Mesa Money Minute

Correspondence from tax agencies are on the rise. What should you do if you receive a letter or a notice from the IRS or a state tax agency? First of all, don't panic, but don't ignore it. Many of these issues are relatively easily resolved. Don't assume the notice, including any balance due, is correct. If you prepared your own return, carefully review the notice against your records to ensure that you understand what the agency is changing or what they are requesting of you. If you do not understand, it is best to contact a CPA to help you solve the issue. It can save you thousands of dollars. If you used a tax preparer, provide them a copy of the notice as soon as possible (we do not automatically receive copies of these and have no way of knowing that there's an issue unless you give them to us). Ask your preparer if they included the cost of responding to letters in your tax prep fee. If not, ask them to estimate the cost of their assistance with the notice. Lastly, be patient. The IRS and other agencies are taking 6 to 9 months recently to respond to correspondence. You may even receive additional correspondence in the meantime. Follow up if you haven't heard anything in about 9 months.

The cryptocurrency market, just like the stock market, has been on a rout recently. You may be wondering if you sell or dispose of your crypto at a loss, how does that affect your taxes. The IRS has deemed cryptocurrency as property, so gains and losses on it are generally considered capital, similar to holding a stock or a bond. Capital gains and losses are taxed differently than other types of income. Long term capital gains are generally taxed at 15% for most taxpayers. Capital losses can be used to offset any capital gains, plus $3,000 of other income, with any remaining loss being carried forward indefinitely. What this means is that if you sell crypto for less than you paid for it, you can take up to $3,000 of that loss against your other types of income. This can be a useful tax planning strategy if you have lost some money on crypto recently. Remember that purchasing goods or services with cryptocurrency as well as converting one type of crypto to another are all considered taxable sales of currency which must be reported. 

The Fed raised interest rates this month again, from 3% to 3.5%. How might this impact you? You will likely see higher interest rates on borrowing, such as home mortgages and car loans. Rates are expected to continue to increase, though, so if you're considering taking out a loan do so sooner rather than later. HIgher interest rates will also likely put some additional downward pressue on certain types of investments. However, you will likely be able to eek out a bit more interest on your savings account. Higher interest rates are also expected to cool demand for labor somewhat, possibly alleviating some of the worker shortage. The main purpose of increased interest rates, however, is to lower inflation, so we are likely to see the historical inflation rates tame down in the coming months.

Watching the market tank can be anxiety-inducing. However, there can be a tax silver lining to the market downturn. Tax loss harvesting is selling positions within your portfolio at a loss in order to capture or harvest that loss for use against a capital gain. You shouldn't sell losing positions solely for the tax benefits, however you can use this strategy to reduce your capital gains from sales of other positions or real estate, or even reduce your ordinary income by up to $3,000. Consider this strategy if you need to do some routine rebalancing in your portfolio, have an overweighted position in your portfolio, or a position that no longer aligns with your goals. Beware of loss sale rules which disallow losses if you repurchase the same security within 30 days. Speak with your financial advisor and CPA before attempting this complicated stragey.

The Supreme Court decision in Wayfair vs. South Dakota brought to the forefront a concept known as Economic Nexus. What this concept is referring to is essentially, where are you for tax purposes. With the explosion of remote work as well as the continued growth of ecommerce, this concept is more challenging than it once was. For example, if your company is based in Colorado but you have an employee working remotely from their home in Michigan, where is that employee considered to be? Conversely, if your company is based in Florida, but you sell products online to buyers across the country, where are those sales considered to take place? The decision in Wayfair opened up the ability for states to claim a business has nexus in their state without a physical presence in that state. Every state has different rules and exceptions for when you must report to them, and the rules also differ by the type of tax - for example, employment tax rules may be different from sales tax rules. It's important to understand the concept of nexus and how it applies to your business so that you stay in compliance with laws and regulations.

Vacation rentals are common in ski areas in Colorado. A vacation rental is defined as a property that is rented at least 15 days and used for personal purposes. Certain expenses that are directly related to renting the property, such as advertising or agent's fees, can be fully deducted. Other expenses on such a vacation rental must be prorated according to the rental days compared to the personal days used. Any day you spend working on the rental property, such as cleaning or making repairs, is not considered a personal day, even if family members are using the property for recreation on the same day. However, any day rented to someone at a discount (as might be the case with friends or family) is considered a personal day. Also, if you use the property for personal purposes for more 14 days or 10% of the rented days, whichever is greater, you cannot take a loss on the rental activity.

Continuing our discussion from last month on rental real estate investments. What expenses are deductible against your rental real estate income? The IRS allows expenses to be deducted from your rental income that are necessary to the management of the property. This will include the usual things like advertising, property taxes, landlord's insurance, and mortgage interest. However, did you know you can also take a portion of the cost of the building each year as an expense? This is called depreciation. Also, if you use your cell phone or home internet connection to manage the property, you can take a portion of those expenses as well. If you travel overnight to manage an out of town rental, you can deduct travel expenses, including meals. It's important to keep excellent records to ensure that you can justify all the deductions you take on your rental properties.