February 2017 DiSabatino, CPA Newsletter

Imagine you receive a call from an IRS agent who says you owe back taxes and threatens to arrest you if you don't immediately make a payment over the phone.

The threatening approach used in Mumbai is just one variety of IRS scam. Another involved sending emails from fake IRS addresses telling taxpayers that due to a mistake they were owed larger refunds. According to the email, all they had to do was provide their bank information and prepay the tax due on the larger refund. Once they made the prepayment, both the scammer and their supposed refund disappeared.

See through any IRS scam

By following a few guidelines you can see through any IRS scam:

Three of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully. Here are some ideas:

It typically takes a great deal of personal interest and expertise in a given field — whether it's rare art, coins or baseball cards — to judge a treasure from a trinket. For those of you who have been bitten by the collector's bug, here are some tax considerations.

Collectibles defined

For example, a typical one-ounce gold coin is worth about $1,200 based upon the value of the metal and would not be considered a collectible by the IRS. However, a rare antique double eagle gold coin produced in the 19^th century could be worth $20,000 to a collector, even though it is made of exactly the same amount of gold as the non-rare coin.

Collectibles special tax rate

When collectibles are sold, they become taxable at a maximum tax rate of 28 percent. The tax applies to profit on the sale of your collectibles.

That tax rate is considerably higher than the average capital gains tax of 15 percent that most people pay for non-collectible investments such as stocks and bonds (the tax range for long-term capital gains is from 0 to 20 percent). The exception to this rule is that if you've held your collection less than a year before you sell it, your capital gain will be taxed as regular income.

It's all about the basis

In order to calculate what you owe to the IRS if you sell your collectibles, start with your basis. Your basis typically equals the amount you paid for your collectibles, plus any auction or broker fees incurred during your purchase. If you spent money to refurbish, restore or maintain collectibles while you owned them, you can also add that to your basis.

Then, subtract your basis from the sale price of your collectibles; the amount left over is what is taxed. Here's an example:

Ima Dahl decides to sell an 1898 German Bisque porcelain doll from her collection. She's owned the doll for ten years and originally paid $700 for it. She also paid $150 two years ago to repair its cracked finish. She receives $1,800 by selling it at an online auction and spends $100 paying her auction fees and shipping to the new owner. Since she owned the doll for more than one year, her long-term capital gain is $850 and her potential maximum tax is $238. The calculation: $1,800 net sales price, minus the $700 basis, minus $150 for repairs, minus $100 selling expense multiplied by 28%.

Some collectible hints

As you can imagine, the taxes on buying and selling collectibles can be complex. If you are considering selling a potentially valuable item, ask for assistance.

¹ Source: IRS 2016 Schedule D instructions