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San Jose, CA real estate investment tax attorneyMajor financial transactions can have a variety of tax consequences, but taxpayers may be able to make use of tax laws and regulations to minimize the taxes they will be required to pay. Real estate transactions will often result in capital gains taxes being applied to the profits earned, but in some cases, a taxpayer may be able to use a “like-kind exchange” to defer the taxes owed. However, the Tax Cuts and Jobs Act (TCJA) of 2017 made some changes to the types of property that can be included in these exchanges, and the IRS recently issued new rules that will apply in these cases.

What Is a Like-Kind Exchange?

Section 1031 of the Internal Revenue Code allows taxpayers to defer capital gains taxes when selling certain types of property if the proceeds from the sale are reinvested into replacement property. The replacement property must be of a “like-kind” to the original property, meaning that it is property of the same type. Typically, business or investment property can be exchanged for other business or investment property.

Updated Rules for Section 1031 Exchanges

The TCJA restricted like-kind exchanges to real property used for business or investment purposes. It also eliminated certain types of personal or intangible property from being considered in these exchanges, including equipment and machinery, artwork and collectibles, vehicles, and patents or other intellectual property.

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San Jose tax lawyer for expatriatesPeople who live in the United States are required to pay a variety of different types of taxes. Because the U.S. Tax Code is so complex, taxpayers are not always aware of issues that may affect the taxes they pay, and they may encounter situations that trigger unexpected tax obligations. In addition to paying taxes while residing in the United States, taxpayers will also need to meet certain requirements when moving to other countries.

U.S. citizens who plan to relinquish their citizenship or permanent residency “Green Card” holders who will no longer be lawful permanent residents of the United States will need to follow expatriation procedures with the IRS. In some cases, an exit tax may apply, or a person may face a tax audit based on his or her compliance with tax obligations in previous years. By working with a tax law attorney, these individuals can understand their obligations and take steps to minimize penalties and avoid ongoing tax issues.

Preparing for Expatriation

All expatriates are required to file Form 8854 for the year in which they terminated their citizenship or ended their residency in the United States. This form certifies that a taxpayer has complied with tax obligations in the 5 years prior to expatriation. Expatriates who defer tax payments or compensation or who have an interest in nongrantor trusts will need to file Form 8854 annually.

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San Jose, CA tax attorney for corporate taxes and TCJAA C Corporation is a separate legal entity that protects a business owner’s assets from creditor claims. All corporations are C corporations by default until a business owner files for S corporation status. In a C corporation, business income and expenses are taxed to the corporation. When a business owner or owners receive profits from the business as dividends, the owner(s) must also pay income tax on the profits – creating a double taxation situation. On the other hand, S corporations are “flow-through” entities, meaning business income is treated as owner and investor income for tax purposes. This may make it seem as if operating your business as an S corporation is a better choice than operating it as a C corporation. However, major changes to U.S tax law were established by the 2017 Tax Cuts and Jobs Act (TCJA) that may influence your decision regarding corporation status.

The Qualified Business Income Deduction

The TCJA initiated sweeping changes to tax law, including the new qualified business income deduction, which is also called the Section 199A deduction. This deduction allows certain individuals the opportunity to deduct up to 20 percent of their qualified business income. However, business income generated by a C corporation is not eligible for this deduction. The TCJA also enacted a flat 21 percent tax rate on C corporations, which is much lower than the previous rate of 35 percent. Because income from an S corporation is taxed at the personal level instead of the corporate level, S corporation income does not qualify for the 21 percent tax rate. S corporation income flows through to the shareholders’ personal tax returns and can therefore be taxed at rates as high as 37 percent.

Potential Issues Regarding Switching From S Corporation to C Corporation Status

The Tax Cuts and Jobs Act included provisions to help make the transition from S corporation to C corporation easier. Section 1371(f) extends the time period during which an eligible terminated S corporation can make tax-free distributions from its accumulated adjustments account. Business owners should keep in mind that there is a time constraint regarding the transition relief offered by the TCJA. An eligible terminated S corporation must revoke its S election no more than two years after the TCJA is enacted. This means that reversals after December 22, 2019, will not qualify.

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San Jose tax lawyer for amended tax returns

In previous blogs, we have discussed the many consequences of not paying your taxes in full. However, sometimes a person has the opposite problem: the overpayment of taxes. If you have inadvertently or mistakenly paid more than your fair share of taxes, you may wonder if there is a way to get that extra money back. Whether or not the IRS will refund your money is based on many factors. Read on to learn about your options if you have overpaid your taxes and how a qualified tax lawyer can help.

Getting a Refund From the IRS

If you have overpaid the Internal Revenue Service (IRS), you may be able to receive a refund. If the IRS is aware that you overpaid, the agency may correct the issue by refunding you the extra balance. For example, if your tax return shows that you owe $2,000, and you send the IRS a check for $3,000, the IRS may refund you the extra $1,000 without issue. However, the situation becomes more complicated when the IRS is not aware of the overpayment. 

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San Jose, CA tax lawyer for innocent spouse relief

Married couples have the option to file a joint tax return instead of separate tax returns. There are often benefits to choosing this filing status, but there can also be drawbacks. Couples who file jointly are “jointly and severally” responsible for any tax liability, interest, or penalties due. The terms “jointly and severally” mean that each spouse is legally responsible for the entire tax debt. When one spouse does not adequately fulfill his or her tax obligations, this can leave the other spouse in serious trouble with the Internal Revenue Service (IRS). Fortunately, there are several ways that a spouse in this situation can be released from tax liability. One of these types of tax relief is called “innocent spouse relief.”

What Is Innocent Spouse Relief?

Imagine this scenario: your wife is a business owner who struggles to keep track of her profits and expenses. When you jointly file your tax returns, the IRS notices that there are inconsistencies with the business income, expenses, and/or deductions. You are audited. As a result, both of you now owe a significant amount of money in back taxes. In situations like this, innocent spouse relief, also called innocent spouse protection, may help a guiltless spouse avoid his or her spouse’s tax liability.

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