June 2009 Newsletter
This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Summer Travel Tax Deductions
As the summer travel season is almost upon us, a portion of your summer travel may be tax-deductible. If your travel is primarily for business or for career-related education, then a portion of the trip may be tax-deductible. As long as most of your travel days are for business purposes, you can deduct the cost of travel (airfare, trains, car), hotel, parking, taxi service, meals, etc.
As defined by the IRS, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
The key factor is that your trip must be primarily for business. Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on the days and time needed.
Keep all of your documentation on the business purposes, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days to travel to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.
Traveling With Your Spouse
If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse is
- Your employee,
- Has a bona fide business purpose for the travel, and
- Would otherwise be allowed to deduct the travel expenses.
To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single occupancy per day rate, rather than half of the rate. Meals could also be deductible, if you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction.
Example: Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary to the conduct of Bill's business. Her expenses are not deductible.
Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.
With travel outside of the United States, the transportation for business trips of one week or less, may be deducted. However, only a portion of transportation costs for longer trips are deductible.
Example: You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.
If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.
You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round trip airfare from New York to Dublin would have been $850.
You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 x 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).
What Expenses are Deductible?
Here's what you can deduct when you travel away from home for business.
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.
Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between:
1. The airport or station and your hotel, and
2. The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.
Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.
You can deduct the dry cleaning and laundry expenses you incur while away on business.
All business calls while on your business trip are deductible. This includes business communication by fax machine, or other communication devices.
You may deduct the tips you pay for any expense listed above.
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.
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Cut Taxes on the Sale of Your Home
Despite the slumping real estate market, houses are still being sold and there is money to be made. Sellers need to take a close look at the exclusion rules and cost basis of your home to reduce taxable gain on your house.
First, The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, unlike the previous one-time exemption as long as you meet the following Ownership and Use tests. During the 5-year period ending on the date of the sale, you must have:
Owned the house for at least two years - Ownership Test
Lived in the house as your main home for at least two years - Use Test
Tip: The ownership and use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a five year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a one-year sabbatical, do not. If you own more than one home, you can exclude the gain only on your main home. The IRS lists several factors relevant in determining which home is a principal residence, including place of employment, location of family members' main home, mailing address on bills, correspondence, tax returns, driver's license, car registration, voter registration, location of banks you use and location of recreational clubs and religious organizations you are a member of.
Tip: As the exclusion can be used over and over during your lifetime, you can re-establish your primary residence. File a Form 8822 to give the IRS official notice of a change of residence. Note: Do not report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Schedule D (Form 1040). Further, loss on the sale of your main home can not be deducted. Improvements Increase the Cost Basis
Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby, reduce the capital gain.
Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.
Examples of Improvements
Adding an addition, finishing a basement, new fence, new wiring or plumbing, paving driveway, landscaping, central air, flooring, insulation, swimming pool, security systems, etc.
Example: The Kellys purchased their primary residence in 1999 for $200,000. They paved the unpaved driveway, added a swimming pool, among other things for $75,000. The adjusted cost basis of the house is $275,000. The house is then sold in 2008 for $550,000. It costs the Kellys $40,000 in commissions, advertising and legal fees to sell the house.
These selling expenses are reduced from the sales price to determine the amount realized. The amount realized in this example is $510,000. The amount realized $510,000 is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and therefore, no reporting of the sale on the Kelly's 2008 personal tax return.
Tip: Home Energy Credit. Homeowners will benefit from extended energy saving credits when making their homes more energy-efficient in 2009 and 2010. Projects include energy efficient windows, doors, heating and air conditioning systems. The existing 10 percent tax credit for energy saving home improvements has been increased to 30 percent of a cost up to $1,500 and extends through 2010.
Partial Use of the Exclusion Rules
If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.
Example: If you get divorce after living in your home for approximately 1 1/2 years or 438 days and have a gain of $120,000 on the sale of your home. You can take 60% of the capital gain exclusion, as you lived in the house for 60% of the 2 year exclusion period (438 days divided by 730 days or 60%). Therefore, you would be allowed to deduct $150,000 of the capital gain (60% of $250,000 exclusion). No gain would be reported on this sale.
Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year. However, keep records proving your home's cost basis for as long as you own your house. The records you should keep include:
- Proof of the home's purchase price and purchase expenses
- Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis
- Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997.
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Timing Mistakes That Cost Thousands of Dollars
Sometimes we need to talk here about costly taxpayer mistakes that could have been avoided with some advance professional consultation. Like the recent case of a securities firm owner doing business as an S corporation, both reporting on the calendar year. An S corporation's income is directly taxable to its owners, and its losses pass through to owners for deduction on their tax returns. S corporations are like partnerships in this respect, and the problem we'll describe arises with partnerships, too.
In the recent case, the S corporation had heavy losses during the year. Its owner filed for bankruptcy on December 3, 29 days too soon.
What do we mean "too soon"? When one files a bankruptcy petition, one's assets, with a few exemptions and exclusions, pass immediately to the bankruptcy "estate", to be used to pay creditors who are, for the most part, unsecured creditors. In this case, the owner's S corporation stock was such an asset passing to the estate. With it went an asset (the law calls it a "tax attribute") of great value - the year's tax-deductible loss.
In the owner's hands, the loss would have been enough to eliminate current tax and generate a big net operating loss. Such a loss can be carried to other years, eliminating or reducing tax in those years. But the owner didn't own the loss. An S corporation's loss for a year is determined when the year ends. At this year's end, the S corporation stock was owned by the bankruptcy estate. By filing for bankruptcy before the end of the year, the owner gave the bankruptcy estate the loss.
The estate acquired the right to carry the year's loss to other years, including back to a prior year when the owner had profits. With this right, the estate could obtain a refund for the taxes the owner had paid in a previous year, even if the owner had made no claim - and didn't know such a claim existed. Alternatively, the estate can carry the loss to future years to offset income arising during bankruptcy from the owners' assets now held by the estate.
The owner had argued that since he had held the stock 11/12ths of the year, he should be entitled to 11/12ths of the year's loss. Not a bad argument, since the law prorates an S corporation stockholder's share of the corporation's loss on a daily basis throughout the year. But the tax rules for bankruptcy trump those for prorating the loss. When the estate took ownership of the stock on December 3, it received all the rights attached to that stock, including the right to claim all the loss determined at year-end.
Note: The court acknowledged that the owner had made an honest mistake, so no penalties were imposed. That must have been some relief. Still, the mistake squandered tens of thousands of tax dollars. Tip: Here are two ways the owner could have salvaged the loss and its tax value:
- Wait until the new year, say January 2, to file for bankruptcy.
- Sell the S corporation stock, if possible, before the bankruptcy filing. This way the owner could get his share of the year's loss (once determined), prorated for the period he owned the stock-here, about 11/12ths of the year's loss.
Note: The transfer of a debtor's assets to a bankruptcy estate is tax-free and not a sale. The same fate will befall a partner who files for bankruptcy during a partnership's loss year. His or her partnership interest, and that interest's share of partnership loss, will go to the bankruptcy estate. The estate can carry the loss to other years.
Tip for Partners: As with the S corporation stockholder, waiting until year-end before filing will give the partner his or her share of the partnership's loss for the year. Rules for determining share of loss are trickier (than with S corporations) where a partner sells his or her interest before the bankruptcy filing-too tricky to try to summarize here.
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Are Your Social Security Benefits Taxable?
How much, if any, of your Social Security benefits are taxable depend on your total income and marital status. Generally, if Social Security benefits were your only income, your benefits are not taxable and you probably do not need to file a federal income tax return.
If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status. Your taxable benefits and modified adjusted gross income are figured in a worksheet in the Form 1040A or Form 1040 Instruction Booklet.
Before you go to the instruction book, do the following quick computation to determine whether some of your benefits may be taxable:
- First, add one-half of the total Social Security you received to all your other income, including any tax exempt interest and other exclusions from income.
- Then, compare this total to the base amount for your filing status.
The 2009 base amounts are:
$32,000 for married couples filing jointly
$25,000 for single, head of household, qualifying widow/widower with a dependent child or married individuals filing separately who did not live with their spouses at any time during the year
$0 for married persons filing separately who lived together during the year
According to the Social Security Administration, less than one-third of all current beneficiaries pay taxes on their benefits.
Call us for additional information on the taxability of Social Security benefits, or see IRS Publication 915, Social Security Benefits.
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2009 Health Savings Account Limits
As we are in the month of June already, it is important to take a moment and review your Health Savings Account to ensure the maximum benefit is being obtained. In 2009, the limits on health savings accounts were increased.
The 2009 levels are as follows:
New Annual Contribution Levels for HSAs: For 2009, the maximum annual HSA contribution will rise to $3,000 for individual coverage (up from $2,850 in 2008) and $5,950 for family coverage (up from $5,800 in 2008).
Catch up contributions for individuals who are 55 or older is increased by statute to $1,000 for 2009 and all years going forward.
Individuals who are eligible on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution (plus catch up contribution, if 55 or older by year end), regardless of the number of months the individual was eligible in the year. For individuals who are no longer eligible individuals on that date, both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual.
New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs: For 2009, the maximum annual out-of-pocket amounts for HDHP self-coverage increase to $5,800 and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $11,600.
Minimum Deductible Amounts for HSA-Compatible HDHPs: For 2009, the minimum deductible for HDHPs increases to $1,150 for self-only coverage and $2,300 for family coverage. The current minimum deductibles are $1,100 for single coverage and $2,200 for family coverage.
In addition, a fiscal year plan that satisfies the requirements for an HDHP on the first day of the first month of its fiscal year may apply that deductible for the entire fiscal year.
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Do you work at a hair salon, barber shop, casino, golf course, hotel or restaurant or drive a taxicab? The tip income you receive as an employee from those services is taxable income.
Here as some tips about tips:
Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes, and may be subject to state income tax as well. The value of non-cash tips, such as tickets, passes or other items of value, is also income and subject to federal income tax.
Include tips on your tax return. You must include all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees in your gross income.
Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income.
Call us for more information, or check out IRS Publication 531, Reporting Tip Income, or Publication 3148, Tips on Tips.
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Change of Address - How to Notify IRS
If your address has changed, you need to notify the IRS to ensure you receive any IRS refund or correspondence. There are several ways to notify the IRS of an address change. If you change your address before filing your return, you may correct the address on the mailing label from your tax package or write the new address in the appropriate boxes on your return when you file. When your return is processed, the record will be updated by the IRS.
If you change your address after filing your return, you should notify the post office that services your old address because not all post offices forward government checks. Notifying the post office that services your old address ensures that your mail will be forwarded, but not necessarily your refund check. To change your address with the IRS, you may complete a Form 8822 (PDF), Change of Address, and send it to the address shown on the form. You may download Form 8822 from the IRS website (www.irs.gov) or order it by calling 800-TAX-FORM (800-829-3676).
You may also write to inform us of your address change. If you write, we need your full name, old and new addresses, Social Security or Employer Identification Number and your signature. If you filed a joint return, you should also provide the same information and signatures for your spouse. Send your written change of address information to the IRS office where you filed your last return. The IRS Filing office addresses are listed in the instructions of your tax forms.
If you filed a joint return and you and/or your spouse have since established separate residences, you both should notify the IRS of your new addresses.
Note: Tax forms will be mailed to the last address clearly and concisely provided by the taxpayer. Form 8822 should be completed and sent to the address shown on the form.
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Tax Due Dates for June 2009
Employees - who work for tips. If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.
Individuals - If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. Otherwise, see April 15. If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone you may be able to further extend the filing deadline.
Individuals - Make a payment of your 2009 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2009.
Corporations - Deposit the second installment of estimated income tax for 2009. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.
Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.
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