Reliable _________
Financial, Accounting & Tax Advice

   Do beneficiaries of a trust pay taxes?

Beneficiaries of a trust typically pay taxes on distributions they receive from the trust’s income. However, they are not subject to taxes on distributions from the trust’s principal. When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. The K-1 indicates how much of the beneficiary’s distribution is interest income versus principal and, thus, how much the beneficiary is required to claim as taxable income when filing taxes.

Interest Vs. Principal Distributions

When a trust beneficiary receives a distribution from the trust’s principal balance, he does not have to pay taxes on it, the reason being the Internal Revenue Service (IRS) assumes this money was already taxed before it was placed into the trust. Once money is placed into the trust, the interest it accumulates is taxable as income, either to the beneficiary or the trust itself. The trust must pay taxes on any interest income it holds and does not distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who receives it.

Tax Forms

The two most important tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. On this form, the trust deducts from its own taxable income any interest it distributes to beneficiaries. At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the distributed money came from principal versus interest. The K-1 is the form that lets the beneficiary know his tax liability from trust distributions.


   How Can American Expats Reduce their IRS Taxes?

Americans living abroad are still required to file US taxes. The US is the only country that requires its expats to file. It is because the US taxes based on citizenship rather than on residence.

This leaves the millions of Americans who work abroad at risk of double taxation,  paying taxes in both the country where they live, and to the US, on the same income, as the US requires all its citizens to file and pay US taxes on their worldwide income.

There are however a number of ways that US expats can legally reduce their IRS tax liability, in many cases to zero.

The Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion allows American expats who can prove that they live abroad in one of two ways to exclude the first around $100,000 (the exact figure rises a little every year) of their income from US tax.

Expats can prove that they live abroad either using the Bona Fide Residence Test, which requires them to provide proof of permanent residence in another country, or the Physical Presence Test, which requires them to prove that they spent at least 330 days outside the US in the tax year. The Physical Presence Test is useful for Digital Nomads who may be living abroad but traveling between countries, among others.

Expats can claim the Foreign Earned Income Exclusion by filing form 2555 when they file their federal return.

The Foreign Housing Exclusion

Expats who earn over around $100,000 and rent their accommodation abroad can exclude a proportion of the value of their housing expenses from US tax by claiming the Foreign Housing Exclusion alongside the Foreign Earned Income Exclusion, also using form 2555.

The Foreign Tax Credit
The Foreign Tax Credit gives a $1 US tax credit for every dollar of tax already paid abroad. For expats living and paying taxes abroad at a higher rate than the US tax rate, this allows them to eliminate their US tax liability without claiming the Foreign Earned Income Exclusion, while also (if they’ve paid more tax abroad) getting excess US tax credits they can save for the future.
There is also no upper amount of credits that can be claimed, so it can be claimed whatever your income.

Some expats may benefit from claiming the Foreign Earned Income Exclusion and the Foreign Tax Credit on income over the Foreign Earned Income Exclusion limit.

The Foreign Tax Credit is claimed by attaching form 1116 to your federal return.

Which is most beneficial depends on the expats circumstances (more on this in the ‘Strategy’ section, below).

Use your foreign spouse

This can work in one of two ways. Firstly, if you’re earning a little over the Foreign Earned Income Exclusion but either paying no foreign tax, or less foreign tax than you owe the  IRS (so the Foreign Tax Credit isn’t beneficial), and you own your home (so the Foreign Housing Exclusion can’t be claimed), if your foreign spouse earns less than $100,000, if you bring them into the US tax system and file jointly, you double your standard deduction and get a further personal exemption for spouse.

Conversely, if your spouse earns more than $100,000, it’s normally beneficial to leave them outside the US tax system, instead checking ‘married filing separately’ on your return.

The Streamlined Procedure
The Streamlined Procedure is an IRS amnesty program that allows expats who are behind in their tax or FBAR (foreign bank account reporting) filing to catch up without facing penalties. For expats who weren’t previously aware that they have to file US taxes from overseas, the Streamlined Procedure is a great opportunity to become tax compliant without paying any fines, and so save them potentially a small (or large) fortune.
Renouncing citizenship
This is the nuclear option, and shouldn’t be taken without full consideration of all the consequences, however for some people it can make sense

For example, if you have settled abroad permanently, are also a citizen of another country, and are a high earner who will always owe tax to the US on top of the taxes you pay in your country of residence, in the long terms the cost of renouncing ($2350) may be worthwhile in terms of future tax savings.


While there are many strategies available to expats to reduce their US taxes, half the battle is knowing which one (or ones) to apply. This depends on each expats particular circumstances – how much they earn, which country they live in, whether they’re living abroad temporarily or permanently, whether they’re married (and if so their spouse’s nationality and financial circumstances), among other things. This is where it normally the best tax saving strategy to consult an expert expat tax specialist, who by applying the right strategies given the expat’s circumstances will typically be able to save much more money than they cost.

   How the Sales Tax Holiday Can Boost Your Back-to-School Savings


With several of my family members working in the education field, I know it will be only a matter of time before I’ll get tweets and Facebook shares on the back to school deals they find. Depending on where you live, your state may be offering a huge savings with a sales tax free shopping weekend on specific purchases. With state sales tax ranging 4-7%, that means more money in your pocket.

Dates vary, but this year many states are having it the first full weekend in August (7th-9th). You can check here for more details on which states are offering sales tax holidays.

Why Tax Free is Even Better Than You Think

While not all states participate, you may be able to enjoy tax free shopping for school supplies in several states including Texas, Iowa, and Connecticut. If you have several kids going to school this year, you can boost your savings picking up paper, pens, calculators, and back packs.

Speaking of saving money, you can get even better deals on the bigger ticket items – namely laptops and tablets.

Getting the Bigger Bang for Your Hard Earned Buck with Laptops

You don’t want to buy a laptop because it was on sale only to see it slow or break down in a year. While specs change year to year, here are some guidelines to help you get technology that will last.

What Workload Will It Be Handling?

If your kid needs a computer they can easily tote with them for notes, but not to run highly specialized programs, you may want to get a tablet instead. There are some wonderful bundles that give you a tablet (with warranty) and a case at a great bargain.

They can use the tablet while at school and then do the heavy lifting on the home computer. For those who need more processing power, but still want the portability of a tablet, getting a hybrid like the Surface or Yoga may be the right ticket for you.

High school and college students may need a laptop to keep up with their coursework. New processors come out, but right now you can get incredible performance with some older models. Those who are using programs like Photoshop and Unity will want to make sure that their computer has plenty of memory (at least 8GB RAM).

You also want to check out reviews and make sure you get a laptop with a reputation for good battery life (at least 9 hours).

Thoughts on Back to School Savings

I hope this helps you prepare your shopping list. What supplies do you need to pick up this school year?

   IRS Simplifies Surviving Spouse Portability Election

The Internal Revenue Service has released a revenue procedure that offers an easier way to get an extension of time to file a return to opt for portability of the deceased spousal unused exclusion amount.

Revenue Procedure 2017-34 applies to estates that aren’t typically required to file an estate tax return because the value of the gross estate and adjusted taxable gifts is under the filing threshold. The first $5,490,000 (under the 2017 exemption) is excluded for federal estate tax purposes. This is a cumulative lifetime exemption, so taxable gifts made during a taxpayer’s lifetime use part of the exemption. After a taxpayer’s death, the rest of the exemption amount is applied to the remaining estate.

For federal estate tax purposes, if taxpayers follow the proper compliance procedures, they can “port” the exemption of the first spouse to the second spouse for all deaths after 2010, according to Lisa Rispoli, partner-in-charge of trust and estate services at Grassi & Co., in a note to clients Monday. This provides for the availability of approximately $10,980,000 in assets to be exempt from estate tax. The exemption ported is known as the “deceased spouse unused exemption,” or DSUE.

“This portability election requires the filing of a return for the estate of the first deceased spouse, even if that estate is too small to require filing otherwise,” Grassi & Co. noted. “It must be elected on a timely filed return, including extensions.”

In the earlier years after the DSUE portability provisions were originally enacted, the IRS provided a simplified method for getting a time extension to make the portability election for estates that wouldn’t normally need to file an estate tax return. But that simpler method was only available up until the end of 2014.

After Dec. 31, 2014, the IRS has issued several letter rulings to allow some estates to make a portability election if they missed the deadline for filing and weren’t otherwise required to file. But it involved paying a substantial fee (now as high as $10,000) to the IRS.

The new revenue procedure provides a less expensive and simpler way to make the election. For estates of people who died between Jan. 1, 2011 and Jan. 2, 2016 (and who aren’t otherwise required to file an estate tax return and missed the deadline for timely filing) the election can be made up until Jan. 2, 2018. Estates of people who died after Jan. 2, 2016, can make an election up to two years after the date of death.

For the surviving spouse, the tax savings for making this election is significant, Grassi noted, as much as $2.2 million.


Michael Cohn


Business travel, an expensive and time-consuming activity for both the employer and employee, also can create tax problems for all concerned unless the rules are followed to the letter. If it’s done right, business travel will be fully deductible by the company (but only 50% of travel meals are deductible), tax-free to the employee, and free of FICA and payroll tax withholding. If the rules aren’t followed, the expense will still be deductible by the employer, but it will be taxed to the employee and fully subject to withholding. This Practice Alert reviews the business travel rules that apply in a variety of common situations.

Background. In general, a business may deduct under Code Sec. 162 all ordinary and necessary business expenses paid or incurred during the tax year in carrying on any trade or business, including travel expenses (such as lodging expenses) that aren’t lavish or extravagant while away from home in the pursuit of a trade or business.

Under Reg. § 1.132-5(a), the value of a working condition fringe benefit (WCFB) is not included in an employee’s gross income. A WCFB is any property or service provided to an employee to the extent that, if the employee paid for the property or service, it would be deductible under Code Sec. 162 or Code Sec. 167 (dealing with the depreciation allowance).

Under Reg. § 1.62-2(c)(4), an advance or reimbursement made to an employee under an “accountable plan” is deductible by the employer and is not subject to FICA and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if the employee:

  1. Receives the advance, etc., for a deductible business expense that he or she paid or incurred while performing services as an employee of his or her employer;
  2. Must adequately account to his or her employer for the expense within a reasonable period of time; and
  3. Must return any excess reimbursement or allowance within a reasonable period of time.

By contrast, an advance, etc., made under a “nonaccountable plan” is fully taxable to the employee and subject to FICA and income tax withholding. It will be treated as compensation to the employee and, in general, deducted as such by the employer.

Tax attraction of business travel status. The round-trip cost of traveling on business is deductible whether or not the taxpayer is away from home overnight. For example, if a New York businesswoman takes the shuttle to Washington on business, the airfare is deductible whether she returns home the same day (in which case it’s treated as business transportation) or stays in Washington overnight (in which case it’s treated as business travel). What makes business travel unique from the tax viewpoint is that when a taxpayer is in business travel status, the entire cost of lodging and incidental expenses, and 50% of meal expenses, are deductible by a business that pays the bill and don’t result in any taxable income to employees who are reimbursed under an accountable plan.

Qualifying for business travel status. A business trip has the status of business travel only if:


  1. It involves overnight travel;
  2. The taxpayer travels away from his or her tax home;
  3. The trip is undertaken solely, or primarily, for ordinary and necessary business reasons; and
  4. The trip is “temporary”, i.e., the traveler is temporarily away from home.

Overnight travel status. To deduct the cost of lodging and meals, the taxpayer generally must be away from home overnight. (Correll (S Ct 1967) 20 AFTR 2d 584520 AFTR 2d 5845; Rev Rul 75-432, 1975-2 CB 60) This isn’t a literal test in the sense that the taxpayer must be away from dusk to dawn. Any trip that is of such a length as to require sleep or rest to enable the taxpayer to continue working is considered “overnight”. (Rev Rul 75-170, 1975-1 CB 60)

Noteworthy exception. The regs provide one exception under which local non-lavish expenses for lodging while not away from home overnight on business are deductible, if all the facts and circumstances so indicate. One factor is whether the taxpayer incurs the expense because of a bona fide condition or requirement of employment imposed by his employer. (Reg. § 1.162-32(a))

Under Reg. § 1.162-32(b), local lodging expenses are treated as ordinary and necessary business expenses if all of the following conditions are met:


  1. The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function.
  2. The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.
  3. If the individual is an employee, his or her employer requires him to remain at the activity or function overnight.
  4. The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

RIA illustration1 XYZ Corp runs a 3-day business-related training session at a hotel near its main office. It requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. If XYZ pays the lodging costs directly to the hotel, the stay is a WCFB to all attendees (even to employees who live in the area who are not on travel status), and XYZ may deduct the cost as an ordinary and necessary business expense. If employees pay for the lodging costs and are reimbursed by XYZ, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by XYZ as an ordinary and necessary business expense. (Adapted from Reg. § 1.162-32(c), Exs. 1 and 2)

Travel away from tax home. Deductions for meals and lodging on business trips are allowed because expenses for these items are duplicative of costs normally incurred at the taxpayer’s regular home and require the taxpayer to spend more money while traveling. Consequently, the taxpayer can’t claim deductions for meals and lodging unless he or she has a home for tax purposes, and travels away from it overnight. (See, e.g., Correll (S Ct 1967) 20 AFTR 2d 584520 AFTR 2d 5845; Andrews (CA 1 1991) 67 AFTR 2d 91-88167 AFTR 2d 91-881, vacg TC Memo 1990-391TC Memo 1990-391) There are no deductions when, for instance, a business person sleeps at a local hotel because of a late workday in the city, instead of traveling back to his or her nearby suburban home.

A taxpayer’s “tax home”, that is, his or her home for purposes of the business-travel deduction rules, is located at

  1. His or her regular or principal (if more than one regular) place of business, or
  2. If the taxpayer has no regular or principal place of business, his or her regular place of abode in a real and substantial sense. (Rev Rul 73-529, 1973-2 CB 37)

Where a taxpayer has two or more work locations, his or her main place of work is his tax home. In determining which location is the main place of work, the factors to be taken into account include: the total time ordinarily spent in each place; the level of business activity in each place; and whether the income from each place is significant or insignificant. (Markey (CA 6 1974) 33 AFTR 2d 74-59533 AFTR 2d 74-595, revg TC Memo 1972-154TC Memo 1972-154; IRS Publication 463, 2016, pg. 3)

The rules are different where the taxpayer does not maintain a permanent residence. For example, an itinerant salesperson who moves from place to place is “home” wherever he or she stays at each location. Since the taxpayer doesn’t have duplicative expenses, there’s no deduction for meals and lodging. (Rev Rul 73-529, 1973-2 CB 37; Henderson (CA 9 1998) 81 AFTR 2d 98-174881 AFTR 2d 98-1748, affg TC Memo 1995-559TC Memo 1995-559)

When business traveler is “temporarily” away from home. Except for certain federal criminal investigators and prosecutors, a taxpayer won’t be treated as temporarily away from home during any period of employment if such period exceeds one year. (Code Sec. 162(a)) IRS has ruled that if employment away from home in a single location is realistically expected to last (and does in fact last) for one year or less, the employment is “temporary” in the absence of facts and circumstances indicating otherwise. If employment away from home in a single location initially is realistically expected to last for one year or less, but at some later date the employment is realistically expected to exceed one year, the employment will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the taxpayer’s realistic expectation changes. (Rev Rul 93-86, 1993-2 CB 71)

“Breaks in service” and the 1-year rule. An employee may be asked to work at offsite location 1 for a specified period, then be shifted to offsite location 2 or back to the home office, and then reassigned back to offsite location 1. How long does the “break in service” (i.e., the period at offsite location 2 or back at the home office) have to be for employment at offsite location 1 to be treated as two separate periods of employment for purposes of the 1-year rule for temporary travel away from home?

In Chief Counsel Advice 200026025, IRS dealt with this question in the context of Rev Rul 99-7, 1999-5 CB 361, which provides a 1-year rule for determining whether transportation between an employee’s home and a work location is “temporary” and therefore deductible. The 1-year rule in Rev Rul 99-7 is very similar to the 1-year temporary away-from-home rule in Rev Rul 93-86. The CCA said that, while there’s no general guidance on when a break is significant, a break of three weeks or less isn’t significant and won’t “stop the clock” in applying the 1-year temporary workplace limit. By contrast, a continuous break of at least seven months would be significant. Thus, two offsite work assignments separated by a 7-month continuous break would be treated as two separate periods of employment for purposes of the 1-year temporary workplace limit. The CCA said that this would be the case “regardless of the nature of the employee’s work activities or the nature of the break, and regardless of whether the subsequent employment at the work location was anticipated”.

Illustration2: On Jan. 1, Year 1, employee Jack Blue is told he will work at Client DEF’s office for eight months (Jan. 1—Aug. 31), then work exclusively at Client GHI’s office for three weeks (Sept. 1—Sept. 21), and then work again at DEF’s office for four months (Sept. 22—Jan. 22). Because the 3-week break in service at DEF’s office is inconsequential, on Jan. 1, Year 1, there’s a realistic expectation that Blue will be employed at DEF’s office for a period exceeding one year (Jan. 1, Year 1 through Jan. 22, Year 2). As a result, his employment at DEF’s office is not temporary. (Chief Counsel Advice 200026025, Ex. 1)

Illustration3: The facts are the same as in illustration (2), except that the interim assignment at Client GHI’s office will last for seven months (Sept. 1, Year 1–Mar. 31, Year 2), followed by a 4-month reassignment to DEF’s office (Apr. 1, Year 2–July 31, Year 2). Here, Blue’s employment at DEF’s office is treated as temporary for each of the two periods he’s there. This result wouldn’t change even if Blue had spent some of the interim 7-month period on vacation or at training rather than working at GHI’s office. (Chief Counsel Advice 200026025, Ex. 2)

RIA observation: Although IRS doesn’t say so, its “break in service” guidance for purposes of the 1-year temporary workplace rule also should apply for purposes of the 1-year away from home rule for business travel. Thus, in the last illustration, if Client DEF was located out of town, Blue could be reimbursed tax-free not only for his round-trip travel costs, but also for his lodging and meal expenses while on the out-of-town assignments.

   IRS Warns of New Phone Scam Involving Bogus Certified Letters

The Internal Revenue Service today warned people to beware of a new scam linked to the Electronic Federal Tax Payment System (EFTPS), where fraudsters call to demand an immediate tax payment through a prepaid debit card. This scam is being reported across the country, so taxpayers should be alert to the details.

In the latest twist, the scammer claims to be from the IRS and tells the victim about two certified letters purportedly sent to the taxpayer in the mail but returned as undeliverable. The scam artist then threatens arrest if a payment is not made through a prepaid debit card. The scammer also tells the victim that the card is linked to the EFTPS system when, in fact, it is entirely controlled by the scammer. The victim is also warned not to contact their tax preparer, an attorney or their local IRS office until after the tax payment is made.

“This is a new twist to an old scam,” said IRS Commissioner John Koskinen. “Just because tax season is over, scams and schemes do not take the summer off. People should stay vigilant against IRS impersonation scams. People should remember that the first contact they receive from IRS will not be through a random, threatening phone call.”

EFTPS is an automated system for paying federal taxes electronically using the Internet or by phone using the EFTPS Voice Response System. EFTPS is offered free by the U.S. Department of Treasury and does not require the purchase of a prepaid debit card. Since EFTPS is an automated system, taxpayers won’t receive a call from the IRS. In addition, taxpayers have several options for paying a real tax bill and are not required to use a specific one.

Tell Tale Signs of a Scam:

The IRS (and its authorized private collection agencies) will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

For anyone who doesn’t owe taxes and has no reason to think they do:

  • Do not give out any information. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration to report the call. Use their IRS Impersonation Scam Reporting web page. Alternatively, call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the FTC Complaint Assistant on Please add “IRS Telephone Scam” in the notes.

For anyone who owes tax or thinks they do:

The IRS does not use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds. For more information, visit the “Tax Scams and Consumer Alerts” page on Additional information about tax scams is available on IRS social media sites, including YouTube videos.

   How to Secure a Valuable Tax Credit for Hiring Designated Workers

Before you interview the next group of job candidates for your small business, whether it’s to fill a full-time position or just for the summer, keep in mind that long-term unemployment recipients and other workers certified by a state agency may qualify for the Work Opportunity Tax Credit (WOTC).

This isn’t just chicken feed: The credit is generally equal to 40 percent of the worker’s first-year wages up to $6,000, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be available for the first $24,000 of wages, for a maximum credit of $9,600 per worker. And remember that tax credits, as opposed to tax deductions, offset tax liability on a dollar-for-dollar basis.

The WOTC is a long-standing income tax benefit that encourages employers to hire designated categories of workers who face significant barriers to employment.

This credit is usually claimed on Form 5884, Work Opportunity Credit. However, to qualify for the credit, an employer must first request certification by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with the state workforce agency within 28 days after the eligible employee begins work. Other requirements and further details can be found in the instructions to Form 8850.

Currently, there are 10 categories of WOTC-eligible workers. The latest category to be added, effective Jan. 1, 2016, covers long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and have received state or federal unemployment benefits during part or all of that time.

According to the IRS, the other categories include certain veterans and recipients of various kinds of public assistance, among others. The 10 categories are:

  • Qualified IV-A Temporary Assistance for Needy Families recipients
  • Unemployed veterans, including disabled veterans
  • Ex-felons
  • Designated community residents living in empowerment zones or rural renewal counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in empowerment zones
  • Food stamp recipients
  • Supplemental Security Income recipients
  • Long-term family assistance recipients
  • Qualified long-term unemployment recipients

Note that a special summertime credit is available for hiring youths who are 16 or 17 years old and reside in an empowerment zone or enterprise community. This credit equals 40 percent of the first-year wages of $3,000, up to a maximum of $1,200, for a youth working at least 400 hours. But the credit is limited to wages paid for services performed between May 1 and Sept. 15.

Eligible businesses claim the WOTC on their income tax return. First, the credit is calculated on Form 5884, and then it becomes a part of the general business credit claimed on Form 3800.

These rules are complex, so small business owners may require guidance from their professional tax advisor.


Ken Berry

   How to Play All the Right Tax Angles for Hobbies

Millions of people enjoy hobbies that also provide a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing – no matter what your passion is, there will likely be tax repercussions.

Some taxpayers are surprised to learn that they must report income earned from hobbies on their tax return. The exact rules for reporting income, as well as deducting expenses, depend on whether the activity is a hobby or a business. In fact, you may bump up against obstacles in this area.

Accordingly, the IRS has focused on the following points for hobby enthusiasts to consider:

Business vs. Hobby
If an activity is a hobby, not a business, your deductions are generally limited to the amount of hobby income. Conversely, a business might be able to claim a loss. The key distinction is often whether you’re engaging in the activity to turn a profit.

Traditionally, the IRS and the courts have relied on nine factors to make this determination:

  1. The manner in which the taxpayer carries on the activity.
  2. The taxpayer’s expertise.
  3. The time and effort expended by the taxpayer in carrying out the activity.
  4. Any expectation that assets used in the activity (e.g., land) may appreciate in value.
  5. The taxpayer’s success in other activities.
  6. The taxpayer’s history of income or losses from the activity.
  7. The relative amounts of the profits and losses.
  8. The taxpayer’s financial status.
  9. Whether the activity provides recreation or involves personal motives.

Don’t discount any of these factors. All nine of them may come into play.

Allowable Hobby Deductions
Within certain limits, taxpayers can usually deduct “ordinary and necessary” hobby expenses to offset hobby income. An ordinary expense is one that is common and accepted for the activity, while a necessary expense is one that is appropriate for the activity. Typically, your deductible expenses might include production and advertising costs.

Limits on Hobby Expenses
Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses exceed the income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income like a business loss can.

Method of Deducting Hobby Expenses
Taxpayers must itemize deductions on their tax return in order to deduct their hobby expenses. Generally, hobby expenses are deducted on Schedule A of Form 1040 as miscellaneous expenses, subject to the usual limits. Thus, if you do not itemize deductions, or if your expenses fall below the threshold for deducting miscellaneous expenses, you may get no tax benefit from your hobby.

Note that the IRS follows a special presumption when determining whether an activity is a business or a hobby. If an activity turns a profit in three of five consecutive years, the activity is presumed to be a business, although this presumption can be rebutted by evidence.

The presumption applies if you show a profit in only two out of seven years for activities related to the breeding, training, showing, or racing of horses.

   Some of the Biggest Estate-Planning Mistakes People Make

Will your legacy be a benefit or a burden to your loved ones? It depends on how well you’ve planned.

There are some things we just don’t like to think about, much less speak about. The universal truth is we are all going to pass away one day. The legacy you leave can either simplify the process of dealing with your personal and financial property, or it can be a worrisome burden for those you leave behind.

Legacy planning is as important as your final wishes. So, as much as you avoid the topic, it can’t be — and shouldn’t be — ignored.

When discussing this subject, I like to point out to people that it is often the smallest things that can come back to bite you. I’m reminded of the proverb that says, “For want of a nail, the kingdom was lost.”

So let’s take a look at what you should discuss with a qualified attorney to help make sure your kingdom — and your legacy — isn’t lost.

There are several common mistakes people can make when planning — or not planning — for what will happen with their estates when they die. A few of those mistakes include:

Lack of a see-through provision on a trust.

This can prove very costly. For example, consider a couple who has a $1 million Individual Retirement Account (“IRA”) and the beneficiary of the IRA is a trust. If there is no see-through provision on the trust, the couple’s estate could potentially owe several hundred thousand dollars in taxes when the IRA is passed to beneficiaries due to the higher tax rates trusts are often subject to. In certain circumstances, a trust may be an appropriate beneficiary for an IRA.

A “see-through trust” refers to a trust that meets specific legal requirements and serves as the named beneficiary of an IRA. In this scenario, The IRS will “see through” the trust and treat the trust’s beneficiaries as if they were the IRA’s direct beneficiaries. The beneficiaries’ life expectancies will then be used to determine the IRA’s required minimum distributions. Additionally, a see-through provision allows these distributions to be taxed at the individual beneficiary’s tax rate rather than at the trust’s tax rate.

Oftentimes, a trust’s tax rate is higher than an individual’s. Therefore, a see-through provision could help prevent a large tax bill when the owner of the IRA dies, depending on the individual beneficiary’s tax situation.

A blank or incomplete Schedule.

Schedules are attachments to the trust document that contain important details concerning the trust (most commonly a Schedule A). For example, most trusts have a schedule that is the inventory sheet of the trust, and it typically details what assets you have transferred into the trust. As such, it’s important to make sure all schedules are complete and accurate — it shouldn’t be blank! It is important to confirm with your attorney that your trust actually owns the assets you intend for it to own.

If it’s not clear what assets the trust owns on the statement, you should be concerned and meet with an attorney who can review your trust to help ensure your wishes are accurately reflected.


POD means “payable on death.” TOD stands for “transfer on death.” These designations allow the beneficiary to receive assets without going through probate. Does every bank account, including all your checking, money market, savings and CD accounts, have POD and TOD instructions on them? Probate can be an expensive process. Laws governing attorney fees for probate are decided by individual states and can vary. For example, consider a savings account with $200,000. In Florida, attorney fees to probate this account could be as high as 3%, or $6,000. Having a POD or TOD on this account could help save on these administrative expenses.

Having too many accounts.

The FDIC places a limit of $250,000 per depositor, per bank on the amount that it will insure. As such, you may consider consolidating some of your bank accounts if you have more than you actually need to ensure you are protected. Otherwise, you might overcomplicate your estate.

Leaving no inventory of assets.

So where is everything? Even if you have been meticulous about having all the right documents, it does no one any good if they can’t find them after you die. So leave your loved ones a checklist to tell them where they can find your birth certificate, Social Security card, marriage license, pre-nuptial agreement, military records, will, burial instructions, cemetery plot deed or cremation agreement, bank and credit documents, mortgage papers, personal financial documents, and safe deposit box and keys.

Your legacy is the last impression you leave behind. The last thing families want to do is leave their children or beneficiaries 1,000 puzzle pieces scattered all over the floor. A legacy is not a 1,000-piece puzzle scattered to the wind but a picture worthy to be framed.


Andrew McNair

   How To Pay Less In Taxes On Your Investments

In some cases, you can hold a stock for less than a year and avoid short-term capital-gains rates

The current federal income-tax rates on long-term capital gains recognized by individual taxpayers are still low by historical standards. The rates range from a minimum of 0% to a maximum of 20% depending on your tax bracket. But the rates on short-term gains aren’t so low. They currently range from 15% to 39.6% for most investors. That’s why, as a general rule, you should try hard to satisfy the more-than-one-year holding period requirement for long-term gain treatment before selling winner shares (worth more than you paid for them) held in taxable brokerage firm accounts. That way, the IRS won’t be able to take more than 20% of your profits (or 23.8% if the dreaded 3.8% net investment income tax applies).

However, you may think that today’s somewhat frothy stock market valuations aren’t conducive to making such long-term commitments, even though short-term gains are heavily taxed. What to do? Here are some thoughts on how to rake in short-term gains without getting hosed with much higher taxes.

Sell unlovable losers to create capital losses

Usually I talk about “harvesting” capital losses, by selling loser stocks (worth less than you paid for them), in the context of year-end tax planning. But it works earlier in the year too, like now. Capital losses from selling unlovable losers can be used to shelter short-term gains collected anytime this year. If you have any leftover capital losses at year-end, you can carry them forward to 2018 and use them to shelter short-term gains collected next year and beyond. In other words, to the extent you have capital losses, there’s no need to hang onto winner shares for at least a year and a day in order to pay a lower tax rate.

Consider trading in broad-based stock index options

One popular way to place short-term bets on broad stock market movements is by trading in ETFs like QQQ (which tracks the NASDAQ-100 index) and SPY (which tracks the S&P 500 index). Unfortunately when you sell ETFs for short-term gains, you must pay your regular federal tax rate, which can be as high as 39.6% (or 43.4% if the 3.8% net investment income tax applies). Ditto for short-term gains from precious metal ETFs like GLD or SLV. Under a special unfavorable rule, even long-term gains from precious metal ETFs can be taxed at up to 28% (plus another 3.8% if the net investment income tax applies), because the gains are considered collectibles gains. Rats!

Thankfully, there is a way to play the market in a short-term fashion while paying a lower tax rate on your gains: consider trading in broad-based stock index options.

Favorable tax rates on short-term gains from broad-based index options

Our beloved Internal Revenue Code treats broad-based stock index options, which look and feel a lot like options to buy and sell comparable ETFs, as Section 1256 contracts.

Section 1256 contract treatment is a good deal for investors because gains and losses from trading in Section 1256 contracts are automatically considered to be 60% long-term and 40% short-term. So your actual holding period for a broad-based stock index option doesn’t matter. The tax-saving result is that short-term profits from trading in broad-based stock index options are taxed at a maximum effective federal rate of only 27.84% [(60% × 20%) + (40% × 39.6%) = 27.84%], or 31.64% if the 3.8% net investment income tax applies. If you’re in the top 39.6% bracket, that’s a 29.7% reduction in your tax bill (ignoring the possible impact of the net investment income tax).

The effective rate is lower if you’re not in the top bracket. For example, say you’re in the 25% bracket. The effective rate on short-term gains from trading in broad-based stock index options is only 19% [(60% × 15%) + (40% × 25%) = 19%]. That’s a 24% reduction in your tax bill.

Bottom line: With broad-based stock index options, you pay a significantly lower tax rate on gains without having to make a long-term commitment. That’s a nice advantage.

Favorable treatment for losses too

If you suffer a net loss from trading in Section 1256 contracts, including losses from broad-based stock index options, you can choose to carry back the net loss for three years to offset net gains from Section 1256 contracts recognized in those earlier years, including gains from broad-based stock index options. In contrast, garden-variety net capital losses can only be carried forward.

Year-end mark-to-market rule

As the price to be paid for the aforementioned favorable tax treatment, you must follow a special mark-to-market rule at year-end for any open positions in broad-based stock index options. That means you must pretend to sell your positions at their year-end market prices and include the resulting gains and losses on your tax return for that year. Of course if you don’t have any open positions at year-end, this rule won’t affect you.

Finding broad-based stock index options

A fair number of options meet the tax-law definition of broad-based stock index options, which means they qualify for the favorable 60/40 tax treatment. You can find options that track major stock indexes (like the S&P 500 and the Russell 1000) and some major industry and commodity sectors like biotech, oil, and gold. One place to find options that qualify as broad-based stock index options is tradelog. While trading in these options isn’t for the fainthearted, it’s something to consider if you want better tax results for your profitable short-term stock market bets.

Bill Bischoff



Loading Quotes...



latest news




Subscribe to our mailing list to be informed.

Strict Standards: call_user_func_array() expects parameter 1 to be a valid callback, non-static method dc_jqaccordion::footer() should not be called statically in /home/gurianco/public_html/wp-includes/plugin.php on line 496