Paying Back That Large Tax Debt

Nobody likes owing the IRS a large debt. Don’t stress yourself too bad, you have some options to help ease the burden of that large tax bill. There are two specific options I will outline for you. These include the OIC Program and Installment Agreements.

The Offer in Compromise (OIC) program allows a settlement of the tax liability for less than the full amount owed. The amount offered has to be equal to or greater than the value that is realized from the taxpayer’s assets. There are three ways the IRS will accept the OIC Program:
• There is doubt that the amount owed is fully collectible. The taxpayer’s income and assets are less that the tax liability owed.
• There is doubt in regards to the existence or amount of tax debt under law related to the liability.
• The tax amount owed would create an economic hardship or would be unequitable.

The Installment Agreements allows a taxpayer to make a series of monthly payments overtime if the full amount owed can’t be paid in 120 days. To set up the installments you must file form 9465. You have a few options on how to make the monthly payments. Some of these include:
• Payroll deductions
• Debit to your bank account each month
• Online/phone payments

So, when you see that large tax bill during tax season don’t be so alarmed. You have plenty of ways to get it paid back without putting your bank account in the negative.

Housing BOOM

All have taken notice to the for-sale signs everywhere. It seems the real estate market is on a spiral only going up. While the higher homes prices and bidding wars are not ideal for the buyer’s market, it has great advantages for the sellers.

Are you or do you know of anyone frightened by the large amount of profit turned on the sale of a home? Well you’re in luck! Talking tax, there is a fantastic residential gain exclusion for singles and married couples. It is quite generous at a $250,000 excluded gain for singles and $500,000 excluded for married couples.

There are a few conditions that must be met that include an ownership, use and frequency test. The ownership and use tests require that the individual(s) own and use the home as a principal residence for at least two out of five years prior to the sale. The frequency test is a limitation that allows the annual exclusion to be used only once every two years.

For example, Jimmy bought a home in 2005 for $200,000 and then married Julie in 2008, whom moved in with Jimmy. In 2016, they sold their home for $700,000. They can exclude the entire $500,000 gain on a joint return because all tests are met.

A Double Whammy for Retirement Savings

How can you benefit yourself now and in the future at the same time? It’s simple, save money in a tax-deferred retirement account like a traditional IRA. A traditional IRA is a personal savings plan that allows a taxpayer to accumulate money tax free. For 2017, you can qualify for up to $5,500 in tax-deferred contributions made. If you’re 50 or older it is an extra $1,000.

To provide a clear picture, let’s say you contribute $5,500 to a traditional IRA. If you’re in the 25% tax bracket, this allows $1,375 in tax savings! Not only do you receive a tax savings, you also accumulate for retirement days.

Along with a tax deduction for traditional IRA contributions, there is a “Saver’s Credit” available to lower income individuals. You can receive a maximum credit of up to $2,000. Credits are much more beneficial than a deduction for the fact they reduce your tax liability dollar for dollar. Why not get both?

College Tax Credits

Credits are deducted straight from your tax liability usually preferred over a deduction. Did you know If you have qualifying education expenses you are allowed up to a $2,500 tax credit per student, of which up to $1,000 is refundable on the American Opportunity Tax Credit! The credit equals 100% of the first $2,000 of qualified expenses plus 25% of up to $2,000 in excess, equaling a possible $2,500. What’s a qualified expense? Included are tuition and fees required for enrollment, course materials and textbooks. The limitations on this credit are; you cannot include room and board or activity fees, must be expenses related to the first four years of post-secondary education and only used four times per student.
What tax incentives are there for going to graduate school? The Lifetime Learning credit is a credit worth up to $2,000 per student (20% of $10,000 of expenses per year). This credit can be used for an unlimited number of years and for post-secondary educational expenses.

Easy Tax-Free Rental Income

All income is taxable unless excluded by law.

One of those exclusions is rental income received by you from the rental of your personal residence for 14 days or less.

That means that 14 days of AirBnB rental income is tax-free.

That means that your business can pay you to rent out your home for a company christmas party, company meeting, etc and create a deduction on your business tax return with no corresponding income on your personal tax return. Imagine your business renting out your home for $2,000. You can deduct the $2,000 from your business tax return and still keep the money.

This is a tax freebie. But if you rent your home for 15 days or more, then the entire tax break goes away.

How to Deduct County Club Dues (Kinda)

Membership dues (which let you use the golf course) you pay to a county club are never deductible.

…but “golf outings” are deductible if, before you committed to spend money on the golf outing, you:

  • expected to generate income or other specific business benefits other than goodwill at some point, and
  • you engaged in the discussion, negotiation, business meeting, or other bona fide transaction
  • you kept your receipts from the golf expenditures and documented the business purpose within a week (the IRS safe-harbor)

Try this:

If you purchase a “corporate golf membership that allows you to play once a day with up to three guests of your choosing”, then you have a deductible “season pass”.  No food discounts, no social memberships…nothing but golf.  That is how you can turn your non-deductible membership into a deductible pre-paid series of outings.

Tips for Converting your Appreciated Home into a Rental

You can exclude up to $250,000 ($500,000 if married) of gain from taxation when you sell your home.  Your home, for this exclusion, is the place where you reside for a 2 year period out of the last 5 years.

Problems arise when you move out of your appreciated home and convert it to a rental.  If you rent it for more than 3 years after moving out, then you no longer meet the 2-out-of-5 rule and will now need to pay tax on all of the price appreciation that your home has enjoyed since the day you bought it.

How can you preserve this valuable exclusion and convert it to a long-term rental?

Form an S Corporation and sell the home to the S Corporation within 3 years of moving out of the home.  The sale triggers the gain to be recognized, and since you would meet the 2-out-of-5 rule, you can exclude the gain.  You then have your S Corporation rent the property for whatever duration is necessary.

If You’re Self-Employed, Hire Your Child in your Business

You can hire your child and compensate them for their labor.  If your child is under age 18, and your business is not a C Corp or an S Corp, then the wage payments to the child are not subject to employment taxes.  When you pay the child, you will be deducting the payment at your higher tax rate (assuming 33% Federal and 4.3% Indiana) and the child will be taxed on the payment at their lower tax rate (which likely will be 0% for Federal and 4.3% Indiana).

Suppose it is time for the child’s first car which costs $6,000.  You employ your child, pay him $6,000, and deduct it.  Child then pays close to $0 tax on the $6,000 of wage income and uses the money to buy a car.  You have effectively deducted the cost of your child’s car – a personal expense – in your business.

If the child does not need to spend the money, then the money can be put into the child’s ROTH IRA to grow tax free for a very long time.  You have essentially created a deductible ROTH IRA contribution.  $5,000 put into a ROTH IRA when the child is 18 will be worth $212,000 when the child turns age 65 if growing at 8% per annum.

Are you age 70+…Try This

The US Government allows a taxpayer who is over age 70 1/2 (don’t ask me why it can’t just be age 70) to donate up to $100,000 from his IRA to charity.

Why is this a good thing?

A taxpayer who is over age 70 1/2 is required to take money from his IRA and include it in his taxable income.  If that same taxpayer makes a donation to a charity and doesn’t itemize, then he doesn’t get to enjoy a deduction for that donation.  Thus, he would have income with no offsetting deduction.

This provision allows that same taxpayer to send the money directly from his IRA to the charity and avoid putting the IRA income on his tax return (because he never touched the money – it went directly from his IRA to the charity)  In effect, the amount that goes from his IRA to the charity is deducted from his income, as if he had itemized.

In addition, when the money goes directly from the IRA to the charity, it potentially could allow the taxpayer to pay less tax on their social security earnings, and well as enjoy other positive tax effect.

…something worth considering if you are over age 70 1/2.

 

Six Tips for Year-End Gifts to Charity

If you’re thinking about making a charitable donation during the holiday season this year and want to claim a tax deduction for your gifts, you must itemize your deductions. This is just one of several tax rules that you should know about before you give. Here’s what else you need to know:

1. Qualified charities. You can only deduct gifts you give to qualified charities. Call the office if you’re not sure if the group you give to is a qualified organization. Remember that you can deduct donations you give to churches, synagogues, temples, mosques and government agencies.

2. Monetary donations. Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, or bank, credit union, and credit card statements.

If you donate through payroll deductions, you should retain a pay stub, a Form W-2 wage statement or another document from your employer. It must show the total amount withheld for charity, along with the pledge card showing the name of the charity.

3. Household goods. Household items include furniture, furnishings, electronics, appliances and linens. If you donate clothing and household items to charity they generally must be in at least good used condition to claim a tax deduction. If you claim a deduction of over $500 for an item it doesn’t have to meet this standard if you include a qualified appraisal of the item with your tax return.

4. Records required. You must get an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.

5. Year-end gifts. You can deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2015. This is true even if you don’t pay the credit card bill until 2016. Also, a check will count for 2015 as long as you mail it in 2015.

6. Special rules. Special rules apply if you give a car, boat or airplane to charity. For more information about this and other questions about charitable giving, please contact the office.

Document Your Business Activities

You may not need to pay a 3.8 percent Medicare tax on your business income if you participate in the business enough that you are not considered a passive investor. Participation includes any work performed as an owner, manager, or employee as long as it is not investor activity. Document your hours with your calendar, appointment books, and emails.

Deduct 100% of Meals Instead of the Usual 50%

As a general rule, most businesses can only deduct 50% of business meals.  There are several exceptions to this rule.  One exception is the “Convenience of Employer” rule.

How it works:

To achieve the 100% deduction, you have to serve the meal on your businesses premises, and you have to have provided the meal for “your business convenience”.

Examples:

  • Meals are served to make employees available for emergency calls
  • Meals are furnished so that the employee can work through their lunch-break
  • There are insufficient eating facilities in the vicinity and you want to keep your employees working instead of driving around looking for food
  • Meals are furnished for some other substantial non-compensatory business reason (you are furnishing the meals for a business reason and not simply to give the employee a “bonus”

Tax Extenders Bill Passed

The Senate Finance Committee passed a tax extenders bill with a bipartisan vote of 23 to 3 that extends over 50 tax breaks for two years.

 

The bill would extend dozens of tax breaks that expired at the end of last year. Last December, Congress only managed to extend the tax breaks for an extra two weeks through the end of the year and retroactively for the rest of 2014, allowing tax season to proceed this past tax season without new forms needing to be created by the IRS.

The bipartisan tax extenders package includes provisions to assist families, individuals and small businesses. Among the more popular provisions are the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books and supplies, mortgage debt relief, the deduction for mortgage insurance premiums, the deduction for state and local general sales taxes, the above-the-line deduction for higher education expenses, tax-free distributions from individual retirement plan for charitable purposes, and the research and experimentation tax credit.

Deduct Mission Trip Travel Expenses

Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.

  1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.
  2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.
  3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
  4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
  5. Deductible travel expenses may include:
    • Air, rail and bus transportation
    • Car expenses (i.e. Mileage to and from the airport)
    • Lodging costs
    • The cost of meals
    • Baggage fees, luggage expenses, passport fees, etc.

To learn more see Publication 526, Charitable Contributions. The booklet is available at IRS.gov