Tax Tips Blog

Rich asks:I’m thinking about opening a SEP-IRA this year. I believe the contribution limit is 25% of profits up to $44,000. If I have two different sole proprietorships, would I have to open two different SEP-IRAs or could I contribute 25% of total profits to just one IRA? TIA.

My reply: First if you already have a traditional IRA account you do not need to open any new accounts, but some custodians may make you open a new one anyway.

Second, because of the adjustment for 1/2 of your self-employment tax, your maximum contribution usually works out to 20% of the sum of your net taxable profit reported on your Schedules Cs up to $45,000 this year.

You may want to read IRS Publication 560.

Best wishes,

Gina

Tim writes: Hello. I’ve now been investing and learning a little over 5 years. Somewhere I remember reading that if one holds stocks or funds for over five years the tax basis is even lower that the year and a day basis. I don’t remember where I read that but if you can enlighten me, I would appreciate it very much.

My reply: Oh Tim. There was a tax rule in 2001, known for a brief time as the “ultra or super long-term gains rate” that reduced the tax rate on those gains, but that rule didn’t last long enough to have any practical effect.  It’s just helping to confuse taxpayers and keep the tax code as long and confusing as possible.

The current rule, which began in 2003 is that all long-term capital gains are taxed at a reduced rate. You may wish to read this article I wrote about the capital gains rates last March. Then once you get that read, prepare yourself for another change….when I’m not sure, but it’ll happen.

Best wishes,

Gina

Doug writes: I recently purchased some property (unimproved land) as an investment and possibly a location for a dream home. At the time of purchase I wasn’t too concerned over the tax implications, expecting that nothing would be deductible. Am I correct? Can any of my expenses (loan interest, surveys, permits, etc.)be deducted?

My reply: If this is an investment, you can deduct your interest as investment interest. The only problem is that deduction is limited to your net investment income. Investment income includes interest and dividends (but only non-qualified dividends or qualified dividends that you elect to forgo the 15% max tax rate). For many taxpayers this means the interest is just accumulated and deferred.

You may want to do a little reading up on investment interest. IRS publication 550 would be a good place to start.

If this is a personal purchase, the interest is not deductible.

In either case, the property taxes are deductible currently. Surveys and permits related to constructing a house would add to the cost of the property and reduce the gain whenever the property is ultimately sold.

Best wishes,

Gina