Every year, the Internal Revenue Service announces the optional standard mileage reimbursement rates. The IRS uses these rates to calculate the deductible costs of operating a vehicle for business, charitable, medical or moving purposes. Inflation is the primary reason why mileage reimbursement rates are have been adjusted for 2017. Continue reading
Have you ever considered your time-share use as a charitable deduction? If you have ever attended a charity auction, it is not uncommon. Often you may see a week’s use of a time-share included in the items donated for auction. The time-share owners who donate these weeks do so in hoping to be able to take charitable donation deduction on their tax returns. Continue reading
Did you forget something when you filed your tax return? Maybe overlooked something? Alimony income? Tip Income? Maybe another item of income? Maybe you forgot to claim a deduction or credit? It’s not too late! The good news! File an amended tax return. Continue reading
Mortgage Interest and Home Mortgage Tax Deduction is not all it may seem. One of the current IRS audit initiatives is checking to see if taxpayers are deducting too much home equity debt interest. Taxpayers are allowed to deduct the interest on up to $1 million of home acquisition debt. This debt includes debt incurred to make improvements, but not repairs. It also includes the interest on up to $100,000 of home equity debt. Equity debt is debt not incurred to acquire or improve the home. Taxpayers often exceed the equity debt limit. They fail to adjust their interest deduction accordingly.
The best way to explain this interest deduction limitation is by example. Let’s assume you have never refinanced the original loan that was used to purchase your home, and the current principal balance of that acquisition debt is less than $1 million. However, you also have a line of credit on the home. The debt on that line of credit is treated as equity debt. If the balance on that line of credit is $120,000, then you have exceeded the equity debt limitation. This debt is only 83.33% ($100,000/$120,000) of the equity line interest. It is deductible as home mortgage interest on Schedule A. The balance is not deductible unless you can trace the use of the excess debt to either investment or business use. If traceable to investments, the interest you pay on the amount traceable would be deductible as investment interest. This is deducted on Schedule A but is limited to an amount equal to your net investment income (investment income less investment expenses). If the excess debt was used for business, you could deduct the interest on that excess debt on the appropriate business schedule.
Secured or Not Secured
On the other hand, the IRS allows you to elect to treat the equity line debt as “not secured.”. This allows the interest on the entire equity debt to be traced to its use, as well as, if it was deducted on the appropriate schedule. For instance, you borrow from the equity line for a down payment on a rental. If you make the “not secured” election. The interest on the amount borrowed for the rental down payment would be deductible on the Schedule E rental income and expense schedule. But it would not be subject to the home equity debt limitations.
However, one of the rules that allows home mortgage interest to be deductible is it must be secured by the home. If the unsecured election is used, none of the interest can be traced back to the home itself. What if the equity line was used partly for the rental down payment and partially for personal reasons? The interest associated with the personal portion of the loan would not be deductible since you elected to treat it as not secured by your home.
Using the unsecured election can have unexpected results in the current year and in the future. You should use that election only after consulting with this office. We admit, it can get confusing for people who are not familiar with the complicated rules associated with home mortgage interest. They may think that the interest shown on the Form 1098, issued by their lenders at the end of the year, is fully deductible. In many cases, when taxpayers have refinanced or have equity loans, that may be far from the truth. It could result in an IRS inquiry and potential multi-year adjustments. In fact, for Forms 1098 issued after 2016 (thus effective for 2016 information), the IRS will require lenders to include additional information, including:
1) the amount of the outstanding mortgage principal as of the beginning of the calendar year,
2) the mortgage origination date, and
3) the address of the property securing the mortgage
This information will provide the IRS additional tools for audits.
When in doubt about mortgage interest rules, ask:
When in doubt about how much interest you can deduct. Or, if you have questions about how refinancing. Or, questions about taking on additional home mortgage debt and how it will impact your taxes? Please call Alex for assistance.
In our last post we talked about, ages 0-49 birthday surprises from Uncle Sam. This week, ages 50 and up get to discover their birthday gifts or surprises from the IRS when you file your tax return next tax season. As we mentioned, in some situations the gift may not be because you reached a certain age, but will be the result of the age your dependent(s) or spouse turned this year. Unfortunately, not all of Uncle Sam’s gifts will be welcomed on this birthday, because some birthdays mark the end of eligibility for certain credits or exclusions of income. Others signal the start of needing to include retirement benefits in income.
A Birthday Over 50
Age 50 – Are you a qualified public safety employee, such as a police officer or fireman who separates from service after age 50? Did you take a distribution from your government employer’s defined benefit pension plan? You should know that the 10% early withdrawal penalty will not apply.
Age 55 – If you take a distribution from your employer’s qualified retirement plan after separation from service in or after the year you reach age 55, the distribution is not subject to the 10% penalty that usually applies when distributions are taken before age 59-1/2. To qualify for this exception to the penalty, you must be age 55 or older, and then separate from employment. This provision does not apply to IRAs.
Age 59-1/2 – The half birthday is just as important to pay attention to. Once you have reached age 59-1/2, distributions from your qualified retirement plans and traditional IRAs are no longer considered to be early distributions. Therefore, the distributions are not subject to the 10% early withdrawal penalty. However, in most cases, all of the distribution amount is included as your income and will be taxed.
Age 62 – Many individuals opt to start receiving their Social Security benefits on this birthday. The benefit will be at a reduced amount than if they had waited until they reached full retirement age. Full retirement is when they first become eligible to receive the payments, generally at age 62. If this is your first year for collecting SS benefits, whether at age 62 or another age, you may be surprised to learn that part of the benefits may be taxable. Depending on your other income and filing status, 50% to 85% of the benefits may be taxable.
Age 65 – As mentioned above, starting with the year you reach age 65, you are eligible for an additional standard deduction amount. For 2015, the extra amount is $1,550 for a taxpayer filing as single or head of household or $1,250 for those filing married joint, married separate or a qualifying widow or widower. There is no extra deduction if you itemize your deductions. If you file a joint return for you and your spouse, if he or she is also age 65 or older, you are each allowed the additional amount.
Through 2016, if you itemize deductions and either you or your spouse, filing a joint return, and you are age 65 by the end of the year, you need to reduce your medical expenses by only 7.5% of adjusted gross income. This is instead of the 10% reduction rate that applies to other taxpayers. If you are subject to the alternative minimum tax, only medical expenses exceeding 10% of your regular AGI are deductible for the AMT computation.
If you have been claiming the earned income credit without having a dependent child, you will no longer be eligible for the credit starting in the year you turn 65.
Contributions to a health savings account (HSA) are not permitted once you are entitled to benefits under Medicare. This means you are eligible for and have enrolled in Medicare. Most individuals become Medicare eligible and enroll at age 65. Contributions to the HSA may continue until the month you are actually enrolled in Medicare.
Age 70-1/2 – Remember that half birthday comment above? If you turned 70-1/2 in 2015, distributions from your traditional IRA must begin by April 1, 2016. Otherwise, a minimum distribution penalty can apply. You must continue to take distributions annually. Not only must you take distributions after turning 70-1/2, the law specifies how the minimum distribution is to be calculated. You may take a larger distribution, but the amount in excess of the required minimum distribution amount cannot be used to reduce future required distributions. You are considered age 70-1/2 on the date that is 6 calendar months after the 70th anniversary of your birth.
In general, if you are or were an employee whose employer has a qualified plan, distributions from the qualified plan must begin no later than April 1 of the year following the year in which you reach age 70-1/2 or (except if you are a 5 percent owner), if later, you retire. This “retirement, if later” exception does not apply to IRAs.
If you were required to take your first distribution in 2015 but delay the withdrawal until April 1 of 2016, you will then have two distributions to include in your 2016 income, since the regular 2016 distribution must be taken by December 31 of that year. You cannot make a contribution to a traditional IRA for the year in which you reach age 70 1/2 or for any later year. Contributions to Roth IRAs, however, are allowed regardless of age on your birthday, provided you have wages, self-employment income or alimony income.
Are you Celebrating a Birthday Milestone?
If you or a member of your tax family celebrated a milestone birthday (or half-birthday) this year and you have questions as to how the tax implications of that event will affect your return, please give Alex Franch, BS EA a call at 781-849-7200.
On June 26, the Supreme Court ruled that the Fourteenth Amendment to the Constitution requires all states to license marriages between two people of the same sex. It also required that all same-sex marriages performed in other states are recognized in every state in the USA. This comes approximately two years after the Supreme Court overturned the Defense of Marriage Act (DOMA) enacted by Congress and signed by then President Bill Clinton. DOMA defined marriage as “legal union between one man and one woman as husband and wife.”
This has wide-range implications for married individuals who reside in states that until now have not recognized same-sex marriage. Also, for those who can now marry in their state, including employer-provided employee and spousal benefits, retirement issues, Social Security benefits, and of course tax issues.
Since DOMA was overturned, legally married same-sex couples have been required to file their federal returns as “married,” but they have had to file their state returns as single or head of household status if their state did not recognize their marriage as legal. That will now change. They will now be able to file using the married status for their state returns as well.
Tax Breaks Available to Legally Married Same-Sex Couples
Being married for tax purposes is not always beneficial. It depends on a number of circumstances. The following are some of the tax breaks available to legally married same-sex couples:
- The right to file a joint return, which can produce a lower combined tax than the total tax paid by same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners or one or both previously qualified to file as head of household);
- The opportunity to get tax-free employer-paid health coverage for the same-sex spouse;
- The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;
- The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse;
- The opportunity for the estate of the spouse who dies first to transfer the deceased spouse’s unused exclusion amount to the surviving spouse;
- The opportunity to consent to make “split” gifts (i.e., gifts to others treated as if made one-half by each); and
- The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for non-spousal beneficiaries.
There is a negative side as well.
Many same-sex married couples, especially higher-income ones, may find that filing as married has unpleasant income tax outcomes. Divorcing before the end of the year can fix that. However, before employing that strategy, a couple needs to consider the other financial benefits of being married. The following issues are commonly encountered by same-sex married couples.
- A taxpayer who is married and living with his or her spouse cannot file using head of household filing status. So a same-sex spouse (or both) who previously qualified for and filed a federal return using the head of household status will no longer file as head of household. Instead, the same-sex couple will file as married using the joint or separate status. This will generally result in higher taxes.
- When filing as unmarried, one individual can take the standard deduction and the other can itemize. As married individuals, they must choose between the two. This could substantially reduce their overall deductions. If a same-sex couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.
- As unmarried individuals, same-sex partners were able to adopt each others children and claim the adoption credit. As married individuals they can no longer do that.
For those who are registered domestic partners (RDPs) in California, the Supreme Court’s recent ruling does not address the IRS’s position that these individuals are not legally married and therefore not eligible to file as married. Unless IRS changes its interpretation, RDPs will still not be able to file as married for federal purposes.
Contemplating a Same-Sex Marriage?
Are you thinking about a same-sex marriage? Do you live in a state that previously did not recognize same-sex marriage? Do you wish to explore the tax consequences of now filing as married individuals? Call Alex a call at 781-848-7200.
– – – – – –
photo credit: Supreme Court of the United States via photopin (license)
– – – – – –
– – – – – –
Whether an activity is a hobby or a business may not be apparent to the customers of the endeavor. However, distinguishing the difference is necessary for tax purposes. Why? Because the tax treatments are substantially different. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or if it is engaged in as a hobby.
Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”
This article provides information that is helpful to determine if an activity qualifies as an activity engaged in for profit. It also addresses what limitations apply if the activity was not engaged in for profit.
Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.
The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed to be engaged in for profit if it makes a profit in at least three of the last five tax years. This includes the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
If it is determined that your activity is not for profit, allowable deductions cannot exceed the gross receipts for the activity.
Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of the three categories:
- Expenses that a taxpayer would otherwise be allowed to deduct, such as home mortgage interest and taxes, may be taken in full.
- Deductions that do not result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category.
- Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories.
Do you have questions about your endeavor, if it is a hobby or a business?
If you have questions related to your specific business or hobby circumstances, please give please give Alex a call at 781-848-7200. You are also welcome to leave a comment below or on our Facebook or Google+ page. Either way, Alex can help you sort through the tax treatments for what you do.
Many of us have taken out a home loan. It is not uncommon for individuals to loan money to relatives to help them buy a home. In those situations, it is also not uncommon for a loan to be undocumented or documented with an unsecured note. The unintended result is that the home buyer cannot claim a tax deduction for the home loan interest paid on the loan given by their helpful relative.
The tax code describes qualified residence interest as interest paid or accrued during the tax year. This is on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. It also provides that the term “acquisition indebtedness” means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. There are also limits on the amount of debt and number of qualified residences that a taxpayer may have for purposes of claiming a home mortgage interest tax deduction. For the purchase of this article, those details are not covered. This article focuses on the requirement that the debt be secured.
Secured debt means a debt that is on the security of any instrument. These include a mortgage, deed of trust, or land contract:
- that makes the interest of the debtor in the qualified residence-specific security of the payment of the debt,
- under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated, and
- that is recorded, where permitted, or is otherwise perfected in accordance with applicable state law.
In other words, the home is put up as collateral to protect the interest of the lender.
Thus, interest paid on undocumented loans, or documented but unsecured notes, is not deductible by the borrower. Yet it is fully taxable to the lending individual. The IRS is always skeptical of family transactions. Do not get trapped in this type of situation. Take the time to have a note drawn up and recorded or perfected in accordance with state law.
Do you have questions about Home Loan Interest?
If you have questions related to this situation or other issues related to the deduction of home mortgage interest, please give call our office at 781-849-7200.
Tax Season is Here – Only 2 Weeks Left!
By: Cindy Toran, MBA, BA
There are potential advantages and disadvantages to formally hiring your spouse if you own a small business as a sole proprietor or single-member LLC. Keep in mind that you can only do so if he or she plays a bona fide role in providing services to your business, such as office work or marketing.
The disadvantage to hiring your spouse is that it may result in added employment tax filing (such as FICA, Medicare, but not FUTA). However, this also reduces taxable income.
Advantages to Hiring Your Spouse
- Your spouse is able to build up Social Security benefits.
- Reduction in self-employment tax for sole proprietor (15.3% up to $117,000 earnings for 2014). However, 50% of the amount paid reduces the Adjusted Gross Income (AGI). This could impact other tax deductions.
- Your spouse can be provided health insurance coverage that includes all family members (including the sole proprietor).
NOTE: This can be a significant advantage. If you are hiring your spouse as your only employee, this will provide the maximum benefit. This fringe benefit will reduce both income tax and self-employment tax.
Here is how the last advantage works for hiring your spouse. There is a 100% tax deduction for the following medical expenses for the employee and family (including the employer’s spouse):
- Health insurance premiums
- Uninsured medical, dental and vision care expenses
- Other deductible benefits, such as premiums for term life insurance up to $50K, accident and disability.
Thus, all medical expenses and insurance premiums would be 100% deductible expenses of the business, assuming the total compensation package is considered reasonable for the duties being performed.
Keep in mind, however, that ALL employees must be offered the same benefits.
Here is an example:
John is a self-employed consultant with no employees. John hires his spouse, Peggy. Peggy’s job description is to perform bookkeeping and research duties for John.
An employment contract is prepared. The contract states that Peggy will receive $20 per hour. John prepared a written medical reimbursement plan. The plan states the following: “The employer will reimburse all employees for medical care expenses of each employee, his or her spouse and his or her dependents.”
John paid Peggy $16,000 in wages in 2014 for 800 hours of work. He also filed all employment tax returns. John reimbursed Peggy $9,000 by check for medical expenses. These included doctor and dentist bills not covered by health insurance. These medical expenses were incurred during 2014.
Peggy’s salary, payroll taxes, and the medical reimbursement are all valid business expenses.
What about you?
If this scenario fits your small business, do some calculations to see if you would benefit financially from hiring your spouse. Also, check with a trusted tax professional to be sure you meet all qualifications.
Do you have a trusted tax professional?
Maybe you are too busy to work through the calculations for how hiring your spouse may affect your tax returns. Perhaps you are at a place in your business you need tax advice. Do you have thoughts, questions or concerns regarding this subject? Please feel free to contact us, leave your comments below or post to on our Facebook, Google+ or LinkedIn pages.
Tax Season is Here!
by Alex Franch, Tax Specialist
In 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:
- 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.
- 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.