Tax Tip of the Week Archives

May 7, 2012

Active participation matters in rental real estate

How active are you? Staying active is good for your health — and for reducing your tax bill. Here's how: Actively participating in your real estate rentals can help maximize your deductions.

As you may know, rental real estate is considered a "passive" activity. Passive activities are those in which you're not involved on a regular and substantial basis, and they're subject to passive loss rules. Those rules generally limit losses on your rentals to the amount of your income from other passive activities.

But when you actively participate in your rentals, you may qualify for an exception to the general rules. In that case, you can deduct up to $25,000 of losses from your rentals even if you have no passive income. That means you can use rental losses to reduce other income on your federal tax return, including wages and interest.

What's the definition of an active participant? You may be thinking of an hourly requirement, such as spending 500 hours or 750 hours on your rental properties during the year. Those tests do not apply to the active participant exception.

Instead, to be an active participant you have to own at least 10% of the rental and genuinely participate in management decisions such as approving amounts spent on upgrades and repairs.

To claim the full $25,000 allowance, your modified adjusted gross income (MAGI) must be less than $100,000 ($50,000 when you're married filing separately). The allowance disappears completely when your MAGI exceeds $150,000.

Do you have questions about the tax treatment of rentals? Take action and give us a call. We'll run the numbers to make sure you get the most benefit available.

April 30, 2012

Repair or improvement?

If you own a business, you're probably aware of changes to federal depreciation rules for property and equipment purchased during 2012.

For example, under current law, the maximum Section 179 deduction (first year expensing) for 2012 is $139,000, down from $500,000 in 2011. In addition, the 100% special bonus rules allowing a write-off of the entire cost of qualifying assets shrank to 50% for 2012.

While those rules may be familiar, other less publicized regulations affecting depreciation deductions also became effective in January. These new “repair regulations” make no changes to depreciation methods or rates. Instead, they affect the way you distinguish between repairs and expenditures that should be capitalized.

Say, for instance, you replace the roof on your office building. In prior years, you may have decided the expense was a repair because only a small part of your building was involved. Under the new regulations, roof replacement is an improvement. That means you depreciate the cost over the life of the building instead of expensing it immediately.

The repair regulations are comprehensive and affect property you acquire, produce, or improve as well as materials and supplies used in your business. Give us a call if you need more information on how they apply to you.

April 23, 2012

WOTC: This acronym could save you taxes

WOTC. Those four letters may look like Internet shorthand, but they're actually an acronym for a federal income tax break. The work opportunity tax credit can reduce your business income tax when you hire workers from specified groups that typically experience high unemployment, such as veterans.

You may have heard that the WOTC tax benefits for other categories of workers expired on December 31, 2011. However, thanks to a law passed in November, you can still claim the WOTC — up to a maximum of $9,600 — for eligible veterans you put on the payroll during 2012.

The law added two new categories of veterans who qualify and made the credit for those workers also available to nonprofit employers.

What you need to do. As under the prior rules, you'll need to complete Form 8850 for each eligible worker and submit it to your state employment security agency. One change: You have until June 19, 2012, to complete Form 8850 for qualifying veterans you hire between November 22, 2011, and May 22, 2012. For workers hired after that, the usual 28-day filing requirement applies.

Remember, you'll claim the tax benefit on your year-end federal income tax return for your business, as a dollar-for-dollar reduction in the amount you owe. Your quarterly payroll tax returns and your payroll tax deposits are not affected.

Want to learn how the WOTC can help your business save tax dollars? Give us a call. We'll be happy to explain the rules and help you complete the required paperwork.

April 16, 2012

The bottom line: Options for paying your taxes

What's the bottom line? On your federal income tax return, the bottom line is the amount you owe — and you have several options for submitting your payment.

For instance, when you file electronically you can choose to pay electronically too, by having the balance due subtracted directly from your bank account. The electronic funds withdrawal can be scheduled any time, right up to the April 17 due date, even if you submit your tax information before then.

You also have the option of using your credit or debit card to pay the balance due. You can choose this method whether you e-file or paper file. Just be aware your bank or card company will charge a fee. If you itemize, you can claim the fee as a deduction on next year's return.

The Electronic Federal Tax Payment System offers another payment method for both paper and e-filed returns. EFTPS is a free online system you access via the Internet or telephone. Your tax payment is withdrawn from your bank account on the day you select.

Finally, with all the electronic methods of payment available now-a-days, it's easy to overlook a then-a-days option: a paper check. Even if you e-file, you can mail a check for the balance due. Be sure the envelope is postmarked by April 17, and include Form 1040-V, Payment Voucher.

Give us a call to discuss which payment method makes sense for you and for tax planning advice about adjusting your 2012 withholding or estimated payments.

April 9, 2012

Late filing penalties

Sometimes smart people forget to do smart things — and when taxes are involved, a lapse of memory may be costly. For example, two penalties can apply if you forget the federal income tax filing deadline.

The failure-to-file penalty is assessed each month or part of a month from the due date until you submit your return. The penalty is calculated on the net amount of tax you owe — so no tax due means no penalty.
The failure-to-pay penalty comes into play when you owe tax but fail to pay it by the due date of your return. This is true even if you received an extension of time to file the return.

When both situations apply — that is, you did not file a return and you would have owed tax if you had — the penalties can be combined.

The failure-to-file and failure-to-pay penalties may be abated when you have good reason for forgetting to send in your return and/or your payment. What's a good reason? One example is when paying the tax would cause undue hardship, such as a situation where you are forced to sell property at a sacrifice price.

An extended period of unemployment may also qualify you for relief. As an illustration, you could request a one-time extension to pay your 2011 income tax if you were unemployed for 30 consecutive days during the fifteen months prior to April 17, 2012. The extension may also be available if your 2011 business income dropped by 25% or more due to economic conditions.

Give us a call if you haven't yet filed your return or paid your income tax for 2011 or an earlier year. We can help you find a payment option that will keep the penalties to a minimum.

April 2, 2012

Gambling income is taxable

Think it's a good bet that Internet gambling will soon be legal in your state? One thing is sure: A payoff from that wager, or any other, is taxable income. So are prizes from bingo, lotteries, raffles, and radio station contests.

Those winnings, and others, are taxable whether or not you receive Form W-2G, "Certain Gambling Winnings," from the sponsor of the wager or contest. It doesn't matter how much you win either. On your federal income tax return, all your lucky bets are ordinary income, taxable at your regular rate.

What about unlucky bets? Gambling losses are deductible — as long as you itemize. That means you're not allowed to subtract your total losses from your total winnings and report the net amount on Line 21 of your federal Form 1040.

Instead, you claim some of your losses as an "other miscellaneous deduction" on Schedule A, Itemized Deductions. Why only some losses? Because the rules limit the amount you can deduct to the total of the winnings you report.

A minor consolation: Gambling losses are not subject to the two-percent-of-AGI haircut, so the only limitation is the amount of your winnings. Of course, you'll also need to be able to support your total claimed losses with records such as the actual vouchers or a log book.

Give us a call before you cash that winning ticket. In addition to helping you sort out the tax reporting, we have planning suggestions so you can keep more of your windfall.

March 26, 2012

Is it alimony?

Divorce is difficult enough without having to consider income tax consequences. Yet payments you agree to make or receive related to a divorce can affect your return in current and future years.

An example is alimony. Alimony you pay is deductible on your return, while alimony you receive is taxable. What's not always clear is what qualifies as alimony. That's because tax rules specifically define alimony, no matter how the term is used in your divorce decree or other court order.

For divorces after 1984, those rules mean you'll need a written decree or agreement, and that document cannot specifically designate the payments as something other than alimony, such as child support. In addition, you and your former spouse must live in separate households and not file a joint return with each other. Finally, the payments must be in cash and must terminate at the death of the receiving spouse.

If payments to your former spouse meet the definition of alimony, you can deduct them in the year you make them. There's no need to itemize to claim the deduction, though you will have to include your former spouse's social security number on your return.

Written amendments or other modifications to divorce documents can change the tax treatment of the payments, and you and your spouse can agree that qualifying payments are not considered alimony.

Please call if you have questions about alimony or other payments related to your divorce. We're here to help you consider all your tax options.

March 19, 2012

Note these 2011 Schedule C changes

Tax laws and information reporting requirements continue to change — and so do tax forms. Schedule C, the form you include with your federal tax return to report income from your sole proprietorship, is no exception.

Here are two changes to the 2011 Schedule C.

New informational questions. Did you pay rent or hire an independent contractor to perform services for your business during 2011? For payments to certain vendors that total more than $600, you're required to complete Form 1099-MISC — and the IRS wants to make sure you do.

Two new questions on the 2011 Schedule C ask about your information return filing responsibilities.

New reporting for gross receipts. You might have noticed Line 1a, merchant card and third party payments, in the income section of your Schedule C.

Ignore it.

Why? The requirement for reporting this category of receipts separately from other types of income was suspended after Schedule C was printed. For 2011, you can report your total sales on Line 1b, gross receipts or sales.

That's true even if you get one or more Forms 1099-K, the new information return that shows the amounts your business received during 2011 from credit card sales or third party networks such as PayPal.

Got other questions about the new Schedule C? Give us a call. We'll keep you up to date with the latest developments.

March 12, 2012

Foreclosure may require more tax forms

If you went through a foreclosure or had home mortgage debt forgiven last year, you might have income to report on your federal tax return — and you might see forms that are new to you.

Forms from the lender. You may receive Form 1099-A, Acquisition or Abandonment of Secured Property, when your lender forecloses on your home or you give the lender a deed-in-lieu of foreclosure. Form 1099-A shows your outstanding debt and the fair market value of the property when the lender took it back.

You use Form 1099-A to determine the amount of gain or loss from relinquishing your home.

Did your lender forgive all or part of your mortgage? In that case, you'll also get Form 1099-C, Cancellation of Debt, which reports the amount you no longer have to repay.

Note: When foreclosure occurs in the same year as debt is forgiven, lenders are only required to send Form 1099-C.

Forms filed with your federal income tax return. While cancelled debt is generally taxable, debt forgiven on your principal residence can be excluded from income on your federal return. Form 982 tells the IRS you qualify for the exclusion.

In addition to income from cancellation of debt, a foreclosure is considered a sale of your home and can result in a capital gain or loss.

As you know, you can generally exclude gain from the sale of your principal residence (up to $500,000 when you're married filing jointly). However, to report the foreclosure you may need to file a form that's new for 2011: "Form 8949, Sales and Other Dispositions of Capital Assets."

Foreclosures of property other than your home and cancellation of income from debts such as credit cards require additional reporting. Please give us a call. We'll help you work through the tax issues.

March 5, 2012

New law extends payroll tax cut

The temporary reduction in the FICA tax rate that began in January 2011 as a replacement for the "Making Work Pay Credit" has been extended through December 2012. The 2% rate cut applies to wages, salaries and self-employment income of up to $110,100.

If you're an employee, your portion of FICA wages — the part deducted from your paycheck — will remain at 4.2% for the rest of the year. There's no effect on your future social security benefits, and no need to change your withholding allowance certificate (Form W-4).

If you're self-employed, the combined rate for your 2012 self-employment taxes will continue to be 10.4%. In addition, you may have noticed the federal tax deduction you claim as an adjustment to income was revised on your 2011 income tax return to reflect the new self-employment tax rate. That revision applies to 2012 as well.

If you're an employer, your portion of the FICA tax has not changed. You'll continue to pay the 6.2% "match" on your employees' wages.

One change to note: The recapture provision affecting high income earners that took effect in January 2012 was repealed.

Got payroll tax questions? Give us a call. We're ready to help.

February 27, 2012

New foreign investment filing is required

New form alert! If you own foreign investments, you may have an additional federal tax filing requirement this year.

Form 8938, "Statement of Specified Foreign Financial Assets," is due April 17, 2012, and is filed as part of your individual tax return. You'll use Form 8938 to disclose interests in certain foreign financial accounts when your ownership exceeds the reporting requirements.

What are the reporting requirements? They vary depending on where you live and your filing status. For example, say you're married and live in the United States, and you'll file a joint tax return for 2011. You'll include Form 8938 with your tax return when the total value of your reportable assets on the last day of 2011 is more than $100,000, or if the value exceeds $150,000 at any time during the year.

Tip: In some cases, you may also need to file Form 8938 for tax year 2010.

Reportable assets include investment accounts you own that are held in foreign financial institutions, interests in foreign entities, and stocks or securities issued by foreign individuals or companies.

You've probably noticed the reporting requirements are similar to the "Report of Foreign Bank and Financial Accounts" (FBAR), a separate return you may already be filing. Be aware the new Form 8938 does not replace the FBAR, which you'll still need to complete by June 30.

Penalties for failure to file Form 8938 start at $10,000. We urge you to contact us so we can help you evaluate your filing requirements for foreign investments.

February 20, 2012

Income tax rules affect your Web business

Did you start an online business in 2011? If so, you might have income and expenses that affect your federal income tax return.

Here are three items to consider.

Home office deduction. Do you use part of your home or apartment on a regular or exclusive basis for conducting your web business? Do you have a separate studio or other freestanding building where you work exclusively in your business? Do you store your business inventory in a specific place in your home?

Answer yes to any of those questions and you may be able to deduct part of the cost of utilities, insurance, and repairs made to your home.

Payments to independent contractors. Paying a vendor to create your web site or handle administrative tasks means you may need to file information returns — generally Form 1099 — to support your deduction.

You're required to send copies to the vendor as well as to the IRS.

Documentation of expenses. Though your business is online, you probably use your vehicle for work-related errands or sales calls. Track your mileage to determine whether you should calculate a deduction based on actual expenses or the standard mileage rate.

For 2011, the standard rate for business miles was 51¢ from January 1 through June 30. The rate increased to 55.5¢ from July 1 through December 31.

Another expense to document: Telephone use. For a land line, you can deduct the cost of long distance business calls. The regular monthly charge is not deductible unless you have a dedicated business line.

For your cell phone, keep records of business usage so you can deduct that portion of your bill or plan.

Give us a call for rules on claiming other expenses related to your online business, including merchant fees, start up costs, and website development.

February 13, 2012

Caregivers could qualify for tax breaks

When you're focused on the rewards and stresses of taking care of a parent or family member who can no longer manage on their own, it's likely you're not thinking of tax benefits. Yet you might qualify for breaks that can reduce your year-end bill.

Here are three benefits to keep in mind as you gather information for your 2011 federal income tax return.

Dependency exemption. Did you provide over half the support for a loved one during 2011? If so, and that person's income is less than $3,700, you may be able to claim a dependency exemption. Remember that tax-exempt social security is not included when figuring your loved one's income.

Tip: This break is also available even if the dependent parent lived in a nursing home during the year.

For 2011, the amount you can claim for each dependent is $3,700. More than one family member can qualify as a dependent as long as the income and support tests are met.

Medical expense deduction. When you itemize, you can claim expenses you paid for a dependent relative. If you provide over 50% of the support for your relative, the expenses may be deductible even when that person is not a dependent.

What happens if you can't meet the 50% threshold? When medical expenses are paid by multiple family members, you can choose who gets the deduction by completing a multiple support agreement (Form 2120).

Dependent care credit. You may be eligible for the dependent care credit when you pay for home care or daycare for a physically or mentally disabled person who lives with you.

You must have earned income to claim the credit, which can be as much as $1,050 in 2011.

Please give us a call if you would like details about tax benefits available to caregivers.

February 6, 2012

Depreciation update for 2012

If you bought business assets in the past few years, you probably noticed more than one change to the immediate expensing depreciation rules. While the trend has been toward higher deductions, opportunities for writing off the cost of assets under federal rules presently in effect for 2012 are less generous.

Here are the new limits.

Bonus depreciation. The enhanced deduction — up to 100% of qualified assets — expired at the end of 2011. The maximum bonus depreciation allowance for most qualified property placed in service in 2012 is 50% of the cost of the property.

Bonus depreciation is generally available for new assets that have a useful life of 20 years or less.

Section 179. The expanded $500,000 Section 179 write-off that has been available for the past two years ended December 31, 2011. For 2012, you can elect to expense up to $139,000 of qualified assets you purchase during the year.

To receive the full benefit of the Section 179 deduction, the total cost of all qualifying assets purchased in 2012 must be $560,000 or less. Your deduction may also be limited by the amount of your business income.

Both new and used assets qualify for Section 179.

If you're thinking of purchasing assets for your business this year, please give us a call. We'll keep you up to date with the latest depreciation developments.

January 30, 2012

Do you know the arithmetic of real estate sales?

An old quote says real estate and arithmetic are acquired together. The two also go together when figuring the tax consequences of selling property.

Here are numbers to know.

Amount realized. How much did you get for the property? You may think first of the selling price, but noncash receipts also affect the amount realized. For example, if the buyer assumes an existing mortgage, the amount you no longer have to pay on the loan increases the amount realized.

Adjusted basis. To calculate adjusted basis, start with what you paid for the property, add the cost of capital improvements, and subtract amounts you recovered through tax benefits during your ownership, such as depreciation or certain energy credits.

Gain or loss realized. Subtracting adjusted basis from the amount realized gives you the gain or loss on the sale.

In general, the gain or loss realized is the same as the amount recognized on your tax return, though there are exceptions. One you're probably familiar with applies when you sell your principal residence. Sell at a loss, and it's considered personal and nondeductible.

If you have a gain on a home sale and meet certain requirements, you can exclude the gain from income.

Did you sell property in 2011? Give us a call. We're happy to help with the math.

January 23, 2012

Is your business eligible for the health insurance premium credit?

Remember the postcard you got from the IRS last year introducing the health insurance premium credit for small businesses? To paraphrase the old song, there's no letter in the mail for you this year.

Your business can still get the credit, though. When you qualify, you can use it to offset your federal income tax liability by up to 35% of the cost of health insurance premiums you pay for employees.

Three general tests for eligibility are:

Employing fewer than 25 "full time equivalent" employees.

Paying average annual wages of less than $50,000.

Paying at least 50% of health insurance premiums for those employees.

Each test has specific requirements. For example, you may qualify for the credit, in full or in part, when you have more than 25 employees. That's because "full time equivalent" is based on hours your employees worked during the year.

In addition, some employees aren't counted for purposes of the credit, such as seasonal staff who were on the payroll for less than 120 days. Other excluded workers are sole proprietors, owner/employees, and shareholders who own more than 2% of the stock of an S corporation.

According to a recent report, many businesses that qualify for the health insurance premium credit fail to take it. Give us a call. We'll make sure you get full benefit of all the tax breaks available to you.

January 16, 2012

Are you an active participant?

Are you an active participant in your employer's retirement plan?

A "yes" answer can affect your federal income tax deduction for contributions to your traditional IRA.

For 2011 and 2012, the maximum contribution to a traditional IRA is $5,000 (plus an additional $1,000 when you're over age 50). When you're an active participant in your employer's plan, how much of that you can deduct may be limited.

Not sure of your status?

Look at the middle box on line 13 of Form W-2 — the one labeled "Retirement plan." When the box is checked, you're considered an active participant.

The next question — should the box be checked? — can cause confusion for both employers who prepare Form W-2 and employees who use Form W-2 to file tax returns.

That's because the rules differ for different types of plans. For example, when you're eligible to participate in a defined benefit plan, you're an active participant even if you choose to not take part. Your eligibility is enough to trigger "active" status.

For 401(k) plans, you're an active participant when you elect to make contributions. If you decide not to contribute, you may still be considered an active participant, depending on what other amounts were allocated to your account during the year.

Please call if you need more information about the meaning of active participation. We're ready to help.

January 9, 2012

What is income?

No matter what the weather report says, each new year brings a flurry of information returns. These forms report the income you received during the prior year, and the size of the paper blizzard is partly due to the definition of "gross income" in the federal tax code.

That definition encompasses all income earned anywhere in the world, including cash and non-cash receipts from sources such as bartering, discharge of debts, and illegal activities.

In addition, you probably noticed there's no reference to amount. So, although you might not get an information form for amounts under specified limits — the familiar $600 figure for Form 1099-MISC, for example — that income is reportable on your tax return.

Despite the broad nature of the term, not everything you receive is considered gross income. For instance, rebates, refunds, and purchase price adjustments are specifically excluded. Gifts, inheritances, and proceeds from life insurance policies are other familiar exclusions.

However, in contrast to gross income, exclusions tend to be narrowly defined. An illustration: While proceeds from life insurance policies are generally not taxable to you as a beneficiary, interest earned on the proceeds typically is.

Your state may have different rules on what's includable and excludable when calculating income.

Give us a call if you have questions about the tax effect of your receipts during 2011. We'll help you dig out the answers.

January 2, 2012

Payroll update for 2012

Out with the old and in with the new. The expression applies not only to the upcoming new year, but also to the new year's payroll tax reporting and compliance.

Here are two changes.

Health care costs. You're not required to include the amount of insurance coverage you provided to your employees in 2011 on Forms W-2. When you have less than 250 employees, you're exempt from reporting health insurance costs in 2012 as well. If you're already tracking the costs, you can choose to report the information in both years, no matter how many employees you have.

Note: The reported benefits are not taxable to your employees.

Wages subject to social security. Social security tax (FICA) applies to gross wages you pay your employees, up to a “wage base,” or limit, that's typically adjusted each year. The wage base for 2012 is $110,100, up from $106,800 in 2011.

Reminder: There's no wage base for the Medicare portion of the payroll tax you withhold from employees. All compensation is taxed at the current rate of 1.45%.

Give us a call for information on state payroll tax changes, as well as proposed federal legislation. It's our job to help you keep up to date.