Eight Tips About Rental Income and Expenses

Posted on September 14, 2011 by taxblogger

Tax and Money Tip of the Week
September 14, 2011 | No. 60
Eight Tips About Rental Income and Expenses

Do you Rent Property to Others?

If you rent property to others you’ll want to read the following eight tips about rental income and expenses.

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use of or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them.  Publication 527, Residential Rental Property, includes information on the expenses you can deduct if you rent property.

  1. When to report income:  You generally must report rental income on your tax return in the year that you actually receive it.
  2. Advance rent:  Advance rent is any amount you receive before the period that it covers.  Include advance rent in your rental income in the year you receive it, regardless of the period covered.
  3. Security deposits:  Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
  4. Property or services in lieu of rent:  If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.  If the services are provided at an agreed upon or specified price, that price is the fair market value, unless there is evidence to the contrary.
  5. Expenses paid by tenant:  If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information.
  6. Rental expenses:  Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.
  7. Personal use of vacation home:  If you have any personal use of a vacation home, or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use.  If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.
  8. Depreciation:  Properly depreciate the rental and all improvements.  When you initially offer a property as a rental you need to separate the land value from the home value because land never depreciates.  A residential property would then be depreciated over 27.5 years.  A commercial property is depreciated over 39 years.  Any subsequent improvements that have a useful life of more than one year need be depreciated over their useful lives.  New carpet, for example, has a useful life of five years.

Rental income and expenses are typically reported on Form 1040-Schedule E.

As always, we suggest you give us a call before going into the rental business—-not after!

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Don’t Forget: September 15th, 2011 Tax Payments Are Due

Posted on September 8, 2011 by taxblogger

Tax and Money Tip of the Week
September 8, 2011 | No. 59

Don’t Forget:  September 15th, 2011
Tax Payments Are Due

This is the time of year in our CPA practice that I work with small business owners and individuals to perform tax checkups to help them project their tax liabilities for 2011 and make tax saving recommendations of moves they can make between now and December 31, 2011. Frequently, just defining the amount of taxes they owe via these planning services helps manage their cash flow so the businesses and individuals don’t have a big amount and/or surprise each Spring when they prepare their tax returns.

Coming up September 15, 2011 is the date in which the 3rd installment for individuals that have income that is not taxed and withheld (like W-2 income) is due.

Self employed businesses, e.g. Proprietor Schedule C filers, folks that own S Corporations, Partnerships, LLCs, or other flow-through entities must estimate their unpaid income and/or self-employment taxes for the period January 1-August 31, 2011 and pay ½ of this amount to IRS and/or NC Dept of Revenue on September 15, 2011 and the other ½ of this amount on or before January 15, 2012.  (April 15th and June 15th of each year are also Quarterly Estimated Tax Payment dates that have also passed by if you weren’t aware)

The rules for estimated tax payments depend on your modified adjusted gross income for 2011. “Safety” estimates can be designed to avoid penalties and interest, optimize cash flow, and save taxes. Call us for help.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Paying Wages to Your Children

Posted on August 31, 2011 by taxblogger

Tax and Money Tip of the Week
Paying Wages to Your Children
August 31, 2011 | No. 58

Parents Employing Their Own Children

Payments for the services of a child under the age of 18, who works for his or her parent in a trade or business, are not subject to Social Security, Medicare, and North Carolina Unemployment taxes, if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.
 
If these payments are for work, other than in a trade or business, such as domestic work in the parent’s private home, they are not subject to Social Security and Medicare taxes until the child reaches age 21.   Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to federal unemployment tax.  Depending on the amount of payments for services, they could be subject to federal, state, school and city income tax withholdings.
 
Paying wages to a child can be an effective income-shifting strategy for a taxpayer who owns a business or income-producing property.  Income may be taxed at the child’s lower rate, or escape tax altogether.  The child can contribute to a retirement plan.  If a child earns enough from the family business during college years, the child may be able to claim an education credit that the parents lose because of AGI limitation. Earned income is not subject to kiddie tax regardless of age.
 
A child’s wages are deductible by the parent-employer only if: 

  1. the work is done in connection with the parent’s trade of business (or income-producing property),
  2. the child actually renders the services and
  3. the payments are actually made. 

The payments must be reasonable in relation to the services rendered.  Maintain records showing services performed and wages paid. 

Call us if you need help.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Money Tips: Investing 101, #2

Posted on August 24, 2011 by taxblogger

Tax and Money Tip of the Week
Money Tip – Investing 101
August 24, 2011 | No. 57

This week we continue our series on investing concepts. 

This series is not intended as investment advice, but only a general discussion of investing in the new millennium and in the age of the Internet, High Frequency Trading, and Machines.

Considering all the volatility over the last few weeks, here are some thoughts to consider for investing today, that our parents may not have taught us:

  1. Always limit your losses on any stock or mutual fund to 7-8%; frequently, you can limit your losses sooner.  Let your gains run.
  2. Know when its time to sell a stock or mutual fund.
  3. In today’s market, know how to be agile and nimble when necessary.
  4. ALWAYS protect your capital.

More on investing next week.
Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Money Tip – Investing 101

Posted on August 17, 2011 by taxblogger

Tax and Money Tip of the Week
Money Tip – Investing 101
August 17, 2011 | No. 56

This week we will start a series on investing concepts. 

This series is not intended as investment advice, but only a general discussion of investing in the new millennium and in the age of the Internet, High Frequency Trading, and Machines.

Considering all the volatility over the last few weeks, here are some thoughts to consider for investing today, that our parents may not have taught us:

1)  It’s OK not to play. 
     Point:  You do NOT have to be invested all the time.

2)  Have a goal and an exit plan in mind.

3)  Never fall in love with any stock.

More on investing next week.
Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Estimated Tax Payments – Individuals

Posted on August 10, 2011 by taxblogger

Tax and Money Tip of the Week
Estimated Tax Payments – Individuals
August 10, 2011 | No. 55

Estimated tax payments need to be made by individuals to provide for current payment of income taxes not collected through withholding on a W-2 or Form 1099.

The tax law requires individuals to pay these taxes currently. The first general rule is that at least 90% of a person’s current year income tax is to be paid through withholding and/or estimated tax payments to avoid penalties and interest. Form 1040 ES is used for Federal Estimated Tax Payments to the Internal Revenue Service; Form NC-40 is used for NC Estimated tax payments to the NC Department of Revenue. The due dates for these payments are as follows: April 15th; June 15th; September 15th; and January 17th, 2012.    If 90% of the tax is not paid, you will be penalized and charged interest.

Exception to the general rule:
Individuals may make what is called a “safety” set of estimates for federal purposes:

  1. If a joint return taxpayer makes less than $150,000 in adjusted gross income, they pay 100% of the prior year’s tax return tax liability, they will be “safe”. Even if they make a lot more income in the current year, they may pay the balance due of taxes with their individual income tax return due the following April 15th without penalties or interest and hold on to their money until April 15th.
  2. If a joint return taxpayer makes $150,000 or more in adjusted gross income, they must pay 110% or more of their LAST YEAR tax liability, and they will be “safe”.

I have used this exception over the last 30 years in my CPA practice and allowed folks to hold onto their money and make interest and profits and pay thousands and millions on April 15th  with their tax returns penalty and interest free under these legal exceptions. This exception works the best when a client has a BIG income year and needs guidance.

The most important thing is to professionally and properly do tax planning with your CPA throughout the year, not just at tax time.

It can save many times their fee.  And, clients will pay current year taxes with current year income and not be surprised!

Call us if you need help.
Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Individual Estimated Taxes and Tax Planning Checkups

Posted on August 3, 2011 by taxblogger

Tax and Money Tip of the Week
September 15, 2011 Tax Deadlines:
Individual Estimated Taxes and Tax Planning Checkups | August 3, 2011 | No. 54

This is the time of year in our CPA practice that I work with small business owners and individuals to perform tax checkups to help them project their tax liabilities for 2011 and make tax saving recommendations of moves they can make between now and December 31, 2011. Frequently, just defining the amount of taxes they owe via these planning services helps manage their cash flow so the businesses and individuals don’t have a big amount and/or surprise each Spring when they prepare their tax returns.

Coming up September 15, 2011 is the date in which the 3rd installment for individuals that have income that is not taxed and withheld (like W-2 income) is due.

Self employed businesses, e.g. Proprietor Schedule C filers, folks that own S Corporations, Partnerships, LLCs, or other flow-through entities must estimate their unpaid income and/or self-employment taxes for the period January 1-August 31, 2011 and pay ½ of this amount to IRS and/or NC Dept of Revenue on September 15, 2011 and the other ½ of this amount on or before January 15, 2012.  (April 15th and June 15th of each year are also Quarterly Estimated Tax Payment dates that have also passed by if you weren’t aware)

The rules for estimated tax payments depend on your modified adjusted gross income for 2011. “Safety” estimates can be designed to avoid penalties and interest, optimize cash flow, and save taxes. Call us for help.

There are existing tax laws that apply to estimated tax payments; next week we will cover these rules and how to optimize these rules and applicability to different income situations.
Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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What Records should I keep?

Posted on July 27, 2011 by taxblogger

Tax and Money Tip of the Week:
What Records should I keep?
July 27, 2011 | No. 53

This week we will discuss a question that I get in my CPA practice a lot:
How long should I keep certain records?
Here are some recommendations:

Keep Forever:

  1. Copies of Tax Returns only
  2. W-2s and 1099 income forms
  3. Roth IRA statements(to prove that you have already paid taxes when you withdraw at retirement)
  4. Life insurance policies
  5. Birth and death certificates

Keep for 3 years:

  1. All Backup records of the latest 3 years of Federal and NC income tax returns
  2. Bank Statements, brokerage statements,  1099s, deductions, etc.

Why 3 years?

Because the statute of limitation is 3 years under which the IRS or NC Department of Revenue may change your return or you can amend your return. However, if these agencies believe that a taxpayer has underestimated their income by 25% or more, this period becomes six years.  If the IRS believes you filed a fraudulent return or did not file a return at all, there is NO statute of limitations.

Therefore, never throw away your tax return copies that we always provide you.  It is possible, but very difficult and time consuming to try to get copies from the governmental agencies of your past tax returns, especially old ones.

Also, when deciding what to store in a safety deposit box,  keep in mind when someone dies, the safe deposit box may be sealed by taxing authorities. This action may cause problems in probating and executing the will; therefore, store original copies of the will in a fireproof safe at home as well as with your attorney.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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Insurance Tip: Accident Forgiveness Rider

Posted on July 20, 2011 by taxblogger

Tax and Money Tip of the Week:
Insurance Tip:  Accident Forgiveness Rider on Your Auto Insurance Policy
July 20, 2011 | No. 52

I’d like to share a relatively new addition to some insurance companies auto policies:  The Accident Forgiveness and/or Violation/Ticket Forgiveness Rider.  If you have this on your auto policy, it could save you hundreds or thousands of dollars! (it costs me very little)

Here’s how it works:
If you have this rider on your policy and you or someone in your family has an accident or ticket, your insurance company will “forgive” you one time and not increase your rates.  Some insurance companies have an accident forgiveness rider only and not ticket forgiveness, so be sure to ask questions and understand the details of what you are buying.

Call and ask your auto insurance agent or insurance company if they offer this relatively new insurance rider that could save you thousands.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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NC Small Business Tax Break – New Law

Posted on July 13, 2011 by taxblogger

NC Small Business Tax Break –
New Law

With the passing of the state’s new $19.7 billion budget, the North Carolina General Assembly passed a new law that will allow North Carolina companies to deduct the first $50,000 in net business income from their taxable income on the state return. 

Beginning with their 2012 tax return, North Carolina partnerships, S-corps and proprietorships will be able to write off the first $50,000 of net business income.  Legislators are hoping that this tax break will generate job growth for North Carolina’s economy through these employers.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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