In This Issue
Featured Article
Your Real Estate and Your Taxes
Curt's Quick Comment
Could You Be Subject to the AMT?
From the Financial Presses
Quick Links
Featured Article
I'm proud to announce that I was recently asked to help with a pro bono financial planning program for wounded warriors at Walter Reed.  There is still a lot to figure out, but I'm hoping during the pilot program we can put something together to help those who have given so much to our country. 
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals

I'm going to break from tradition in this edition of Financial Strategies and not give a summary of the articles here.  You'll just have to look for yourself to see what the articles are about.  I'm doing that because I have a few announcements.

First off, if you look at my signature block below, you'll see that I am now a Certified Financial Planner ™ Practitioner.  I honestly believe this designation is the "gold standard" for financial planners/advisors.
Second.  I'm launching a new service.  It's called Blue II Services.  In essence, if you desire/require assistance with your transition from the military you can retain my services to help.  Specifically, I'll help you estimate your new tax "picture" when you become a civilian and help you evaluate and understand retirement plans and other financial incentives in a job offer.  The service will be provided at a flat retainer of $500 and the retainer runs from 3 months prior to your retirement until you have settled in at your new job.
Third.  If you are looking for tax preparation services, I still have a few slots available.
Have a great March!  I hope that Spring actually comes this year.

Curtis L. Sheldon, CFP, EA, AIF
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
Your Real Estate and Your Taxes

A lot of us end up with Rental Real Estate throughout our career.  It is the natural result of numerous PCS moves.  There are a lot of tax considerations when it comes to rental real estate.  So...since it is tax season I thought I would cover some of them.


Renting the Property.  Once you turn a piece of real estate into a rental a bunch of tax "benefits" become available.  Some of the major ones are:


Expense Deductions.  You can deduct any expenses you incur for the production of income at the property.  Normal expenses include:  Repairs, Maintenance and Cleaning, Advertising, Management Fees, Mortgage Interest and Commissions.  These expenses can be used to offset income in the year they occur (normally).


Depreciation Deductions.  Normally things wear out.  The IRS allows you to account for this through depreciation.  You depreciate the structure (house) over 27.5 years.  So each year, you'll be able to deduct just under 4% of the value of the structure(s).  A couple of notes.  First, depreciation is not really optional.  You must depreciate the property.  Second, the value used for the depreciation is the Fair Market Value of the property when purchased or placed in service as a rental...whichever is lower.  If you make improvements to the structure, such as a new roof, you do not expense them in the year acquired, but rather depreciate the improvements over the life of the improvement (could be less than 27.5 years).


Taking Deductions on Your Taxes.  You may be able to deduct up to $25,000 in losses on your rental property against your other current income.  To do this, you must Actively Participate in the management of the property.  The IRS has specific criteria to determine if you actively participate.  If you don't actively participate in the management then your losses are passive and can only be deducted against passive income.  If your Adjusted Gross Income exceeds $150,000 even if you actively participate in the management of the property you can't take the deductions.  Any deductions that you can't claim on your taxes in the current year roll forward until you sell the property.


Selling the property.  Just like when you rent the property there are tax issues, there are also tax issues when you sell it.


Depreciation Recapture.  When you depreciate a piece of property, you are in effect saying it is wearing out and not worth as much.  When you then turn around and sell it at more than what you said it was worth, the IRS says, "Wait a minute."  If you sell your property at more than it's adjusted basis (FMV + Improvements - Depreciation) then the IRS wants the depreciation back.  Any amount from the adjusted basis to the FMV when placed in service is what is called 1250 gains.  1250 gains are normally taxed at 25%.  You can't avoid depreciation recapture by refusing to depreciate the property.  1250 gains are due on the deprecation taken or that should have been taken.


Capital Gains.  If you sell the property for more than its FMV when placed on the market you will owe capital gains taxes.  Depending on how long you owned the property the gains will be either short-term or long-term.  The gains will be taxed at your appropriate capital gains tax rate.  If the property was worth less than its purchase price when placed in service, sales between the FMV and the original purchase price are generally not considered gains (this could apply if you lived in the house before it became a rental).


Primary Residence Exclusion.  If the house still qualifies as a primary residence (you lived in it for 2 of the last 5 years ...or up to 15 years if still on active duty), you will not have to pay taxes on the capital gains.  You will however have to pay taxes on the Depreciation Recapture.


1031 Exchange.  If you exchange the rental property for another rental property you can avoid current taxation.  1031 exchanges are a little complicated and you will need to hire a trustee to hold the money, if you sell the house.  But, they can be done.


Real Estate is one of the last great tax shelters.  Even if you can't deduct current losses, you can shelter from income...which can be a great benefit.  While direct ownership of real estate is not for everyone if you do decide to own real estate or if you are forced to by a PCS, you want to make sure you understand the tax implications...or get help from someone who does.

Curt's Quick Comment
Do you keep you receipts for taxes?  More importantly do you keep those receipts that are heat printed (like gas stations and some restaurants).  Those receipts fade over time and the IRS/Court has determined that faded receipts don't count.  You might want to make an electronic copy or use your copy machine to make a copy to store with your tax records.
Could You Be Subject to the AMT?


The alternative minimum tax (AMT) was originally created as a fallback tax for wealthy taxpayers who avoided regular taxes by claiming many exemptions and deductibles.


Now, however, more individuals are finding themselves subject to the AMT. The mechanics of the AMT are complex. But a general understanding of how the tax works can help you avoid it and even use it to your advantage.


What Triggers the AMT?


The AMT truly functions as an "alternative" tax system. It has its own set of rates and rules for deductions, which are more restrictive than the regular rules. It operates in parallel with the regular income tax system in that if you're already paying at least as much under the "regular" income tax as you would under AMT, you don't have to pay it. But if your regular tax falls below this minimum, you have to make up the difference by paying the alternative minimum tax.


The AMT can be triggered by a number of different variables. Certain circumstances and tax items are likely to trigger the AMT, including the following:

  • Your gross income is $100,000 or higher.

  • You have large numbers of personal exemptions.

  • You have significant itemized deductions for state and local taxes, home equity loan interest, deductible medical expenses, or other miscellaneous deductions.

  • You exercised incentive stock options (ISOs) during the year.

  • You had a large capital gain.

  • You own a business, rental properties, partnership interests, or S corporation stock.

To find out if you are subject to the AMT, fill out the worksheets provided with the instructions to Form 1040 or complete Form 6251, Alternative Minimum Tax -- Individuals.


AMT rates start at 26%, rising to 28% at higher income levels. This compares with regular federal tax rates, which start at 10% and step up to 39.6%. Although the AMT rates may appear to cap out at a lower rate than regular taxes, the AMT calculation allows significantly fewer deductions, making for a potentially bigger bottom-line tax bite.


Unlike regular taxes, you cannot claim exemptions for yourself or other dependents, nor may you claim the standard deduction. You also cannot deduct state and local tax, property tax, and a number of other itemized deductions, including your home-equity loan interest, if the loan proceeds are not used for home improvements. Accordingly, the more exemptions and deductions you normally claim, the more likely it is that you'll have an AMT liability.


Avoiding the AMT


Because large one-time gains and big deductions that trigger the AMT are sometimes controllable, you may be able to avoid or minimize the impact of the AMT by planning ahead. Here are some practical suggestions.

  • Time your capital gains. You may be able to delay an asset sale until after the end of the year, or spread a gain over a number of years by using an installment sale. If you're looking to liquidate an investment with a long-term gain, you should review your AMT consequences and determine what impact such a sale might have.

  • Time your deductible expenses. When possible, time payments of state and local taxes, home-equity loan interest (if the loan proceeds are not used for home improvements), and other miscellaneous itemized deductions to fall in years when you won't face the AMT. Since they are not AMT deductible, they will go unused in a year when you pay the AMT. The same holds true for medical deductions, which face stricter deduction rules for the AMT.

  • Look before you exercise. Exercising ISOs is a red flag for triggering the AMT. The AMT on ISO proceeds can be significant. Because ISO tax issues are complex, you should consult with your tax professional before exercising ISOs.

This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.


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2014 Wealth Management Systems Inc. All rights reserved.


From the Financial Presses

4 Tips For Assembling A College Savings Plan
Sooner or later, most parents hoping to send their children to college must face a harsh reality: It's going to take a boatload of money to pay for four years or more at a top-flight college or university.  (Read More Here)

5 Withdrawal Strategies For Retirement Savings
For most people, it's not enough to scrimp and save for the golden years. Once you've entered retirement, you have to figure out how to crack open your savings nest egg. The manner and order in which you withdraw funds from various accounts can make a big difference in your retirement lifestyle....(More Here)      
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