In this episode of Tax Tuesday, Anderson Advisors’ Barley Bowler, CPA, and Eliot Thomas, Esq., answer listener questions covering a broad range of real estate, retirement, and investment tax topics. They break down cost segregation studies and depreciation recapture, explaining how bonus depreciation accelerates deductions and how 1031 exchanges and stepped-up basis can help investors defer or eliminate gain entirely. They address whether vacated rental rooms can qualify as deductible office space, and walk through how multi-state 1099 income is taxed when a worker performs services in Kansas for California patients through a Utah company.

Barley and Eliot also clarify how MAGI determines the taxable portion of Social Security benefits in retirement, and confirm that qualified retirement plan distributions are protected from California taxation once a taxpayer has established residency in Nevada. Additional topics include 529 college savings plans for children attending accredited foreign universities, combining Roth IRAs with a payroll strategy for minor children, when Schedule E versus Schedule C applies to short-term rental income, and the significant hurdles of qualifying for Trader Tax Status — along with an alternative C-corporation trading structure that may offer far greater and more reliable tax advantages. Tune in for expert advice on these topics and more!

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

[00:00] Intro to Tax Tuesday with Eliot and Barley

[7:10] “I would like to know more about cost segregation and depreciation recapture on property sales.” Cost segregation accelerates deductions upfront. Recapture taxes those gains at ordinary rates upon sale.

[18:00] “At the beginning of this year, I moved into a new home. At my previous residence, I had been renting two rooms, and I am currently working to sublet them. I am still on the lease and committed to covering the cost of those two rooms until I find replacements. My question is: since I am continuing to pay for these rooms, would it be possible to classify them as office space and potentially use them as a tax deduction?” Have your business assume the lease directly. That creates a clean, legitimate deduction.

[22:53] “My wife is doing remote 1099 work, and I had a question on where state taxes are due. We live in Kansas and she performs the work from a home office or rented office space in Kansas. She is performing this work through a contracting/locums company based out of Utah, but the current work she is providing is for patients in California. Do we pay KS or CA state income tax for this 1099 work?” Both Kansas and California claim the income. Kansas credits taxes already paid to California.

[29:35] “Taxes in retirement: we know you can be taxed on Social Security. We don’t know the details. How much can you make to avoid being taxed? Does the IRS include all incomes, passive and active? We just don’t have details.” Between 50–85% of benefits may be taxable. MAGI includes all income, even tax-exempt interest.

[36:54] “I have been a Nevada resident for 2 years. I started my retirement from a California corporation this year. Can California tax my retirement benefits now that I am a NV resident?” No. Federal law fully protects qualified retirement benefits paid to Nevada residents.

[40:55] “I am a business owner in Texas. My twin kids are growing up in a foreign country with their cousins. They may want to pursue higher education there. I haven’t started a 529 college savings plan yet. If they decide not to go to college at an American university, what would be the best type of tax-sheltered account to invest in, for the kids?” 529 plans cover accredited foreign universities. Combine with a Roth IRA for maximum impact.

[48:17] “Is it okay to use Schedule E to report short-term rental income?” Yes, if you provide only minimal services. Substantial services push income to Schedule C.

[53:55] “For 2025 tax year, I made more than 800 trades – frequently – 3 days/week throughout the year. I made profits both from long-term investing and short-term trades. Am I eligible for Trader Tax Status and able to deduct my expenses in 2025 filing (I applied for extension).” Trader Tax Status is highly subjective and audit-prone. A C-corp trading structure is safer.

Resources:

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Clint Coons YouTube

Full Episode Transcript:

[00:00.00] Intro:

[00:12.92] Barley: Welcome back, everyone. It’s Tax Tuesday.

[00:14.92] Eliot: It is.

[00:15.92] Barley: That time of the week again. Every other week, answering your tax questions live. My name is Barley Bowler, one of the CPAs here at Anderson Advisors. For some reason, we always have this guy on Tax Tuesday. Why are you always here? You’ve been doing this for a minute, huh?

[00:27.96] Eliot: Yeah. Been a little bit. Eliot Thomas, manager of the tax advisors here.

[00:31.68] Barley: Yep. Eliot knows tax law. He knows it really well. My focus as a CPA, kind of more on the financial statements, debits, credits, bookkeeping, all that kind of stuff. Really happy to have you guys here. Welcome back. For anyone here for their first time, big welcome to you. We do this every other week, answering your tax questions. Typically focus on real estate, small business, that kind of stuff. But all across the board, we got a couple of fun ones today.

[00:53.52] Eliot: Yes, we do.

[00:54.52] Barley: A little bit different there. You guys know the drill. We got a chat. Shout us out in the chat. Where you’re tuning in from, where you’re listening in from. Post questions as we go in the Q&A. We got a team helping us out as answering questions in the back there as well. Plus email your questions taxtuesday@andersonadvisors.com.

[01:11.60] Eliot reads through all your questions every other week and we pick some that will hopefully be obviously useful and add value to you guys. Plus explore some new topics, all that kind of fun stuff. We need a detailed response. I think we have a link in here about set up a tax consult, or how to become a client.

[01:29.96] Obviously reach out to us if you want any information on that. We’d love to have you become a tax client here. We obviously offer tax preparation, tax advising, consulting services. Fast, fun and educational.

[01:41.12] Eliot: Yes it is.

[01:42.12] Barley: That’s right.

[01:43.12] Eliot: We think it is.

[01:44.12] Barley: That’s right. Give back and help educate. And that’s kind of been the partner mission from the beginning, right? I say on the YouTube channels, which we’ll make sure you’re subscribed there. We’ll go through that in a minute. Tons of great content. I mean, so much of this is such a steep learning curve. We’ve just got to get the material to you.

[01:59.32] We kind of know based on the questions you guys start to ask when you’re starting to digest this mountain of legal and tax information. But welcome back everyone. Any announcements we want to get into before we open?

[02:10.08] Eliot: Other than maybe our questions are a little bit off, I’m thinking on our PDF, so we’ll read the whole question. We’ll get that off there a little bit. It’s good on our side, which is probably the important part.

[02:19.60] Barley: Right. As long as we can read them. Well, hopefully you guys can see the whole question there. It looks a little off on our screen, but we’ve got so many screens we’re looking at here in the studio.

[02:27.04] Eliot: True.

[02:28.04] Barley: All that matters is that you guys can see the questions. Let’s read through these questions. I’d like to know more about cost segregation and depreciation recapture. Wow, you’re in the right place.

[02:38.96] Eliot: We’ve done that a couple times.

[02:39.96] Barley: On property sales. We’re in the right place. Is this the same? Well, that’s just the first question.That’s it.

[02:45.96] Eliot: That’s the question.

[02:46.96] Barley: All right. What do we got for the next one?

[02:48.96] Eliot: At the beginning of this year, I moved into a new home. My previous residence, I’d been renting two rooms and I’m currently working to sublet them. I’m still on the lease and committed to covering the cost of those two rooms until I find replacements. My question is, since I’m continuing to pay for those rooms, would it be possible to classify them as an office space and potentially use them as a tax deduction? I’m going to look at that a little bit different angles on that.

[03:16.36] Barley: Like what you’re thinking there. She’s doing remote 1099 work, remote likely out of state or something. I had a question on where state taxes are due, on where state taxes are due. We live in Kansas. She performs the work from a home office or rented office space in Kansas. She’s performing work through a contracting locum company based out of Utah.

[03:37.88] This is a fun one. But the current work she’s providing for us in patients in California.  Holy cow. Where do we even, how do we draw the lines through that tax base? Do we pay a Kansas City tax, California state tax? What about the Utah portion? We’re going to certainly go up. Great question.

[03:52.52] Eliot: Probably have to draw that one up.

[03:53.52] Barley: Right. We don’t have to get off the map.

[03:56.80] Eliot: Taxes in retirement. We know that we can be taxed on Social Security. We don’t know the details.

[04:01.88] Barley: We don’t know why though. Why would you tax Social Security?

[04:04.32] Eliot: I’ve always wondered that. How much can you make to avoid being taxed? Does the IRS include all incomes, passive and active? We just don’t have details.

[04:12.44] Barley: Yep. We’re going to provide some of those. That’s a real common question too. I’ve been a Nevada resident for two years. I started my retirement from a California corporation this year. Welcome to Nevada. Can California tax my retirement benefits now that I’m a Nevada resident? I know they sure want to.

[04:28.76] Eliot: I’m a business owner in Texas. My twin kids are growing up in a foreign country with their cousins. They may want to pursue higher education there. I haven’t started a 529 college savings plan yet. If they decide not to go to a college in an American university, what would be the best type of tax sheltered account to invest in for the kids?

[04:51.04] Barley: Is it okay to use Schedule E to report short term rental income, kind of a tax reporting question there? Great question.

[04:57.16] Eliot: Maybe it is. For 2025 tax year, I made more than 800 trades frequently, three days per week throughout the year. I made profits for long term and short term investing. Am I eligible for the trader tax status, and am I able to deduct my expenses in my 2025 filing? I applied for an extension. I get that one quite a bit.

[05:18.76] Barley: Yeah, a couple things. We got that active trader status and the mark to market, couple different things there. As promised, looks like somebody didn’t subscribe to Clint Coons’ YouTube page, guys. Get busy. Subscribe for great content. Turn on the notifications. Tons of great content. As you know, Clint focuses more on the asset protection side. Toby more on the tax planning side. And together, they are.

[05:42.52] Make sure you subscribe. Great recent interview, or excuse me, not interview, but just kind of talking about tax credits with Savannah. I think that was just posted a week or so ago, kind of the difference between credits and deductions. Anyway, tons of great content on there, guys, up over 1,000 videos. Upcoming events here. What do we got here?

[06:00.28] Eliot: Tax and asset protection workshop. We call it the TAP event.

[06:03.40] Barley: Just over your assets.

[06:05.48] Eliot: Right. Exactly. Every weekend, doing it live on video virtual. We have that coming up Saturday, May 2nd. Go ahead and register there. Also, May 9th, the following Saturday, our regular workshop on the virtual side. Then again, May 28th through the 30th, we’re going to be live in Phoenix. Just hit the buy tickets and just go to our website and we can direct you to how to get into that.

[06:33.16] Barley: Come join the fun. This is the original strategy session right now. Meet with the team, build your blueprint, get the ball rolling. If you’re interested in becoming a client, becoming a tax client or in any of our services here, this is a great way to just kind of get the ball rolling. Just get the initial information going, see what next steps we need to take.

[06:51.72] Eliot: Get in with a business advisor. They’re very well versed in both the tax and the asset protection. Got really good groundwork there and help you get on your way.

[07:01.16] Barley: All right, guys. Let’s dive in. Let’s talk tax. This is a great question to start out with. Some of these questions are simple, maybe short, but 10 different routes we could take out of this one question. I love these kinds of questions. I’d like to know more about cost segregation, cost segregation study, and depreciation recapture.

[07:22.84] That’s kind of a big word on property sales. Where should we start here? Probably start with just what’s cost segregation and depreciation. What the heck are we even doing here, huh?

[07:31.60] Eliot: Yeah, I think depreciation is where we start here, and it’s just the concept that you bought probably a bigger asset, usually your house, your building. It’s going to be your capital assets typically, and the government doesn’t allow you to expense it all right away as a general matter. However, they do let you take a systematic approach to taking that cost over time, over several years.

[07:55.60] When we talk about houses, which we know we are, when we talk about cost segregation, we’re talking about housing, real property, commercial buildings, things of that nature. Generally speaking, just on the depreciation for a house or a building, it’s straight line. You buy it, let’s say it’s $275,000 for the building, and it’s a long-term rental, single family home.

[08:18.04] We know that’s going to be divided over 27 and a half years. You take the same amount each year, $10,000 a year, $275,000 divided by 27 years. We get the systematic amount of deduction each year, which is nice. That’s not a bad amount. That’s a good deduction. But then they bring in this cost seg. What’s going on there?

[08:35.36] Barley: Right. This is the cost segregation study is going to identify different assets or components of the rental property that technically should be depreciated over a shorter life, right? We’’ve got this, we’ve got a building here, right? Four walls and a roof and a pad it’s sitting on.

[08:54.92] This is 27 and a half year property. If it’s commercial, it’s 39 year property. Again, this is the roof, the four walls and the foundation. But within this house, right, we have all these, electric, flooring, fixtures. What else is common on cost seg study? Wiring.

[09:13.20] Eliot: Yep. About to be your electrical again.

[09:15.20] Barley: All your five and seven year property. These are not part of the roof or the four walls or the structure. They’re actually supposed to be depreciated over five or seven, sometimes 15 years. Most of the cost seg stuff is five and seven year property a lot of the time. What’s happening when we do a cost segregation study, we’re separating out the assets that are supposed to be depreciated faster from the whole structure.

[09:37.92] And then we’re going to apply that, that, that the correct depreciation life and that will accelerate or speed up the depreciation. What does that mean? To say, Hey, the same amount of depreciation over the 27 and a half years, but by separating out the shorter life assets and accelerating the depreciation, we just get to take more deduction upfront. According to time, value of money, net present value of a dollar, we want the dollar today as opposed to 30 years, right? Obviously, plus other reasons we can get, reduce our taxes as well.

[10:08.82] Eliot: It’s just speeding up a portion of the house, getting the pressure or the building. In the end of itself, that may not sound like a lot, but when you actually see these studies, see some of the numbers, especially on commercial buildings, it can be quite a bit. Talking several hundred thousand dollars, sometimes maybe million,

[10:24.38] Barley: 25%, maybe a third of the depreciable basis.

[10:29.32] Eliot: Yes, sir. Again, we started with straight line depreciation. We’ve now taken, Barley’s gotten a cost segregation study done. A group comes in there and does this review of that building and breaks it into five, seven, 15. And there’ll still be a significant amount, that’s 27 and a half or 39 in the case of a commercial building.

[10:48.32] We’ve sped it up, taken all this depreciation. Now, something we don’t have listed here in the question, is that often we’re going to throw on something called bonus depreciation. What’s going on there?

[10:58.20] Barley: Yeah, that’s what you’ve all heard about, this 100% bonus depreciation. Such a big deal, at least in our world, about the biggest deal in our real estate world. Of course, with the new law passed, was that just last year, right? Last year? We are allowed to take 100% bonus depreciation. And just like Eliot said, this is on top of, so we can do a cost segregation study, separate out the shorter life assets.

[11:20.68] That automatically, just by doing that, is going to speed up our depreciation. We’re going to get more deduction upfront faster. But now we have this extra power tool, can apply that even on top. We had flooring, let’s say we had $10,000 worth of flooring that was being depreciated over 27 and a half years. We get X amount per year. Now if we’re just depreciating over five or seven years, we’re going to get a much bigger benefit, a larger deduction number for the next five to seven years.

[11:50.36] With bonus depreciation, we’re going to take that whole benefit we would have gotten the five to seven years and take it all this year right now in year one. We accelerate the depreciation, proper classification of the assets, automatically results in accelerated depreciation. That’s a benefit right there. But we can apply bonus on top to take the whole deduction right now in year one.

[12:09.48] Eliot: All of that five, seven, 15 year property, anything under 20 years is what we call 1245 property, tangible personal property. We can take 100% of that immediately. The other pile left over is what we call 1250 property. That’s just your building. That’s your real estate, the building, the foundation, the walls, the roof, the windows, things like that. There you just continue to straight line it. Why do we care about all that?

[12:38.68] Well, because then we get onto the next part, depreciation recapture. Now what’s going on there is the government says, well, look, we let you take deductions for all this at ordinary rates. Now you’re going to go ahead and sell that. We want our money back because we don’t want you double dipping, getting a double benefit here of having the deduction and getting it also taxed later on when you sell it at a lower capital gains rate.

[13:03.56] They say anything that you did in that five, seven, 15 year period, they’re the accelerated, the bonus depreciation, things like that, they’re going to come back and reclaim it. And they say, we’re going to tax that at ordinary rates because clearly it has value. The reason we’re giving you this depreciation to begin with is we’re saying the value is going down over time.

[13:24.16] Well, clearly when you just sold it for a gain, the value didn’t go down.It went up. They’re saying we’re going to reclaim that or recapture that depreciation. Again, if it’s that 1245 property, the five, seven year carpet lights, 15 year property, things like that, they’re going to tax you at your ordinary tax rate. On the other hand, we have that 1250, which is, again, the foundation and things like that of the building, the 1250 property, that’s going to be taxed up to a maximum of 25% depending on what your tax bracket is.

[13:55.08] Now we never have recapture if we don’t have a gain. You got to sell it at a gain. If there’s no gain, there’s no recapture. But assuming that you did, let’s say we took $20,000 of depreciation over time and we had $100 of gain, well then the first 20 of that 100 gain will be recapture, subject to recapture to get that back.

[14:17.48] And then everything else, the other 80 will be capital gain rates, zero, 15, or 20 depending on the bracket. That’s why we have the depreciation recapture. That’s what it is. What we have for their cost segregation, why we do it, and takes it from A to Z when we have sale of property.

[14:36.12] Barley: How can we avoid that? If you’re planning on selling the property next year or in two years, it’s likely not going to be beneficial for you to do a cost segregation study to identify all the upfront depreciation. Now just for those of you that maybe have a commercial building or a large apartment building, there may be a time when you do a cost segregation study at the time of sale to revalue some of those assets and show that they went down in value, there’s some benefit there.

[14:59.44] But generally speaking, we’re talking about large upfront tax deduction and then we’re going to hold onto this property. If you’re planning on selling in the next year or two, you’re going to have to pay a lot of that back. It’s not always going to make this a no go or a non-starter, but you got to be aware of that. Generally speaking, if we can hold the property for five to seven years, because these are five to seven year property items that are identified, then we can say those are fully depreciated, and we won’t owe as much depreciation recapture on those amounts as well.

[15:31.92] That’s something we can work with. I know that gets a little in the weeds, but I just want to let you guys know we have ways of dealing with this, right? But you have to kind of work with a tax preparer that understands the real estate tax treatments and can implement all this stuff. Those balance sheets get, or the depreciation schedules get a little. They get pretty steep.

[15:49.80] Eliot: They get kind of informative with a lot of numbers and chaos.

[15:50.80] Barley: I like that.

[15:52.16] Eliot: Now also, you mentioned ways to kind of work with this. You can also defer 1031, because remember, 1031, what it does is defer gain.

[16:01.48] Barley: And recapture.

[16:02.48] Eliot: If we don’t have gain, we don’t have recapture, so it kind of follows that logic. Just talk just today with a client who happens to be a listener, so we say hi, and some of the things you can do with a 1031, you can also go into a Delaware statutory trust. You can 1031 into those, eventually getting into a real estate investment trust.

[16:21.68] These are all items that allow you to keep deferring into other properties. Maybe you don’t want to take the control of the building anymore. You want to kind of hand it over, give it to someone else to handle all that, and maybe get invested into more properties. Those are two ways to get in the Delaware statutory trust, or REIT as they call it.

[16:40.12] Take a little more investment time, or I should say a little more time, with investment people to help you get set up with that. Just as Barley pointed out, there’s ways that we can work with us to avoid any gain at all. If we avoid gain, that means there’s no recapture, or at least I should say defer gain.

[16:57.60]  Barley: Right. Well, I like this question. We could probably spend quite a bit more time on there, but we’ll keep it moving.

[17:02.96] Eliot: And then the ultimate, if you pass away, which is kind of a heavy price to pay, but you can leave it to your beneficiaries, and they get stepped up basis.

[17:11.24]  Barley: 1031 for life.

[17:12.24] Eliot: Right? There you go.

[17:14.24] Barley: That’s a great point. If you’re into selling, you can 1031 to a higher value asset. Then on your passing, your heirs will get that stepped up to whatever the current fair market value was.You may have started on this 20, 30 years ago.

[17:25.20] Eliot: So you’re passing away, you don’t know what to do with it, you can leave it to Barley and Eliot. We’ll get stepped up basis. Happy to handle it for you.

[17:33.00] Barley: That’s right. We’ll do all the taxes in accounting.

[17:35.68] Eliot: Right?

[17:37.68] Barley: Well, let’s keep it moving. Great, great question. Any questions on that, you guys let us know. This is kind of certainly our main area of focus, a lot of great questions from you guys on this topic. But we’ll keep it moving just to keep it interesting here. At the beginning of this year, I moved into a new home, and my previous residence, I’d been renting two rooms. I was renting two rooms for whatever, maybe a room in an office in a previous house.

[18:01.36] I’m still on the lease, committed to covering the cost of those two rooms until I find replacements. My question is, since I’m continuing to pay for these rooms, would it be possible to classify them as an office space, potentially use them as a tax deduction? I certainly like how you’re thinking here.

[18:16.08] Eliot: Got a couple different avenues we can take here. Remember, you still have these two rooms. You’re paying for them. You want to try and get some kind of deduction. Most common, I think, I suppose comes to a lot of our clients’ minds, even mine, is administrative office or home office type use.

[18:31.88] Well, it’s kind of still my, it was my residence. Maybe if I use it as an office or something of that nature, I can get a deduction, maybe reimbursement or something like that through an accountable plan or something of that nature. But we’ve got to hold back. That’s no longer our residence. We moved out. We moved into a new building.

[18:48.74] We just happen to still have rentals on these other two. But if it’s not your home, not your residence, we can’t do an administrative office because that’s the whole purpose between a home office or administrative office, is that it’s in your residence and you have to use that room continuously and on a regular basis. Well, you’re not even living there, so that cuts that out.

[19:09.00] We’re not talking that kind of office, but you can still move a desk, a chair over there into these empty rooms that you once were renting. Maybe from your new place, if you have some other business, it certainly could pay you rent. Your business pays rent to you as you sublease those rooms out to you and you’d get a deduction, but you’re going to have to show that income.

[19:30.68] Maybe not, is it worth all that trouble just renting that as an office to your business if it’s just going to be a circular situation, that money comes right back into your pocket. Sometimes that can even be prohibitive if somehow we get taxed with different kinds of taxes or something like that going on.

[19:45.64] Barley: Right, so that’s limited tax.

[19:46.64] Eliot: It could be, yeah. However, another option might be, well, maybe if you do have this business that could take this office deduction, maybe it can just take over that sublease. It could take that, I should say, take over the lease altogether from the original lender, owner, I should say, and in that case, it would be using it as an office, paying directly to them, and so it is a deduction.

[20:10.60] Barley: No income tax to you personally.

[20:12.08] Eliot: Exactly, just a deduction for you. Same dollar amount going up that you’re renting it out for or paying in rent to begin with, and so if maybe that’s something they’d be amenable to, that might work for you, and then you could take it as a deduction in that manner.

[20:28.76] Barley: Yeah, I like that. We’re talking about the same kind of concept, but we got to look at it in a couple of different ways. Like, Eliot had a great point there. If we want the home office reimbursement, we have to continuous regular use, right? The IRS has all these qualifications we have to meet if we’re going to get this tax-free reimbursement, but your business can go rent office space wherever it wants, whenever it wants, and never even has to use it if it doesn’t want to.

[20:53.56] I mean, you’d want to have an actual business purpose, right, of being kind of flippant there, but if the business rents a third-party office space, it can use it at its own will, you’re going to avoid that continuous, but I’m with Eliot also on, I don’t know, I’m pretty lazy if it creates just a bunch of paperwork. I have a pretty high delta for that. I don’t want to do a shuffle, a bunch of paperwork for nothing, plus you may have some concerns with running a business out of somebody else’s home there.

[21:22.12] That’s not a tax issue, really, but some things you might want to think about there. Oh, I know what I was going to say, one of the first things we thought was, well, if you could sublet it, find somebody just to take over the rent, then that kind of eliminates that problem altogether, but of course, that’s not what you’re asking there, but.

[21:36.20] Eliot: One last thing we didn’t cover here, well, if you do have another business, which I assume you do if you’re going to try and take a deduction here, in your new residence that you have now, what about if you have an administrative office there? If it’s a C or an S corporation, you have an accountable plan, you’re into new surroundings, you got your new residence, maybe you have a room there using it as administrative office.

[22:02.00] Would you be allowed to set up a second office, cross town at that old building where you used to live? You theoretically could, but you’d probably want to make sure you go over there and use it occasionally so that it’s a legitimate, you know, customary, ordinary, reasonable, necessary business expense, but then still make sure you’re coming back to home to use your administrative office, so there could be a scenario where it could be very beneficial if it’s a cross town in a different area and you don’t want to go there all the time, but occasionally you have to go back to the area. That also might be in consideration as well.

[22:34.92] Barley: Great question. Can we move in here?

[22:37.92] Eliot: Yep.

[22:39.92] Barley: What do we got next?

[22:40.92] Eliot: My wife is doing remote 1099 work, and I had a question on where state taxes are due.We live in Kansas, she performs the work from a home office or a rented office space in Kansas.

[22:52.08]  Barley: Kind of like we were just talking about there.

[22:53.56] Eliot: Yes, sir. She is performing this work through a contracting locum’s company based out of Utah, but the current work she’s providing is for patients in California, in the state of California. Do we pay Kansas or California state income tax for this 1099 work, so we’re kind of across the country almost, the western half, and the idea here is, how do you work through all these different states and the tax rules?

[23:20.20] Well, we first go to where this individual actually lives, and she is living in Kansas. She is doing the work from Kansas, so we know we got Kansas income to worry about, all right? We look to the rules in Kansas, and they’re very much like the US in general, and says, we’re going to tax all the income that you earn everywhere around the world from every source, but if you happen to pay tax in another state, maybe even a foreign country.

[23:48.44] I didn’t look into that, but certainly if you pay tax in another state, well, we’ll go ahead and give you a tax credit for that, and we’ll reduce your Kansas taxes, recognizing that you already paid tax on it in another state, and that’s very common, we know that that’s how we’re going to handle the Kansas activity. Now we have to move over to California.

[24:10.84] California has a different model, and they call it a sourcing, yeah, they have what they call a market-based sourcing, which is a fancy term for, where’s the benefit being received? If it’s happening in their state, California, then they’re going to say, hey, you’re in our territory, we want to tax that activity, and what’s she doing? She’s calling up telemarking, or not telemedicine, excuse me, some might confuse it too. It’s over in California, so we’re entering into California, to California patients, that fits the California criteria, that activity, what she’s getting paid to do there is taxable in California, and technically in this situation.

[24:53.12] Barley: Right, they’re going to say the income was earned in California.

[24:55.32] Eliot: go figure, they’re going to want to take the taxes on that, can’t really blame them, okay, so now we know we’re, at least on that income, the portion that’s California activity, that’s going to be taxed by California, therefore, what we said earlier in Kansas, she’s going to be able to take a tax credit for what she pays in taxes in California.

[25:16.76] Now if you do a lot of taxes, like Barley and I do, we know that California taxes at a very high rate. Let’s say it’s $100,000 worth of income that we’re talking about here, and they tax this, this may or may not be accurate, but let’s just say it’s at 13%, one of the higher tax brackets in California. She paid taxes of $13,000 in the state of California, but let’s say it’s only $6,000 in Kansas, 6% on that $100,000.

[25:44.88] What’s going to happen? Well, we’re going to be able to take $6,000 of tax credit that $13,000 paid to California, and it’s going to wipe out the Kansas $6,000, because they will recognize that tax credit. But what about the other seven? Do they get a carry it over? Do they get a tax refund from the state of Kansas? Is Kansas going to refund them, you think, for paying more money to California?

[26:11.24] Barley: For overpaying? Well, I mean, just paying taxes to California?

[26:14.80] Eliot: Probably not. And indeed, no, they won’t. That $7,000 just goes out the window. What, you can’t carry it forward? No, you can’t. It’s gone that year. We’re out of luck on that one, and that’s just the way it is. But that’s how it’s going to happen. Well, what about Utah? You haven’t said anything about that, guys.

[26:31.52] Well, in Utah, it really doesn’t concern what’s going on here, because she’s in Kansas doing everything in Kansas. It doesn’t really have any impact with anything going on in Utah. That would be for the business up there that she’s contracting on behalf of that company based in Utah.They would have their own sets of incomes coming in and amounts going out.

[26:52.54] But really, for our person here, they’re just getting $10.99 for activity happening in Kansas. It’s just the difference is that this individual in Kansas is reaching out across the border to work in California with California residents. And that’s why we have that Kansas-California interaction going on.

[27:11.32]  Barley: And that’ll be true with most any state that you’re going to be doing that kind of tell that locum’s work, and I think it’s specifically a medical term there, but pretty much you’re traveling or, in this case, more telemed type services. Utah, I think of that as just like that’s kind of the corporate headquarters for the people that’s paying or there’s no income generation there. That’s just kind of where the paycheck comes from. I don’t know if that’s helpful or not.

[27:34.92] Eliot: That locum’s, it’s very common in medicine. It’s just saying that maybe there’s a position that’s not filled yet in a hospital or medical center in California. They just need someone temporarily to kind of fill in, or maybe one of the physicians out from maternity leave or something of that nature, or it’s a position that just hasn’t been filled yet. It’s very common.

[27:54.20]  Barley: You’ve got a family that does some of this work, aren’t they?.

[27:57.68] Eliot: We certainly have a lot of clients that do. My sister happens to be a physician, but she doesn’t do locums. She’s busy enough with the kitters in her own hospital to deal with. But yes, they certainly can do that. We have a lot of clients that do this, kind of side gigs, if you will. It’s quite popular.

[28:16.08] Barley: But yeah, a lot of this will be handled in the tax software. It will determine the state tax, the limitations, the credits, all that kind of stuff Just work with your taxpayers as you go through it. Ask questions.

[28:28.68] Eliot: Here we go. Who’s this guy?

[28:31.68] Barley: Back to this part. Make sure you subscribe, guys. Tons of great content. It’s all free. There’s no reason not to. Plus, boy, we had some, it was so fun watching these guys do interviews, Toby and Clint, I guess we don’t have Toby’s page here, but watching these guys do interviews. I started here before COVID, but that was a really fascinating time.

[28:49.68] Eliot: They were.

[28:50.68] Barley: Toby interviewed all kinds of different industry leaders just to see what the heck was going to happen. But I mean, ever since then, it’s just grown more and more. A lot of great content. Make sure you tune in there, guys. We’re going to do some more tax talk here.

[29:05.52] Eliot: We went out with our traditional real estate, went into state taxes, and now we’re going into something else, social security, something we don’t get to talk too much about here.

[29:13.64] Barley: But such a common question. This is relevant to everyone here, pretty much. Taxes in retirement. Here we go. We know you can be taxed on social security. Again, why is that? We don’t know that. But we do know you are taxed on social security. We don’t know the details. Who does? No, I’m just kidding. How much can you make to avoid being taxed?

[29:33.86] Does the IRS include all income? Passive, active, investment income, capital gains, right? There’s all these different types of income. We just don’t have the details. Social security. Why do we tax it at all? We’re not even sure. But you can be taxed. We know that there’s a bottom chunk.

[29:50.54] Everyone gets to keep, no matter how much you make, 10% to 15% or so that will never be taxed. But how do we determine how much of our social security taxes? I think we have to use this term, magi. What does that modify, the just in gross income or something?

[30:03.60] Eliot: We got all kinds of words coming our way here on this one.nWe’ll stay away from the four letter ones, okay? Except for MAGI. But the social security, basically, how much of it typically gets taxed, just starting the basics of this is your social security benefits that you’re receiving, it’s going to be anywhere from 50% to 85%.

[30:22.92] Just as Barley was saying, there’s probably going to be a 15% of that that isn’t going to get taxed. But we do have this large swath of 50% to 85%. That is going to be taxed, okay? What are our benefits for that? That’s going to be things like retirement, disability, survivor payments and things of that nature. And of course, the famous, that we’re all concerned with the tier one railroad payments. That’s always kind of common.

[30:47.72] Barley: Everyone knows about that one.

[30:48.72] Eliot: Don’t see a whole lot of those these days. But yes, that’s part of it, too.

[30:51.64] Barley: Sorry, guys. It’s a line on a tax form we always make a joke about, so nobody really knows what the heck it is.

[30:57.08] Eliot: Now, that being said…

[30:58.08] Barley: Eliot knows what it is, but the rest of us don’t know.

[31:00.92] Eliot: I’ll keep my secrets to myself. We know we have somewhere between 50% and 85% of just the benefits getting taxed potentially. Then we have to look back, OK, well, what determines how much of that and where it ends and all that? Statutorily in the code, Congress went out there and said, well, what if you’re single?

[31:21.60] We’re going to have a base amount. They just throw out this amount. It’s $25,000. And it just says, look, if it’s below your income, one half of your Social Security benefits plus basically all of your income, which is the MAGI, as Barley was pointing out, modified adjusted gross income. We say it every time we talk about MAGI or MAGI, however you want to pronounce it, MAGI, whatever it is, that M, the modification, it’s completely different depending on what part of the code you’re talking about.

[31:55.50] Do not assume that the MAGI that you saw in one particular issue, like maybe using passive losses, has anything to do with the MAGI having to do here in our Social Security problem. They’re completely different potentially. In this case, MAGI just brings bring in all the income, everything, even tax exempt interest income, pull it all in, which usually gets left off of a modifier. But in this case, no, bring it all in.

[32:22.24] If you’re over, if all of that plus one half of your benefits gets you over $25,000 if you’re single, now we’re starting to go outside of the initial base. Between 25 and 34,000, it starts to go up and rise from anywhere above 50% up to that basically the 85% as it starts to rise. If we get above that 35, it’s just going to continue, excuse me, it’s going to go from 0 to 50 during that space, 25 to 34, and then above 34, it’s going to go from 50 up to 85%.

[32:57.80] Barley: The MAX phase out.

[32:59.16] Eliot: Again, what we’re talking about here is how much of your Social Security benefits are going to get taxed anywhere from 50 to 85% exactly right. It’s kind of nerve wracking to try and follow that I get that, but this is how it’s done.

[33:13.76] Barley: Is this just double for married? Is that the same one?

[33:15.76] Eliot: Unfortunately, no, because they wouldn’t make this easy. Just about everything else. Barley is exactly correct. On anything else, they just double it. That’s all we have to do. No, no, no, we wouldn’t do that. Married filing joint, the base starts at 32,000, probably for the same reason that, you know, why? Well, because why are they taxing it to begin with? I think it’d make everybody’s day easier if they didn’t tax Social Security. Done well.

[33:38.76] Barley: That was the whole point.

[33:41.76] Eliot: Right? Now, 32 to 44 is where we go from 0 to 50. Anyway, 0 to 50 in what, $12,000? If you go to 44, we go from 50 to 85% of your Social Security benefits. Again, that’s retirement, survivor, viable, disability, tier one, railroad. That’s going to be taxed anywhere from 50 to 85 when you’re above 44.

[34:10.44] There’s a curve where they go up there to where it’s all taxed out. But as you pointed out earlier, that top 15%, we don’t have to pay any tax on. Indeed, if you’re below the base, you’re not paying anything there. That’s kind of how it breaks out and how we get to that. But to your original question about passive and active, are they included?

[34:31.84] Everything else in the kitchen sink, too. Because this modifier for MAGI, modified adjustment gross income, as we said earlier, is a type that pulls in all income, which is really surprising because I see a lot of these in different parts of the code. They always throw out the tax exempt interest income. Not on this one.

[34:49.84] Barley: Muni bonds.

[34:50.84] Eliot: Bring it back in. Let’s all have a big party. they bring it all back in to be taxed. Certainly your passive and active income is going to be included in that.

[35:00.32] Barley: Right.

[35:01.32] Eliot: Real dense. There’s no doubt about that. Not a fun question, but a very good question. You’re asking a great question here. Hopefully that helps you.

[35:10.16] Barley: I hate it when some of the most common questions are the most confusing. They really are. This should be the simple stuff that everyone understands because everyone has these retirement accounts. A lot of people live off these kind of benefits.

[35:21.52] Eliot: One of the details, they got them now, probably asking, wishing they hadn’t. But that is how it’s done and hopefully that helps.

[35:28.12] Barley: And you guys hear me say this all the time, that tax answers kind of have a funny way of generating more tax questions. Platinum Portal, you can submit questions there. The Platinum Knowledge Room, five days a week, five hours a day. Here, Tax Tuesday. Set up an advisor call. A lot of ways to get in touch with us and get this stuff. Don’t let it overwhelm you.

[35:46.64] It’s perhaps unduly burdensome by nature, but we can walk you through it every step of the way. Just break it apart in pieces and then we can take it one step at a time there. Great question though.  Come on.

[35:57.80] Eliot: Here he is.

[35:58.80] Barley: There he is.

[35:59.80] Eliot: Found him.

[36:00.80] Barley: Make sure you subscribe to the YouTube page. Here’s the QR code to scan for to get the strategy session rolling with an advisor. Back to taxes. I’ve been in Nevada resident for, I’ve been in Nevada resident for over 10 years now. What a great Second home. Originally from Montana.

[36:19.08] Eliot: Beautiful land.

[36:20.08] Barley: Kind of a sister state almost.

[36:21.08] Eliot: It is.

[36:22.08] Barley: A lot of people moving back and forth. But our client here in Nevada, resident for two years, started my retirement from California. I started my retirement from a California corporation this year. Can California tax my retirement benefits now that I’m a Nevada resident? My flip and answer was before, well, of course they want to. I think this is one of the few areas where we get really solid protection though, right?

[36:47.72] Eliot: That’s exactly right.

[36:48.72] Barley: You earn that money. That’s yours no matter where you go.

[36:51.12] Eliot: And big federal cases about this a few years back and California can’t touch this. If you’ve moved out. Now there may be some overlap if you started taking a few payments and you’re a part time resident in the year you started receiving them and then you moved to another state. Those first payments if we were still in California, we might get hit with that.

[37:09.56] Barley: Sure.If you’re still living there.

[37:11.56] Eliot: Right.But if we got moved out, especially two years ago. No, they’re not touching this at all. Now we had noticed down here that really is for qualified retirement payments. That’s where they don’t have to, you don’t have to give the income to California that even though you “earned it” while you were in California or from a California C-corp for that matter.

[37:31.40] Barley: Sure. That’s a good point.

[37:33.40] Eliot: What’s qualified sometimes, you know, maybe that sounds like, that minor language at the bottom. You’re trying to pull a fast one. It’s just the things you would think. It’s your seps. It’s your IRAs, annuity plans, deferred comp. We got our 401(k)s, things like that. We talked about those quite a bit.

[37:50.24] If you’re in the public schools, they usually have the 403(b) plans and maybe you’re working for the government, state and local. That’s your 457 plans. All those things are qualified plans and so in this case, if we’ve moved out, California shouldn’t be able to touch it now that you’re in the great state of Nevada where we have no tax.

[38:10.40] Barley: retirement benefits, you could also maybe use that loosely. If we’re talking about a severance package, a bonus, something like that. Those obviously are going to be taxable even if you don’t live there, if the income was earned in California. But yeah, you mentioned you’ve been out of there for two years, you know, wherever you are at the end of the year, your tax home at the end of the year, which is why we’ve seen a lot of people leave in California.

[38:35.60] In Washington, there’s been an exodus and Washington just did a similar raise in there. It’s different kind of structure.

[38:40.76] Eliot: Millionaire?

.

[38:42.76] Barley: That’s what it was. Thank you. A certain level of income tax or net worth tax. I can’t remember, but either way, it’s driving people out of the state after they retire.

[38:51.04] Eliot: That’s a great example. It is on a million of income per year, so they look at you, so you got to earn a million before you get there.

[38:56.68] Barley: I was going to say I’d be shocked if that was net worth.

[38:58.72] Eliot: But as I recall, it’s like 9.9, but I mean, it’s not a small amount, it’s a lot, certainly more than I have, but the point being that it’s a lot, hearing a lot of interest generated about from several clients, how to handle that one, but it’s not on the net worth, at least not right now, in the form it is. And that would really be painful because you get in, like, say California on that west coast, a lot of heavy, very expensive real estate, easy to get up to, you know, seven figure on that. That’s why.

[39:27.88] Barley: That’s a big balance sheets over there. The solution? Come on over, guys. Plenty of room between here and Reno. Just got nothing but desert.

[39:37.04] Eliot: Everybody’s down in Texas and Florida, we got a lot of clients going to those. You like the beach? Okay. That’s cool too. You like good brisket, hit Texas. You like the beach, go to Florida. You like gambling.

[39:47.24] Barley: Yep. A lot of options. You like paying taxes? California’s a good bet there.

[39:51.84] Eliot: Want to do your heart for your state and local government? Go to California.

[39:55.96] Barley: But hey, I mean, we can’t blame you if you’ve been to Santa Barbara or Pacific Beach and San Diego. I mean, the whole coastline is amazing. The whole interior is amazing. I spent a bunch of time in Sierra Nevadas and it’s probably the most beautiful state in the country. The land of milk and honey. I think that’s where they want to live here.

[40:13.80] You got to pay the tax. I’m sorry, guys. It’s just, it’s that beautiful. Go to Huntington Beach and ask yourself, why do I pay taxes to live here?

[40:21.36] Eliot: Now I see.

[40:23.36] Barley: We’ve got a business owner in Texas, twin kids growing up in a foreign country with their cousins. They may want to pursue higher education there. I haven’t started a 529 college savings, but I think they still call that the Cloverdale plan, college savings plan. If they decide not to go to college in an American university, what would be the best type of tax sheltered account to invest in for the kids?

[40:42.72] Well, we like the 529 college savings plan. Those have become a lot more, if I recall correctly, they used to only be for in-state universities and a number of other restrictions. Now we can transfer between dependents, pay off student loans. I think we still have this kind of accredited university thing.

[41:00.16] It has to be like a real college or whatever, but still a great way, great for saving for college. We’re going to talk about using a Roth here in a minute to kind of even couple those things together for some super power stuff there. But what about the out of the country part? Do we have a concern here? I don’t think we do, do we?

[41:18.20] Eliot: Well, typically not, especially we’d probably, you know, the first thing to do is look at the 529. When we look at it a little bit in depth, it does allow its participants to take colleges, go to accredited colleges outside the US. You can go to school in Barcelona or London or Paris or what have you and still take advantage of your 529 plan.

[41:41.10] The only problem here is we just hadn’t started one yet. Looking into it, well, what exactly is a 529? The idea is that you can put money in there on behalf of your children over time. It grows tax-free. Now you don’t get a deduction when you put the money in, but it grows tax-free as far as an investment strategy.

[41:59.04] If you continue to put in each year and so on and so forth, you can put a tidy sum  away. If it has extra 10, 15% growth with the markets or something like that, you don’t pay any tax on it. It’s quite nice. As long as you use the fees for education, room board, et cetera, your supplies for school and things of that nature. Indeed, as we just said, you can use it overseas as well for college over there.

[42:23.00] There’s nothing wrong with setting up a 529 now. Maybe if we, well, we didn’t set it up yet, we’re trying to catch up. They do have an interesting provision where you can put what they call a five-year super contribution.

[42:35.56] Barley: Oh, yeah. I didn’t know about this one. Let me jump in.

[42:39.56] Eliot: right now it is considered a gift when you put it in there. We step back and we often talk about, well, how much can I gift my kids without having any tax considerations? Well, first of all, the kids are never going to pay tax on any gifts they receive. But how much can you give them without there being a tax consequence? Well, you’re not going to pay tax either unless, because you have a lifetime exclusion right now of 15 million, as long as you don’t go over that.

[43:05.72] Barley: Double that if you’re married, right?

[43:07.32] Eliot: Yeah, exactly, 30 million if you’re married. We have quite a bit of room to work with. I don’t know of any tuition that high. If we give $19,000 a year to each of the children into a 529, we follow that same gifting logic. You can give away $19,000 a year as a gift to your children, each of them, $19,000, $19,000, a total of $38,000 if you had two kids, and no tax consequence. They don’t pay taxes.

[43:32.96] And that’s how we treat it when you put it into the 529 plan, $19,000 each year. Now if you want to catch up, you can make immediate five-year times contribution, which would be $95,000, five times $19,000, $95,000 that you could put in for each child right away in year one. You just can’t put any more for the next five years.

[43:53.68] But now you’ve got this amazing base right away, $95,000, and it’s growing for the next five years at 10%, 15%, or whatever the markets do for your investments. That’s really nice that they allow that. Those are some options there. If you happen to give more than that, more than the $19,000, let’s say we give $20,000 in one particular year, well, we still have the $19,000 that we don’t have to worry about, but an extra $1,000, we’re going to have to file form 709.

[44:23.24] That goes in and says, hey, I gave a little bit more than I’m allowed to this particular year, and they’re going to drop that $15 million down by $1,000 there. That’s one consideration too, except unless you’re doing the five-year super contribution, then they don’t have a problem with it. We can do that. There’s a lot of options here as far as the 529.

[44:43.92] It’s still a very valid plan that you could take advantage of, even though the twins might be overseas in Spain or what have you. It’s still a valuable option. But you mentioned something about a Roth. What do we got to go on there? We’re going to have to shift it up a little bit there, won’t we?

[44:58.24] Barley: Yeah. Toby, you’ve heard Toby mention this a lot. We’re big fans of using a Roth IRA for the kids. You guys have likely heard about paying the kids less than the standard deduction. Why would we do that? Because then you report line 1W2 income of $16,100 more than that. Then so $16,000 line 1W2 drop down standard deduction.

[45:19.00] They take the standard deduction for a single filer, $16,100, taxable income zero. They don’t know any taxes. Now, remember, we paid them payroll, excuse me, payroll is a deductible expense. When we pay them, that’s a deduction to us, right? When we gift them money, that’s not a deduction.

[45:37.40] But if I put them on payroll, W2 payroll, that’s a tax deduction to my business, $16,100 tax deduction. Then they get that in their pocket, take the standard deduction, they don’t owe any taxes. But now, as opposed to the gift, different than the gift, they have earned income. This is eligible to be contributed to a Roth IRA.

[45:57.36] We really like that option. Pay them the standard deduction. They won’t owe any tax. They can contribute the whole thing to a Roth if they wanted to, and that can grow tax-free. Another great option. Plus, then the kids have this kind of awareness of. They have their own retirement account, kind of develops a financial awareness as well. Another huge benefit there.

[46:15.58] Eliot: And again, why don’t you just combine the two? You can pay them $16,000 also, quote unquote, gift 19. You have a mega amount that you’re moving into or towards this goal of college savings. They can take out for college 100% of the amount of the Roth. Typically if you take it out, you can always take your contribution out because it’s with after-tax dollars.

[46:40.92] However, usually if you take it out, then any gain that’s happened in that plan, you’re going to pay some penalties on. However, they have an exemption to that. One of them being that if you’re going to use the funds towards education. Here we could put approximately, what is that? 35,000? 35,000 a year into each child’s plans towards retirement.

[47:03.24] Barley: Great use of the Roth. Plus, if you pay for the kids’ college, you’re paying with your very expensive after-tax dollars. If you pay the kids, you get a tax deduction, and then they pay for it with their effectively 0% tax dollars, right? Just a great way we can do a little bit of tax planning there. Great option.

[47:21.96] Eliot: A lot of options.

[47:22.96] Barley: The Roth qualified university for the Roth as well. Same kind of qualification there for the Cloverdale has to be some, an accredited university or whatever they call it.

[47:32.40] Eliot: And so really a good plan that’s probably going to be your best bets for these type of things.

[47:37.28] Barley: Yep. That’s right. Back to the rentals, guys. Rental, the real estate is kind of our area of focus here. Obviously the partners, that’s what they focus on. It’s the walk that they talk or talk that they walk. Back to the rental real estate, is it okay to use Schedule E to report short-term rental income?

[47:56.68] Now of course, Schedule E, E is an echo. That’s a great way if you’re just getting started with this whole real estate thing and you’re trying to figure out how all this works, Google Form Schedule E, IRS Form Schedule E. It’s a pre-made profit and loss statement from the IRS. It’s just a list of expenses they’re going to expect to see if you have a rental property. Great way just to start building your knowledge, anyone here for their first time just getting started on this journey, great place to start if you got rental real estate.

[48:21.08] Why would we use Schedule E? We’re going to use that to report typically traditional long-term rental real estate. You can report royalty income, a couple other things on there as well, but typically long-term rental real estate. This can be commercial building, apartment building, single family rental, doesn’t matter. What’s kind of unique about Schedule E?

[48:42.78] The income on Schedule E is not subject to self-employment tax. That’s your ordinary tax plus that additional 15.3, you get part of that back as a credit but we generally don’t want to pay that tax, we don’t have to. We like Schedule E in that way, but when would we maybe have to report a short-term rental to Schedule C?

[49:01.68] Eliot: Well, it depends how much work you put in, but just stepping back for a second, what is your short-term rental? Well that’s going to be anything that’s average day, seven days or less, or 30 days and less average rent where you put in significant personal services. Typically those are going to be your two categories. Anything else having to do with a building and your renting out is going to be what we call long-term rental.

[49:27.56] Just as Barley pointed out, that long-term rental activity is pretty much always going to be on Schedule E, okay? However, your short-term has an option depending on what we have going on. If you’re simply doing the bare minimum, you’re providing basically a place for them to stay at, everything’s there in the place, but you’re not really doing much else, that’s going to be a lacking of substantial services, so we’re going to put that on the Schedule E.

[49:54.28] But if you start to put more activity into it, maybe a concierge type thing, you provide food, you have changing of the bedding and things of that nature and cleaning every day going on. Well now we get to these substantial services and that can change your short-term rental from Schedule E, move it over to the Schedule C. Schedule C’s a completely different beast.

[50:17.48] There if you have net income, not only are you going to get hit with income tax, but  you’re going to get hit with an extra 15.3% for employment taxes. We like to stay away from Schedule C if we can. There may be some tax reasons why we want to be on Schedule C, it just depends. But generally speaking, if you’re on net profit, you probably don’t want to be there, you’d rather be on Schedule E. Again, it just depends.

[50:41.72] But maybe providing extra services is what brings top dollar rentals to you, well then fine, that might be your play, well then we end up on Schedule C and that’s okay. But that’s the difference and more likely why we’re asking this question is how do we stay on Schedule E so I don’t get over to Schedule C? And that just says run a regular short terminal seven days or less average rents or 30 days or less and you put in some significant services, then we can stay on a Schedule E.

[51:11.80]  However, if you put too much in the way of significant personal services, as we’ve talked before in the past here, that list for significant personal services mirrors quite closely the substantial services list, which means if we’re in the 30-day realm, we’re probably going to get stuck over on Schedule C to begin with because those lists are very confusing because they still talk about daily cleaning of the place, providing concierge type services.

[51:40.68] Maybe you’ve given some kind of Uber credits so they can go around or whatnot, food, things of that nature. It’s kind of, in my estimation, it’s very challenging to be at the 30-day or less level and stay on Schedule E. I think you almost get kind of drug over to Schedule C if we’re doing that much effort to try and make a 30-day or less a short-term rental. That’s what we got going on.

[52:04.72] To the direct question, can we use Schedule E, you certainly can. Just make sure it’s just the room basically and the things they’re in and you’re not really doing anything else. Make sure you’re managing it because you’re probably going to want to keep it as an active business but that’s how we would do it.

[52:22.44] Barley: Any question? I’m trying to think if I want to add to anything. Yeah, make sure Schedule E fill in the fair rental days, type of property, that stuff. Just kind of go make sure you double check those details.

[52:31.84] Eliot: And Barley mentioned a very good point. I think this is just one of the most fast, to me it’s an exciting part. Go to the IRS website, Google Schedule E. As you said, there it is. You got the list of all the expenses that they expect to see. You got your profit loss going right there. Same thing with the Schedule C, Schedule C or E, just go Schedule C or Schedule E, IRS.gov.

[52:55.20] PDF and it’s going to show you and it’s going to show you whether you’re on Schedule E or Schedule C. It’s going to show you how to break out the most common expenses. You got a lot of your bookkeeping work done there as far as categorization, very good point.

[53:09.60] Barley: Absolutely. Oh boy, Trader Tom, this is our last question too.

[53:14.84] Eliot: It is.

[53:16.84] Barley: Kick us off here, Eliot. We focus, you guys know, real estate, small business, very closely followed by trade, just stock trading, general stock trading. Toby talked a lot about trading options and infinity investing. There’s a lot of activity that you guys are into on that. This comes up a lot. Active trade status, mark to market election. Let’s just, let’s solve what is this talking about? Do we recommend it? Why or why not?

[53:42.76] Eliot: So again, a lot of trade, our question here is we got so many trades going on, so much time during the week, et cetera, et cetera, long-term, short-term trader status. Why do we care? Well, trader status allows it to be considered a business and that means you can take business deductions.

[54:02.04] Whereas if we didn’t have this status, typically speaking, it’s just investment. There’s no deduction to take against your long-term or short-term gains. We have, we can’t take business expenses against that because it’s portfolio income and they remove this section in the code in 2017 that allowed us to deduct at least a minimal amount of deductions against that.

[54:25.36] So that’s why this individual cares and wants probably the trader status. Now the reason, and we see this all the time, we hear this all the time, well, I’ve done X amount of trades and just showing it so often during the week throughout the whole year, because we’re trying to say I’ve met some standard or look, I’m, I’m pretty active in this and so I should be able to call it a business and therefore take business expenses.

[54:48.68] However, the problem is that the IRS doesn’t see it the same way, nor does Congress. There really isn’t a trader status even in the code. It’s something that kind of got thrown in there by the IRS and we kind of have mention of it in regs and things like that. It’s a little bit of a different area and there isn’t one just do this and you’v won the game and you get the status. It doesn’t matter. I don’t care how many trades you’ve done.

[55:12.54] I don’t care how often that isn’t necessarily going to win the day. And so Barley and I can’t tell you if that’s going to make it or not. Now we can see it point to certain tax court cases where someone made this amount of trade or this much of activity and they said yes or no, but that doesn’t mean that’s the standard. And the very next case can, they still don’t get it.

[55:35.00] It’s a hit and miss, very difficult target to make. Really what you want to do with the IRS is going to look though, just to know what the test is. They want to make sure that you’re really the taxpayer. You’re seeking a profit from this all consistent profit motive behind your trading in a business type format.

[55:53.10] We’re consistently, maybe that means you’re always going to work on this on many, many days throughout, throughout the year. Like you would any other job kind of treat it. That’s the idea behind that. Trying to follow the market movements and things like that.

[56:05.56] That’s where you’re seeing all day eyeballing it, so on and so forth. That your trading activity is substantial. That means a lot of trades, 800 maybe, I don’t know, might be enough, but that’s where we’re looking for a lot of trades to be sure. That’s carried on with continuity and regularity. That means we can’t just do all this for January, take February off while I usually take the month up.

[56:29.36] Well, the IRS doesn’t see it that way. You have to consistently throughout the year and on a regular basis continue this kind of activity. But again, that’s so full of holes. That is so subjective. You can’t even blame a court for not really knowing what’s going to work or what’s not because the IRS can still come in and say, no, we don’t think that’s right.

[56:48.84] Furthermore, in this case, when you have any gains long, far more short term, they’re going to go on your scheduled D’s and dog. And that’s pretty normal. That’s where we see all that kind of activity begin with. But where are you going to deduct all these expenses now that you’re calling? You think it’s a business because you’re going for trader status.

[57:07.12] The only place we have on the return to put it, the schedule C that we were just talking about. And what’s the problem with that? Barley, what happens if you just have consistent expenses on a schedule C, i.e. loss year in, year out? What do you think?

[57:22.30] Barley: Well, number one, the IRS is going to want to know what the heck you’re up to. They’re going to pry that thing open and check out those numbers and see what’s going on. Because what Eliot is referring to there, we have this thing called the hobby loss rule. If you just show a loss on schedule C, this comes up a lot.

[57:36.04] I want to be a photographer. I’m going to go buy $30,000 worth of photography equipment. I sold a photograph for $200 and had a $25,000 loss. Well, the next year I’m going to maybe sell one, but buy a bunch of more equipment, keep showing a loss. That’s a hobby. It’s not a for-profit activity.

[57:52.12] Eliot: Fraud.

[57:53.12] Barley: Well, maybe there was the intention there, maybe not, but you can’t just keep reporting the loss. In this case, you would be doing that. You could continue to, because you’re just like Eliot said, you’re reporting your gains and losses from the stocks on schedule D. You’re reporting your expenses, platform fees, software, all the stuff you guys paid for, your hardware, right, subscriptions.

[58:16.38] Those only are going to go on schedule C. So you’re just going to have a big, huge loss on schedule C every year. And yes, that’s going to be a red flag to the IRS. They’re going to audit that, almost guarantee it, because that’s going to offset your ordinary income. It’s going to be an ordinary deduction on schedule C. Every penny you spend is going to offset your ordinary income, which is typically not allowed.

[58:36.52] We used to have that 2% miscellaneous thing, but that’s not even that’s available anymore. One way I kind of read this is like I had profits from both long-term investing and short-term trades. You’re going to pay tax on those profits, and then if you get a mark to market, you’re also going to owe tax on gains in your account. Not even realize gains, so you don’t even have the money for it. I mean, I’m sure you’re aware of that, but just going to throw that out there.

[59:04.60] Eliot: You bring up that, the mark to market, that is a specific type of, I’ll say it’s an ability if you do have the trader status, then you can say what we’re saying with mark to market is that at the end of the year, you just call it inventory, as if you sold everything that day. You don’t have to sell anything, but you treat it as if you did to determine, usually people do it so that they can take all their losses.

[59:28.52] Well, that’s nice, but hopefully we’re not in it to make losses, okay? ] That’s not why we’re trading. There’s an issue with that. Mark to market really may not be the real blessing you’re thinking, and once you get into it, you basically, for all intents and purposes, can’t back out unless you’ve sold all those securities.

[59:46.04] Barley: That’s a good point. I did kind of put those two terms together with active trader status, which kind of, that’s when you’re going to take the losses on Schedule C, then the mark to market, that’s a separate election, you’re right. And since you mentioned you applied for an extension, you want to talk about the timing of these kind of elections?

[01:01.84] Eliot: Trader status, that’s fine. You could do it on your return up until you file it. I’m not sure you can do it on an extended trader status. It might have to be on originally filed. I’m not 100% on that. I didn’t know it at one time, but I don’t now, at least at this moment. However, the mark to market that you mentioned, you actually have to do that on the previous return without extensions.

[01:00.22] So in other words, back on your 2024 return before April 15th, you had to say, even though you weren’t that year for your ’24 return, you had to say, “Hey, next year IRS note here, I’m taking the mark to market election for my 2025 return.”

[01:00.32] Barley: The 2025 return you’re filing now, you would have basically had to make that election two years ago.

[01:00.43] Eliot: Then that’s the mark to market. However, the trader stats you could still do, provided that they allowed on extension, let’s just assume that they do, but if we want to do that, then yeah, the long-term investing, short-term trades, et cetera. One thing about that is that they would expect these trades to get trader status, that the majority of them are short-term because they want to see that turning. They don’t want to see holding it too long because that doesn’t really look like the fact that you’re tracking the market movements daily.

[01:01.10] Barley: And you bring up short-term rentals, great point to wrap up with here, guys. If you have a lot of short-term rental gains, set up a trade structure. If you haven’t heard of the set up a C-corp trading partner, we can take 20% of those gains right off the top, right out of your personal tax return into a totally legally separate entity, a C-corporation, and then we can take tax-free reimbursements out of there.

[01:01.35] We’d highly recommend at least considering the trade structure, at least get educated on that, see what the benefits are, kind of how to implement that, really not too much there. A couple of bookkeeping entries and you can save quite a bit on taxes each year, no extra elections or anything like that. Anyone with this question, start with Toby’s trade structure kind of videos first.Let us know. We got plenty of material on that.

[01:01.57] Eliot: Hit the scan code. Come in and talk to one of our business advisor. They know all about this. All it is is a partnership where you just own maybe only 90% or 80% now, and a C-corporation owns the other portion of this where the brokerage account is in the partnership, automatically a certain percentage, 10, 20, whatever it be, gets into your C-corporation.

[01:02.19] It can even earn more money by overseen operations with what we call guaranteed payment fee. Point being is that you can get a lot of money into your C-corporation, a lot of deductions, or money shifted off of your personal return. Once it’s in the C-corp, it’s managing everything. That’s a business.Now you can take business expenses.

[01:02.39] Now all of a sudden all these things that we’re trying to do, we get exactly where we want. It’s not all on the Schedule C, which is just a bright light, red light showing to the IRS. ] “Hey, look, please audit me.” I’d like the little attention I feel like I’ve been ignored by the IRS. I’d like to hear more from you folks. I missed the letters. That type of thing. We can do that.

[01:02.59]  Barley: Send a field worker.

[63:00.68] Eliot:Right. Exactly. Please.

[01:03.04] Barley: Schedule C over here, C-corp over here. You don’t even have a night and day, you don’t even have enough arms, but it’s totally, totally different entity. Unique to a C-corp, just to throw this out, guys, if you’re considering this trade structure, 100% medical reimbursement for you and your whole family, you know, that’s unique to a C-corp.

[01:03.19] Plus all these other benefits. We talked about the 2 ADA, home office, reimburse your cell phone, that kind of stuff.

[01:03.24] Eliot: But you got to bring the umbrella with that trade because the savings are raining down on you. If you do that trading partnership, make sure you’re ready for the weather because it’s just going to have savings all over the place.

[01:03.34] Barley: That’s right. You know, 20,000, 30,000, you can pull out of a C-corp operation each year. You come visit Eliot and I here in Las Vegas, we can spend that in one night. No problem.

[01:03.45] Eliot: We’ll help you.

[01:03.46] Barley: But if you’re smart, like the rest of our clients will just reinvest it.

[01:03.48] Eliot:That’s a better play.

[01:03.49]] Barley: Cashflow, producer, cashizer.But yeah, great, great question. Look into that trade status or excuse me, the trade structure. I’m not saying this isn’t the election for you. We just don’t provide a lot of guidance on it because guys, the bottom line is very few people really are making money like this. We do have a couple numbers on this.

[01:04.08] Eliot: We have clients that I will say grandfathered in that have been with us for a long time and we still would do the returns. There’s very few of them. We won’t even do these returns anymore for trader status because it’s just not worth our time dealing with the audit and the IRS and all that. So we’ve pretty much removed ourselves from doing that.

[01:04.24] Barley: Yep.I think that about wraps it up for this. Make sure you subscribe, schedule a session.

[01:04.30] Eliot: There it is right there.

[01:04.31] Barley: We’re ready to talk shop whenever you’re ready. Yeah, the advisor team here is great. Just focus on small business and we’ll answer any tax questions. And guys, we’ll see you in two weeks right back here. Please email your questions to TaxTuesday@AndersonAdvisors.com.  Like I said, Eliot reads through all of them.

[01:04.48] And thanks again for attending, guys. Definitely appreciate you spending a Tuesday afternoon learning about legal and tax with us. Certainly what we like to do, but good, good on you for joining. We’ll see you again here next two weeks from now for the next TaxTuesday. Thanks, guys.