From the Archives: Win a Home On TV, Find a Tax Collector in the Attic

It’s a holiday week, so I’m re-publishing popular stories from days gone by.

This popular story from January 2012 is about the tax consequences of winning a home in a TV giveaway. It was part 1 of a 6-part series. All 6 parts have remained popular almost 3 years later.

—–

Originally published January 2, 2012

HGTV gave away a home in their “Urban Oasis” promotion last week (it was an apartment in the Trump Tower in Chicago) and they are giving away another home on February 17. The winners of those homes are always so happy on camera — but they may not be happy once it comes time to file their tax return.

Why? Because the value of the home is considered taxable income to the winner.

For example, in the Dream Home Giveaway next month, the winner gets a $2 million home plus $500,000 in cash. That’s $2.5 million of taxable income to the winner. They’ll be in the 35% tax bracket. $2.5 million x 35% = $875,000 in federal taxes. Meaning, even with the cash prize of $500,000, they’ll be $375,000 short.

Sell the Home to Pay the Tax, Owe More in Taxes!

The winners could always take the home, sell it, and then use the cash to pay the taxes. But if they do that, they’ll either a) owe short-term capital gains tax or b) have a non-deductible capital loss.

Example

The winner of the $2 million home immediately sells it for $2.1 million. On their tax return, they’ll have to claim a $100,000 capital gain taxed at 35% (assuming that it’s sold less than 1 year after taking possession). So $2.6 million of total income ($2 million value of the house plus $100,000 gain plus $500,000 cash prize) taxed at 35%, which equals $910,000 of taxes. Their net takeaway after federal taxes will be $1.69 million ($2.1 million cash from sale plus $500,000 prize minus $910,000 in taxes).

If they sell the home for $1.9 million, they’ll have a non-deductible $100,000 loss on the sale and still be taxed on $2 million. Tax owed equals $875,000. Their net takeaway after federal taxes will be $1.525 million ($1.9 million sale plus $500,000 cash prize minus $875,000 in taxes).

Better to Take the Cash? Are There Other Options?

Most of these contests offer the option of taking a cash prize instead of taking the home. Is that a better option? What about taking out a bank loan or line of credit against the house? Or renting out the home? I’ll discuss tomorrow.

Image: nuchylee / FreeDigitalPhotos.net

I Don’t Have Time to Write Grant Proposals or Meet with Donors … But Give Me Money Anyway!

window-washer-30554A few weeks ago I attended a conference in my capacity as a board member of a not-for-profit. This was not a “business” conference for me, because the conference was related to the work the not-for-profit does, not to accounting. I was there as a board member, not an accountant.

But of course, I can’t just turn off the accountant part of my brain. And some things were said at this conference that I have to blog about here in relation to not-for-profit and small-business management.

I Don’t Have Time to Do the Dirty Work

Many of the people at this conference were activists who were trying to get not-for-profits off the ground. Here are two quotes that stood out to me:

There’s too much work to be done in the field. I don’t have time to waste writing grant proposals

And,

I don’t have time to meet with funders. Why don’t they come to me?

Not-for-profits aren’t that different from businesses, in that many of the leaders of not-for-profits that I encounter are Joe the Window Washers. They believe strongly in the mission of their group. They love helping people and doing the work that furthers the mission of the group. They have no use for anything that’s not directly related to the organization’s core mission.

The problem is: as with businesses, not-for-profits have a certain amount of crap that has to be dealt with:

  • Someone has to meet with donors
  • Someone has to write the grant proposals
  • Someone has to deal with IRS filings
  • Someone has to keep the books
  • Someone has to manage the volunteers and/or employees

“Someone” is not a mystical fairy that comes in the middle of the night to wave a wand and make the hard stuff go away.

I think this reality is even harsher for not-for-profits than for small businesses.

A business owner can be a Joe the Window Washer and keep things small and manageable. Yes Joe has to accept that there will be some amount of bureaucracy to deal with, but he can do things to keep his sanity.

Not-for-profits don’t really have the option to just be a Joe, because not-for-profits have more hoops to jump through. And unfortunately, it’s the founders who will have to jump through those hoops.

Image courtesy of user Nemo on Pixabay.com

Tell Your Accountant Before You Start Operating in Other States

map-294521_1280The most-recent edition of the NATP TaxPro Journal had an article that caught my attention: “Taking on a New Business Client: 18 Things You Need to Know.”

It was a really good article (the only item I disagreed with was the author saying to ask for a copy of the business’s “fire inspection certificate” — I’m not sure why that’s relevant for a tax preparer to have).

And I want to add a #19, or better yet, replace the “fire inspection certificate” item with: ask if the client is operating in other states.

Some small business owners — especially those who are inclined to be Joe the Window Washers — operate their businesses blissfully unaware of the fact that if they cross state borders to provide a service, they probably have various filing requirements in that state.

Examples of those “various filing requirements” might include:

  • Registering to do business in that state
  • Maybe collecting sales tax
  • Filing an income tax return in that state

It’s far better for the preparer to know about a business’s out-of-state activities up-front.

In fact, this is one of the reasons why I’m changing the way in which I work with small business clients. I’ll cover that in an upcoming blog post.

Image courtesy of user Nemo on Pixabay.com

My Experiences at the NAEA Leadership Academy

Pic of me at SSLA
My graduation picture. On the left is Mike Nelson, Executive Vice President of NAEA. On the right is is Terry Durkin, EA, President-Elect of NAEA.

I had the privilege of attending the Schuldiner/Smollan Memorial Leadership Academy conducted by the National Association of Enrolled Agents. This academy teaches about effective governance of state affiliates of NAEA (and I feel the concepts taught can apply broadly to all not-for-profit boards).

I’m not big on over-the-top emotional expressions and exaggerations, but I have to say: this was a life-changing experience. And it was FUN. The camaraderie of my group was unbelievable. I made so many great connections. And I learned valuable information.

I’m president of the Iowa Society of EAs. We used to be an active group. We’d get 30 people attending meetings, which is amazing for a group our size (we topped out at around 75 members).

Over the last 5 years, the group has drifted apart. We’re down to approximately 55 members, and no one comes to meetings anymore. We have a skeleton board of directors that meets by phone a few times a year, but we haven’t had a face-to-face meeting in 18 months, and only 3 or 4 people attended that meeting.

Attending the leadership academy will help turn the Iowa Society around. In my application for the academy, I wrote that I felt it was vital to keep the group alive, because EAs have to stick together.

Because there are so few of us, some would say (and some have said) to just let the group die. This cannot happen. EAs in Iowa are small in

The view from my hotel room in Orlando where I attended the leadership academy. It was about 50-degrees warmer there than back home in Iowa!
The view from my hotel room in Orlando where I attended the leadership academy. It was about 50-degrees warmer there than back home in Iowa!

number … but that’s all the more reason for us to stick together! Most of the EAs I know are solo operators such as me, and we tend to exist in isolation in our own little silos. The number-one thing EAs in Iowa have told me they want is networking and a sense of community. Keeping the Iowa Society alive will help provide that.

I have too many thoughts about the future of EAs, lessons learned, the future of ISEA, and thoughts on not-for-profit governance in general to put into this blog post. More to come.

Same-sex Marriage, Amended Tax Returns and Filing Status

flag-36423_1280I’ve pondered this question several times and not found a good answer .. until now (I think). 

The question regarded filing status on amended tax returns filed for 2011 or 2012 by someone in a same-sex marriage in those years. The original return used a filing status of single (because of the Defense of Marriage Act). They choose not to amend to file a joint return with their spouse. But they discover something — perhaps a missed deduction, or whatever — and they now want to amend that prior-year return.

Can they amend and keep their filing status as single, or must they use married?

I’ve twisted myself in knots over this issue in various posts on this blog. At first, I said that amended return must use a filing status of married.

Later, I speculated that one could maybe filing as single if filing status wasn’t relevant to the thing(s) being changed.

And now, I think I’ve found the answer … in the instructions to the Form 1040X (the form you file to amend a tax return):

Same-sex spouses. You may amend a return filed before September 16, 2013, to change your filing status to married filing separately or married filing jointly. But you are not required to change your filing status on a prior return, even if you amend that return for another reason. In either case, your amended return must be consistent with the filing status you choose.

So if you’re in a same-sex marriage and you’re amending a 2011 or 2012 tax return, you can file that amended return as married or keep your filing status as single.

Image courtesy of user Nemo on Pixabay.com