You asked, our tax experts answered!
Hancock Askew teamed up with the Savannah Morning News to help you get through tax season stresses and better prepare for the year ahead.
The following are the questions and answers our experts thought would be most helpful to our readers.
Q: May I deduct damage incurred from Hurricane Irma on my 2017 return?
A: If you suffered a casualty loss during one of the 2017 hurricanes, including Hurricane Irma, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides relief. The act states that any casualty loss, not just the portion in excess of 10 percent of your adjusted gross income, qualifies as a deduction. You do not have to itemize in order to take advantage of this tax relief. This Act also provided an exception to the 10 percent early retirement plan withdrawal for qualified hurricane relief distributions; allows for the re-contribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters, provides for loans from retirement plans for qualified hurricane relief; temporarily suspended limitations on charitable deductions associated with qualified hurricane relief made before December 31, 2017, provides a tax credit for 40 percent of wages (up to $6,000 per employee) paid by a disaster-affected employer to each employee from a core disaster area; and allows taxpayers to refer to earned income from the immediately preceding year for purposes of determining the earned income tax credit and child tax credit for the 2017 tax year.
Q: I received a 1099 reporting OID. What is OID?
A: Original issue discount or OID is related to the purchase of a debt security or bond. When a bond is issued at an amount that is less than the redemption price, the discount or difference is OID. If you have a debt instrument or bond with OID, you should receive a Form 1099-OID reporting the amount of OID income for the tax year. OID is recorded as interest income on Schedule B. Generally, if the bond is held to maturity, no gain or loss results from the sale as the bond’s basis equals face value. The owner of OID bond may redeem it prior to maturity. In this case, capital gain on the redemption is calculated by the difference between the sales price and basis of the bond (basis includes original cost plus OID income).
Q: May I make a Qualified Charitable Distribution in 2018?
A: Qualified Charitable Distributions or QCDs are transfers made from an individual retirement account (IRA) directly to a qualified charity. For many years we had to wait until December to see if Congress would extend qualified charitable distributions. Fortunately, QCDs became permanent in the Protecting Americans from Tax Hikes (PATH) Act of 2015. QCDs are available for individuals who are age 70 ½ or older. The charitable distribution is limited to $100,000 per person per year. The QCD is not included in the individual’s income or allowed as a charitable contribution. QCDs can be a beneficial tax planning tool to keep you under a certain adjusted gross income (AGI) threshold. QCDs also count toward your required minimum distributions.
Q: We sold our second home in the fall. Can we postpone the capital gain tax if we buy another second home?
A: Capital gains on the sale of real property can only be deferred if you enter a like-kind exchange at the time of the sale. But if your second home was for personal use (rather than rental property or investment property), you would not have been eligible to do a like-kind exchange anyway.
Q: I didn’t have health insurance last year. I heard that the penalty is gone – is that true?
A: The shared responsibility payment has been eliminated for 2019 and beyond. You will still have to pay it when you file your 2017 and 2018 tax returns if you don’t have health insurance coverage or qualify for an exemption.
Q: We suffered major damage to our dock in Irma, which was not covered by flood or homeowners insurance. However, we haven’t been able to get anyone out to do the work yet. The loss was in 2017, but the repairs will be done in 2018. In which year can we take the loss? Or can we take it at all if the loss and the repairs were not in the same year?
A: A casualty loss should typically be deducted in the year the loss was sustained. Because Georgia was in a qualified disaster area, you also have the option to carry the loss back to your 2016 return. If you choose to forego the carry-back, the loss would be claimed on your 2017 return but not 2018. Since the loss was on personal property, it would need to be included in your Individual Income Tax Return Form 1040 on Schedule A Itemized Deductions. If you do not itemize, you could still get a benefit as the loss amount would get added to your Standard Deduction.
The loss is determined by taking the smaller of: (1) the cost or other basis of the property (reduced by any insurance reimbursement) or (2) the decline in fair market value of the property measured immediately before and after the casualty (reduced by any insurance reimbursement). If you installed the dock, determining the cost may be a little easier since it would be what you paid. If it was pre-existing when you purchased your home, you would need to allocate a reasonable estimate of your purchase price of the dock.
To determine the change in the fair market value of the dock, you do not need to have had the repairs completed yet. Fair market value is defined as a selling price for an item to which a buyer and seller can agree. To determine this, you can simply estimate what the value before and after the hurricane would be. The extent of the repairs could potentially help you estimate the decrease in the value, but it is not necessary to estimate.
Once those components are estimated, you will have the casualty loss. Due to the passing of the 2017 Disaster Tax Relief bill in September, the loss is not limited to 10 percent of AGI like for other personal casualty event losses. The calculated loss must simply be reduced by the $500 floor for qualified disaster-related personal casualty losses, and you are ready to report your casualty loss on your return.
Q: I own a business that needs some expensive equipment. I am thinking of buying it personally and renting it to my company. Would this give me passive income?
A: No, unlike rental real estate, the rental of personal property is reported on schedule C and is subject to self-employment tax.
Q: I am not going to be able to file my tax return on time. How do I get an extension for Georgia?
A: If you are filing a federal extension, you do not need to do anything else because Georgia accepts the federal extension. Just attach a copy of the federal form 4868 to your Georgia return when you file it. If you only need to extend your Georgia return, file Georgia form IT-303. In either case, if you need to send an extension payment to Georgia, you need to mail form IT-560 with your check.
Q: I cut timber and sold it for $50,000 in 2017. I inherited the land years ago. The timber on the property had been recently cut prior to the date I inherited the land, and I did not replant the timber. The timber that I cut in 2017 was naturally grown. I am married and my wife and I are both retired. Our taxable income is only $30,000 per year. How will the $50,000 timber sale be taxed by federal government and Georgia?
A: Since you inherited the land with no mature timber on it and you did not plant the timber that was cut, you do not have a cost basis in the timber. Since there is no cost basis in the timber, you will recognize a gain of $50,000 on the sale of timber minus any selling expenses or commissions. The sale of timber is generally taxed at long-term capital gains rates, which are 0 percent, 15 percent and 20 percent depending on your marginal tax bracket. Since your combined taxable income is only $30,000, your federal capital gains tax rate on the timber will be 0 percent. In general, Georgia does not provide preferential rates for capital gains. However, depending on your age and the nature of your other income, it is likely that you will be able to exclude the capital gain on the sale of timber under Georgia’s retirement income exclusion.
Q: Chatham County took property through eminent domain and valued it at $136,000. Do I have to pay tax on the $136,000 that they paid? Is there anything I can do to reduce the tax?
A: When a local, state or federal government seizes property under eminent domain, the taxpayer is generally able to postpone the gain under the involuntary conversion rules if they use the funds to replace the property with similar property within a two-year period. To postpone the gain, you have to make an election on your tax return by attaching a statement to the tax return report the details of the conversion.
Q: How can I find IRS Publication 17 if I want to refer to it when I am preparing my own tax return?
A: IRS publications are available online. You can use a search engine, such as Google, to find IRS publications and other documents, or you can search for them directly on the IRS website at www.IRS.gov.