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Tax Relief for Those Affected By Natural Disasters
With hurricanes, tornadoes, floods, wildfires, and other natural disasters affecting so many people throughout the US this year, many have been left wondering how they're going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is some relief for tax payers--but only if you meet certain conditions.
Recovery efforts after natural disasters can be costly. For instance, when Hurricane Irene struck last year causing widespread flooding, many homeowners were not covered because most standard insurance policies do not cover flood damage.
Tax Relief for Homeowners
Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone AND these four conditions are met:
1. The loss was caused by a sudden, unexplained, or unusual event.
2. The damages were not covered by insurance.
3. Your losses were sufficient to overcome reductions required by the IRS.
4. You must itemize.
Tax Relief for Individuals and Business Owners
The IRS often provides tax relief for those affected by natural disasters. For example, individuals and businesses affected by Hurricane Isaac with tax filing and payment deadlines that occurred on or after August 26, 2012 have until January 11, 2013 to file their returns and pay any taxes due. This includes corporations and businesses that previously obtained an extension until September 17, 2012, to file their 2011 returns and individuals and businesses that received a similar extension until October 15. It also includes the estimated tax payment for the third quarter of 2012, normally due September 17. If you've been affected by a natural disaster, please call our office. We'll help you figure out when your tax payments are due.
Tax Relief Tips
The IRS also states that you have two options when it comes to deducting casualty losses on your tax returns. You can deduct the losses in the year in which they occurred or claim them for the prior year's return. So if you were affected by a natural disaster this year you can claim your losses on your 2012 tax return or amend your 2011 tax return and deduct your losses. If you choose to deduct losses on your 2011 tax return, then you have one year from the date the tax return was due to file it.
Confused about whether you qualify for tax relief after a recent natural disaster? Give us a call. We'll help you figure out the best way to handle casualty losses related to hurricanes and other natural disasters.
Lending Money to Family? Make it a Tax-Smart Loan
Lending money to a cash-strapped family member or friend is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications down the road.
Let's say you decide to loan $5,000 to your daughter who's been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation. Here's why.
When you make an interest-free loan to someone, you will be subject to "below market interest rules". IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you and you will need to pay taxes on these interest payments when you file a tax return. Further, if the imaginary interest payments exceed $13,000 for the year, there may be adverse gift and estate tax consequences.
Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000 and the borrower doesn't use the loan proceeds to buy or carry income-producing assets.
In addition, if you don't charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule) and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan--or the IRS decides to audit you and decides your loan is really a gift.
Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it's legally binding.
As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.
AFRs for term loans, that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which change frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.
Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, in this case your daughter cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest--as long as the promissory note for the loan was secured by the residence.
If you have questions about the tax implications of loaning a family member money, don't hesitate to call us. We're here to help.
Living Trusts 101
A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Further, you can actually be the trustee of your own living trust, keeping full control over all property legally owned by the trust.
There are many kinds of trusts. A living trust (also called an inter vivos trust) is simply a trust you create while you're alive, rather than one that is created upon your death under the terms of your will.
All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.
Do I need a living trust?
In many cases, the whole process takes only a few weeks and there are no attorney or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.
Is it expensive to create a living trust?
Is a trust document ever made public, like a will?
Does a trust protect property from creditors?
After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.
On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.
Do I need a trust if I'm young and healthy?
Can a living trust save taxes?
If you're wondering whether you need a living trust give us a call. We'll help you figure out the answer.
Hobby or Business? Why It Matters
Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.
Definition of a Hobby vs a Business
The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.
The tax considerations are different for each activity so it's important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.
Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.
Is Your Hobby Actually a Business?
If you're not sure whether you're running a business or simply enjoying a hobby, here are some of the factors you should consider:
An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).
The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it's a business or a hobby. (It should be noted that this list is not all-inclusive.)
Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.
What Are Allowable Hobby Deductions?
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.
Still wondering whether your hobby is actually a business? Give us a call, we'll help you figure it out.
Moving This Year? 10 Helpful Tax Tips
If you moved--or are planning to move--this year to start a new job you may be able to deduct certain moving-related expenses on your tax return. You may be able to deduct these expenses even if you kept the same job but moved to a different location.
1. Expenses must be close to the time you start work. Generally, you can consider moving expenses that you incurred within one year of the date you first report to work at a new job location.
2. Distance Test. Your move meets the distance test if your new main job location is at least 50 miles farther from your former home than your previous main job location was from your former home. For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.
3. Time Test. Upon arriving in the general area of your new job location, you must work full-time for at least 39 weeks during the first year at your new job location. Self-employed individuals must meet this test, and they must also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. If your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test. There are some special rules and exceptions to these general rules. Call us for more information.
4. Travel. You can deduct lodging expenses (but not meals) for yourself and household members while moving from your former home to your new home. You can also deduct transportation expenses, including airfare, vehicle mileage, parking fees and tolls you pay, but you can only deduct one trip per person.
5. Household goods. You can deduct the cost of packing, crating and transporting your household goods and personal property, including the cost of shipping household pets. You may be able to include the cost of storing and insuring these items while in transit.
6. Utilities. You can deduct the costs of connecting or disconnecting utilities.
7. Nondeductible expenses. You cannot deduct the following moving-related expenses: any part of the purchase price of your new home, car tags, a drivers license renewal, costs of buying or selling a home, expenses of entering into or breaking a lease, or security deposits and storage charges, except those incurred in transit and for foreign moves.
8. Form. You can deduct only those expenses that are reasonable for the circumstances of your move. Call us if you have any questions.
9. Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, the reimbursement may have to be included as income on your tax return.
10. Update your address. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS.
Don't hesitate to call us if you need help figuring out the amount of your deduction for moving expenses. We are here to help.
Take Advantage of Miscellaneous Deductions
A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay. If you are able to itemize your deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. Here are some things you should know about miscellaneous tax deductions:
Deductions Subject to the 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:
2. Manage, conserve, or maintain property held to produce taxable income, or
3. Determine, contest, pay, or claim a refund of any tax.
Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.
Deductions Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:
Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.
There are also many expenses that you cannot deduct such as personal living or family expenses. Call us today if you have questions about miscellaneous deductions.
Do You Qualify for the Earned Income Tax Credit?
Millions of Americans forfeit critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for low-to-moderate-income individuals who work. Taxpayers who qualify and claim the credit could owe less federal tax, owe no tax, or even receive a refund.
The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. Additionally, you must be a US citizen, have a valid social security card, and file a tax return to claim the credit.
General requirements: If you were employed for at least part of 2012 and are at least age 25, but under age 65, and are not a dependent of anyone else you may be eligible for the EITC based on these general requirements:
Tax Year 2012 Maximum Credit
Investment income must be $3,200 or less for the year.
If you think you qualify for the EITC but aren't sure, call our office.
Five Important Tips on Gambling Income and Losses
Whether you roll the dice, bet on the ponies, play cards or enjoy slot machines, you should know that as a casual gambler, your gambling winnings are fully taxable and must be reported on your income tax return. You can also deduct your gambling losses...but only up to the extent of your winnings.
Here are five important tips about gambling and taxes:
1. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes such as cars and trips.
2. If you receive a certain amount of gambling winnings or if you have any winnings that are subject to federal tax withholding, the payer is required to issue you a Form W-2G, Certain Gambling Winnings. The payer must give you a W-2G if you receive:
3. Generally, you report all gambling winnings on the "Other income" line of Form 1040, U.S. Federal Income Tax Return.
4. You can claim your gambling losses up to the amount of your winnings on Schedule A, Itemized Deductions, under 'Other Miscellaneous Deductions.' You must report the full amount of your winnings as income and claim your allowable losses separately. You cannot reduce your gambling winnings by your gambling losses and report the difference. Your records should also show your winnings separately from your losses.
5. Keep accurate records. If you are going to deduct gambling losses, you must have receipts, tickets, statements and documentation such as a diary or similar record of your losses and winnings.
If you have questions about gambling income and losses, don't hesitate to call us.
Tax Due Dates for October 2012
Note: September due dates were extended to January 2013 for areas impacted by Hurricane Isaac. See article "Tax Relief for Those Affected By Natural Disasters" in this newsletter.
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