The required minimum distributions rules for Individual Retirement Accounts (IRAs) rely on IRS provided tables that use standardized life expectancies based upon your age. When using their tables (IRS tables) you use your age as of the end of the year to which the distribution applies, and the Fair Market Value of all your IRAs as of the beginning of the year.
CCH has an easy to use calculator here: RMD When using their calculator, you should enter your beneficiaries age if you have one. Because of the distribution rules that cover what to do when you don't have beneficiary, I recommend that you do have a beneficiary. |
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| Posted by David Greenslit CPA at | | | |
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People claimed on another's return do not qualify for the Stimulus Rebate. When deciding if parents should claim their child for one last year, the Stimulus Rebate should be considered. There are no age limits on the Rebate that I am aware of. We often compare the total tax a family would pay two ways. With them claiming their child and without them claiming the child. This often occurs when children are of college age. The potential $600 that they could get, if they have enough income, should be considered when figuring who should claim the child, MAYBE.
Part of my uncertainty here is caused by what I call the 2008 Make Up filing. I expect that those who missed out on this May's payment will still have chance at getting it later. According to the IRS, "If you're not eligible this year but you become eligible next year, you can claim the economic stimulus payment next year on your 2008 tax return."
So, if a child aged 18 is claimed by their parents for 2007, can they next year when filing their 2008 return, in effect claim that they are entitled to their $600, because they actually claimed themselves on their 2008 return, the period to which the Stimulus Rebate is tied to? If this is allowed, the parents can benefit from claiming them for one more year, and they can get the rebate. This is different than the rule that says, dependents can't get the rebate. I am not offering an opinion about whether this will be possible? I am asking for my readers comments on it. |
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| Posted by David Greenslit CPA at | | | |
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| I have a client who is renting out their former residence and giving the renter a $1000 credit per month towards the purchase of the house at the end of a 2 year lease. The question is, did my client really sell his house or is he leasing it out? There doesn't seem to be a hybrid answer where the $1000/month is treated differently from the rent payment. The IRS has I think in this case said that you have one or the other and that the total monthly payments are either all rent or all payments on the sale of the house. We ended up here, treating all the payments as rent income, based on the circumstances. I good description of the rules is available from CIRE Magazine: Lease Option |
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| Posted by David Greenslit CPA at | | | |
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There's a question of what to do with the remaining basis of an annuity upon the death of its owner? In Minnesota many people receive Public Employee Retirement Association (PERA) when they retire. I expect to see on their 1099-Rs a slightly larger Gross distribution than Taxable distribution. The difference represents a part of their unrecovered basis in the plan (of their after tax money). Where does this untaxed money go upon their death? I think it goes to their beneficiary when there is one.
I noticed a surviving spouse taking over the payments recently. The spouses 1099-R didn't show basis because the Gross distribution equaled the Taxable distribution. It seems we should either convince PERA to change how it does things, or find out what the remaining basis is and figure the basis recovered each your ourselves.
In looking into this issue if found this clear as mud support for my position: Basis Cornell who has this information is thanked. The problem with trying to understand it is with the IRS, who wrote what Cornall reproduces, who often fails to write in simple terms for normal people. I can also write that carrying forward and using this uncovered basis makes sense to an accountant because it balances the books. Because the money that was once taxed, is not taxed again.
"the deduction... ...shall be allowed to the person entitled to such payments for the taxable year in which such payments are received." - The IRS |
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| Posted by David Greenslit CPA at | | | |
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Selling Covered Calls is when you own a stock and sell the right for someone else to "Call" it away from you and make it theirs, at an agreed upon price. If your stock is trading for $100/share, you might sell a call for sometime to buy it at $105/share. So, if the stock rises above $105 before the call expires, this other person will most likely buy it. If the stock prices rises to $110, they can buy it from you for $105 and turn around and sell it for $110, making a quick profit. So what would sell such an option for? The market will determine this. I'd say all calls have an expiration date.
It to me is similar to selling an option on land. You can sell an option for someone to buy your land at an agreed upon price for a certain amount of time. The question de jour is, how to report the money from covered call sales on your 1040?
If the Call expires worthless, that means it isn't exercised, you report the income as capital gain. If the stock is called away from you, you add it to your Gross Proceeds when you report the sale of the stock, you just had to sell, because it was called away from you.
Most Covered Calls are written for less than a year. So the next question is, is the income from an expired call Long or Short term gain? It has some attributes of both long and short term. If the stock is called, this money is treated the same as the underlying stock, so it would be long term if the stock has been held for more than a year. But in the case of an expired call, it seems a short term bet was made that the stock wouldn't rise much. That's a question this CPA wishes to look into another day, and I'd appreciated your comments hopefully with links that support your position.
Brokers are getting good about providing Realized Gain and Loss Summaries. If you receive one of these from your Broker to help you with your income taxes, and you have Covered Call Sales, ask the broker if they correctly treated the Sales by adding them to any stock that was Called? And then ask them to prove it to you, by showing how they came up with the basis numbers related to covered calls sales?
Thanks to: slcg.com
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| Posted by David Greenslit CPA at | | | |
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For the Child and Dependent Care Credit, married couples generally need compensation for the credit to be taken. If only one spouse works, the credit in not allowed. There is an exception to this rule if the spouse is a full time student. Being a full time student counts as having compensation for the credit. 2441 instructions
What is unclear is what to do when there is a single parent that is a student? We could conclude that even though the IRS doesn't say that the credit is allowed in the situation, it is. We might argue that what the IRS writes about married couples, would apply to single parents.
My current position is that an informed client of mine can decide to claim the credit. What I'd like see is more discussion about this issue, and for the IRS to clarify its position. |
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| Posted by David Greenslit CPA at | | | |
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| When you've inherited a house and later sell it, you could be looking at a taxable gain or loss. At the time of sale, you will generally compare the house's Fair Market Value on the date of death to what you get for it, less selling costs. During the time you hold the house, you can deduct property taxes. Here's a rather aggressive opinion from TaxMama, about what to do with some of the other costs related to maintaining the house: Inherited House |
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| Posted by David Greenslit CPA at | | | |
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| The award for funniest name for a tax related website goes to: Don't Mess With Taxes, a site that covers: "money news, notices, tips, commentary, insight and humor". The site appears to be Texas journalist Kay Bell's. Taxes |
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| Posted by David Greenslit CPA at | | | |
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| From kiplinger.com: "...teenage babysitters are normally considered employees, so they are exempt from paying self-employment tax. There's also a specific exemption for newspaper carriers under age 18.
If a child under 18 is working part-time as a household worker (this means babysitters, gardeners, people who do housecleaning or repair work, or anyone who is employed in or around someone else's home), he or she is also exempt from the Social Security tax."
http://www.kiplinger.com/columns/drt/archive/2007/dt070703.html
It's been my general advice that if your child is in a similar situation, they don't have to pay the Self Employment Tax. The income is reported on line 21 of form 1040. I code it "Child's non SE earned income", so that my tax preparation software knows its relevant attributes and treats it in the correct way. Line 21 is used for almost everything that doesn't fit someplace else on the return. In the case of a child with earned income from babysitting entered on line 21, their standard deduction should be tied to this line 21. As their line 21 increases, their standard deduction generally also increases, up to the 2007 maximum of $5350. |
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| Posted by David Greenslit CPA at | | | |
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From CNET News: "The U.S. Treasury Department wants Congress to force auction sites like eBay, Amazon.com and uBid.com to turn over the identities and Social Security numbers of a large portion of their users to the IRS--so tax collectors know how much each person made through online selling.
The effort is part of a larger plan, which enjoys enthusiastic support from both Democrats and Republicans, to close what's known as the "tax gap." It's a broad term that covers Americans who don't file tax returns or those who underreport their income, and the IRS believes it to total around $345 billion for the 2001 tax year." More
My comments: This type of income should be reported when there is a material amount of it. There may be some arguments for not reporting it in limited situations. If you sell your old boat on eBay, mostly like you'll have a non-reportable personal loss. If you are buying boats to resell them on eBay, then I'd say you have a business, and you need to be reporting it on your 1040. Material omissions of income from your 1040 tax return is a serious matter. Whether or not Congress acts to require auction sites to report these sales doesn't matter. If someone fails to report to you taxable income that you earned, the law (and this CPA) says you still have to report it. |
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| Posted by David Greenslit CPA at | | | |
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From: The LA Times: "Debt cancellation exclusion. Before last year, if you lost your house in foreclosure or were forced to sell it for less than the loan amount, you'd typically be subject to "debt cancellation income." The short version: The IRS assessed income tax on the money you didn't have to pay back.
Let's say you had a home with a $500,000 mortgage and a market value of $450,000. Before Congress passed a three-year exception to help people cope with the sub-prime crisis, if the lender took the home in foreclosure and you walked away owing nothing, the $50,000 difference was taxable income to you.
For 2007 through 2009, debt cancellation on your primary residence, whether as the result of a so-called "short sale" or a foreclosure, is not taxable. (Taxpayers are likely to get a 1099C showing the phantom income, however, so you must fill out a Form 982 to exclude that income from tax, Perlman said.)" Debt income
My advice here is to not automatically assume you have taxable income to report. Another aspect of the situation is that the Exclusion on the sale of your home can apply and cancel out the difference between what you paid for it (plus additions), and what it was worth when it was foreclosed upon.
At this next link, there is guidance on other ways to exclude canceled debt from income. Of note is the general rule that, "The cancellation takes place when you are insolvent... ...and the amount excluded is not more than the amount by which you are insolvent." Canceled So, it would seem that canceled credit card debt, may in some cases be excluded from income. |
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| Posted by David Greenslit CPA at | | | |
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The question arose as to how to inform the IRS about the amount of a client's only source of income, Veterans disability payments. Since they are generally non-taxable, the IRS has no line on their forms for it, yet it is qualifying income for the rebate. Here is a link to the answer: Veterans
The IRS is telling us to put the income on the same line as total Social Security Benefits. Also note at the top of the page the words, "Stimulus Payment". Be sure to have that on the return for Rebate Only Filings.
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| Posted by David Greenslit CPA at | | | |
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Casino drawing winnings are taxable. The question arises as to whether or not someone can deduct their gambling losses from a drawing winning? Guidance is provided here:
Drawings
It seems the crux of the matter is proving a direct relationship between the drawing and other gambling activity. If there is one, I'd be OK with an informed client taking the deduction. It would be helpful if Casinos took this into account, and structured their drawings in such a way as to require a minimal amount of gambling in order to enter the drawing. |
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| Posted by David Greenslit CPA at | | | |
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| A handy tool for calculating what your 2008 income tax rebate should be is provided by Kiplinger.com: http://kiplinger.com/tools/rebate/ |
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| Posted by David Greenslit CPA at | | | |
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I had a client who inadvertently transfered an inherited IRA into their regular traditional Individual Retirement Account. This transfer is not "allowed" by the IRS. Inherited IRAs, that are not from a deceased spouse, have special rules that generally say that the IRA will be taxed because the custodian of the IRA is required to make taxable distributions of the IRA to its beneficiary.
The required and allowed distributions range from taking all the money right away, to over many years. Typically, people like the option of not having to take any distributions, but that isn't possible.
So the IRS wants people to keep their inherited IRAs separate from their regular traditional IRAs, since there are different rules for each.
I advised my client that the inherited IRA that was transfered was taxable and he'd have to pay taxes on it. The next question was, what to do with the combined IRA account? Could he take the inherited money out tax free because he just payed taxes on it? Another possible answer was that his new combined IRA has what we call a basis. When he took money out in the future, part of it wouldn't be taxed to balance the books on what he had already paid tax on. After some research, I couldn't find any guidance for him.
We considered a complete distribution of the account so as to avoid uncertainty. If that was done, he wouldn't pay tax on his assumed basis, or his perhaps allowed distribution of what he'd paid tax on. So I figured that the IRS couldn't have it both ways, by not allowing him both his basis and a 'corrective' distribution. This wasn't too appealing of an option, since his IRA would be gone. But it would hopefully end the problem. Fortunately, the problem was resolved. The bank (IRA custodian) took responsibility and un-transfered the money. What the bank apparently did is, transfer money from an account entitled: the beneficiary IRA of John Doe into an account entitled: the IRA of John Doe. This is something we might assume it would know not to do.
Still, I have a question for my readers. What happens to the inherited IRA money that was transfered into the normal traditional IRA account? Can it be distributed tax free the next year, is it part of the basis, or is there some answer I haven't thought of?
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| Posted by David Greenslit CPA at | | | |
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Due to a number of circumstances, Minnesota has once again failed to adopt or renew some Federal tax laws. Minnesota generally follows the IRS's rules when it comes to personal income taxes. It is expected that they will "renew" some provisions of its tax code. But that hasn't happened yet for tax year 2007. This year there are a number of adjustments some taxpayers should be making when filing their form M-1.
Some of these adjustments relate to:
The tuition and fees deduction on federal Form 1040
The educator expenses deduction on federal Form 1040
Qualified mortgage insurance premiums on federal Schedule A
See More
If the Minnesota legislature does eventually renew these expired provisions, people who have already filed, should amend their Minnesota form M-1s. |
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| Posted by David Greenslit CPA at | | | |
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The State of Minnesota offers a Property Tax Refund for individual filers. It is based on Household income and the amount of property taxes paid by a homeowner, or in the case of renters, the amount of deemed property taxes paid through their rent.
Some people with middle and higher incomes do not qualify for the refund as it is progressive. The more Household income one has the greater the chance that they will not get a property tax refund. Household income is similar to one's Adjusted Gross Income, but there can be adjustments to it.
An important adjustment to it can be when two or more unmarried people share the same household. In some cases, the income from this other person or people should be combined with the filers income, to arrive at Household income for the Property Tax Refund. The rules for when to do this are found here:
http://www.taxes.state.mn.us/taxes/prop_refund/instructions/m1pr_inst_07.pdf
It is this accountant's wish that the rules were a little more helpful.
I have seen a Minnesota Revenue auditor claiming that they have information that another party lives with a Property Tax Refund filer. I would assume, they use a data base of all returns filed and look for matching addresses. They then might attempt to question a Property Tax Refund's legitimacy by arguing that the Household income was under-reported. I would advise property tax refund filers who live with others, to review the Household income rules.
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| Posted by David Greenslit CPA at | | | |
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The IRS has clarified the status of non-filers and the 2007 Tax Return Rebate. Some low income people are not required to file a return. Often times there is no tax benefit for them filing, but 2007 will be an exception for many of them.
The IRS recently stated on its website:
"The law also allows for payments for select taxpayers who have no tax liability, such as low-income workers or those who receive Social Security benefits or veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans Affairs in 2007. These taxpayers will be eligible to receive a payment of $300 ($600 on a joint return) if they had at least $3,000 of qualifying income.
Qualifying income includes Social Security benefits, certain Railroad Retirement benefits, certain veterans' benefits and earned income, such as income from wages, salaries, tips and self-employment. While these people may not be normally required to file a tax return because they do not meet the filing requirement, the IRS emphasizes they must file a 2007 return in order to receive a payment."
The IRS further stated that: "Recipients of Social Security, certain Railroad Retirement and certain veterans' benefits should report their 2007 benefits on Line 14a of Form 1040A or Line 20a of Form 1040. Taxpayers who already have filed but failed to report these benefits can file an amended return by using Form 1040X. The IRS is working with the Social Security Administration and Department of Veterans Affairs to ensure that recipients are aware of this issue."
Some filers may not have used line 14a or 20a as they are not required to do so by the IRS when their Social Security is not taxable. Low income filers should review their situation. I'd consider any problems one might have receiving the rebate, correctable.
Many retired people with lower incomes will benefit from this rebate. The rebate is automatic for people who file a return.
As usual, there are limits and qualifications for the rebate. Some higher income taxpayers will not receive a rebate check, as the IRS states on its site: "Payments to higher income taxpayers will be reduced by 5 percent of the amount of adjusted gross income above $75,000 for individuals and $150,000 for those filing jointly." |
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| Posted by David Greenslit CPA at | | | |
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The IRS instructions for what Air Conditioners qualify for the Residential Energy Credit appears a little light on specifics. This link from the Consortium for Energy Efficiency is helpful:
http://www.cee1.org/resid/rs-ac/rs-ac-tax-credits.php3
I as a practicing CPA, am relying on it and its content to keep my clients safe from reasonable IRS auditors.
I've found that the standards for these Energy Credits are quite high. However, one improvement that seemingly always qualifies is more attic insulation. Remember that these credits don't pay you back for what you spent, they just give you some of your money back.
They are also non-refundable meaning, some low income that don't normally file income taxes, will not derive a tax benefit. Of course they still save energy and money on their utilities.
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| Posted by David Greenslit CPA at | | | |
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I had a recent question about the viability of one's Individual Retirement Account (IRA) owning real estate? It is allowed, but close attention should be paid to the IRA rules. You don't want to make a disqualifying transaction that could subject the IRA to being taxed early. Article about disqualifying transactionsIf you have decided that your IRA needs to own real estate, you'll have to find a custodian who specializes in this type of thing. Expect the custodian to be compensated for their efforts, and consider how much that is going to cost you per year? In theory, what makes this so appealing is that if a property appreciates after your IRA buys it, the gain is deferred. It's my opinion that transferring property that your already own is not allowed and doing so would cause major problems. Nor can you buy property from your brother and put it into your IRA as he would be a disqualified (related) party. Having your IRA own real estate may be a good idea. Traditional investing involves putting a certain percentage of your assets into: Stocks, Bonds, Hard Assets like Real Estate or Gold, and Cash. You may already own enough hard assets, and real estate though it has a history of appreciating, can be risky. |
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| Posted by David Greenslit CPA at | | | |
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The question is sometimes asked, why would capital gains trigger the Alternative Minimum Tax (AMT)? On form 6251 where the AMT is calculated, there is even a section thats purpose is to give people the lower capital gains tax rate on their gains. A lower capital gains rate wouldn't mean much to some filers if they still had pay the higher of the AMT rate or the capital gains rate. But as I see it, the problem is not with the form 6251, and it generally does pass through to the individual the lower rate.
Capital gains can and do phase out the income exemption amount so even though you might still be getting the 15% maximum capital gains rate on form 6251, you can lose your exemption, and the resulting tax rate might be 17% rather than 15%. So it's been my practice to mention the possibility of a higher effect gain rate because of the AMT.
What I've covered is only one aspect of the AMT. I often use my tax prep software to run a projection when clients ask me how much tax they are going to owe on a big capital gain, and I think this is a standard practice, however any software used should take into account relevant changes to the tax laws. |
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| Posted by David Greenslit CPA at | | | |
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TAXGIRL writes: "The IRS wants you to understand that you'll never actually see that message in a subject line from IRS. It's the newest scam to target taxpayers.
Taxpayers have reported the receipt of an email allegedly from "IRS Criminal Investigation" claiming that an investigation is underway for filing of a false return or other complaint. The email has an attachment and link which may result in a virus commonly called a Trojan Horse which allows hackers access to your computer's hard drive.
If you receive any emails claiming to be from the IRS, please remember that the IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS will never ask for your PIN numbers, passwords or other access information for credit card, bank or other financial accounts.
Do not open the attachment! Instead, forward the e-mails to phishing@irs.gov." TAXGIRL
My comments: Just use common sense. The IRS is going to use a letter to announce something this drastic. I can't say that I have ever seen email correspondence from the IRS. I am on some of their email lists, where updates on tax changes are given to preparers, but that's about it from the IRS. It's true that things are evolving. but this future isn't here yet. |
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| Posted by David Greenslit CPA at | | | |
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From the IRS: "WASHINGTON — The Internal Revenue Service today announced that it began mailing educational letters this month to more than 650,000 small tax-exempt organizations that may be required to submit a new annual notice, Form 990-N, “Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ.”
IRS expects to mail the letters over a period of several months, finishing in December.
With the enactment of the Pension Protection Act of 2006 (PPA), the majority of small tax-exempt organizations are now required to submit the e-Postcard. Previously, tax-exempt organizations with gross receipts of $25,000 or less were not required to submit information returns. The first e-Postcards are due in calendar year 2008. The IRS intends to have an option available for free electronic submission of the e-Postcard. Form 990-N |
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| Posted by David Greenslit CPA at | | | |
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| From the IRS: "Farmers may receive income from many sources, but the most common source is the sale of livestock, produce, grains, and other products raised or bought for resale. The entire amount a farmer receives, including money and the fair market value of any property or services, is reported on IRS Schedule F, Profit or Loss From Farming." Farmers |
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| Posted by David Greenslit CPA at | | | |
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From SmartPros: "Beginning this fall, the Internal Revenue Service plans to revive a once-controversial practice of randomly targeting thousands of taxpayers for audits, even when the agency has no reason to suspect them of wrongdoing. IRS officials expect the tax probes to provide fresh data to update the top-secret formulas the agency uses to help select which returns to audit and thus enable it to do a better job of combating tax-dodging.
The first wave of random audits will start in October and target about 13,000 income-tax returns for the 2006 tax year, selected from various income categories. The IRS says it expects to conduct random audits on similar-size groups in subsequent years." Audit
My comment: At 13,000 returns, your chances of being audited at less than 1 in 5000. |
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| Posted by David Greenslit CPA at | | | |
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| Most non-profits with sufficient revenue (more that $25,000) must file a form 990 or 990-EZ. The due date for this filing is the 15th of the 5th month following the close of their year. They can file for an automatic 3 month extension of time to file using form 8868, and after that, an additional 3 month extension providing they have an adequate reason for doing so in the eyes of the IRS. Filing late without a valid extension can cost the organization $20/day or $100/day if their gross receipts exceed $1,000,000/year. See: http://www.irs.gov/pub/irs-pdf/i990-ez.pdf |
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| Posted by David Greenslit CPA at | | | |
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I've been asked if it makes sense to make pre-payments on a mortgage? Disregarding income taxes for the moment, it usually does. If you have $10,000 earning interest of say 3 percent, and your mortgage has a rate of 6.5%, you "earn" an additional 3.5% by investing the $10,000 into your mortgage. The money you will save over the life of the mortgage, will give you a return of 6.5% on your $10,000. Not having to pay interest of 6.5% is the same as earning it. One problem with doing this is you can't easily get your $10,000 back out of your mortgage if you decide you need it.
Taking income taxes into account complicates the situation. Not having to pay taxes on the 3% earnings of the $10,000 lowers your taxes by let's say $45/year. Not being able to deduct the interest on $10,000 of mortgage, raises your taxes by about $95/year, so you lose $50/year here, but that is offset by you earning an additional $350/year. I assumed a 15% tax bracket here, so I think we can say, income taxes reduce the benefits I wrote about in the first paragraph, but only by 15%. So in this case, you only got 85% (1.00 - .15) of the benefit. If your tax bracket is higher and/or you pay state income taxes, your benefit will be reduced more. Also, a lot of people don't itemize, so a lost mortgage deduction, is irrelevant, which would mean, pre-paying your mortgage lowers your income taxes since your interest income is less.
Debt isn't everything some people claim it is. The value of its write-off is in many cases, overstated. |
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| Posted by David Greenslit CPA at | | | |
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From the CourierPost Online: "The recently completed 2007 tax filing season set a number of electronic records, highlighted by more than 76 million electronically filed individual tax returns and more than 140 million visits to IRS.gov, the Internal Revenue Service said. This year's tax season saw a surge in electronic filing among last-minute filers, a group that has traditionally sent in paper returns, the IRS said. Records were also set for the number of returns e-filed by home computer users, the number of balance-due returns filed electronically and the number and amount of direct-deposit refunds."
My comments: There's no going back with electronic filing. More and more people will do it, especially younger taxpayers. At our office, our supply of paper tax forms is almost irrelevant. We just print them off as needed. |
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| Posted by David Greenslit CPA at | | | |
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Work on buildings that you own are costs that may be either an improvement or a repair, and which of these categories they fit in can make a difference in your taxes. One definition of the difference between the two is that an improvement makes it better than what you had. New windows for instance, can be argued to be an improvement if they are more energy efficient than the original windows were when purchased. The same goes with furnaces. Most new furnaces are more efficient.
One case where the definition matters is when you sell your home for a gain that is more than the gain exclusion amount, which is currently $500,000 for the Married Filing Joint status, and 1/2 that for others. In that case, you want to have as many improvements as you can find to lower your tax bill. If you put a new roof on your house, that probably should be treated as a repair, and that would not reduce any gain you might have, unless you argued, that when you bought the house, the roof was in poor shape, leaking perhaps. It can be a subjective thing. Painting your house is probably not a repair, but adding no maintenance siding probably is, because you could say its lower maintenance is an improvement.
Whether a cost is a repair or an improvement is usually even more important when it comes to a 2nd home you may own, because there are no normal gain exclusion rules in place for that.
This issue also matters for buildings that are used commercially. In that case, you have a bias to call things repairs, in order to get a fast write-off versus the typical 27.5 and 39.5 year depreciation lives.
This IRS covers some of this in publication 523: http://www.irs.gov/pub/irs-pdf/p523.pdf on page 9, where it defines an improvement as adding value, prolonging its useful life, or adapts it to new uses. It also gives a list of typical improvements.
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| Posted by David Greenslit CPA at | | | |
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There are limits on the amount of mortgage interest you can deduct. One of them has to do with what you can think of as your primary mortgage. You are allowed to deduct interest on the first 1 million dollars of home acquisition debt plus you can generally deduct the interest on another $100,000 of what is called home equity debt. This makes your grand total, $1.1 million of debt on your house. These numbers also apply to a second home you may own. The grand total for two homes is the same $1.1 million. Divide the above numbers in half if your filing status is, Married Filing Separate. This leads us to one drastic way around these limits for some married people. It seems that two single people jointly owning a house could each have half the debt, and claim half the interest deduction, in effect doubling the limits.
These limits illustrate something quite common in the tax code. I don't recall the last time these amounts were raised for inflation or any other reason. So, it's logical to assume they effect more and more people each year. It is a back door tax increase, the failure to index key numbers in the tax code. This reflects poorly on those making our tax laws.
I have only covered a limited amount of the home interest deduction rules here. More information is available in IRS Publication 936: Interest |
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| Posted by David Greenslit CPA at | | | |
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According to the National Society of Accountants (NSA) the typical tax preparation firms charges the following:
$110 for a form 1040, not itemized
$640 for a form 1120 (corporation)
$1732 for a form 706 (estates)
$201 for an itemized form 1040
Their information was taken from the NSA 2006 Income & Fees Survey. |
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| Posted by David Greenslit CPA at | | | |
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| From the IRS: "The annual May 15 filing deadline is here for many nonprofits, and the IRS urges any of these organizations that paid the three percent telephone tax to be sure to request this special refund. The telephone tax refund is also available to churches and small tax-exempt organizations that don’t normally file annual returns with the IRS." Phone Tax | |
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| Posted by David Greenslit CPA at | | | |
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From the IRS: "The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit...
In order to make this determination, taxpayers should consider the following factors:
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Does the time and effort put into the activity indicate an intention to make a profit?
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Does the taxpayer depend on income from the activity?
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If there are losses, are they due to circumstances beyond the taxpayer's control or did they occur in the start-up phase of the business?
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Has the taxpayer changed methods of operation to improve profitability?
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Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
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Has the taxpayer made a profit in similar activities in the past?
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Does the activity make a profit in some years?
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Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?" Hobby
The rules might apply to hobbies such as: Amateur auto racing, and horse operations, but each situation has its own characteristics. |
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| Posted by David Greenslit CPA at | | | |
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From cnet news: "Americans who sell items through Internet auction sites could be in for an unpleasant surprise at tax time next year, thanks to an IRS proposal designed to identify taxpayers who don't report income from those sales." auction
My comment: CPAs know that all taxable income must be reported. I don't see much if any room for exceptions here. The sale of personal property, for instance the types of things sold at a garage sale, most often result in a non-deductible personal loss. You compare what you paid for it, to what you got. If you lose money, I can see not even reporting it. If your ebay activities consist of you selling your old golf clubs for less than you paid for them, I would say no reporting is required. But if you are running a business, you need to give a lot of thought to reporting that. Even these losses may not be deductible if it is determined your activity is a hobby. |
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| Posted by David Greenslit CPA at | | | |
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The estate tax is a tax on ones net worth on the day they die. Because of the exemption amount, it generally only applies if your net worth exceeds $2 million for the years 2007 and 2008. So you can think of your estate as having the first $2 million to itself ($3.5 million for 2009). Then what is in excess of that being taxed at steep rates.
The question might be, If one gifted away all their assets, a day before they died, would the estate tax not apply? The answer is maybe. The gift tax and the estate tax are related, and one reason for that, is to limit the effectiveness of death bed gifts. Ones lifetime gifts, reduces ones exemption amount. So the $2 million amount above, is really $2 million less your lifetime gifts. And your lifetime gifts, are really what you give away, less the annual exemption amount that applies to gifts, when you made them. For 2007 the annual amount you can give away to one individual with out chipping away at your $2 million is $12,000. So one strategy if you seek to avoid the estate tax, is to start making gifts of $12,000 every year, to your family members.
Another factor to consider is that when virtually all of your assets transfer to your spouse upon your death, there are generally no estate tax issues, it does not apply. This assumes your spouse is a U. S. Citizen. But when your spouse dies, they are subject to the same rules, so if their estate is in excess of the $2 million, the government will tax it. So one way to reduce this tax, is to not leave everything to your spouse.
If ones net worth is $4 million and they are married, they could leave half to their spouse, and half to their children upon their death, and the half they leave to their children could go into what I call an A-B Trust, where the surviving spouse gets the income from the assets in the trust, and the beneficiaries get the principle of the trust upon the surviving spouses death. Half the estate is shielded by the unlimited martial deduction, and the remaining half is just at the exemption amount, and therefore not taxed. An A-B trust certainly requires legal advice, but it isn't that complicated. I'd guess on a $4 million net worth, it would save 2/3s of a million dollars. The savings is capped at the $2 million exemption amount times the 33% estate tax rate, so estates larger than $4 million would not save more than the 2/3s of a million dollars.
It is difficult to know what congress will do with the estate tax in the future? Apparently it all goes away in 2010 for one year. What happens after that is anybodies guess. |
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| Posted by David Greenslit CPA at | | | |
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A client of mine recently received a CP2000 notice from the IRS, proposing that they include their state income tax refund received during 2005 in their taxable income. Based on my advice, he replied that it was not taxable. I am confident the IRS will go along with this.
My client's 2004 Federal 1040 had about $1200 of Alternative Minimum Tax (AMT) on it. He had to pay that much AMT on top of his regular tax for 2004. His 2004 state return resulted in an $800 refund. He did itemize his deductions in 2004 and claimed $9000 of state income taxes as a deduction. It would seem he would have to claim a refund as taxable, but that is not the case.
Since he could have claimed only $8200 of state income taxes and still got the same bottom line number on his 2004 1040, the refund is not taxable. He could have claimed only $8200 of state taxes and got the same answer because of the AMT. Often the AMT results in this: No matter how much in state taxes you add in to your itemized deductions, your total tax doesn't change, because as you lower your regular tax by $100, your AMT rises by $100. Since my client was in this flat zone, another $800 of state income taxes (the amount of his refund,) did him no good in 2004, so it is not taxable as a refund in 2005.
There is a term some accountants use. It is "buried". He had so much in state income taxes deducted, that more of the same, would have done him no good. Think of it as meaning, you have reached zero, and can go no lower. At the point where you have so much in deductions, that additional deductions do you no good, you have buried something, in this case, his state income tax deduction. Other clients of mine, bury their taxable income. They have so much in deductions, they have negative taxable income. This matters when they get a state income tax refund, and we have to decide if it is taxable?
So my client with the AMT in the prior year, doesn't have to report his state income tax refund as taxable, but there are cases where one can have AMT in the prior year, and have at least a partially taxable state income tax refund. I have not covered all situations here. What helps in following along with this situation, is a cardinal rule of tax preparation: The tax benefit rule. If you derived a benefit from a prior deduction, a refund is at least partially taxable. If you did not derive a benefit, a refund is not taxable. What you may find helpful here is IRS Publication 525, pages 25-26 of the 2006 edition. What is missing from publication 525 is a worksheet for this specific situation.
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| Posted by David Greenslit CPA at | | | |
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| From AccountingWEB.com - Apr-19-2007: "Taxpayers who were unable to e-file their tax returns Tuesday using Intuit Inc. software products have until midnight on Thursday, April 19, to file their returns, the Internal Revenue Service announced Wednesday.
Potentially up to several hundred thousand last-minute tax filers were affected by company server problems on Tuesday evening, and they or their accountants may have been unable to electronically file returns. Intuit confirmed Wednesday that those problems had been resolved, and it was successfully accepting e-file returns on Wednesday." Turbo Tax |
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| Posted by David Greenslit CPA at | | | |
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| Our firm, Tulberg and Greenslit, CPAs, just finished another successful year. I would like to thank our clients, who are what our firm is all about, about taking care of their income tax issues. As you know, we are available all year to answer your questions, and otherwise help you with your tax and financial matters. Thank You. |
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| Posted by David Greenslit CPA at | | | |
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A few years back, Congress brought back the sales tax deduction, but there are limitations. If you live in a state that has its own income tax, you can deduct the higher of your state and local income taxes, or your sales tax paid. Your sales tax paid can be figured three ways. Actual, table, or table plus major purchases. Actual is self explanatory, the table method references your Adjusted Gross Income and your exemptions claimed. Table plus major purchases, adds the table amount to your major purchases which includes, cars, trucks, boats and RVs.
We've found that most people continue to deduct their income taxes, but we practice in Minnesota, a state with an income tax. This change can be said to most help people in no income tax states like South Dakota, Florida, and Texas. This deduction applies to personal purchases generally. Businesses have always been able to deduct their sales tax paid. For instance, when supplies are purchased for a business, the whole cost including the sales tax, is written off.
Even if you do deduct your income taxes, the taxability of any state income tax refund you might get, may be effected by the sales tax table amounts. Generally, if you deduct sales tax paid instead of income taxes paid to a state, a state income tax refund is not taxable. But let's say your refund from the state is $500 and your state income taxes only exceeded your sales taxes paid by $200 in the year you deducted your state income taxes. Only $200 would be taxable, because that is the extent of your benefit from the deduction of your state income taxes. Is it any wonder that, accountants rely on their software? This interpretation, though not part of the instructions to form 1040, is on firm ground, relying on the tax benefit rule, which states that if you didn't get a benefit for deducting something, a later refund related to it, is not taxable. |
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| Posted by David Greenslit CPA at | | | |
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If you own a rental property, it's not unusual for it to generate tax losses. Back in the mid 80s, Congress came up with the concept of passive income and losses, and deemed rental income and losses to be passive. What this means to rental property owners is that if their filing status is Married Filing Joint (MFJ), and their Modified Adjusted Gross Income (MAGI) is over $150,000, they won't be reporting net passive losses on their tax return. Any losses will be suspended and carried forward, to be used against future passive income. The most typical source of future passive income is selling the property. When the property sold, all passive losses associated with it are released and can be taken.
This is an example of a tax loss taken away from taxpayers, but only for a while. Upon the sale of a property with suspended losses, all debts are settled so to speak, and the books balance. What Congress told you you couldn't take, you finally get to take. It is a timing difference, a deferral.
If your MAGI is less than $150,000, and your status is MFJ, then you are granted a special allowance of up to $25,000 of passive losses per year. These passive losses rules also apply to Limited Partnerships (LPs) that own Rental Properties. Just as notable as Congress coming the the idea of passive losses, is when brokers came up with the idea of selling high commission LPs for their write-offs, only to find that Congress put an end to that, with the introduction of the passive rules, denying taxpayers their promised write-offs. I had clients during this time who told me they couldn't even find a market to sell these dogs of an investment. It did influence me have a critical eye towards brokers. The reason LP owners can't take the special allowance write-off, is that they do not materially participate in the operation of the rental property. As with rental property owners, the suspended losses on an LP can be taken upon its disposition.
It is true that some of these LPs did make money, but many others where put together by promoters ignoring underlying economic fundamentals. A good rule of thumb is to rate making money first, and worrying about taxes, second. Don't reverse the two and make tax avoidance your highest goal. Another mistake that brokers offering LPs made, is they didn't anticipate the the lowering of tax rates, that make tax write-offs, less valuable. And a mistake a limited number of brokers made, is selling these LPs to my lower income clients, with apparently no rational for them doing so beyond, I assume, their own self interest.
Not all LPs are bad. But some question should be asked before buying into one. For instance, what is the broker's commission? What does the price history of the LP look like for the last 5 years? Is there even a market you can find this thing listed on? Will you able to use any expected losses or do you have to suspend them? Why is this investment better than an S & P 500 index fund? What litigation is the LP current involved in?
And yet another consideration of owning LPs is that many of them don't feel the pressing need to get your tax information for the year, sometime not sending it out until after April 15th. And the final consideration is that if you own an LP, you will probably hiring someone like me to do your tax return, because now it's likely to be more complicated.
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| Posted by David Greenslit CPA at | | | |
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Our accounting firm uses UltraTax CS tax preparation software. Because of the size of their company and the number of accountants they serve, their product has taken on a sort of artificial intelligence. One feature of the software is its diagnostics function. It finds some problems and brings them to my attention.
The resources that the company puts into making its product, to getting every schedule right, to keeping its users happy, results in a good product. UltraTax listens to its users, and changes its software as needed. A few accountants call in and point out something that UltraTax is doing wrong, or causing extra work for us, and within days, the software is changed. It is this listening to it users, that results in the product evolving in the direction of greater usefulness. Yes, it might be said, UltraTax learns. Not by itself, but with the help of many people.
One of my rules for using UltraTax, is to never override what it is doing with a return. When a problem occurs, and the software isn't doing what I expect it to, I have learned to not force UltraTax to do what it doesn't want to do, but rather discuss it with tech support, or do some more research on the particular issue. I've learned to trust UltraTax and work with it. In most cases, UltraTax is right, and when it's not, they will change their software.
In our office, there are someti | | | | |
