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

Adoption Credit from IRS – Help with Adoption Expenes

The adoption credit is one of the better credits offered by the IRS. In 2016, the credit is up to $13,460 per child.  The adoption process is usually expensive, but the tax credit can help defer some of the costs.

Qualified adoption costs usually include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses, and other expenses directly related to the adoption. An eligible child must be under the age of 18. However, if the child is physically or mentally handicapped or unable to care for themself, then there is no age limit.

The credit is subject to income limitations. If your modified adjusted gross income (MAGI) is less than $201,920 (2016), the credit is not affected. However, if your MAGI is above $201,920 the credit begins to phase out, and is completely phased out at $241,920.  

For more information about the adoption credit contact Brycast at (512) 293-4170 or through email at service@brycast.com


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

Paying Your IRS Bill -- Installment Agreements – Offers in Compromise

Installment Agreement

If you owe the IRS money and cannot pay the full amount, you may be feeling a bit nervous. The most important thing to remember is stay in contact with them. There are ways to pay off your tax debt. You shouldn’t ignore any letters they send you, phone calls or not file income tax returns.

If you cannot pay your tax debt in one payment, you may request an installment agreement from the IRS.  If you owe $50,000 (updated tax year 2016) or less, an installment agreement is pretty much guaranteed, and you can apply online.  However, if you have not filed any prior year tax returns, the IRS will probably require that you file those returns before the installment plan is set up. You should also be aware that penalties (failure to pay) and interest are charged until you pay off your debt.  If possible, you might try to borrow money from a credit union or bank, in order to avoid penalties, and possibly get a lower interest loan.  You can request an installment plan by clicking here or by calling the number on your tax bill.

If you owe more than $50,000, you may still qualify for an installment agreement. However, you may need to complete IRS Forms 433F and 9465, then mail the forms to the address on the bill. Or, you can call the phone number on the bill.

For more information about payment plans, read this IRS article.

Offer in Compromise (OIC)

An OIC is an agreement between the IRS and you that settles your tax bill for less than the full amount owed. The IRS doesn’t rubber stamp the OIC, so don’t expect it to happen unless your claim for being unable to pay holds up to intense scrutiny by the IRS. I mention the OIC as an option because I know that there people who genuinely cannot pay their tax liabilities, and this may be their only recourse.  Here is the link to the IRS article discussing the OIC.  

If you need help filling out or filing the forms, Brycast can assist you.

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 and Investment Advisor Representative

Ministers, Priests, Rabbis and Social Security Tax

If you are a member of the clergy, you may be aware that you can opt out of the Social Security system. However, there are strict and timely procedures to follow.  This exemption only applies to your ministerial services such as performing sacerdotal functions, conducting religious worship, controlling, conducting, and maintaining religious organizations that are under the authority of a religious body that is a church or denomination.     

There are several conditions that must be met to claim the exemption. If you meet all of the conditions (listed in IRS Pub 517), you must file IRS Form 4361 by the due date of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment income. Part of these earning must have been from ministerial services. Also, the 2 tax years don’t have to be consecutive. The IRS tends to be unforgiving relative to this deadline, so timeliness is extremely important.

The IRS will notify you about you application status. If you are approved, you’ll receive a copy of your 4361 stating so. Be sure and keep this copy for your records, and present it to your tax preparer at tax time.   

If you are granted an exemption to paying Social Security tax, you should be saving for your retirement through some other vehicle. If your church offers a retirement plan, consider participating. Also, you can set up an IRA for yourself. If you have enough self-employment income, you may be able to set up a SEP-IRA and save even more money for your retirement.

Also remember that ministers are not exempt from federal income tax or non-ministerial self-employment tax. The US has a multitude of tax systems. Form 4361 only applies to be exempt from Social Security tax on ministerial income.   

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 and  Investment Advisor Representative

Avoiding Tax Scams

The IRS is warning taxpayers that it is seeing an increase in tax related scams. Scammers are targeting people who do not have a filing obligation. They are encouraging these individuals to file in order to claim credits, refunds and credits for which that are not entitled.

At Brycast your tax return is prepared by an Enrolled Agent. Enrolled Agents are federally licensed to represent taxpayers in all tax matters before the IRS.  Enrolled Agents must pass all parts of the Special Enrollment Examinations which cover individual and business tax returns, as well as a representation, practices and procedures. Additionally, they must pass a background check to ensure that they have not engaged in any conduct that would justify the suspension or disbarment of an enrolled agent from practice before the IRS.   

Here is a list of red flags that the IRS says you should watch for:

• Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
• Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
• Unfamiliar for-profit tax services teaming up with local churches.
• Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
• Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.

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 and Investment Advisor Reprentative

Do You Want to Pay Taxes? 401(k) and IRA Distributions Consequences

Who in the right mind would answer yes? I’ve had several clients that have taken a distribution from either a 401(k) or an IRA. They were asked by the plan administrator if they wanted to pay taxes. Their answer was of course, “No”.

What the administrator should have said is “We are withholding 20% of the distribution as a payment to the IRS that goes toward your total tax bill. You could owe more or less taxes on the distribution; it depends on your particular situation.  We can withhold a larger percentage if you want us to.”

The money inside a 401(k) has not been taxed, yet. The money in a Traditional IRA probably has not been taxed yet.  I say probably because it is possible to make a nondeductible contribution to an IRA.  When you take a distribution from one of the plans, the IRS is going to require that you pay taxes on the distribution amount that has not been taxed. However, the distribution is not considered in isolation; it is added to all of your income.

For example, let’s say that you earn $90,000 per year from your job, and you take a $10,000 distribution from your IRA. Adding the two together, your total income for the year is $100,000. And that is the amount that will be used to determine your taxable income.  Depending on your deductions, it could be that you are in the 25% tax bracket, or 10% tax bracket.  So, you don’t know what the correct amount of tax is that should be withheld at the time of the distribution. But, you should try to make an educated guess based off of your prior or current year tax situation.  Either ask the plan administrator to withhold that amount, or set the money aside yourself.

By the way, there is an early distribution penalty of 10% on the taxable portion of the distribution, if you are under 59 ½ years old. Although there are exceptions to the penalty, many people do not qualify for the exceptions and are unpleasantly surprised at tax time.  Try to either consult your financial advisor or a tax pro like an Enrolled Agent, before you take a distribution from your retirement plan.

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 and  Investment Advisor Representative

Summer Day Camp Expenses May Be Deductible

As you may know, there is a Child and Dependent Care Credit.  The credit applies to children under 13, and can be up to 35% of your qualifying expenses.  You can apply up to $3000 of the unreimbursed expenses for one child, and up to $6000 for two or more children.

The cost of summer day camps are considered qualified expenses. However, expenses for overnight camps are not qualified expenses.

There are several tests you must pass to qualify for the credit, see IRS Pub 503 for a thorough discussion of the credit.

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

When is a Loss your Gain? When it’s NOL.

If you are starting a new business, you may want to pay attention to your income tax preparation, whether you do it yourself or not. Many new businesses incur losses in their formative years. Unlike personal losses, net business losses are deductible in either prior or future year tax returns.

Another twist to the situation is that many people are not aware that they are considered a business by the IRS. If you receive an IRS Form 1099-MISC with a nonzero entry in Box 7, the IRS considers you a business. Additionally, if there is a nonzero entry in Box 3 of the same form, you may still be considered a business. This article does not pertain to C-Corps. It’s geared towards individuals operating as Sole Proprietors, Partners, or who report their business income on IRS Form 1040, Schedule C. Also, I’ve simplified the discussion because I just want to make you aware of a potential tax benefit. For a more thorough discussion of NOL, refer to the IRS Pub 536.

NOL stands for Net Operating Loss; it occurs when your deductions exceed your income for the year.  In the easy version, after you correctly fill out your tax return using tax software your NOL (if any) appears on Form 1045 Schedule A, Line 25. If the number here is negative, you have an NOL.  Now comes the beneficially interesting part. What do you do with the NOL? An NOL can be used as an above-the-line deduction in prior and future tax years. If you’re unfamiliar with the term above-the-line, basically it’s the best kind of deduction you can have because it reduces your adjusted gross income (AGI). The carryover NOL is entered on IRS Form 1040, Line 21. Generally, you must carry the entire NOL amount to the 2 prior tax years. You start with the earliest tax year. You only use as much NOL as you need to reduce your taxable income to zero. You would have to amend the tax return or file Form 1045 Schedule A to claim the refund, but so what, you're going to get a refund. Your NOL is reduced by the amount you applied. If your still have NOL left, apply it to the next earliest tax year.

If you still have NOL left after going back 2 tax years, you can apply the remaining NOL in the next 20 tax years.  Also, you can carry NOL from multiple tax years. You just have to keep track of where it came from and how much is left.   

The IRS allows you to waive the NOL carryback.  If you choose this option you must notify the IRS with a statement attached to your original return filed by the due date.

So as it turns out, if you operate a business you can “spread out” a loss in one year over multiple profitable years.  This is a pretty good deal and can reduce your taxable income resulting in less tax paid. You just have to be vigilant about keeping track of the NOL and applying it at the right time and place.  Or, have your return prepared by a tax pro like an Enrolled Agent.

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

Is Your College Graduate Child Still Your Dependent?

If you have a child that graduated or is graduating from college this year, you may be wondering if you can still claim them as a dependent on your income tax return.  If you are a single parent and only have one child, this question is even more important because it can change your filing status from Head of Household to the less desirable Single status.

The rules for claiming a dependent are actually lengthy. In order to keep this article short, I’m assuming that your child has qualified as your dependent in prior tax years, so the only year in question is this tax year.  There are 5 tests that must be passed to be a qualifying child, 1) relationship, 2) age, 3) residency, 4) support and 5) joint return.  I’ll review the tests that I think your child may not pass. If your child fails any of the tests, you may not claim them as a dependent. For a more thorough discussion of the rules for claiming a dependent, refer to IRS Pub 17. In this article, I’m assuming that your child passes the relationship test.

Age Test – Your child’s age is determined at the end of the tax year, and your child must be younger than you or your spouse (if married filing jointly). Your child must be under 19 or your child must be under 24 and a full-time student. To be a full-time student, your child must have been a student during some part of any 5 calender months of the year (the 5 months don't have to be consecutive). The definition of Full-time student depends on the particular college. But in many colleges, you must be enrolled for at least 12 hours during any semester.  So, even if your child graduated in May, he does not necessarily fail the age test. Also, your child passes the Age test if he or she is permanently and totally disabled at any time during the year, regardless of age.   

Residency Test – Your child must have lived with you more than half of the year.  The time that your child is away at college is considered a temporary absence, and still counts as time lived with you. So, if your child graduates in May, and comes home and lives with you until July 1st or later, he still passes the residency test.  However, if he graduates in May, then takes a job and does not live with you for the rest of the year, he fails the residency test.

Support Test – The child cannot provide more than half of his or her own support for the year. The good thing about this one is that if your child received a scholarship, it does not count towards his contribution to his own support. However, if your child works it’s possible that he could fail the support test.  

Joint Return Test – Your child cannot file a joint return for the tax year.  The exception to the rule is if your child and his spouse file a joint return merely to claim a refund. In other words, they weren’t required to file a return, but they filed because they had a refund coming to them.

As I said, your child must pass all 5 tests to be claimed as a dependent by you. To make this article shorter, I did not discuss a qualifying relative.  If your child is not your qualifying child, he or she may be your qualifying relative. The rules for each are different, and should be investigated if necessary.

If you have a tax question, just click on the email link below or leave a comment.
Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

Electric Plug-In Car Credit

If you’ve been thinking about buying an electric car to replace your gas guzzler but have been holding back because of the cost, there may be some relief. Congress has decided to help pay for part of the cost of that electric plug-in. The following manufacturers have vehicles that may qualify for the maximum tax credit of $7500. The list of qualified vehicles has grown significantly since the inception of the program. 

Index to Manufacturers (Tax Year 2016)

Qualified Plug-in Electric Drive Motor Vehicles (IRC 30D)
AMP Electric Vehicles, Inc.
Audi of America, LLC
Azure Dynamics
BMW of North America
Boulder Electric Vehicles, Inc.
BYD Motors Inc
CODA Automotive
Electric Vehicles International
Electric Mobile Cars
FCA (Fiat Chrysler Automobiles) North America Holdings LLC
Fisker Automotive, Inc.
Ford Motor Company
General Motors Corporation
Hyundai
Kia Motors America, Inc.
Mercedes-Benz USA, LLC
Mitsubishi Motors North America, Inc.
Nissan North America
Porsche Cars North America, Inc.
Smart USA Distributor LLC
Tesla
Think
Toyota Motor Sales
VIA Motors, Inc.
Volkswagen Group of America
Volvo Cars of North America LLC
Wheego Electric Cars, Inc.
Zenith Motors, Inc.

The credit is available for cars purchased after 12/31/2009. The IRS last updated the page on 10/19/2016, so I’m assuming that this list is valid as of the date of this writing.  With so many choices, you probably can find a vehicle that's within your budget. 

In order to claim the credit, you must fill out IRS Form 8936. This credit is nonrefundable, meaning that it cannot generate a refund for you. It can only reduce your taxable income to zero. If you need help claiming the credit, consult a tax pro like an Enrolled Agent, or visit the IRS website. Happy Electric Motoring!

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

Restricted Stock Units (RSU) -- Potential to be Double Taxed! – Part 2 of 2

In Part 1, I talked about the Same Day Sale option of RSUs. In other words, the day you become vested in the RSUs, you sell all of them. The other option is to sell only as many as you need to pay the estimated tax due.  This is known as Sell to Cover.

Remember, as soon as you become vested in the RSUs, your employer adds their value to your W-2 income and tax is due. So what happens if the value of the stock drops? Well, it’s too bad.  You’ve already paid taxes on the RSUs, and it doesn’t matter that their value has decreased. In fact, you can’t get any relief until you sell the stock. Then, you can enter a capital loss on your tax return. Although you can use capital losses to offset capital gains, you can only deduct $3000 of capital losses per year.

If the stock price increases, you are in good shape. If you wait more than a year to sell the stock, then you can report the stock sale as a long-term capital gain. Otherwise, it’s a short-term capital gain.

 

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

Restricted Stock Units (RSU) -- Potential to be Double Taxed! – Part 1 of 2

If your employer grants you RSUs (Restricted Stock Units), count your blessings. This is a method of rewarding employees for exceptional contributions, loyalty, or just wanting to say “thanks”. However, there are some things that you should know about the way RSUs are treated from an income tax perspective so that you will not be double taxed.

First of all, RSUs are taxed as ordinary income to you, not capital gains. This sometimes confuses people because most of the time stocks and capital gains go together.  When your employer grants RSUs to you, there is a restriction associated with them. Usually, the restriction is that you cannot sell the stock until a certain amount of time has passed, aka vesting period.  Typically, an employee will vest in a certain percentage of the granted RSUs every year. For example, it could be that your employer granted 400 RSUs to you that proportionally vest over a 4 year period. This means that you will be vested in 100 RSUs every year for the next 4 years. Every year, once the vesting period is passed, two things happen.  Your employer will add the value of the RSUs that vested to your income. And, you will be able to sell the vested RSUs.

Large employers usually relegate the RSU transactions to a broker.  Your employer might initially set up the account for you, and then you can see how many RSU you have, and when they will vest. Once you become vested in the RSUs, your employer will add the value of the RSUs to your income (assuming an 83(b) election was not made).  He’s also obligated to withhold taxes from the distribution, usually referred to as backup withholding. If your employer uses a broker to handle the RSUs, he’ll require that just enough of the vested RSUs be sold to potentially cover all income and social security taxes resulting from the vesting. This is known as Sell to Cover. However you can select another option to sell all of the vested RSUs. This is usually referred to as a Same Day Sale.  If you elect the Same Day Sale option, after deductions proceeds are deposited into your cash brokerage account.

Here is an example of how the double taxation can occur. Let’s say your employer granted 1000 RSUs to you last year. You become vested in 250 shares this year. On the day that you become vested, the stock value is $50. Also, let’s say that you setup the Same Day Sale option in the brokerage account.  On the day that you become vested, your broker will sell 250 shares of stock on your behalf.  The gross amount from the sale is $12,500 (250sh * $50/sh). However, your broker will probably withhold a fee, maybe $100, for executing the transaction. And, your broker will transfer some amount to your employer to help pay the taxes due. Assume it’s 28% of the sale, or $3500. Whatever is left over, $8900 in this case, is deposited into your cash account at the brokerage firm.

Your end-of-year W-2 will show that you received $12,500 of additional income, and it will also show the $3500 of additional tax paid. Also, you broker is going to issue a 1099-B to you, and therein lies the problem. In this example, your broker should report net proceeds of $12,400 ($12,500 - $100 commission). You must report this 1099-B transaction on your income tax.  How you handle it is very important. Your cost basis on the transaction is what the stocks sold for, $12,500. So this essentially turns out to be a short term capital loss on your Schedule D.  If you fail to report it, the IRS will assume that your cost basis is zero, and will want you to pay the additional income tax, plus interest and penalties.  I’ve seen some people report the transaction with zero cost basis because their employer gave them the stock! Ok, it was a gift, but the employer has already withheld a portion of the proceeds for taxes.

Next, I’ll discuss the Sell to Cover option, and how you can end up on the short end of the stick.

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

Can You Deduct Nursing Home Expenses for an Elderly Parent? – Part 2 of 2

In Part 1, I went through the requirements for claiming your parent(s) as a dependent. This part continues with a discussion of deductible medical/dental expenses.

Nursing home care is discussed in IRS Pub 502, under Nursing Home & Nursing Services. Here are two quotes from the Pub. ”You can include in medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for yourself, your spouse, or your dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is to get medical care. And, “This includes services connected with caring for the patient’s condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in your home or another care facility.”

You don’t necessarily need to hire a nurse, but you have to hire a legitimate health care professional to provide the care. Or, the facility must be a licensed long term care facility or nursing home.

Although you cannot deduct medical/dental expenses until they exceed 10% (for 2013) of your AGI, the cost of long term care can be very expensive. So, it’s not that difficult to exceed the 10% limit. Additionally, among the many other medical/dental expenses, don’t forget to deduct the cost of prescription drugs, hearing aids, eyeglasses, etc.   

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

Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/

Enrolled Agent; Investment Advisor Representative