Grossbach Zaino & Associates, CPA's, PC


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Summer Jobs, Teen Taxes

 

Will your child have to pay taxes on the income earned at a summer job? It’s important to know the guidelines and keep good records.

  • Tips from waitressing, etc., are considered taxable income.

 

  • Net earnings of $400 or more from self-employment (e.g., babysitting, lawn mowing) are subject to self-employment tax, in addition to income tax.

 

  • Your child may be taxed on unearned income (dividends and interest) from bank and investment accounts set up under your child’s Social Security number.

 

  • Your child can claim an exemption from federal income-tax withholding if he or she had no income-tax liability last year and doesn’t expect to owe income taxes this year (e.g., because anticipated earnings are less than the standard deduction for single taxpayers, $6,350 for 2017).


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Know Your Tax Talk

Credits, deductions, withholding, oh my! Tax vocabulary can be confusing. Here are explanations for some common terms that you should know.

 

Adjusted gross income (AGI). Calculated by taking all of your gross income from taxable sources (wages, dividends, interest, capital gains, etc.) minus specified deductions that are allowed in arriving at AGI, such as qualified retirement plan contributions, alimony payments, etc.

 

Deductions. Expenses that are subtracted from your AGI. You can take either the standard deduction, an inflation-adjusted fixed amount, or you can itemize deductions by listing specific expenses, such as real property taxes, qualifying mortgage interest, and charitable contributions.

 

Exemptions. An amount you can deduct for yourself, your spouse (on a joint return), and each dependent.

 

Taxable income. What’s left after your gross income is reduced by allowable adjustments, deductions, and exemptions.

 

Credits. Subtracted directly from your tax liability to reduce the amount of tax you owe.


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ABCs of Saving for College

It’s no secret that college costs have risen dramatically in recent years. Setting up an education savings program as early as possible can help you manage the ever-rising costs of post-secondary education for your children or grandchildren. Two types of college savings vehicles — qualified tuition programs, also called Section 529 plans, and Coverdell education savings accounts (ESAs) — offer income-tax benefits.

 

529 Plans

Most states offer some form of 529 plan. There are two types of programs — prepaid tuition programs and college savings plans.

 

Prepaid tuition programs let you lock in today’s tuition rates by purchasing credits or units of tuition in “today’s dollars” for your children’s use when they actually attend college at some future date. Typically, the units purchased are based on the average public school tuition rate in the state offering the plan. Generally, you may purchase amounts of tuition through a one-time, lump-sum purchase or monthly installments.

 

College savings plans, however, are the more common type of 529 plan. Minimum contribution requirements are generally very low. Once an account is set up, you typically may choose among several investment options.

 

For federal tax purposes, earnings on 529 plan investments accumulate on a tax-deferred basis. Distributions used to pay qualified education expenses* are excluded from taxation. Many states also exempt earnings and distributions from income taxes, and some even allow a deduction for contributions. Certain state benefits may not be available unless specific requirements (e.g., residency) are met.

 

Coverdell ESAs

You can establish an ESA at a bank, brokerage firm, insurance company, or other financial institution. ESAs are self-directed and must be funded with cash.

 

Subject to income limitations, you can make nondeductible contributions of up to $2,000 per year to ESAs for each child younger than 18 years old (and for special needs beneficiaries of any age). Your eligibility to contribute to an ESA is phased out with adjusted gross income (AGI) from $95,000 to $110,000 if you are an individual taxpayer or from $190,000 to $220,000 if you are a married taxpayer filing a joint return.

 

ESA distributions that are used to pay qualified education expenses are not subject to federal income taxes. Qualified education expenses include not only tuition and fees, but also books and supplies and, for students enrolled at least half-time, certain room and board charges. In addition to undergraduate and graduate-level education, ESAs can cover elementary and secondary public, private, or religious school tuition and qualified expenses.

 

 

* Includes tuition, fees, room and board, books, and supplies and equipment required for enrollment.


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A Taxing Dilemma

With year-end just around the corner, you may be thinking of ways to reduce your taxes. If you own stocks (or mutual funds) that have declined in value, selling shares could produce a capital loss that you can use to offset gains on stock sales earlier this year.

 

However, suppose you still believe a particular stock has potential for future growth. Couldn’t you sell the stock and then immediately repurchase shares in the same company while the price is still low? That way, you could claim the capital loss on your tax return and still own the stock.

 

Unfortunately, the IRS limits the use of this strategy. The tax law’s “wash-sale rule” prevents you from claiming a capital loss on a securities sale if you buy “substantially identical” securities within 30 days before or after the sale. To claim the loss, you’d have to wait more than 30 days after your sale to repurchase stock in the company.


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A Second Home’s Built-in Advantages

Whatever the location, size, or value of a second home, certain tax advantages are built in. However, your opportunity to benefit from them depends on how you use the property.

Personal Use

Both property taxes and mortgage interest are as deductible for a second home as they are for your primary residence — and are subject to the same limitations. If you file a joint return, you cannot deduct interest on more than $1 million of acquisition debt ($500,000 for married persons filing separately) on one or two homes.

Two tax advantages of home ownership are not available for a second home — the immediate deduction of mortgage points when purchasing and the capital gain exemption when selling. Both tax breaks require the home to be your “principal residence.” However, you can deduct the points on your second home’s mortgage over the loan’s term.

Rental Use

More tax advantages become available if you forgo some of your personal use in favor of renting out your second home for part of the year. But there may be drawbacks as well.

If you rent out your home for 14 or fewer days during the year, you do not have to report rental income on your tax return, regardless of the amount, and there is no effect on your mortgage interest deduction. But you cannot deduct any rental expenses.

If you rent out your property for more than 14 days during the year, all rental income becomes taxable from day one. However, rental-related ownership expenses — including depreciation, maintenance, and utilities — become tax deductible. Your personal use of the second home affects the deductible amount. When personal use is more than 14 days (or 10% of the number of days your home is rented, whichever is greater), the maximum deduction is 100% of the rental income. Note that allowing relatives to use your vacation home usually counts as personal use, regardless of how much they pay for the privilege. And, if a friend rents your home for less than the fair market rate, that also counts as personal use.

If your vacation home qualifies as a rental property (i.e., personal use doesn’t exceed the allowable limits), a deduction is allowed only for mortgage interest allocated to rental use. That could be important. If you were to rent your second home during July only, for example, then only 1/12 of your interest expense would be deductible.

Deducting Losses

What if your rental expenses exceed the rent you collect? Only an “active” investor can deduct rental losses. If you actively participate in managing the rentals and maintaining the property, you can apply up to $25,000 of losses each year against your regular income. This loss deduction is phased out for taxpayers with adjusted gross income between $100,000 and $150,000. But, if you hire a manager, you become a passive investor and can use rental expenses to offset only rental income. However, you can carry any excess deductions forward to future tax years.

Your use determines the tax treatment of a second home. Before you decide to rent your second home for more than 14 days a year, carefully weigh the benefits and disadvantages.

Deductible Yacht and Motor Home Financing

Your second home doesn’t have to sit on a fixed foundation to qualify for tax advantages.

According to the IRS, a facility qualifies as a residence if it has sleeping, cooking, and bathroom accommodations. Therefore, your yacht or smaller boat can be a second home. So can a motor home of any size or value.

Provided the boat or motor home secures the purchase loan, your mortgage interest is as deductible as it would be on a more conventional second home. The same $1 million limit on total debt to buy or improve your residences also applies.


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Business Travel Expenses

Employers and employees who travel for business may deduct certain types of travel expenses. Following are some general guidelines.

 

Business Travel

 

Generally, the round-trip cost of traveling for business is deductible whether the taxpayer stays away from home overnight or not. However, the IRS makes an important distinction between “business transportation” — a broad label that would apply to round-trip travel during the day — and “business travel,” which includes an overnight stay. For qualifying business travel, the taxpayer is allowed to deduct the entire cost of lodging and incidental expenses (as well as 50% of meal expenses).

 

To qualify for business travel status, the business trip must:

 

  • Involve overnight travel

 

  • Be temporary — expected to last one year or less

 

  • Be away from the “tax home” — generally, the taxpayer’s principal place of business

 

Substantiation

 

To deduct travel expenses, employers may want to first consider implementing an “accountable plan.” Generally, an accountable plan requires that the employee adequately account for the business expense and return any unaccounted for advances within a reasonable period of time. Accountable plans benefit both the employee and the employer because expense reimbursements/advances that are properly accounted for are free of income-tax withholding and the employer’s and employee’s shares of FICA taxes.

 

Employees potentially may deduct unreimbursed ordinary and necessary business travel expenses. However, this deduction must be taken as an itemized deduction, and only the amount exceeding 2% of adjusted gross income will be deductible.

 

Employees should be careful to meet the IRS’s substantiation requirements. Generally, employees will be required to retain receipts and keep a logbook recording specific expenses related to business travel.


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New Tax Law Provisions To Note

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

 

Return due dates

 

The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

 

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

 

Basis reporting

 

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

 

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

 

Mortgage information returns

 

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.

 

* Surface Transportation and Veterans Health Improvement Act of 2015