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Renting Out a Vacation Home
Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.
There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.
Known as the "Master's exemption", because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master's Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.
In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a "vacation home" is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.
Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
Questions about vacation home rental income? Give us a call. We'll help you figure it out.
Should You Invest in Life Insurance?
The purpose of life insurance is to provide a source of income, in case of death, for your children, dependents, or other beneficiaries. Life insurance can also serve certain estate planning purposes, which we won't go into here.
Buying life insurance is contingent upon whether anyone is depending on your income after your death. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance.
Because life insurance protects your family in the event of a death, it is important to determine the correct amount. Most people do not have the right amount of insurance.
There are two basic types of life insurance: term and permanent. Term insurance is insurance that covers a specified period. If you die within this time frame, your beneficiary receives the insurance benefit. Term policy premiums usually increase with age.
Permanent insurance such as universal life, variable life, and whole life, contains a cash value account or an investment element to the insurance.
Rules of Thumb
The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, bookkeeping, etc.). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance for the wage earner.
If there are no dependents and your spouse could live comfortably without your income, then you will still need life insurance, but you will need less than someone who has dependents.
If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount of insurance you need depends on your salary level and that of your spouse, the amount of savings you have, and the amount of debt you both have.
If you need help figuring out the correct amount of life insurance you need, then give us a call. We're happy to help.
Employee Relocation in a Down Market
Many companies have questions about what to do with an employee's home when he or she is moved to a new job location, especially when the real estate market is in a downturn throughout much of the country.
Typically, the employer wants to protect the employee against financial loss on a "forced" sale of the home. Outlined below are some of the most common ways to do that, and the consequences to the employee.
The employer reimburses the employee's financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee's costs of the sale.
If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). However, tax loss on the sale of one's residence is not deductible.
The employer's reimbursement of the employee's financial loss is considered taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may "gross-up" the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket - more where Social Security taxes or state taxes are also grossed-up.
Employer buys the home. Few employers directly buy and sell employees' homes. But many do this indirectly, effectively becoming the homes' owners, through use of relocation firms acting as the employers' agents. An IRS ruling shows how to do this with no tax on the employee:
Option 1. The relocation firm as employer's agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which covers sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee's gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).
Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm's fee and the gain is tax exempt under the above limits.
The Employer's Side
Reimbursing the employee's loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.
Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn't covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.
Are you an employee who is being relocated this fall? Are you wondering about the sale of your home and the tax implications for you? We can answer your questions. Just give us a call.
A SIMPLE Retirement Plan for the Self-Employed
Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.
These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend a lot of time and pay high administration fees associated with more complex retirement plans.
SIMPLE plans really shine for self-employed business owners. Here's why...
Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLE plans calculate contributions in two steps:
SIMPLE plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.
If living expenses are covered by your day job (or your spouse's job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.
A Truly Simple Plan
A SIMPLE plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.
What's Not So Good About SIMPLE Plans
Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).
It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.
If the SIMPLE plan is set up for a sideline business and you're already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE plan and the 401(k) combined (in 2012) can't be more than $17,000 or $22,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.
So someone under age 50 who puts $9,000 in her 401(k) can't put more than $8,000 in her SIMPLE 2012. The same limit applies if you have a SIMPLE plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).
How to Get Started with a SIMPLE Plan
You can set up a SIMPLE account on your own, but most people turn to financial institutions. SIMPLE Plans are offered by the same financial institutions that offer IRAs and 401k master plans.
You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1.
Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.
Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.
401k, SEPs, and SIMPLES Compared
Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE plans.
Special Tax Benefits for Armed Forces Personnel
Military personnel and their families face unique life challenges with their duties, expenses and transitions. As such, active members of the U.S. Armed Forces should be aware of all the special tax benefits that are available to them.
1. Moving Expenses. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses.
2. Combat Pay. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. You can also elect to include your nontaxable combat pay in your "earned income" for purposes of claiming the Earned Income Tax Credit.
3. Extension of Deadlines. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.
4. Uniform Cost and Upkeep. If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.
5. Joint Returns. Generally, joint income tax returns must be signed by both spouses. However, when one spouse is unavailable due to military duty, a power of attorney may be used to file a joint return.
6. Travel to Reserve Duty. If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.
7. ROTC Students. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.
8. Transitioning Back to Civilian Life. You may be able to deduct some of the costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.
We want to make sure you get all of the tax benefits you are entitled to as a member of the armed forces. Please call us if you need guidance or have any questions.
Deducting Charitable Contributions: Eight Essentials
Donations made to qualified organizations may help reduce the amount of tax you pay. With that in mind, here are eight tips to help ensure your contributions pay off on your tax return.
1. If your goal is a legitimate tax deduction, then your charitable contributions, whether a cash donation or non-cash gifts such as goods and services, must be given to a qualified organization. In addition, you cannot deduct contributions made to specific individuals, political organizations or candidates. Give us a call if you need help figuring out what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. Call us if you need assistance with this form.
3. If, because of your contribution you receive a benefit such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations. Please contact us for assistance if you are considering donating a vehicle.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser. If you need assistance with Form 8283 don't hesitate to schedule an appointment with us.
Questions about charitable deductions? Give us a call. We have the answers.
What Income Is Nontaxable?
Generally, you are taxed on income that is available to you regardless of whether it is actually in your possession, but there are some situations when certain types of income are partially taxed or not taxed at all.
Here are some examples of items that are NOT included in your income:
Here are examples of items that may or may not be included in your income:
Please contact us if you'd like more information about what income is nontaxable.
Tips for Recently Married or Divorced Taxpayers
Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration (SSA). A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.
If you have any questions related to your requirements to the IRS after getting married or divorced, or need help changing your name with the SSA, give us a call. We're happy to help.
QuickBooks Can Do Much More Than You Think
Zero In On Key Report Figures
You've undoubtedly created reports that were so lengthy that you got tired of scrolling up and down to find totals for each individual section. QuickBooks lets you collapse and expand reports to see primary totals only, but this command affects the entire report.
If you want to just collapse a section or two, here's how you do it. As an example, go to Reports | Company & Financial | Balance Sheet Standard. In QuickBooks 2012, you'd click the Excel button (your version may say Export). Indicate that you want to create a new worksheet and click Advanced. This window opens:
Figure 1: The Advanced Excel Options window displays the formatting tools you can carry over from QuickBooks and the features in Excel that you want to be active.
Make sure that Auto Outline (allows collapsing/expanding) is checked, then click OK and start the export. When your report opens as an Excel spreadsheet, you'll notice that there is a series of vertical lines to the left of your data, and a group of numbers that corresponds to them running above horizontally.
Figure 2: Excel's Auto Outline feature adds tools to the left of your data that let you collapse and expand subsections.
To collapse a section so that only the totals show, click on the minus (-) sign next to the line that should remain (in this example, it's Total Checking/Savings). Do the same for Total Accounts Receivable and Total Other Current Assets. Then scroll down and do the same thing for the other asset subtotals. Here's what you'll see:
Figure 3: As you can see, the minus (-) signs have turned into plus (+) signs, which allows you to expand the rows back to their original states.
Auto Outline is a very useful feature, but there's more than one way to implement it. And its availability and operation can vary in different versions of both Excel and QuickBooks. We can help you master this, as well as other QuickBooks-to-Excel tools.
Here are some other less-commonly-used QuickBooks features that you may want to try:
Figure 4: Summarize Payroll Data in Excel is actually a series of reports, available by clicking this navigational bar at the bottom of the screen.
There's more than one way to do a lot of things in QuickBooks. We can tell you about more of them and evaluate your workflow to what else we can do to improve your accounting experience.
Tax Due Dates for September 2012
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