The holidays are behind us and thoughts of organizing finances and getting ready for taxes are now on our agendas. Here are a few things you should know as you venture forward in these tasks:

Organize: If you haven’t done so already, set up a file folder marked 2022 taxes. As the various documents come in–W2s, 1099s, K-1s, Forms 1098 for mortgage interest, etc., place them in the folder so you aren’t scrambling the day before your tax appointment to retrieve your documents. It’s also a good idea to set up a file folder right now for 2023 taxes, then as various taxable events occur during the year: DMV and property tax payments, receipts and acknowledgment letters from charitable organizations, etc., you can file them there to ease the pain of tax season in the upcoming year.

The tax organizer that you receive from your preparer will show the names and amounts of taxable entries from the prior year. Even if you don’t use the organizer, it’s a good reference to ensure that you include all tax data for the current year.

Filing Deadlines: The IRS currently has no plans to expand the filing dates as they have in the past due to COVID. Therefore, the due dates for individual income tax returns will be April 18 (April 15 is a national holiday: Emancipation Day, celebrated on Monday, April 17) with extensions allowable to October 16, 2023. The due date for partnerships and corporations remains March 15 with extensions to September 15.

REMEMBER: An extension is only for additional time to file, not additional time to pay. Your taxes must be paid by the initial due date and if the return is not filed by that date, you must estimate your liability and pay it with the extension form to avoid penalties and interest.

The IRS is issuing a warning for 2023: You likely won’t receive as large a tax refund as you have in the past and that is because there were no stimulus payments in 2022.

As always, Congress has passed changes to the tax law:

1. Taxpayers may only take the charitable deduction if they itemize deductions. In 2021, the IRS temporarily allowed non itemizing individuals $300 per person, up to $600 per family in charitable contributions. That won’t be allowed this year. Don’t let that dissuade you from giving. You may be able to use the deduction on your state income tax return.
2. The IRS has also lowered the reporting threshold for third-party networks that process payments for doing business, such as Venmo or CashApp. Note that money received via a third-party app from friends and relatives as a gift or reimbursement for personal expenses is not taxable.
3. The standard deduction increased slightly.
4. Itemized deductions remain mostly the same. Employee business expenses are still nondeductible, but list them anyway as they are allowed on your state income tax return if you can itemize.
5. IRA contribution limits remain the same and 401(k) limits are slightly higher.
6. You can save a bit more in your health savings account (HSA) now: $3,650 for single and $7,300 for family coverage.
7. New mileage rate for 2022 income tax returns is $.625, up from $.575 in 2021. For 2023, it has increased to $.655

Naturally there are caveats, exceptions, special circumstances and other complications involved in all tax law. If you have questions, please consult your tax advisor for more information.

Wishing you and yours a healthy, happy, and prosperous New Year.

As you may have heard the Tax Reform Act has passed both the House and the Senate. It will be a little while before we can nail down the exact changes as there is quite a large discrepancy between the two bills. But change will come. All the fine points are expected to be discussed, debated, hammered out and forced into law before the end of the year. This, as usual, allows for very little tax planning. Nor does it allow for much time for consideration and discussion by our legislators.

Here is our advice for this month, December 2017.

• Pay your property taxes for 2018 now if you are able. The deduction will either be eliminated or reduced to $10,000. Even if it’s lowered to $10,000 your tax benefit will be greater in 2017 because your tax rate is higher
• Make your Q4 2017 estimated tax payment for California before the end of the year instead of on its due date of January 15, 2018. That deduction is going away permanently, so it would behoove you to pay it now while you can still enjoy the write off.
• If you’re planning to buy a new car, do so in December rather than waiting. The new vehicle registration fee will not be deductible in 2018.
• Prepay your tax preparation fee by December 31. That deduction is set to go away as well.

Listed below is a summary of the major changes that will likely affect you:

• The top rate on the income earned by owners of “flow through” businesses — S corporations and partnerships — is reduced from 39.6% to a shade below 30%.
• The standard deduction is doubled from $6,350 for a single/ $12,700 if married to $12,000/$24,000.
• Deductions for personal exemptions are repealed, but the child tax credit is increased from $1,000 to $2,000.
• Many popular itemized deductions — state and local income taxes, casualty losses, and unreimbursed employee expenses, among others — are eliminated.
• The estate tax exemption is doubled, to $11 million for a single taxpayer and $22 million for married taxpayers.
• The alternative minimum tax remains intact, although with a higher exemption amount.
• The corporate rate is reduced from 35% to 20%.
• Businesses will be able to immediately expense many asset purchases; after five years of 100% expensing, the rate will phase out at 80%/60%/40%/20% rates over the ensuing four years.
• If you own rental property, your maximum tax rate on profits from rentals will be 25%. This is great news for wealthy landlords.
• All of these changes will expire in 2025. Tax law will revert back to what we now know.

My feelings about all this are reflected by Tony Nitti, a respected journalist for Forbes Magazine: “As an American taxpayer, I’m saddened by the way the process played out. A tax bill needs to be carefully considered, available to the public for review and contemplation well in advance of a vote, and—in a perfect world—bipartisan. That way, we can reap the benefit of the most valuable product of tax reform: permanence. Certainty of where the tax law will be in years 3 and 5 and 7 and 10, so that we can plan accordingly. With a Republican-led bill, however, the tax law is only as certain as Republican control; should things flip in 2020, the Code will be revamped again, and it will be taxpayers left struggling to respond to the changes.”

As you will soon learn, this whole business about being able to “file taxes on a postcard,” is incorrect.  Schedule A will be trimmed down possibly eliminating its use for many taxpayers but that’s pretty much it. You must still use all other applicable schedules and line items as well as complete the information regarding health care coverage.

If you have any questions or concerns, please contact either Bonnie or Amanda at  bonnie@taxpertise.com or amanda@taxpertise.com.

Happy Holidays to you and yours.

The Internal Revenue Service will begin accepting electronically filed income tax returns on January 23, 2017. But more than likely, you will not receive all of your tax filing documents by that day. Employers and providers of all third party documents such as W2s, 1098s, and 1099s have until January 31 to mail these documents to recipients. Therefore, most Americans will not be ready to file until the first week in February.

The deadline for filing your 2016 income tax return is April 18, 2017. Of course, you may file for an extension to Monday, October 16, 2017 (the 15^th falls on a Sunday, so the due date defaults to the next business day). Keep in mind that the extension is merely for time to file, not time to pay. The IRS expects all taxes to be paid by April 18. Beware! The penalties for failure to pay are 5% of the unpaid tax per month for a maximum of 25%. That can be incredibly expensive.

Legal entities such as C and S corporations, LLCs, partnerships, etc. now have new due dates. Check with your tax professional or visit www.irs.gov to find out when these returns are due.

If you are able to enjoy the Earned Income Tax credit, the Education credits (Lifetime or American Opportunity tax credit), the Additional Child tax credit or if you have been the victim of identity theft or use Form 8379 (injured spouse allocation), your refund will be held up until at least February 15 even if you file right out of the gate on January 23. These returns take additional verification and therefore more processing time.

There are a few updates to tax law that you should know:

1. Beginning in 2016, educator expenses will include the cost of taking professional development courses. The maximum amount you can deduct on the face of the 1040 under Adjustments to Income is $250. It’s been that rate for many years. However, beginning in 2017, this amount will be adjusted for inflation. Any amounts in excess of $250 are deducted as an employee business expense on Schedule A if you are able to itemize.
2. So many states are making the use of medical marijuana a legal activity. However, the federal government does not agree. Which means the IRS doesn’t either. For 2016 and the unforeseeable future, no medical deduction is allowed for the cost of any controlled substance, including medical marijuana.
3. If you pay mortgage insurance premiums (PMI), the deduction has been extended through 2016. Unless extended by Congress it will not be deductible in 2017 and beyond.
4. If you are low income and live in the state of California, you may enjoy the Earned Income Tax credit at the state level this year.
5. There are 24 other tax provisions set to expire on December 31. As usual, Congress will decide at the last minute whether or not to extend them and allow them as tax deductions on your 2016 income tax return. Waiting until the last minute makes tax planning difficult at best!
6. If you have foreign bank accounts with balances totaling $10,000 or more at any time during the tax year, you are required to file FBAR. The FBAR is due this year on April 15 rather than June 30 as in prior years. You can request an extension of time to file to October 15, 2017, however, it’s subject to approval.
7. If you are considering converting from a traditional IRA to a ROTH IRA, you must do so before December 31 in order for it to be counted for the 2016 tax year.

There is plenty more to consider when it comes to your taxes. And there are many more changes than those listed above. Consult with your tax professional to find out if any tax law changes impact your situation. It is also advisable to consult with your tax advisor if you experienced any major life changes this year: marriage, divorce, sale of a home or other property, new job, move to a different state, etc. A tax planning session now can minimize shock on April 15.

Warning: the newest fraud attempt is a phony IRS letter – a CP2000. The CP2000 is a valid IRS letter that is sent to taxpayers who neglect to report certain pieces of income on their tax returns. The IRS picks up these items from third party reporting documents such as W2s, K-1s, and 1099s. Then via its matching program it checks to ensure this income has been reported. If it has not, its computer generates the CP2000 letter which includes a bill for recalculated taxes.

These fraudsters copied the IRS logo perfectly; they even use the same font in writing the bogus CP2000 letter. It looks completely legitimate. The letter tells you that you left off some income from your tax return. The tax liability is then recomputed and you are billed for the resulting tax, interest and possibly a penalty. The amount is relatively small – usually less than $500. You are directed to write a check “payable to the IRS” and mail it to a post office box. And this is exactly how you know the letter is phony. If the letter were real, you would be told to make out the check to the “Department of the Treasury” not the “IRS.” if you receive such a letter, take it to your tax pro and report it to the Internal Revenue Service by scanning it and attaching it an email addressed to phishing@irs.gov.

Happy New Year! We extend our best wishes to you for a healthy, happy, and prosperous New Year.

Tax season is here! The IRS has already begun accepting electronically filed tax returns for corporations and partnerships. On Tuesday, January 19th they will begin accepting electronic filing of individual income tax returns. When calling for pricing, make sure you provide a complete listing of the schedules we prepared for you to get an accurate comparison.  This listing is available on our invoice.

The tax extenders bill passed legislation in December resulting in $650 billion in tax savings. More than 50 tax extenders were approved, 22 of which were made permanent. Permanency of a tax law is a good thing! It takes the guesswork out of year end tax planning, as these extenders are always left to December for renewal. Some of the more common extenders that may apply to your situation include:

1. the Earned Income Tax Credit,
2. the Child Tax Credit (CTC),
3. the American Opportunity Tax Credit,
4. the deduction for classroom expenses used by teachers
5. the deduction for state and local sales taxes,
6. credit for solar electric property and qualified solar water heating property extended to 2021.

Low Income: California has passed a bill to provide an earned income tax credit for low income individuals with children.

Five tax incentives for charitable giving are in the bill, including a provision that allows individuals that are at least 70.5 years old to exclude distributions to charities from their Individual Retirement Accounts. This will be helpful for you if you do not itemize deductions. Contact us for more details.

A number of business tax breaks are extended without an expiration date, including the research and development tax credit, the increased maximum amount that businesses can immediately expense for property described in section 179 of the tax code, which is increased to $500,000. This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2015, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2015.

The due date for filing returns is moved to April 18 this year. If you cannot meet the deadline, contact us to file an extension for you. REMEMBER: an extension is only an extension of time to file, not time to pay. If you anticipate owing taxes, you must pay them with the extension form by April 18.

If you have questions about any tax issues, please give us a call.

The holiday season is upon us but before you go into party mode, sit back a moment and reflect upon your year. Financially, that is. Especially if you encountered a lot of financial changes – lost a job, got a new job, bought a house, sold a house, moved, got married or divorced, had a baby, went back to school, took an early distribution from a retirement plan, started a business or closed a business – then you need to crunch those numbers and see what kind of tax liability has been created. After all, better to know now than have that deer-in-the-headlights look in your eyes next April 15. And because the year isn’t over, you may likely counter some of the damage with additional tax planning to staunch the bleeding.

And who knows? After compiling your data, you may be pleasantly surprised. Maybe a financial event has gone in your favor tax-wise and you may be anticipating a refund.

Whatever the case, a projection of your anticipated liability is in order which may involve a visit to your tax pro. A review of your numbers might elicit some excellent advice for warding off the tax man and minimizing your tax liability.

Some things to consider:

1. If you lost a job or changed jobs sometime during the year, your annual income may have increased or decreased and should be examined to determine if proper withholding has accumulated. Also, you may have been receiving unemployment benefits for part of the year. Did you know that these benefits are taxable income at the federal level? Yes, that’s right; they kick you while you’re down. They may also be taxable at the state level, depending on your state’s tax laws, but usually not. If you elected for federal withholding from your benefits, you may be okay. Otherwise, plan on paying additional taxes on the amount you received. Discuss this and the job change with your tax professional. A benefit in your favor is that all job seeking expenses and continuing education costs to improve existing skills are tax deductible if you are able to itemize deductions. If you moved because of a job, you may be able to deduct moving expenses.
2. Buying or selling a home can affect your tax situation. Buying a home is always good news. Not only do you have the benefit and pride of home ownership but the transaction results in numerous tax deductions you didn’t enjoy as a renter. Any points (loan origination fees) paid is deductible. Mortgage interest, mortgage insurance (PMI), and property taxes are deductions that will save you money on your tax bill. Selling a home can result in a taxable capital gain if you didn’t live there two out of the last five years or if your profit exceeded $250,000 (single) or $500,000 (married filing joint). Ask your tax pro to analyze the bottom line and educate you on all the qualifiers to determine if your profit will be excluded from taxable income and if not, to learn how much you will owe so you can plan for it.
3. Changes to your family structure can greatly affect your tax picture. If you marry, you gain another exemption. But you also gain this individual’s tax situation. It is always advisable to sit down with your tax pro to go over the pros and cons of filing jointly or separately and to determine the resulting tax liability if you were to combine your income and deductions. Having a child results in an additional exemption as well. Other tax benefits include the child tax credit and the dependent care credit. If you are in a low income tax bracket, you may receive a larger refund due to the Earned Income Tax Credit (EITC).
4. If you went back to school last year, you will likely qualify for American Opportunity or the Lifetime Learning tax credits. If the schooling was in the form of continuing education to improve your current job skills, the costs associated with the training is deductible. Please note that any education costs to train you for a new position entirely are not deductible but if the education is pursued at a qualifying institution, you may enjoy one of the education tax credits.
5. If you took an early distribution from your retirement plan, did you ask for taxes to be withheld? If not, review the numbers with your tax pro to determine the tax liability resulting from this transaction. Many people think that having withholding at the source automatically covers the additional tax liability but beware! This is not the case. Typically, the fund manager, upon request, will withhold 20%. But what if you are in a higher tax bracket? Not only that, but if you took the distribution prior to age 59 ½ and there are no exceptions to exclude the penalty, be advised that you can add another 10% penalty for early withdrawal. And don’t forget the state. If you live in a state that levies income tax you may be subject to state taxes and penalties as well. With the highest tax bracket at 39.6%, the tax liability including penalties could be more than 50% of the amount distributed to you.
6. If you started or closed a business, I sincerely hope you ran straight away to your tax pro. If you are new to self-employment activities there is a lot to learn when it comes to pleasing Uncle Sam. The IRS Website provides plenty of information on this topic. Read up prior to visiting your tax professional. Not only will you receive free intel but you can subsequently compile a list of questions to pursue. Closing a business can result in a tax obligation. But generally if you are operating as a sole proprietorship, you needn’t worry about that.

Right now is an excellent time to contact your tax professional. Final extensions for the year were due October 15, so your tax pro has had time to unwind and is not enduring as hectic a schedule.  There is still time to implement a tax plan with the very little time we have left in this year.  Once you have that out of the way… Party on!

If you have children, you will be happy to learn that the tax code favors you. Whether you are single or married, there are benefits for folks with offspring. The child tax credit gives you a nice break of $1,000 per child subtracted from your tax liability. The Dependent Care Credit and the Earned Income Tax Credit for low income filers, which was enhanced several years ago to cover three or more children rather than two, provides even more of a tax break.

Here are some other tips parents should know:

1. Check your filing status. Years ago my masseuse asked me to look over her tax return. “It’s odd; I’ve never had to pay before. I’ve always gotten a refund. This year my CPA says I owe two grand; that’s how much I usually get as a refund. There’s not much difference between my income this year and last year.” After reviewing the return, I realized that the problem was filing status. She was listed as single rather than head of household. Not only is the tax bracket higher for single, but a single filing status blew her out of the water for enjoying the Earned Income Tax Credit. Correcting her filing status provided her with a refund of $2,600. That’s quite a swing. If you are a single parent and your child is away at college and you pay for more than 50% of her support, you may still take the head of household filing status because the child’s absence is considered temporary.

2. File first. If you suspect your ex will try to take your kid(s) as dependent(s) when you are entitled to the deduction, file your taxes first. The IRS will not get in the middle of a domestic dispute. Whoever files first gets the deduction. If the later-filing party is entitled to the deduction, he or she will have to make a case for it.

3. Proof of Dependency. In conjunction with #2 above, keep important information relating to the validity of deducting your dependent in your tax file. This includes paperwork such as school records which show the child lived at your address and records to prove that you provided more than 50% of the child’s support.

4. Dependent Care Credit.  You may accumulate up to $3,000 in child care expenses for each child under the age of 13. The maximum credit has been increased from 30% to 35% of total expenses. At year end ask your child care provider for a statement showing how much you paid. You must have the provider’s federal ID number or social security number and address in order to take the Dependent Care Credit. This credit also applies to a spouse or other dependent over the age of 13 that is incapable of self-care.

5. Track alimony payments. This is taxable income for the recipient and must be reported on your income tax return. By the same token, alimony you pay to a former spouse is a tax deduction as long as it is court ordered. Child support is not taxable income to the recipient nor is it deductible for the one who pays it. Keep that in mind if you are getting a divorce so that support issues are structured fairly in the marital dissolution agreement.

6. Tuition. Tax credits are available if you pay tuition to a qualified higher learning institution. Payments for books, computers, and fees also qualify for the credit. Room and board do not. Naturally, there are income limitations. It often works out to this: if you can afford to pay for your kid’s college education, you don’t qualify for the credit. Tuition for private schools for K-12 does not qualify for the deduction.

7. Tutoring. If your child is diagnosed with a learning disability and special schooling or tutoring is required, you may be able to deduct those fees as a medical expense. Check with your tax pro. You will need a letter from your doctor to substantiate the deduction.

8. Adoption Credit. Taxpayers who incur qualified adoption expenses may be eligible for this credit or, in the case of employer-provided assistance, an exclusion from income. In other words, it can qualify as a nontaxable fringe benefit. The dollar limitation of the credit has been increased to $13,190 per child for 2014.

9. Employer-Provided Child Care. Employers that provide child care facilities may be eligible for a tax credit equal to 25% of qualified expenses plus an amount equal to 10% of qualified expenses for child care resource and referral services. The credit caps at $150,000 of annual qualified costs.

From time to time every taxpayer will go head to toe with the Internal Revenue Service. Whether you are setting up an installment agreement, facing the auditor from hell, resolving a misunderstanding, or dealing with collectors on the phone or worse yet, on your doorstep, please heed the following suggestions.

1. You get more flies with honey. Remember what Mom used to say! Dealing with bureaucracy can be very frustrating. Especially now when the IRS has experienced so many budget cuts that customer service is at an all time low. Blame Congress not the overworked agent on the other end of the line. Park your bad attitude and anger at the door. Take a deep breath, demonstrate a cooperative attitude, and proceed in an orderly fashion. This will give you an advantage in resolving your issue. In my long career of dealing with the IRS, I have found that most IRS personnel are compassionate humans that will bend over backwards to find ways to resolve issues and help taxpayers. It’s true! It’s not like you won’t ever run into that power-hungry, condescending, or surly agent from time to time. If you do, you can always trade up to a more understanding and respectful model. Just ask for the manager.

2. Use IRS lingo. When you use IRS lingo the person you are speaking with will find you knowledgeable and may treat you with a little more respect. Here is some verbiage you may find useful:
a. Ask for penalties to be “abated” rather than removed.
b. Tell them, if it’s the case, that your failure to (pay or file or comply with a document request) was due to “reasonable cause.” Use this term if you didn’t just flake and have a good reason, which could include such things as unemployment, losing your records, losing your home, health problems, etc.
c. If you can’t pay a tax bill because you are suffering financial reversals you can ask to be deemed “Currently not collectible.” If you are granted this status, they will leave you alone while you get it together.
d. If you feel a spouse or former spouse should be responsible for a tax matter, ask to be treated as an “Innocent spouse.” There are certain criteria to determine if you qualify for this status. Do some research or discuss the issues with your tax pro to find out if you qualify. Because if you do, the IRS will not attempt to collect from you and instead will go after your former spouse.
e. If defending business deductions during an audit, the term “ordinary and necessary” business expense will help – but only if that’s really the case.
f. If you owe a lot of money, perhaps you qualify for the “Fresh Start” program. This program helps taxpayers resolve their liabilities by using more lenient guidelines.

3. Don’t talk too much. IRS agents are trained to draw as much information from you as possible. Answer questions truthfully, but keep your answers short, succinct, and to the point. There is no need to elaborate or discuss your personal life or disclose too much. This will only lead to misunderstandings and possibly investigations.

4. Always tell the truth. Lies have a way of uncovering themselves. Once you are caught in a lie, you will always be suspect. And when you are suspect, you lose the cooperation you would normally receive. Don’t hide assets, don’t run for cover. There are many ways to resolve tax problems using a straightforward and honest approach. Bear in mind that lies can lead to jail time.

5. Only make promises you can keep. This is especially true when it comes to paying your liability. If an IRS agent asks you if you can pay $200 per month on a tax balance and you know damn well that you can only afford $100, tell him so. Indicate that you will try to pay extra when you can. But you are not going to set yourself up for failure by promising more than you are able. If it’s the case, then add that you have always timely filed and paid liabilities in the past and now you need a break. Note that this will not work if their analysis of your financial situation indicates you can pay more.

6. Go to them before they come at you. If you are unable to keep a promise you make, call them and let them know immediately. They are usually so happy with the cooperation they will likely grant you the extensions you need. The collections department notes your file whenever you or your representative calls.

7. Stop the Interview. If at any time during an audit or a phone conversation you feel intimidated, disrespected, or out of your depth, simply say so and end the interview. Tell the IRS that you will be seeking representation and will get back with them soon. This will give you a chance to take a deep breath and discuss the matter with your tax pro. If you felt disrespected, you can always request a different agent. Or if it was a matter of a surly customer service rep you were speaking with on the phone, you can back in hopes of getting someone kinder or a little more understanding.

Life is complicated. And that’s probably one big reason tax law is complicated. So many “what if’s” make for more and more legislation. Below are situations that may arise once you become a landlord. It’s important to understand the tax consequences in order to maximize your tax savings and to be in compliance with tax law.

Must I file 1099s if I pay a workman? No you don’t have to do that. Congress actually passed that requirement for landlords in 2011 but rescinded the legislation later on. Anyone who is self-employed is required to file Form 1099-Misc for payment for services in the amount of $600 or more. But if you are reporting your rental income and expenses on Schedule E then you needn’t worry about this obligation.

What if I am renting out to a family member? Renting to relatives can be a sticky wicket. The IRS views all transactions between related parties as suspect especially if the activity results in a loss that reduces your tax liability. In order to take all of the deductions to which you are entitled, and not have the rental reclassified by the IRS as “personal use,” make sure the rent is charged at fair market value and that you are treating the rental in a professional manner. So we’re talking rental or lease agreements on file as well as a bona fide business relationship. It would be advisable to obtain a list of comps in your area to substantiate that the rent you charge to your relative is what you would charge to a stranger. Keep that list in your tenant file along with the rental agreement in case of audit.

Renting part of your home is an interesting topic expanded upon in IRS Publication 527. Many people rent out spare rooms. This should be reported on your tax return if you your activity falls within the guidelines outlined in this publication. Allocate your expenses between personal use and rental purposes and claim your rental income and expenses on Schedule E. The rules listed in this publication also apply to vacation homes that are used for personal purposes as well as for rental. Speak to your tax adviser to work out the amounts you can deduct.

Limits on deductions apply to rental properties. Rentals are considered passive activities. Unless you are a real estate professional, you can deduct losses from these activities only against other passive income. Any unused losses and credits may be carried forward to future tax years. There is an exception: if you actively participate in the activity, you may deduct $25,000 in losses in the current year. If your modified adjusted gross income exceeds $100,000 ($50,000 if married filing separately), the amount of deductible loss will phase out. There is no deduction allowed currently if your income is greater than $150,000.

Depreciation is a deduction for the cost of the property, the cost of improvements, furniture, furnishings, machinery and equipment, expensed over the useful life. You cannot deduct depreciation for land or for any equipment you purchase to make improvements to the property. For example, if you buy a table saw so you can cut baseboard and other lumber for a remodel to the property, you cannot take a deduction, depreciation or otherwise, for the cost of the saw. You also cannot take a Section 179 deduction, in which you expense the full cost of furniture, fixtures, machinery, and equipment in the year of purchase. This special allowance is allowed only for businesses and not for a rental activity listed on Schedule E.

These are only a few examples of special situations. Because the tax laws governing rental properties are so complex, I would urge you to sit down with a tax professional to learn more so that your activity will pass all tests if you are under audit.

If this is the year you become a landlord, you will want to pay attention to the tax rules governing this investment. If you already own income property, you may want to review these IRS regulations to ensure that you are in compliance.

Unless you are in a partnership, your rental income and expenses are listed on your individual tax return on Schedule E.

The profit or loss from the activity is included in income and taxed at your ordinary income tax rate. It sounds pretty straightforward, doesn’t it? Not so fast. Watch and see just how tricky it can get.

First of all, what is rental income? If a prospective tenant pays first, last, and  a security deposit when moving into the property, not all of that is included in current year taxable income. Or is it? Here’s how it breaks down:

1. First and last month’s rent are included in the current year income even if the last month’s rent will be applied in a future year.
2. Advance rent – e.g. payment of next year’s today – is all included in income for the current year, regardless of what year the payments are for.
3. Non refundable deposits are included in current year rent, even if a fee, for example, a nonrefundable cleaning fee, won’t be used until the tenant moves out in a future year.
4. Security deposits need not be claimed as income if you intend to return the deposit to the tenant at the end of the lease term.
5. Barter is income. If, for example, as part of the rent, your tenant agrees to maintain the gardens and pool, you must show the value of these services as rental income. By the same token, you may also deduct the same amount as a rental expense. I know it’s a push, but the IRS wants us to sharpen our pencils and do extra paperwork.
6. Expenses paid by your tenant. See barter income above. Say you’re jet setting through Europe and the pipes spring a leak. Your tenant pays the plumber then deducts it from his rent. You must include the full rent in income and write off the plumbing expense against it. And again, it’s a push.
7. Lease cancellation. If your tenant pays you to cancel the lease, include the payment as rental income.
8. Option payments. If your tenant signs a lease with an option to buy, the option payments are generally rental income. But once the tenant exercises the right to buy the property, all payments received after the sale are considered part of the selling price.
9. Here’s a little tax break for you: if you rent out part of your personal residence for fewer than 15 days, you need not include the rent you receive in your income.
10. If you are renting space in your personal residence (including a vacation home) for more than 15 days, you must declare the income. But you should consult with your tax pro to determine how to properly allocate your rental expenses against the income you receive.
11. If the property is unoccupied but available for rent, it is still considered a rental activity and as such, you may take all rental expenses against zero income. Be ready to prove it was available for rent. That includes keeping copies of ads you’ve run, etc.

Also make sure you keep all lease/rental agreements and tenant applications. If you are audited, the IRS will review these documents as part of the verification that this is indeed a rental property. Also keep all cancelled checks and credit card receipts for all rental expenses deducted on your tax return.

If you play the stock market, it is wise to know about the tax consequences of your securities transactions.

Capital Gains Tax First of all, any profit you enjoy from the sale of a stock held for at least a full year is taxed at the long term capital gains rate, which is lower than the rate applied to your other taxable income.  If you are in the 10%-15% tax bracket your rate on capital gains is 0%.  That’s right, zero. The 15% capital gains rate applies to those in the 25% tax bracket. Capital gains peaks out at 20% for higher income taxpayers. If the stock was held for less than a year, ordinary income tax rates apply. It is therefore beneficial tax-wise to hold the investment for longer than a year.

Dividends. The capital gains rate applies to “qualified” dividends. For dividends to be classified as “qualified” they must be paid by a U.S. corporation or a qualified foreign corporation and the holding period of the stock must be more than 60 days. There are plenty of other exceptions and definitions so check with your broker or tax advisor to see if the dividends for your stock holdings are “qualified” or not. Dividends on stock held in a qualified retirement plan are not taxable income.

Congress enacted the lower capital gains rate to drive investment. After all, most tax laws are passed as a form of directing social behaviors.

The Wash Rule Many investors benefit from selling a stock in a losing position to offset a gain, then turn around and buy the stock right back.

Well, the IRS will not allow an investor to claim a capital loss if you sell a stock and buy it back within 30 days. It is called the “wash rule” and does not allow for a capital loss. If you sell a stock and buy it back within 30 days, the IRS will disallow the capital loss and you will lose the offset.

Capital Losses One of the big limitations in stock investing is the amount of losses you are allowed to deduct on your tax return. If you sell stocks at a loss, you may deduct only $3,000 in losses per year. The remainder of the loss is carried forward to future years. You may apply capital losses against capital gains in the current and future years to net out the overall profit or loss.

Deductible Investment Expenses A tax deduction often overlooked by investors is the cost of management fees paid to brokers, usually for management of mutual fund accounts or for advisory services. You may deduct these fees as an investment expense on Schedule A of your tax return.  Some brokerage 1099s or year-end statements will state the total paid for the year.  But many do not. You may have to call your broker to find out how much you paid. Be sure to provide this information to your tax pro.

Stock Sales When determining your profit from a stock sale, it’s important to understand not only the formula but the meaning of the variables in the formula. Certain circumstances applied to the variables can reduce your tax liability when you sell. Many taxpayers believe they must pay taxes on the full amount of the check they receive from the sale. That is not true. You can subtract your basis.

The formula is: Sales Proceeds – Basis = Taxable Profit or Deductible Loss.

Sales proceeds can be reduced by commissions paid to the broker.

Basis is the cost of the stock plus any reinvested dividends and commissions paid for acquisition.  If you inherited the stock, the basis is the fair market value of the stock on the date of the decedent’s death or the alternate valuation date. If the stock was received as a gift, the basis is the lower of the fair market value or the basis of the donor at the time the gift was made.

Audit Taxpayers oftentimes forget about a stock sale when compiling their income tax return. This results in a CP-2000 letter from the IRS. The letter is about eight pages long and somewhere in the middle is a listing of omitted items and a calculation of the tax liability on those items. If you receive one showing an omitted stock sale, don’t just pay the tax bill. The IRS only knows about the stock sale; they have no clue as to what your basis in the stock is. Remember the formula earlier? You may actually have taken a loss on the stock and that means no tax liability whatsoever. In fact, you may be entitled to a refund. So call the phone number on the front of the letter and let them know that you will amend that tax return. The IRS may instruct you to complete a Schedule D declaring the details of the stock sale and ask you to fax it to them. They will adjust the tax due (if any) accordingly.

However, beginning January 1, 2011 as a part of the Emergency Economic Stabilization Act of 2008, brokerage firms are required to report the cost basis and gain/loss information to the IRS on their form 1099. This streamlines the tax preparation process considerably.