Vernoia, Enterline + Brewer, CPA LLC

Archive for December, 2014

Tax benefits of van pooling

In a recently-released information letter to a taxpayer, the IRS outlined the rules for excluding the costs of van pooling, which is one type of qualified transportation fringe benefit. Code Sec. 132(a)(5) allows an employee to exclude from his or her income a specified amount of costs spent on qualified transportation fringe benefits such as parking, transit passes, bicycle commuting, and van pooling. Under current law for 2014, the maximum monthly fringe benefits exclusion for transit benefits, including van pools, is $130, down from $245 for 2013.

Background

A commuter highway vehicle (a van pool) may constitute a qualified transportation fringe if the vehicle:

  • has a seating capacity of at least six adults (not including the driver);
  • can reasonably be expected to be for transporting employees between their residences and their place of employment for at least 80 percent of its mileage; and
  • is used on trips during which the number of employees transported for such purposes is at least 50 percent of the adult seating capacity (not including the driver).

These requirements put together are known as the “80/50” rule.

Types of van pools

The IRS explained that the application of the 80/50 rule depends on whether the van pool is an employer-operated van pool, an employee-operated van pool, or a private or public transit-operated van pool:

Blue minibus on highwayEmployer-operated van pool. In an employer-operated van pool, the employer either purchases or leases vans to enable employees to commute together to the employer’s place of business or the employer contracts with and pays a third party to provide the vans and pays some or all of the costs of operating the vans. If an employer-operated van meets the definition of a commuter highway vehicle, then the value (up to the statutory monthly limit) of an employer-operated van pool used by an employee is a nontaxable qualified transportation fringe. If a van pool is employer-operated, the van must comply with the 80/50 rule for the value of the benefit, or the employer’s reimbursements of the employee’s costs, to qualify as transportation fringes and be excluded from income and employment taxes, the IRS explained.

Employee-operated van pool. In an employee-operated van pool, the employees, independent of their employer, operate a van to commute to their places of employment. If the van meets the definition of a commuter highway vehicle, then the employer’s cash reimbursement to employees for expenses incurred in connection with an employee-operated van pool (up to the statutory monthly limit) is a nontaxable qualified transportation fringe. If a van pool is employee-operated, the van must comply with the 80/50 rule for the value of the benefit, or the employer’s reimbursements of the employee’s costs, to qualify as transportation fringes and be excluded from income and employment taxes, the IRS explained.

Private or public transit-operated van pool. In a private or public transit-operated van pool, public transit authorities or a person in the business of transporting persons for compensation or hire owns or operates the van pool. The van must seat at least six adults (not including the driver). The 80/50 rule does not apply to private or public transit-operated van pools, the IRS explained.

2015 inflation adjustments to retirement-related amounts

The IRS recently issued a long list of cost of living adjustments (COLAs) for various Tax Code provisions related to retirement savings. These COLAs are for the 2015 tax year and are dependent upon the CPI-U index average from September 2013 through August 2014. The Tax Code requires that federal income tax brackets and certain other figures be adjusted annually for inflation. Because of inflation and rounding conventions, many provisions increase for 2015.

Benefit plans

Among the many adjustments published by the IRS are these (this is not an exclusive list):

Elective deferrals. The limits on elective deferrals for employees who participate in 401(k)s, 403(b)s, certain 457s, and Thrift Savings Plans increase to $18,000, up from $17,500 for 2014.

Catch-up contributions. Eligible individuals age 50 and above may make catch-up contributions to IRAs, 401(k)s and other savings arrangements. The catch-up amount for 401(k)s, 457s, 403(b)s, and SEPs, increase to $6,000 for 2015. The additional catch-up contribution amount to IRAs remains at $1,000 since it is a non-inflation-adjusted flat amount set by the Tax Code.

Defined contribution plans. The limitation for Code Sec. 415(c)(1)(A) defined contribution plans will increase from $52,000 for 2014 to $53,000 for 2015.

Traditional IRAs. For 2015, the maximum deductible amount under Code Sec. 219(b)(5)(A) for an individual making qualified retirement contributions to traditional IRAs and similar plans will remain $5,500. The allowable IRA deduction will phase out when modified AGI is between $61,000 and $71,000 for single taxpayers who are active participants in an employer-sponsored retirement plan (up from $60,000 and $70,000 in 2014). For married couples filing a joint return, where the spouse making the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $98,000 to $118,000 (up from $96,000 to $116,000 for 2014).

The IRS announcement also included the following figures:

  • The Code Sec. 414(q)(1)(B) limit used in the definition of a “highly-compensated employee” is set for 2015 at $120,000, an increase from $115,000 for 2014 and 2013.
  • The dollar limit used within the definition of “key employee” in a top heavy plan remains $170,000 for 2015.
  • The compensation amounts relevant to the definition of “control employee” for fringe benefit valuation purposes remains $105,000 for 2015. The compensation amount under Reg. §1.61-21(f)(5)(iii) is $215,000 for 2015, up from $210,000 for 2014.

Social Security wage base

At the same time the IRS issued the qualified retirement plan COLAs, the Social Security Administration (SSA) announced that the maximum amount of earnings subject to OASDI Social Security tax will also increase. The 2015 wage base will increase to $118,500, up from $117,000 for 2014. (The $1,500 increase reflects an overall rise in average total wages.)

The SSA figures also included the 2015 domestic employee coverage threshold, which is often called the “nanny tax.” Adjusted for inflation, the amount is $1,900, which is unchanged from the previous year. If a taxpayer pays a domestic household employee more than $1,900 during the year, he or she is responsible for withholding and paying FICA taxes on the employee’s behalf.

 

IRA’s acquisition of shares in gold trust not treated as collectible

The IRS has determined that an individual retirement account (IRA) could acquire shares in a trust invested in gold and the acquisition would not be treated as a collectible. As a result, the amount the IRA would invest in the trust would escape being treated as a distribution from the IRA in an amount equal to the cost of the collectible.

Background

Gold bullion barr on a stocks and shares chartA trust offered investors with an opportunity to invest in gold through shares and take delivery of physical gold bullion in exchange for their shares. The trust’s secondary objective was for the shares to reflect the performance of the price of gold less the expenses of its operations. Shares were listed and traded on a stock exchange. Investors, including retirement accounts, acquired shares through a broker-dealer. Ownership of the shares was evidenced only on the books and records of the broker-dealer through which the shares were purchased.

IRS analysis

The IRS first looked to Code Sec. 408(m)(1). Under Code Sec. 408(m)(1), acquisition of any collectible by an IRA or by an individually-directed account under a qualified retirement plan is treated as a taxable distribution from the IRA or account in an amount equal to the cost of the collectible. In other words, collectible are “discouraged” from being held within an IRA. A collectible includes works of art, stamps and coins, and other property. There is a limited exception for a certain type of gold bullion in the physical possession of the IRA trustee.

Here, the IRS determined that the acquisition of shares by the trustee or custodian of an IRA would not constitute the acquisition of a collectible for purposes of Code Sec. 408(m)(1). However, the IRS explained that if the shares would be exchanged for gold, the exchange would constitute the acquisition of a collectible, triggering Code Sec. 408(m)(1).

LTR 201446030

Many who contribute to retirement savings may still get Saver’s Credit

The IRS recently issued a reminder that there is still time left for low- and moderate-income workers to save for retirement and earn a tax credit for 2014. Eligible taxpayers, including new college grads and others starting out, who contribute to their retirement funds before April 15, 2015, can earn a special tax credit commonly called the “Saver’s Credit.”

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

People have until April 15, 2015, to set up a new individual retirement arrangement or add money to an existing IRA for 2014, the IRS said. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, or the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2015 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

  • Married couples filing jointly with incomes up to $60,000 in 2014 or $61,000 in 2015;
  • Heads of Household with incomes up to $45,000 in 2014 or $45,750 in 2015; and
  • Married individuals filing separately and singles with incomes up to $30,000 in 2014 or $30,500 in 2015.

Per diem rates for post-Sept 30 travel

The IRS has released the simplified per diem rates that taxpayers can use to calculate reimbursements to employees for ordinary and necessary expenses incurred during business-related travel after September 30, 2014, and through 2015. The high-cost area per diem increases from $251 to $259 and the low-cost area per diem increases from $170 to $172, the IRS reported in Notice 2014-57.

Per diem rates

The IRS provides employers and employees with the option of claiming travel expenses based on the official per diem allowances, in lieu of substantiating actual travel-related meal and lodging costs by maintaining and providing adequate records or other sufficient evidence. The per diem amounts also satisfy the requirement that employees provide an adequate accounting to the employer of meal and lodging expenses.

High-low substantiation method

Businessman with Hotel Room ServiceThe IRS-approved per diem rate for high-cost areas is $259 ($194 for lodging and $65 for meals and incidental expenses). The IRS has designated locations in 23 states, including the District of Columbia, as high cost areas. These areas include: The Washington, D.C. metropolitan area, Philadelphia, New York City, Chicago, San Francisco, Denver, and others.

In addition, Notice 2014-57 added several localities to the list of high-cost localities: San Mateo/Foster City/Belmont, Calif.; Sunnyvale/Palo Alto/San Jose, Calif.; Glendive/Sidney, Montana; and Williston, N.D.

For all other areas, the IRS-approved per diem rate is $172 ($120 for lodging and $52 for meals and incidental expenses). The rates apply to per diem allowances paid for travel after September 30, 2014.

Incidental expenses

The rate for the incidental expenses only deduction is $5 per day for post-September 30, 2014 travel. The IRS explained in Rev. Proc. 2011-47 that the term “incidental expenses” has the same meaning as in the federal travel regulations issued by the General Services Administration (GSA) in 2011. These describe incidental expenses as fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost associated with filing travel vouchers and payment of employer-sponsored charge card billings are excluded from the GSA definition of incidental expenses.

Transportation industry

The special transportation industry meals and incidental expense (M&IE) rate for taxpayers in the transportation industry is $59 for any locality of travel in the continental United States (CONUS). The special transportation industry M&IE expense rate is $65 for any locality of travel outside the continental United States (OCONUS), which includes Alaska and Hawaii.

Effective date

Notice 2014-57 is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, which are paid to any employee on or after October 1, 2014, for travel away from home on or after October 1, 2014. For purposes of computing the amount allowable as a deduction for travel away from home, this notice is effective for meal and incidental expenses or for incidental expenses only paid or incurred on or after October 1, 2014.

A special “transition rule” is also available to the business, as first spelled out in Rev. Proc. 2011-47. For travel in the last 3 months of a calendar year—

  • A payor must continue to use the same method (per diem method or high-low method) for an employee as the payor used during the first 9 months of the calendar year; and
  • A payor may use either the rates and high-cost localities in effect for the first 9 months of the calendar year or the updated rates and high-cost localities in effect for the last 3 months of the calendar year, but only if the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method.

Notice 2014-57

IRS finalizes rules on deductible local lodging expenses

The IRS has issued final rules under Code Secs. 162 and 262 for when employees may deduct their expenses for local lodging that are required in their trade or business. The final regulations also provide favorable tax treatment for certain local lodging expenses paid or reimbursed by the employer.

The final regulations apply to expenses paid or incurred on or after October 1, 2014. Generally, the final rules track the earlier proposed reliance regulations issued in 2012, with some enhancements.

Local Lodging

high-low methodIn general, local lodging expenses are treated as nondeductible personal, living or family expenses. However, in some situations, local lodging expenses that are incurred in connection with a trade or business are deductible. The IRS has provided a safe harbor in the final rules. If a taxpayer meets the requirements of this safe harbor, the local lodging expenses will be treated as deductible ordinary and necessary business expenses. If the taxpayer does not meet all the requirements of the safe harbor, the IRS has clarified in the final regulations that the local lodging expenses may still be deductible, depending on the facts and circumstances.

The final rules set forth the requirements of the safe harbor:

  • The lodging is necessary for the individual to participate fully in or be available for a bona fide business function;
  • The lodging period does not exceed five calendar days and does not recur more than once per calendar quarter;
  • The individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight; and
  • The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

Examples

The final regulations include six examples illustrating when taxpayers may deduct local lodging expenses. One example describes circumstances in which a professional sports team provides local lodging to players and coaches for a noncompensatory purpose. The IRS revised the example to clarify that the example is illustrative and can apply to other employees of a sports team.

In another example, the employer conducted a seven-day training session at a hotel near the employer’s main office. The employer required all employees to stay at the hotel overnight. Although the facts do not satisfy the safe harbor (because the training is longer than five calendar days), the IRS concluded that the training satisfied the facts and circumstances test. The value of the lodging, which the employer paid directly to the hotel, satisfies the facts and circumstances test and is excluded from the employees’ income as a working condition fringe under Code Sec. 132. Another example allows a deduction for housing an employee who is on call outside of normal working hours.

Other examples in the final regulations concluded that the employer’s provision of local lodging provided a personal benefit to the employee and was includible in the employee’s gross income. This result applied: where an employee who lived 500 miles from the employer was provided temporary local lodging while looking for a residence; and where an employee who commutes two hours each way was provided temporary lodging while she worked on a project that required late hours.

FAQ: What is a substitute for return (SFR)?

Under Code Sec. 6020, the IRS has the authority to prepare and file a substitute tax return for a taxpayer who fails to file a timely return. If a taxpayer does not file a return or cooperate with the IRS on a substitute return, the IRS can prepare and sign a substitute return based on the information it has.

Requirements

A substitute return must satisfy the requirements of Code Sec. 6020(b). The document must identify the taxpayer by name and taxpayer identification number; provide sufficient information to compute the taxpayer’s tax liability, and purport to be a return. The return must be signed by an authorized IRS employee to signify that the IRS adopted the document as a return for the taxpayer.

Uses for an SFR

An SFR that satisfies Code Sec. 6020(b) is treated as a valid return filed by the taxpayer for determining penalties for failure to file a return, failure to pay the tax shown on the return, and failure to pay estimated taxes. The IRS can use the SFR to satisfy its burden to produce evidence before a court, in support of the claimed penalties. However, the IRS cannot use the SFR to impose accuracy-related penalties. Despite its treatment as a return for tax and penalty purposes, an SFR does not terminate the statute of limitations for failing to file a return, and is not treated in a bankruptcy proceeding as a return that the debtor can use to obtain a discharge of tax debts.

Example of SFR

In a 2014 Tax Court case, Rader, 143 TC No. 19, CCH Dec. 60,067, the IRS also provided a Form 13496, IRC Section 6020(b) Certification; Form 4549-A, Income Tax Discrepancy Adjustments; and Form 886-A, Explanation of Items. The IRS did not include a Form 1040. The court concluded that the SFR was valid – the combination of documents filed by the IRS agent for the taxpayer was sufficient to be a valid SFR.

In Rader, the taxpayer, a plumber, filed no returns and paid no taxes. An IRS agent examined taxpayer’s bank records to determine deposits that could be unreported income, after verifying that taxpayer continued to practice his livelihood. The IRS also examined information returns filed by the taxpayer’s customers who paid him for services. The IRS concluded that the taxpayer had income of $350,000 or more for the years at issue. The taxpayer failed to furnish any evidence of deductible expenses to offset the income, and the court did not impute any deductions.

One-IRA rollover-per-year limit

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

Taxpayers and the IRS both believed that this one-rollover-per-year limit was applied separately to each IRA owned by the individual. If an individual owned two IRAs, for example, the taxpayer could do two rollovers in the appropriate period – one from each IRA. The IRS applied this interpretation in proposed regulations and in Publication 590, IRAs.

One rollover per taxpayer

In Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), issued in January 2014, the Tax Court concluded that a taxpayer could make only one nontaxable rollover between IRAs within a one-year period, regardless of how many IRAs the taxpayer maintained. Thus, the one-per-year limit applied to the taxpayer, not to each separate IRA owned by the taxpayer.

In Notice 2014-15 and Announcement 2014-32, the IRS indicated that it would follow the Bobrow interpretation. It withdrew the proposed regulations, and will issue a new Publication 590-A, Contributions to IRAs, that applies theBobrow interpretation.

Transition rule

In the notice and the announcement, the IRS provided a transition rule that it will not apply the new interpretation of the limit on permissible IRA rollovers until January 1, 2015. A distribution from an IRA in 2014 that is rolled over to another IRA will be disregarded in applying the new rule to 2015 distributions, provided that the 2015 distribution is from a different IRA that was included in the 2014 rollover.

Exceptions

The IRS noted that there are several types of rollovers that that are not subject to the Bobrow rule: a rollover from a traditional IRA to a Roth IRA; a rollover to or from a qualified plan; and trustee-to-trustee transfers. The IRS stated that trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly between IRAs, or by providing the IRA owner with a check made payable to the trustee of the receiving IRA.

However, a rollover between Roth IRAs would preclude a separate rollover within the one-year period between the individual’s traditional IRAs; similarly, a rollover between traditional IRAs would preclude a rollover between Roth IRAs with the one-year period.

Affordable Care Act filing requirements and more

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

Individual shared responsibility payment

Individuals who are not exempt from the individual mandate and who do not carry minimum essential coverage in 2014 must make a shared responsibility payment. The payment is due when the individual files his or her 2014 tax return in 2015. In November, the IRS’s national ACA coordinator said that the agency will work with individuals who owe a shared responsibility payment and may not have the resources to make the payment when they file their return. Keep in mind that the IRS will apply any refund to a taxpayer’s unpaid shared responsibility payment. The IRS cannot, however, use its lien and levy power to collect an unpaid shared responsibility payment.

Note. For 2014, the shared responsibility payment amount generally is the greater of: One percent of the person’s household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment, however, does not stay at this level after 2014. By 2016, the payment grows significantly.

In November, the IRS clarified when Medicaid coverage qualifies as minimum essential coverage and when it may not. The IRS also clarified how employer contributions to a cafeteria plan impact minimum essential coverage. Final regulations exclude employer contributions to a cafeteria plan from an employee’s household income for purposes of determining minimum essential coverage,

Exemptions

The IRS reminded individuals in November that they may be exempt from the requirement to carry minimum essential coverage. There are nine main exemptions: religious conscience; health care sharing ministries; members of federally recognized Native American nations; individuals whose income is below the minimum return filing threshold; individuals with a short coverage gap; hardship cases; affordability cases; incarcerated individuals; and individuals not lawfully present in the U.S.

Some exemptions are obtained through the Marketplaces, some through the filing process, and some either way. The exemptions for members of federally recognized Native American nations, members of health care sharing ministries and individuals who are incarcerated are available either from the Marketplace or claiming the exemption as part of filing a federal income tax return. The exemptions for lack of affordable coverage, a short coverage gap, and household income below the filing threshold and individuals who are not lawfully present in the U.S. may be claimed only as part of filing a federal income tax return. In November, the IRS removed references to specific hardships and streamlined the process for obtaining an exemption because of a hardship.

Code Sec. 36B litigation

The Code Sec. 36B premium assistance tax credit helps offset the cost of health insurance obtained through the ACA Marketplace. According to the U.S. Department of Health and Human Services (HHS), more than two-thirds of enrollees in Marketplace coverage were eligible for the credit in 2014. IRS regulations for the credit, however, have come under fire for being contrary to the ACA. The regulations allow enrollees in state-run Marketplaces and federal-facilitated Marketplaces to claim the credit.

In July, the U.S. Court of Appeals for the District of Columbia Circuit struck down the IRS regulations in Halbig, 2014-2 USTC ¶50,366. The D.C. Circuit found that the plain language of the Affordable Care Act limits the credit to enrollees in state-run Marketplaces. In contrast, the Court of Appeals for the Fourth Circuit upheld the regulations in King, 2014-2 USTC ¶50,367. The Fourth Circuit found that it could not say definitively that Congress intended to limit the Code Sec. 36B credit to individuals who obtain insurance through state-run Marketplaces.

The U.S. Supreme Court announced in November that it will hear an appeal of King. The Supreme Court is expected to hear oral arguments about the IRS regulations in early 2015. A decision will likely be announced in June 2015. Our office will keep you posted of developments.

Open enrollment

The ACA Marketplace opened for enrollment for 2015 coverage on November 15 and runs through February 15, 2015. HHS explained that it has streamlined application procedures for individuals who are renewing coverage and who are applying for coverage for the first time. The Small Business Health Option Program (SHOP) also opened on November 15. Small employers (employers with 50 or fewer full-time equivalent employees) may enroll qualified employees in health coverage through SHOP.

Please contact our office if you have any questions about the Affordable Care Act and the new requirements.

Time payments to maximize year-end tax benefits

When accelerating or deferring income or expenses at year end as part of an overall tax strategy, certain timing rules become critical. So does the ability to prove to the IRS when certain actions take place. The following timing rules, among others, should be considered especially important as year-end approaches:

Actual payment rule. Cash-basis taxpayers who want to maximize their deductions and credits for 2014 must make a payment of each expense giving rise to a deduction or credit by December 31. A cash-basis taxpayer generally is entitled to a deduction only when actual payment is made: irrespective of the fact that the expense has already been incurred. “Cash substitutes” under this rule include:

  • Payment by check. If the check is mailed, the payment is considered made at the time of mailing, even if the check is received in the following year, as long as the check is honored in the routine course of business. If the recipient delays but ultimately cashes the check, and the date of delivery is not disputed, the payment dates back to the time the check is delivered or mailed.
  • Payment by credit card. The IRS generally treats a payment by credit card as a cash equivalent. In effect, the taxpayer has borrowed funds from the bank issuing the card and has paid the seller for goods or services. However, in an adjacent rule apparently still in effect, if the taxpayer uses a card issued by the seller with no involvement by an intermediary bank, there may be no payment until the taxpayer pays the bill.

Prepayment of an expense before it is incurred, however, generally does not trigger the immediate right to a deduction in the year paid.

Paid/gifted by check. The mailing rule applicable for a charitable donation calls for any check dated and mailed via the US Post Office within the tax year to be considered deductible in that year, provided the charity cashes it in due course and sufficient funds are available.

Charitable pledges. Like unsecured promissory notes, pledges to a charitable organization are treated as unenforceable promises to pay in the future and are not deductible until payment is made to the charity. However, if the pledge is legally binding, a deduction is allowed when the pledge is made.

Trade date. Stock traded in an over-the-counter market or on a regulated national securities exchange is generally treated as sold on the date the taxpayer enters into a binding contract to sell. This is the trade date, in contrast to the settlement date, which occurs when delivery of the stock certificate and payment are made. The trade date also marks the end of the selling taxpayer’s holding period, important for separating short- and long-term capital gain.

Short sale. In the case of short sales, if the stock price falls and a gain results, the gain is considered realized for tax purposes on the trade date, when the seller directed his or her broker to purchase shares. If the price rises and a loss results, the loss is not realized until the stock is delivered on the settlement date.

Wash sale. A stock (or securities) loss is not allowed to be taken if, within a period beginning 30 days before the date of the disposition and ending 30 days after that date, the individual acquired, or entered into a contract or option to acquire, substantially identical stock or securities. This wash sale rule was designed to prevent taxpayers from selling stock to establish a tax loss and then buying it back the next day. Certain techniques, however, are available to minimize its impact:

  • Buy shares in the same industry rather than the same company
  • Buy more of the same shares, then sell the original shares 31 days later
  • Sell the original shares, then buy the same shares 31 days later.

No similar “wash sale” restriction is imposed on recognizing gain and then immediately purchasing the same shares.

FIFO stock sales. Under the automatic first-in, first-out (FIFO) rule for selling securities, the shares purchased first are considered sold first within the same brokerage account, unless a specified ID method is used by identification of a share’s purchase date and cost. Identification must be made at the time of sale by the broker.

If you have any questions regarding the application of these or other timing rules to your situation, please call this office.