Month: November 2017

Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 66 million Americans will increase just 2.0% in 2018, the federal government recently announced.

The 2.0% cost-of-living adjustment (COLA) will begin with benefits that more than 61 million Social Security beneficiaries will receive in January 2018. Increased payments to more than 8 million SSI beneficiaries will begin on December 29, 2017.

The purpose of the COLA, the Social Security Administration explained, is to ensure that the purchasing power of benefits is not eroded by inflation. The COLA is based on inflation changes as measured by the Consumer Price Index.

Estimated Average Monthly Social Security Benefits in 2018

Type of Benefit or Family		Before 2.0% COLA	After 2.0% COLA	Increase
Benefit Type	All retired workers	$1,377	$1,404	$27
	All disabled workers	$1,173	$1,197	$24
Family Type	Disabled worker, spouse and one or more children	$2,011	$2,051	$40
	Aged couple, both receiving benefits	$2,294	$2,340	$46
	Aged widow or widow(er) alone	$1,310	$1,336	$26
	Widowed mother and 2 children	$2,717	$2,771	$54
	— Source: Social Security Administration

Through the Years: Social Security Cost-Of-Living Adjustments
Year	COLA	Year	COLA	Year	COLA	Year	COLA
1975	8.0	1986	1.3	1997	2.1	2008	5.8
1976	6.4	1987	4.2	1998	1.3	2009	0.0
1977	5.9	1988	4.0	1999*	2.5	2010	0.0
1978	6.5	1989	4.7	2000	3.5	2011	3.6
1979	9.9	1990	5.4	2001	2.6	2012	1.7
1980	14.3	1991	3.7	2002	1.4	2013	1.5
1981	11.2	1992	3.0	2003	2.1	2014	1.7
1982	7.4	1993	3.6	2004	2.7	2015	0.0
1983	3.5	1994	2.8	2005	4.1	2016	0.3
1984	3.5	1995	2.6	2006	3.3	2017	0.3
1985	3.1	1996	2.9	2007	2.3	<align=center>2018</align=center>	<align=center>2.0</align=center>
*The COLA for December 1999 was originally determined as 2.4% based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5%.

Are you planning to sell real estate before the end of the year? Naturally, you hope to entice a qualified buyer who has plenty of cash on hand. But being open to the idea of an installment sale may help you seal the deal. Fortunately, installment sales also offer tax savings for sellers. Here’s how these deals work.

Qualifying as an Installment Sale

With installment sales, the buyer makes payments to the seller over time, rather than handing over a lump sum at closing. The buyer’s obligation to make future payments to the seller may be spelled out in a deed of trust, note, land contract, mortgage or other evidence of debt.

Under the tax code, an installment sale allows the seller to defer tax on a gain from the sale and possibly reduce the overall tax liability by spreading out the tax liability over several years. So, it’s a popular tax planning technique for real estate owners.

To qualify as an installment sale under the tax law, you must receive at least one payment after the year of the sale. For example, if you sell real estate in October and receive a total of three monthly payments in October, November and December, you aren’t eligible for installment sale reporting. Conversely, if you arrange to receive only two payments — say, one in December 2017 and the other in January 2018 — you qualify.

Moreover, if it suits your needs, you can “elect out of” installment sale treatment when you file your 2017 tax return. (See “Should You Elect Out of Installment Sale Treatment?” at right.) Also note that the installment sale rules apply only to gains, not losses.

Should You Elect Out of Installment Sale Treatment?

When you sell real estate on the installment basis, you can elect out of installment sale reporting by paying tax on the entire gain in the year of the sale. Why  would you ever do that? There are several possible reasons.

For example, you might expect to pay lower tax rates in 2017 than in 2018 or 2019. In that case, you may prefer to pay the full amount of tax due on your 2017 tax return.

Or you might have capital losses or suspended passive losses that will offset the tax on an installment sale gain. Therefore, you may benefit by reporting all  your gain in the year of the sale, instead of spreading it out over time.

Not sure how to report your sale? Your tax advisor can calculate your cumulative tax liability with and without installment sale reporting. Then you’ll have the information needed to make an informed choice on your 2017 tax return.

Understanding the Exclusions

The following types of transactions are not eligible for installment sale reporting:

• Sale of inventory of personal property,
• Sales of personal property by a dealer (a person who regularly sells or otherwise disposes of this type of personal property on the installment basis), unless the property is used or produced in farming,
• Sales of timeshares and residential lots by dealers, unless the buyer elects to pay a special interest charge, and
• Sales of stock or securities traded on an established securities market.

For these types of transactions, you must report the entire gain on the sale in the year in which it occurs.

Reaping the Tax Benefits

Although installment sales require you to wait several years to receive the property’s full fair market value, they offer three key tax advantages:

1. Long-term capital gains treatment. With an installment sale of real estate, any gain is taxed as tax-favored long-term gain if you’ve owned the property for longer than one year. Under current tax law, the maximum long-term capital gains rate is 15%, or 20% if you are in the top ordinary income tax bracket of 39.6%. Even if you’re also liable for the 3.8% net investment income tax (NIIT), the maximum combined federal tax rate is limited to 23.8%.

2. Tax deferral. Instead of paying tax on the entire gain in one year, only a portion of your gain is taxable in the year of the sale. The remainder is taxable in the years payments are received.

The taxable portion of each payment is based on the “gross profit ratio.” To calculate this ratio, divide the gross profit from the sale by the price.

For example, in November 2017, you sell a small apartment building that you acquired in 2005 with an adjusted tax basis of $600,000. The buyer agrees to pay $1.5 million in three annual installments of $500,000 each. Because your gross profit is $900,000 ($1.5 million – $600,000), the taxable percentage of each installment received is 60% ($900,000 / $1.5 million). When you report the sale on your 2017 tax return, you have to pay tax on only $300,000 of the gain (60% x $500,000). You’ll also be taxed on $300,000 of gain in 2018 and 2019.

3. Lower tax liability. Because your gain from an installment sale is spread out over several years, you may benefit from the tax rate differential in each of those years. For simplicity, let’s assume that you arrange a five-year installment sale where $50,000 of the gain is taxed at the 15% rate each year instead of the 20% rate (if the entire gain had been taxed in the year of sale). As a result, you save $2,500 ($50,000 x 5% tax rate differential) each year for a total savings of $12,500 ($2,500 x 5 years). These rates may change in the future if tax reforms are enacted, however.

Navigating Other Tax Hurdles

Beware: The tax law contains some hidden “tax traps” for the unwary when property is sold on the installment sale basis. First, any depreciation claimed on the property must be recaptured as ordinary income to the extent it exceeds the amount allowed under the straight-line method. The adjusted basis of the property is increased by the amount of recaptured income, thereby decreasing the gain realized in future years.

In addition, if the sales price of your property (other than farm property or personal property) exceeds $150,000, interest must be paid on the deferred tax to the extent that your outstanding installment obligations exceed $5 million.

Finally, sales of depreciable property to related parties are prohibited unless you can demonstrate that tax avoidance wasn’t a principal purpose of the sale. Furthermore, if the related party disposes of the property within two years, either by resale or some other method, the remaining tax is due immediately.

Important note: The definition of a “related party” isn’t limited to immediate family members, such as your spouse, children, grandchildren, siblings and parents. It also includes a partnership or corporation in which you have a controlling interest or an estate or trust that you’re connected to. To avoid any negative tax results when deals involve related parties, consider adding a clause that stipulates that the property can’t be disposed of within two years.

Bottom Line

Installment sales aren’t right for every real estate transaction, but for patient sellers who aren’t strapped for cash, installment sales can help finalize an agreement. Your tax advisor can help you cement a profitable deal with favorable tax consequences.

Could your data be hacked? Unfortunately, every organization — including for-profit businesses, not-for-profits and government agencies — is vulnerable to cyberattacks today.

Examples abound. In September, Equifax reported a data breach that exposed the credit histories and other information of 145.5 million Americans. Shortly thereafter, the Securities and Exchange Commission (SEC) reported a hacking incident that occurred in 2016.

These incidents have raised concerns from individuals and lawmakers about delays in reporting breaches. However, breach response requires a delicate balance. Organizations that are hacked have a responsibility to make a measured, comprehensive assessment of the situation before reporting a breach to the public at large. Here are details of the SEC breach incident and guidance for victim-organizations on how (and when) to report a data breach.

Breach Response Legislation in the Works

Following the SEC and Equifax incidents, the Personal Data Notification and Protection Act was reintroduced in the House. This bill aims to expedite data breach response time. Representative Jim Langevin (D-RI) originally proposed this bill in 2015. He claims that, if the legislation had been in effect when the Equifax breach occurred, Equifax would have had to disclose its breach to the Federal Trade Commission and the Department of Homeland Security within 30 days, not six weeks later.

“This bill will replace the patchwork of 48 state breach notification laws with a single nationwide standard that would clarify and strengthen companies’ obligations to report intrusions that compromise consumers’ personal information,” Langevin said. “Americans put a lot of trust in companies by giving them personal and private information, and they should have confidence that their data is secure. While I do not believe that breach notification is the only legislative response required following Equifax, it is an important first step in building accountability and protecting consumers.”

Under the proposed legislation, companies that fail to meet the requirements would be severely penalized, including fines of up to $1 million per violation. They could also be targeted for civil penalties in lawsuits from states across the country. The legislation doesn’t include any limit on damages in the event a corporation is found to have acted “willfully or intentionally.”

Critics of the bill argue that organizations could be hamstrung by stricter reporting requirements, especially if they are forced to report every isolated incident. Premature or inaccurate reports may cause consumers and other stakeholders to unnecessarily panic or become confused. Some also fear that “data breach fatigue” will eventually lead to public indifference.

We’re monitoring this controversial bill as it works its way through Congress. The recent Equifax and EDGAR breaches are helping it pick up momentum, however.

SEC Announces Breach

In September, SEC Chairman Jay Clayton announced that the agency was expanding a probe into a 2016 data breach of its electronic filing system, known as EDGAR (short for Electronic Data Gathering, Analysis and Retrieval). The investigation will primarily focus on a review of when agency officials learned that the EDGAR system had been hacked. The FBI and U.S. Secret Service have also launched investigations into the breach.

What exactly is EDGAR? It’s the electronic filing system that the SEC created to increase efficiency and accessibility to corporate filings. Most publicly traded companies must submit documents to the SEC using EDGAR. However, some smaller companies may be exempt from these EDGAR mandates if they don’t meet certain thresholds.

Examples of documents that the SEC requires companies to file through EDGAR include annual and quarterly corporate reports and information pertaining to institutional investors. This time-sensitive information is often critical to investors and analysts.

Hackers Exploit Outdated System

EDGAR was launched in the 1990s, and it’s been routinely updated and modified over the last two decades. Like many legacy systems, however, EDGAR has some weaknesses and glitches, and the system will eventually need to be replaced.

In September 2016, the SEC awarded a $6.1 million contract to a firm to collect information needed to completely redesign EDGAR. The SEC anticipates that the information-gathering phase will extend through March 2018. A further extension may be requested to provide additional support for the redesign.

Based on the SEC’s preliminary investigation, it appears that hackers were able to breach EDGAR by using authentic financial data when they were testing the agency’s corporate filing system. The breach occurred in October 2016 and was reportedly detected that month. The cyberattack appears to have been routed through a server in Eastern Europe.

The SEC’s enforcement division discovered the breach as part of an ongoing investigation. Although SEC Chair Clayton was vague on the details, he admitted, “Information they gained caused them to question whether there had been a breach of the system.”

Furthermore, it’s not entirely clear what kind of information was breached. Corporate filings contain detailed financial information about company performance, but such information is usually available to investors in press releases prior to SEC disclosure. According to industry insiders, one potential target could be Forms 8-K. These are unscheduled filings regarding material events that companies are legally required to disclose. These disclosures in EDGAR begin before the official word gets out to the rest of the world.

Media sources say that the FBI’s investigation has homed in on trading activities conducted in connection with the breach. One possibility is that the EDGAR breach is connected to a group of hackers that intercepted electronic corporate press releases in a previous case handled by the FBI team.

SEC Chair Clayton, who took office in May 2017, claims to have first learned of the breach in August 2017. Although he didn’t blame his predecessors, Clayton can’t guarantee that there haven’t been other breaches. “I cannot tell you with 100% certainty that this is the only breach we have had,” Clayton said, reiterating that the investigation was “ongoing.”

Take Control of Breach Response

Public response to the SEC incident, which was announced at roughly the same time as the high-profile Equifax breach, has focused significant attention on the lag between when an organization detects a breach and when it’s announced to the public.

The media and congressional investigations have cast doubt on the intentions of SEC Chair Clayton and the management team at Equifax: Were the delayed responses actually attempts to hide the truth, thereby exposing investors and other stakeholders to even greater potential losses?

Before anyone jumps to conclusions, however, it’s also important to consider the perspective of the victim-organization. It takes time to investigate a breach before announcing it to the public. A knee-jerk response that needs to subsequently be revised can cause major damage to the organization’s reputation with its stakeholders.

What should you do as soon as you suspect that your organization’s data has been breached? First, call your attorney, who will help assemble a team of data response specialists. The preliminary goal is to answer two fundamental questions:

1. How were the systems breached?
2. What data did the hackers access?

Once these questions have been answered, forensic experts can help evaluate the extent of the damage. Sometimes, a breach occurs, but the hackers don’t actually steal any data.

A comprehensive data response includes the following services:

• Legal,
• Forensic,
• Information technology (IT),
• Communications / public relations, and
• Credit monitoring services.

Whether your organization is small or large, for-profit or not-for-profit, the goal in breach response is essentially the same: to provide accurate, detailed information about the incident as quickly as possible to help minimize losses and preserve trust with customers, employees, investors, creditors and other stakeholders.

Once investigative and response procedures are underway, management needs to take proactive measures to fortify controls. This final step helps minimize the risk that another data breach will occur in the future.

Plan Ahead

Data breaches are an inevitable part of today’s interconnected, technology-driven world. How an organization responds to a breach can set it apart from others and affect its goodwill with stakeholders.

Proactive organizations don’t wait for a breach to strike, however. Work with your legal and forensic accounting professionals to help prevent and detect breaches, as well as to establish policies and procedures for investigating and responding to suspected hacking incidents.

As year end approaches, you may be thinking about making some charitable donations. Here’s a rundown of the potential tax breaks for your generosity.

Itemized Deductions

You can claim write-offs for contributions of cash and other items donated to charitable organizations, such as United Way and Goodwill. What you might not realize is that not all contributions to charities qualify for tax breaks.

First, you receive tax savings from charitable donations only if you itemize deductions on your personal tax return. For 2017, the standard deduction amounts are:

• $6,350 for singles,
• $9,350 for heads of households, and
• $12,700 for married joint-filers.

Unless your total itemized deductions, including any charitable donations, exceed the applicable standard deduction, you won’t get any tax savings for your generosity. In general, most people who don’t own homes don’t itemize.

Also, be aware that some not-for-profit organizations aren’t qualified charities for federal income tax purposes. You can search for IRS-approved charities on the IRS website or ask your tax advisor for help. And of course, you can’t deduct money or property you give to an individual.

In addition, there are limits on the amount of itemized charitable donations that you can deduct in any one year. For most types of donations, the limit is 50% of adjusted gross income (AGI). However, lower limits apply to certain types of donations.

Any amount of charitable contribution that’s disallowed under the applicable percent-of-AGI limitation is carried forward to the following five tax years. If you can’t use up the carryover amount during the five-year period, the remainder can’t be deducted.

Donating Clothing and Household Items

When it comes to your old clothes, furniture, linens, electronics, appliances, and the like, the general rule is that you can claim deductions only for items in “good condition or better.” However, you can deduct the fair market value of an item that’s not in good condition or better if you attach a written qualified appraisal that values the item at more than $500. For example, this rule might apply to a Persian rug that’s valuable despite being in only “fair” condition.

Supporting Documentation

The tax rules also require proper documentation for charitable contribution deductions. The type of documentation depends on the size and nature of the donation.

Cash contribution under $250. These donations require a written receipt from the organization showing its name, the date and place of the contribution, and the amount. Alternatively, you can save canceled checks or credit card statements.

Cash contribution of $250 or more. The IRS won’t accept canceled checks or other evidence supplied by you for these donations. Instead, you must obtain a written acknowledgment from the charity by the time you file your federal tax return. If you don’t get a written acknowledgment and you do get audited, the IRS will reject your deduction, even if there’s no doubt that your donations were legitimate.

Noncash donation under $250. Here, you’ll need to obtain a receipt from the charity by the time you file your return. Keep it with your tax records for the year, but don’t file it with your return.

Noncash donation worth between $250 and $5,000. These donations require a contemporaneous written acknowledgment from the charity (more detailed than a receipt) that meets IRS guidelines. Keep it with your tax records, but don’t file it with your return.

A qualified acknowledgment must include the following information:

• A description (but not the value) of the noncash item,
• Whether the charity provided you with any goods or services in exchange for the donation (other than intangible religious benefits), and
• A description and good-faith estimate of the value of any goods or services provided by the charity in exchange for your donation.

An acknowledgment meets the contemporaneous requirement if you obtain it on or before the earlier of 1) the date you file your Form 1040 for the year you made the donation, or 2) the due date (including any extension) for filing that return. If you don’t have a qualified acknowledgment in hand by the relevant date, you can’t claim a charitable deduction.

Noncash donation worth between $501 and $5,000. In addition to the aforementioned contemporaneous written acknowledgment from the charity, you’ll need to provide written evidence that supports the item’s acquisition date, fair market value and cost.

The written evidence — which may be as simple as your own handwritten notes — will be used to complete IRS Form 8283, “Noncash Charitable Contributions.” Keep the evidence with your tax records, but don’t file it with your return.

Noncash donation worth more than $5,000. In addition to a contemporaneous written acknowledgment and written evidence, these donations require a written qualified appraisal. Specific appraisal requirements apply to certain types of donated property and donations valued above certain amounts. However, no appraisal is required for donations of publicly traded securities.

Special restrictions apply to donations of vehicles, planes and boats. As a general rule, your charitable write-off will usually be limited to the amount the charity receives when it sells the vehicle, plane or boat (as opposed to the item’s fair market value).

Save Taxes by Donating

You can reap tax savings by making charitable donations, but the rules are complicated. Your tax advisor can help devise a plan that delivers the maximum tax savings for your generosity. Just don’t wait too long to get started: Year end will be here before you know it.

If you’ve reached age 70½, and you’re philanthropically inclined, you can make cash donations to IRS-approved charities out of your IRA. These so-called “qualified charitable distributions” (QCDs) can save taxes, but you must take action by December 31, 2017, to benefit for 2017.

Tax Benefits of Making QCDs

Qualified charitable distributions (QCDs) can help you save taxes four ways:

1. QCDs aren’t included in your adjusted gross income (AGI), lowering the odds that you’ll be affected by various unfavorable AGI-based rules. This includes rules that can cause more of your Social Security benefits to be taxed, less of your rental estate losses to be deductible and more of your investment income to be hit with the 3.8% Medicare surtax. Also, QCDs are exempt from the rule that says your itemized charitable write-offs for the year can’t exceed a specified percentage of your AGI (50% in most cases) and the rule that phases out up to 80% of itemized charitable deductions for higher-income individuals.

2. A QCD from a traditional IRA counts as a distribution for purposes of the required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2017 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to withdraw and pay taxes on.

3. Suppose you own one or more traditional IRAs to which you’ve made nondeductible contributions over the years. Your IRA balances consist partly of a taxable layer (from deductible contributions and account earnings) and partly of a nontaxable layer (from nondeductible contributions). Any QCDs are treated as coming straight from the taxable layer (even though you pay no tax). Any nontaxable amounts are left behind in your account. Later on, those nontaxable amounts can be withdrawn tax-free by you or your heirs.

4. QCDs reduce your taxable estate.

How Do these Donations Work?

QCDs come out of your traditional IRA free of any federal income taxes. In contrast, other IRA distributions are taxable. Unlike garden-variety cash donations to charities, you can’t claim itemized deductions for QCDs.

However, the tax-free treatment of QCDs equates to a 100% deduction, because you’ll never be taxed on those amounts. In addition, you won’t have to worry about the aforementioned percent-of-AGI limitations that apply to itemized deductions for charitable contributions.

But there’s a $100,000 limit on total QCDs for any one year. If you and your spouse have separate IRAs, each of you is entitled to a separate $100,000 limit, for a combined total of $200,000, whether you file jointly or separately.

If you inherited an IRA from the deceased original account owner, you too can do the QCD drill if you’ve reached 70½.

Tax Law Requirements

A QCD must meet all of the following tax law requirements:

• It must be distributed from an IRA, and the distribution can’t occur before the IRA owner or beneficiary reaches 70½.
• It must meet the requirements for a 100% deductible charitable donation. If you receive any benefits that would be subtracted under the normal charitable deduction rules, such as tickets to a sporting event, the distribution can’t be a QCD.
• It must be a distribution that would otherwise be taxable.

A Roth IRA distribution can meet the last requirement if it’s not a qualified (meaning tax-free) distribution. However, making QCDs out of Roth IRAs generally isn’t advisable.

Why? It’s generally best to leave Roth balances untouched for as long as possible rather than taking money out for QCDs, because the tax rules for Roth IRAs are so favorable. For example, you can take tax-free Roth IRA withdrawals after at least one Roth account owned by you has been open for more than five years and you’re age 59½ or older. Your heirs can take tax-free withdrawals from inherited Roth IRAs if at least one Roth account owned by you has been open for more than five years.

Also, for original account owners (as opposed to account beneficiaries), Roth IRAs aren’t subject to the required minimum distribution rules until after you die.

Want more information? Contact your tax advisor to see whether this strategy would be beneficial in your situation.