“Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
Source: IRS Publication 561
This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation. The difficulty here, is if the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but penalties to boot. Here are some tips to help defend your FMV in case of an audit.
Understand when it is used
Fair Market Value or FMV is used whenever an item is bought, sold, or donated that has tax consequences. The most common examples are:
- Buying or selling your home or other real estate
- Buying or selling personal property
- Buying or selling business property
- Establishing values of other business assets like inventory
- Valuing charitable donations of personal goods and property like automobiles
- Valuing bartering of services
- Valuing transfer of business ownership
- Valuing the assets in an estate of a deceased taxpayer
Ideas to defend your FMV determination
Here are some suggestions to help you defend your FMV determinations.
Properly document donations. FMV of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.
Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Websites like Kelley blue book (kbb.com) can help establish the value of your vehicle when you donate it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it.
Get an appraisal. If you sell a small business, collection, art, or capital asset make sure you have an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.
Keep copies of similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.
Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.
Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and amount paid for the item.
With proper planning, establishing the fair market value of an item sold or donated, can be done in a reasonably defendable way if ever challenged.
Most income you receive is taxable income that is reported to you and to the Federal/State tax authorities. However, there are a few income-producing events that the IRS has said are not taxable. One of them is renting out your home or vacation property.
The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.
Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced with the income from up to two weeks of rental activity.
Would someone want to rent your property?
Sure it sounds good, but why would someone want to rent your property? Here are some ideas:
A sporting event. If a big sporting event is in town, consider renting out your home for participants and fans. Common examples include;
- Football games
- Golf tournaments
- State high school tournaments
- College football and other college events
- Host foreign students/teachers
Rent out your vacation home. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.
Vacationer alternative to hotels. Often times travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets these travelers have a real “local” experience versus staying in a hotel.
Know the risks
The hassle factor needs to be considered prior to taking advantage of this free income opportunity. You should also understand the risks involved. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember to only rent out your property for up to 14 days. Rent received beyond this is taxable and rental income rules apply.
Thankfully there are a number of internet sites that can help you navigate through your options. Here are a couple popular sites to find out more information.
Vrbo.com (vacation rentals by owner)
Tripadvisor.com (includes personal rentals with user feedback)
Understanding the rules surrounding investment losses can really help minimize your tax obligation each year. This is because investment gains and income can be subject to a variety of federal tax rates as high as 39.6%. This and a newly minted tax law in 2013 that could add a 3.8% Medicare investment tax surcharge make planning around when to take investment losses an important tax planning subject.
Know the meaningful rules
What makes investment losses such an important tax planning subject? Here are the relevant tax ramifications surrounding investment losses.
- Offsetting gains. Investment losses can be used to offset investment gains every year.
- Short-term versus long-term. Short-term investment gains (from assets owned by you for less than one year) can be subject to ordinary income tax rates up to 39.6% while long-term gains have a maximum tax rate of 20% (0% if your income is in the 15% income tax bracket or lower).
- Netting rules. You first net investment losses against investment gains prior to applying losses against your ordinary income. Where possible you must net short-term losses against short-term gains and long-term losses against long-term gains.
- Excess losses. Up to $3,000 of excess investment losses can be used to offset your ordinary income in any one year.
- Unused losses. Unused losses can be carried forward to offset income in future tax years.
So given these rules, here are some tips.
Maximizing the impact of investment losses
- Net losses against short-term gains whenever possible. If you are in a high income tax bracket, try to sell stocks with a loss to offset any investments you wish to sell that you have owned less than one year.
- Defer taking losses if they will be used to offset lower taxed gains.
- Time taking an investment loss to take advantage of the annual $3,000 reduction of income it provides.
- Transfer stock from a low tax rate family member to a higher taxed individual.
- Take full advantage of the loss carry-forward rules. If you sold an investment that had a huge loss in a prior year, you can only take $3,000 against your regular income each year. If this applies to you, conduct an annual review of your portfolio and consider selling investments with a gain to offset more of this loss carry-forward.
Remember, investment losses can be used to offset investment gains and a limited amount of your ordinary income. Since the tax rates vary so greatly, proper planning to match losses against higher taxed items can make these losers a real winner on your tax return.
IRS to send out special mailings
Noted here is a copy of a recent interest error calculation announcement made by the IRS. If you recently received a form CP2000 from the IRS please be aware an adjusted, higher interest amount may be owed.
The IRS alerted taxpayers and tax professionals about an interest calculation error on certain notices mailed the weeks of July 1 and July 8.
The IRS discovered errors in the CP2000 notices during a two-week period this July. The notices contained an incorrect calculation on the interest owed on proposed taxes from under reported income. The interest figures were lower than they should be. The IRS has corrected the issue for future mailings.
Later this month, the IRS will be sending a special mailing to the recipients of the notices. Taxpayers should follow the directions on the letter, and they will be encouraged to either call a special toll-free number or write to the IRS to receive the corrected interest amount.
A CP2000 notice shows proposed changes to income tax returns based on a comparison of the income, payments, credits and deductions reported on a tax return with information reported by employers, banks, businesses and other payers. The CP2000 also reflects any corrections made to an original tax return during processing.
Should you have any questions or need assistance please feel free to call
With the increased popularity of lotteries and casinos, more unsuspecting winners are experiencing a lucky payday only to end up with a huge tax head-ache when filing their income taxes. Here is what you need to know:
Look for the warning signs
You are required to report as income any winnings you receive including, but not limited to:
|• slot machines||• bingo||• pull tabs||• horse/dog racing|
|• game shows||• raffles||• lottery||• gambling (e.g. cards, roulette)|
The winnings could be in cash, but also includes the fair market value of prizes such as a car, boat or vacation package. When you win the payer is required to give you a Form W-2G. Receipt of this form should be your clear signal that you have a taxable event.
How the tax math works
Unlike a business, gambling winnings are reported on one part of your tax return while any offsetting gambling losses are reported as a miscellaneous itemized deduction. In plain English, this means:
- Your income is increased by the amounts listed on W-2Gs and any other winnings you had during the year.
- If you do not itemize, you cannot deduct any gambling losses during the year.
- If you do itemize, you must be able to substantiate any gambling losses with an accurate diary, receipts, tickets, statements and other records.
- You may never deduct more in losses than winnings.
- Merchandise. If you win a non-cash item, make sure you agree with the market value attributed to the item won. Often the item is overstated by the game organizer as a promotional technique. Ask to see a copy of the invoice that the organizer actually paid for the item. Consider printing out a dated copy of an advertisement of a similar item that is offered for less money.
- Losses. Losses do not need to match winnings for time and date. You may play bingo all year long at a locally hosted charitable bingo hall, but only win the big payout once during the year. You can offset all your losses against this one win, as long as you have accurate records.
- Casino assistance. When you win at a casino ask them for help. They often can help you understand and record your costs/losses. Consider joining the casino’s player’s club. With it they will send you a winning/loss statement at the end of each year.
- Tax withholdings. Consider withholding some of your winnings to pay for your federal and state tax obligation. This will help reduce the sting on tax day. Also consider submitting quarterly estimated tax payments.
- Professionals. If you consider yourself a professional gambler, business tax rules apply. But make sure this consideration is a defensible position in the eyes of the IRS. The IRS often challenges professional gamblers that attempt to take more in expense than they earn in winnings.
- Reselling merchandise. A special caution if you win an item and then resell it. Using a new car as an example, say you don’t need the car so you sell it for $25,000. You could find your W-2G has a market value of $30,000. In this case you would have $30,000 in taxable income, but only received $25,000. Your personal loss is not a tax deductible item.
Is there good news? Yes, gambling losses cannot be reduced at the federal level if you are subject to the Alternative Minimum Tax (AMT) or if you are subject to the reinstated itemized deduction phase-out.