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Posts from the ‘Individual Tax’ Category

Dec 6

How to Keep Life Insurance Proceeds Out of Your Estate

Few people realize that, even though they may have a modest estate, their families may owe hundreds of thousands of dollars in estate taxes because they own a life insurance policy with a substantial death benefit. This is so because life insurance proceeds,  while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax.

The solution to this problem is to create an irrevocable life insurance trust that will own the policy and receive the policy proceeds on your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as  well as in the estate of your surviving spouse. It also protects the trust beneficiaries from their own “excesses”, against their creditors, and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here’s  how the irrevocable life insurance trust works.

You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the  trust is properly drafted, the contributions you make to the trust for premium payments will qualify for the annual gift tax exclusion, so you won’t have to pay gift tax on the contributions.

The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee’s discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value  of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial  interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.

If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you.

If you have any questions about the above, or any other topics, please do not hesitate to contact us.

Sincerely,

Mike Jackson, CPA
Minar Northey LLP

(206) 282-2666

mike@minarnorthey.com

Dec 4

Volunteer for Charity? Pay Less Taxes.

If you are a volunteer worker for a charity, you should be aware that your generosity may entitle you to some tax breaks.

Although no tax deduction is allowed for the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services (subject to the deduction limit that generally applies  to charitable contributions). This includes items such as:

  •          Away-from-home travel expenses while performing services for a charity (out-of-pocket round-trip travel cost, taxi fares and other costs of transportation between the airport or station and hotel, plus lodging and meals). However, these expenses aren’t  deductible if there’s a significant element of personal pleasure associated with the travel, or if your services for a charity involve lobbying activities.
  •         The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible).
  •          If you use your car while performing services for a charitable organization you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs. Alternatively, you may deduct a flat 14¢ per mile for charitable  use of your car. In either event, you may also deduct parking fees and tolls.
  •         You can deduct the cost of a uniform you wear when you do volunteer work for the charity, as long as the uniform has no general utility (e.g., a volunteer ambulance worker’s jumpsuit). You can also deduct the cost of cleaning the uniform.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution by a written acknowledgment from the charitable organization. The acknowledgment generally must include the amount of cash, a description of any  property contributed, and whether you got anything in return for your contribution. This presents a problem where you as a volunteer make a contribution on behalf of rather than directly to a charity. One way around this is for the charity to pay for the expenses,  itself, and then be reimbursed by you (or you can make the donation before the expense is incurred). If this isn’t possible, you can safeguard your deductions as follows:

  •         Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, get a letter from the charity explaining why you’re needed at the  out-of-town location.
  •         If you are out-of-pocket for substantial amounts, you should submit a statement of expenses and, preferably, a copy of the receipts, to the charity, and arrange for the charity to acknowledge in writing the amount of the contribution.
  •         You should maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

If you have any questions about the above, or any other topics, please let us know.

Sincerely,

Mike Jackson, CPA
Minar Northey

mike@minarnorthey.com

206-282-2666

Dec 2

Year End Planning

It’s that time of year again when CPA’s are screaming “DEDUCT DEDUCT DEDUCT!!!”.

But we say, “WAIT WAIT WAIT!!!”

Although conventional wisdom encourages taxpayers to accelerate deductions and defer income, this is not always the path to reducing your tax bill.  Only after a carefull analysis of your current situation and your projected future are you able to determine what’s right for you.

Still a little lost?  We can help.

Sincerely,

Mike Jackson, CPA
Minar Northey

mike@minarnorthey.com

206.282.2666

 

Nov 30

Home Office Deductions

If you’re self-employed and work out of an office in your home, and if you satisfy the strict rules that govern those deductions (discussed below), you will be entitled to favorable “home office” deductions—that  is, above-the-line business expense deductions for the following:

  •         the “direct expenses” of the home office—e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
  •         the “indirect” expenses of maintaining the home office—e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of  mortgage interest, real  estate taxes, and casualty losses.

In addition, if your home office is your “principal place of business” under the rules discussed below, the costs of travelling between your  home office and other work locations in that business  are deductible transportation expenses, rather than nondeductible commuting costs. And you may also deduct the cost of computers and related equipment that you use  in the home office, without being subject to the “listed property” restrictions that would otherwise apply.

Tests for home office deductions. You may deduct your home office expenses if you meet any of the three tests described below:  the principal place of business test, the place for meeting  patients, clients or customers test, orthe  separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

Principal place of business.You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. (What “exclusively  and on a regular basis” means is not entirely self-evident. We can help you figure out whether your home office satisfies this make-or-break requirement.) Your home office  is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities  test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is  the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

Home office used for meeting patients, clients, or customers.You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with  patients, clients, or  customers. The patients, clients or customers must be physically present in the home office.

Separate structures.You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the  same property as your home—for example, an unattached garage, artist’s studio, workshop, or office building.

Space for storing inventory or product samples.If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home  expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

Amount limitations on home office deductions.The amount of your home office deductions is subject to limitations based on the income attributable to your use of the home office, your  residence-based deductions that aren’t dependent  on use of your home for business (e.g., mortgage interest and real estate taxes), and your business deductions that aren’t attributable to your use of the home office. But any home office expenses that  can’t be deducted because of these limitations may be carried over and deducted in later years. We can help you figure out how these limitations affect your home office deductions.

Sales of homes with home offices.If you sell—at a profit—a home that contains, or contained, a home office, the otherwise available $250,000/$500,000 exclusion  for gain on the sale of a principal residence won’t apply to the portion of your profit equal to the amount of depreciation you claimed on the home office. In addition, the exclusion won’t apply to the  portion of your profit allocable to a home office that’s separate from the dwelling unit. Otherwise, the home office won’t affect your eligibility for the exclusion.

We can help. Proper planning can be the key to nailing down the optimum tax treatment for your office at home expenses.  Please call us at (206) 282-2666 or email mike@minarnorthey.com if you would like to discuss these (or any other) matters.

Sincerely,

Michael Jackson, CPA
Minar Northey LLP

Apr 4

IRS Audit Statistics

The chance of receiving an audit generally changes based upon income level and filing type. Below are IRS statistics that are broken down by individual, income level, and business type. These are the overall numbers provided by the IRS, but realize that there are many factors that go into determining if the IRS is going to audit. IRS audits are rarely random and can be avoided by understanding how the IRS audit process works and what the common red flags are for an audit.

Total Amount of IRS Audits on Individual Tax Returns 

 
2007
2008
2009
Total Returns Filed
134,542,879
137,849,635
138,949,670
Total Audits Conducted
1,384,563
1,384,563
1,425,888
Percentage Audited
1.03%
1.01%
1.03%

 

IRS Audit Rates Based on Income

 
Percentage of Total Returns Filed
Percentage of Returns Audited
No adjusted gross income
2.13%
2.15%
$1 – $24,999
40.51%
0.90%
$25,000-$49,999
24.31%
0.72%
$50,000-$74,999
13.44%
0.69%
$75,000-$99,999
7.99%
0.69%
$100,000-$199,999
8.69%
0.98%
$200,000-$499,999
2.25%
1.92%
$500,000-$999,999
0.43%
2.98%
$1,000,000-$4,999,999
0.23%
4.02%
$5,000,000-$9,999,999
0.02%
6.47%
$10,000,000+
0.01%
9.77%

 

IRS Audit Rates Based on Return Type

 
Returns Filed
Returns Audited
Percentage Audited
Small Corporation
2,146,400
18,298
0.85%
Large Corporation
65,546
9,536
14.55%
Subchapter S
4,390,857
17,455
0.40%
Partnership
3,348,845
12,855
0.38%
Individual
137,849,635
1,384,563
1.01%

Feb 3

Schedule C Small Biz 2010 Prep and 2011 Planning

IRS recently released Publication 334, Tax Guide for Small Business, for use by individuals who file a Schedule C or C-EZ in preparing their 2010 returns and planning for the 2011 tax year. It highlights several administrative and tax law changes for 2010 and 2011, including several changes enacted as part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act).

Background. Publication 334 states that a taxpayer is self-employed if he carries on a trade or business as a sole proprietor (i.e., owner of unincorporated business) or independent contractor. A “trade or business” is defined as an activity carried on with the intent of making a profit, although the taxpayer need not actually make a profit in order to be in a trade or business. The publication further stated that a taxpayer’s part-time business, conducted in addition to a full-time job, can be considered self-employment.

Many service providers who offer their services to the general public, including doctors and lawyers, are considered independent contractors. The distinction between an employee and an independent contractor often turns on the amount of control exercised by the payor. In general, an individual is an independent contractor if the payor has the right to control or direct only the result of the work and not how it will be done. The earnings of an independent contractor are subject to self-employment tax.

Statutory employees (who have box 13 checked in their W-2s) and individual owners of single-member limited liability companies (LLCs) also use Schedule C or C-EZ.

What’s new for 2010. Publication 334 examines these new items for 2010:

… Self-employment tax wage base. For 2010, the maximum net self-employment earnings subject to the social security part of the self-employment tax remains at $106,800.
… Self-employed health insurance deduction. For 2010, self-employeds can deduct any self-employed health insurance deduction reported on Form 1040, line 29, from self-employment earnings.
… Increased Code Sec. 179 expense deduction dollar limits. For tax years beginning in 2010 (and 2011), the amount that may be expensed under Code Sec. 179 is $500,000.
… Standard mileage rate. For 2010, the standard mileage rate is 50¢ per mile.
… New general business credits. For 2010, there are 2 new general business credits: (1) the credit for small employer health insurance premiums, for eligible small employers’ nonelective contributions to purchase health insurance for its employees (Form 8941); and (2) the new hire retention credit, up to $1,000 for retaining qualifying employees hired after Feb. 3, 2010 and before Jan. 1, 2011 (Form 5884-B).

What’s new for 2011. Publication 334 highlights these new items for 2011:

… Self-employment tax wage base. For 2011, the maximum net self-employment earnings subject to the social security part of the self-employment tax remains at $106,800.
… Self-employment tax reduction. For 2011, self-employeds pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.
… Standard mileage rate. For 2011, the standard mileage rate is 51¢ per mile.
… Information reporting requirements. For 2011, subject to limited exceptions, a person receiving rental income from real estate is treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income must provide an information return to the service provider and IRS.

Extended due date for 2010 return. The due date for calendar year Form 1040 for 2010 is Apr. 18, 2011. For fiscal year taxpayers, the due date is the 15th day of the 4th month after the end of the fiscal year. Any taxes owed are due by Apr. 18, 2011, to avoid late-payment penalties and interest.

For help in determining how the above rules and regulations apply to you and your business, please contact us.

Sincerely,

Minar Northey LLP
mike@minarnorthey.com
206.282.2666

Feb 3

What’s New on the 2010 1040

Despite calls for simplifying the tax laws, they have actually been made much more complicated in the last few years. Year after year, there have been numerous tax changes that even some professionals have a tough time keeping up with. This filing season is no different. The 2010 Form 1040 reflects a number of new tax breaks. Some are straightforward. Others are complex. Some present choices. But they all provide an opportunity to save money.

We want you to be aware of the new tax breaks for this filing season so that you can take full advantage of them. To this end, we have put together this listing of the key changes for this filing season:

(1) Roth IRA rollovers no longer restricted. You can now make a qualified rollover contribution to a Roth IRA, regardless of the amount of your modified adjusted gross income.
(2) Income from Roth rollover can be spread out. Half of any income that results from a rollover or conversion to a Roth IRA from another retirement plan in 2010 is included in income in 2011, and the other half in 2012, unless you elect to include all of it in 2010.
(3) Self-employed health insurance deduction. Effective March 30, 2010, a self-employed person who paid for health insurance may be able to include in his self-employed health insurance deduction any premiums he paid to cover his child who was under age 27 at the end of 2010, even if the child was not his dependent. Also, health insurance costs for a taxpayer and his family are deductible in computing 2010 self-employment tax.
(4) Small business health insurance credit. There’s a new tax credit for an eligible small employer who makes qualifying contributions to buy health insurance for his employees. This credit is very complex but it can yield substantial tax savings. In general, the credit is 35% of premiums paid and can be taken against regular and alternative minimum tax.
(5) Limits on personal exemptions and itemized deductions ended. You no longer lose part of your deduction for personal exemptions and itemized deductions, regardless of the amount of your adjusted gross income.
(6) Personal casualty and theft loss limit reduced. Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of the $500 limit that applied for 2009). This yields larger deductions and thus greater tax savings for affected individuals.
(7) Corrosive drywall damage. A taxpayer who paid for repairs to his personal residence or household appliances because of corrosive drywall that was installed between 2001 and 2008 may be able to deduct those amounts as casualty losses under a special safe harbor crafted by the IRS.
(8) Homebuyer credit. An eligible first-time homebuyer (and a long-term resident treated as a first-time homebuyer) may be able to claim a first-time homebuyer credit for a home that was purchased in 2010. To qualify, the home must have cost $800,000 or less. You generally cannot claim the credit for a home you bought after April 30, 2010. However, you may be able to claim the credit if you entered into a written binding contract before May 1, 2010, to buy the home before July 1, 2010, and actually bought the home before October 1, 2010.
(9) Adoption credit. The maximum adoption credit is $13,170 per eligible child for both non-special needs adoptions and special needs adoptions. In addition, the adoption credit is refundable, i.e., you get the credit even if it exceeds your taxes.
(10) Gifts to charity. The provision that excludes up to $100,000 of qualified charitable distributions (distributions to a charity from an Individual Retirement Account) has been extended. If you elect, a qualified charitable distribution made in January of 2011, will be treated as made in 2010.
(11) Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. For 2010, you generally may expense up to $500,000 of qualifying property placed in service during the tax year. This annual limit is reduced by the amount by which the cost of property placed in service exceeds $2,000,000.
(12) Special depreciation allowance. Businesses that acquire and place qualified property into service after September 8, 2010 can now claim a depreciation allowance in the placed-in-service year equal to 100% of the cost of the property. Businesses that acquired qualified property from January 1, 2010 through September 8, 2010 can claim a bonus first-year depreciation allowance of 50% of the cost of the property.
(13) Cellular telephones. Cellular telephones (cell phones) and other similar telecommunications equipment have been removed from the categories of “listed property.” This means that cell phones can be deducted or depreciated like other business property, without onerous record keeping requirements.
(14) Carryback of general business credits. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. However, for 2010, eligible small businesses can carry back unused general business credits for five years instead of just one.
(15) Luxury auto limits. First-year luxury auto limits for vehicles first placed in service in 2010 are $11,060 for autos and $11,160 for light trucks or vans (for vehicles ineligible for bonus depreciation, or if the taxpayer elects out, $3,060 and $3,160, respectively).

As you can see, there are many new rules for this filing season.  If you’d like some guidance in determining how these rules apply to you, please don’t hesitate to contact us.

Sincerely,

Minar Northey LLP
mike@minarnorthey.com
206.282.2666

Jan 20

Rental Property Owners Beware (New Filing Requirements Take Effect in 2011)

Beginning with payments made after Dec. 31, 2010, with certain exceptions, taxpayers receiving income from rental real estate are considered to be in the trade or business of renting property, and subject to the same information reporting requirements as taxpayers in other trades or businesses. That is, if an owner of rental property makes a payment of at least $600 to a service provider (such as a plumber. electrician, property manager, accountant, etc.) during the tax year, the owner must file an information return with IRS and with the service provider. Typically, the payments will be reported on Form 1099-MISC.

Certain taxpayers are exempt from this information reporting. You will not have to report payments to service providers if you fit within one of the following categories:

  • an individual who receives rental income of no more than the “minimal amount.” This amount has not yet been defined and is to be determined under IRS regs;
  • an individual who receives substantially all rental income from renting his principal residence on a temporary basis. This category includes active members of the uniformed services and employees of the intelligence community
  • any other individual for whom the information reporting requirements would cause hardship.

Note that the exceptions refer to individual taxpayers. Presumably, therefore, if you own rental real estate as a corporation, partnership, trust, estate or other entity, that entity will be subject to the information reporting rules even if one of the above conditions is met. In addition, many of the terms used are not defined and will need to be clarified by IRS guidance.

Please keep in mind that this is only an overview of the new rental real estate information reporting rules. If you would like further information, we’d be happy to help.

email:  mike@minarnorthey.com
phone:  206.282.2666
web:  www.minarnorthey.com

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