Category Archives: Personal Tax Related

Pros and Cons of Turning Your Home into a Rental

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If you’re buying a new home, you may have thought about keeping your current home and renting it out. But how much have you thought about this? Keep reading to learn some of the pros and cons of turning your home into a rental.

Becoming a Landlord

In April, average rents for one- and two-bedroom residences in the Twin Cities area were $1,150 and $1,792, respectively, according to the latest Zumper National Rent Report.

In other parts of the country, though, rents can be much higher or lower than the averages in this area. Becoming a landlord and renting out a residence comes with financial risks and rewards. However, you should also know that it carries potential tax benefits and pitfalls.

You’re generally treated as a real estate landlord once you begin renting your home. That means you must report rental income on your tax return. But you are also entitled to offsetting landlord deductions for the money you spend on utilities, operating expenses, incidental repairs, and maintenance (for example, fixing a leaky roof). Additionally, you can claim depreciation deductions for the home. And you can fully offset rental income with otherwise allowable landlord deductions.

Passive Activity Loss Rules

However, under the passive activity loss (PAL) rules, you may not be able to currently claim the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won’t affect your converted property for a tax year in which your adjusted gross income doesn’t exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don’t exceed $25,000.

You should also be aware that potential tax pitfalls may arise from renting your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for home sellers if you finally sell the home at a profit. In general, you can escape tax on up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of your principal home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So, renting your home out for an extended time could jeopardize a big tax break.

Even if you don’t rent out your home long enough to jeopardize the principal residence exclusion, the tax break you would get on the sale (the $250,000/$500,000 exclusion) won’t apply to:

  • the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997, or
  • any gain allocable to a period of nonqualified use (any period during which the property isn’t used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse) after December 31, 2008.

A maximum tax rate of 25 percent will apply to this gain (attributable to depreciation deductions).

Selling Your Home at a Loss

What if you bought at the height of a market and ultimately sell at a loss? In such situations, the loss is available for tax purposes only if you can establish that the home was, in fact, converted permanently into income-producing property. Here, a longer lease period helps. However, if you’re in this situation, be aware that you may not wind up with much of a loss for tax purposes. That’s because basis (the cost, for tax purposes) is equal to the lesser of actual cost or the property’s fair market value when it’s converted to rental property.

So, if a home was purchased for $300,000, converted to a rental when it was worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.

We Can Help

As with most things, there’s a lot to consider when weighing the pros and cons of turning your home into a rental. The details can be complicated, but the tax professionals at Ramsay & Associates are here to help. We can answer your questions and explain any tax implications to help you make the best and most informed decision. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

What to Know When Donating Appreciated Assets

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Are you charitably inclined? If so, you probably know that donations of long-term appreciated assets, such as stocks, have an advantage over cash donations. But in some cases, selling appreciated assets and donating the proceeds may be a better strategy. That’s because adjusted gross income (AGI) limitations on charitable deductions are higher for cash donations. Plus, if the assets don’t qualify for long-term capital gain treatment, the deduction rules are different. Here’s what to know when donating appreciated assets.

Tax Treatments by Type of Gift

All things being equal, donating long-term appreciated assets directly to charity is preferable. Not only do you enjoy a charitable deduction equal to the assets’ fair market value on the date of the gift (assuming you itemize deductions on your return), you also avoid capital gains tax on their appreciation in value. If you were to sell the assets and donate the proceeds to charity, the resulting capital gains tax could reduce the tax benefits of your gift.

But all things aren’t equal. Donations of appreciated assets to public charities are generally limited to 30 percent of AGI, while cash donations are deductible up to 60 percent of AGI. In either case, excess deductions may be carried forward for up to five years.

Work the Math

If you’re contemplating a donation of appreciated assets that’s greater than 30 percent of your AGI, crunch the numbers first. Then determine whether selling the assets, paying the capital gains tax, and donating cash up to 60 percent of AGI will produce greater tax benefits in the year of the gift and over the following five tax years. The answer will depend on several factors, including the size of your gift, your AGI in the year of the gift, your projected AGI in the following five years, and your ability to itemize deductions in each of those years.

Before You Donate

Before making charitable donations, discuss your options with us. The tax professionals at Ramsay & Associates can help you understand what to know when donating appreciated assets so that you can make charitable gifts at the lowest tax cost.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

2023 Limits on Individual Taxes Q&A

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Many people are more concerned about their 2022 tax bills right now than they are about their 2023 tax situations. That’s understandable because your 2022 individual tax return is due to be filed in a few weeks (unless you file an extension). However, it’s a good time to familiarize yourself with tax amounts that may have changed for 2023. Due to inflation, many amounts have been raised more than in past years. Here is a Q&A about limits on individual taxes for this year.

Note: Not all tax figures are adjusted annually for inflation and some amounts only change when new laws are enacted.

Itemizing Deductions for 2023

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2023?

In 2017, a law was enacted that eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2023, the standard deduction amount is $27,700 for married couples filing jointly (up from $25,900). For single filers, the amount is $13,850 (up from $12,950) and for heads of households, it’s $20,800 (up from $19,400). If the amount of your itemized deductions (including mortgage interest) is less than the applicable standard deduction amount, you won’t itemize for 2023.

Contribution Regulations

How much can I contribute to an IRA for 2023?

If you’re eligible, you can contribute $6,500 a year to a traditional or Roth IRA, up to 100 percent of your earned income. (This is up from $6,000 for 2022.) If you’re 50 or older, you can make another $1,000 “catch-up” contribution (for 2023 and 2022).

401(k) or 403(b) Contributions

I have a 401(k) plan through my job. How much can I contribute to it?

In 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan (up from $20,500 in 2022). You can make an additional $7,500 catch-up contribution if you’re age 50 or older (up from $6,500 in 2022).

FICA Tax Questions

I periodically hire a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2023, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. who are independent contractors is $2,600 (up from $2,400 in 2022).

Social Security Tax

How much do I have to earn in 2023 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $160,200 for this year (up from $147,000 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

Charitable Deductions for 2023

If I don’t itemize, can I claim charitable deductions on my 2023 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. For 2020 and 2021, non-itemizers could claim a limited charitable contribution deduction. Unfortunately, this tax break has expired and isn’t available for 2022 or 2023.

Gift Tax Return

How much can I give to one person without triggering a gift tax return in 2023?

The annual gift exclusion for 2023 is $17,000 (up from $16,000 in 2022).

Only the Beginning

These are only some of the tax amounts that may apply to you. If you have questions or need more information about 2023 limits on individual taxes, the tax professionals at Ramsay & Associates can help. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Be Aware When Renting to a Relative

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If you own a home and rent it to a family member, you may be surprised to find out there could be tax consequences. Knowing the rules ahead of time can help you watch out for tax traps and be aware when renting to a relative.

Quick Rundown of the Rules for Renting

Renting out a home or apartment that you own may result in a tax loss for you, even if the rental income is more than your operating costs. You’ll be entitled to a depreciation deduction for your cost of the house or apartment (except for the portion allocated to the land). However, if your tenant is related to you, special rules and limitations may apply. For this purpose, “related” means a spouse, child, grandchild, parent, grandparent, or sibling.

No limitations apply if:

  • You rent a home to a relative who uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and
  • The home is rented at a fair market rent amount (not at a discount).

In these cases, you can deduct all the normal rental expenses, even if they result in a rental loss for the year. (If you have a loss, however, it’s a “passive” loss, which may be subject to a different set of limitations.)

Below Fair Market Rent

Problems arise if you set the rent below the fair market rental value. The reason is that this then becomes a rental property that you’ve treated as using personally. So, you’d have to allocate the expenses between the personal and rental portions of the year. Even more seriously, however, since all the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion would be zero. Thus, you’d have to report all the rent you receive in income, but none of your expenses for the home would be deductible. (You’d still be able to deduct the mortgage interest, assuming it otherwise qualifies as deductible, and property taxes. These items are deductible even for nonrental homes.)

Given the above problems, it’s important to set the rent at a fair rate. Factors to look at include comparable rentals in the area and whether you made any “side” gifts to your relative (to help pay the rent) that could reasonably be interpreted to be a bargain element.

We Can Answer Your Questions

The best way to avoid tax traps is to know the rules and be aware when renting to a relative. If you’re in this situation and still have questions, we can help. The tax professionals at Ramsay & Associates can provide you with answers or discuss these matters with you in more detail. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Estate Planning and Spousal Rights

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When it comes to your wedding, there’s a lot to plan and think about. And this extends beyond rings and invitations. You also want to consider estate planning and spousal rights before saying “I do.” Let’s look at what to know regarding assets and laws when it comes to your spouse.

Spousal Inheritance Rights

If you’re taking a second trip down the aisle, you may have different expectations than you did when you got married the first time — especially when it comes to estate planning. For example, if you have children from a previous marriage, your priority may be to provide for them. Or perhaps you feel that your new spouse should have limited rights to your assets compared to those of your spouse from your first marriage.

Unfortunately, the law doesn’t see it that way. In nearly every state, a person’s spouse has certain property rights that apply regardless of the terms of the estate plan. And these rights are the same, whether it’s your first marriage or your second. Here’s an introduction to spousal property rights and strategies you may be able to use to limit them.

Defining a Spouse’s “Elective Share”

Spousal property rights are creatures of state law, so it’s critical to familiarize yourself with the laws in your state to achieve your planning objectives. Most, but not all, states provide a surviving spouse with an “elective share” of the deceased spouse’s estate, regardless of the terms of his or her will or certain other documents.

Generally, a surviving spouse’s elective share ranges from 30 percent to 50 percent, though some states start lower and provide for progressively larger shares as the duration of the marriage increases. Perhaps the most significant variable, with respect to planning, is the definition of assets subject to the surviving spouse’s elective share rights.

In some states, the elective share applies only to the “probate estate” — generally, assets held in the deceased spouse’s name alone that don’t have a beneficiary designation. In other states, it applies to the “augmented estate,” which is the probate estate plus certain non-probate assets. These assets may include revocable trusts, life insurance policies, and retirement or financial accounts that pass according to a beneficiary designation or transfer-on-death designation.

By developing an understanding of how elective share laws apply in your state, you can identify potential strategies for bypassing them.

Using Estate Strategies

Elective shares are designed to protect surviving spouses from being disinherited. But there may be good reasons for limiting the amount of property that goes to your spouse when you die. For one thing, your spouse may possess substantial wealth in his or her own name. And you may want most of your estate to go to your children from a previous marriage.

Strategies for minimizing the impact of your spouse’s elective share on your estate plan include making lifetime gifts. By transferring property to your children or other loved ones during your lifetime (either outright or through an irrevocable trust), you remove those assets from your probate estate and place them beyond the reach of your surviving spouse’s elective share. If your state uses an augmented estate to determine a spouse’s elective share, lifetime gifts will be protected so long as they’re made before the lookback period or, if permitted, your spouse waives the lookback period.

Talk to the Professionals

Elective share laws are complex and can vary dramatically from state to state, so understanding estate planning and spousal rights can be confusing. That’s why the estate planning professionals at Ramsay & Associates are here to help. If you’re remarrying, we can help you evaluate their impact on your estate plan and explore strategies for protecting your assets. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.