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The myRA? It’s Just Been Revoked.

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A myRA is a government-administered Roth IRA authorized to hold only one type of investment, a US Treasury security which earns interest at the same variable rate as investments in the government securities fund for federal employees.  MyRAs became available in 2014 and were described as being safe, simple, and affordable savings accounts to help low- and moderate-income taxpayers save for retirement.

Why the MyRA Program Failed

Unfortunately for the myRA program, there are a multitude of private sector investment alternatives.  Taxpayers have many options in the private market to offer no account maintenance fees, no minimum balance, and safe investment opportunities.  Demand for myRA accounts has been extremely low, and the Treasury Department announced that it will be phasing out the myRA program over the next few months.  Taxpayers have paid nearly $70 million to administer this program since 2014 and the cost to taxpayers is not justified.

MyRAs are Roth IRAs that Can Only Invest in One Security.  When the MyRA Account Becomes Too Big, it Must be Converted to a Roth IRA…Huh?

MyRAs are subject to the same rules that apply to Roth IRAs, including the income-based eligibility for contributions, maximum annual contributions, and tax treatment of distributions.  Participants can save up to $15,000 in a myRA account and can hold funds in myRAs for up to 30 years.  Once either of these limits is reached, the myRA will have to be rolled into a Roth IRA.  So why not just invest in a Roth IRA?  Exactly, that is why the myRA is being discontinued.  Too bad $70 million taxpayer dollars had to be wasted.

The myRA program is no longer accepting new enrollments.  However, existing accounts remain open and accessible, and until further notice, participants can make deposits and their accounts will earn interest.  Participants are being notified of upcoming changes, including information on how to roll over their myRAs into Roth IRAs.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Deducting Travel Expenses for Charity

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People who travel to, or on behalf of, a charitable organization as a volunteer may be able to deduct the travel expenses as charitable contributions.  Unreimbursed travel expenses are deductible only if there is no significant element of personal pleasure, recreation, or vacation in the travel.  In determining whether there is a significant element of personal pleasure, the relevant question is how much time the taxpayer spends in service to the organization and how much time the taxpayer spends in recreation or in free time.

What Travel Expenses are Deductible?

Deductible travel expenses include:

  • Air, rail, and bus transportation
  • Auto expenses.  The use of an automobile for charitable purposes is deductible at the standard mileage rate of 14 cents per mile.  Alternatively, taxpayers may deduct the cost of gas and oil directly related to the use of the auto in providing services to a charitable organization
  • Reasonable food (subject to the 50% meal limitation) and lodging costs necessarily incurred while away from home
  • Transportation costs between the airport or station and the hotel (or place where the taxpayer is staying)

There is no deduction for the value of the volunteer’s time or services.

Example:  Tim is on the board of directors of a charity.  There is a seminar in Florida on fundraising.  Tim is sent by the charity to attend the seminar.  He is covering the travel, lodging, and meal costs.  If the seminar lasts a couple hours a day for three days, and Tim spends most of the day hanging out at Disney World, it is highly likely that the travel contains a significant element of personal pleasure and the travel, lodging, and meal expenses are not deductible.

Example 2:  Same as above except that the seminar is 8 hours a day for three days.  Tim goes out for dinner and entertainment each night.  In this example, most of the day is spent at the seminar and even though Tim enjoys some recreation at night, it is unlikely that this amount of recreation would constitute a significant element of personal pleasure.  Tim would be able to deduct the expenses.

Keeping Records

Unreimbursed volunteer expenses have the same substantiation requirements that apply to cash contributions.  To prove a gift was made, a donor must produce one of the following:

  • A cancelled check
  • A receipt showing the name of the charity, the contribution date, and the contribution amount

A contribution of $250 or more must, in addition to meeting one of the two above requirements, be supported by a contemporaneous written acknowledgement by the charity.  It is critical for clients to have all required receipts before filing their return, even if this means extending the return.  Since the charity is not directly receiving funds it may be unaware that the volunteer incurred the expenses, volunteers have to be proactive in requesting an acknowledgement that they incurred unreimbursed expenses while volunteering.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

What You Need to Know about the Alternative Minimum Tax

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The alternative minimum tax (AMT) can increase the complexity of your tax planning. Knowing the basic rules can help you better plan for its potential impact.

How It Works

Originally introduced in the 1960s, the AMT system was designed to prevent higher income taxpayers from avoiding federal income taxes through the use of various exclusions, deductions, and credits. To achieve this goal, the AMT system treats certain items — referred to as “preferences” and “adjustments” — less favorably than they are treated for regular income-tax purposes.

Affected items include interest on certain tax-exempt bonds; itemized deductions for home equity loan interest, state and local income taxes, and medical expenses; personal and dependency exemptions; incentive stock options; and depreciation.

Generally, the AMT calculation starts with your regular taxable income and requires you to make the required revisions for adjustments and preferences until you arrive at alternative minimum taxable income (AMTI). Then, after an exemption amount is subtracted, a 26% tax rate is applied to the first $187,800 (in 2017) of the resulting income, and a 28% tax rate is applied to any amounts above $187,800.

The 2017 exemption amounts are $84,500 (married filing jointly), $53,900 (single and head of household) and $42,250 (married filing separately). These exemptions phase out at higher income levels.

Planning

If you believe you may have a potential AMT problem — either this year or in 2016 — you may be able to use certain strategies to reduce your tax. For example, if a tax projection indicates that you will be subject to AMT this year but not next year, you may want to delay prepaying certain expenses, such as state and local income taxes, for which you would not receive a tax benefit this year.

Connect with our team today for all the latest and most current tax rules and regulations.

Comments or questions about this post?  Please let us know through the comment area below!

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

The Tax Implications of a Company Car

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When an employer provides a company vehicle to an employee, the employee must generally include the market value of her personal use of the vehicle in her income.  The employer can generally take a payroll deduction for the actual costs, including depreciation, of providing the vehicle to the employee.

If the personal use of the vehicle is de minimis (of such small value that accounting for it would be impractical), the employee will not have to include the value of her personal use in income.  However, personal use of more than one day per month is not considered de minimis, so this exception is of little value.

Determining How Much to Include in the Employee’s Income

Under the general valuation rule, the value of the company vehicle that is included in the employee’s income is what it would cost the employee to lease a comparable vehicle for the same period the vehicle is available to her.  Generally, a cents-per-mile value cannot be used unless a comparable vehicle is available for lease to the employee on a cents-per-mile basis.

There are also three special valuation rules (each having different requirements).

  • The Annual Lease Value Method
  • The Commuting Value Method
  • The Cents-per-Mile Method

The Annual Lease Value Method (ALV)

The ALV is based on IRS tables and is based on the market value of the vehicle on the first date it is available to the employee.  The vehicle’s purchase price can be used as the market value if the vehicle was purchased in an arm’s length transaction.  If the employer leases the vehicle, the employer can use the MSRP plus sales tax less 8% of this sum as the market value.

Example: ABC Corp leases a Ford Focus.  The MSRP for the car is $23,000.  After sales tax, the cost is $24,380.  ABC Corp can reduce this sum by 8% to determine a market value of $22,429 to look up in the ALV tables.  Based on the ALV tables, the employee will have to include $6,100 as income for her personal use of the car with a market value of $22,429.

The ALV includes maintenance and insurance, but does not include gas.  If the employer pays for gas, the value of the gas will have to be included in income in addition to the ALV amount.

The Commuting Value Method

This method may be used if four requirements are met:

  • The auto must be owned or leased by the employer and provided to the employee to use in the employer’s business
  • The employer requires, because of business reasons, the employee to commute in the vehicle (e.g., the employee is on 24 hour call)
  • The employer must have a written policy that forbids the employee (or certain family members) from using the vehicle for personal reasons other than commuting or de minimis personal use
  • The employee required to use the vehicle must not be a controlling owner of the employer

If these requirements are met, the personal use value of the company car will be $3 per round trip ($1.50 per one way commute).

The Cents-Per-Mile Method

This method may be limited because it cannot be used when the value of the vehicle when it first becomes available to the employee exceeds $15,900 for a passenger vehicle and $17,800 for a truck or van.  In addition, this rule may be used only for vehicles that are expected to be used in the employer’s business throughout the year, or for vehicles that are actually driven at least 10,000 miles in that year and used primarily for business by employees.  If the vehicle qualifies under this method, the standard mileage rate (53.5 cents in 2017) may be used to determine the personal use value of the vehicle.

Requirements of All Special Use Valuation Methods

To use any of the three special valuation rules, one of the following conditions must exist:

  • The employer treats the value of the vehicle as wages for reporting purposes before the extended due date of its tax return for the year the benefit is provided
  • The employee includes the value of the benefit in income before the extended due date of her tax return for the year the benefit is provided
  • The employee is not in control of the employer
  • The employer demonstrates a good faith effort to treat the benefit correctly

Payroll Tax Implications

The employer must report and withhold income and employment taxes on the value of personal use of a company car.  However, there are two elections available to the employer:

  • The employer can elect to treat the personal use value as paid at any time during the year.  Thus, the employer can treat the entire personal use value as being provided on December 31 of each year to delay the due dates of the income withholding and payroll taxes
  • An employer can elect not to withholding income taxes (the employee will have to pay income tax estimates on her own).  However, the employer is still responsible for employment taxes.

 

Comments or questions about this post?  Please let us know through the comment area below!

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

 

Taxes and Your Social Security

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social security income tax

If you thought Uncle Sam would forget about taxes on your Social Security retirement benefits, think again. When you have other income, up to 85% of your benefit could be taxable. Your “combined income” determines whether — and how much of — your benefits will be subject to federal income tax.

What’s Combined Income?

Your combined income comprises all the income you receive from any source, with only a few exceptions. Combined income includes wages and self-employment income; rental income; investment income, such as interest, dividends, and capital gains; income from pensions and retirement accounts (but not tax-free Roth distributions); and — here’s the kicker — even tax-exempt interest from municipal bonds. In addition, you have to add in half your Social Security benefits when you are figuring your combined income.*

The Thresholds

You won’t pay taxes on your Social Security if:

  • Your combined income is not more than $25,000 and your filing status is single or head of household
  • Your and your spouse’s combined income is not more than $32,000 and you file a joint return

Up to 50% of benefits are taxable if you have combined income between:

  • $25,000 and $34,000 (single/head of household)
  • $32,000 and $44,000 (married joint)

Up to 85% of benefits are taxable if you have combined income of more than:

  • $34,000 (single/head of household)
  • $44,000 (married joint)

And if you’re a married taxpayer filing a separate return, you’ll probably have to pay taxes on your benefits. Connect with us today for all the latest and most current tax rules and regulations.

* You have to take certain adjustments into account in the combined income calculation.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

How to Improve Your Cash Flow

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money-2328715_1920Slow paying customers, seasonal revenue variations, an unexpected downturn in sales, higher expenses — any number of business conditions can contribute to a cash flow crunch. If you own a small business, you may find the suggestions that follow helpful in minimizing cash flow problems.

Billing and collections. Your employees need to work with clear guidelines. If you don’t have a standardized process for billing and collections, make it a priority to develop one. Consider sending invoices electronically instead of by mail. And encourage customers to pay via electronic funds transfer rather than by check. If you don’t offer a discount for timely payment, consider adding one to your payment terms.

Expense management. Know when bills are due. As often as possible, pay suppliers within the period that allows you to take advantage of any prompt-payment incentives. Remember that foregoing a discount in order to pay later is essentially financing your purchase.

Take another look at your costs for ongoing goods and services, including telecommunications, shipping and delivery, utilities, etc. If you or your employees travel frequently for in-person meetings, consider holding more web conferences to reduce costs.

Inventory. Focus on inventory management, if applicable, to avoid tying up cash unnecessarily. Determine the minimum quantities you need to keep on hand to promptly serve customers. Systematically track inventory levels to avoid overbuying.

Debt management. Consider how you use credit. Before you commit to financing, compare terms from more than one lender and keep the amount to a manageable level. For flexibility, consider establishing a line of credit if you do not already have one. You will be charged interest only on the amount drawn from the credit line.

Control taxes. Make sure you are taking advantage of available tax breaks, such as the Section 179 deduction for equipment purchases, to limit taxes.

Develop a cash flow budget. Projecting monthly or weekly cash inflows and outflows gives you a critical snapshot of your business’s cash position and shows whether you’ll have enough cash on hand to meet your company’s needs.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

IRS Issues Reminder of What Is Needed to Prove Charitable Deductions

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charitable donationsAs people are getting their last minute tax deductions in before the end of the year, the IRS published reminders to taxpayers of what documentation is needed to claim charitable donations.

The documentation requirements are strict and if there is any deficiency in proof, the IRS can disallow the deduction even if you can prove payment with a canceled check or receipt.

So, here are the requirements:

Rules for Clothing & Household Items

To be deductible, clothing and household items must be in good condition or better. A clothing or household item (e.g., furniture, furnishings, electronics, etc.) for which a taxpayer claims a deduction of over $500 does not have to be in good condition if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgment from the charity for all gifts worth $250 or more.

Rules for Donating Money

To deduct donations of money, regardless of amount, the taxpayer must have a bank record or a written statement from the charity showing the name of the charity and the date and amount of the contribution.

Bank records include: canceled checks, bank or credit union statements, and credit card statements. The bank record should show the name of the charity, the date of the donation, and the amount paid.

For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 showing donations, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

For money donations $250 or more, the taxpayer MUST receive an acknowledgment from the charity BEFORE filing the tax return in order to claim the deduction. If an acknowledgment is not received, the taxpayer cannot claim the deduction even if proof of donation is established by bank record.

Other Reminders

Only donations to qualified organizations are deductible. Donations directly to needy individuals are not deductible. The IRS maintains a database of qualifying organizations at https://apps.irs.gov/app/eos/mainSearch.do;jsessionid=mg3hp1dT8jJZjNPqoF3SdA__?mainSearchChoice=pub78&dispatchMethod=selectSearch

Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2015 even if the credit card bill isn’t paid until the following year. Donations by check are deductible in 2015 if they are mailed out before the end of the year.

For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions.

For donations of all property, including clothing and household items, the taxpayer should get from the charity a receipt that includes the name of the charity, the date of the contribution, and a reasonably detailed description of the donated property.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

IRS to Its Auditors:  Info on IRS.gov Isn’t Reliable

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irs faqsThe IRS Small Business/Self-Employed Division recently issued a memo to its Field Examination Area Directors [auditors] stating that frequently asked questions (FAQs) and other items posted on IRS.gov, that have not been published in the Internal Revenue Bulletin, are not legal authority.

The Internal Revenue Bulletin is the authoritative instrument for announcing official rulings and procedures of the IRS and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest.

Background

The IRS makes frequent postings to its website.  In many cases, these postings are in the form of FAQs.  Often, these items are not reproduced in pronouncements that form part of the Internal Revenue Bulletin.

The memo states that it is the policy of the IRS to publish in the Internal Revenue Bulletin all substantive rulings necessary to promote a uniform application of the tax laws.  IRS employees must follow items published in the Internal Revenue Bulletin, and taxpayers may rely on them.  FAQs that appear on IRS.gov but that have not been published in the Internal Revenue Bulletin are not legal authority and should not be used to sustain a position unless the items explicitly indicate otherwise or IRS indicates otherwise by press release or by notice or announcement published in the Internal Revenue Bulletin.

So Why Bother Viewing Info on IRS.gov?

While information cannot be cited as support for a tax position, the information on IRS.gov is still useful if you need an overview of a tax topic.  The information on IRS.gov also tends to cite sources that can be used as legal authority (such as tax statutes, regulations, etc.).  While you can’t cite the information on IRS.gov as legal authority, the site will usually point you to source material that can be used as legal authority.  By the way, you probably shouldn’t be doing tax research in the first place—talk to a tax professional if you have a complicated tax issue.

Defer Tax with a Like-Kind Exchange (aka 1031 Exchange)

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1031People who sell real estate at a gain often want to use the proceeds to purchase additional real estate.  However, people have to pay tax on the gain before they can use the proceeds to buy more real estate.  Often, they are surprised that they have to pay tax on the gain when they’re rolling the proceeds into more real estate.

Taxpayers in this situation can avoid paying tax immediately on the sale by entering into a like-kind exchange.  In a like-kind exchange, taxpayers exchange their property with another taxpayer’s property without cash exchanging hands.  If taxpayers can’t find another party to exchange properties with, multi-party exchanges (described in my next blog) can be structured.

Like-kind exchanges can include business for business, business for investment, investment for business, or investment for investment property.  Inventory, partnership interests, and stocks and bonds do not qualify for like-kind exchange treatment.  The term like-kind refers to the nature and character of the property and not to its grade or quality.  Real estate can be exchanged only for other real estate, and personal property can only be exchanged for other personal property.

A major benefit of like-kind exchanges is that the taxpayer can acquire new property on a pre-tax basis.

Example:  Suzy has property with a $100,000 cost and a $250,000 market value.  If she sells the property she will pay tax of 15% on her $150,000 gain, which amounts to $22,500.  After paying tax, Suzy only has $227,500 of the proceeds left to purchase new property.  If Suzy can enter into a like-kind exchange, she can defer paying tax and will be able to acquire new property worth the $250,000 value of her old property.

With a like-kind exchange, tax is deferred rather than avoided.  When a taxpayer exchanges a property, the original cost of the old property is applied to the new property.

Example:  Barney owns Parcel 1 which he bought for $100,000 but is now worth $250,000..  Andy owns Parcel 2, which he bought for $120,000 but is now worth $250,000.  They exchange properties.  Barney now owns Parcel 2, with a cost of $100,000 and a market value of $250,000.  Andy now owns Parcel 1 with a cost of $120,000 and a market value of $250,000.  Neither pays tax at the time of the exchange.  However, tax is not permanently avoided because Barney will have a taxable gain of $150,000 when he later sells Parcel 2 and Andy will have a taxable gain of $130,000 when he later sells Parcel 1.

To fully defer tax, no cash or assets other than the exchanged properties can change hands.  If cash (including relief from debt) changes hands, taxable gain may be recognized to the extent of cash and other assets received.  Cash and other assets received in a like-kind exchange are referred to as “boot”.

Example:   Barney owns Parcel 1 which he bought for $100,000 but is now worth $250,000.  Andy owns Parcel 2, which he bought for $120,000 but is now worth $230,000.  They exchange properties and Andy pays Barney $20,000 because his property is worthless than Barney’s.  Barney’s economic gain is $150,000, but his taxable gain is limited to the $20,000 cash he received.  Andy’s exchange is still completely tax deferred because he received no boot.

Example 2:  Barney owns Parcel 1 which he bought for $100,000 but is worth $250,000. Assume Barney has a $20,000 mortgage on Parcel 1.  Andy owns Parcel 2, which he bought for $120,000 but is worth $230,000.  They exchange properties and Andy assumes Barney’s $20,000 mortgage.  Since Barney was relieved of the $20,000 mortgage, he has received boot.   Barney’s economic gain is $150,000, but his taxable gain is limited to the $20,000 mortgage relief he received.  Andy’s exchange is still completely tax deferred because he received no boot.

The basis of the new property is equal to the basis of the old property:

  • Plus boot paid
  • Less boot received
  • Plus gain recognized

For both of the above 2 examples, Barney’s basis in Parcel 2 is:

Basis of Parcel 1:              $100,000

Plus boot paid:                  $0

Less boot received:          ($20,000)

Plus gain recognized:          $20,000

Basis of Parcel 2:               $100,000

If Barney immediately sells Parcel 2 for $230,000, he will recognize a gain of $130,000 ($230,000 sales price less basis of $100,000).  When you add this $130,000 gain on sale to the $20,000 gain Barney recognized when he received the $20,000 boot, you have $150,000 which is the economic gain Barney had in Parcel 1.  Notice how the economic gain of $150,000 is taxed as Barney received cash of $20,000 during the like-kind exchange, and $130,000 when he sells Parcel 2 for cash.

For both of the above 2 examples, Andy’s basis in Parcel 1 is:

Basis of Parcel 2:               $120,000

Plus boot paid:                  $20,000

Less boot received:                   $0

Plus gain recognized:                 $0

Basis of Parcel 1:               $140,000

If Andy immediately sells Parcel 1 for $250,000, he will recognize a gain of $110,000 ($250,000 sales price less basis of $140,000).  This is the economic gain he had in Parcel 2.

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 Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

 

You May Not Get Any Amended Form 1099s for Investment Income This Tax Season

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smart-investmentsOne of the more annoying aspects of tax filing has been the amended Form 1099s that people receive from investment brokers late in the filing season that require amended returns. Well, the number of these amended Form 1099s may decline substantially this filing season.

For investment income Form 1099s filed after December 31, 2016 (i.e., for tax years 2016 and later) there is a new safe harbor for de minimis errors on informational returns. If the broker makes an error that differs from the correct amount by no more than $100 or tax withheld differs by no more than $25, the broker is not required to issue a revised Form 1099 unless the payee elects that the safe harbor not apply.

Most of the corrected Form 1099s issued late in the filing season tend to report changes that are fairly small amounts, and they are generally under $100. So this safe harbor should substantially reduce the number of amended tax returns that are required because of corrected investment income Form 1099s.

If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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