Recent Posts

Sponsored Links

Archives

Search

Meta

Capital Gain and Loss Tax Issues

By cpa | May 15, 2008

Investors

Whenever you sell an investment at a profit, you will probably owe the IRS a tax known as a capital gains tax. This is true for most investments, including stock, mutual funds, bonds, options, or business. Capital gains are the amount by which an asset’s selling price exceeds its initial purchase price. A realized capital gain is an investment that has actually been sold at a profit. The term capital gain is often used to mean realized capital gain. An investment that hasn’t been sold yet usually does not have capital gain tax issues.

 Most investors’ federal long-term capital gains taxed at 15 percent. Taxpayers in 15% or lower income brackets pay only 5 percent on most investment earnings. To take advantage of the low 5% or 15% tax rate, you should try to hold more than one year to qualify.

 If you’re an investor, you already know how to report your income and related investment expenses. You should have received a 1099-B if you sold stocks or mutual funds in 2007. You should keep a record of all your stock transactions, and report all of the investments sold on Schedule D. You can only take up to $3,000 capital loss exceeding net capital gain from other types of income. You carryover the unused loss to offset capital gains or you can use $3,000 loss to offset your other types of income in the future.

 If your stock declared dividends in 2006, you should have received 1099-Div. You have to report dividend income under schedule B. A reader asked if a foreigner who was already withholds 30% from its dividend income, is he required to file tax return. I advice the taxpayer to file a return, because he could possible receive a nice refund. I will write an separate article for international tax issues.

 You report any margin interest expense paid on Schedule A as an interest expense deduction. You also report any related investment expenses (such as investment newspapers and publications, stock analysis computer programs, etc. on Schedule A as an itemized deduction, subject to the 2% Adjusted Gross Income (AGI) limitation.

You also have to be careful about wash sale. In general you have a wash sale if you sell stock at a loss, and buy substantially identical securities within 30 days before or after the sale. You cannot deduct your loss.

 The unfortunate fact is, if you don’t itemize your deductions or your AGI is high relative to your investment expenses, your investment expenses could be rendered useless.

Example: Scott has $2,200 of investment expenses related to her stock portfolio. Sally doesn’t itemize her deductions. Therefore, the $2,200 of expenses will not reduce Sally’s taxes.

 Traders

 If you buy and sell stocks very frequently, you may be able to qualified as a trader instead of an investor. There is a different tax-reporting world open up to you. IRS does not have a clear guideline about who is an investor and who is a trader. The general rules are as follow:

 The trader generally holds positions 30 days or less. Virtually none of the trader’s positions are held for more than a year.

The trader’s goal is to profit from short-term swings in the market and the associated stock price.

The trader spends a lot of time doing just trading stocks!
 
If you qualify for trader status, your stock gains or losses are still reported on Schedule D, but your trading expenses are reported on Schedule C, and there are no AGI restrictions or limitations thwarting the deduction of these expenses.

If Scott on the above example is qualified as a trader, he can deduct his $2,200 of trading expenses on his schedule C without limitation on Schedule A. However, traders are still subject to many of the same rules as the investor, such as $3,000 capital loss rules, wash sales rules.

 According to IRC 1402, capital gains and losses are not subject to the SE tax. Many people overpaid SE taxes should consult a CPA specializes on stock trading and possible claim the past-overpaid taxes.

Mark-To-Mark Election

 The IRC 475, allows traders to make an election that allows them to “mark” their stock holdings to the fair market value (FMV) at the end of the tax year. If the election is made, all securities held by the trader are deemed to have been “sold” at the end of the tax year, and then immediately repurchased. This causes the trader to realize tax profits on stocks that haven’t really been sold yet.

Why in the world would anyone want to make an election that would cause her to pay taxes on “paper” profits each year? For two very good reasons: Making the election will remove the annual $3,000 limitation on net capital losses and the wash sale rules no longer apply to the trader.

 If you determine that you’re a trader and you’re looking forward to making the MTM election for the current tax year, in general, you are required to file the appropriate election and you’ll have to follow the procedures 99-17 with 2007tax return if you want to election to be effective in 2007. There are special rules for new taxpayers, corporation and Limited Liability Company.

Topics: TAX | No Comments »

Rental Property Tax Issues

By cpa | April 25, 2008

When you purchase property and rent it out, you’re essentially running a business. You receive rental income and incur expenses from the property. You hope that, your revenue exceeds your expenses so that your real estate investment produces a profit for all the money and time you’ve invested. You also hope that the market value of your investment property appreciates over time. 
You could possible having positive cash flow but taxable loss on the return because of depreciation. Depreciation expense is a tax deducible expense, but doesn’t involve your cash outflow. After depreciation, you are possible to show a loss for the year, but you are able to deduct the loss on your tax return. If you actively participate in managing the property, you’re possible to be allowed to deduct your losses against your other taxable income and save taxes.

Deductible Expenses

In addition to the deductions allowed for mortgage interest and property taxes, you can also deduct almost all of the money that you spend on the property. For example, insurance, maintenance, management, advertisement incurred in finding tenants, traveling expenses (mileage) to look after the properties, legal & accounting professional expenses, commissions paid to find tenants, utilities, repairs and capital improvement.
IRS agents pay close attention to repair and maintenance deductions claimed on the very aggressive tax returns. Most taxpayers would prefer to classify the expenditure as a repair and taking a current year deduction, rather than by capitalizing the expense and depreciate the cost over the applicable years.
Here I would like to point out the differences between repairs and capital improvement. The Internal Revenue Service, has defined the difference between repairs and improvements in Pub.527as follows:
“A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life.”
“An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses.”
Capital improvement need to be depreciate over the applicable years. Depreciation is an accounting deduction that the IRS allows you to take for the overall wear and tear on your building. The idea behind this deduction is that, over time, your building will deteriorate and need upgrading, rebuilding, and so on. The IRS tables now say that for residential property, you can depreciate over 27-1/2 years, and for nonresidential property, 39 years. Only the portion of a property’s value that is attributable to the building. Please note that land can not be depreciated.
For example, suppose that you bought a residential rental property for $300,000 and the land is deemed to be worth $100,000. Thus the building is worth $200,000. If you can depreciate your $200,000 building over 27-1/2 years, that works out to a $7,272 annual depreciation deduction.
If you have large mortgage, after depreciation and all other expenses, you are possible to show a taxable loss for the year. If your adjusted gross income is less than $100,000 and you actively participate in managing the property, you’re allowed to deduct your losses on operating rental real estate for up to $25,000 per year.

If you make more than $100,000 per year, you start to lose these write-offs. At an income of $150,000 or more, you can’t deduct rental real estate losses from your other income. People in the real estate business (for example, agents and developers) who work more than 750 hours per year in the industry may not be subject to these rules.

Suppose that you purchase a rental property many years ago and now the property worth much more than you originally paid for it. However, when sell the property, you owe taxes on your gain or profit. For example, if you bought the property for $100,000 and sell it for $150,000, you not only owe tax on that difference, but you also owe tax on an additional amount, depending on the property’s depreciation. The amount of depreciation that you deducted on your tax returns reduces the original $100,000 purchase price, making the taxable difference that much larger. For example, if you deducted $25,000 for depreciation over the years that you owned the property, you owe tax on the difference between the sale price of $150,000 and $75,000 ($100,000 purchase price minus $25,000 depreciation).
All this tax may just motivate you to hold on to your property. But you can avoid paying tax on your profit when you sell a rental property by “exchanging” it for a similar or like-kind property, thereby rolling over your gain. The section of the tax code that allows rollovers is a 1031 exchange. We will talk about it in detail in a separate article.
Another strategy is to utilize IRC 121 gain exclusion. You may convert the rental property to your residence. The basic gain exclusion qualification rule is simple. You must have owned and used the home as your main residence for at least two years out of the five-year period ending on the date of sale. If you are married, the full $500,000 break is available as long one or both of you satisfies the ownership test and you both satisfy the use test.


Say you are married and own three homes. First there’s your current main home, which qualifies for the $500,000 exclusion and could be sold for a $400,000 gain. You sell it tax-free and move into your vacation home in Miami, Florida. Live there for two years, and you can unload the property and exclude up to $500,000 of gain from this sale as well. Then move into your remaining vacation home in San Francisco, CA, and live there for two years. You get the idea.

If you do not mind keeping moving to different homes, you can repeat the gain exclusion every two years.

Topics: Investing in Real Estate | No Comments »

Tax Issues For Foreign Students – F Visa & Opt Status

By cpa | April 15, 2008

Tax issues for foreign students are often very complicate and difficult. What do you do when the first paycheck, scholarship check or loan disbursement check is received and taxes are withheld?
 
First of all, is the student is a “resident alien” or “non-resident alien” for U.S. tax purposes?
 
Resident Alien vs. Nonresident Alien
 
An individual who is not a U.S. citizen is classified as a resident alien if he or she meets
·        lawful permanent resident test which is also known as the green card test,
·        substantial presence test, if such individual is present in the U.S. (i) for at least 31 days during the current year, and (ii) for a total of 183 “adjusted” days during the current and two preceding calendar years. For purposes of applying the 183-day test, a day of presence in the U.S. during the current year counts as a full day; a day of presence in the preceding year counts as 1/3rd of a day; and, a day of presence in the second preceding year counts as 1/6th of a day. Due to special exceptions to the students, the days as students are often exempted. However, there are very complex rules apply here. For example, an individual may not exclude days of presence as an exempt student if the individual has been exempt for two of the prior six calendar years.
·        such alien elects to be treated as a resident. An individual can make an election to be treated as a resident. To qualify for the election the individual must be a resident under the substantial presence. Most foreign students should not attempt to make this election, as it will ordinarily have adverse tax consequences. Students often prefer nonresident alien status on account of the associated exemption from employment taxes. 
 
Resident and nonresident aliens file different types of income tax returns. Resident aliens complete Forms 1040 and are taxed on their worldwide incomes in a manner identical to that of U.S. citizens.
 
On the other hand, nonresident aliens need to file tax returns Forms 1040NR and is only taxed on the US connected income. In general, the US source incomes are subject of 30 percent withholding or the same basis as U.S. citizens.
   
 
Social Security and Medicare Taxes
 
Generally, services performed as a nonresident alien admitted into the U.S. under a F visa are not covered under the U.S. social security program if the services are performed in accordance with the terms of the visa. These individuals are exempt from Social Security and Medicare withholding taxes. Many employers withheld those taxes and it is a very painful process to claim them afterward.
Tax Treaties
 
The U.S. has income tax treaties in effect with many countries. If you are a resident or citizen China, you may qualify for the tax treaty between the U.S. and the People’s Republic of China provides the following:
 
A student, business apprentice or trainee who is or was immediately before visiting [the U.S.], a resident of the [P.R.C.] and who is present in the [U.S.] solely for the purpose of his education, training or obtaining special technical experience shall be exempt from tax in the [U.S.] with respect to:
 
(a) payments received from abroad for the purpose of his maintenance, education, study, research or training;
 
(b) grants or awards from a government, scientific, educational or other tax-exempt organization; and
 
(c) income from personal services performed in [the U.S.] in an amount not in excess of 5,000 United States dollars or its equivalent in Chinese yuan for any taxable year.
 
The benefits provided under this Article shall extend only for such period of time as is reasonably necessary to complete the education or training.
 
Treaty provisions are not limited to simply determining whether income is taxable in one country or not. They may also provide special rules for determining whether the individual is considered a resident alien or not. Also, treaty provisions often reduce the rate at which taxes are withheld upon the payment of certain types of income. For example, the withholding rate reduces from 30% to 15% for China.
 
Students who are considered to be nonresident aliens should provide their employers with Form W-8233 or Form W-8BEN to establish that they are foreign persons. You should also provide your employers with a Form W-4. However, special rules apply to nonresidents filing out Forms W-4. All nonresident aliens should claim single status on Form W-4 even through they are actually married and claim only one allowance on line 5 except residents of Canada, Mexico, Japan or South Korea. Also you need to request your employer withhold an additional $7.60/week because non-resident are not qualify to take standard deduction.

Alien students with U.S. source income may consider consulting with a very qualified tax professional because these tax rules are unfortunately very complex. 

Topics: Individuals | No Comments »

Tax Tips for Small Businesses

By cpa | April 8, 2008

Most of unincorporated business are considered “sole proprietors.” A sole proprietor is just another way of saying “self-employed,” “independent contractor,” or “freelancer.” Income and expenses related to your self-employment is reported on your 1040, Schedule C.
 
Being self-employed is quite possibly one of the best tax strategies available today. You are in full control of your tax situation, and you can reduce current income by any losses you have from freelancing, or renting out property.
However, IRS is fully aware of the tax benefits of being self-employed. They are on the lookout for individuals who (1) have a high business loss, or (2) have business losses year after year.
If you are in one of these situations, you need to start thinking about how to protect yourself in case the IRS audits.
The basic tax planning strategy goes like this: reduce your taxable income, shift taxable income into nontaxable income, take advantage of tax credits, and pay the right amount of estimated taxes.
The first step to getting organized is to separate your freelance income from other types of income. Keep a record of all your business-related income. Have a separate business bank account and a separate credit card.
Your clients may send you a Form 1099-MISC to report 2007 payments to you. Form 1099-MISC is like a W-2, it is used to report income you received. The IRS also gets a copy of any 1099s. Your total business income on Schedule C Line 1 must be greater than or equal to the total amount of income reported on your 1099-MISC forms. If you report less income on your Schedule C than reported on your 1099s, you will get an audit notice. The easiest way to avoid an audit is to report all your income, whether you received a Form 1099 or not.
The second step to getting organized is taking a look especially at the various types of business-related expenses you can report. I highly recommend you start tracking your business-related expenses using different categories. For example, advertising, insurance, legal and professional services, auto, office expenses, repair, rent, supplies, education, due and subscription, computer, travel, meal and entertainment, utilities, telephone, home office and others. You can track your expenses using folders to sort receipts, or using a spreadsheet program, or using a personal finance program such as Excel, Quicken, QuickBooks, Microsoft Small Business.
You need to make sure your expenses are necessary and ordinary. That way the IRS auditor will see that your expense was clearly related to your business activity.
Claiming expenses for your home office need to follow the IRS rules.
Accounting for Your Business Assets. A business asset is any property with a useful life longer than one year and which is used to produce income. Thus your website, computer, software programs, and office furniture can all be considered business assets. You have two choices for accounting for these purchases. You can treat them as ordinary expenses and deduct the full cost of purchase in the year the property is bought by using Section 179, or you can treat them as capital expenses and spread out the cost of the purchase over a number of years.
The basic equation for a Schedule C, is income minus expenses equals profit. If the profit figure is a positive number, it increases both your regular income tax and your Self-Employment Tax. The Self-Employment Tax, figured on Form 1040 Schedule SE , is 15.3% of your net profit and represents the Social Security and Medicare taxes owed on your business profit. As an employee (on a W-2), you only pay half of the Social Security and Medicare taxes (7.65%), and your employer pays the other half. As a self-employed, you are your own employer, so you pay both halves.
Most self-employed people get into tax trouble because of the Self-Employment Tax. You need to set aside money at least every quarter, or better yet every month, towards your Self-Employment Tax. Let’s say you anticipate having a net profit of around $1,000. Well, your Self-Employment Tax would be ($1,000 x 15.3%) $153. If you divide that into four quarterly payments, you should be paying $38.25 every quarter to the IRS as an estimated tax payment. You should also calculate your anticipated regular income tax. If you are in the 25% tax bracket, the additional income tax on your business profit would be ($1,000 x 25%) $250. So you should set aside $403 ($153 + $250) over the course of the year towards your estimated taxes. Freelancers who fail to make reasonable estimates of their future taxes often end up owing at the end of the year. Paying a balance due can be a hardship for struggling freelancers. Protect yourself from tax troubles by planning ahead, and making a sincere effort to pre-pay your taxes.
If the net profit figure on your Schedule C is a negative number, you have a business loss. Your business loss reduces your total income. If you have a W-2 job, you can use the business loss to offset your W-2 income.  This means you will get a bigger refund compared to someone who earned the same amount of wages but did not have a side business.
 
Reducing your taxes in this way is an excellent tax strategy. However, the IRS disallows a hobby loss. What is a Hobby Loss? The IRS expects new businesses to incur a loss. It is normal for a business to have a year or two of losses before becoming profitable. But if a business reports a net loss in 3 out of 5 years, it is presumed to be a hobby.
 
You can still be fine if you can still prove your profit motive using the following nine factors:

  1. You carry on the activity in a businesslike manner,
  2. The time and effort you put into the activity indicate you intend to make it profitable,
  3. You depend on income from the activity for your livelihood,
  4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
  5. You were successful in making a profit in similar activities in the past,
  6. The activity makes a profit in some years, and how much profit it makes, and
  7. You can expect to make a future profit from the appreciation of the assets used in the activity.

An audit to defend your business losses can be a very expensive and time consuming. If you lose, the IRS will disallow the loss and expenses. You will have to repay some of your income tax, plus penalties and interest. You also have a higher chance to be audited.
If you are self-employed, you must carry on your freelance work in a very businesslike manner. This means keeping good records, keeping a business diary showing meetings with clients, deadlines, and projects, having business cards and a web site that promotes your business, and so forth.
The hobby loss rule-of-thumb applies to sole proprietors filing a Schedule C. One of the surest ways to prove you are serious about doing business is to form some sort of separate business entity. Businesses are separate entities for tax purposes, and so setting up a business for your freelance will provide a way for you to separate your personal income and expenses from your business income and expenses.
Incorporating your business in a formal way for you to separate your business activities from your personal activities. I will discuss incorporating your business and protecting your losses in a separate article.

Topics: Businesses | 1 Comment »

How do you get audited?

By cpa | April 1, 2008

The IRS uses a system called DIF (Discriminate Income Function) to identity tax returns to examine. The scoring system is set up to identify specific returns that, if audited, will generate additional income tax. Sometimes, the IRS computer selects returns for audit on a random basis. Your income, deductions or where you live could be irrelevant. However, there are things we can do to minimize the chances of being audited.

1. Check Your Math
The IRS computers automatically correct mathematical errors. I recommend typing up your returns or use a computerized tax preparation program.If the IRS’s computer system catches mathematical mistakes on your forms or if your return is hard to read, a person will look at your return.
You do not want to give the IRS any additional reasons for them to look at your return.

2. Self-Employed If you are self-employed and file a Schedule C, it automatically increases your audit chances. It is because you have more opportunities to either “hide” your income or “create” deductions by converting personal expenses into business expenses. If so, be prepared to substantiate your expenditures as deductible expenses. The IRS has specific audit programs aimed at specific professions and occupations that get their income in cash. The more cash you receive and the higher your income potential, the more likely the IRS is to find additional tax dollars by reviewing your return.How to Reduce the Chance of being Audited: If you are self-employed, the best way to avoid scrutiny from the IRS is to Incorporate or form a Limited Liability Company (LLC). Corporations and LLCs are audited far less frequently than individuals. It’s also a good idea to be incorporated to help protect your personal assets in the event of a lawsuit.  Another benefit is the fact that corporations are allowed more deductions with fewer limitations.

3: Don’t stand out
Economic Reality: There is an economic reality that must be kept in mind when preparing a return. A certain amount of money is needed to support yourself and your family. Did you report enough adjusted gross income to cover normal and everyday living expenses such as rent, food, and clothing? If the answer is no, then the IRS will question the validity of the return simply because the income figures are not realistically possible.   For example: If you live in a rich area, but you only claimed you earned $15,000 that year, this is a red flag for an audit. Inconsistencies: If there are inconsistencies, the IRS will want an explanation. For example: make sure to file the same information on your federal taxes that you filed on your state returns. Report All Income: This refers to the information reported to the IRS compared to what you report on your return. People, who pay you money, whether as an employee Form W-2 or Independent Contractor Form 1099, will report your income to the IRS. If your return shows less income than what has been reported to the IRS, it may trigger an audit.IRS has been targeting these areas for audit:

4: Always Prepare for an Audit
Always keep your receipts, you will do fine if you are unlucky enough to get audited. The rule is simple: no receipt, no deduction.Specially keep all of the receipts for auto, travel, meals and entertainment. I also recommend attaching detailed explanations of everything you claim on your return if you have unusually large deductions or unusual circumstances. For example, you have a huge medical deduction for a year that you feel would increase your chances of being audited; attach copies of your medical bills to your return. Although the IRS computer system still kicks out your return, it is ultimately an agent who decides if your particular return will be sent to an examiner for a complete audit. The agent might decide an audit would not be necessary because he might already have his questions answered. 

5. Avoid red flag:Don’t use round numbers: Example: use $2,967 instead of $3,000. $3,000 indicates an estimate.Answer All Questions: Leave no blanks.Avoid “Misc.” and “Other” Deductions.Bad Debt Expense: Often questioned. Casualty Losses: Often Questioned.Medical Expenses: Remember the expenses need to exceed 7.5% of Adjusted Gross Income.Charitable Contributions: Understand the limitations and what constitutes a legitimate donation.Home Office: make sure that you understand it and you can support the usage of home office before taking it.

6. Amendments: If possible, try to avoid amendments. The filing of an amended tax return may attract IRS attention and subsequent scrutiny. An amendment can possibly open you up to an examination of both the amended return and the original return. However, if you do a good job on using detailed explanations, the agent may decide the audit is not worth the trouble.
7. When to filecertainly recommend that you have your return prepared early. If you have a big refund and are unconcerned with audit issues, file early and get your money back.It has been claimed that the later you file, the less likely it is the IRS will pick your return to be examined. We do not know for sure if this is still true. But….Due to budget constraints there is a limit to the number of returns selected for examination. Most returns are selected by the end of the summer, so file on the last extension possible (October 15th). By then it’s likely that the IRS has already reached its yearly quota of audited returns so your chances of an audit is reduced.If you are concerned about a potential audit, never file until the last minute. It probably won’t hurt and can possibly decrease your chances of being selected.

Conclusion:If your return is not simple, I suggest that you seek for an experienced CPA to prepare your return. It will not only reduce the errors, save your taxes and probably reduce your chance of being audited. A good experienced CPA usually accesses the reasonableness of your return and has you on board of preparing an audit.

I always said, if your return has more than a 10% chance of being audited, you would be audited 5 times (10% x 50 years) in your life. Is that the kind of risk you want to take?

Topics: Individuals | No Comments »

Business Tax Overview

By cpa | March 28, 2008

When you have your own corporation, you are responsible for many other tax obligations. Many new entrepreneurs are overwhelming with many complex and burdensome bookkeeping and tax obligations.
 When you are an employee, you do not have to worry much about taxes. Almost all of your taxes are withheld from paychecks by your employers. But now you are obligated to be in compliance with all of the tax requirements.
 Federal, state and local government impose taxes. Federal government has employment taxes, and income taxes. State government has employment taxes, income taxes, sales tax and other local taxes. This article will provide you an overview of the different taxes may apply to you. However, you should contact your state and local tax department for other applicable tax in your state or city.
  Employment Taxes: When you need to hire people to help you, you need to be concerned about obeying employment tax law.
 The tax laws you have to follow when you hire helpers differ depending upon whether your helpers qualify as employees or as independent contractors by the government agencies.
 If you hire an employee to help you in your business, you become subject to a wide array of tax requirement. You must withhold taxes from your employee’s pay, and you must pay Social Security, Medicare taxes and other taxes for them. You have to know that whenever you hire an employee, you become an unpaid tax collector for the government. You are required to withhold and pay both federal and state taxes for your employees. You must pay these taxes periodically (yearly, quarterly, monthly, or semi-monthly) by making tax deposits.

The IRS imposes employment taxes on both employer and employees. Employers and employees are each required to pay 6.2% Social Security on the first $97,500 of an employee’s annual wages. The ceiling for the Social Security tax and 1.45% Medicare taxes on all wages. However, there is no such limit on the Medicare tax: Both you and the employee must pay the 1.45% Medicare tax on any wages.

 When you own your corporation and you work as an employee for your corporation, you are subject to both employer and employee’s portion – 15.3% up to $97,500. Now you are the boss as well as the worker.
 If you hire an independent contractor, you need not comply with these requirements. All you have to do is report the mount you pay to the independent contractor by filed all required Form 1099.
 You may think it is up to you to determine whether any person you hire is an employee or an independent contractor. However, your decision about the classification is subject to review by various government agencies, including: IRS, state tax department, unemployment compensation insurance agency and worker’s compensation insurance agency. In general, if you have the right to control the way a worker does his work and the details of when, where, and how the work is done, and the worker is your employee. Since this is one of the major audit area. We will have a separate article for details.
  Income Taxes: You must file federal annual income tax for your corporation. This involves figuring out and calculating all your deductible expenses for the year and subtracting them from your gross income to determine your taxable income.  Most states charge a percentage of the income shown on your federal income tax return. You also have to file an annual state income tax return. All states except Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming impose income taxes. New Hampshire and Tennessee impose income taxes on dividend and interest income only. Some cities and counties also impose their own income taxes or annual business registration fees. For example, New York City imposes its own income taxes.  
  Sales Taxes:
 Almost all states and many cities impose sales taxes of some kind. The only states without sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. In general, sales taxes impose on sales of goods or products. If you only provide services to clients or customers, you probably are not subject to sales taxes. Most states either do not tax services at all or tax only certain specified services. However, you need to check with your state authorities. For example, Hawaii, New Mexico and South Dakota impose sales taxes on services.
 One common misconception is many people think that only corporation is subject to sales tax or employment tax. This is incorrect. Whether you are subject to employment tax or sales tax is not because of your form of business. Corporation or individual Schedule C filers are subject to the same rules when it comes to employment tax and sales tax.

Topics: Businesses | 2 Comments »

Home Office Tax Saving

By cpa | March 24, 2008

Do you spend a lot of your time working from home? If you do, you may find not only it is convenient, low overhead, but more importantly, it  allows you to deduct the business use of your home and take the advantage of tax saving.
 Your personal household expense are generally not deductible. By utilize your home office, you are able to convert part of your personal household expense to business deductible expense.
 The home office deduction is available to both homeowners and renters. You home can be a house, condo, co-op or even a mobile home. Not only you can use the office space, but also garage, storage space.
 In order to qualify the home office deduction, IRC 280 states that a home office deduction is available only to the extent that a portion of your home is used exclusively and on a regular basis as your principal place or at least you must be able to show business at least one of the following:
 

You also need to meet the following requirements:
 ·        If you are self-employed, your gross income is more than your related deductions.
 ·        If you’re a company employee, the home office need to be “for your employer’s convenience”. That means if you are encouraged to work at home to save the company office space, you could claim a deduction for the expenses your company doesn’t reimburse. But not if you negotiated with your boss to work from home a few days a week.
 Although it is not required that all activities taking place at home, it is important that your home office is used for book keeping, ordering goods, administration and meeting clients.
 The following are strategies to increase your bottom line when you  work at home:
 ·        Convert your furniture to business use: If you purchased the desk, file cabinet and chairs two years ago, you can still convert the assets to business.
 ·        Use your home office for storage: A deduction is allowed if you use your home for inventory or product samples.
 The example of the deductible expenses are:
 ·        utilities
 ·        phone bills - IRC 262 does not allow deduction for the first telephone into your personal residence. Local charges are deductible only if you install a second phone in your home. Long distance charges are deductible and should be documented.
 ·        rent
 ·        insurance
 ·        depreciation - if you have taken any depreciation on your home, you must pay tax on the depreciation deduction you have taken regardless of the gain is within the exclusion amount.
 ·        mortgage interest
 ·        real estate taxes
 ·        repairs and improvements.
 Please note that your home office deduction is limited to the net income from the activity conducted from your home. However, any expenses disallowed solely because they exceed your business income can be carried forward.
 Since a home office deduction can sometimes trigger IRS flags, we highly advice that you always have the following proofs ready:
 1.      A diagram or photographs to show that part of your home is being used as your office.
 2.      You home address is your business mailing address. You business card and stationery should show the same address as your home address.
 3.      Have a separate phone line installed in the business part of your house.
 4.      Keep a guest books of your clients’ visits.
 If you don’t qualify for the home office deduction, you can still deduct ordinary and necessary business expenses that you incur at home — for example, long-distance phone calls, a separate business telephone line, and the cost of office supplies and equipment. The home office rules only apply to the expenses of actually running and maintaining your home, such as utilities, rent, depreciation, home insurance, mortgage interest, real estate taxes, and repairs.

Topics: Businesses | No Comments »

Tax Planning and Home

By cpa | March 20, 2008

Should I rent or buy a place to live? How much money do you have to pay for housing? Should I buy it now or should I wait? Many people have asked  these questions.
Buying a house is a big dream for most of people. However, it is very complicated and it requires a tremendous commitment.

There are many issues need to be taking into consideration while you are buying a house.

  • A substantial down payment is needed.
  • There are a lot of costs associated with owning a house, such as insurance, property taxes, maintenance and repairs.
  • Unexpected loss of income due to job termination or unemployment may limit money available for the mortgage.

However, there are many advantages to owning your own home as well:

In recent years, Congress and the Internal Revenue Service have made your home potentially the greatest tax shelter. You can deduct mortgage interest and property taxes. Also, you can usually keep all of the gains when you sell your home. It’s even better if you use your home for your business.
Since these tax breaks took place, home prices have shot up in real estate markets. Many people’s gain from the sale of a home exceeds their lifetime savings. People have more reasons and incentives than ever to own their homes.

How long these breaks stay in place is a question mark. President Bush’s Advisory Panel on Tax Reform thinks we should limit the exclusions on some of the gains. But these changes would take at least a few years to become law. So enjoy it now.

 Here is the summary of all the deductions and benefits:

Property Taxes

You can deduct all the real property taxes you pay. If your bank escrows the taxes, you get the deduction when your bank makes the payment. You should receive Form 1098 at the end of the year from your bank.

Even if you’re a shareholder in a co-op apartment building, you get to deduct your share of any property taxes paid under Internal Revenue code section 216.  A letter is provided to you by the co-op explaining how much is deductible per share owned.

Deductible taxes include all state or local taxes for the general welfare of the state or locality. However, it doesn’t count any trash or garbage collection fees or homeowner association charges.Owned More than One Residency? There’s no limit on the number of properties for which you can deduct taxes paid. If you have 10 homes, you can deduct the taxes on all 10. However, if your deductions are too great, you could be subject to the alternative minimum tax.

Interest

Interest paid on the purchase of your principal residence is deductible. You can deduct the interest you pay to buy a second residence or vacation home as well. The residence interest deduction is limited to the first $1 million of debt.

 Home Equity? You can even take a home equity loan, and deduct the interest as qualified residence interest. Keeping in mind that Home-equity debt is limited to $100,000 debt. The IRS doesn’t care what you do with the borrowed money. You can use it for whatever you want, including a vacation or new car, or even a party to celebrate your newfound deductions.One of the beauties in this country is the Constitutional intent, which is pretty much on helping people live comfortably in this nation. When your interest payments are made deductible it can almost be thought of as the government subsidizing your home purchase.Example:

If you have a mortgage of $400,000 at an interest rate of 6%. You get to deduct $24,000 interest from your income.

If you’re in the 25% tax bracket, $24,000 in interest paid only takes $18,000 out of your pocket. Uncle Sam subsidizes the other $6,000.Gain exclusion
The 2–out-of-5 Rule: To qualify for the $250,000 ($500,000 on a joint return) exclusion, you must have owned and occupied a home as your principal residence for at least two years during the five-year period ending on the date of sale.

One-Time Exclusion? This is not a one-time exclusion. You can get another full exclusion every two years. You don’t have to buy a new house from the money you receive from the sale of your home. You can even rent after you sale your home.Partial Exclusion? You can even get a partial exclusion based on the time of use and ownership. But you need to be able to justify the sale of your residence based on the following reasons:

 

If you don’t meet the “safe harbor” test all is not lost. You may want to talk to your CPA. He or she might be able to help you to prove that it was the primary reason for the move based on the facts and circumstances of your case.

Example:

The partial exclusion is based on the maximum exclusion, not on the basis of your actual realized profit.

If you (single) bought a residence for $250,000 and sold it for $350,000, because of a job change, after only one year.

You are qualifying for a partial exclusion. It was your principal residence for one year out of two.

$250,000 Maximum Exclusion x 1 year / 2 Years = $125,000 – Maximum Exclusion

$350,000 Sold Price - $250,000 Purchased Price = $100,000

You can exclude the whole $100,000 gain.

Home offices
In the past, it’s a red flag to use home offices. IRS is getting friendlier with home office taxpayers. Let’s say you use 20% of your house as a home office. You can deduct depreciation and expenses (utilities, repair, etc.) for working in that part of the house.In the past, when you sold your house, 20% of the gain wouldn’t qualify for the exclusion because that 20% wasn’t used as a “residence.” Now, the IRS doesn’t care even if you used your home 90% for business as a home office. You can now exclude as much as 100% of your gain, up to the $250,000/$500,000 limit.

You only need to recapture the gain to the extent of depreciation taken on the building. That’s taxed at 25%.
Many people who work out of their homes and don’t claim home offices may begin to consider taking the advantage of home offices. If you are not sure how to maximize your tax benefits, please consult your CPA.

Topics: REAL ESTATE | No Comments »

Reduce Taxes For Education Expenses

By cpa | March 17, 2008

College (or Higher) Education Expenses / Back to School

If you or your children are studying for college, graduate, or professional level education, then you might be able to utilize the following information to reduce your taxes.

  1. Hope Tax Credit: The first $1,000 of tuition and fees paid for higher education and half of the next $1,000 of tuition and fees paid, up to a maximum credit of $1,500 per student. You may claim a tax credit up to $1,500 for the first two years in college.
  2. Lifetime Learning Tax Credit: 20% of the first $10,000 of qualified education expenses. The maximum credit is $2,000.   This credit applies to anyone taking post-secondary, vocational or graduate education courses

Income Limitation: Both credits are only available to income less than $53,000 for single taxpayers or $106,000 for married filing jointly taxpayers.

  1. Tuition and Fees Deduction: The deduction can be up to $4,000 for tuition and fees paid for higher education.

Income Limitation: The deduction is only available to income less than $80,000 for single taxpayers or $160,000 for married filing jointly taxpayers.

Note: You may not claim the tuition and fees deduction with Hope Tax Credit or Lifetime Learning Tax Credit for the same student.

 

Some states allow a tax credit for college tuition.  For example, New York allows a credit up to $ 400 for undergraduate college tuition. 

Income Exceeds Limitation: If you improve your professional skills by attending courses that are required by your employer, but your income exceeds the limitation, you may deduct the education expenses as an employee business expense deduction on Schedule A. If you are a self-employed business owner, you may deduct the education expenses on Schedule C.

Topics: TAX | 1 Comment »

Common Misconception of Term Life

By cpa | March 14, 2008

           In recent years, a “Term Life Insurance ” very popular, and many families (particularly younger families), are willing to protect their families, because it premiums low, even if the purchase of half of million protection, and need only several dozen dollar per month.

            This is a feature of life insurance, the premiums can be locked low for a considerable period of time as short as 10 years, as long as 30 years, during this period of time, regardless of how is the body insured, the premium will not increase. Such insurance as a “Term Life,” possibly with the security costs of the lock.

             However, there is a common misconception that Term life insurance in 20 or 30 years will lapse after a regular basis, Term life is in fact a life-long, 20 or 30 is the premium lock period, after both physical situation, Auto insurance still remain in force, that is, Term life insurance can be whole life insured, the insurance companies will not ask for health checks.

             Of course, after the premium lock period, the premium would be substantially increased. When you buy term life insurance, “the policy agreement” has been specified, in the future premiums lock period, the maximum amount of insurance premiums; according to past experience, usually insurance companies collected premiums under the maximum amount.

Topics: LIFE | 3 Comments »


« Previous Entries