The IRS has released the annual inflation adjustments for 2026 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2026 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2026 Income Tax Brackets

For 2026, the highest income tax bracket of 37 percent applies when taxable income hits:

• $768,700 for married individuals filing jointly and surviving spouses,
• $640,600 for single individuals and heads of households,
• $384,350 for married individuals filing separately, and
• $16,000 for estates and trusts.

2026 Standard Deduction

The standard deduction for 2026 is:

• $32,200 for married individuals filing jointly and surviving spouses,
• $24,150 for heads of households, and
• $16,100 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,350 or
• the sum of $450, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,650 for married taxpayers and surviving spouses, or
• $2,050 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2026

The AMT exemption for 2026 is:

• $140,200 for married individuals filing jointly and surviving spouses,
• $90,100 for single individuals and heads of households,
• $70,100 for married individuals filing separately, and
• $31,400 for estates and trusts.

The exemption amounts phase out in 2026 when AMTI exceeds:

• $1,000,000 for married individuals filing jointly and surviving spouses,
• $500,000 for single individuals, heads of households, and married individuals filing separately, and
• $104,800 for estates and trusts.

Expensing Code Sec. 179 Property in 2026

For tax years beginning in 2026, taxpayers can expense up to $2,560,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $4,090,000.

Estate and Gift Tax Adjustments for 2026

The following inflation adjustments apply to federal estate and gift taxes in 2026:

• the gift tax exclusion is $19,000 per donee, or $194,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $15,000,000; and
• the maximum reduction for real property under the special valuation method is $1,460,000.

2026 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2026 is $132,900.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2026 Adjustments

These inflation adjustments generally apply to tax years beginning in 2026, so they affect most returns that will be filed in 2027. However, some specified figures apply to transactions or events in calendar year 2026.

Rev. Proc. 2025-32

IR-2025-103

The IRS has released the 2025-2026 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

The IRS has released the 2025-2026 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates,
2. the rate for the incidental expenses only deduction,
3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2025-2026 special per diem rates are:

• $319 for travel to any high-cost locality, and
• $225 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2024-68, I.R.B. 2024-41, 729 is superseded.

Notice 2025-54

The IRS has issued transitional guidance for reporting certain interest payments received on specified passenger vehicle loans made in the course of a trade or business during calendar year 2025. The guidance applies to reporting obligations under new Code Sec. 6050AA, enacted as part of the One Big, Beautiful Bill Act (P.L. 119-21).

The IRS has issued transitional guidance for reporting certain interest payments received on specified passenger vehicle loans made in the course of a trade or business during calendar year 2025. The guidance applies to reporting obligations under new Code Sec. 6050AA, enacted as part of the One Big, Beautiful Bill Act (P.L. 119-21).

Under Code Sec. 163(h)(4), as amended, "qualified passenger vehicle loan interest" is deductible by an individual for tax years beginning in 2025 through 2028. Code Sec. 6050AA requires any person engaged in a trade or business who receives $600 or more in such interest from an individual in a calendar year to file an information return with the IRS and statements to the borrowers. The information return must include the borrower’s identifying information, the amount of interest paid, loan details, and vehicle information.

Recognizing that lenders may need additional time to update their systems and that the Service must design new reporting forms, the Treasury Department and the IRS have granted temporary relief. For calendar year 2025 only, recipients may satisfy their reporting obligations by providing a statement to each borrower by January 31, 2026, indicating the total amount of interest received in calendar year 2025 on a specified passenger vehicle loan. This information may be delivered electronically, through online portals, or via annual or monthly statements.

No penalties under Code Sec. 6721 or 6722 will be imposed for 2025 if recipients comply with this transitional reporting procedure. The notice is effective for interest received during calendar year 2025. The IRS estimates that approximately 35,800 respondents will issue about 8 million responses annually, with an average burden of 0.25 hours per response.

Notice 2025-57

IR 2025-105

The IRS issued updates to frequently asked questions (FAQs) about Form 1099-K, Payment Card and Third-Party Network Transactions (Code Sec. 6050W). The updates reflect changes made under the One, Big, Beautiful Bill Act (OBBBA), which reinstated the prior reporting threshold for third-party settlement organizations (TPSOs) and provided clarifications on filing requirements, taxpayer responsibilities, and penalty relief provisions. The updates supersede those issued in FS-2024-03. More information is available here.

The IRS issued updates to frequently asked questions (FAQs) about Form 1099-K, Payment Card and Third-Party Network Transactions (Code Sec. 6050W). The updates reflect changes made under the One, Big, Beautiful Bill Act (OBBBA), which reinstated the prior reporting threshold for third-party settlement organizations (TPSOs) and provided clarifications on filing requirements, taxpayer responsibilities, and penalty relief provisions. The updates supersede those issued in FS-2024-03. More information is available here.

Form 1099-K Reporting Threshold

Under the OBBB, the reporting threshold for TPSOs has been restored to the pre-ARPA level, requiring a Form 1099-K to be issued only when the gross amount of payments exceeds $20,000 and the number of transactions exceeds 200. The lower $600 threshold established by the American Rescue Plan Act (ARPA) no longer applies. The IRS noted that while the federal threshold has increased, some states may impose lower thresholds, and TPSOs must comply with those state-level reporting requirements.

Taxpayer Guidance

The FAQs explain that a Form 1099-K reports payments received through payment cards (credit, debit, or stored-value cards) or payment apps and online marketplaces used for selling goods or providing services. All income remains taxable unless excluded by law, even if not reported on a Form 1099-K.

If a Form 1099-K is incorrect or issued in error, taxpayers should contact the filer listed on the form to request a correction. If a corrected form cannot be obtained in time, taxpayers may adjust the reporting on Schedule 1 (Form 1040) by offsetting the erroneous amount when filing their return.

New Clarifications and Examples

The updated FAQs include expanded examples to help taxpayers properly determine income and filing obligations:

• Sales of personal items – How to determine taxable gain or nondeductible loss on items sold through online platforms?
• Crowdfunding proceeds – When contributions are taxable income versus nontaxable gifts.
• Backup withholding – How failure to provide a valid taxpayer identification number (TIN) can result in withholding under Code Sec. 3406?
• Multiple Forms 1099-K – How to report combined or duplicate forms properly using Schedule 1 (Form 1040)?

Third-Party Filer Responsibilities

The FAQs reaffirm that merchant acquiring entities and TPSOs are responsible for preparing, filing, and furnishing Form 1099-K statements. There is no de minimis exception for payment-card transactions. Entities that submit payment instructions remain subject to penalties under Code Sec. 6721 and 6722 for failing to file or furnish correct information returns. TPSOs are not required to include Merchant Category Codes (MCCs), while merchant acquiring entities must do so where applicable.

Ticket Sales and Executive Order 14254

The updated FAQs also address Executive Order 14254, Combating Unfair Practices in the Live Entertainment Market, issued in March 2025. The IRS clarified that income from ticket sales and resales is includible in gross income and subject to reporting. Payment settlement entities facilitating these sales must issue Form 1099-K when federal thresholds are met, and non-PSE payors may be required to issue Form 1099-MISC or Form 1099-NEC for payments of $2,000 or more made after December 31, 2025.

Reliance and Penalty Relief

Although the FAQs are not published in the Internal Revenue Bulletin (IRB) and cannot be used as legal precedent, the IRS confirmed that taxpayers who reasonably and in good faith rely on them will not be subject to penalties that allow for a reasonable-cause standard, including negligence or accuracy-related penalties, if such reliance results in an underpayment of tax.

FS-2025-8

IR-2025-107

For 2026, the Social Security wage cap will be $184,500, and Social Security and Supplemental Security Income (SSI) benefits will increase by 2.8 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2026, the Social Security wage cap will be $184,500, and Social Security and Supplemental Security Income (SSI) benefits will increase by 2.8 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2026, the wage base is $184,500. Thus, OASDI tax applies only to the taxpayer’s first $184,500 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $184,500.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2026

For workers who earn $184,500 or more in 2026:

• an employee will pay a total of $11,439 in social security tax ($184,500 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $22,878 in social security tax ($184,500 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2026

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2026 by 2.8 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Social Security Fact Sheet: 2026 Social Security Changes

SSA Press Release: Social Security Announces 2.8 Percent Benefit Increase for 2026

The IRS issued frequently asked questions (FAQs) addressing the limitation on Employee Retention Credit (ERC) claims for the third and fourth quarters of 2021 under the One, Big, Beautiful Bill Act (OBBBA). The FAQs clarify when such claims are disallowed and how the IRS will handle related filings.

The IRS issued frequently asked questions (FAQs) addressing the limitation on Employee Retention Credit (ERC) claims for the third and fourth quarters of 2021 under the One, Big, Beautiful Bill Act (OBBBA). The FAQs clarify when such claims are disallowed and how the IRS will handle related filings.

Limitation on Late Claims

ERC claims filed after January 31, 2024, for the third and fourth quarters of 2021 will not be allowed or refunded after July 4, 2025, under section 70605(d) of the OBBBA.

Previously Refunded Claims

Claims filed after January 31, 2024, that were refunded or credited before July 4, 2025, are not affected by this limitation. Other IRS compliance reviews, however, may still apply.

Withdrawn Claims

An amended return withdrawing a previously claimed ERC after January 31, 2024, is not subject to section 70605(d). The IRS will process such amended returns.

Filing Date

An ERC claim is considered filed on or before January 31, 2024, if the return was postmarked or electronically submitted by that date.

Processing of Other Items

If an ERC claim is disallowed under section 70605(d), the IRS may still process other items on the same return.

Appeals Rights

Taxpayers whose ERC claims are disallowed will receive Letter 105-C (Claim Disallowed) and may appeal to the IRS Independent Office of Appeals if they believe the claim was timely filed.

FS-2025-7

IR-2025-106

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be raised for slaughter, held for sporting purposes or be poultry.

Second, the taxpayer must have held the converted livestock for:

• draft,
• dairy, or
• breeding purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

• ends on August 31 in or after the last year of the four-year replacement period, and
• does not include any weekly period of drought.

What Areas are Suffering from Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/Maps/MapArchive.aspx.

However, the IRS also provided a list of areas where the year ending on August 31, 2025, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

Notice 2025-52

IR-2025-93

The IRS and Treasury have issued final regulations setting forth recordkeeping and reporting requirements for the average income test for purposes of the low-income housing credit. The regulations adopt the proposed and temporary regulations issued in 2022 with only minor, non-substantive changes.

The IRS and Treasury have issued final regulations setting forth recordkeeping and reporting requirements for the average income test for purposes of the low-income housing credit. The regulations adopt the proposed and temporary regulations issued in 2022 with only minor, non-substantive changes.

Low-Income Housing Credit

An owner of a newly constructed or substantially rehabilitated qualified low-income building in a qualified low-income housing project may be eligible for the low-income housing tax credit (LIHTC) under Code Sec. 42. A project qualifies as a low-income housing project it satisfies certain set-aside tests or alternatively an average income test.

Under the average income test, at least 40 percent (25 percent in New York City) of a qualified group of residential units must be both rent-restricted and occupied by low-income individuals. Also, the average of the imputed income limitations must not exceed 60 percent of the area median gross income (AMGI).

Recording Keeping and Reporting Requirements

The regulations provide procedures for a taxpayer to identify a qualified group of residential units that satisfy the average income test. This includes recording the identification in the taxpayer’s books and records, including a change in a unit’s imputed income limit. The taxpayer also must communicate the annual identification to the applicable housing agency.

The final regulations clarify the submission of a corrected qualified group when the taxpayer or housing agency realizes that a previously submitted group fails to be a qualified group. The housing agency is also allowed the discretion to permit a taxpayer to submit one or two lists qualified groups of low-income units to demonstrate compliance with the minimum set-aside test and the applicable fractions for the building.

(T.D. 10036)

U.S. citizens and resident aliens working abroad may exclude up to $91,400 of their foreign earned income for 2009. Additionally, expatriates may deduct or exclude their foreign housing costs in excess of a base amount. The housing exclusion is for reimbursed expenses while the deduction is for unreimbursed costs.

Earned foreign income

Before being able to claim these exclusions, you must meet some primary requirements. Foreign earned income is an individual's earned income from foreign sources during the time period that he or she has a foreign tax home and either satisfies the bona fide or physical residence test.

Tax home

Your tax home also must be in a foreign country. Generally, the IRS and the courts hold that your principal place of business or employment is your tax home.

Status

Finally, you must be a:

U.S. citizen who is a bona fide resident of a foreign country or countries for a continuous time period including the entire tax year;

U.S. resident alien who is a citizen or national of a country having an income tax treaty with the U.S. and who satisfies the continuous residency requirement; or

U.S. citizen or resident alien physically present in a foreign country or countries for a minimum of 330 days during any consecutive 12 month period.

Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.

With mortgage rates at the lowest level in years, you may be debating whether to refinance your adjustable-rate or higher-interest fixed-rate mortgage to lock in what looks like a real bargain. Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.

Boom in refinancing

Escalating home prices in many parts of the country have motivated many homeowners to refinance their existing mortgages. Many people are refinancing to secure cash for home improvements or to pay debts. These are often called "cash-out" refinancings because you receive cash back from the lender based upon the difference between the old and new mortgages.

Example. You have an existing mortgage of $195,000. Your home is valued at $325,000. You refinance and take a new mortgage for $225,000. You receive $30,000 from the lender and use the money to pay for home improvements.

Cash-out refinancings account for more than one-half of all refinancings. Some estimates pegged the value of "cash-out" refinancings at more than $100 billion in 2001.

Original mortgage points

The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a mortgage. Generally, for individuals who itemize, points paid by a borrower at the time a home is purchased are immediately deductible as interest if they are charged solely for the use or forbearance of the lender's money. Points for this purpose include:

• Loan origination fees;

• Processing fees;

• Maximum loan charges; and

• Premium fees.

Amounts paid for services provided by the lender, however, are not deductible as interest. These services include:

• Appraisal fees;

• Credit investigation charges;

• Recording fees; and

• Inspection fees.

Refinancing points

Unlike points paid on an original mortgage, you cannot immediately deduct points paid for refinancing. However, if refinancing proceeds are used to refinance an existing mortgage and to pay for improvements, the portion of points attributable to the improvements is immediately deductible.

With interest rates so low, many homeowners are refinancing for the second or even third time. If you are refinancing for a second time, you may immediately deduct points paid and not yet deducted from the previously refinanced mortgage.

Example. You refinanced your home mortgage several years ago and used the proceeds to pay off your first mortgage. Your refinancing mortgage (loan #2) was a 30-year fixed-rate loan for $100,000. You paid three points ($3,000) on the refinancing. Because all of the loan proceeds were used to pay off the original mortgage and none were used to buy or substantially improve your home, all of the points on the refinancing loan must be deducted over the loan term. This year, you refinance again (loan #3) when there's a remaining (not-yet-deducted) points balance of $2,400 on loan #2. You can deduct the $2,400 as home mortgage interest on your 2003 return.

Deducting interest

Generally, home mortgage interest is any interest you pay on a loan secured by your home. The loan may be a first mortgage, a second mortgage, a line of credit, or a home equity loan.

The interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. Usually, this information is available from lenders. You may deduct points only for those payments made in the tax year.

Example. You paid $2,000 in points. You will make 360 payments on a 30-year mortgage. You may deduct $5.65 per monthly payment, or a total of $66.72, if you make 12 payments in one year.

Refinancing is anything but simple. There may be additional complications if there are several mortgages on your home or if you own a vacation home as well as a principal home. Please contact this office if you are considering refinancing now or in the near future.

If you want to withdraw funds from either your company retirement plan or your individual retirement account, there is a 10% additional tax (penalty) if you make withdrawals before the age of 59 ½. There is an exception to this rule if you make withdrawals from your account of a series of "substantially equal periodic payments."

If you want to withdraw funds from either your company retirement plan or your individual retirement account, there is a 10% additional tax (penalty) if you make withdrawals before the age of 59 ½. There is an exception to this rule if you make withdrawals from your account of a series of "substantially equal periodic payments."

Three methods

The IRS allows three acceptable methods of calculating "substantially equal periodic payments":

1. The required minimum distribution method: Under this method, the annual payment withdrawn from your account each year is determined by dividing the amount in your retirement account by a number from a designated life expectancy table. Under this method, the annual dollar amount of each payment is redetermined on a year-by-year basis.

2. The fixed amortization method: The annual amount you withdraw from your retirement account for each year is determined by dividing your account balance into equal amounts over a specified number of years from a chosen life expectancy table and a chosen interest rate. Under this method, the annual payment that you withdraw from your account remains the same each year.

• Note: The life expectancy tables and interest rates for Methods 1 and 2 are provided by the IRS.

3. The fixed annuitization method: Using this method, the annual payment that you withdraw from your account each year is determined by dividing the account balance by an annuity factor. This annuity factor is taken from a table provided by the IRS. Under this method, the annual payment remains the same each year.

Current problem

If you are taking a series of substantially equal periodic payments and you change the amount you withdraw at any time in during the first five years, the IRS will go back and impose the penalty for early withdrawals against you. If you calculated your payment using Method 1 this is not a problem. Many people who started taking a series of substantially equal periodic payments in the last few years are encountering a problem. The amount they are withdrawing is based on a retirement account with a higher value than they currently have due to the decline in the stock market.

When they continue withdrawing this high amount out of their retirement accounts each year they end up in danger of depleting their account too soon. The IRS is giving all taxpayers in this position a one-time opportunity to change their calculation method to Method 1.

If you have questions about how you calculate annual payments in order to avoid the penalty for early withdrawal from your account, please feel free to contact this office.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Deductible investment expenses

Investment interest. A significant source of investment-related costs is investment interest expense. Investment interest paid related to the generation of taxable investment income is generally deductible on Schedule A of Form 1040, however certain limitations may reduce the amount deductible. For example, your deduction for investment interest paid may not exceed your net investment income. "Net investment income" is arrived at by subtracting your investment expenses (other than interest expense) from your investment income. Interest paid in excess of that amount determined to be deductible can be carried over and deducted in subsequent years (after application of these rules, of course).

Other investment expenses. Qualified investment expenses (other than interest) can be claimed as miscellaneous itemized deductions on Schedule A of your federal Form 1040 and are generally subject to the 2% threshold imposed on miscellaneous itemized deductions. If you itemize your deductions on your return, to the extent that these and other miscellaneous itemized deductions exceed 2% of your adjusted gross income (AGI), they are deductible from income.

The list of investment expenses approved for inclusion as miscellaneous itemized deductions (by the IRS or the courts) is a long one -- and one worth reviewing by you as a taxpayer, as unexpected ways to reduce your taxable income can be found. Some of the investment expenses that have been determined to be deductible as miscellaneous itemized deductions subject to the 2% floor include:

• Investment counsel or advisory fees, including managers or planners.
• Subscriptions to publications offering investment advice.
• Legal expenses for the maintenance, conservation or management of investment property.
• Legal expenses incurred in recovering investment property or amounts earned by such property.
• Guardian fees and expenses incurred in the production or collection of income of a ward or minor or in the management of the ward or minor's investments.
• Clerical help and office rent connected with the management of investments and/or the collection of the income they generate.
• Accounting fees for keeping investment income records.
• Depreciation of home computers used to manage investments that produce taxable income.
• Costs of premiums and other expenses for indemnity bonds for the replacement of missing securities.
• Dividend reinvestment plan (DRIP) service charges, such as charges for holding the shares acquired through the plan, collecting and reinvesting cash dividends, keeping individual records, and providing detailed statements of accounts.
• Proxy fight expenses if incurred in connection with a legitimate corporate policy dispute
• Investment expenses connected with the purchase, sale or ownership of securities
• Fees paid to a broker, bank, trustee, or other investment-related agent to collect interest or dividends on taxable investments.
• Losses on non-federally insured deposits in an insolvent or bankrupt financial institution, if the loss is treated as an ordinary loss by the taxpayer but is not treated as a casualty loss; and subject to a $20,000 limit on losses from any one institution.
• Allocable investment expenses of privately offered mutual funds.
• Custodial fees.
• Safe deposit box rent so long as the box is used for the storage of (taxable) income-producing stocks, bonds, or papers and documents related to taxable investments^.
• Travel costs incurred in making trips away from home to check on your property or to confer with investment advisors about your income-producing investments. But be careful -- if your investment property is in Vail or Maui, make sure your records establish that your trip was primarily made to check on your investment, not to take a personal vacation.

The expenses generated in connection with the management of investment property are deductible even if the property isn't currently producing income -- so long as the property is held for the production of income. And expenses incurred in reducing additional loss or to prevent anticipated losses with respect to investment property are also deductible.

Nondeductible investment expenses

What kinds of investment-related expenses are not deductible? A nonexclusive list of such expenses includes:

• Fees charged by a broker to acquire securities. These costs are instead added to the basis of the securities. Similarly, fees paid on the sale of securities reduce the selling price.
• Fees for establishing or administering an IRA, unless billed and paid separately and apart from the regular IRA contribution.
• Expenses related to tax-exempt investments.
• Trips to attend seminars or conventions connected with investment or financial planning.
• Trips to stockholder meetings. Although an exception has been made where a taxpayer with significant holdings traveled to a meeting to protest specific practices that were hurting his investment.
• Home office expenses, unless investing is actually the taxpayer's business.

Remember, for purposes of the rules governing investment expenses, rental and royalty income-related properties are not considered. These investments are subject to their own rules and reporting requirements, and are not included in the category of investment expenses limited by the 2% threshold.

While this discussion related to the tax treatment of investment-related expenses may appear comprehensive, other limitations and exceptions exist that may apply to your tax situation. For more information regarding how you can make the most of your investment-related expenditures, please feel free to contact the office for assistance.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

Dependents

One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.

The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.

Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.

A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.

Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.

Alimony

Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.

Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.

There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.

Property

Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.

Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.

Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.

Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.

Retirement

When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.

Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.

Tax Prepayment and Joint Refunds

When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.

Legal and Other Expenses

To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.

Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

A. Unfortunately, you're not alone in your "seasonal" approach to considering your tax situation. Many people have a once-a-year relationship with their tax professional, which can result in the improper handling of important tax documents and sometimes-costly financial decisions. When it comes to handling your tax situation during the year, you will find that a little common sense will go a long way.

Here are some general common sense tips to handling all things tax-related pre- tax season and during the "off-season":

Don't assume all your tax paperwork is correct. Check Forms W-2s and 1099s for accuracy. Many W-2s and 1099s are prepared by data processing companies that merely process your tax information as raw data. Mistakes have been known to occur. Although your employer or financial institution should be checking these forms for accuracy, it's a good idea to double-check these forms against payroll stubs and monthly statements from the payer. If you find a discrepancy, notify your employer as soon as possible to the error corrected and reported to the appropriate taxing authorities.

Gather possible ALL relevant tax documents for your tax preparation. Don't avoid taking legitimate deductions out of fear of "raising red flags" that may cause your return to be audited. Filing a complete and accurate return is required and is your best defense against an audit.

Don't make decisions solely on potential "tax breaks". All good investment or business decisions should be able to stand on their own before tax breaks are considered. A change in the tax law can be disastrous (and costly) when you are stuck in an affected investment (can you say "abusive tax shelter"?).

Seek planning advice from a tax professional. Probably the best investment decision you can make is to seek out the services of your tax professional. In most cases, the amount you are charged for good tax advice is a fraction of the resulting tax savings.

Consult with a tax professional before responding to IRS notices. If you receive a notice from the IRS (or any taxing authority) do not automatically assume that it is accurate and mail them a check. Many notices are inaccurate or merely require additional explanation. Tax professionals have the knowledge and experience to recognize areas where additional explanation or documentation may reduce or eliminate the assessment stated on the notice.

If audited, consider your appeal rights. Although the IRS auditor may not bring it to your attention, the end of an audit is be no means the end of the road for your tax case. Appealing an audit decision can many times put your case in front of a more experienced agent who may better understand the issues and your position on them.

Taking a little time during the year to consider your tax situation and invoke a little common sense can pay off with substantial tax savings and the avoidance of unnecessary expenditures. If you need any additional assistance throughout the year, please do not hesitate to contact the office for guidance.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Over the past few years, the rules governing stock options have become increasingly complicated. More than ever, it is important that employees who receive stock options have a good understanding about how they are taxed -- on receipt of the option, at its exercise, or pursuant to the sale of the underlying stock -- as well as the potential consequences of their decisions regarding the timing of the taxation of those options.

NSOs vs ISOs

The most common type of stock option that employees receive is called a nonstatutory stock option (NSO). The other, less common type of stock option is generically referred to as an incentive stock option (ISO). ISOs are governed by very specific rules and are subjected to strict statutory requirements; NSOs, on the other hand, are subject to more general rules and guidelines.

Incentive stock options (ISOs) give the employee the right to purchase stock from the employer at a specified price. The employee is not taxed on the ISO at the time of its grant or at the time of the exercise of the option. Instead, he or she is taxed only at the time of the disposition of the stock acquired through exercise of the option. Note, however, the exercise of an ISO does give rise to an alternative minimum tax item in the amount of the difference between the option price and the market price of the stock.

Note. The IRS temporarily suspended the collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

NSOs also give the employee the right to purchase stock from the employer at a specified price. When and how an NSO is taxed depends on several factors including whether the underlying stock is substantially vested, and whether or not the fair market value of the stock is readily ascertainable.

Vesting. If an employee receives options from his employer, the tax consequences depend on whether the stock is vested. Stock you receive from your employer is "substantially vested" if it is either "transferable" by the employee or it is no longer subject to a "substantial risk of forfeiture". Property is "transferable" if you can sell, assign or pledge your interest in the option without the risk of losing it. A "substantial risk of forfeiture" exists if the rights in the property transferred depend on the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a certain condition related to the transfer.

Readily ascertainable fair market value. An NSO always has a readily ascertainable fair market value when the option is publicly traded. When an option is not publicly traded, it can have a readily ascertainable fair market value if its value can be measured with reasonable accuracy. IRS rules spell out when fair market value can be measured with reasonable accuracy.

Generally, an employee who receives an NSO that has a readily ascertainable fair market value is subject to special tax rules under the Internal Revenue Code that apply to property received by a taxpayer in exchange for services when the option is granted. Under these rules, the option must be included in the employee's income as ordinary income in the amount of the fair market value in the year the option becomes substantially vested. If the employee paid for the option, he recognizes the value of the option minus its cost. The employee is not taxed again when he exercises the option and buys the corporate stock; he is taxed when the stock is sold. The gain or loss recognized when the employee sells the stock is capital in nature.

No readily ascertainable fair market value. Employees who receive NSOs from privately held companies are most likely to receive an NSO without a readily ascertainable fair market value. In general, when an NSO does not have a readily ascertainable fair market value, taxation occurs at the time when the option is exercised or transferred. The employee will recognize ordinary income in the amount of the value of the stock when it becomes substantially vested minus any amounts paid for the option or stock. The gain or loss recognized when the employee sells the stock is capital in nature. However, employees who have NSOs without a readily ascertainable fair market value also have the ability to elect to have the transaction taxed differently,

Section 83(b) election: Elector beware

Employees who exercise options that did not have a readily ascertainable fair market value when they were granted may elect to report income from the stock underlying the option at the time of the exercise rather than waiting until the stock is substantially vested. This election is referred to as a "Section 83(b) election" and is non-revocable. Once the election is made, any later subsequent appreciation when the stock becomes substantially vested would not be includible in income.

As you can see, the rules and tax laws related to stock options are indeed complicated and require some advance planning in order to avoid a big tax "gotcha". If you are contemplating entering into any transactions that involve stock options, please contact the office for additional guidance.

A number of charities use the Internet to solicit funds, allowing potential donors to make contributions online. You can even create an account in a special type of planned giving instrument: a donor-advised fund. What are these funds, and are they right for you?

A number of charities use the Internet to solicit funds, allowing potential donors to make contributions online. You can even create an account in a special type of planned giving instrument: a donor-advised fund. What are these funds, and are they right for you?

A popular alternative to making outright gifts at one extreme and private foundations at the other has been the "donor-advised charitable fund." To make these funds work, however, the donor must protect his or her right to an immediate charitable deduction.

Nature of donor-advised funds

Donor-advised funds are similar to private foundations in many ways and can allow you a certain degree of control over how your contributions are invested and distributed, all without the expenses associated with setting up and running a private foundation.

Upon a contribution to a charity, the charity opens up an account in the donor's name in a special fund. The donor can recommend where the funds are invested, how and when the income is distributed, and to what charities. However, the charity managing the fund need not follow the donor's recommendation and it has ultimate say as to the disposition. Many donor-advised funds require an initial contribution of $100,000, although as they have grown in popularity, some funds offer a minimum contribution of $5,000 or less. In addition to being offered on the Internet, many donor-advised funds are offered by banks and brokerage houses.

Proceed with caution

Contributing to a donor-advised fund in which your wishes are respected, although perhaps not legally enforceable, may provide you with the extra degree of tangible participation that can make your charitable contributions more meaningful to you. Such charitable giving, however, does require some research to make sure that the IRS recognizes your initial contribution as a charitable deduction. Before making a substantial initial contribution, you also should investigate other ways to give, from designated gifts to setting up your own private foundation. Please feel free to contact the office for a consultation.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.