Monthly Archives: November 2014

The Dark Side of Simplified Home Office Deduction

by Alex Franch, Tax Specialist

2014_11_26 the Dark Side medium_13658502903In 2013, the IRS implemented an optional simplified method of calculating the Home Office Deduction. The intention was to reduce the paperwork and record keeping burden on small businesses. Limited and capped at $1,500 per year, it is based on a standard square footage amount of five dollars for up to 300 square feet.  Thus, the simple calculation is $5 x sqft, up to $1500.  Taxpayers using the new option will deduct no depreciation. Mortgage interest and real estate taxes will be Itemized deductions (Schedule A).

Sounds simple, right? However, there are some limitations for home office deductions:

  1. The amount of deduction is limited to the amount of business profit, excluding the home office deduction. This is no different from the actual cost method of calculation.
  2. BUT for any unused home office deduction there is no carryover to future years when your business produces a profit. The actual cost method, of course, could be carried forward to offset income in future years.

NOTE:  The simplified option does not change the criteria for claiming a home office deduction.
For example, the home office must be used regularly and exclusively for business purposes. The election to use either calculation option is irrevocable once chosen for a year but can be changed each year.

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photo credit: Glenn Brown via photopin cc

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Alimony: Bounty After Mutiny

by Alex Franch, Tax Specialist

Divorces can get pretty ugly, and alimony can feel like a bounty after mutiny. After all, money is often on the top of the agenda. Kids are expensive, so let’s lump them in with the topic of money as well.

Qualifying Alimony Payments

medium_8213432552Here are some basic items that qualify as alimony:

  • You and your spouse or former spouse do not file a joint return with each other
  • You pay in cash (including checks or money orders)
  • The payment is received by (or on behalf of) your spouse or former spouse
  • If legally separated under a decree of divorce or separate maintenance, you and your
    former spouse are not members of the same household when you make the payment.
  • You have no liability to make the payment (in cash or property) after the death of
    your spouse or former spouse
  • Your payment is not treated as child support or a property settlement

Non-Qualifying  Alimony Payments

Here are payments that do not qualify:

  • Child support
  • Non-cash property settlements
  • Payments that are your spouse’s part of community property income
  • Payments to keep up the payer’s property
  • Use of the payer’s property

What About Property Settlements?

Here is the interesting part of all of the alimony information, property settlements do not qualify and it sometimes happens that alimony can drop. When this happens, the IRS can go back and disallow some of the alimony payments because it considers them to be a property settlement. Divorce can indeed be expensive.

If my loving wife ever reads this, she should know that whatever happens, she would have to
pry the dog from my cold dead hands.

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photo credit: StockMonkeys.com via photopin cc

 

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Steep Long Term Care Costs Await Seniors: Tax Deductibles Help Abate the Price Tag

By Thomas J. Holmes, JD
Chief Tax Specialist, Co-Founder, and Partner at Joseph Cahill & Associates / WorthTax

medium_4083393337Seniors often face the prospect of entering a nursing home to receive long-term care. At other times, the senior will remain at home and receive some type of assistance with his or her everyday activities. Both of these options can involve considerable expense to the senior. As a result, care should be taken to claim every tax deduction available in these situations to help abate the costs.

Deductible expenses include the entire costs for medical care, meals and lodging for a nursing home resident, provided that the main reason for being in the nursing home is to obtain medical care. Otherwise, only the portion of the expense actually spent on medical care is deductible. For a senior receiving services at home, maintenance and personal care expenses, such as cooking and cleaning, are deductible.

In both situations, the person receiving the services must be a chronically ill patient and the services must be prescribed by a licensed health care practitioner. A chronically ill patient is (1) one unable to perform at least two of the following daily tasks without substantial assistance from another person for a period of at least 90 days: eating, toileting, transferring, bathing, dressing and continence or (2) one requiring substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

The person providing the services need not be a registered or trained nurse, but if the service provider is a spouse, child or parent of the patient, such relative must be licensed to provide such services.

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photo credit: ulrichkarljoho via photopin cc

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What Types of Taxes Are You Paying?

by Alex Franch, Tax Specialist

What types of taxes are you paying? Or another way to ask this is, what are the different types of taxes are you paying?

1. Federal income tax (The more you make the more they take)

The-more-you-make-the-more-they-take

FIT is a progressive tax. The rate of taxation increases along with your income.  If you (married, 2 kids, house, mortgage) are making $100k & your tax is $5,316, FIT doesn’t seem so bad.  Your kids, real estate taxes, and mortgage are all subsidized.  Let’s fast forward a couple of years and things are going really well.  You landed a killer job and scores a few raises and you are now making $200k.  Your tax did not double, nor did it triple, in fact, you tax went up by nearly a magnitude of six to $30,422.  Your marginal tax rate may show 25% but it is really 30% because all that stuff being subsidized is being phased out.

2. Old-Age, Survivors, and Disability Insurance (OASDI aka Social Security)

SS tax is a regressive tax and it applies on an individual basis rather than household as the FIT.  You as an individual only pay on the first $117k of your income and then you are done for the year.  If you made $117k and your spouse made another $117k, you paid just as much in SS tax as Warren Buffet and Bill Gates combined.

3. Medicare Tax (was flat, now not so much)

Medicare tax was traditionally a flat 1.45% on your earned income.  This last year it was expanded to include an additional 0.9% above certain incomes and 3.8% on certain types of passive income.

4. Capital Gains (including LT, ST, recapture, etc.)

This tax is like a game of ‘whack-a-mole’  Capital gains often depend on two things, the length of time an asset is held AND the type of asset.  I can think of the following rates: 0%, 5%, 15% 18.8%, 20%, 23.8%, 25%, 28%, and all the FIT rates which may apply.  This is what compromise looks like.

5. Alternative Minimum Tax

Everyone who wanted a ‘flat’ tax and got it now hates it.  There are only two rates, 26%, and 28% so on the face, it seems like a fairly flat tax.  However, your marginal rate can be as high as 35% because all your write-off’s are being phased out.

6. State income taxes (not so united)

By my last count, we have 7 states with no income tax, 36* states (including DC) with a progressive income tax, 6 states with a flat tax (including Massachusetts), and 2 states (Tennessee and New Hampshire) that tax just dividends and some other miscellaneous items.

*4 of these states have the top tax rate that begins under $10k which would make them almost ‘flat.’

7. Sales Tax

Let’s classify every type of transaction and assess a different rate on each depending on where you are and where you live.  Also, let’s make sure businesses have to report on a monthly basis.  Also, you may have to report this on your personal tax return depending on where you bought stuff and where you keep that stuff.

8. Other Use Taxes (Real Estate, excise, etc)

I guess you kind of get what you pay for on this.

I’m sure I am missing another few dozen taxes that we pay on a regular basis.  I also haven’t touched upon corporate, trust, or estate taxes.  Please feel free to write in if you hear of any interesting taxes out there.

 

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How Cancellation of Debt Becomes Tax Free – Federal vs. Massachusetts

 by Cindy Toran, Tax Manager

cancelled-debtHow does cancellation of debt become tax free? Is Federal versus Massachusetts different?

Generally debt forgiveness for a borrower who is personally liable on a loan is taxable income unless one of the following exceptions applies per Federal tax law:

  1. Occurs under Title 11 bankruptcy
  2. Occurs when the taxpayer is insolvent (Debts greater than Assets)
  3. Is qualified farm indebtedness
  4. Is qualified real property business indebtedness (other than C-corporations)
  5. Is qualified principal residence acquisition debt (up to $2M for MFJ) – expired December 31, 2013

Massachusetts, however, did not adopt the exclusion for mortgage forgiveness on principal residence.  Thus, for home mortgage cancellation of debt only one of the first 4 exceptions listed above will prevent the debt forgiveness from being subject to MA income tax.

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