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A New Bundle of Tax Strategies – BABY EDITION!

I had a wonderful phone call last week with two very awesome clients of mine. We were getting ready to discuss some business strategies when they decided to share some “news” with me. I curiously asked what the news was since I good tell that it was good. “We’re pregnant with twins!” was the reply.

This was not something that had come easily for this couple, so beyond just the normal excitement around the announcement, there was an extra bit of happiness that rang through to me. I wished that I could have been present in person, as I would have liked to give them both a big hug! After we talked a bit about the baby, they asked a familiar question—“Is there any tax planning that we should be thinking about for the babies?”

I chuckled and asked if I could defer the answer for a week and write an article about the topic. They were kind enough to allow me to defer, and so to keep my commitment, below is a “bundle” of tax strategies for new parents!

Medical Expenses Associated with Pregnancy, Delivery, and Postpartum Care

Without a doubt, you will probably have some medical expenses throughout the pregnancy, at the time of delivery, and afterward. The great news is that most of these expenses are probably tax deductible. The key questions are what expenses are deductible and how should you deduct them.

What Does and Does Not Qualify as a Medical Deduction Related to Pregnancy and Birth?

A very important rule in determining whether or not a medical expense is deductible is that you need to pay for it. If the deductions are reimbursed through an employee health reimbursement plan (HRA) at work or through health insurance, or paid with money from a health savings account (HSA), they are typically not deductible. But if you come out of pocket for the expense, KEEP THAT RECEIPT and GOOD RECORDS!!

Deductible medical costs are typically paid out of pocket with post-tax money. Items that qualify for a deduction generally include costs for doctor’s and dental visits, costs for lab work and tests, ultrasounds, and even the mileage to travel to and from your appointments. Check out IRS Publication 502 for a good list on items that may be deductible on your tax returns.

During pregnancy and after birth, you will likely incur many other “necessary” expenses that unfortunately are excluded as medical deductions. These include maternity clothes, diapers, formula, most over-the-counter medicine, and subscriptions to video streaming services during late nights in which your little one mixes up his or her days and nights (let the fun begin!).

The next important item is how to deduct these medical costs. Generally speaking, you only really benefit from deducting medical costs if (1) you are itemizing and (2) only to the extent that your costs exceed 10% of your adjusted gross income (AGI) for the tax year. If your AGI is $100,000, you must (1) itemize and (2) only deduct dollars in excess of $10,000 (10% of AGI). In other words, you would receive a $1 deduction for spending $10,001 since you only exceeded the 10% “floor” by the $1. This isn’t really a great situation, but it’s where most Americans find themselves.

At Kohler & Eyre CPA’s, we want to maximize your medical deductions so you can take advantage of all of the costs you incur. This may be possible depending on your tax situation. We encourage you to explore some of these ways of maximizing your medical deductions. You can start by visiting Mark’s blog here and reading up on some ways that you can save THOUSANDS of dollars by simply changing how you pay for your medical care. They include utilizing HSAs, HRAs, starting a small business, etc.

Health Insurance Premiums

Lets not forget health insurance and odds are that you probably have some form of health insurance. Health insurance premiums that can be deductible in your business or at least as an itemized deduction on Schedule A or on the front page of your tax return (if you have a small-business) unless they are paid with pre-tax money. Check out partner Mark Kohler’s video on Deducting Health Insurance:

Keep in mind that you may want to consider alternatives to health insurance depending on your situation. A popular option that continues to grow in light of rising health care premiums is that of healthcare sharing ministries and healthcare co-ops. Please do your research before looking at any of these options. Many of these monthly costs (like those for healthcare ministries) may not be deductible as it is not true health insurance.

Consider Adjusting Your Withholdings

Since you will be claiming an extra dependent, reducing your overall tax bill, you may be able to reduce income tax withholdings from your paychecks. Talk to your human resources representatives and consider filing a new W-4 form with your employer to claim an additional withholding “allowance.” This can help put more money in your pocket throughout the year. Ask your trusted tax advisor for help in determining your withholdings amounts if necessary.

Personal Exemption and Filing Status

Once your little one arrives, you may be entitled to claim a personal exemption for him or her. This is basically an extra reduction to your federal taxable income of $4,050 for 2017. Most states also allow for an exemption for your state taxable income. One word of caution—high AGI levels or being subject to alternative minimum taxes (AMT) can reduce or eliminate the exemption.

If you are single parent and have traditionally filed as “Single”, your child will further improve our tax situation by allowing you to claim “Head of Household”. You may also qualify for the earned income tax credit. These adjustments further reduce your overall tax bill and can allow for you to claim additional tax credits (many of which are described below).

Child Tax Credits

In addition to the extra exemption, you may also be claim a tax credit for your new child. The credit is worth up to $1,000 and may be a refundable tax credit. Remember that tax credits provide a dollar for dollar reduction in your overall tax bill. The best part is that you can continue to claim it year after year until your child reaches the age of 17. If your income is greater than $110,000 on a married filing jointly return or $75,000 for single or head of household, you may see this credit begin to phase out.

Dependent Care Tax Credit and Flex Plans

If you pay for child care with the goal of allowing you to go to work and if you generate income that is taxable during the year, you may be eligible for the dependent care tax credit. This credit can vary depending on how much you pay for your child’s care as well as how much income you earn during the year. The cool part about this credit is that even those that earn higher amounts of income can still get some benefit from it. Overall it can vary between $600 – $1,050 for one child and $1,200 – $2,100 for two or more children depending on income and the price of the child care.

If your place of employment provides for it, you should definitely ask about flexible spending (or child care reimbursement) accounts to help subsidize your child’s daily care costs. They can allow for up to $5,000 to be allocated into a flex spending account that can then be used to pay for child care so you and/or your spouse can go to work. The one caution here is that these accounts may be “use it or lose it” accounts where in you would need to spend the money before the end of the period. The benefit is that this money is pre-tax, so you would not need to pay any income taxes on it.

Nanny Taxes

This is a HUGE area where a lot of clients get things mixed up, as it is very unfamiliar to a lot of people. Mark has written an entire article on this topic, which I would encourage you to read. The moral of the story is that if you hire a nanny or caregiver and you control not only what work needs to be done but how the work is done, you may be considered an employer for federal and/or state tax purposes. This may mean that you have payroll and unemployment responsibilities on behalf of your employee if you pay them more than $2,000 in 2017. Please consult with a trusted tax professional in this area if you have questions here.

Start Saving for College

It is no secret that life is expensive. Life with kids is even more! Perhaps one of the largest expenses that parents worry about is paying for college one day. As tuition costs skyrocket and student debt is a top priority in discussions about fiscal well-being, new parents can take important steps to help a child be prepared for these future costs. Mark has previously written a good article about this topic, so please visit it for additional considerations; however, I would like to just list a couple of popular options here:

  • Coverdell Education Savings Account (ESA): These plans can grow tax-free and come out tax-free if utilized for qualified education expenses (such as tuition, books, fees, supplies, a computer, and even room and board subject to certain limitations). They can also be self-directed. Contributions are limited to $2,000 per year per child under age 18. Income thresholds apply as well and can phase out.
  • Qualified 529 Plans: This is a great option because families can contribute significant amounts and there are no limits based on the parent’s income tax brackets. These plans generally permit an “account holder” to open an account for a future student, or beneficiary, for the purpose of paying the beneficiary’s eligible college expenses. The account holder generally chooses among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Contributions are generally not tax deductible for federal purposes, but many states offer a tax incentive to participate in these plans.

BONUS: Adoption Tax Credits

Many clients are unaware that there exists a federal tax credit (and oftentimes something at the state level) to assist with what can be the high costs of adopting a child or a baby. This is an awesome help to many families that desire to give a child a home. I personally have a great respect for the many families that are willing to do this!

The adoption tax credit is available to families who adopt through foster care systems, private U.S. adoption, and intercountry adoption. For 2017, qualifying families can claim a credit of up to $13,750 in qualified adoption expenses. Families who adopt a child that a state has determined has special needs may even be able to claim the maximum credit regardless of their actual expenses. Higher income families who make more than $201,920 in a tax year may only claim a partial credit. This credit completely phases out for families making more than $241,920. If a family’s tax liability is less than the credit, the credit can be carried forward for up to five years to reduce a future tax liability.

For those of you that are expecting a new addition to your family, whether through giving birth to a child or through adoptions, you are probably both excited as well as a little anxious. Enjoy the journey! It is such an awesome time in your life! Look to your family and friends for support, and you will do just great. If you need any assistance with tax, legal, or financial planning assistance, please give us a call at K&E or KKOS Lawyers, and we’ll be glad to help. Best of luck in your new adventures!

Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate.  Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.

Tax Strategies for US Military Veterans

Coming back into the general population after serving in the Military can be a very difficult transition. In fact, for many of us that never served in the military, we can’t imagine the stress and challenges.

With that said, and after a heartfelt thanks for your tremendous service on our behalf, we wanted to offer a few potential tax strategies that might make your transition a little smoother…at least on your tax return.

Strategy #1: Pension payments are typically taxable, disability benefits are not

The first thing to know is that pension payments received after retirement from the military are taxable and should be reported on your tax returns. If you also receive disability benefits from the Department of Veterans Affairs, you do NOT need to report these disability benefits on your personal income tax returns. Disability benefits may include the following items:

  • Disability compensation and pension payments for disabilities paid either to Veterans or their families,
  • Grants for homes designed for wheelchair living,
  • Grants for motor vehicles for Veterans who lost their sight or the use of their limbs, or
  • Benefits under a dependent-care assistance program.

In some cases, the VA may determine retroactively that you were entitled to additional disability benefits. Since you have already reported these amounts as taxable pension amounts in prior years, reclassifying certain taxable pension payments as non-taxable disability payments would reduce your taxable income in those prior years. You may consider amending previous tax returns reclassifying the amounts based on the VA directive, and apply for an income tax refund. Consult with your tax advisor for assistance in doing this.

Strategy #2: Tell your potential employers about “WOTC”

The federal Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers who hire veterans and individuals from other eligible target groups with employment barriers. Not only are veterans excellent job candidates, but veterans who have service-connected disabilities, are unemployed for at least four weeks, or are receiving SNAP (food stamp) benefits are also eligible to help their employers through the WOTC.

If you are a veteran that is looking for work and if you fall into one or more of these categories, tell your employer that they may consider taking advantage of these generous tax credits once you are hired. The credit can vary from $2,400 to $9,600 (dollar for dollar tax reductions) depending on your circumstances. This can help reduce costs to get you training for your new position. The credit requires the employer to prepare certain paper work at or around the time the job offer is made, so they need to be on top things early. Help them by introducing the idea of this credit in the interview process so that they can appropriately take advantage of it.

Strategy #3: Be aware of federal tax credits that may be available to you

Many of these federal credits apply to all U.S. citizens are also available for both active-duty members of the Armed Forces as well as military veterans. Various state tax credits can also help, so consult with your preferred tax advisor for more information. Keep in mind that tax credits are dollar for dollar reductions in your tax liabilities:

  1. Child Tax Credit: The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children.
  2. Additional Child Tax Credit: This may be available if you are not able to claim the full amount of the child tax credit.
  3. Earned Income Credit (EIC): This tax credit is available to certain US citizens or resident aliens that have earned income and an adjusted gross income (AGI) below certain dollar thresholds. It is a refundable credit—in other words, it is a tax credit that can offset your taxes due PLUS provide additional amounts to maximize your federal refund.
  4. American Opportunity Credit: This tax credit is for qualified education expenses paid for an eligible student for the first four years of higher education. It is a great way to help you pay for the costs of higher education. You can get a maximum annual credit of $2,500 per eligible student. A portion of the tax credit is refundable like the EIC. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

Strategy #4: Tax Advantages to Relocating

If you end up needing to move while a member of the Armed Forces or when your service is done, there may be some important tax strategies to consider.

First, your moving expenses may be deductible! If you are a member of the Armed Forces, you can deduct certain reasonable moving expenses if you move because of a permanent change in station. If you move for a new job that is at least 50 miles farther than your previous employer from your home and if you work full-time for at least 39 weeks after the move, you may be entitled to a deduction for moving expenses. This deduction includes reasonable expenses to transport your personal belongings and household items to your new home as well as travel costs for you and your family. Inform your tax advisor in advance of moving for specifics of what you should track to claim this deduction.

Second, the sale of your personal residence may qualify to be totally tax free! This is probably one of the greatest gifts from Congress in the entire Internal Revenue Code. Here are the tests:

  1. You owned the home and used it as your main home during at least two of the last five years before the date of the sale.
  2. You didn’t acquire the home through a like-kind exchange (known as a “1031 exchange) for at least the past five years.
  3. You haven’t claimed any exclusion for the sale of a home that occurred during a two-year period prior to the date of the sale of your home.

If you satisfy these tests, you may be eligible to exclude from taxation (“exclude” means to NEVER pay taxes on it) up to $250,000 of gain ($500,000 of gain if married filing jointly)! Not only does this provision apply for federal income taxes but states generally conform to this provision as well, which means that not only can you avoid paying federal income taxes, you likely can avoid paying state income taxes as well. Your tax advisor will probably know this rule, but it never hurts to bring it up as you meet with him or her.

Strategy #5: Know what resources exist to help you

Beyond just tax strategies, consider these resources if you find you need some additional help guidance or assistance with further education or employment:

  1. Visit the VA Benefits website: The U.S. Department of Veterans Affairs maintains a website that provides a host of ideas and benefits ranging from education and training to loan information, employment services to health care benefits. Please take advantage of this website and its content. You can visit it at http://benefits.va.gov/.
  2. Veterans may find that they are in need of legal assistance with their homes, child support issues, or past warrants or fines. Legal help may be available for reduced costs or even for free. Visit statesidelegal.org to learn more.
  3. Consider the GI bill if you’re going back to school. There are different types, so it is important to do your homework here. The key idea is that there is money set aside to help you further your education to make the transition back to civilian life a little easier. Visit http://benefits.va.gov/gibill/ for more information.

Bonus Strategy: Start your small business!

We included this strategy in our guide for active-duty military personnel, but it may be even more applicable to our proud U.S. military veterans! One of the best tax strategies in America is the opportunity to have a small business. Consider starting something on the side NOW!! This could be an online business you start on the web as you pursue a college education or it could be simply investing in a rental property where you have family or have served on a base.

A small business will give you an extra source of income and tax deductions related to starting the business (including but not limited to travel, dining, entertainment, computers, supplies, equipment and auto…just to name a few). Most importantly, it can give you some focus and direction for what your plans may be while you are looking for a certain career or in school. Why not build your own business, develop necessary skills that you can enhance your resume with, and then go out and pursue your dreams!

Keep your eyes open. No idea is a bad one. If you don’t know where to start, consider Mark Kohler’s 8 Steps to Start and Grow your Business. It’s an affordable workbook and series of videos to walk you through the steps to build your Business Plan, Marketing Plan and Strategic Plan to get it off the ground.

Once again—THANK YOU! Thank you for being willing to share your time, talents, and maybe even putting your life on the line to protect our great country and the freedoms that we cherish. We love and respect you for your service. Wherever you find yourself on life’s great journey, let us assist you with anything you may need. God bless you, your family, and this great nation!

Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate.  Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.

The 1031 Exchange – A Real Estate Investor’s Secret Weapon

To 1031 or not to 1031…that is the question. Back in the real estate boom of 2005-2008 the 1031 exchange was an often used tax strategy by real estate investors looking to avoid the tax when selling highly appreciated properties. However, due to the “Great Recession” at the end of the boom, the 1031 strategy got put on the back burner of most taxpayers minds as worries of job security, declines in retirement accounts, and economic instability became the soup de jour.

However, Americans are known for their resilience and now, almost a decade after that near-fatal collapse of the economy, the sun has come back out again. Property values are up and again investors are looking for creative ways to get around the state and capital gains tax.

Bottom line, the 1031 exchange has proven to be one of the most effective ways to save tax dollars today!

The Basics

Most simply put a 1031 exchange occurs when a taxpayer sells a property and buys another piece of real estate of equal or greater value. Sounds simple right? Well, this is where it get’s fun.

  • You can sell one property and buy 3 (or more actually), so as long as what you buy in total is equal to or greater than what you sold.
  • You can sell 3 (or more actually) and buy one property, so long as it’s equal to or greater than the sum of what you sold.
  • You can only do it with Real Estate, and
  • Both properties you sell and purchase must be in the U.S.

The Problem

If you noticed, the law is call the 1031 “exchange”. Well, where in the world are you going to find a seller that wants your property and is willing to ‘exchange’ it and help you with your 1031? You have a better chance of winning the lottery- right?

So to help smooth the way for a qualifying exchange, the IRS allows for a something called a Qualified Intermediary (“QI”). This is a third-party that must be used to ‘hold’ the money the seller receives from the sale of the property, until the buyer pulls the trigger and buys the ‘replacement’ property.

Here is an image of what a proper exchange looks like:

The QI acts as the “referee” in the 1031 exchange, making sure all the rules are followed.

Just like in sports there are good refs and bad refs. A bad QI can blow up the whole transaction causing you to pay tax you would not have otherwise planned on paying, similar to the no call when Michael Jordan pushed off Bryon Russell to get open and score the championship winning points in game 6 of the 1998 NBA finals. Unfortunately, the 1998 Utah Jazz squad didn’t have a referee looking out for their best interest. Make sure you have a good QI on your side when completed a 1031.

Nuts and Bolts

In the diagram above, it shows a seller finding a buyer to pay the highest price for their property and the QI ‘holding’ the cash as they wait for the ‘exchange’ to unfold.

Then the Seller must act within 45 days to identify what property or properties it hopes to buy in the exchange. This is called the “Exchange Period”. The Seller doesn’t have to ‘close’ on the purchase within 45 days, but just let the IRS know what the plan is. The QI documents this process for you if the IRS was to come knocking on your door.

After the Exchange Period is over, the Seller must close on the purchase of the new or replacement property within 135 days (essentially 180 days from the date of the sale). This is called the “Replacement Period”.   The IRS doesn’t mind allowing for the exchange, but it doesn’t want you to drag it on…thus it creates these two timing rules so you move it along and close.

A good QI will be very clear about what needs to happen by what dates. Second, you have 180 days to close on the new property. Anything that occurs outside these 2 dates will result in a disqualified 1031 exchange.

What about taxes?

There are no taxes- for now. That’s the beauty of the 1031. However, what you did do is ‘defer’ the taxes. The gain you didn’t have to pay taxes on is allocated to the property or properties you purchased. Thus, you have to come up with another 1031 or strategy to avoid the tax someday in the future.

When you successfully complete a 1031 exchange your tax accountant will fill out a special form with the IRS and attach it to your tax return. This form will give the appropriate dates and the appropriate amounts of your “carryover basis” of the new property. It will also show any amount of taxable gain from the transaction.

Pitfalls

As you might expect there are many pitfalls in a 1031 exchange which will cause unintended consequences. We’ll note a few of them here:

  1. Not using a QI. Having the QI set up is essential for the transaction because the IRS requires that the Seller does not touch the money from the sale to Buyer. If the Seller touches the money, the 1031 is blown up. You cannot achieve a successful 1031 exchange without a QI. Furthermore, a QI cannot be just any Joe Blow off the street. They have to be a company that deals specifically with 1031 exchanges.
  2. Missing the dates. The IRS form that shows your 1031 exchange has the relevant dates printed on lines 3 through 6 of the FIRST page. The IRS will not miss them. If your dates are not in line with the rules, you are out of luck
  3. Your 1031 exchanges straddles two years and you fail the exchange. Say you sell your old property on Dec 1, 2017. Your 180 days ends after the April 15 due date of your 2017 tax return, what happens? The IRS rule states that the 1031 exchange is to be reported in the year that the 1031 exchange BEGINS. In this case if you don’t close on your new property until after April 15, which is likely, you will have to file for an extension of time to file your tax return because the 1031 must be reported on your 2017 tax return. Take precautions by paying an estimate tax payment if you think there is a chance the 1031 could fail.
  4. The purchase price of the exchange property or properties isn’t equal to or greater than what you sold. If the new property isn’t as valuable as the old property you’ve defeated the purpose of deferring the gain.
  5. Beware of State rules. The “1031 exchange” comes from code section 1031 of the Internal Revenue Code aka the tax code. It is the federal tax code. Much to the dismay of tax accountants everywhere, not all states follow all rules of the federal tax code. If you’re seeking to do a 1031 exchange take a moment to find out what your state rules are. If you’re in Pennsylvania, you’re out of luck as they are the only state that doesn’t recognize the 1031 exchange rules in some form or another.
  6. Beware of “Boot.” In a 1031 exchange you actually have an interesting choice. You can choose to take some money out when you sell the original property. If you choose to do so you will have to pay tax on the amount of cash you receive. This, by itself, doesn’t blow up the 1031 exchange.
  7. Your gain is deferred, not exempt! This means if you sell the 1031 property at a later date you will pay tax on that sale as if the original 1031 didn’t take place. There is potentially one exception to this rule. If you successfully complete a 1031 exchange and subsequently die, the new property will receive a “step-up” in basis. At the sale of the property your heirs will enjoy the benefit of that step up and may potentially pay zero tax from the sale.

The 1031 exchange can be a great tax strategy and is available to everyone who has the right property in place. Especially since the economy is currently in an upswing now is the best time to consider “upgrading” your portfolio through a 1031 exchange.

Pay attention to the rules and avoid the pitfalls. The best piece of advice I could give is that you contact your tax advisor prior to starting the 1031 exchange transaction. Press them for information to ensure you are doing things correctly, and even get a referral for a good QI.

Rick Taylor is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Rick’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate.  Rick previously worked in the tax department at Barlow & Douglas, LLP in Las Vegas, Nevada, and is currently married with 7 children living in Cedar City, Utah.

Tax Strategies for US Military Personnel- Active Duty

At KKOS Lawyers and Kohler & Eyre CPA’s, we salute our brave men and women in uniform. THANK YOU for putting your life on the line to protect our great country. We honor and cherish your sacrifices that keep us safe.

In turn, we try to give back where we can, personally, to you amazing service members.  As such we have summarized some important tax strategies for active duty military personnel. We work diligently to help our active-duty military clients as well as military veterans strategize and make the most of tax planning opportunities.

Here are 5 tax strategy/opportunities to be aware of and discuss with your tax advisor each year.

Strategy #1: Know what benefits/compensation are taxable and which ones are not!

Like all U.S. citizens, members of the Armed Forces receive income that is taxable to them. This includes foreign source income (income earned overseas). Some foreign income may be excluded, but these exclusions aren’t available for wages and salaries of military and civilian employees of the U.S. Government. The following list provides payments are typically included as taxable benefits and compensation for members of the Armed Forces:

  1. Basic pay: This includes compensation for active duty, attendance at a designated services school, drills, reserve training and training duty pay, and CONUS COLA amounts (supplemental cost of living allowances).
  2. Special pay
  3. Bonus pay
  4. Incentive pay
  5. Other pay: This would include accrued leave, student loan repayment programs, high deployment per diem amounts, personal money allowances for high-ranking officers, and the personal use of government provided vehicles.
  6. Differential wage payments: Differential wage payments are payments made by an employer (other than the Armed Forces) to an individual. They are paid for a period during which the individual performed services in the uniformed services while on active duty for a period of more than 30 days. These payments represent all or a portion of the wages the individual would have received from the employer if the individual had been performing services for the employer during that period.
  7. Qualified reservist distributions (QRD): The portion of your QRD reported by your employer as wages on Form W-2, Wage and Tax Statement, is included in your gross income and is taxable. A portion of this amount may also be subject to employment taxes as well.
  8. Uniformed Services Traditional Thrift Savings Plan (TSP) distributions (except for tax-exempt combat pay contributions)

Depending on the type of income, there are many items that should not be included in the taxable income for members of the Armed Forces. The following list provides payments are typically excluded from your taxable income:

  1. Combat pay: This is compensation for active service while in a combat zone. Some states may have bonus pay programs that are also typically not taxable.
  2. Disability payments, including payments received for injuries incurred as a direct result of a terrorist or military action
  3. Group-term life insurance amounts received by an individual or his/her family
  4. Professional education or ROTC educational and subsistence allowances
  5. Uniforms and uniform allowances
  6. Death allowances such as burial services, death gratuity payments to eligible survivors or travel of dependents to burial site.
  7. Family allowances including certain educational expenses for dependents, emergency allowances, evacuation to a place of safety or separation allowances.
  8. Living allowances including a basic allowance for housing (BAH), basic allowance for subsistence (BAS), overseas housing allowances (OHA), or housing and cost-of-living allowances abroad paid the US or a foreign government
  9. Moving allowances
  10. Most travel allowances
  11. In-kind military benefits such as dependent-care assistance programs, legal assistance, medical/dental care, commissary or exchange discounts, and space-available travel on government aircrafts
  12. Military base realignment and closure benefits paid under the Homeowners Assistance Program (HAP) (unless total payments are greater than certain thresholds)

Strategy #2: Deduct expenses paid with your excluded basic allowance for housing

A common question that military clients may have is whether or not they can claim a deduction for items paid for with their BAH, since the BAH is a living allowance that was not included in taxable income in the first place. Great news here—you can still deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH!

Strategy #3: Be aware of special combat zone and/or contingency operation extensions

If you serve in the Armed Forces in a combat zone, you have qualifying service outside of a combat zone, or if you serve in the Armed Forces on deployment outside the United States away from your permanent duty station while participating in a contingency operation, you may be allowed additional time to file your tax returns and/or pay your taxes. Spouses also may be able to enjoy these benefits.

The extension period may vary, but you could be entitled to at least an extra 180 days after the later of (1) the last day you are in a combat zone, serve outside the combat zone, or serve in a contingency operation or (2) the last day of any continuous qualified hospitalization from injury from service in these areas. Take the later of those dates and add at least 180 days (i.e. almost six months) to do the following items:

  • Filing tax returns
  • Paying taxes due
  • Filing for credit or refund from the IRS
  • Making contributions to an IRA account
  • Giving or making any notice or demand by the IRS for payment of taxes

Strategy #4: Deduct unreimbursed expenses

Unreimbursed employee expenses are deducted on Schedule A as an itemized deduction. These expenses are deductible to the extent that they are more than 2% of your adjusted gross income, or AGI. Keep good records here and you may find that they can really add up!

Even if you are a reservist, you may be entitled to deductions for many of the activities that you do. For example, if you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from your home in connection with your work as a reserve member, you can typically deduct your unreimbursed travel expenses from the time you leave home to the time you return home. Record keeping is critical here to substantiate your deduction. Track your meals, lodging, your total miles driven, and keep receipts. For the miles, it helps to maintain a mileage log that includes the date and the purpose of the trip.

Other expenses to consider are unreimbursed expenses to maintain uniforms of which you are prohibited to wear off duty. In other words, the cost and upkeep of uniforms like military battle dress and utility uniforms that are not typically allowed to be worn off duty are deductible. You may also be able to deduct unreimbursed professional dues if they are required for your military service. For example, if you are an electrical engineer at a military base and you pay dues to the American Society of Electrical Engineers without reimbursement, you would be able to claim a deduction for those dues.

Strategy #5: Start your small business ‘on the side’ NOW!

One of the best tax strategies in America, that YOU ARE FIGHTING for, is the opportunity to have a small business.  Get started now!!  This could be an online business you start on the web during your time down and days off, it could be a service business that you are laying the ground work for on your ‘leave’ when you are home, OR it could be simply investing in a rental property where you have family or have been serving on a base.

A small business will give you an extra source of income, tax deductions related to starting the business (including but not limited to travel, dining, entertainment, computers, supplies, equipment and auto…just to name a few).  Most importantly, it can give you some focus and direction for what your plans may be after your tour is up.  Why not build your own business, then search and look for J.O.B. when you get back.  Plan the future you want!!

Keep your eyes open. No idea is a bad one.  If you don’t know where to start, consider my 8 Steps to Start and Grow your Business.  It’s an affordable workbook and series of videos to walk you through the steps to build your Business Plan, Marketing Plan and Strategic Plan to get it off the ground.

In, sum, we love our active-duty military men and women as well as those that have served in the past! We thank you for your service, and we are here to help with whatever situation you find yourself in. Whether you are actively serving or making the transition back to civilian life, consider these ideas above to help along your journey.

Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate.  Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.

ARE SINGLE MEMBER LLC’S WORTH IT?

There’s a lot of talk on the internet in the entrepreneurial and real estate investing blogosphere regarding the single-member LLC. Some people seem to think they are completely worthless, while others prescribe them like aspirin for headache. However, as is almost always the case, neither extreme is correct. Single-member LLC’s have their place in the spectrum of business entity choices, and whether such an entity is right for you will depend on the details of your own personal situation.

As the name implies, a single-member LLC is simply a limited liability company with one owner (member), instead of multiple owners.

Single-Member LLC Pros

1) Asset Protection: as is the case with any LLC, the single-member LLC will act as a shield to protect your personal assets from the liabilities associated with the business conducted by the LLC. For example: if your LLC owns a rental property, and someone slips and falls on that property and wants to sue the property owner, that plaintiff will be required to sue the LLC, not you personally. If the plaintiff ultimately wins the lawsuit, he or she will only be able to come after the assets owned by the LLC, not the LLC owner. The same protection applies to protect the owner from any debts of the LLC.

2) Disregarded Entity Tax Status: a single-member LLC will be treated as a “disregarded entity” for federal income tax purposes (unless it formally elects to be treated as a corporation), and thus its profit or loss will be reported on an individual member’s Schedule C as if it were a sole proprietorship. This will save the member time and money in connection with the preparation of income tax returns, since the separate LLC entity need not file any tax return.

3) Ease of Use: there are very few legal requirements when it comes to running an LLC. The state will not require you to file annual reports or annual minutes. You really don’t have to keep any minutes at all. However, beware of this potential trap! See the list of “cons” below to see how to avoid this problem.

Single-Member LLC Cons

1) Don’t Fall Asleep at the Wheel: Since little is required, most people do almost nothing in regard to keeping records of actions taken by the LLC. In many cases, they don’t even have an Operating Agreement, which is the bylaw of the LLC and dictates how the company will function. In such situations, the plaintiff in a lawsuit against the LLC will ask the judge to set aside the asset protection associated with the company by claiming the company is a sham since it has no records and no Operating Agreement. In many cases, the court will agree and the single member [that’s you] becomes personally liable for the business debts. This potential disaster can be avoided through good corporate governance and annual maintenance.

2) Lack of “Outside” Liability Protection: unlike multiple-member LLC’s, in most states a single-member LLC will not protect against personal liability in the event of a lawsuit or other claim. Indeed, certain courts have “pierced the veil” of a single-member LLC and have held that it is not a separate entity and thus may not be used to protect the assets of the LLC from the creditors of the member. In order to avoid this issue, we advise clients to do two things: (i) create sufficient legal documentation (including a single-member operating agreement and annual company minutes, etc.) to reflect that the single-member LLC is indeed a separate entity and has been treated as such; and (ii) if there is significant liability exposure, issue a small equity interest (e.g., 2%) to a close relative – i.e., create a multiple-member LLC — in which case, the LLC will no longer be a “disregarded entity” for tax purposes.

Bottom Line

While effective in several situations, a single-member LLC is not a silver bullet that will cure all potential asset protection and tax planning problems. It’s important to sit down with a competent legal and tax help to create a solution that is right for you and your goals.