Polaris Tax & Accounting Newsletter – June 2024

New Crypto Tax Reporting Rules Are Here

If you invest or trade in Bitcoin, non-fungible tokens (NFTs), Stablecoins, or other digital assets, prepare for new tax reporting requirements starting soon.

Congress aims to ensure taxpayers report and pay taxes on crypto gains. To achieve this, new regulations require people and companies facilitating digital asset sales to provide the IRS with information similar to stockbrokers.

Key Points:

  • Form 1099-DA: Starting in 2025, digital asset brokers must file Form 1099-DA with the IRS. This form will include customer details, sales proceeds, tax basis, and gains/losses.
  • Digital Assets Defined: Includes Bitcoin, other cryptocurrencies, Stablecoins, and NFTs.
  • Brokers Defined: Entities that facilitate sales and can identify parties involved, such as trading platforms and payment processors.
  • Implementation Stages:
    • 2025: Report gross proceeds of digital asset sales.
    • 2026: Report adjusted basis and classify gains/losses as short-term or long-term.

This new rule will significantly impact how taxpayers report crypto transactions. Stay tuned for any further updates from the IRS.

Benefits of Selling Your Home to Your S Corporation

Converting your home to a rental property? Consider selling it to your S corporation for improved tax benefits.

Advantages:

  • Tax Savings: Utilize the home-sale profit exclusion (up to $500,000 for married couples) to avoid taxes on gains if eligible.
  • Increased Depreciation Deductions: Increases the depreciable basis of your property, resulting in higher annual deductions.

Considerations:

  • Property Taxes: Potential increase due to reassessment, but overall financial benefits often outweigh this.
  • Homestead Exemption: You lose this when converting to a rental property, regardless of the sale.
  • Related-Party Sale: It’s legitimate under tax law but subject to ordinary income treatment.

Steps:

  1. Create an S Corporation: Hold your old home as the S corporation’s rental property.
  2. Appraisal: Obtain an independent appraisal for fair market value.
  3. Formal Procedures: Use professional services for title transfer and legal documentation.
  4. Documentation: Maintain proper records to support the transaction.

Selling your home to your S corporation can provide substantial financial advantages despite increased property taxes.

No Business Income, No Home-Office Deduction? Think Again!

You can claim a home-office deduction even without business income.

Key Points:

  • Claim Deductions: Even with no business income, claim all business deductions to potentially create a net operating loss, which can offset future taxable income.
  • Home-Office Deduction: Claim this deduction; expenses not allowed this year carry over to future years.
  • Business Miles: Deduct trips from your home to many business locations if your home office is your principal place of business.
  • File a Tax Return: File a return to claim these benefits even if not required.

Actions:

  • Document Your Home Office: Prove it is your principal place of business.
  • Claim All Possible Deductions: Important even in a loss year.

Your home office can offer significant tax advantages, so make sure to claim all possible benefits.

Donating Clothing to Goodwill and the Salvation Army

Donating clothing and household items can optimize your tax deductions.

Key Points:

  • $250 Rule: For contributions of $250 or more, obtain written acknowledgment from the charity.
  • Fair Market Value: Not the original price, but its current worth. Use guides from The Salvation Army and Goodwill for valuations.
  • Aggregation and Appraisal: Donations exceeding $5,000 require a qualified appraisal.

Remember, proper documentation is crucial to maximize your deductions and comply with IRS regulations.

Deduct Travel by Car, Train, Plane, or Boat

Traveling for business? You can choose your mode of transport and still deduct expenses.

Modes of Travel:

  • Car: Deduct direct route expenses for meals, lodging, and vehicle expenses.
  • Train: Deduct the cost of tickets, including sleeping rooms.
  • Plane: Deduct the direct route airfare cost.
  • Boat: Special rules apply, with daily luxury limits for deductions.

Example: Travel from Washington, D.C., to San Francisco by any means; just ensure you follow the specific deduction rules for each mode of transport.

Tax-Free Rental Income with the Augusta Rule

The Augusta rule allows you to earn tax-free rental income by renting your home for less than 15 days a year.

Key Points:

  • IRC Section 280A(g): Allows exclusion of rental income from your gross income if you rent your home for fewer than 15 days a year.
  • Example: Rent your home for $3,000 a day for 14 days and exclude $42,000 from your income.

This rule can be a great way to earn extra income without increasing your taxable income.

The Advantage of Using Our Client Portal

At Polaris Tax & Accounting, we leverage advanced technology to ensure the security and efficiency of your financial interactions. Our client portal, powered by TaxDome, offers numerous benefits that set us apart:

Benefits:

  • Secure Communication: Protects sensitive information through encrypted messaging.
  • Document Exchange: Easily upload and download documents, ensuring timely and secure exchanges.
  • E-Signatures: Simplifies the process of signing important documents electronically.
  • Real-Time Updates: Stay informed with instant notifications and updates.

Identity Theft Statistics:

  • According to the Federal Trade Commission (FTC), identity theft cases have been increasing, with millions of reports annually.
  • The IRS reported that tax-related identity theft impacted over 100,000 taxpayers in 2023 alone.

Using our secure client portal minimizes the risk of identity theft, ensuring your personal and financial data is protected. Our commitment to utilizing top-tier technology means you can trust us with your sensitive information, providing peace of mind and efficient service.

Latest IRS Updates for June 2024

Tax Relief for Disaster Victims: The IRS has announced tax relief for individuals and businesses affected by severe storms in West Virginia, Kentucky, and other areas. This relief includes extended filing deadlines and other support measures. These measures help ensure affected taxpayers have the time and resources needed to recover without the immediate pressure of tax deadlines.

Clean Vehicle Credits: The Treasury and IRS have updated procedures for qualified manufacturers and dealers of clean vehicles, impacting how credits for these vehicles are claimed and processed. This update aims to streamline the process and ensure eligible buyers can benefit from these credits efficiently.

Payroll Insights: Recent adjustments to health savings account limits and social security wage base projections are among the key updates. Additionally, there’s ongoing litigation challenging the IRS over its Employee Retention Credit (ERC) claims review process. Staying informed about these changes is crucial for maintaining compliance and maximizing benefits.

Energy Community Bonus Credit: The IRS released new guidance under the Inflation Reduction Act, providing details on how taxpayers can qualify for the Energy Community Bonus Credit. This guidance helps taxpayers determine eligibility and ensures they can take full advantage of this incentive for clean energy projects.

Stay informed about these changes to ensure you take advantage of all available tax benefits and comply with new regulations.

Benefits of Tax Planning and Projections for Q2 2024

As we approach the midpoint of 2024, it’s an excellent time to consider tax planning and projections. Here’s why:

Key Benefits:

  • Avoid Underpayment Penalties: By reviewing your tax situation mid-year, you can adjust your withholdings or estimated tax payments to avoid underpayment penalties.
  • Maximize Deductions and Credits: Planning allows you to strategize your expenses to maximize available deductions and credits.
  • Cash Flow Management: Understanding your tax liability helps manage cash flow more effectively throughout the year.
  • Year-End Planning: Early tax planning provides ample time to implement strategies that can reduce your tax burden before year-end.

Action Steps:

  1. Review Your Withholdings: Use the IRS Tax Withholding Estimator to ensure your withholdings are accurate.
  2. Estimate Tax Payments: If you have non-wage income, ensure your estimated tax payments are on track.
  3. Consult with a Professional: Schedule a consultation with us to review your tax situation and make necessary adjustments.

For personalized tax planning and projections, contact Polaris Tax & Accounting. We’re here to help you navigate the complexities of tax regulations and maximize your financial benefits.

For more detailed information or to discuss your specific situation, please reach out to us at Polaris Tax & Accounting.