There are several tax incentives in the form of credits and deductions currently available to help offset ever increasing higher education expenses for you, your spouse, and dependents.

Tax Credits

Currently there are two tax credits available.

The first is the American Opportunity Tax Credit.  This credit is available to qualified students for their first four years of higher education.  The credit is computed by taking 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000.  The maximum credit is $2,500 per student.  Up to 40% of this credit is refundable, meaning that if the credit reduces your tax to zero, 40% of the unused credit will be refunded to you.

The second is the Lifetime Learning Credit.  This credit is available to qualified students for eligible expenses, such as graduate school, that are not covered by the American Opportunity Tax Credit.  The credit is 20% of eligible expenses.  The maximum credit is $2,000 and unlike the American Opportunity Credit, it is on refundable.

You cannot claim both credits in the same year.

Tuition and Fees Deductions

This deduction is for qualified expenses up to $4,000.  This is an adjustment to income so you do not have to itemize deductions in order to take advantage of this.

This deduction can be taken instead of (but not in addition to) one of the credits discussed above.

Each of the credits and deductions is subject to its own eligibility requirements and income limitations.  Your situation should be analyzed carefully to determine which choice is the right one for your situation.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: info@dohertyandassociates.com

Call us at: 302-239-3500

Visit our website: http://dohertyandassociates.com

– Doherty & Associates Team

Well, as with most tax questions, the answer is, it depends.

Investor vs. Dealer.

When we think of a real estate investor, we think of someone who purchases and holds real estate for rental income and/or appreciation over a period of time.  A typical investor might own a few rental properties, keep them for several years and eventually sell them.  An investor is thought of as being in it for the long term.

Being a real estate dealer is more involved. The IRS considers a dealer to be someone who is engaged in the business of selling real estate to customers with the purpose of making a profit from those sales, such as flipping and wholesaling.  A dealer is more of a short term proposition.  Determining who is a dealer is subjective and open to interpretation.  The IRS and the courts use several factors that have been developed through numerous court cases.  These factors are:

• The taxpayer’s purpose in acquiring the property;
• The purpose for which the property was subsequently held;
• The taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income;
• The frequency, continuity, and substantiality of sales of property;
• The extent of developing and improving the property to increase the sales revenue;
• The extent to which the taxpayer used advertising, promotion, or other activities to increase sales;
• The use of a business office for sale of property;
• The character and degree of supervision or control the taxpayer exercised over any representative selling the property; and
• The time and effort the taxpayer habitually devoted to sales of property.

No one of these factors is, by itself, conclusive in determining if you are a dealer.  However, the Tax Court has indicated that the frequency, continuity, and substantiality of sales of property are the most important factors to consider.

 

Tax consequences of being an investor vs. a dealer.

For an investor, rental income is generally taxed at ordinary income rates and is not subject to self-employment tax (Self-employment tax is a tax of up to 15.3% on your net income from self-employment.  Self-employment tax is in addition to your regular income tax).  If you hold your investment property for at least a year, your gain on sale will be taxed at favorable long term capital gain rates.

If you are classified by the IRS as a dealer, all of your income will be taxed at ordinary income rates.  There is no favorable long term capital gain treatment.  Installment Sales and Like Kind Exchanges are not available to dealers.  Additionally, you will be subject to self-employment tax on your profits.

If the IRS classifies you as a dealer, then all of your real estate income, including rental income, will be subject to dealer treatment.  To avoid this treatment, it is important to use separate entities for different types of real estate activities.   The best example of this would be holding rental properties in an LLC while using an S-Corporation for wholesaling and flipping.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: info@dohertyandassociates.com

Call us at: 302-239-3500

Visit our website: http://dohertyandassociates.com

– Doherty & Associates Team