Tax Returns, W-2s, 1099s, etc. Available from IRS

The IRS keeps copies of your tax returns, W-2s, 1099-MISCs, 1099-Rs, etc. You can quickly get free copies of these documents online by going to the website http://www.irs.gov/Individuals/Get-Transcript .  You’ll have to create an account to get access to your documents.

You can also get documents showing how much you owe the IRS, when your returns were filed, when they were processed, etc.   

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/ (512) 293-4170

Enrolled Agent; Investment Advisor Representative

Home Office Deduction – Simplified Option

Starting in tax year 2013, the IRS offers a new simplified way of claiming a tax deduction for the business use of a home office.   The new optional method allows taxpayers to claim a standard deduction of $5 per square foot of their home used for business.  The maximum allowed size that can be claimed is 300 square feet, which translates into a $1500 deduction.

Some of the advantages of using this option are that you no longer have to split deductions such as mortgage interest and real estate taxes between Schedules A and C (or F).  Also, there is no depreciation deduction to claim and no depreciation recapture when you sell your home.

The criteria for claiming a home office deduction is unchanged.  My earlier article, Home Office Deduction, discusses the criteria in more detail.

The new simplified option may not be more beneficial to everyone. For a more detailed discussion of this option see the IRS article Simplified Option for Home Office Deduction and Revenue Procedure 2013-13.   

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/ (512) 293-4170

Enrolled Agent; Investment Advisor Representative

The Cost Basis and Holding Period of Inherited Property

If you inherited property and are planning on selling it, you may be wondering how to treat the gain or loss. First, the basis of the property is its fair market value at the time of the decedant's death. This is usually referred to as "step-to fair market value". So, you don't have to worry about what the decendant paid for the property, just what is was worth when they died.

You can see that this is probably beneficial because many things, such as real estate, appreciate with time. Plus, it might be really difficult to determine the original cost because the property could have been purchased many years (decades) ago.

The holding period of the inherited property is characterized as long-term, regardless of when the decedant purchased it. This is another break because of the low long-term capital gains rate compared to the short term cap rate.

There are exceptions for the step-to FMV treatment.  For example, IRAs and 401(k)s.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas

contact:(512) 293-4170)  service@brycast.com http://www.brycast.com/

Enrolled Agent; Investment Advisor Representative

Potential Double Taxation and the Employee Stock Purchase Plan (ESPP)

Many large companies offer their employees the opportunity to purchase company stock at a discount. These discounts can range from a few percent to up to 15%. This presents a good opportunity for employees to make a long-term investment in their employer, at a discount. But, some employees choose to sell the ESPP stock immediately after purchase and use the discount as additional income. Correctly determining the stock’s basis (cost) is a little tricky. And this is where many people can end up paying tax twice on the discounted amount.

When the stock is first purchased for you at a discount, no taxes are owed. However, after you sell the stock, taxes are owed. How the stock sale is taxed depends on hold long you held the stock. If you sell the stock within 1 year or less after purchase, the sale is considered a disqualifying disposition. In this case your employer will add the discount that you received (also known as the bargain element) to your compensation for the year. If you look closely at your pay check stub after the sale, you should see that your gross income increased by the bargain element. And, your W-2 should also show the additional income as an increase in the Box 1 amount.

This stock sale must be reported on your individual tax return, Form 8949 and Schedule D. Reporting the correct stock basis (cost) is the tricky part. Here is an example of what should be done.

Suppose that your employer’s stock is selling for $100 per share. Your employer purchases 10 shares for you ($1000) and sells it to you for $850 (15% discount). Then you immediately sell the stock for $1000. Even though you bought the stock for $850, this is not your basis. In fact the 1099-B that you receive from your broker may even (incorrectly) report your basis as $850, or not report the basis at all. Your correct basis is $1000, not $850. Why? Remember, your employer has added the bargain element to your compensation and it appears on your W-2, added to your Box 1 income. So, you are taxed on the bargain element through your W-2 and if you report your basis as $850, you will be taxed again on the same bargain element.

In this example, the correct way of reporting the stock transaction is to show the sales price as $1000 and the cost as $1000. In actuality, there is almost always a brokerage fee for the transaction. So, these types of transactions typically result in a small short-term capital loss.

If you prepare you own tax return and have sold stocks from your ESSP, you may want to double check your reported transactions. And, if you pay a professional preparer to do your return for you, there could still be a mistake if your preparer was unaware that the stock sales came from an ESPP. If you discover a mistake in a prior year tax return, you may still be able to correct it and claim a refund. But there is generally a 3 year statute of limitations for claiming refunds, so don’t wait too long.

Reporting the sale of stocks purchased through an ESPP can get more complicated if you sell the stock in what is known as a qualifying disposition, or you sell the stock after you leave the employer from whom you purchased the stocks.

If you need help preparing your tax return, please contact us at 512-293-4170 or through email at service@brycast.com.  We are tax professionals licensed through the IRS.  

Brycast Financial Planning in Austin, Texas --- We Can Help

Income Tax Preparation in Austin, Texas

Contact: service@brycast.com www.brycast.com

Enrolled Agent; Investment Advisor Representative

Disclaimer: The information provided in this article is only for educational purposes. It may not reflect all rules, regulations, or laws for the tax year discussed and it may not pertain to your situation. It is not intended as investment or tax advice. Please consult a professional tax preparer or financial advisor to assist you.

Home Office Deduction

If you use a portion of your home for business, you may be able to claim a home office deduction on your income tax. The deduction allows you to claim expenses related to using a portion of your home as a business office. These expenses may include, mortgage interest, real estate taxes, utilities, insurance, etc. The deduction is available to both employees and the self-employed. And, you don’t have to be a homeowner; the deduction is available for renters too. However, there are several rules that you must follow in order to claim the deduction.  The relevant IRS document is IRS Pub 587. It’s about 35 pages long, so please refer to it for more details about the deduction. I’m just trying to make you aware of the home office deduction, and provide a few of its highlights.

Probably the most difficult rule to adhere to is that you must use your home office exclusively and regularly as your principal place of business. The exclusive part means just that, only business use. You cannot use your office for business for some part of the day, and personal use at any other time. A good way to ensure exclusive use is to use a spare room for your office and avoid putting entertainment devices in it. Just keep business related furniture and equipment in your office. It’s even better if you have a separate structure not attached to your home that you can use as an office.

There are a couple of exceptions to the exclusive use test. The first is that you can use part of your home for storage of inventory or product samples.  However, you must meet the following tests

·         You sell products at wholesale or retail as your trade or business 

      ·         You keep the inventory or product samples in your home for use
               in your trade or business
      ·         Your home is  the only fixed location of your trade or business
      ·         The space you use is a separately identifiable space suitable for storage.

Among others, individuals that sell mechanics tools from a truck or cosmetic salespeople might qualify for this exception if they keep an inventory in their home.

The second exception for the exclusive use test is for those that run a home daycare.  In order to qualify for this exception,

·         You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.

      ·         You must have applied for, been granted, or be exempt from having, a license,   
              certification,  registration, or approval as a daycare center or as a family or group daycare
              home under state law. You do not meet this requirement if your application
             was rejected or your license or other authorization was revoked.

Regular use is not clearly defined by the IRS. Here is what one of their publications says on the topic, “To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. You must consider all facts and circumstances in determining whether your use is on a regular basis.”  They’re actually using the word “regular” in the definition of regular use.

In general, if you qualify to deduct the business use of your home, then you can deduct the business percentage of the home operating expenses that are proportional to the size of your home office. For example, suppose that you have a 2000 square foot home, and the size of your home office is 200 square feet. Then, the business use percent of your home is 10% (200/2000). If your utility bills for the year are $3000, then you can deduct $300 as a business expense.   Similarly, if your annual homeowners insurance is $1200, then you can deduct $120 as a business expense.  

If you are an employee, that is you are not self-employed, then you must be using your home office for the convenience of your employer and you must not rent out any part of your home to your employer.  An example might be if you do phone sales and are required to work out of your home, using your own phone.  Your business expenses are listed on Schedule A, under the Unreimbursed Employee Expenses section and you probably will need to complete Form 2106 too.

If you are self-employed and file Schedule C, then expenses for business use of your home are listed on the IRS Form 8829.

Remember, if you are claiming a home office related expense, you can only claim the business use percentage of the expense that relates to your home office. But if you qualify for the home office deduction, it's a great way to reduce your income tax liability.

Brycast Financial Planning in Austin Texas --- (512)-329-2020
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Rental Real Estate Income and Expenses

Owning rental real estate can be a good way of building wealth. Many millionaires built their fortunes through real estate investing. However, sometimes people get into the rental business because they are forced to. That is, they may want to sell their house, but the housing market is depressed and they can’t sell their house for more than what they owe or what they feel it is worth. So, they become “accidental” landlords and have to start dealing with tenants and more complex income tax preparation. This discussion is for people who have a rental property that is used 100% for rental, i.e. no personal use.

If you actively participate in real estate rental, it’s generally considered a passive activity. Active participation means that you own at least 10% of the property, make management decisions like selecting tenants, or arranged for others to provide services, like repairs. As a passive activity, deductions for losses (expenses) are limited to the extent of rental income. So, if you have $12,000 of rental income for the year, you can only deduct up to $12,000 of rental related expenses.   And, it’s very easy to have large expenses related to your rental property. If you still have a mortgage on the rental, the interest is deductible along with depreciation, real estate taxes, insurance, and any repairs that you may have to make throughout the year. If your rental is vacant for a few months in the year, income drops but expenses keep going. Generally, all income and expenses related to rental real estate is reportable on Schedule E.

As I said, generally rental expenses can only be deducted up to rental income. However, there is a special allowance.   If you actively participate in a passive rental real estate activity, then you may be able to deduct up to $25,000 of loss from the activity from your non-passive income.  Non-passive income means ordinary income and investment income.  This is potentially a huge benefit in that it can lower your overall income tax obligation.  However, there is one downside…phase out. The $25,000 exemption begins to phase-out if your modified adjusted gross income (MAGI) is $100,000 and it disappears entirely if your MAGI is $150,000 or more.
If you have an un-allowed loss because your MAGI is too high don’t worry, you can carry forward that unused loss to future tax years, indefinitely.  So, in the years where your net income is positive you can still offset income by using prior years’ un-allowed losses. You just have to remember to carry forward the loss until it is used up.  

That Often Overlooked Expense…Depreciation
If you are new to renting residential real estate you’ve probably heard about depreciation, but don’t really understand it. Think of it as a way to recover most of the money you spent purchasing and remodeling your home, spread over 27.5 years. You cannot depreciate the cost of the land, only the house. But, the IRS allows you to deduct an annual depreciation expense equal to your adjusted basis, divided by 27.5.  There are several rules around depreciation, too many to discuss here. But, depreciation is an important expense that you should not ignore, so consult a tax pro like an Enrolled Agent if you are having difficulty determining the depreciation deduction.

Congress has written tax laws that are very generous when you are renting for profit. However, the generosity disappears if you rent to a relative, or below fair market value.

If you rent to a relative, your rental property may be considered personal use, i.e. treated the same as a second home. In this case, you can still claim mortgage interest and real estate taxes, but they are reported on Schedule A, as itemized deductions.

If you rent below fair market value, the activity is considered "not for profit". Deductible expenses start to disappear.  You can still deduct rental expenses, however only up to rental income.  The special $25,000 loss allowance is gone, and you cannot carry over losses to future tax years. Rental expenses are claimed on Schedule A as itemized deductions, subject to the 2% AGI limitation. Rental income is reported on Line 21 of Form 1040. 

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: (512) 293-4170 service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Double Taxation of Foreign Income and How to Account for It

If you own stocks or bonds of foreign companies and receive dividends or interest payments, it could be that you are being double taxed.  Quite often the foreign company will tax you on the income, and the US will tax you on the same income.  The US provides two options to compensate for foreign taxes paid. The first is the foreign tax credit; the second is an itemized deduction.

Assuming that you deal with publicly traded companies, you can find out if you are paying foreign taxes by looking at your brokerage 1099 statement.  On my brokerage consolidated 1099 statement, it appears in the 1099-DIV section.  The entry simply says on line 6, “Foreign Tax Paid”. To the right should be how much foreign tax you paid. It could also appear on the 1099-INT Line 6.

You can either take a tax credit or an itemized deduction for the foreign taxes paid. Usually, it is more beneficial to take the credit rather than the deduction. But, you may want to work your taxes both ways to see which way benefits you the most. Whichever method you pick, you must treat all of your foreign taxes the same. In other words, if you choose the credit, you must claim the credit for all of the foreign taxes paid. You cannot choose the credit for some and the deduction for others. However, you can switch between the credit and deduction for each tax year.

The foreign tax credit is calculated on IRS Form 1116. Most tax software will handle the calculations for you. You just have to tell the software that you had foreign income and paid foreign income tax. The actual credit should appear on IRS Form 1040, Line 47. If the resulting credit is less than the amount of foreign taxes that you paid, don’t fret.  The calculation for the credit involves the ratio of your foreign income to your taxable income, then a multiplication of that ratio by your tax. Then, the lesser of that amount compared to your actual foreign taxes paid is your foreign tax credit.

If the foreign taxes paid are not more than $300 ($600 if married filing jointly) you may be able to take the credit without filling out Form 1116. All of your foreign income must be from interest or dividends, and must have been reported to you on Forms 1099-INT or 1099-DIV.

If you choose to go the itemized deduction route, enter the amount of foreign taxes paid on Schedule A, Line 8 (2012 version of Form).  

Remember, if you were entitled to claim a foreign tax credit in 2013, 2014, or 2015 but didn’t claim it, you can still amend the return and claim the refund.

More information about the foreign tax credit can be found in the following IRS documents, Topic 856-Foreign Tax Credit and Credit or Deduction.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: (512) 293-4170 service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative