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Small Business Tax Q&A: July ’17

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in Small Business Tax

There’s no place like home

Q. Can the sale of a vacation home qualify for the exclusion if you’ve moved into it full-time? N.S., Vienna, Va.

A. Yes, with a caveat. To exclude the tax on a gain from a home sale—up to $250,000 for single filers and $500,000 for joint filers—you must have owned and used the home as your principal residence at least two of the five years prior to the sale. So you can qualify by moving into the vacation home for a minimum of two years.

However, the portion of the gain attributable to “nonqualified use” isn’t eligible for the exclusion. Nonqualified use includes using the place as a vacation home. Consult your tax advisor to understand how this rule can impact your situation.   

Tip: The home sale exclusion can be elected an unlimited number of times.

Spell out divorce terms

Q. My daughter is getting divorced. If her husband pays her rent through the end of their lease, is it taxable alimony? D.J., Parsippany, N.J.

A. Not necessarily. The IRS characterizes payments as alimony only if they are included in a legal divorce or separation agreement. Therefore, if your daughter and husband come to a “side agreement,” either verbally or in a separate document, it won’t be treated as alimony. This is significant to both parties because alimony is taxable to the recipient and deductible by the payer, but other payments (including child support and property divisions) aren’t. The couple can negotiate this during the divorce process.

Tip: Generally, the specifics in the divorce or separation agreement will control.

No extension for IRA contributions

Q. I just started my company and don’t have a retirement plan. Can I still deduct contributions to an IRA for last year? O.M., Boston

A. No. The deadline for contributions to an IRA is April 15 of the following year, adjusted for weekends and holidays (April 18, 2017, for the 2016 tax year). No extension for IRA contributions is allowed even if you’ve obtained an automatic six-month filing extension (Oct. 16, 2017 for the 2016 tax year). Because you don’t have a company retirement plan, your IRA contributions would have been fully deductible up to the annual limit of $5,500 ($6,500 if age 50 or older).

Alternative: If you extended your 2016 return, you could still open up and contribute to a Simplified Employee Pension by Oct. 16, 2017, and deduct the contribution on your 2016 return.

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