We are often asked about college tax credits.
One of the largest credits on the books is the American Opportunity Credit which tops out at $2,500 each year.
In order to qualify for this credit, the family income cannot exceed $180,000 ($90,000 if single).
This credit allows for a 100% return of the first $2,000 spent, plus 25% of the next $2,000 spent. The money must have been paid during the taxable year for tuition, fees, and required course materials.
Colleges and Universities will provide students with a form 1098-T in January, and that form is needed in order to prepare your tax return. This form reflects tuition only, so in addition, you must provide your accountant with the amount paid for books and required course materials including calculators, tablets, or laptops.
This credit is only good for the first four years of college (undergraduate degree).
There are other vehicles which might help with expenses beyond the four years such as the Lifetime Learning Credit or Tuition and Fees Deduction.
In order to claim the American Opportunity Credit, you must complete a Form 8863 and attach that to your 1040.
Any benefit from scholarships and 529 Plans must also be taken into account.
We are often asked about penalties that the IRS assesses for filing late, paying late, etc.
The penalty for filing a return late is 5% of the tax owed per month. This is called the failure to file penalty. Thankfully, it is capped after 5 months, but that totals up to 25% of the total tax due which is quite hefty. There is also a minimum penalty of 100% of the tax due or $135.
If there was no tax due, then there is no penalty assessed. The IRS is happy to hold your refund for additional time of course.
An extension is a way to avoid a failure to file penalty, and that gets you an additional 6 months to file making your return due not April 15th, but October 15th.
It is possible to have late filing penalties forgiven. In fact, I called the IRS just yesterday and they forgave nearly $1,400 in penalties for a taxpayer, but habitual late filers will receive no mercy.
There is also a failure to pay penalty, so do not file an extension if you will owe money unless you send that payment in with the extension. The failure to pay penalty is ½ of 1% of your unpaid taxes, and even if you set up an installment agreement, that continues to accrue. It maxes out at 25% of your total tax due.
So, it is expensive to owe the IRS. My best advice? File on time and never fall behind. If you do, then call us to help you set up an installment plan and start whittling that debt down.
We are so frequently asked, “Who can I claim as my dependent?”, and hope this clarifies it for you.
The IRS states that a dependent must be either your “qualifying child” or your “qualifying relative” and must meet certain tests in order for you to claim them.
There are 5 tests to qualify a child:
Relationship – must be your child, brother, sister, descendant of one of these, or a foster child
Residence – Must share your residence for more than half the year
Age – Must be under 19 or under 24 and a full time student for at least months, or totally disabled
Support – Must not have provided more than half of their own support during the year
Joint Support – The child cannot file a joint return with someone else
There are 4 tests that will qualify a relative as a dependent:
They are not the “qualifying child” of another taxpayer
Gross Income – Dependent has gross income of less than $3,950 (2014 Number)
Total Support – You provide more than half of the total support for the year
Member of Household or Relationship – The person must live with you all year or be a relative
My girlfriend lived with me all year and didn’t work. Can she be my dependent?
Yes because she lived in your home and did not make more than $3,950 for the year.
My parents live in their own home and only have social security income. Can I claim them ?
Yes if you provide more than half of their support, social security by itself is not taxable and they are then your dependents for tax purposes.
We hope that this is food for thought and answers some questions.
Rachel B Santana, EA
Hamilton and Phillips PA
We have received so many questions regarding Obamacare as it has been termed. We wanted to address the concerns of our clients and try to explain a bit how this can affect you at tax time.
Individuals with unaffordable health care can elect to use the government exchange. These exchanges are supposed to help qualified individuals find coverage that fits their budget and potentially gives them financial assistance to help with the cost of coverage beginning in 2014.
As we all know, the exchange maintains a website and allows individuals to compare information on health plans. The exchange offers four levels of essential benefits coverage which includes bronze, silver, gold and platinum with the higher level plans costing the participants more.
The required contribution is the premium for the applicable plan, reduced by the allowable premium assistance credit (PAC) for the taxable year.
The PAC is a refundable credit that helps subsidize the purchase of health insurance and is available to applicable taxpayers. The criteria to qualify for the PAC includes meeting an income test which places the household income between 100 and 400 percent of the Federal Poverty Level (FPL) for the taxpayer’s family size.
In order to qualify for PAC, individuals report household income to an exchange and then enroll in a health plan through the exchange. The financial information provided is used to calculate the applicable individual’s share of the premium.
This credit is on a sliding scale and as the household income increases, the taxpayer’s required share of contribution increases and the credit goes down. Because it is based on an estimate, here-in lies the problem.
If 2013 were a bad year for you, you may decide to enroll in the exchange and would qualify for the credit. However, if your income increases for 2014, you would then owe some or all of the credit back. Below is a good example.
Amy is single and purchases health insurance on the exchange. In 2013, her MAGI was 200% of the poverty line or $23,000. However, in 2014, she had a better year and earned $35,000. At tax time, her additional tax due would be $1,250 because she received too much health insurance subsidy during the year. As the size or your family increases, so does the potential to receive a larger credit and therefore a larger potential pay-back at tax time if your income increases. Beware!!!!
Rachel Santana, EA
If you are going to accept a job working out of the country, this exclusion will become your favorite part of the tax code.
It is available to US Citizens and resident aliens who live and work abroad. It allows you to exclude all or part of your foreign salary from income when you file your U.S. tax return. It also allows you to exclude costs for personal services and certain foreign housing expenses.
There are several ways to qualify, but the most common is based on time. You must be present in a foreign country or countries for at least 330 full (24-hour) days during a period of 12 consecutive months. What does this mean? You work in the foreign country for a full year (it doesnâ??t have to be a calendar year) and come home for a couple of weeks at Christmas and a couple of weeks mid-yearâ?¦ you still qualify.
The amount you can exclude (2013) is $97,600 per qualifying person.
The exclusion is claimed using Form 2555, and you absolutely need our help to fill this form out as it is complicated and often confusing, but the exclusion is absolutely worth it.
Another important fact to remember is that you cannot take a foreign tax credit or deduction on any of the income excluded. This would be considered double-dipping and would result in the exclusion being revoked. Finally, the exclusion is not available to US Government Employees working abroad.
This exclusion could save you up to $38,064 in real tax dollars (bottom line) based on your income tax rate. If you are or have the potential to be employed outside of the United States, then come and talk to us first. We can help.
Many changes have taken place over the last few years. Eight years ago, we became experts on 1031exchanges which allow you to defer paying taxes on gains when selling a property. So many clients were selling real estate at a gain, we looked for ways to minimize, defer, or alleviate their tax burden resulting from these sales. However, the world is a changing place.
One of our most common questions now is, ?What is the tax consequence of my house being foreclosed on / short sold?. We have had so many clients with 1099-Cs issued to them over the last couple of years. Again, we have become experts, but in a different area.
First, if you are significantly upside down on your home, you are probably considering letting the property go back to the mortgage holder. Are there tax consequences? Absolutely, but we can help.
Between a short sale and a foreclosure, short sales are usually your best option. This occurs when you can find a buyer for your home and the bank agrees to settle for less money than you owe. Ultimately, the bank is short. The bank cancels the debt and agrees not to pursue you or lay claim to your personal assets for the difference. In case of foreclosure, there is no guarantee that the bank will not continue to pursue you and put liens against your other assets.
Where do we come in, and how does this affect your tax bill at year-end?
Cancelled debt is considered income for tax purposes. If this home was your residence and you did not take cash out while you owned the property, then you may be able to exclude the cancelled debt from income using code section 108(a)(1)(E). Even if you took cash out, but used that cash to improve the property, then this exclusion may also work for you. However, the ability to exercise that exclusion as of now is set to expire at the end of 2013.
Bankruptcy is another option which may allow you to exclude the income, but it should be filed prior to losing the property.
In addition, some people find relief under the insolvency exclusion which means that at the time you lost the home, your liabilities exceeded your assets. Insolvency involves a complicated calculation and should include your retirement accounts and the home that was relinquished along with the debt on that home.
We have become experts in the area of foreclosures, short sales, and cancellation of debt. If you have questions in any of these areas, then let us help you.
Rachel Santana, EA
Hamilton & Phillips PA
Most business owners start out as a Sole Proprietor. It is the easiest entity to work within. It is for single-owner businesses. The business does not have to be registered each year, and more importantly, it does not need a separate tax return filed each year. Business activity is simply reported on a Schedule C as part of the individual?s personal income tax return (1040).
It is important to know that at tax time, the individual will owe income tax on the net profit from their business. In addition, they will also owe what is commonly referred to as self-employment-tax. This is comprised of 12.4% (of net profit) due in for Social Security and 2.9% for Medicare. This seems very high, and it is high because as a business owner, you are not only required to pay in 7.65% of your earnings, but match them as your own employer. Again, keep in mind that this is above and beyond the income tax that is due.
An LLC is a business structure that is formed to limit the liability of the member(s) who own the business. The business can file taxes as a sole proprietor, partnership or corporation. However, there are limited opportunities / time frames in which the election must be made to be treated as a corporation and a filing is required with the IRS. An LLC can have a foreign partner, but an S Corp cannot. These entities are great for someone purchasing rental property to allow for asset protection and isolate that property. This entity may or may not need an additional tax return depending on the number of partners and the elections made which would be an additional fee. It is also required to be renewed with the state each year for a fee.
An S Corporation is a corporation that makes an S Election which is a special designation with the IRS. This entity must file it?s own tax return (1120S), but does not pay it?s own taxes. Instead, the profit or loss from the corporation is passed on to the shareholders and reported on their own individual tax returns via a K-1 form issued by the corp. This entity allows the business to pay out only a portion of the profit as salary, the amount determined by what is ?reasonable compensation?. This amount is subject to the roughly 15% of self-employment / payroll tax eluded to in the paragraph above, and the remainder of the income flows thru in the form of investment income on the K-1 only subject to income tax. The corporation needs it?s own tax return which is an additional fee. There are fees for payroll, whether using a bookkeeper or payroll company, and this entity also has to be renewed with the state every year for a fee.
To summarize above, there are instances in which each of the above
entities are best and this is governed by individual circumstances of the
business. Hamilton and Phillips can help you to figure out
the best entity for your business. We also form LLCs, Corporations, Partnerships, etc... We look forward to helping you.
We recently had a client with a unique situation.
In the case where a US Shareholder was partnered with a foreign partner in a business venture. The foreign partner was required to have 39.6% withheld on all of his earnings even though the earnings were not generated in the US nor was he a US resident.
While there was no difference in the taxes paid by the US Partner as all worldwide earnings by US Citizens are subject to taxation in the US, there was a huge difference to his foreign partner. By opening a corp in another country that does not tax income generated outside of that country even if the corp is housed there, we are able to pass the foreign partner his earnings at gross and then they are simply subject to taxation in his country of residence.
We always learn thru experiences and circumstances surrounding clients, and this resulted in huge tax savings. We will continue to build on this knowledge looking for ways to implement these tax saving strategies into situations that our clients face.
1.) Any expenses incurred prior to the home being available and advertised for rent must be capitalized, not expensed meaning that the repairs, etc are depreciated over the life of the dwelling which is 27.5 years for a rental home.
2.) Any repair bills must be detailed as to what is being done so that the auditor can distinguish between a repair and an improvement.
3.) The break-down of the home on the depreciation schedules between land and house must follow the % on the tax appraiser's website unless there was an appraisal done at the time the property became a rental breaking down the dwelling and land.
4.) All write-offs require a receipt, not just a credit card statement, and the address of the property should be written on the receipt. The auditor wants to see what was purchased and will also want to know why.
5.) If you use a management company, make sure that they don't have full authority to screen and decide on tenants. That decision must be the owners in order to establish that they "actively participate" in managing the property.
This audit was an excruciating experience for this client and it is not over. I am hoping that this will help us to better prepare all of our clients that own rental property to be successful if they find themselves before an auditor.