Traditionally, tax planning is targeted to individual taxpayers, but small business owners can also benefit from such tax-saving techniques. Instead of waiting until the very end of the year to pitch ideas to clients, present them with the following ten strategies at midyear.
Stock up on depreciable equipment. Under current law, the maximum Section 179 deduction for business equipment is limited to only $25,000, while 50% bonus depreciation generally isn’t allowed anymore this year. Nevertheless, don’t hesitate to buy needed equipment if the price is right. At tax return time, you can maximize deductions, including any retroactive extensions of favorable provisions ultimately approved by Congress.
Sweeten your retirement pot. Whether you’re an employee or self-employed, you can salt away money within generous limits through a qualified retirement plan. For instance, you may defer up to $17,500 of salary to a 401(k) plan ($23,000 if age 50 or over) or contribute the lesser of 25% of compensation or $52,000 ($57,500 if age 50 or over) to a SEP in 2014. It’s easier to increase contributions throughout the year than it is to fork over most or all of a paycheck at year-end.
Add vacation time to business trips. Generally speaking, you can deduct travel expenses – including airfare, lodging, ground transportation and 50% of meal costs – if the primary purpose of the trip is business-related. As long as you spend more days on business than pleasure, you should be in the clear. However, note that expenses that are strictly personal, such as a sightseeing jaunt, are nondeductible.
Fete your business customers. If a taxpayer entertains a business customer preceding or following a “substantial business discussion,” 50% of the entertainment and meal expenses are deductible. The entertainment can take place the day before or after for an out-of-town customer. What’s more, spouses or significant others can tag along when the situation calls for it.
Celebrate with your staff. Normally, deductions for business entertainment are limited to 50% of the cost. However, under a special tax law exception, you can write off 100% of a company party, like a July 4th or Labor Day picnic or barbecue, as long as the entire workforce is invited.
Turn a passion into business. Frequently, an activity that starts out as a hobby turns into a bona fide business. However, to deduct a loss, you must show that you're engaging in the activity to generate a profit. Otherwise, the write-off is limited to the amount of income from the activity under the "hobby loss" rules. Be sure that your records can stand up to an IRS challenge.
Make minor repairs to the premises. The tax law generally permits you to currently deduct minor repairs (e.g., fixing a broken lock) while the cost of major improvements must be capitalized. Have repairs made throughout the year when they are needed. Conversely, if they are part of a major overhaul, the IRS may treat the entire cost, including the repairs, as a capital improvement.
Salvage S corporation losses. An S corporation’s losses are deductible by the shareholders up to the amount of their basis in the stock. If your S corp expects to show a loss for the year, ensure that you have sufficient basis in your stock to absorb the loss deduction. If necessary, you might increase your basis by adding capital or lending money to the S corporation.
Business vehicles are limited by the “luxury car rules.” But there’s a special exception for certain vehicles – including many sports utility vehicles (SUVs) – weighing 6,000 pounds or less. In this case, the maximum Section 179 deduction is capped at $25,000, much higher than the luxury car limits. Congress has threatened to repeal this tax break, so act soon.
Start up a new business. If you getting a new business venture off the ground, you’re permitted to currently deduct up to $5,000 of qualified start-up expenses. Any remainder must be amortized over 180 months. But you must officially be ”open for business” to qualify for this tax break. Give yourself plenty of time before year-end to commence operations.
Tuesday, April 29, 2014
Monday, April 28, 2014
10 Mid-Year Tax Tips for Individual Taxpayers
Now that this year’s tax filing season for individuals is over, it’s time to concentrate on saving taxes in 2014. All too often, professional tax advisors don’t reach out to their clients until the very end of the year when it might be too late for them to implement meaningful tax planning strategies. Break up the spring and summer doldrums by presenting these ten ideas for their consideration.
- Harvest losses from securities sales. Capital losses can offset capital gains for the year plus up to $3,000 of ordinary income. Any excess loss is carried over. Thus, this could be an opportune time to realize losses that can offset earlier or anticipated gains. Note that this strategy also reduces exposure to the 3.8% Medicare surtax on net investment income.
- Cash in on 0% capital gains rate. Remarkably, taxpayers in the two lowest income tax brackets can benefit from an unprecedented 0% rate on long-term capital gains. Advise clients who are expecting to have a low-income year, or have a child in a low tax bracket who is holding appreciated securities, to maximize the tax-saving opportunities.
- Arrange an installment sale deal. Normally, you must recognize the entire gain from the sale of property, such as real estate, in the year of the sale. But tax on a portion of the gain is spread out over two or more years through an installment sale. Not only does this defer tax payment, it may reduce the overall tax liability for the seller.
- Sidestep the wash sale rule. The “wash sale rule” prevents someone from realizing a capital loss if substantially identical securities are acquired within 30 days of the sale. Don’t wait until year-end when the wash sale rule could hamper transactions. In lieu of waiting 30 days to buy the same securities, “double up” by acquiring the securities now and hold off selling the original shares for more than 30 days before selling.
- Adjust your portfolio. After a midyear review, you can fine-tune your investments for greater tax efficiency. For instance, you might buy dividend-paying stocks that qualify for the maximum capital gains tax rate of 15% (20% for taxpayers in the top ordinary income tax bracket). Another suggestion for upper-income taxpayers is to increase the allocation of tax-free municipal bonds and bond funds.
- Check out AMT status. It’s not too early to start thinking about the alternative minimum tax (AMT) for 2014. Figure out if it will make sense to postpone recognition of tax preference items, like tax-exempt interest on private activity bonds, to 2015. Alternatively, you might count on pulling more income into this year if the AMT rate, topping out at 28%, will be lower than your regular income tax rate.
- Give away property to charity. Generally, a donor can deduct the fair market value (FMV) of property that’s been owned longer than one year, within certain limits. Do a thorough “spring cleaning” to find households items in good condition that can be donated to charity. Use online resources to establish the FMV of donations.
- Add support for relatives. If you provide more than 50% of the support for a child under 19, or full-time student under 24, you can generally claim a dependency exemption for the child. For other relatives, the recipient also can’t have more than $3,950 in gross income in 2014. Consider that gifts of support to college grads or to a parent on Mother’s or Father’s Day can push you over the 50% threshold.
- Limit vacation home use. A taxpayer who rents out a vacation home may benefit from valuable deductions, including depreciation, that offset rental income. But you can’t claim a tax loss if your “personal use” exceeds the greater of 14 days or 10% of the days the home is rented out. Monitor your personal use in the summer to ensure you don’t cross over the line.
- Latch onto dependent care credit. If you pay a sitter or day care center to watch your young children this summer while you and your spouse work, you may be eligible for a dependent care credit. The maximum credit is generally $600 for one child; $1.200 for two or more children. Note that the cost of sending a child to day camp qualifies for the credit, but not overnight camp.
Thursday, April 10, 2014
Two Ways to Cut Investment-Related Taxes
We are in the thick of tax season and some of you who have completed your returns may have realized that your investment-related taxes went up last year. Most Americans are much more reactive than proactive when it comes to effective tax planning. There are various strategies you can deploy to minimize your investment-related taxes and here are two of my ideas to consider.
The $250,000 adjusted gross income (AGI) for married couples ($200,000 single) is an extremely important threshold to watch because it triggers the 3.8% Medicare surtax on ‘net investment income’. This applies to taxable interest, taxable dividends, net taxable capital gains on investments, and net income from a rental property. Since it is early in the year, you will want to consider strategies that may keep your income below these levels if you are floating around the threshold. Considerations include maxing out 401(k), using a deferred compensation plan if your company offers one, waiting on exercising stock options, health savings accounts and flexible spending accounts. This is not an end-all-be-all list, but a good place to start. Remember, the difference between a 15% capital gain tax and capital gain 18.8% tax isn’t 3.8%. It’s over 25%!
Another option that many investors miss out on is matching up their capital gains and losses within their brokerage accounts toward the end of the year. Remember, if you have carried forward capital-gain losses from a prior tax year then you can sell positions that have gains essentially at a zero tax rate. At a minimum, if you have a fair amount of positive capital gains in 2014, just look for loss positions to at least wipe out some of the liability.
The $250,000 adjusted gross income (AGI) for married couples ($200,000 single) is an extremely important threshold to watch because it triggers the 3.8% Medicare surtax on ‘net investment income’. This applies to taxable interest, taxable dividends, net taxable capital gains on investments, and net income from a rental property. Since it is early in the year, you will want to consider strategies that may keep your income below these levels if you are floating around the threshold. Considerations include maxing out 401(k), using a deferred compensation plan if your company offers one, waiting on exercising stock options, health savings accounts and flexible spending accounts. This is not an end-all-be-all list, but a good place to start. Remember, the difference between a 15% capital gain tax and capital gain 18.8% tax isn’t 3.8%. It’s over 25%!
Another option that many investors miss out on is matching up their capital gains and losses within their brokerage accounts toward the end of the year. Remember, if you have carried forward capital-gain losses from a prior tax year then you can sell positions that have gains essentially at a zero tax rate. At a minimum, if you have a fair amount of positive capital gains in 2014, just look for loss positions to at least wipe out some of the liability.
Wednesday, April 9, 2014
More income, more taxes - Upper-income earners face a gantlet with this year's changes
SOURCE: Detroit Free Press
Some well-to-do taxpayers won't be thrilled when they're hit with extra tax increase — which can add several hundred or several thousand dollars to the bill.
We're talking about higher tax rates for upper-income taxpayers, as well as a higher capital-gains tax rate and a new investment surtax that was included in the Affordable Care Act.
MORE TAX HELP:
See Form 8960 for the 3.8 percent tax that could apply to net investment income. The tax can apply to individuals, estates and trusts. You'd pay an additional 3.8 percent tax on the lesser of your net investment income, or the excess of modified adjusted gross income over $200,000 ($250,000 married filing jointly, $125,000 married filing separately).
- Some new tax strategies can apply because of that extra 3.8 percent surtax. For example, tax experts warn that someone in a higher-income household might think twice about making a large conversion from a traditional IRA into a Roth IRA. That's because the required inclusion of income from that conversion would drive up your adjusted gross income. Better planning over a few years could avoid triggering the tax.
- Financial planners are suggesting that investors review some strategies to help avoid or mitigate the 3.8 percent surtax. Some might ideas include reducing taxable income by contributing to 401(k) plans and IRAs; and looking into life insurance and charitable remainder trusts.
"Between the increased tax brackets that went into effect in 2013, and the new 3.8 percent Medicare surtax on net investment income, many upper-income taxpayers are seeing a significant bump in their taxes," said Patricia Bojanic, certified public accountant and tax partner at Gordon Advisors in Troy, Mich.
"It's made tax and investment planning that much more important," Bojanic said.
Some higher-income households, she said, could end up seeing an increase of 24 percent or more in the taxes on their investment income.
First, let's look at the new, little-understood 3.8 percent surtax that took effect in 2013.
Now, some taxpayers could be subject to an extra tax on net investment income. Investment income includes interest, dividends, royalties, rents, capital gains and passive activity income.
More people could be talking about the 3.8 percent surtax this season because of the relatively lower income threshold, said Bernie Kent, chairman of Schechter Investment Advisors in Birmingham, Mich.
"This is the one new tax that applies to the most people," said Kent, who has worked more than 40 years with high-net worth individuals and families.
The 3.8 percent surtax would apply to married couples when modified adjusted gross income exceeds $250,000 if filing jointly, and singles when modified adjusted gross income exceeds $200,000. The surtax would apply to married couples filing separately who individually earn more than $125,000.
On top of that, an added Medicare tax of 0.9 percent on gross income from wages and self-employment would be imposed on taxpayers earning more than $200,000 single or $250,000 for joint filers, too.
Alan Semonian, certified public accountant at Ameritax Plus in Berkley, Mich., said he has seen some higher-income households this season getting hit by the 3.8 percent surtax after receiving significant capital gains distributions from mutual funds.
One married couple, both physicians, had to report $50,000 in capital gains distributions from their mutual funds, he said. For that particular couple, the gains helped to trigger about $5,000 in extra taxes relating to the surcharge.
Mutual funds that aren't in tax-sheltered accounts, such as IRAs or 401(k)s, are required to pass profits from capital gains, interest or dividends to individual investors. You'd owe tax on that distribution, even if you did not sell off your shares in the fund.
The 3.8 percent tax does not apply to money taken out of a qualified retirement plan or IRA. It also does not apply to interest income from municipal bonds. Net investment income would not include wages, jobless benefits, Social Security benefits and alimony, either.
Though there are not many ways to reduce this 3.8 percent tax hit in 2013, a few options can exist for some people who are slightly above the $200,000 or $250,000 thresholds, Kent said.
Kent noted that someone who works for an employer who doesn't provide a 401(k) plan or other type of retirement plan, such as a traditional pension, still could contribute now through April 15 for the 2013 tax year to a deductible IRA, which would reduce taxable income. For 2013, a taxpayer could contribute up to $5,500. Or someone age 50 or older last year could contribute up to $6,500.
Someone who is self-employed could consider contributions to a Simplified Employee Pension IRA, and that could reduce 2013 taxable income.
The way the 3.8 percent surtax is calculated can be a bit confusing. For example, a single person with $225,000 in modified adjusted gross income could face an extra tax of $950 if wages were $100,000 and net investment income was $125,000. The surtax in that case is applied to $25,000 of net investment income.
For those with even higher incomes, more tax hits are taking place this year.
The highest tax rate jumps back to 39.6 percent for taxable income more than $400,000 for singles and more than $450,000 for married couples. That's up from 35 percent.
Investors in the top bracket now must pay 20 percent on long-term capital gains and dividends, instead of the 15 percent that most other taxpayers pay.
Higher-income taxpayers also face a potential phase-out of itemized deductions and personal exemptions, if their adjusted gross income is $250,000 or more if single or $300,000 or more for married couples.
James Jenkins, president of Jenkins accounting firm in Southfield, Mich., said self-employed business people are doing more planning. Many of these upper-income people, he said, "aren't accidentally rich" and they are not likely to just stand still as rates climb higher.
The real tax rate is closer to 44 percent, not 39.6 percent, for some higher-income taxpayers who have taxable income above the $450,000 threshold, Jenkins said.
"You know what a phase-out is? It's called higher tax rates," Jenkins said.
Tuesday, April 8, 2014
Some ways to save at tax time
It’s that time of year. If you’ve filed your taxes, congratulations! Year-round tax planning is the best way to avoid last-minute surprises.
The IRS website publishes very helpful information, particularly in the Tax Tips series at www.irs.gov/uac/IRS-Tax-Tips. I can’t give you tax advice, of course, but if you are selling a home, here are a few items you may want to discuss with your tax advisor:
• Capital Gain Exclusion. You may be able to exclude up to $250,000 ($500,000 for joint filers) of the gain from the sale of your main home;
• Ownership/Use Tests. In general, you need to have owned and lived in your main home for at least two out of the five years before the date of sale;
• Main Home. If you own more than one home, only your main home (the one you live in most of the time) is eligible for the exclusion;
• Reduced Exclusion. If you don’t qualify for the full exclusion, there are specific circumstances in which you may qualify for a reduced exclusion.
This reminded me of the 1031 Exchange provision in the tax code. I have clients who are using it right now to postpone paying tax on the gain from the sale of an investment property by reinvesting the proceeds in similar property as part of a qualifying like-kind exchange. It’s important to note that the tax is deferred, not excluded. Always consult a qualified tax professional if you are contemplating this kind of transaction. There are specific rules and requirements to follow or you won’t get the advantage of the deferment.
Finally, I have a favorite way to save money over the long term: refinance your 30-year mortgage to a 15-year mortgage and build your net worth by tens of thousands of dollars. You will own your home free and clear, pay less interest over time, and be able to use the money you aren’t spending on your home loan for other purposes.
Monday, April 7, 2014
There are ways to reduce your tax bill after year’s end
If you have not finished your taxes, then join the crowd. The IRS typically receives 20 percent of all returns within the last week of the April 15 tax deadline. Given there are around 150 million individual income tax returns filed in a year, this represents almost 30 million returns.
While there are fewer opportunities to reduce your tax bill after year-end, there are some. While tax planning after the end of the year can help you reduce your tax liability, it can also make the tax-filing season cheaper and easier and give you a jump start on next year’s taxes, as well.
Some tips:
If you are not self-employed, the No. 1 tax savings opportunity after year-end is to fund an Individual Retirement Account (IRA). Without getting too in depth about the intricacies of IRAs, in general, if you have earned income from a job or self-employment and are under the age of 50, you can contribute up to $5,500 into an IRA for 2013. This contribution must be made by April 15 without extensions.
If you are over the age of 50, you can contribute an additional $1,000 via the catch-up provision associated with IRAs. If you are a non-working spouse, you can utilize the earnings of the working spouse to allow a contribution to be made in your own IRA. Whether the contribution is deductible, and thus saves you taxes, will depend upon your filing status, your adjusted gross income and whether you and/or your spouse are covered by a retirement plan at work so please check with a tax professional on this.
If you are self-employed, an even larger contribution can be made via an SEP IRA. Unlike the Traditional IRA, these contributions can be made up until the tax filing deadline, plus extensions. This is the only type of retirement account that can be set up after year-end for a self-employed person and thus is very popular with those who did not plan accordingly. In general (and not exact), to find your allowable contribution, multiply the net earnings from your business by 20 percent. If your self-employed earnings exceed $255,000, you will be limited to a maximum $51,000 SEP contribution. This is an excellent tool for those who are self-employed without employees. If you have employees, the IRS requires a contribution for the employees at the same percentage made for the owner. There are qualification rules associated with this for employees which can be found in IRS Publication 590.
In addition, make sure you are organized. Many taxpayers simply overlook deductions because they can’t find them or don’t track them very well. A good system, whether manual or via a computer program such as Quicken or Mint.com, can make a world of difference between owing taxes and getting a refund.
If you will be getting a large refund, you may wish to put this money to good use on something that will make a difference in your life. Consider paying down credit card debts; applying the refund to a long-term goal, such as education for a child; or making an extra mortgage payment on your home. But don’t simply waste it on some impulse purchase that will add no real value once you take it home. If you are receiving too big a refund or owing too much, consider changing your withholdings to prevent this and to allow your money to better work for you.
While taxes may not be your favorite activity, taking simple steps can make them much easier and less expensive for you, allow you to save money even after year-end and use any refunds wisely.
Life is a journey; plan for it.
While there are fewer opportunities to reduce your tax bill after year-end, there are some. While tax planning after the end of the year can help you reduce your tax liability, it can also make the tax-filing season cheaper and easier and give you a jump start on next year’s taxes, as well.
Some tips:
If you are not self-employed, the No. 1 tax savings opportunity after year-end is to fund an Individual Retirement Account (IRA). Without getting too in depth about the intricacies of IRAs, in general, if you have earned income from a job or self-employment and are under the age of 50, you can contribute up to $5,500 into an IRA for 2013. This contribution must be made by April 15 without extensions.
If you are over the age of 50, you can contribute an additional $1,000 via the catch-up provision associated with IRAs. If you are a non-working spouse, you can utilize the earnings of the working spouse to allow a contribution to be made in your own IRA. Whether the contribution is deductible, and thus saves you taxes, will depend upon your filing status, your adjusted gross income and whether you and/or your spouse are covered by a retirement plan at work so please check with a tax professional on this.
If you are self-employed, an even larger contribution can be made via an SEP IRA. Unlike the Traditional IRA, these contributions can be made up until the tax filing deadline, plus extensions. This is the only type of retirement account that can be set up after year-end for a self-employed person and thus is very popular with those who did not plan accordingly. In general (and not exact), to find your allowable contribution, multiply the net earnings from your business by 20 percent. If your self-employed earnings exceed $255,000, you will be limited to a maximum $51,000 SEP contribution. This is an excellent tool for those who are self-employed without employees. If you have employees, the IRS requires a contribution for the employees at the same percentage made for the owner. There are qualification rules associated with this for employees which can be found in IRS Publication 590.
In addition, make sure you are organized. Many taxpayers simply overlook deductions because they can’t find them or don’t track them very well. A good system, whether manual or via a computer program such as Quicken or Mint.com, can make a world of difference between owing taxes and getting a refund.
If you will be getting a large refund, you may wish to put this money to good use on something that will make a difference in your life. Consider paying down credit card debts; applying the refund to a long-term goal, such as education for a child; or making an extra mortgage payment on your home. But don’t simply waste it on some impulse purchase that will add no real value once you take it home. If you are receiving too big a refund or owing too much, consider changing your withholdings to prevent this and to allow your money to better work for you.
While taxes may not be your favorite activity, taking simple steps can make them much easier and less expensive for you, allow you to save money even after year-end and use any refunds wisely.
Life is a journey; plan for it.
Sunday, April 6, 2014
Top 10 Tax Mistakes To Avoid At All Costs
FROM FORBES.COM
A tax audit involves the time and expense of being examined and often a tax dispute. Avoid these common mistakes and you’ll reduce your chances of grief from the IRS.
1. Failing to Declare Income. Apart from very few special rules, everything is income to the IRS. So regardless of whether you receive a Form 1099, declare it. If the IRS audits you, it can ask for your bank records and compute income that way.
2. Sloppy Records. Maybe its karma, but keeping good records can keep you out of trouble in the first place. Most audits are by correspondence. To respond quickly and thoroughly, here’s what to do.
3. Missing Forms 1099. Much of what the IRS does is information return matching, the endless correlation of taxpayer ID numbers and payments from Form 1099-MISC, interest Form 1099-INT, and many others. Keep track of your Forms 1099. Don’t stick them in a drawer when they arrive, examine them.
If you receive an incorrect Form 1099, contact the payer, explain the error and ask if they have already sent a copy to the IRS. If not, ask them to destroy it and issue a correct one. If so, ask for a “corrected” 1099 since care with Forms 1099 helps audit-proof tax returns.
314. Commingling Business and Personal. You may do things with a dual motive like a pleasant lunch with a business colleague or boondoggle with your best customer. But your tax life will be easier if you avoid morphing personal into business, including:
Deducting the cost of your divorce because your business is at risk;
Deducting a miserable vacation with a client; or
Claiming your hobby was really for profit.
It’s safer to separate your business and personal lives.
5. Ignoring Timing. Just about everything in taxes is about timing. It affects when you have income and when you can claim deductions. If you push away a paycheck and say “pay me later,” it is income now. If you sign papers selling your house and then notify the seller you want to be paid next year rather than immediately. In contrast, if you sold your house now calling for the purchase price to be paid to you in January, it will be respected as long as it is in the original contract.
6. Claiming Flaky Deductions. No, I don’t mean home office deductions (though some say they are likely to be audited). I mean ones you know in your heart are quite aggressive or downright made up. You file under penalties of perjury. Sure, you might skate by. But is it worth worrying about, worth a dispute or, in an extreme case, being prosecuted? Probably not. Get some advice about your deductions if you’re unsure. But if professionals tell you not to do it, you probably shouldn’t.
7. Forgetting Foreign Income. This is a biggie. You won’t get Forms 1099 from foreign banks. If you have income from abroad, report it regardless of the amount. Even an account with less than $10,000 may have taxable interest. Interest, rent, dividends, are all taxable in the U.S. even if you are paying tax elsewhere. (If you are paying foreign taxes, you may get a credit on your U.S. taxes but must still report it.)
8. Forgetting Foreign Accounts. Once you report the interest and other income from abroad, if the total of your offshore accounts is over $10,000 in the aggregate at any time during the year, you must file an FBAR. They are due by June 30 each year, and the deadline is not extendable, even if your tax return is on extension until October 15.
9. Ignoring Entities. Whether foreign or domestic, if you own stock in a company or interests in a partnership, don’t ignore it. Apart from any forms and returns those entities must file, it often impacts your personal return as well. Just one example is Form 5471 for interests (as small as 10%) in foreign companies. If you fail to file it, the statute of limitations on your return never expires.
10. Ignoring Filing Status. Although 95% of married people file jointly, it’s not always best, especially if one may have past financial issues, they have different immigration statuses, etc. Consider it both ways before you decide.
A tax audit involves the time and expense of being examined and often a tax dispute. Avoid these common mistakes and you’ll reduce your chances of grief from the IRS.
1. Failing to Declare Income. Apart from very few special rules, everything is income to the IRS. So regardless of whether you receive a Form 1099, declare it. If the IRS audits you, it can ask for your bank records and compute income that way.
2. Sloppy Records. Maybe its karma, but keeping good records can keep you out of trouble in the first place. Most audits are by correspondence. To respond quickly and thoroughly, here’s what to do.
3. Missing Forms 1099. Much of what the IRS does is information return matching, the endless correlation of taxpayer ID numbers and payments from Form 1099-MISC, interest Form 1099-INT, and many others. Keep track of your Forms 1099. Don’t stick them in a drawer when they arrive, examine them.
If you receive an incorrect Form 1099, contact the payer, explain the error and ask if they have already sent a copy to the IRS. If not, ask them to destroy it and issue a correct one. If so, ask for a “corrected” 1099 since care with Forms 1099 helps audit-proof tax returns.
314. Commingling Business and Personal. You may do things with a dual motive like a pleasant lunch with a business colleague or boondoggle with your best customer. But your tax life will be easier if you avoid morphing personal into business, including:
Deducting the cost of your divorce because your business is at risk;
Deducting a miserable vacation with a client; or
Claiming your hobby was really for profit.
It’s safer to separate your business and personal lives.
5. Ignoring Timing. Just about everything in taxes is about timing. It affects when you have income and when you can claim deductions. If you push away a paycheck and say “pay me later,” it is income now. If you sign papers selling your house and then notify the seller you want to be paid next year rather than immediately. In contrast, if you sold your house now calling for the purchase price to be paid to you in January, it will be respected as long as it is in the original contract.
6. Claiming Flaky Deductions. No, I don’t mean home office deductions (though some say they are likely to be audited). I mean ones you know in your heart are quite aggressive or downright made up. You file under penalties of perjury. Sure, you might skate by. But is it worth worrying about, worth a dispute or, in an extreme case, being prosecuted? Probably not. Get some advice about your deductions if you’re unsure. But if professionals tell you not to do it, you probably shouldn’t.
7. Forgetting Foreign Income. This is a biggie. You won’t get Forms 1099 from foreign banks. If you have income from abroad, report it regardless of the amount. Even an account with less than $10,000 may have taxable interest. Interest, rent, dividends, are all taxable in the U.S. even if you are paying tax elsewhere. (If you are paying foreign taxes, you may get a credit on your U.S. taxes but must still report it.)
8. Forgetting Foreign Accounts. Once you report the interest and other income from abroad, if the total of your offshore accounts is over $10,000 in the aggregate at any time during the year, you must file an FBAR. They are due by June 30 each year, and the deadline is not extendable, even if your tax return is on extension until October 15.
9. Ignoring Entities. Whether foreign or domestic, if you own stock in a company or interests in a partnership, don’t ignore it. Apart from any forms and returns those entities must file, it often impacts your personal return as well. Just one example is Form 5471 for interests (as small as 10%) in foreign companies. If you fail to file it, the statute of limitations on your return never expires.
10. Ignoring Filing Status. Although 95% of married people file jointly, it’s not always best, especially if one may have past financial issues, they have different immigration statuses, etc. Consider it both ways before you decide.
Saturday, April 5, 2014
Reporting Your Investment Earnings on your Income Tax return
You call it making your money work for you. The Internal Revenue Service calls it unearned income. Regardless of the name, the tax collector wants to know how much you make each year on earnings from your savings accounts, stocks and bonds, certificates of deposit or mutual funds.
Just how you report your investment income, however, depends largely on how much you made. For many taxpayers, the process is relatively simple and requires no additional tax forms. Those who pocketed a bit more from their investments will have to give the IRS details via extra forms.
And every investor who benefits from the lower capital gains and dividend tax rates will have to pay for their tax savings by running extra computations to figure out their precise IRS bill.
Smaller earnings mean less tax filing
First, take a look at investors who have the easiest reporting route.
If your dividend and interest income is less than $1,500 in each category, you don't have to file Schedule B with your Form 1040 or Form 1040A. You simply list your interest and dividend income directly on line 8a of your 1040 or 1040A.
And don't forget to report tax-exempt interest. It won't be counted in your eventual tax calculations, but the IRS wants to know about it anyway, on line 8b of the 1040 and 1040A.
The $1,500 threshold also applies to interest income earned by Form 1040EZ filers. Previously, when the interest earnings limit was substantially smaller, taxpayers who otherwise qualified to use the simple EZ return were forced to file one of the more complex individual returns.
But now, as long as an individual meets the 1040EZ's other requirements (e.g., taxable income, filing status), that taxpayer can earn up to $1,500 in interest and still use this one-page return.
The EZ remains off limits, however, for individuals who earn dividend income. They'll have to move up to the 1040A.
2 types of dividends, 2 lines to complete
Taxpayers who are able to report dividend payments directly on their 1040 or 1040A returns also need to note that there are two lines for these earnings.
On each of these forms, ordinary dividends go on line 9a. Just below is 9b, where you'll enter any qualified dividends that are eligible for the lower tax rates. For most taxpayers, these qualified amounts on 2013 tax returns are taxed at 15% or 20%, depending on your adjusted gross income, rather than regular income tax rates that go as high as 39.6%.
The year-end tax statement for each dividend-paying investment will detail how much of your earnings to enter on line 9a and 9b.
Count interest and dividends separately
Taxpayers also must evaluate their earnings in interest and dividend categories separately to see if they can be free of some forms. The new limit is applied independently to each type of income.
So, if you received $500 in interest from a certificate of deposit and your stocks paid $1,200 in dividends, you don't have to file Schedule B even though your investment income total is $1,700. But if either category alone exceeds $1,500, you must report the amount on the appropriate schedule and send it with your return to the IRS.
Of course, to see if you need to file Schedule B, you'll have to total up the amounts from your Form 1099-INT and Form 1099 DIV. Since you have to add up your investment earnings to see if you need to report them on Schedule B, why not use Schedule B to do just that? If the totals aren't enough to require filing the appropriate investment earnings schedule, simply keep it as part of your personal tax records.
And taxpayers with bank or financial accounts in foreign countries, or who are involved in certain foreign trusts, will still have to file Schedule B regardless of interest or dividend income amounts.
Distributions also divided on the forms
What if your year-end account statement indicates you received capital gain distributions? You still might be able to escape the more complicated Schedule D, and Form 8949 to report these earnings directly on your individual return (1040 or 1040A filers only).
Capital gain distributions do not mean that you personally sold any of your holdings. Rather, asset managers sell portions of portfolios throughout the year. If these sales produce a profit, the gain is passed along to individual shareholders as capital gain distributions.
To let the IRS know of this income, Form 1040 and Form 1040A filers with no other capital gain activity can simply enter the distribution amounts on their individual tax returns.
Form 1040 taxpayers report distributions on line 13. Be sure to check the box at the end of the line so the IRS won't look for a Schedule D with your return. If you file Form 1040A, your distributions go on line 10.
Figuring your investment tax bill
Now to the ultimate goal of tax filing: determining your tax bill. When it comes to your investment earnings, you'll find that your earlier ease in reporting earnings is countermanded by a separate page of tax computations.
You probably noticed that the dividend and distribution amounts entered on line 9b are inset on each return so they're not included when you total your adjusted gross income. Rather, you must transfer these amounts, along with other entries from your return, to a work sheet found in the 1040 or 1040A instruction booklets. You'll also need the work sheet if you reported qualified capital gains distributions (line 13 on the 1040; line 10 on 1040A forms).
By variously adding and subtracting different entries transferred from your return to the work sheet, you'll eventually arrive at your correct tax bill. It definitely takes time, especially if you're still doing your taxes by hand, but you have two good reasons not to take any shortcuts here.
First, the IRS gets copies of all your earning statements so agents can double-check your amounts. If your numbers don't jibe with the statements, the IRS will certainly let you know.
But more importantly, doing the extra math can save you some tax dollars.
New net investment income tax
If, however, you are a higher-income earner, you'll end up paying a bit more for your portfolio prowess.
The 3.8% net investment income tax, or NIIT, took effect Jan. 1, 2013. This provision, which is part of the Affordable Care Act, applies to taxpayers who make more than a certain amount. The NIIT earnings thresholds are $125,000 for married taxpayers filing separate returns; $200,000 for single or head of household filers; and $250,000 for married couples filing jointly or a widow or widower with a dependent child. You also face more figuring and filing in connection with the 3.8% net investment income tax.
In these cases, you'll have to pay the surtax on either your annual net investment income or the amount that your modified adjusted gross income exceeds your income threshold. The tax applies to the lesser of those two amounts.
This NIIT is computed on Form 8960 and reported on line 60 of Form 1040.
Just how you report your investment income, however, depends largely on how much you made. For many taxpayers, the process is relatively simple and requires no additional tax forms. Those who pocketed a bit more from their investments will have to give the IRS details via extra forms.
And every investor who benefits from the lower capital gains and dividend tax rates will have to pay for their tax savings by running extra computations to figure out their precise IRS bill.
Smaller earnings mean less tax filing
First, take a look at investors who have the easiest reporting route.
If your dividend and interest income is less than $1,500 in each category, you don't have to file Schedule B with your Form 1040 or Form 1040A. You simply list your interest and dividend income directly on line 8a of your 1040 or 1040A.
And don't forget to report tax-exempt interest. It won't be counted in your eventual tax calculations, but the IRS wants to know about it anyway, on line 8b of the 1040 and 1040A.
The $1,500 threshold also applies to interest income earned by Form 1040EZ filers. Previously, when the interest earnings limit was substantially smaller, taxpayers who otherwise qualified to use the simple EZ return were forced to file one of the more complex individual returns.
But now, as long as an individual meets the 1040EZ's other requirements (e.g., taxable income, filing status), that taxpayer can earn up to $1,500 in interest and still use this one-page return.
The EZ remains off limits, however, for individuals who earn dividend income. They'll have to move up to the 1040A.
2 types of dividends, 2 lines to complete
Taxpayers who are able to report dividend payments directly on their 1040 or 1040A returns also need to note that there are two lines for these earnings.
On each of these forms, ordinary dividends go on line 9a. Just below is 9b, where you'll enter any qualified dividends that are eligible for the lower tax rates. For most taxpayers, these qualified amounts on 2013 tax returns are taxed at 15% or 20%, depending on your adjusted gross income, rather than regular income tax rates that go as high as 39.6%.
The year-end tax statement for each dividend-paying investment will detail how much of your earnings to enter on line 9a and 9b.
Count interest and dividends separately
Taxpayers also must evaluate their earnings in interest and dividend categories separately to see if they can be free of some forms. The new limit is applied independently to each type of income.
So, if you received $500 in interest from a certificate of deposit and your stocks paid $1,200 in dividends, you don't have to file Schedule B even though your investment income total is $1,700. But if either category alone exceeds $1,500, you must report the amount on the appropriate schedule and send it with your return to the IRS.
Of course, to see if you need to file Schedule B, you'll have to total up the amounts from your Form 1099-INT and Form 1099 DIV. Since you have to add up your investment earnings to see if you need to report them on Schedule B, why not use Schedule B to do just that? If the totals aren't enough to require filing the appropriate investment earnings schedule, simply keep it as part of your personal tax records.
And taxpayers with bank or financial accounts in foreign countries, or who are involved in certain foreign trusts, will still have to file Schedule B regardless of interest or dividend income amounts.
Distributions also divided on the forms
What if your year-end account statement indicates you received capital gain distributions? You still might be able to escape the more complicated Schedule D, and Form 8949 to report these earnings directly on your individual return (1040 or 1040A filers only).
Capital gain distributions do not mean that you personally sold any of your holdings. Rather, asset managers sell portions of portfolios throughout the year. If these sales produce a profit, the gain is passed along to individual shareholders as capital gain distributions.
To let the IRS know of this income, Form 1040 and Form 1040A filers with no other capital gain activity can simply enter the distribution amounts on their individual tax returns.
Form 1040 taxpayers report distributions on line 13. Be sure to check the box at the end of the line so the IRS won't look for a Schedule D with your return. If you file Form 1040A, your distributions go on line 10.
Figuring your investment tax bill
Now to the ultimate goal of tax filing: determining your tax bill. When it comes to your investment earnings, you'll find that your earlier ease in reporting earnings is countermanded by a separate page of tax computations.
You probably noticed that the dividend and distribution amounts entered on line 9b are inset on each return so they're not included when you total your adjusted gross income. Rather, you must transfer these amounts, along with other entries from your return, to a work sheet found in the 1040 or 1040A instruction booklets. You'll also need the work sheet if you reported qualified capital gains distributions (line 13 on the 1040; line 10 on 1040A forms).
By variously adding and subtracting different entries transferred from your return to the work sheet, you'll eventually arrive at your correct tax bill. It definitely takes time, especially if you're still doing your taxes by hand, but you have two good reasons not to take any shortcuts here.
First, the IRS gets copies of all your earning statements so agents can double-check your amounts. If your numbers don't jibe with the statements, the IRS will certainly let you know.
But more importantly, doing the extra math can save you some tax dollars.
New net investment income tax
If, however, you are a higher-income earner, you'll end up paying a bit more for your portfolio prowess.
The 3.8% net investment income tax, or NIIT, took effect Jan. 1, 2013. This provision, which is part of the Affordable Care Act, applies to taxpayers who make more than a certain amount. The NIIT earnings thresholds are $125,000 for married taxpayers filing separate returns; $200,000 for single or head of household filers; and $250,000 for married couples filing jointly or a widow or widower with a dependent child. You also face more figuring and filing in connection with the 3.8% net investment income tax.
In these cases, you'll have to pay the surtax on either your annual net investment income or the amount that your modified adjusted gross income exceeds your income threshold. The tax applies to the lesser of those two amounts.
This NIIT is computed on Form 8960 and reported on line 60 of Form 1040.
Friday, April 4, 2014
Terrence Rice, CPA shares tax tips for 2014
As the filing deadline looms, income tax professionals are urging residents to
not delay.
not delay.
According to Terry Rice, Milwaukee CPA, people most often delay preparing their
taxes because they’re afraid they owe money.
taxes because they’re afraid they owe money.
“The one thing I’d love for taxpayers to understand is the biggest penalty is
failure to file,” he said. “File even if you can’t pay, or if you can’t pay immediately.”
failure to file,” he said. “File even if you can’t pay, or if you can’t pay immediately.”
The IRS notes on its website that a failure-to-file penalty is generally more than the
failure-to-pay penalty. Usually, filing penalties are around 5 percent per month taxes
are unpaid, while payment failure penalties are 0.5 to one percent per month. The
IRS will work with taxpayers who have trouble making payments, like setting up
installments.
failure-to-pay penalty. Usually, filing penalties are around 5 percent per month taxes
are unpaid, while payment failure penalties are 0.5 to one percent per month. The
IRS will work with taxpayers who have trouble making payments, like setting up
installments.
As more and more taxpayers turn to software or online programs to help them
prepare taxes, Rice said he’s also noticed more calls from people wanting free
advice. But Rice urges those people to set up appointments to speak with tax
professionals instead.
prepare taxes, Rice said he’s also noticed more calls from people wanting free
advice. But Rice urges those people to set up appointments to speak with tax
professionals instead.
“It’s like calling the doctor and saying, ‘my left knee hurts, give me pain pills,’”
he said. “It’s hard, really hard, when people ask a blind question with no context.”
he said. “It’s hard, really hard, when people ask a blind question with no context.”
Rice said that with those blind questions, he doesn’t know what software the
taxpayer is using or their income complexities. His office still uses specialized
software, making it difficult for him to provide any advice. Tax preparation
software and websites usually have toll-free customer service numbers
customers can call for better assistance, he said.
taxpayer is using or their income complexities. His office still uses specialized
software, making it difficult for him to provide any advice. Tax preparation
software and websites usually have toll-free customer service numbers
customers can call for better assistance, he said.
He acknowledged these digital products are good tools for people with easy
taxes. When taxpayers run into wrinkles, however, he said it’s best to consult
a professional. They’re usually more up-to-speed on complex tax law, tax
credits and deductions. They can also help if a taxpayer received a letter
from the IRS or state after filing.
taxes. When taxpayers run into wrinkles, however, he said it’s best to consult
a professional. They’re usually more up-to-speed on complex tax law, tax
credits and deductions. They can also help if a taxpayer received a letter
from the IRS or state after filing.
“It’s scary to get a letter … but they can make mistakes, too,” he said.
“It’s good to have the assurance of someone who’s objective and will file
a letter or send papers on your behalf.”
“It’s good to have the assurance of someone who’s objective and will file
a letter or send papers on your behalf.”
Fees for tax preparation at Rice's office are comparable to H&R Block.
The Health Care Act factor
Rice also said the biggest change taxpayers can expect will actually
come next year, when the IRS begins assessing penalties for those without
health insurance. For the 2014 tax year, that penalty will be $95. The
following year, it’ll jump to $695 and keep rising annually after that.
come next year, when the IRS begins assessing penalties for those without
health insurance. For the 2014 tax year, that penalty will be $95. The
following year, it’ll jump to $695 and keep rising annually after that.
“Right now, the Affordable Care Act is a law without a lot of teeth,”
he said. “Your penalty of $100 is a lot less than the $2,400 you might
pay for the year if you carry insurance. Although, if something happens
to you, that’s the other piece.”
he said. “Your penalty of $100 is a lot less than the $2,400 you might
pay for the year if you carry insurance. Although, if something happens
to you, that’s the other piece.”
Terry Rice can be reached at 414-507-2414..
Thursday, April 3, 2014
List of Available Tax Deductions That Landlords can Take Advantage of Before Tax Day
As April 15 nears, The National Association of Independent Landlords urges landlords to learn about and take advantage of the many tax write-offs that could save them money on tax day. “Every legitimate deduction a landlord takes means more money in their bank account,” said Tracey Benson, president of The National Association of Independent Landlords. “Tax deductions can determine whether a landlord makes or loses money, so it’s vital they understand some of the often overlooked write-offs. Even if they have already submitted their taxes, they should consider refiling if they find something significant.”
An accountant can identify more deductions, but here is a starting list:
MONTHLY/ANNUAL FEES
- Interest on money borrowed for the investment.
Insurance.
- State and local property taxes.
- Professional memberships.
- Monthly homeowner or condo dues.
- Utilities, garbage collection and lawn care.
KEEPING THE PROPERTY IN GOOD WORKING ORDER
- Repairs to make the property handicapped accessible or keep it in its original condition.
- Rental equipment for repairs.
AUTO AND TRAVEL
- Property-related mileage (trips to collect rent, for example) at 56.5 cents per mile.
- Out-of-town transportation, lodging and meals to show or work on a property.
- Tolls, parking, state registration, fees and taxes.
ONE OFFS
- At least partial damage from a fire, flood or other catastrophe.
- Mortgage fees.
PERSONNEL
- Money paid to employees, contractors, lawyers, accountants and property managers.
OUT OF POCKET EXPENSES
- Advertising and costs related to tenant screening.
- Cleaning. If a relative is paid to do the work, make sure the proper tax forms are filed.
- Almost anything paid to resolve a pertinent tax underpayment.
- Telephone calls related to the rental business.
- Office supplies.
- Home office if it’s the primary place of business and is a set-aside location.
Important to remember: landlords filing for an extension have until October 15 to submit their paperwork, but they must pay any money due by April 15.
For a landlord to claim property as a rental, they generally cannot use it for personal use for more than 14 days a year, though conditions apply.
An accountant can identify more deductions, but here is a starting list:
MONTHLY/ANNUAL FEES
- Interest on money borrowed for the investment.
Insurance.
- State and local property taxes.
- Professional memberships.
- Monthly homeowner or condo dues.
- Utilities, garbage collection and lawn care.
KEEPING THE PROPERTY IN GOOD WORKING ORDER
- Repairs to make the property handicapped accessible or keep it in its original condition.
- Rental equipment for repairs.
AUTO AND TRAVEL
- Property-related mileage (trips to collect rent, for example) at 56.5 cents per mile.
- Out-of-town transportation, lodging and meals to show or work on a property.
- Tolls, parking, state registration, fees and taxes.
ONE OFFS
- At least partial damage from a fire, flood or other catastrophe.
- Mortgage fees.
PERSONNEL
- Money paid to employees, contractors, lawyers, accountants and property managers.
OUT OF POCKET EXPENSES
- Advertising and costs related to tenant screening.
- Cleaning. If a relative is paid to do the work, make sure the proper tax forms are filed.
- Almost anything paid to resolve a pertinent tax underpayment.
- Telephone calls related to the rental business.
- Office supplies.
- Home office if it’s the primary place of business and is a set-aside location.
Important to remember: landlords filing for an extension have until October 15 to submit their paperwork, but they must pay any money due by April 15.
For a landlord to claim property as a rental, they generally cannot use it for personal use for more than 14 days a year, though conditions apply.
Wednesday, April 2, 2014
Questions Every Tax Pro Gets Asked in Filing Season
Our tax code is long and complex. Even tax professionals have to work to stay informed and up to date about all the changes.
Over my nearly three decades as a tax professional, there is a core set of questions that I undoubtedly will get asked every year as April 15 approaches.
Question: Can I write off my business suits? I only wear them to work. What about my haircuts?
I’ve seen professional tax preparers take deductions for clothing and haircuts on tax returns—and they shouldn’t. General grooming is not a deductible expense.
I understand that most of us have to look nice for work; and believe me, if work clothes were tax deductible, I’d be filling my closest with Manolo Blahnik shoes and Gucci apparel. The tax savings alone would be comparable to buying the items on sale. But Uncle Sam doesn’t allow professional attire as a write off.
However, there are some exceptions: When it comes to clothing, costumes that are used in the normal course of your business, but are not suitable for street wear are deductible. This generally applies to performers and musicians. Also deductible are protective gear, uniforms, and clothing emblazoned with the name of your company.
A carpenter may write off his steel-toed boots, his “Bob’s Construction” T-shirt, and any tool bags. He cannot take a deduction for the cost of his blue jeans – even if he wears them only for work. I once encountered an auditor who told me he actually allowed the blue jeans expense for a contractor because he “felt sorry for the guy.” There are so many shades of gray in the tax code it often depends on the mood of the auditor you come up against and his/her perspective and interpretation of the tax code. But don’t count on it. Rules are rules.
I recently (for the first time) took a deduction for a client for a haircut. He’s a lieutenant in the navy and the buzz cut is a “requirement of his employer.” This form of intent supports this as an appropriate employee business deduction. Whether or not it would fly in audit remains to be seen.
Question: Can I deduct the federal income tax I pay every year?
No, you cannot deduct federal income tax. But if you itemize deductions, you are allowed to write off the amounts you pay in state income taxes. This includes state income tax withheld from wages, state disability premiums withheld from your pay, estimated tax payments made during the tax year as well as state income tax payments for the prior year income tax return or any other prior years.
For example, come April 15, 2013, you may have had to pay a state income tax liability for your 2012 tax return due that day. You may list this as a deduction for 2013. And in January of 2013 you may have paid installment 4 of your 2012 state income tax. This is also a deduction for 2013. You may also have been audited for 2010 and owe the state an additional tax liability which you paid during 2013. Take this as a deduction as well.
I find the taxes section of Schedule A to be the most omitted when clients dig for their deductions. I would estimate close to 75% of my clients fail to bring me their vehicle registration fees and some forget all about their property taxes. Did you know that if you own property in a foreign country you can write off the property taxes you pay there?
Question: I’m thinking about buying a house this year but I will have to pay private mortgage insurance (PMI). Is that deductible?
This particular deduction has come and gone a few times over the years. For 2013, PMI is a write off. However, this is one of the 55 tax provisions that expired at the end of 2013 and has yet to be renewed by Congress.
Even if your PMI is not deductible, run the numbers to determine if buying a house will save you tax dollars in the long run. Most of the time owning a home is a wise investment from a tax-planning point of view. Then if the deduction is renewed, you will be all that much better off.
Over my nearly three decades as a tax professional, there is a core set of questions that I undoubtedly will get asked every year as April 15 approaches.
Question: Can I write off my business suits? I only wear them to work. What about my haircuts?
I’ve seen professional tax preparers take deductions for clothing and haircuts on tax returns—and they shouldn’t. General grooming is not a deductible expense.
I understand that most of us have to look nice for work; and believe me, if work clothes were tax deductible, I’d be filling my closest with Manolo Blahnik shoes and Gucci apparel. The tax savings alone would be comparable to buying the items on sale. But Uncle Sam doesn’t allow professional attire as a write off.
However, there are some exceptions: When it comes to clothing, costumes that are used in the normal course of your business, but are not suitable for street wear are deductible. This generally applies to performers and musicians. Also deductible are protective gear, uniforms, and clothing emblazoned with the name of your company.
A carpenter may write off his steel-toed boots, his “Bob’s Construction” T-shirt, and any tool bags. He cannot take a deduction for the cost of his blue jeans – even if he wears them only for work. I once encountered an auditor who told me he actually allowed the blue jeans expense for a contractor because he “felt sorry for the guy.” There are so many shades of gray in the tax code it often depends on the mood of the auditor you come up against and his/her perspective and interpretation of the tax code. But don’t count on it. Rules are rules.
I recently (for the first time) took a deduction for a client for a haircut. He’s a lieutenant in the navy and the buzz cut is a “requirement of his employer.” This form of intent supports this as an appropriate employee business deduction. Whether or not it would fly in audit remains to be seen.
Question: Can I deduct the federal income tax I pay every year?
No, you cannot deduct federal income tax. But if you itemize deductions, you are allowed to write off the amounts you pay in state income taxes. This includes state income tax withheld from wages, state disability premiums withheld from your pay, estimated tax payments made during the tax year as well as state income tax payments for the prior year income tax return or any other prior years.
For example, come April 15, 2013, you may have had to pay a state income tax liability for your 2012 tax return due that day. You may list this as a deduction for 2013. And in January of 2013 you may have paid installment 4 of your 2012 state income tax. This is also a deduction for 2013. You may also have been audited for 2010 and owe the state an additional tax liability which you paid during 2013. Take this as a deduction as well.
I find the taxes section of Schedule A to be the most omitted when clients dig for their deductions. I would estimate close to 75% of my clients fail to bring me their vehicle registration fees and some forget all about their property taxes. Did you know that if you own property in a foreign country you can write off the property taxes you pay there?
Question: I’m thinking about buying a house this year but I will have to pay private mortgage insurance (PMI). Is that deductible?
This particular deduction has come and gone a few times over the years. For 2013, PMI is a write off. However, this is one of the 55 tax provisions that expired at the end of 2013 and has yet to be renewed by Congress.
Even if your PMI is not deductible, run the numbers to determine if buying a house will save you tax dollars in the long run. Most of the time owning a home is a wise investment from a tax-planning point of view. Then if the deduction is renewed, you will be all that much better off.
Tuesday, April 1, 2014
Ten examples for many happy 2013 income tax returns in the next 15 days
FROM cpapracticeadvisor.com
With about two weeks to go in tax filing season, the procrastinators are finally starting to contact your office. Usually, they’ve postponed the inevitable because they fear they’ll be entitled to only a miniscule refund or they will have to ante up to Uncle Sam.
But you can still “save the day” for clients by proposing some deft tax moves, including use of a number of special elections or strategies. Here are ten prime examples for many happy 2013 returns.
1. State tax deductions. Unless you live in a state that doesn’t have its own income tax, you face a choice on your 2013 tax return: Deduct your state and local income taxes or the state sales tax you paid. Figure out which one produces a bigger deduction. Note: You can add the sales tax paid on qualified big-ticket items – including boats, cars and homebuilding materials – to the IRS table amount, so that might tip the scales.
2. Higher education expenses. Clients may benefit from one of the tax credits for paying higher education expenses – the American Opportunity Tax Credit or the Lifetime Learning Credit – or a deduction for tuition and fees, but not both. Each of these tax breaks is subject to a phase-out based on modified adjusted gross income (MAGI). Again, you must crunch all the numbers to determine the best alternative for a client’s situation.
3. Home office deduction. For the first time ever, the IRS approved a simplified method for deducting home office expenses on 2013 returns, up to a maximum of $1,500. In most cases, the solution is simple, too: Don’t do it! Usually, deducting actual home office costs and a percentage of overall household expenses, as well as depreciation, is preferable as long as you have records to support the write-off.
4. IRA contributions. By contributing up to $5,500 to a traditional IRA by the tax return due date ($56,500 if age 50 or over), you can still reduce your tax liability for 2013, even though the year is over. But the contribution must be made by April 15th whether or not you’ve requested a filing extension. Also, deductions are phased out for upper-income taxpayers if your MAGI exceeds a specified level and you (or your spouse, if married) actively participate in an employer-sponsored retirement plan.
5. SEP contributions. A small business owner can use the same basic strategy as IRA holders with greater impact through a Simplified Employee Pension (SEP). For 2013, you can contribute up to the lesser of 25% of compensation or $51,000 ($56,500 if age 50 or over). The maximum compensation taken into account is $255,000. To top it off, you can wait until as late as October 15th to make a deductible contribution if you have a filing extension.
6. Section 179 deductions. If you placed qualified business assets in service in 2013, you’re allowed to currently deduct, or “expense” up to $500,000 of the cost under Section 179 of the tax code. This generous write-off is reduced on a dollar-for-dollar basis above $2 million – not a problem for most small business owners. Caveat: The Section 179 deduction can’t exceed your taxable business income.
7. Bonus depreciation. This is the cherry on top of the tax icing for some small business owners. For qualified assets placed in service in 2013, you can claim 50% bonus depreciation on any remaining balance after taking the Section 179 write-off. This extra tax break is especially beneficial for vehicles with limited first-year deductions due to the “luxury car” rules.
8. Standard mileage rates. In lieu of deducting actual expenses of driving a business car – or for medical, moving or charitable reasons – you can use a flat rate amount. The standard mileage rate for business driving in 2013 is 56.5 cents per mile; 24 cents per mile for medical and moving expenses; and 14 cents per mile for charitable travel. But your actual expenses will generally produce a bigger deduction if records are available.
9. Investment interest. As a general rule, you may deduct annual investment interest expenses up to the amount of net investment income. For this purpose, “net investment income” doesn’t include capital gains. However, you can elect to include capital gains in the total — thus increasing your investment interest deduction – if you forego the favorable capital gains rate on certain gains. This election can made for as many or as few gains as needed.
10. Joint vs. separate filing. Despite the “marriage penalty,” a married couple usually benefits from filing a joint tax return. However, in some cases they may fare better y filing separately. For instance, a couple may save tax if one spouse has an exceptionally large portion of the couple’s medical or miscellaneous expenses, due to the “floors” limiting those deductions. Caveat: This decision affects other aspects of the return, so consider all the ramifications.
With about two weeks to go in tax filing season, the procrastinators are finally starting to contact your office. Usually, they’ve postponed the inevitable because they fear they’ll be entitled to only a miniscule refund or they will have to ante up to Uncle Sam.
But you can still “save the day” for clients by proposing some deft tax moves, including use of a number of special elections or strategies. Here are ten prime examples for many happy 2013 returns.
1. State tax deductions. Unless you live in a state that doesn’t have its own income tax, you face a choice on your 2013 tax return: Deduct your state and local income taxes or the state sales tax you paid. Figure out which one produces a bigger deduction. Note: You can add the sales tax paid on qualified big-ticket items – including boats, cars and homebuilding materials – to the IRS table amount, so that might tip the scales.
2. Higher education expenses. Clients may benefit from one of the tax credits for paying higher education expenses – the American Opportunity Tax Credit or the Lifetime Learning Credit – or a deduction for tuition and fees, but not both. Each of these tax breaks is subject to a phase-out based on modified adjusted gross income (MAGI). Again, you must crunch all the numbers to determine the best alternative for a client’s situation.
3. Home office deduction. For the first time ever, the IRS approved a simplified method for deducting home office expenses on 2013 returns, up to a maximum of $1,500. In most cases, the solution is simple, too: Don’t do it! Usually, deducting actual home office costs and a percentage of overall household expenses, as well as depreciation, is preferable as long as you have records to support the write-off.
4. IRA contributions. By contributing up to $5,500 to a traditional IRA by the tax return due date ($56,500 if age 50 or over), you can still reduce your tax liability for 2013, even though the year is over. But the contribution must be made by April 15th whether or not you’ve requested a filing extension. Also, deductions are phased out for upper-income taxpayers if your MAGI exceeds a specified level and you (or your spouse, if married) actively participate in an employer-sponsored retirement plan.
5. SEP contributions. A small business owner can use the same basic strategy as IRA holders with greater impact through a Simplified Employee Pension (SEP). For 2013, you can contribute up to the lesser of 25% of compensation or $51,000 ($56,500 if age 50 or over). The maximum compensation taken into account is $255,000. To top it off, you can wait until as late as October 15th to make a deductible contribution if you have a filing extension.
6. Section 179 deductions. If you placed qualified business assets in service in 2013, you’re allowed to currently deduct, or “expense” up to $500,000 of the cost under Section 179 of the tax code. This generous write-off is reduced on a dollar-for-dollar basis above $2 million – not a problem for most small business owners. Caveat: The Section 179 deduction can’t exceed your taxable business income.
7. Bonus depreciation. This is the cherry on top of the tax icing for some small business owners. For qualified assets placed in service in 2013, you can claim 50% bonus depreciation on any remaining balance after taking the Section 179 write-off. This extra tax break is especially beneficial for vehicles with limited first-year deductions due to the “luxury car” rules.
8. Standard mileage rates. In lieu of deducting actual expenses of driving a business car – or for medical, moving or charitable reasons – you can use a flat rate amount. The standard mileage rate for business driving in 2013 is 56.5 cents per mile; 24 cents per mile for medical and moving expenses; and 14 cents per mile for charitable travel. But your actual expenses will generally produce a bigger deduction if records are available.
9. Investment interest. As a general rule, you may deduct annual investment interest expenses up to the amount of net investment income. For this purpose, “net investment income” doesn’t include capital gains. However, you can elect to include capital gains in the total — thus increasing your investment interest deduction – if you forego the favorable capital gains rate on certain gains. This election can made for as many or as few gains as needed.
10. Joint vs. separate filing. Despite the “marriage penalty,” a married couple usually benefits from filing a joint tax return. However, in some cases they may fare better y filing separately. For instance, a couple may save tax if one spouse has an exceptionally large portion of the couple’s medical or miscellaneous expenses, due to the “floors” limiting those deductions. Caveat: This decision affects other aspects of the return, so consider all the ramifications.
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