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Have you ever thought about buying your parents house?
If your parents are aging and have a lot of equity in their home, you can give them immediate access to all of that equity if you buy their home from them and rent it back to them. Their mortgage is pretty small if they’ve been in the home forever, or they may not even have a mortgage payment.
And your parents income may be low enough to not even warrant taking an itemized deduction anymore for the mortgage interest, if there is any!
Keep these points in mind when pulling these tax tricks… uhm… wise investments:
1 Don’t rent to your parents if they’re slackers and they’ll stick you with the mortgage payment each month (they have to pay you rent, dang it!),
2 Your parents will no longer be able to itemize (more than likely) because they’ll be loosing the mortgage interest deduction,
3 Make sure you charge fair value for the monthly rent on the home,
4 Make sure your parents (if filing jointly) won’t incur more than a $500k gain on the sale of their personal home (or they’ll have to pay some taxes),
5 Make sure you pay fair value for the purchase of the home or the IRS might get suspicious and try to stick your folks with some gift tax,
6 You’ll now own rental property, and may have some great new tax deductions! Keep track of your repairs, painting, new toilets, etc. on this new rental home so you can deduct these on your taxes.
Thanks, Jason M. Blumer
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
Last week during Tuesday Tax Time, thriveal posted a primer on the problems behind the current economic crisis. This week we’ll look at the main provisions behind the Emergency Economic Stabilization Act of 2008, the latest government answer to our economic woes. Bless them.
Here goes:
1. This bill creates the Troubled Assets Relief Program (TARP), where the Secretary of the Treasury will have the ability to use Federal funds to purchase up to $700 Billion of private company financial instruments. Currently, the financial instruments of focus would be the junk commercial and residential mortgage assets (i.e. Troubled Assets) held by many of the nation’s largest banks. This part of the Act is initially set to expire on December 31, 2009, but could be extended for two years if needed. Secretary Paulson has mentioned stepping down as the Secretary after the elections, so the next President will have a lot of control over this area and it’s continued use. Essentially, a new market for these assets will be created. The Secretary could buy and sell these assets on some type of market and incur gains and losses as a result. Should the government incur losses due to these purchases (duh), TARP allows the government to recoup these losses from the companies petitioning the government to buy their junk assets.
2. From all of the recent turmoil in the economy, it has become apparent that the chief executives and management team of some of the largest Wall Street investment firms have continued to receive unusually large bonuses and pay while their company was going down the toilet. This Act would restrict the executive pay (that is, the top 5 executives) of those companies that petition the federal government to purchase their troubled assets. The restrictions are lifted again when the federal government no longer holds troubled assets of a particular company.
3. Though set to expire December 31, 2009, the FDIC deposit insurance limits have been raised from $100,000 to $250,000 on all depository accounts.
4. This Act requires the President of the United States to submit to Congress (within 5 years) a plan to recoup any losses to the taxpayer due to the institution of TARP.
5. The AMT has been indexed again for inflation, thereby helping millions of middle-income taxpayers avoid this “tax on the rich.”
That sums up most of the relevant provisions. There are a lot of ambiguities in this act, and many experts don’t actually know how a lot of this Act will be implemented. Our economy didn’t necessarily react with great joy (the Dow is still going up and down) when the Act was passed. I think the market still needs to “correct” itself from prior poor decisions by big companies, so we are yet to see if all is well.
Let’s hang in there and do good business for the next year or year and a half, and see who’s standing after the smoke clears.
Thanks, Jason M. Blumer
Today, a discussion on where our problems came from in the current economic crisis. Next week, a little more detail on the Emergency Economic Stabilization Act of 2008, and it’s specific provisions.
“When credit markets freeze, the economy starts to seize.” That’s what was happening. A freezure in the credit markets shuts the flow of available credit to businesses for expansion, and the economy reacts in panic. An immediate shortage of free flowing credit in our economy, brings quick results to slow our economy to a crawl. Our economy is dependent on the availability of credit. It greases the system.
The problem: we thought house values would continue rising, thus, the loans on those houses would always be secure. As builders glutted the market with new construction, house values didn’t keep up with the influx of new homes. And the subprime loans handed out to people who couldn’t even afford them didn’t stand up to the slagging house market. And there were a lot of subprime loans.
The banks that handed out these subprime loans (some being adjustable rate mortgages, or ARMs, where you could get in at a small payment and interest rate only to have it rise after year 3, 4 or 5), and the Federal-backed entities that bought those subprime loans from the market (Fannie Mae and Freddie Mac), got into real trouble when the owners of these loans started defaulting. And they defaulted in a big way… mortgage default rates were up over 10%, when they stood around 4 to 5% in the mid-2000s.
So people default on their loans, banks don’t get paid back and the credit markets are shot. Then the economy starts tanking and banks stop lending. And that really affects the small business. Growth grinds to a halt. And the market has only responded to what was headed our way from our past sins. Credit is still available, but only for the well-funded, those with excellent credit and for seriously solid business models. Emerging expansion is going to be slow for a while.
What have we learned? There are fundamentals in life and business to follow. When rejected, we all hurt:
1. Even if you can doesn’t mean you should. Some who could get loans, didn’t need to take on those loans. Be your own regulator… is your business solid enough to ENSURE future cash flow to pay back your loans? Be honest with yourself… you’ll be stepping into deep waters with a large loan you can’t pay back.
2. Cash is king. Operating on cash is never unsafe. Your cash flow and cash availability speak to your abilities to service your debt. Listen to and get to know your cash flow (hey, I’m a poet).
3. Know your industry’s margins. Can your business make enough money to provide good cash flow for future growth, while also servicing debt that allowed for the last expansion? Make sure your industry is a safe one to loan in.
Let’s not let this downturn happen to our businesses, even though it is happening to our economy.
Thanks, Jason M. Blumer
Tax Breaks on “Tree Hugger” Cars may be Expiring…
Newly purchased hybrid vehicles (you know, “tree hugger” cars) may offer some tax credit incentives to the purchaser. The IRS certifies how much the credit will be by car, depending on the information the auto dealers are feeding to the IRS, and how fuel efficient the vehicle is. For example, a Chevrolet 2008 Malibu Hybrid gets a $1,300 credit while a Honda 2008 Civic Hybrid CVT gets a $2,100 credit.
But the tax law was written so as to phase out (over a certain period of time) the tax credit once the manufacturer of the vehicle sells 60,000 models. If you are buying Hondas, then your tax credit is half of what you probably thought it was. Honda hybrid credits started phasing out early 2008. Credits for a Toyota or Lexus dried up in the fall of 2007.
Before buying, find out where your potential vehicle purchase stands here (scroll down on the report). Go green!!
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
Capital Gains Are Fun!!
Capital gains can be fun for you if your income puts you in the 10% or 15% tax brackets for the years 2008 to 2010 (stop laughing). If you are in these income tax brackets, then your long-term capital gains will be taxed at 0%. That’s right - 0%. Maybe you know someone who could sell some stock their Grandmother gave them, or you can sell that rental house you can’t stand managing… and pay no tax on the gains!!
Here’s what you gotta remember:
1. For married folks, your taxable income needs to be less than $65,100 (which includes the gain on the capital asset you sold),
2. For single taxpayers, the income limitation is $32,550,
3. You need to have held the capital asset for at least 366 days,
4. Some rich people (not me) will try to give their appreciated capital assets to their kids so the kids can sell them and get the 0% tax break (because the kids are in the lower tax bracket). But the IRS has raised the age of the kiddie tax too this year, which now means the investment income of teenagers up to 19 years old (or 24 if that slacker, uh.. child, is still a dependent of their parents and going to school) will be taxed at the rate of their parents. So the transfer of the capital asset to the child will basically have no effect.
5. This bill was basically designed for low income older tax payers, like retirees. But be careful. If they sell appreciated assets, their income may qualify for the 0% tax break but be high enough to: (1) kick in tax on their social security income or (2) make them ineligible for Medicaid while trying to get into a nursing home.
6. Tax laws like this require a lot of planning if you are looking to cash in on some appreciated capital assets you own. Look ahead at least three to four years to plan how your income is earned, how you can control the earning of income in certain years, when your social security income will begin (age 62 or 65?), when you plan on selling the capital asset, when the asset will be considered a long-term asset (must be held for more than one year), etc.
Talk to your tax advisor. If you don’t have one, I know a good one.
See SmartMoney’s cool calculator on this very issue here.
Go impress someone at the water cooler now.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
The Housing and Economic Recovery Act of 2008 provides many government hand-outs for those looking to refinance their mortgages or qualify for a first-time home buyers credit. Most everybody is interested in the free money from the government (i.e. the first-time home buyers credit), but is it really “free?” (no, but please read on…)
First a few requirements before taking the credit:
1. You gotta close on the home after April 9, 2008 but before July 1, 2009.
2. If you’re single and make more than $75k per year, then your credit will begin phasing out until your income reaches $95,000. Then it will all be gone. And if you are married, then you can make up to $150,000 before your credit begins phasing out. For married couples, the credit will be totally phased out when their income reaches $170,000.
3. This credit is for first-time home buyers, defined as those who have not OWNED a home during the past three years (no, you can’t call your Maui condo a new home, move to Hawaii and take the credit).
4. It’s a refundable credit. That means you either use up the credit on your tax return to eliminate your tax due, or the IRS will pay you the difference. For example, if you owe $5,000 in taxes and you take the first-time home buyers credit, then the IRS will pay you the difference, or $2,500 (I had to calculate that on my calculator). Here it is again: $5,000 in taxes owed - $7,500 in credit = $2,500 refund to you for the difference.
5. US Citizens are eligible for this credit.
Remember, this is a loan from the IRS. You gotta give it back, unless you sell your home in the 15 years after you took the credit and you sold your home at a loss. Then the IRS will forgive the loan. But if you show a profit on the sale of your home, then they will make you pay back ALL of the remaining credit you owe them at that time.
You have to pay this loan back over the next 15 years, at $500/year. But at least they are not going to charge you interest to borrow their money. That’s pretty good. And if you anticipate taking the credit in 2008, then maybe you can reduce your withholding at work and get more money in your paycheck NOW!
Thanks, Jason M. Blumer
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
Beware…
The IRS don’t play no games when it comes to the classification of your workers into the ”subcontractor” or “employee” camp. Did you know that YOU don’t get to totally chose how to pay your people? They are either subcontractors or employees, as determined BY THE IRS.
Common trick: employers would rather not have employees because they have to withhold taxes for them and pay in taxes (an expense to the business) for their employees. So, they call them “subcontractors” and don’t worry about taxes. It saves them time and money. Pretty smart, huh? Not really. An employer may have to pay big time if they have been misclassifying employees as subcontractors… as in penalties and interest dating back the time they began the missclassification.
Here are a few methods the IRS is using to crack down on employers who misclassify their workers:
1. The states are going to start sharing information with the IRS that they’ve gleaned from their state payroll audits. To be sure, more IRS audits will follow. And the states are often more aggressive than the federal government (IRS) in the collection of taxes owed to them.
2. Additional “matching software” is being employed by the IRS to determine who is tagged for the next audit. For example, when a company is not issuing W-2s, but is issuing 1099s to subcontractors of $25k or more, then that company will potentially become a target of an audit. Keep in mind: the IRS always assumes that companies have employees, thus should be issuing some W-2s.
3. Taxpayers who don’t want to be classified as subcontractors can file Form 8919 now to tattle to the IRS concerning their employers’ failure to withhold and pay taxes on them. This handy dandy form can greatly assist subcontractors who don’t want to pay self employment taxes at the end of the year.
The risks in playing the “payroll game” are VERY high. As an employer, you may have saved time and money, but I’ve seen houses foreclosed on and bank accounts wiped out by the IRS due to the failure to pay payroll taxes timely. Don’t play this game…
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
Look for bonus depreciation to kick into effect this year for businesses (and to end at 12/31/2008). Bonus depreciation is ADDITIONAL depreciation (above and beyond what is already available to the business owner) that can be claimed in this new year by business owners purchasing (and placing into service) tangible personal property.
Sounds fun. Here’s the details:
1 You can deduct 50% of the price of property purchased this year,
2 Which is brand new,
3 And is “placed into service” in 2008,
4 In addition to what you can already deduct for depreciation this year,
5 If you want to (you are not required to do this).
Any questions?
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
See that kid staring into the camera? Her parents or guardians may be missing a year-end tax credit on their tax return. Doesn’t that make you want to cry? We’ll call this little girl Taxita (pretty lame, huh?).
See, if Taxita’s Mom put money in her flex spending account to pay for dependent care costs, then she would only be allowed to put in $5,000 per year. And when she put money in her flex spending account, she did this tax free.
“But what if your dependent care costs are more than what the flex spending account allows you to spend?”, Taxita’s Mother may ask. Good question. Taxita needs to let her Mommy know that you have a Child Care Credit you can also take on your tax return at the end of the year to make up for what you couldn’t pay for using your flex spending account. Make sense?
Example: Taxita’s Mommy spent $5,000 on dependent care through her flex spending account at work. But her total costs for dependent care was $6,000. Well, she can take a tax credit at the end of the year (subject to restrictions) for the $1,000 she couldn’t pay for using the flex spending account funds. Of course, she can’t use this year end credit if she paid for all of the dependent care costs using the flex spending account. Then she would be getting the tax free benefit twice.
Just make sure you (and Taxita’s Mommy) monitor this situation, and claim all the tax benefits you have coming to you.
So, get thee to the Sunshine House… and take all the tax deduction you can for it!
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
- Uncle Sam’s hat fell over - guess what’s inside?
Our clients, and other non-nerdy people, often talk about their “income” being taxable. They use “income” in a general sense. Grass-cutting money, your whopping paycheck and the credit card debt you defaulted on last month are all considered income by the IRS. A lot of people may mistakenly think you multiply your “income” by your tax rate.
However, us nerdy CPAs speak in terms of “taxable income.” Income is everything you got paid or constructively earned (i.e., you might not have gotten it, but its gonna’ get taxed anyway because it’s considered income by the IRS). And from this “income,” you deduct allowable deductions (itemized or standard) and your exemptions. THEN, you multiply your tax rate by your “taxable income” to determine what you owe Sam (that’s kinda’ how it works).
So, remember, you may be talking about “income”, but your CPA (don’t have a CPA? - I know a good one) is probably talking about “taxable income,” which is totally different.
Now, go do stuff with all of those smarts you have - you owe it to America.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
Capitol Hill Loves Taxes!!
Did you know that our tax system uses what’s called a Progressive Tax? Your individual income is taxed using graduated rates, as opposed to taxing all of your income at one level. It’s progressive in that it tries to tax rich people (who have more income) at a higher rate; and poor people (those with less income) at lower tax rates.
For example, the rates for 2008 for those filing Married Filing Jointly are as follows:
10% on the income between $0 and $16,050
15% on the income between $16,050 and $65,100; plus $1,605.00
25% on the income between $65,100 and $131,450; plus $8,962.50
28% on the income between $131,450 and $200,300; plus $25,550.00
33% on the income between $200,300 and $357,700; plus $44,828.00
35% on the income over $357,700; plus $96,770.00
So, as seen above, only the first $16k of your income will be taxed at the 10% rate. And every other married couple in America will also have the first $16k of their income taxed at 10%. Then your income will be taxed as you move up from there. It’s actually more complicated than this, but this is a good start.
Now you know - go conquer the world.
Thanks, Jason M. Blumer
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.
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