Tax

Here’s an easy question: Do you need more 2023 tax deductions? If the answer is yes, continue reading.

Next easy question: Do you need a replacement business vehicle?

If so, you can simultaneously solve or mitigate the first problem (needing more deductions) and the second problem (needing a replacement vehicle) if you can get your replacement vehicle in service on or before December 31, 2023. Don’t procrastinate.

To ensure compliance with the “placed in service” rule, drive the vehicle at least one business mile on or before December 31, 2023. In other words, you want to both own and drive the vehicle to ensure that it qualifies for the big deductions.

Now that you have the basics, let’s get to the tax deductions.

1. Buy a New or Used SUV, Crossover Vehicle, or Van

Let’s say that on or before December 31, 2023, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four benefits:

1. Bonus depreciation of 80 percent
2. Section 179 expensing of up to $28,900
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

Example. You buy a $100,000 SUV with a GVWR of 6,080 pounds, which you will use 90 percent for business use. Your write-off can look like this:

• $28,900 in Section 179 expensing
• $48,880 in bonus depreciation
• $2,440 in 20 percent MACRS depreciation, or $611 if the mid-quarter convention applies

So the 2023 write-off on this $90,000 (90 percent business use) SUV can be as high as $80,220 ($28,900 + $48,880 + $2,440).

2. Buy a New or Used Pickup

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2023, then this newly purchased vehicle gives you four big benefits:

1. Bonus depreciation of up to 80 percent
2. Section 179 expensing of up to $1,160,000
3. MACRS depreciation using the five-year table
4. No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

• a GVWR of more than 6,000 pounds, and
• a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Example. You pay $55,000 for a qualifying pickup truck that you use 91 percent for business. You use Section 179 to write off your entire business cost of $50,050 ($55,000 x 91 percent).

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. The vehicle is still eligible for expensing of up to the $28,900 SUV expensing limit and 80 percent bonus depreciation.

3. Buy an Electric Vehicle

If you purchase an all-electric vehicle or a plug-in hybrid electric vehicle, you might qualify for a tax credit of up to $7,500. You take the credit first, and then follow the rules that apply to the vehicle you purchased.

If you would like to discuss these vehicle strategies and more, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 20, 2023

When you leave the U.S. to live in another country, you essentially have two choices from a tax perspective, both of which can cost you a pretty penny.

First, you can simply leave the country and take up residence elsewhere. But if you choose this option, beware: the U.S. continues to tax you on your worldwide income, no matter where you earn it or derive it from.

Second, you can formally renounce your American citizenship or long-term residency and expatriate. This option is also not without its potential financial pitfalls, because the U.S. may impose an “exit tax” on you before you leave.

The rules behind this exit tax are complex, but whether you will be required to pay it depends largely on whether you are classified for tax purposes as a “covered expatriate.”

Are You a Covered Expatriate?

American citizens and long-term residents can, of course, voluntarily give up their status as citizens or residents and expatriate.

Once you give up your status, the IRS will consider you either an “expatriate” or a “covered expatriate.” If you’re simply an expatriate, the exit tax will not apply, and you’re good to go. There’s really nothing more to it. You still have U.S. assets, and you have to pay U.S. taxes on those assets.

But if the tax law deems you a covered expatriate, you have to pay the exit tax.

In most cases, a covered expatriate is a person who meets one of the following three tests:

1. Income tax test. You’ll be deemed a covered expatriate if you paid an average of $190,000 in income tax in the five years before you expatriate.
2. Net worth test. You’re also a covered expatriate if your net worth is $2,000,000 or more on the date you give up your U.S. citizenship or long-term residency.
3. Compliance test. Finally, if you fail to certify, under penalty of perjury, that you met all your tax obligations for the five years preceding your expatriation, you’re a covered expatriate.

What Is the Exit Tax?

Under the exit tax regime, the government requires you to pay income taxes on the unrealized gain in all your property, subject to a few minor exceptions, as if you sold that property the day before your departure.

In other words, the law deems that you sold all your property at fair market value on the date of your departure, even though you did not. You then pay taxes on this imaginary gain.

Mercifully, under today’s law, you can exit in 2023 and exclude up to $821,000 of gain (adjusted annually for inflation).

You Can Pay Later, But…

In the mark-to-market deemed sale of your assets, you didn’t collect any cash, so you might be short of the cash needed to pay your taxes. The U.S. government might help you by allowing you to pay later if you can post “adequate” security as collateral for the debt, such as a bond. The following rules also apply to this payment deferral election:

• Once you make the election, it’s irrevocable.
• You can elect to defer tax on some pieces of property but not others.
• You must waive any right under any U.S. treaty that would otherwise prevent collection of the taxes.
• You pay interest on any taxes you defer.
• You or your estate must pay the expatriate taxes due when you dispose of the property or die.

Easing the Pain

To ease the pain slightly, eligible deferred compensation items, such as IRAs, pensions, and stock option plans, are not part of the deemed sale, and thus are not taxed at the time of expatriation.

Rather, the government makes the payor withhold 30 percent on any taxable payment made to a covered expatriate.

Note that to qualify for this temporary relief, the deferred compensation must be “eligible.” That means

• the payor of the deferred compensation must be a U.S. entity or a foreign entity that has agreed to submit to U.S. withholding and other requirements;
• you tell the payor that you are no longer an American citizen; and
• you permanently waive any claims you might otherwise have had to the reduction or elimination of the tax under a tax treaty.

I’m a Covered Expatriate—What Can I Do?

Though the situation is certainly a sticky wicket, all hope may not be lost.

According to the net worth test, you are a covered expatriate only if your net worth is $2,000,000 or more. With some thoughtful planning, you might structure your assets to avoid this classification.

Depending on the circumstances, direct gifting before expatriation might be one solution. Another solution might be through the creation of trusts before the big day.

You need to exercise extreme care in any such effort. It’s best to use a tax professional who understands expatriation. If you want my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 18, 2023

If you enjoy gambling, whether occasionally or frequently, it is crucial to understand how your winnings and losses can affect your tax liability.

Basic Rules

Winnings: You report your gambling winnings from casinos, lotteries, raffles, and other gambling activities as “above-the-line” taxable income.

Losses: You deduct gambling losses “below-the-line” as itemized deductions on Schedule A, but only to the extent of your winnings.

Reporting: Casinos and other gambling institutions report your winnings to the IRS on Form W-2G if they meet certain thresholds. You will also receive a copy of this form.

A Real-Life Example: The Bright Case

Jacob Bright, a casual gambler, found himself in a complicated tax situation due to extensive gambling activities. The casinos reported his large winnings on Form W-2G, totaling $110,553.

Due to poor recordkeeping and misclassification as a professional gambler, Bright incurred a tax bill of $13,898 despite his gambling losses exceeding his winnings.

Tips and Best Practices for Recreational Gamblers

Keep a gambling log: Maintain a detailed log of your gambling activities, including dates, locations, types of wagers, and amounts won or lost. This record can serve as valuable documentation in an IRS audit.

Use a player’s card: Whenever you gamble at a casino, use a player’s card to track your activities electronically.

Understand the importance of session tracking: Track your wins and losses by gambling session. The session approach allows you to offset wins and losses within the same session, potentially reducing your taxable income.

Be aware of itemizing requirements: Remember that you can only deduct gambling losses if you itemize your deductions. If you take the standard deduction, you don’t reduce your tax liability with your gambling losses.

Takeaway

Gambling has tax implications and can, for the uninformed, lead to unexpected tax bills and complications.

Keep this in mind. You could win a big jackpot on the last day of the year. Would you have the records to keep your tax bill to a minimum?

If you want to discuss the tax implications of your gambling activities, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 16, 2023