Table Of ContentC Y C ’ T B :
UT OUR LIENT S AX ILL
I T P T
NDIVIDUAL AX LANNING IPS
S
AND TRATEGIES
BY BILL BISCHOFF, CPA, MBA
Notice to Readers
Cut Your Client's Tax Bill: Individual Tax Planning Tips and Strategies is intended solely for
use in continuing professional education and not as a reference. It does not represent an official
position of the Association of International Certified Professional Accountants, and it is
distributed with the understanding that the author and publisher are not rendering legal,
accounting, or other professional services in the publication. This course is intended to be an
overview of the topics discussed within, and the author has made every attempt to verify the
completeness and accuracy of the information herein. However, neither the author nor publisher
can guarantee the applicability of the information found herein. If legal advice or other expert
assistance is required, the services of a competent professional should be sought.
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© 2017 Association of International Certified Professional Accountants, Inc. All rights reserved.
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Course Code: 732193
CYCT GS-0417-0A
Revised: March2017
T C
ABLE OF ONTENTS
Chapter 1........................................................................................................................... 1-1
Maximizing Tax Benefits for Sales of Capital Gain Assets and Real Property ................... 1-1
Current Capital Gain and Dividend Tax Rates ............................................................................ 1-3
Tax-Smart Strategies for Capital-Gain Assets ............................................................................. 1-7
Tax-Smart Strategies for Fixed-Income Investments ................................................................. 1-11
Planning for Mutual Fund Transactions .................................................................................... 1-13
Converting Capital Gains and Dividends Into Ordinary Income to
Maximize Investment Interest Write-Offs ................................................................................. 1-18
Planning for Capital Gain Treatment for Subdivided Lot Sales via IRC Section 1237 Relief....... 1-21
Land Is Not Always a Capital Asset .......................................................................................... 1-28
Beneficial Capital Gain Treatment Allowed for Sale of Right to Buy
Land and Build Condo Project ................................................................................................. 1-32
Escape Taxable Gains Altogether With Like-Kind Exchanges ................................................... 1-34
Primer on the 3.8 Percent Net Investment Income Tax ............................................................ 1-48
Chapter 2........................................................................................................................... 2-1
Planning for Employer Stock Options, Employer Stock Held in
Retirement Accounts, and Restricted Stock ...................................................................... 2-1
Employer Stock Options: Tax Implications ................................................................................. 2-2
How to Handle Employer Stock From Qualified Retirement Plan Distributions ........................ 2-12
Restricted Stock: Tax Implications ............................................................................................ 2-14
Chapter 3........................................................................................................................... 3-1
Maximizing Tax Benefits for Personal Residence Transactions ......................................... 3-1
Qualification Rules for Gain Exclusion Privilege .......................................................................... 3-3
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Excluding Gain From Sale of Land Next to Residence .............................................................. 3-13
Excluding Gains in Marriage and Divorce Situations ................................................................ 3-14
“Electing Out” of Gainn EExxcclluussiioonn PPrriivviilleeggee............................................................................... 3-18
Sale of Former Principal Residence “Freed Up” Suspended PALs From
Rental Period Even Though Gain on Sale Was Excluded .......................................................... 3-19
Understanding the Tax Implications of Personal Residence Short Sales and Foreclosures ........ 3-20
Tax Angles When Client Converts Personal Residence Into Rental Property ............................ 3-28
Chapter 4 ........................................................................................................................... 4-1
Tax Planning Opportunities With Vacation Homes, Timeshares,
and Co-Ownership Arrangements ..................................................................................... 4-1
Rules for “Regular” Vacation Homes (as Opposed to Timeshares and Co--OOwwnneerrsshhiipp DDeeaallss)) ..... 4-2
Rules for Timeshares and Vacation Home Co-Ownership Arrangements.................................... 4-6
Playing the Gain Exclusion Game With Multiple Residences ...................................................... 4-9
Chapter 5 ........................................................................................................................... 5-1
Tax Planning for Marital Splits and Married Same-Sex Couples ........................................ 5-1
Separate Versus Joint Returns for Pre-Divorce Years ................................................................. 5-3
Avoiding Pre-Divorce Tax Fiascos With IRA and Qualified Retirement Plan Assets .................. 5-11
Planning to Achieve Tax-Effective Splits of IRA and Qualified Retirement Plan Assets ............. 5-12
Planning to Achieve Equitable After-Tax Property Divisions .................................................... 5-18
Planning for Children’s Dependent Exemption Deductions ..................................................... 5-21
Planning to Qualify Payments as Deductible Alimony .............................................................. 5-22
Tax Developments Affecting Married Same-Sex Couples ........................................................ 5-30
Chapter 6 ........................................................................................................................... 6-1
Tax-Saving Tips for Self-Employed Clients ........................................................................ 6-1
“Heavy” SUVs, Pickups, and Vans Are Still Big TTaaxx--SSaavveerrss ......................................................... 6-2
Combine “Heavy” Vehicle With Deductible Home Office for Major Tax Savings ....................... 6-8
Home Office Deduction Options ............................................................................................. 6-10
What to Do When Spouses Are Active in the Self-Employment Activity ................................... 6-20
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Simplified Compliance Rules for Unincorporated Husband-Wife
Businesses in Non-Community Property States ........................................................................ 6-27
Update on Tax-Smart Health Savings Accounts. ....................................................................... 6-30
Chapter 7........................................................................................................................... 7-1
Tax-Smart College Financing Strategies............................................................................ 7-1
Education Tax Credits ................................................................................................................ 7-2
Deduction for Higher Education Tuition and Fees ...................................................................... 7-8
Deduction for Student Loan Interest ........................................................................................ 7-10
Coverdell Education Savings Accounts..................................................................................... 7-12
Tax-Free Interest From U.S. Savings Bonds .............................................................................. 7-13
Electing the Accrual Method for U.S. Savings Bonds ................................................................ 7-16
Splitting Investment Income With the Kids ............................................................................... 7-18
How a Closely Held Business Can Deduct College Expenses Paid for the
Owner’s Adult Child ................................................................................................................. 7-30
“Last--MMiinnuute” Suggestions for Procrastinators ......................................................................... 7-32
Tax Glossary ....................................................................................................Tax Glossary 1
Index ........................................................................................................................... Index 1
Solutions ............................................................................................................... Solutions 1
Chapter 1 ....................................................................................................................... Solutions 1
Chapter 2 ....................................................................................................................... Solutions 4
Chapter 3 ....................................................................................................................... Solutions 5
Chapter 4 ....................................................................................................................... Solutions 6
Chapter 5 ....................................................................................................................... Solutions 7
Chapter 6 ....................................................................................................................... Solutions 9
Chapter 7 ..................................................................................................................... Solutions 11
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Recent Developments
Users of this course material are encouraged to visit the AICPA website at
www.aicpa.org/CPESupplements to access supplemental learning material reflecting
recent developments that may be applicable to this course. The AICPA anticipates
that supplemental materials will be made available on a quarterly basis. Also
available on this site are links to the various “Standards Trackers” on the AlCPA’s
Financial Reporting Center which include recent standard-setting activity in the areas
of accounting and financial reporting, audit and attest, and compilation, review and
preparation.
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Chapter 1
c.
n
nd Strategies Accountants, I FMOARX SIMALIZEISN OGF T CAAXP IBTEANL EGFAITINS
ng Tips a fessional ASSETS AND REAL PROPERTY
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Pla ed
Tax ertifi
vidual onal C LEARNING OBJECTIVE
x Bill: Indi of Internati After completing this chapter, you should be able to do the following:
Ta n Identify differences in the current federal income tax rate structure to help clients maximize tax
Cut Your Client’s By Bill Bischoff © 2017 Associatio bDAepentpeelfryim tlsiik.n ee- kwinhde ne xscehllianngg ec arpuilteasl uasnsdeetsr , IbRuCsi nSeescst iaosns e1t0s3, a1n. d real estate are to a clients advantage.
INTRODUCTION
This chapter covers what tax advisers need to know, from both the planning and compliance
perspectives, to help clients maximize tax savings under the current federal income tax rate structure for
capital gains and losses, and IRC Section 1231 gains and losses. We also cover some tax breaks that apply
specifically to real estate transactions and the potential application of the 3.8 percent net investment
income tax (NIIT).
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Preface Regarding Continuing Future Tax Rate Uncertainty
The American Taxpayer Relief Act (ATRA) of 2012 increased federal income taxes on high-
income individuals. With ongoing federal deficits and an election year, more increases could be
in the cards in the not-too-distant future. Here, in a nutshell, is the current tax-rate story for
2016 and beyond, unless things change:
The top rate on ordinary income and net short-term capital gains is 39.6 percent (up
from 35 percent in 2012).
High-income individuals can be hit with the additional 0.9 percent Medicare tax on part
of their wages and/or net self-employment income.
The top rate on most net long-term capital gains is 20 percent for upper-income
individuals (up from 15 percent in 2012). Although the maximum rate is 20 percent,
most individuals will not pay more than 15 percent, and individuals with modest
incomes can pay 0 percent. The same preferential rates apply to qualified dividends.
High-income individuals can be hit with the 3.8 percent Medicare surtax (the net
investment income tax or NIIT) on all or part of their net investment income, which is
defined to include capital gains and dividends.
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Current Capital Gain and Dividend Tax Rates
RATES ON SHORT-TERM CAPITAL GAINS
The Taxpayer Relief Act of 2012 increased the maximum rate for higher-income taxpayers to
39.6 percent.
For 2017, this rate increase only affects
singles with taxable income greater than $418,400;
married joint-filing couples with income greater than $470,700;
heads of households with income greater than $444,550; and
married individuals who file separate returns with income greater than $235,350.
For 2015, the 39.6 percent rate thresholds were $415,050, $466,950, $441,000, and $233,475, respectively.
Key point: Higher-income taxpayers may be subject to the 3.8 percent Medicare surtax on net
investment income (IRC Section 1411), which can result in a higher-than-advertised federal tax rate on
short-term capital gains. The IRS calls the 3.8 percent surtax the net investment income tax or NIIT. We will
adopt that terminology.
RATES ON LONG-TERM CAPITAL GAINS AND DIVIDENDS
The tax rates on net long-term capital gains and qualified dividends are also the same as before for most
individuals. However, the Taxpayer Relief Act of 2012 raised the maximum rate for higher-income
taxpayers to 20 percent (increased from 15 percent).
For 2017, this change only affected
singles with taxable income greater than $418,400;
married joint-filing couples with income greater than $470,700;
heads of households with income greater than $444,550; and
married individuals who file separate returns with income greater than $235,350.
For 2016, the 20 percent rate thresholds were $415,050, $466,950, $441,000, and $233,475, respectively.
Key point: Higher-income taxpayers can also be affected by the 3.8 percent NIIT, which can result in a
maximum 23.8 percent federal tax rate on long-term gains and dividends (IRC Section 1411).
Key point: The Taxpayer Relief Act of 2012 also made permanent the rule that qualified dividends do
not count as investment income for purposes of the investment interest expense limitation unless the
taxpayer elects to have those dividends taxed at ordinary income rates [IRC Section 163(d)(4)(B)].
(The same rule has applied to long-term capital gains for many years and is explained later in
this chapter.)
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