Own a Vacation Home? Adjusting Rental vs. Personal Use Might Save Taxes

Own a Vacation Home? Adjusting Rental vs. Personal Use Might Save Taxes

Now that we’ve hit midsummer, if you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences: If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible. If you rent it out for 15 days or more: You must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use: • Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction. • Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal...
Summer is a Good Time to Start Your 2017 Tax Planning and Organize Your Tax Records

Summer is a Good Time to Start Your 2017 Tax Planning and Organize Your Tax Records

You may be tempted to forget all about taxes during summertime, when “the livin’ is easy,” as the Gershwin song goes. But if you start your tax planning now, you may avoid an unpleasant tax surprise when you file next year. Summer is also a good time to set up a storage system for your tax records. Here are some tips: Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you owe. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 with your employer. If you make estimated payments, those may need to be changed as well. Keep records accessible but safe. Put your 2016 tax return and supporting records together in a place where you can easily find them if you need them, such as if you’re ever audited by the IRS. You also may need a copy of your tax return if you apply for a home loan or financial aid. Although accessibility is important, so is safety. A good storage medium for hard copies of important personal documents like tax returns is a fire-, water- and impact-resistant security cabinet or safe. You may want to maintain a duplicate set of records in another location, such as a bank safety deposit box. You can also store copies of records electronically. Simply scan your documents and save them to an external storage device (which you can keep in your home safe or bank safety deposit box). If...
Coverdell ESAs: The Tax-Advantaged Way to Fund Elementary and Secondary School Costs

Coverdell ESAs: The Tax-Advantaged Way to Fund Elementary and Secondary School Costs

With school letting out you might be focused on summer plans for your children (or grandchildren). But the end of the school year is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger. One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition. Other benefits Here are some other key ESA benefits: • Although contributions aren’t deductible, plan assets can grow tax-deferred. • You remain in control of the account — even after the child is of legal age. • You can make rollovers to another qualifying family member. A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs). Limitations The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing. However, the ability to contribute is phased out based on income. The phaseout range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution...
Donating A Vehicle Might Not Provide the Tax Deduction You Expect

Donating A Vehicle Might Not Provide the Tax Deduction You Expect

All charitable donations aren’t created equal — some provide larger deductions than others. And it isn’t necessarily just how much or even what you donate that matters. How the charity uses your donation might also affect your deduction. Take vehicle donations, for example. If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it. Determining your deduction You can deduct the vehicle’s fair market value (FMV) if the charity: • Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly), • Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a sale to a low-income person needing transportation), or • Makes “material improvements” to the vehicle. But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds. Getting proper substantiation You also must obtain proper substantiation from the charity, including a written acknowledgment that: • Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose, • Includes your name and tax identification number and the vehicle identification number, and • Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale. For more information on these and other rules that apply to vehicle donation deductions — or deductions for other charitable gifts — please contact us.   ©...
Business Owners: When it Comes to IRS Audits, be Prepared

Business Owners: When it Comes to IRS Audits, be Prepared

If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process. Catching the IRS’s eye Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples: • Significant inconsistencies between previous years’ filings and your most current filing, • Gross profit margin or expenses markedly different from those of other businesses in your industry, and • Miscalculated or unusually high deductions. An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation. Response measures If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call. The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors. More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need...
Operating Across State Lines Presents Tax Risks — or Possibly Rewards

Operating Across State Lines Presents Tax Risks — or Possibly Rewards

It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines. But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings. Do you have “nexus”? Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations. Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include: • Employing workers in the state, • Owning (or, in some cases even leasing) property there, • Marketing your products or services in the state, • Maintaining a substantial amount of inventory there, and • Using a local telephone number. Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus. Strategic...