Individual Strategies Archives - Think Outside the Tax Box

Individual Strategies

By Phyllis Jo Kubey EA CFP ATA ATP NTPI Fellow

The Bucket List (Part 2): Living Large in Retirement While Minimizing Your Taxes

In Part 1 of this series, we took a deeper dive into IRMAA planning and minimizing tax on your Social Security benefits. You play a large role in shaping your retirement years in terms of lifestyle and financial health. Think of taking advantage of the many techniques to lower your tax during your retirement years as another aspect of self-care. By treating your financial health and well-being as carefully as you treat your mental and physical well-being, you can ensure that you have resources to attain your financial goals and support yourself in the style for which you’ve planned. In my practice, I see a wide range of client behavior surrounding retirement – from no planning to thoughtful, long-range planning. Looking ahead, whether you’re working with your tax professional and financial team or whether you’re planning on your own, pays off enormously.
Please read on for some additional tips and techniques for tax savings involving charitable giving, Roth IRA conversions, and minimizing capital gains taxes – and two more examples.

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Don’t Overpay: Determining the Fair Market Value of Cryptocurrency Airdrops

To the non-crypto enthusiast, the term “airdrop” may conjure an image of a pallet of relief supplies parachuting in from above. In the cryptocurrency world, the term has a very different meaning, but conjures the same mental image. In the simplest terms, a crypto airdrop is a token that appears in your wallet without being purchased, although in some cases additional actions may be necessary to facilitate the transfer of the asset. An airdrop can take several different forms, the most basic of which is an unsolicited token that simply shows up in your wallet. This is typically done as a marketing campaign, to try to expand the user base of a new project. Generally, only a nominal amount of the token is distributed. Many times, this type of airdrop is done maliciously as part of a phishing or dusting attack. The vast majority of these airdrops are unwanted; they function as cryptocurrency’s version of “junk mail.” Other airdrops are used to reward users of a particular protocol for their past behavior. Typically, this will take the form of a governance token or some other newly minted token. Occasionally, the new token will automatically be deposited in the recipient's wallet, but most of the time the user will need to connect their wallet to a website and actively claim the reward. You may also be required to pay a gas fee to enable the transfer. Many airdrops of this type contain tokens of substantial value, so proper determination of when receipt takes place and what the fair market value (FMV) is can have considerable impact to tax. While the two previous examples are the most common form of airdrops, they are not limited to the above. In practice, any unsolicited token received is generally considered an airdrop. This can also apply to non-fungible token (NFT) and game-based environments. Small differences in the facts and circumstances of the airdrop may have outsized impacts on taxability and your planning opportunities. Keep reading to learn more.

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The Bucket List (Part 1): Living Large in Retirement While Minimizing Your Taxes

We've all heard the messages to pay yourself first, save a percentage of your income, build your nest egg, and some of us heeded the messages. Whether you’ve saved a lot or a little, we have many ways to reduce taxes in retirement, and by doing so, we maximize the power of our retirement savings. Accumulating retirement funds is step one. And there are tax-advantaged ways to save for retirement: employer plans (401(k), 403(b), 457), individual retirement accounts (IRAs), self-employed retirement plans (Keogh, SEP, SIMPLE, Solo 401(k)), and non-retirement accounts. While you’re saving, you may have accumulated multiple “buckets” of assets, some in taxable accounts, some tax-deferred, some nontaxable. Looking ahead toward retirement withdrawals/distributions (the funds you’ll need for essential and discretionary living expenses) adds tremendous value, and tax planning is a big part of the picture. Read on for more specifics and stay tuned for Part 2 with additional tips and examples.

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Client Alert

Joint Filing – An Election Not a Marital Vow

The flurry of tax provisions, meant to alleviate the economic dislocation of the Covid plague, have made many tax practitioners sensitive to the possibility of Married Filing Separately yielding a lower tax for a couple. Back in the day, it was rare enough that many felt they could safely ignore it. Lindsay Starrett of Baker Starrett in Grinnell, Iowa, gave me an example of saving taxpayers $3,500. I am not going to try to parse the details of that or other examples. I will just refer you to Reilly’s Sixth Law of Tax Planning: Don’t do the math in your head. Have good software and code income items as taxpayer, spouse, or joint. You may need to run multiple computations moving the dependent’s around. Also be aware, the IRS may not be as cooperative as it should be in allocating estimated tax payments. One of my old friends wrote me: "In 2020, we did MFS returns for the $10,200 unemployment exclusion and learned the IRS is unable to …" Click here to continue reading.

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Filing Separate Returns To Maximize Credits

I have always thought of separate filing as something that filers should seriously consider for the final year of marriage or in circumstances where you think your spouse has significant audit exposure that you don’t want to share. The circumstances in which two married filing separate returns would yield a lower aggregate tax than a joint return were so rare that everyone I knew entirely discounted it. Things are different in 2021 (Also in 2020, but that is water under the bridge). What is driving the phenomenon are recovery rebate credits (which many received as economic income payments) and child tax credits. Be sure and read this before sending those electronic returns before the 18th. You may just have some savings there. Click here to keep reading.

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Client Alert

No One Wants to Pay SE Taxes on Royalties

Most of the Tax Code is “gray.” No, I don’t mean the color font it is written in. Unlike a lot of rules, the Tax Code is difficult to judge what is right and wrong. Perhaps it has to be written this way because to try and define every possible money situation is unfeasible. Perhaps, the writers like it this way because as we’ve said here many times at Think Outside the Tax Box, the gray area provides opportunity for tax savings. Take for example the official Tax Code definition of taxable income. Rather than affirmatively define it, the authors chose to negatively define it. Generally, an amount is part of taxable income unless the law specifically exempts it. Certain types of income get taxed twice. If, for example, you are subject to net investment income tax, you’ll not only pay income or capital gains tax, but an additional tax, as well. The same is true for royalty income. In some instances, it is necessary to pay income tax and self-employment tax on royalty checks you receive. To take advantage of breaks we must examine what loopholes or gray areas exist for royalties, and more importantly, how can you shield it from as much tax as possible. Continue reading to learn how.

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Tax Strategies for the Worthless NFT

So, you bought an NFT of a unicorn riding a unicycle. That sounds nifty. Turns out, though, even though you paid $500 for it with the expectation of a tidy profit, no one actually wants to buy it from you. It’s now so worthless you can’t even give it away. Is there a way to at least deduct the loss and save a bit in tax? Let’s find out.

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Building Land Allocations for the Little People – The Truth About the 80/20 Rule

If you own real estate, you’re no doubt familiar with that wonderful paper loss called depreciation. But you may not be entirely aware that land cannot depreciate. Alas, you must delete part of the price you paid for your real estate land from your original purchase price to generate your tax deduction. A cost segregation study might be the answer. The study, done by an engineer, can accurately allocate the cost between building and land. This price of the allocation can be cost-justified; after all, it can save you tax. But at lower depreciation amounts, the benefits might not outweigh the cost, or, if you’re a tax pro, your client might not believe it does. You’ve still got a tax return to do. Regulation 1.167(a)-5 tells us that we have to do something: In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time. It doesn't really give us much guidance. But you may have seen online or heard somewhere about the old 80/20 rule. That’s right, the tax law says 80 percent of cost gets allocated to the building with the remaining going to land. Only, hold on a second, I can’t find a citation for that one. Is it possible there is no such rule? Then again, Reilly’s 19th Law of Tax Planning says that Reilly uses sarcasm when discussing tax. For the truth about this rule, continue reading here.

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Is Wrapping Cryptocurrency a Realization Event? Don’t Overpay!

I’ve been spending too much time thinking about wrapping. You might picture presents neatly wrapped under a Christmas tree, or surprise birthday gifts next to the cake, but I’m thinking of something very different: cryptocurrency token wrapping. A wrapped token is a token that represents a cryptocurrency from another blockchain or token standard. A wrapped token can be used on certain non-native blockchains and redeemed in the future for the original currency. It is typically worth the same as the original cryptocurrency, but when it isn’t, the question arises that when you exchange virtual currency for other property (including other virtual currency) is there tax due, and if so, how much? Like many areas of cryptocurrency tax, the IRS has yet to issue guidance on this topic, resulting in taxpayers having to fend for themselves. The primary question you need to answer is, “Is wrapping cryptocurrency a realization event?” The answer to this question will influence the ultimate tax treatment. Keep reading to learn more.

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