‘Tis the season for making resolutions and setting goals. Try exploring these three areas to dig deeper into QuickBooks Online.
By now, many New Year’s resolutions have already been made – and broken. Though they’re usually created with the best of intentions, they’re often just too ambitious to be realistic.
For example, you might decide to learn more about QuickBooks Online and keep up with your accounting chores more conscientiously in 2019. That’s hard to quantify. How will you know if you achieved that goal?
Instead, why not pick three (or more) specific areas and focus on them this month? We’ll get the ball rolling for you by making some suggestions.
Explore the QuickBooks Online mobile app:
Yes, QuickBooks Online itself is already mobile; you can access it from any computer that has an internet connection and browser. But you probably don’t always lug a laptop around when you’re away from the office, and you’re sometimes at locations were using it wouldn’t be practical. But you can always pull out your smartphone and fire up the QuickBooks Online app, available for both iOS and Android.
No matter how small your smartphone (this image was captured on an iPhone SE), you can still do your accounting tasks using QuickBooks Online’s app.
QuickBooks Online’s app replicates a surprising percentage of the features found on the browser-based version. You can create, view, and edit invoices, estimates, and sales receipts for example, as well as see abbreviated customer and vendor records. Your product and service records are available there, including tools for recording expenses on the road.
Create a budget for one month:
Budgets are intimidating. That’s one reason why some small businesses don’t create them. So instead of trying to estimate what your income and expenses will be for an entire fiscal year, just build a budget for one month. In QuickBooks Online, you’d click the gear icon in the upper right, then select Budgeting. Click Add budget in the upper right to open the New Budget window.
Give it a name, like “February Budget,” and select FY2019. Leave the Interval at Monthly, and open the Pre-fill data? menu to click on Actual data – 2018 (if you have data from last year). Then click Create Budget in the lower right corner. Look at last year’s February numbers and estimate how they might change in 2019. Replace the old numbers with your new ones.
Creating a framework for a budget in QuickBooks Online is easy.
We’re suggesting you try it for just one month, so you get a feel for how this tool works. And that experiment will probably leave you with some questions. We can help you go further and complete an annual budget.
Customize your sales forms:
Every piece of paper and email you send to your customers contributes to their impression of you. Are you presenting an attractive, consistent image of your business to them? QuickBooks Online can help with this. It offers simple (for the most part) tools that allow you to modify the boilerplate forms offered on the site – without being an experienced graphic designer.
Start by clicking on the gear icon in the upper right and selecting Your Company | Custom Form Styles. Unless you’ve done some work in this area before, the screen that opens will have just one listed entry: your Master form, the one that comes standard in QuickBooks Online. To see what you can do, click Edit at the end of that line. Your four options are:
- Design. This section contains links to modifications you can make to your sales forms’ visuals. You can, for example, add a logo or color and change the default fonts.
Want to change your logo or other elements of your sales forms? QuickBooks Online has the tools.
- Content. Do you want to add or remove the standard columns (Date, Quantity, etc.) displayed on your invoices? You can do so by checking and unchecking boxes.
- Emails. QuickBooks Online sends email messages with forms; you can edit them here.
- Payments. This is a reminder that QuickBooks Online supports online payments, which can help you get paid faster.
There’s more you can do to make your sales forms look professional and polished. We can help you with these tools – and any others you want to explore to expand your use of QuickBooks Online. It’s a new year, and who knows what might come your way over the next 12 months? Contact us if you want to prepare for the new accounting challenges that 2019 might present.
Social media posts
Did you resolve to grow your understanding of QuickBooks Online in 2019? We can help you explore new features.
Go mobile in 2019: Download the QuickBooks Online app for your smartphone. You’d be surprised at how much it can do for you while you’re on the go.
How are things going with your 2019 budget? If you don’t have one yet, let us show you how QuickBooks Online simplifies this critical task.
QuickBooks Online’s sales forms (like invoices) may work fine for you. Do you know, though, how they can be customized to fit the image of your business? Ask us.
QuickBooks Online’s mobile app, available at the Apple App Store and Google Play, can do many of the same tasks that it performs on your office desktop. You can, for example:
- Check account balances.
- Add and edit estimates, invoices, and sales receipts.
- Add and edit customers, vendors, products, and services.
- Record invoice payments.
One of the most common uses of the app, though, is the recording of expenses. Rather than coming home from a trip with your briefcase stuffed full of receipts and notes about purchases you made, you can document them on the road using your mobile device. When you get back to the office and log on to QuickBooks Online, they’ll all be there.
How It Works
You can snap a photo of a receipt with your smartphone and attach it to an expense you record in QuickBooks Online’s mobile app.
Open your QuickBooks Online mobile app and click the plus (+) sign at the bottom, then tap the Expense icon. The New Expense screen will open. If you have a paper receipt, lay it flat on a table in a well-lighted area. Click the camera icon and then the Take Photo link. If you took the picture outside of QuickBooks Online for some reason, you’d select the Choose Existing link. Your device’s camera will open, and you’ll see four squared corners on the edges of the screen.
Hover your device over the receipt. You’ll need to position the camera so the receipt area that you want to be captured appears within the four corners. QuickBooks Online will provide advice along the way to help you do this. When you’re in the right place, you’ll see the phrase, Great! Snap the pic. Click the shutter icon below, and your device will snap the photo and display it. If you want to use it, click Use this photo (if you want to try again, click the X in the upper left of the screen).
QuickBooks Online will open the New Expense screen. You’ll see a miniature version of your receipt in the upper left corner. Looking at your original version—it will be too small to see here—fill in the blanks with the data from the purchase. Be sure to click the Billable button if you can bill someone else for it. Make any notes you’ll need in order to remind yourself of the transaction, and Add a Split if you need to divide the transaction between categories, customers or vendors, or billable status. Click Save when you’re done.
Once you’ve entered an expense in QuickBooks Online’s mobile app, it will be synchronized with your desktop, browser-based version.
Of course, no duplicate data entry is required once you’ve entered a receipt in the QuickBooks Online mobile app – the two versions always update each other.
Once you’re back at your desktop, on the browser-based version of QuickBooks Online, click Expenses in the toolbar to open the Expense Transactions screen. You should see the transaction you just created on your mobile device first in line on the list that displays. Click View/Edit at the end of that line to see it. Look toward the bottom under Item Details to see the link to an attachment that contains the photo you snapped of the receipt.
The record of the expense you entered on your mobile device will contain a link to an attachment that contains the photo of your receipt.
Of course, you don’t have to take a picture of your receipt with your mobile device. You can simply enter the details of your expense and Save the record.
QuickBooks Online’s mobile app can help you save time and improve the accuracy of your work done away from the office. As we mentioned earlier, the app is capable of doing much more than simply recording receipts. We’d be happy to run you through its pieces to make sure your remote accounting work is done correctly.
Social media posts
Have you downloaded and explored QuickBooks Online’s iOS or Android mobile app? There’s a lot you can do away from the office. Let us show you how.
If you come home from trips with a briefcase full of receipts, you should consider entering them quickly and remotely on the QuickBooks Online mobile app.
Collecting a lot of receipts on the road? Snap photos of them using QuickBooks Online’s mobile app. Your expense record will sync with the browser-based version.
Did you know when you take a picture of a receipt using QuickBooks Online’s mobile app, it appears as an attachment in that expense record in your desktop version?
It’s a gig economy. QuickBooks Online makes it easy to track and pay independent contractors.
In days past we used to call it “moonlighting” – taking on a second, part-time job for extra money. And we saw how prevalent this became was when millions of people had to resort to side gigs to keep afloat during the economic downturn of a decade ago. Some who had lost full-time employment even turned one or more of these part-time passions into a small business and became independent contractors for other companies.
If you’re thinking of hiring a freelancer to do some of your work, you’ll find that QuickBooks Online can accommodate your accounting needs for them nicely. Since they’re not W-2 workers, your paperwork needs are minimal. They’ll simply fill out an IRS Form W-9 and you’ll pay them for services provided, dispatching 1099-MISCs after the first of each year so they can pay their taxes.
Here’s how it works.
Creating Contractor Records
Warning: Be sure that any independent contractor you hire cannot be considered an actual employee. The IRS spells out the differences very clearly and takes this distinction very seriously. If you have any doubts, we can help you determine your new worker’s status.
You can either let a new contractor complete his or her own profile or do so yourself.
Like you would with anyone you employ, you’ll need to create records for contractors in QuickBooks Online. Click on Workers in the left navigation pane, then Contractors | Add a contractor. In the window that opens, enter the individual’s name and email address. If you want the contractor to complete his or her own profile, click on the box in front of Email this contractor…
Your contractor will receive an email with an invitation to create an Intuit account and enter W-9 information, which will be transmitted to your QuickBooks Online company account. This will make it easy to process 1099s when tax season arrives. He or she will also be able to use QuickBooks Self-Employed, an Intuit website designed for freelancers. We can walk you through how this works.
If you’d rather enter the worker’s contact details yourself, leave the box blank. A vertical panel containing fields for this information will slide out from the right.
Contractors are also considered vendors. So when you create a record for a contractor, it will also appear in your Vendors list in QuickBooks Online. In fact, you can complete a contractor profile by clicking Expenses in the left vertical pane, then Vendors. Click New Vendor in the upper right and fill in the relevant fields there. Be sure to check the box in front of Track payments for 1099. An abbreviated version of your new record will also be available on the Contractors screen as the two are synchronized.
When you create a Vendor record for an independent contractor, be sure to check the Track payments for 1099 box.
Working with Contractors
You’ll notice in the screenshot above that Brenda Cooper had an Opening balance of $2,450 when you created her record. That’s money you already owed her, and for which she had probably sent you an invoice. QuickBooks Online turned that into an Accounts Payable item that you could find in multiple reports and on both the Vendors and Expenses screens. It will be listed as a Bill in reports, though you haven’t actually created one yet.
You have three options here. You can create a Bill and fill in any missing details if you don’t plan to pay Brenda immediately. If you want to send her the money right away, you can either enter an Expense or write a Check. There are many places in QuickBooks Online where you can do the latter two. We think it’s easiest to return to the Contractors screen since you can accomplish all three from there.
The Contractors screen contains links to the three ways you can handle compensation due to a contractor.
Whenever you receive an invoice from a contractor, you can visit this same screen and choose one of the three options.
You’ll have to select a Category for your payment from the list provided in each of these three types of transactions. The Chart of Accounts contains one called Subcontractors, which may or may not work for your purposes.
We strongly encourage you to consult with us as you begin the process of managing independent contractor compensation to deal with this issue as well as others. QuickBooks Online offers multiple ways to get to the same end result, and it can be confusing. Contact us, and we can schedule a consultation.
Social media posts
Hiring independent contractors? Be sure they should be classified as such, and not employees. We can help you determine how to do this.
QuickBooks Online offers many ways to do the same tasks when you’re working with independent contractors. Here is how we can help you figure this out.
There are three ways to record financial obligations to independent contractors: bill, check, and expense. Do you know the differences? We can help you figure this out.
Though you don’t have the same payroll requirements for contractors as you do employees, it’s very important to get it right. Here are a few ways we can help you with this.
Does your business do work for clients over weeks or months? Consider using QuickBooks Online’s progress invoicing.
Let’s say you’re doing a job or project for a customer that is going to take a long time, but you don’t want to wait until you’re finished to get paid. Or you’ve agreed to let a customer pay for something in multiple payments. QuickBooks can help. You can create an estimate upfront for the work or products and send a series of invoices at different intervals until the bill is paid off. This is called progress invoicing.
Before you can use this tool, you’ll need to make sure it’s turned on. Click the gear icon in the upper right and select Account and Settings. Click the Sales tab. Look for Progress Invoicing in the left column. If that option isn’t On, click the pencil icon in the far-right column and click on the box to create a checkmark and Save it. Then click Done in the lower right corner.
Creating a Template
You’ll need to use a special template for progress invoicing. Click the gear icon again and select Custom Form Styles. In the upper right corner of the screen that opens, click the arrow next to New Style and select Invoice to open the design window. Replace the template name with a descriptive one and click Airy Classic to select it.
You’ll need to select the Airy Classic template and give it a descriptive name.
There are other options on this page – lots of them. You can add a logo, change fonts and colors, and even modify the content on the invoice. Talk to us if you want to explore the possibilities.
Your progress invoice needs you to adjust a couple of other things here. Click on Edit print settings. If there is a check-in front of Fit printed form with pay stub in window envelope, uncheck it. Next, click the Content tab, then click the small pencil icon in the second section of the invoice sample over on the right. At the bottom of the left pane, click Show more activity options. Check the box in front of Show progress on line items if you want your progress invoice to display item details. When you’ve made all the changes you want to, click Done.
Estimate to Invoice
QuickBooks can create both invoices and estimates. They’re very similar, and you’ll complete them in the same way, with one obvious exception: In addition to an Estimate date, you can also specify an Expiration date. Click the + sign in the upper right, select Estimate, and fill out the form. Save and close when you’re done.
When your customer has accepted the estimate and you’ve agreed on a payment schedule, you’ll need to know how to create a progress invoice. Click Sales in the navigation bar on the left, then All Sales. Locate your estimate on the list and click Create invoice at the end of the row. This window opens:
You have three options when the time comes to start your progress invoicing.
You’ll choose Remaining total of all lines when you’re ready to send your final invoice. For your first, you can either enter a percentage of each line item or a custom amount for each. If you choose a percentage, QuickBooks will calculate what that number would be and enter it. You’ll be able to specify your custom amounts when the progress invoice actually opens. Click Create invoice.
The invoice that opens will contain the information you provided on the estimate. You’ll notice a new column here, though, labeled Due. Your calculated percentage will appear there if you chose that option. If you indicated that you wanted to enter a custom amount for each line, that field will say $0.00 of [total]. Go down that column and type in the amount you expect to be paid on each line item. When you’ve finished, Save the invoice and send it to your customer. Now it appears in the invoice list, where you can send reminders, receive payment, etc.
You can send as many progress invoices as you’d like until you can finally bill your customer for the Remaining total of all lines. QuickBooks provides a report so you can see the progress of all of your progress invoices at once. Click Reports and scroll down to Sales and customers to run Estimates & Progress Invoicing Summary by Customer.
Progress invoicing is a simple concept, but it requires many steps, as you’ve seen here. And there are other ways to go about it in QuickBooks. We strongly suggest that you let us help you with this task to make sure your invoices are set up correctly – and that you’ve paid in full.
Social media posts
Do you need to bill customers over time? Let us help you set up progress invoicing.
When you create a progress invoice, you can bill customers for a percentage of what they owe or specify custom amounts. We can help here.
Need to know the status of your progress invoices? Run the Estimates & Progress Invoicing Summary by Customer report. We can show you how.
Did you know when you create an estimate for a customer, you can also set up a payment plan for your work? This is called progress invoicing. We can help show you how.
Every interaction with your customers can enhance your image. Here’s how QuickBooks Online contributes to that.
Getting paid by your customers—on time, and in full—can take some effort on your part. You set smart due dates and enforce them. Price your products and services so they’re both reasonable and profitable. Accept online payments.
But are your invoices working for you here? QuickBooks Online provides sales form templates that you can usually use without modifying. But it also offers tools that support multiple kinds of customization. It helps you shape the content and appearance of your invoices and their accompanying messages to be consistent with your company’s brand.
These may be cosmetic changes, but they can affect the way customers react to communications from you. You have few chances to make an impression, so anything you can do to enhance and personalize every interaction will have impact on their impression of you. Neat, well-designed sales forms convey professionalism and attention to details.
Here’s a look at what you can do.
Unless you use every single field in QuickBooks Online’s default sales form template, your invoices will look sloppier than they might otherwise. The site gives you control over much of the content that your customers will see. To make changes, click the gear icon in the upper right of the screen and select Account and Settings, then Sales. You’ll see Sales form content in the left column. Click on any of the fields to the right to open a more thorough list of options.
QuickBooks Online lets you turn fields on and off in your sales forms and specify other preferences.
Click on the status (On, Off) in the right column to change it. When you’re satisfied with your selections, click Save. Then close that window by clicking the X in the upper right corner.
You have more options than these. Click the gear icon again, and then Your Company | Custom Form Styles. You’ll see that there is already a “master” form. You can either edit it or create a new one. We recommend leaving the master form alone so you always have a clean copy to consult if you get tangled up while you’re working.
Click the down arrow in the New style box in the upper right and select Invoice. In the screen that opens, enter a descriptive name for your template in the field at the top and then click Content. A graphical representation of your invoice will appear in the right pane, grayed out. It’s divided into three sections: header, footer, and table (the middle of the invoice where you describe what you sold). Each displays a small pencil icon on the right side of the screen. Click the one in the middle to make that area more visible.
It’s easy to specify which fields should appear on your invoices, what the labels should say, and how wide space should be.
As you check and uncheck boxes to indicate what content should be included, your invoice on the right will change to reflect your actions. You can Preview PDF by clicking that button in the lower right. When you’re satisfied with the changes you’ve made to all three sections, click on the Design tab.
Changing the Look
You don’t have to be a graphic artist to have QuickBooks Online forms that look attractive and consistent, which highlight your brand. The site provides tools that give you control over the appearance of your invoices, not just their content. Click each link below the Design tab to:
- Choose a template.
- Add your company’s logo.
- Select a color scheme and fonts.
- Change the printer settings to accommodate letterhead, for example.
Choosing Your Words
You have control over the messages that go out with your invoices.
Finally, click the Emails tab. Options here let you customize the emails that are sent to customers along with their invoices. Again, changes you make in the left pane will be reflected in the graphical version on the right side.
When you’ve completed all of your modifications, click Done.
We gave you this whirlwind tour of QuickBooks Online’s invoice customization options so you’d know what was possible. We expect you might need some assistance when you sit down to apply the concepts you’ve learned about to your own company’s sales forms. We’re available to help you present a polished, carefully-crafted image representing your brand to your customers.
Social media posts
Are you satisfied with the image you convey to customers through your QuickBooks Online sales forms? We can help you make them more customized and effective.
You have few chances to interact directly with your customers. Make sure your QuickBooks Online sales forms convey the image you and your brand deserves.
QuickBooks Online comes with sales form templates that may work for your company, but did you know you have control over their appearance and content?
Your customers pay attention to the sales forms you produce for them. QuickBooks Online lets you improve on the default templates it provides making a better impression to your client.
Estimates—or quotes, or bids—are useful tools when you’re pitching a sale of products or services. Here’s how QuickBooks Online handles them.
Sales estimates are standard procedure in many professions. You wouldn’t authorize a car repair without one. Nor would you OK a remodeling job on your kitchen or a summer’s worth of yard landscaping without knowing what the costs will be upfront.
Estimates don’t have to be formal documents. You could scribble a proposal for products or services and their prices on a paper napkin and have your customer sign it. But as we’ve said before, the quality of your sales documents reflects on your company’s professionalism as well as its image.
QuickBooks Online offers specialized tools to manage this step in the selling process. You can create detailed estimates that the site can easily convert to invoices when you get an approval. And QuickBooks Online reports help you monitor the progress of your quotes. Here’s how it works.
A Dedicated Form
You probably already know how to create an invoice. If so, you shouldn’t have any trouble generating estimates because the forms are very similar. To get started, click the + (plus) sign in the upper right corner of the screen. In the Customers column, click Estimates. A form like this will open:
QuickBooks Online provides a form template for your estimates.
Open the drop-down list in the Customer field and select the correct one (or +Add new).
Note: If you click on +Add new, you’re only required to enter your prospective customer’s name to create an estimate; contact detail, of course, will not appear on the form. You can go back later and complete a customer record, but it’s best to at least enter a physical and email address. Click +Details to open the complete record, then save what you provide there.
The word “Pending” should appear below the Customer field. This refers to the status of your estimate. Click the down arrow to the right of it, then on the down arrow in the small window that opens to see what options you’ll have later. If you want to copy someone else on the estimate, click the small Cc/Bcc link to the right and provide the email address(es).
Enter (or select by clicking on the calendar graphic) the Estimate date. If your offer is only good for a limited period of time, enter an Expiration date; otherwise, leave that field blank. Then go down to the Product/Service grid and select the items for which you’re providing an estimate, one on each line. Fill in the Qty field and check the labeled box if the item is taxable.
If you had created a product record for it already, the other fields should be completed automatically. If not, click +Add new. The Product/Service information pane should slide out from the right side of the screen. Here again, you’re only required to enter a Name, but you should really create the whole record and save it to return to the estimate. If you’ve not been through this process before, we can walk you through it.
You can add a discount to the estimate as either a percentage or a dollar amount in the lower right corner of the screen. You can also edit the customer message that appears in the lower left and attach any files necessary. When you’re done, save the estimate.
You can work with your estimate from the Sales Transactions screen.
If you’re not already there, click the Sales link in the left vertical toolbar, and then the All Sales tab and the Estimates bar. Find your estimate and look at the end of the row, in the Action column. If you want to convert your estimate to an invoice, click Create invoice. In the window that opens, indicate whether you want to invoice:
- A percentage of each line item,
- A custom amount for each line, or,
- The total of all lines.
Look over your invoice when it opens, complete any other fields necessary, and save it. Your estimate’s status has now been changed to Closed, and the new invoice created from it will appear on the Sales Transactions screen. It will also be included in the Estimates By Customer report.
If you can create an invoice, you can create an estimate. The tricky part comes in when you have to amend an estimate before you bill it – or even alter it and resubmit it. If you’re going to be working with estimates extensively, let us help you get it right from the start.
Social media posts
Does your business ever provide estimates (bids, quotes, etc.) to customers? QuickBooks Online can help you create them.
Did you know that you can add a discount when you create a customer estimate in QuickBooks Online? Ask us about this.
QuickBooks Online can convert an estimate to an invoice with one click, but amending before sending it can be tricky. We can help.
Did you know that QuickBooks Online contains an Estimates By Customer report, so you can easily keep track of their status? Find out more here.
You’ve finally found a buyer for the rental property, land, or business you’ve been trying to sell but the buyer doesn’t have enough cash to pay the full purchase price in a lump sum. So you agree to an installment sale. The buyer will make a partial payment now and pay you the balance over several years, with interest. The deal’s done, now what about your taxes?
Pay as You Go
Because you’ll receive the payments over more than one tax year, you can defer a portion of any taxable gain realized on the sale. You’ll report only a proportionate amount of your gain each year (plus interest received) until you are paid in full. This lets you pay your taxes over time as you collect from the buyer.
Reduce Surtax Exposure
The installment sale also might help limit your exposure to the 3.8% surtax on net investment income. Capital gains are potentially subject to this surtax (in addition to regular capital gains tax) but only in years when your modified adjusted gross income (AGI) exceeds a threshold amount: $200,000 if you file as a single or head of household taxpayer, $250,000 if you file a joint return with your spouse, and $125,000 if you are married and file a separate return.
If your AGI is typically under the threshold, recognizing a large capital gain all in one year could put you over the top, triggering the additional 3.8% tax. By reporting your gain on the installment method, you may be able to stay under the AGI threshold and minimize your tax burden.
The installment sale method isn’t available for sales of publicly traded securities and certain other sales. And you have the option of electing out of installment sale treatment and reporting your entire gain in the year of sale. Electing out may be advantageous under certain circumstances: for example, if you have a large capital loss that can offset your entire capital gain in the year of sale. Contact your tax advisor for information that pertains to your particular situation.
Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.
Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.
$25,000 Loss Limitation
The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.
What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.
Selling the Property
A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.
Exclusion of Gain
The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.
After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.
This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.
Sooner or later, you may decide to sell the property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.
When you sell the property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death (or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).
These basis rules can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.
For example: Assume your Uncle Harold left you stock he bought in 1986 for $5,000. At the time of his death, the shares were worth $45,000, and you recently sold them for $48,000. Your basis for purposes of calculating your capital gain is stepped up to $45,000. Because of the step-up, your capital gain on the sale is just $3,000 ($48,000 sale proceeds less $45,000 basis). The $40,000 increase in the value of the shares during your Uncle Harold’s lifetime is not subject to capital gains tax.
What happens if a property’s value on the date of death is less than its original purchase price? Instead of a step-up in basis, the basis must be lowered to the date-of-death value.
Capital gains resulting from the disposition of inherited property automatically qualify for long-term capital gain treatment, regardless of how long you or the decedent owned the property. This presents a potential income tax advantage since the long-term capital gain is taxed at a lower rate than short-term capital gain.
Be cautious if you inherited property from someone who died in 2010 since, depending on the situation, different tax basis rules might apply.
Many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case. If you are thinking about buying long-term care insurance, you’ll be interested to know that, within limits, premiums paid for qualified policies are deductible as an itemized medical expense. For 2019, premiums for qualified policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses, exceed 10% of your adjusted gross income.
The typical long-term care insurance policy will pay for the nursing home, home care, or other long-term care arrangements after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.
Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2019 are:
|Long-Term Care Insurance Premium Deduction Limits, 2019|
|40 or under||$420|
Source: Internal Revenue Service
These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $10,540 ($5,270 × 2). Keep in mind, however, that, for individuals under age 65, itemized medical expenses are deductible only to the extent that they, in total, exceed 10% of adjusted gross income (AGI).
As everyone’s situation is different, consider contacting your tax and legal professionals to discuss your personal circumstances.
…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v