement. Others even ignore the issue altogether, thinking their Social Security income (assuming they qualify for it) will take care of their retirement needs.

By current government standards, a single individual with $11,770 or a married couple with $15,930 of annual household income is at the 100% poverty level. If you compare those levels with potential Social Security income, you may find that expecting to retire on just Social Security income may result in a bleak retirement.

You can predict your future Social Security income by visiting the Social Security Administration’sRetirement Estimator. With the Retirement Estimator, you can plug in some basic information to get an instant, personalized estimate of your future benefits. Different life choices can alter the course of your future, so try out different scenarios – such as higher and lower future earnings amounts and various retirement dates – to get a good idea of how these scenarios can change your future benefit amounts. Once you’ve done this, consider what your retirement would be like with only Social Security income.

If you are fortunate enough to have an employer-, union- or government-funded retirement plan, determine how much you can expect to receive when you retire. Add that amount to any Social Security benefits you are entitled to and then consider what retirement would be like with that combined income. If this result portends an austere retirement, know that the sooner you start saving for retirement, the better off you will be.

With today’s relatively low interest rates and up-and-down stock market, it is much more difficult to grow a retirement plan with earnings than it was 10 or 20 years ago. With current interest rates barely mirroring inflation rates, there is little or no effective growth. That means one must set aside more of one’s current earnings for retirement to prepare for a comfortable retirement.

Because the government wants you to save and prepare for your own retirement, tax laws offer a variety of tax incentives for retirement savings plans, both for wage earners and for self-employed individuals and their employees. These plans include:

• Traditional IRA – This plan allows up to $5,500 (or $6,500 for individuals age 50 and over) of tax-deductible contributions each year until reaching age 70½. However, the amount that can be deducted phases out for higher-income taxpayers who also have retirement plans through their employer.
• Roth IRA – This plan also allows up to $5,500 (or $6,500 for individuals age 50 and over) of contributions each year. Like the Traditional IRA, the amount that can be contributed phases out for higher-income taxpayers; unlike the Traditional IRA, these amounts phase out even for those who do not have an employer-related retirement plan.
• myRA Accounts – This relatively new retirement vehicle is designed to be a starter retirement plan for individuals with limited financial resources and those whose employers do not offer a retirement plan. The minimum amount required to establish one of these government-administered plans is $25, with monthly contributions as little as $2. Once the total value of the account reaches $15,000 or after 30 years, the account must be converted to a commercial Roth IRA account.
• Employer 401(k) Plans – An employer 401(k) plan generally enables employees to contribute up to $18,000 per year, before taxes. In addition, taxpayers who are age 50 and over can contribute an extra $6,000 annually, for a total of $24,000. Many employers also match a percentage of the employee’s contribution, and this can amount to a significant sum for those who stay in the plan for many years.
• Health Savings Accounts – Although established to help individuals with high-deductible health insurance plans pay medical expenses, these accounts can also be used as supplemental retirement plans if an individual has already maxed out his or her contributions to other types of plans. Annual contributions for these plans can be as much as $3,350 for individuals and $6,750 for families.
• Tax Sheltered Annuities – These retirement accounts are for employees of public schools and certain tax-exempt organizations; they enable employees to make annual tax-deferred contributions of up to $18,000 (or $24,000 for those age 50 and over).
• Self-Employed Retirement Plans – These plans, also referred to as Keogh plans, allow self-employed individuals to contribute 25% of their net business profits to their retirement plans. The contributions are pre-tax (which means that they reduce the individual’s taxable net profits), so the actual amount that can be contributed is 20% of the net profits.
• Simplified Employee Pension (SEP) – This type of plan allows contributions in the same amounts as allowed for self-employed retirement plans, except that the retirement contributions are held in an IRA account under the control of the employee or self-employed individual. These accounts can be established after the end of the year, and contributions can be made for the prior year.

Each individual’s financial resources, family obligations, health, life expectancy, and retirement expectations will vary greatly, and there is no one-size-fits-all retirement savings strategy for everyone. Purchasing a home and putting children through college are examples of events that can limit an individual’s or family’s ability to make retirement contributions; these events must be accounted for in any retirement planning.

If you have questions about any of the retirement vehicles discussed above, please give this office a call.

The post Are You Ignoring Retirement? first appeared on Wellman Tax & Business Advisors, Inc..

• Asset limitations when receiving Medicaid or federal Supplemental Security Income
• $100,000 account limit
• Similar to Sec 529 education savings accounts
• Annual limit on contributions
• Qualified expenses

Congress created Achieving Better Life Experience (ABLE) accounts in 2014. Prior to the creation of the ABLE accounts, individuals with disabilities who were eligible for Medicaid or federal Supplemental Security Income were limited to a maximum of $2,000 in assets, such as bank savings accounts.

However, ABLE accounts allow disabled people to have up to $100,000 in these accounts without jeopardizing their Medicaid or Supplemental Security Income.

Each state must enact its own legislation to make these accounts available in that particular state. Several have already done so or are in the process of doing so.

ABLE accounts are fashioned after qualified state tuition programs, sometimes referred to as Section 529 plans. Although there is no tax benefit associated with contributions to the accounts, the earnings in the accounts accumulate tax-free and are also tax-free if used for qualified expenses such as health care, education, legal, housing and transportation expenses. As a note of caution, qualified expenses do not include food, entertainment or vacations.

The accounts are available to individuals who became disabled before the age of 26. Once an account is established, anyone can contribute to it, provided that the sum of the contributions for the year does not exceed the annual gift tax exclusion, which is currently $14,000. These accounts are a less-expensive substitute for special needs trusts, which have significant administration costs. If contributions will exceed the annual gifting limit and $100,000 overall, a special needs trust will be required.

While ABLE accounts do fill a need, there are some downsides, including the current $14,000 per year limit on contributions; restrictions on using the funds for food, vacations and entertainment; and the fact that if the beneficiary passes away, the remaining funds cannot be left to siblings or others.

The post ABLE Accounts And Individuals With Disabilities first appeared on Wellman Tax & Business Advisors, Inc..

• Home Energy-Saving Improvements
• Solar and Other Types of Energy Generation Systems
• Things to Consider Before Signing Up

Recently passed legislation has given new life to two homeowner energy credits that had expired or were about to expire, providing renewed opportunities to homeowners wanting to take advantage of these credits and reduce their energy costs.

Non-business Energy Credit – The first of the two credits is what the tax code refers to as the Non-business Energy Credit. A more descriptive title would be an energy saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. This credit was extended for two more years, allowing homeowners to claim the credit for qualifying energy improvements made in 2015 and 2016.

The credit generally applies to insulation, storm windows and doors, and certain types of energy-efficient roofing materials, air-conditioning and hot water systems.

The credit is 10% of the cost of the energy-saving items but does not apply to the cost of installation and is limited to a lifetime maximum of $500. So if you have taken advantage of this credit in the past and received $500 or more in credit in a prior year, you cannot claim any additional credit.

In addition to the $500 overall limitation, there are also per-item limitations on the credit; for example, qualified windows and skylights – $200, qualified hot water boiler – $150 and qualified energy-efficient equipment – $300.

The credit is nonrefundable and can only be used to offset income taxes (including the alternative minimum tax).

Residential Energy Efficient Property Credit – The second credit to be extended is called the Residential Energy Efficient Property Credit. Better known as the home solar credit, it also provides credit for wind energy systems, geothermal systems and fuel cell systems.

The credit is generally 30% of the qualified property and installation costs, subject to some limitations for fuel cell and geothermal systems.

The credit, which was scheduled to expire after 2016, has been extended through 2021, but only for solar electric and solar hot water systems (excluding swimming pools). In addition, the credit percentage is phased out beginning after 2019. The following are the credit percentages allowed through 2021:

• 2009 through 2021: No annual limit
• 2009–2019: 30%
• 2020: rate reduced to 26% and only on solar-related systems
• 2021: rate reduced to 22% and only on solar-related systems

There is no limit on the actual credit other than the credit percentage. It is a nonrefundable credit and can be used to offset income tax liability (including the AMT). However, if the credit is unused because it exceeds the income tax amount, it can be carried over to another year as long as the credit has not expired.

Things to Consider – When considering whether or not to go to the expense of installing a solar system, you need to consider a number of issues:

1. Is it cost effective considering your electric usage?
2. How will you pay for it?
3. If you finance it are the terms and interest rate reasonable for your financial situation?
4. How will it affect your property’s value?
5. Will you be able to benefit from the tax credits?

Installing solar is a big financial commitment and should be considered carefully. Don’t let a solar system salesperson rush you into a decision. If you need assistance analyzing the financial and tax aspects of installing a solar system, please give this office a call before you sign on the dotted line.

The post Homeowner Energy Tax Credits Get New Life first appeared on Wellman Tax & Business Advisors, Inc..

• Legal Fees Associated With Personal, Living, or Family Issues
• Legal Fees Associated With Business and the Production of Taxable Income
• Examples of Legal Fees and Their Deductibility
• The Tax Benefit of Legal Fee Deductions

A frequent question that arises is whether legal expenses are deductible. The answer to that question can be both yes and no and can be complicated depending upon the nature of the legal expense.

The Internal Revenue Code (IRC), which is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created, tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses. The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year:

• For the production or collection of taxable income;
• For the management, conservation, or maintenance of property held for the production of income; or
• In connection with the determination, collection, or refund of any tax.

Applying those IRC provisions will allow you to determine whether a legal expense you’ve incurred is deductible or not, but the application can sometimes be complicated and also must take into account the Internal Revenue Service’s (IRS’s) interpretation of the law through rulings and regulations as well as the courts’ opinions on all of the above. The following are some frequently encountered situations and how legal expenses paid in those situations should be handled:

• Divorce – Legal costs, such as attorney fees and court costs, connected with divorce, separation, or support are non-deductible personal expenses. Non-deductibility extends to legal fees incurred in disputes over money claims. However, legal and accounting fees paid for tax advice in connection with the divorce are deductible, provided the amounts for those services are delineated on the legal firm’s billings.
• Taxable Alimony – The part of legal fees attributable to producing taxable alimony is deductible by the recipient of the alimony. The attorney’s statement or invoice should stipulate what part of the fee relates to alimony to ensure a deduction for the alimony recipient. Legal fees paid by the payer of the alimony are not deductible. Because child support payments are not taxable, fees paid to obtain those payments are not deductible.
• Conduct of a Business – Legal fees incurred by a taxpayer in the course of a trade or business are generally deductible if they are ordinary and necessary expenses of the business.
• Relating to Insurance Proceeds – Legal fees to collect on a claim related to a taxpayer’s business are currently deductible, but legal fees related to a personal loss are not deductible. However, where a loss is associated with a capital asset, such as a taxpayer’s personal home, the related expenses can be added to the home’s tax basis and be used to offset any taxable gain in the future.
• Producing or Collecting Taxable Income – Attorney fees, court costs, and similar expenses are deductible if incurred during the production or collection of taxable income. A reasonably close connection must exist between the legal expense and the production or collection of the taxable income.
• Bankruptcy – Legal fees connected with a business bankruptcy are deductible. If personal bankruptcy is primarily caused by the failure of a business activity, the legal fees related to the bankruptcy proceedings are partially deductible as a business expense. The courts have used a proration of the fees based on the ratio of business creditor claims to total creditor claims.
• Managing, Conserving, or Maintaining Income-Producing Property – Legal fees related to managing, conserving, or maintaining income-producing property are generally deductible. However, just because a taxpayer may have to sell income-producing property to satisfy a possible adverse judgment doesn’t mean he/she can deduct the cost of defending the suit under this provision.
• Related to Title of Property – Although legal expenses to acquire, perfect, defend, or clear title to property currently can’t be deducted as business or investment expenses, they are capital expenditures whose cost may be recovered through depreciation, depletion, or cost recovery. Incurred legal expenses related to title of personal property, such as a principal residence, aren’t deductible but can be added to the basis of the property.
• Damage Suits – Legal fees for defending and filing damage suits in a taxpayer’s business or in employment are deductible. Examples include expenses paid for defending a suit for wrongfully taking property; settling a damage suit against a business, which could help to avoid adverse publicity and controversy; getting a judgment for damages to rental real estate; and a teacher’s action of sex discrimination against a university.
• Damages for Personal Injury or Sickness – In some cases, damages for personal injury or sickness can be excluded from income. Thus, the legal fees paid to secure such income are not deductible if the damage award is not taxable. However, to the extent that the damage award is taxable or accrued interest is paid on the settlement funds, the legal fees are deductible. Where the funds are partially taxable and partially excludable, the legal expenses have to be prorated in the same ratio as the income is.
• Will and Trust Document Preparation – The cost of legal fees for preparing a will is considered a personal expense that is not deductible. In most cases, the legal cost of creating a living trust is similarly treated as a personal, nondeductible expense. However, if the attorney who prepares the trust indicates on the billing statement the amount of the fee that is for tax planning or tax advice, the tax-related portion of the fee is deductible.
• Criminal Cases – Legal fees incurred to defend against criminal charges related to a taxpayer’s trade or business are deductible. This is true even if the taxpayer is convicted of the crime. However, legal defense expenses incurred by an individual charged with a crime are personal and generally not deductible.
• Tax Issues – Legal fees associated with obtaining tax advice, having tax returns prepared, and defending a taxpayer being audited are all specifically included as deductible legal expenses.

Just because legal fees are deductible doesn’t necessarily mean you will receive any tax benefit from the deduction. While some legal fees can be deducted on business schedules and provide the maximum benefit, others have to be deducted as a miscellaneous itemized deductions, the total of which is subject to a 2% of AGI deduction floor. In addition, miscellaneous itemized deductions are not deductible for alternative minimum tax (AMT) purposes.

As you can see, determining which legal expenses are deductible is complicated, and even if allowed, a deduction may not provide any tax benefit. As every circumstance is unique, you are encouraged to call this office to determine if you will derive any tax benefit from your legal expenses.

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