Home Improvements as Medical Deductions
Filed under: Healthcare Costs | Tags: 10% floor, 7.5% floor, aesthetic, architectural, doorways, hallways, home, improvements, itemized deductions, medical deduction, medical expense, personal motivations, railings, ramps, Revenue Ruling 87-106, stairs, support bars
Leave a Comment Originally published in the Cedar Street Times
September 6, 2013
Unless you have a tax favored plan such as a Health Savings Account, Flexible Spending Account or the like, you have probably found that medical deductions have generally eluded your tax returns.
The main reason for this is the floor of 7.5 percent of your adjusted gross income which your medical expenses must exceed before even one dollar becomes an itemized deduction. This floor of 7.5 percent is now ten percent starting with the 2013 tax year. If you or your spouse are 65, you get a grace period through the end of 2016 to remain at 7.5 percent. If either of you turn 65 before 2016 you will then qualify for the 7.5 percent rate for that tax year and any subsequent ones through 2016.
Due to the high threshold, many people do not even bother to track the expenses, especially, if they make a decent income. If people are close to the threshold, one common strategy is to bunch expenses into one year to get as high of a deduction as possible in that year.
Something else to be aware of, is that some improvements to your home, which can be substantial in cost, are considered medical expenses if medically required. For people in the grace period through 2016 of 7.5 percent, it would be good to think about having any of these types of improvements done before 2017 in order to yield the greatest tax benefit.
So what types of improvements can qualify as medical expenses? Well, if the primary purpose is to serve the medical needs of you, your spouse, or your dependent, then just about anything could qualify. (You should be prepared to provide supporting documentation that your healthcare provider agrees with your needs assessment.) The catch, however, is that if the improvement increases the value of your home, you have to deduct the increase in value from the amount you spent to arrive at your deductible portion.
But how in the world do you know the exact answer to that question? Short of having before-and-after appraisals prepared, it could be a bit of an arm-wrestling match with the taxing authorities if ever questioned. Fortunately, however, the IRS has come up with a list of items in Revenue Ruling 87-106 which they have agreed generally will not increase the value of your home (thus fully deductible), and they will rarely pursue if done for medical reasons. These items include installing entrance or exit ramps or lifts, regrading the land to provide access, widening doorways and hallways, modifying stairs, installing railings or support bars, lowering kitchen cabinets, moving electrical outlets and fixtures, modifying smoke alarms and other warning systems, or modifying door hardware. Other similar modifications can also be fully deductible, but are not specifically listed.
One sticky area is that additional cost to satisfy personal motivations such as architectural or aesthetic compatibility with your existing home is not deductible. In other words, if throughout your house you have ornate solid gold hand railings, and you need some additional ones installed for handicapped purposes, the IRS is only going to let you deduct what it would have cost to put in some ugly, basic aluminum railings! They don’t care about things blending in: it is purely a functional consideration. I suppose you may have a legitimate argument if a strict architectural review board refuses to allow you to build something that doesn’t blend well. I would save all documentation regarding a rejection.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Home Office Part III – How Big is My Deduction?
Filed under: Home Office | Tags: 39-year, business use of home, cable, carryover, daycare, deduction, depreciation, Form 2106, Form 8829, furniture, home office, improvements, insurance, janitorial, landscaping, maintenance, miscellaneous itemized deductions, mortgage interest, repairs, satellite, Schedule A, Schedule C, square foot, taxes, trash, utilities, water
Leave a Comment Originally published in the Cedar Street Times
August 23, 2013
Four weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013. Two weeks ago I discussed the rules to qualify for a home office deduction. In this final installment on home office deductions, we will discuss the standard method of determining your deduction, which will still yield the greatest benefit for most people – especially in high cost localities. (If you missed the prior two articles, you can find them on my website at www.tlongcpa.com/blog.)
The standard method of calculating your home office deduction is done on a Form 8829 or on tax worksheets. It typically starts with a square footage calculation of the livable space in your home, and a calculation of the portion used exclusively for your business activity, to determine the percentage used by the business. You can use a calculation based on the number of rooms in the house if they are similarly sized, but in practice hardly anybody uses this method.
The next step is to gather your expenses and multiply them by the business percentage you just determined. Add up in separate categories your utilities, water, trash/recycling service, janitorial (house cleaner), repairs and maintenance, homeowner’s or renter’s insurance, and any other recurring expenses used to maintain your house. If you regularly meet with clients at your house, you can generally do the same for your landscape maintenance expenses as well.
If you rent your home, you add up your total rent and multiply it by the business percentage. If you own, you apply the business percentage to your mortgage interest and real estate taxes (the balance go on Schedule A). Some people will throw their internet access fees on the 8829, but often a better deduction is obtained by thinking about actual business use versus personal use, as square footage is not a great metric for internet use. You could then put that directly on your schedule C if you run a business, or Form 2106 if you are an employee with a qualifying home office. If you buy furniture or equipment exclusively for your office, that is generally put on a depreciation schedule and often linked directly to your Schedule C or Form 2106 instead of running it through your business use of home form.
The first telephone line into the house is not deductible at all. A second line could be, however. But in that case it is typically a dedicated business line, and you would put that on your schedule C or Form 2106 in full to get a better deduction. Your cable or satellite service is probably off limits for most people since there is such a high degree of personal use and it is an area subject to abuse. Based on facts and circumstances some people may be able to build a case for part of it – such as a day trader that depends on the financial channels, or if you have a waiting area which clients regularly use to watch television.
If you own the home you need to set up the home and and any improvements on a 39-year depreciation schedule (not 27.5 like a rental home – common mistake) and run depreciation deductions through your business use of home calculation (beyond the scope of this article). Many people fail to do this thinking it is a choice. It is not. There is a use or lose it rule, and you are responsible for depreciation recapture taxes upon the sale of the home whether or not you claimed the deduction. So you might as well take it!
Facts and circumstances and reasonableness will generally rule the day as an overarching principle to the application of all of these rules. Technically, if you only painted your office, you can take 100% of the cost into consideration for your business use of home deduction. On the flip-side, if you painted everything but your office, you shouldn’t really take any deduction. In practice, records are generally not kept that precisely, and the dollar figures are not that large, so you often end up applying the business percentage to everything in that category for the year for practical purposes.
Even after calculating the deduction, there is another hurdle you must pass – you cannot create an overall loss on your Schedule C from business use of home expenses with the exception of real estate taxes, mortgage interest, or casualty losses which would be deductible on Schedule A regardless. If you have a loss, the excess business use of home expenses will get suspended and carried over to a future year when your business is profitable.
Employees have a different hurdle since their home office deduction is an employee business expense which is a miscellaneous itemized deduction subject to a two percent of adjusted gross income floor. So if their total miscellaneous itemized deductions exceed two percent of their adjusted gross income, then the excess is an itemized deduction, and if their itemized deductions exceed the standard deduction, then they can benefit!
Of course there are many other considerations that can come into play depending on your circumstances such as separately metered properties, or separate structures, multiple offices in the same home, or different homes, a daycare home office, etc. This article should be enough to give you the gist, but it is always best to consult with a professional to ensure you are complying with the laws as well as getting all the deductions you deserve.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Home Office Part II – Do I Qualify?
Filed under: Home Office | Tags: accounting, administrative, administrative and management activities, billing, business owner, business use of home, deduction, detached building, employee, employer's convenience, exclusively and regularly, fixed location, home office, making appointments, management, meet clients, meet customers, multiple businesses, ordering supplies, personal use, principal place of business, qualify, self-employed, separate structure, telecommuting
Leave a Comment Originally published in the Cedar Street Times
August 9, 2013
Two weeks ago, I discussed a new simplified option for calculating the home office deduction that is effective for 2013. (You can find the article on my website at www.tlongcpa.com/blog if you missed it.) The rules to qualify for a home office, however, have remained unchanged, and still complicated! At the end of the last article I promised I would discuss the basic rules to qualify – so let’s get to it!
The purpose of the home office deduction is to offset the costs of maintaining a dedicated office space in a home related to a business owned by an individual, or in some cases for an employee’s job.
Let’s talk about employees first. Many employees these days work from home, but more often than not, they are not entitled to the deduction because it is their personal choice to work from home. The law requires that the office be for the employer’s convenience – not yours. If your employer does not require you to work from home and provides space for you at the main office which you choose not to utilize, you are generally barred from taking the deduction.
An employer hiring for telecommuting position so it can save on corporate office rent or obtain/retain talent in distant places would certainly be for the employer’s convenience. Or perhaps an employer would like to have a presence in a particular area, so it hires somebody to work out of his or her own home office, and meet clients there, instead of having to rent another space. This would also be for the employer’s convenience. Often, people work a couple days from home, and a couple days in the office. They could be closer to a customer base from their home for appointments, for instance, but then also come to the main offices for staff meetings, etc. Many times, it is certainly convenient for both parties.
The key thing employees would want to have is an expectation in writing from the employer about maintaining and using their own office. Rationalizing in your own mind that the employer is benefiting will not help, even though it may be true. If it does seem the employer is better off as a result of your home office, and your job description does not discuss maintaining your own office, you may want to talk to the employer about changing your job description to include this.
Now let’s discuss people running their own business. In this circumstance, the IRS says the office must be one of three things: 1) the principal place of business, 2) a place of business that is used to meet customers, or 3) a separate structure from the home, but used for the business. If you have a business, and your home is the only office, it is pretty clear you meet one of these three. When someone has an office space outside the home, but also has a home office it gets a little trickier, especially if you don’t regularly meet with customers at your home (occasional use won’t qualify) and you don’t have a detached building at your home.
Digging further into item one you find that the IRS distinguishes your principal place of business from other offices as the place where your administrative and management activities such as billing, accounting, ordering supplies, making appointments, etc. takes place. If you have no other fixed location where you conduct substantial administrative and management activities then your home office would qualify as your principal place of business. For instance, if you were a personal trainer and rented space for you and your staff to meet with clients and use your exercise equipment, but you did all of your accounting, billing, appointment making, etc. from your home office, your home office would qualify as the principal place of business.
For any home office, whether it be for employees or business owners, the office must be used “exclusively and regularly” as an office for that business. The rules are very rigid. You can’t use a room a couple times a year and write it off, even if you did not use it for anything else. It needs to be used with regular frequency, and be substantial and integral. You also can’t double up your living room as an office during the day and a TV room at night. You can’t have a family office where the kids use it for computer games on the weekends, dad uses it to work on the finances in the evening, and then mom uses it as her office during the day and tries to deduct it. People often try to write off the whole guest bedroom which also houses there office, but courts have typically denied this if they have a bed in there and admit to having guests on occasion. Technically, any nonbusiness purpose use disqualifies the space (special rules apply to childcare providers, however).
In practice there is at least de minimis personal use of virtually every office space, and at the end of the day, it is quite difficult to know if someone uses an office for some personal purposes. However, if the auditor shows up and the kids are playing games on your computer and your in-laws’ suitcases are next to the bed in your “office,” I think you will have a problem! Stick to the spirit of the law, carve out a dedicated space, and everyone will be happy. Keep in mind that you don’t have to use an entire room, but you can define a portion of a room as the dedicated space, write off closet space for storage, etc.
If you have multiple businesses, you can use the same space for all of them, but if one business fails to qualify, then it is seen as personal use and thus none of the businesses qualify to claim the home office deduction. (Note, in calculating the deduction, you would allocate the allowable deduction to the businesses – you would not get a double or triple deduction for the same space.)
In the final installment on home offices in two weeks, I will discuss the normal method of calculating the home office deduction and what expenses generally qualify.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Home Office Part I – New Option for 2013
Filed under: Home Office | Tags: $5, 2013-13, 300 sf, 300 square feet, allowed or allowable, business use of home, carryover, carryovers, depreciation, exclusion, garbage, home office, itemized deductions, maintenance, mortgage interest, office-in-home, property taxes, recapture, repairs, Rev. Proc., Revenue Procedure 2013-13, safe harbor, section 121, self-employment, standard mileage deduction, utilities, water
Comments (2) Originally published in the Cedar Street Times
July 26, 2013
In January, the IRS issued Revenue Procedure 2013-13 which discusses a new option for calculating the home office deduction. (You may want to clip this article and put it in your tax file as a reminder.) Instead of tracking the actual expenses of operating your home office such as water, utilities, garbage, repairs and maintenance, depreciation, etc., you can now elect a safe harbor $5 per square foot of qualified office space, up to 300 square feet ($1,500). It is kind of like taking a standard mileage deduction on your car instead of tracking gas and repair receipts, and calculating depreciation expense. Unlike vehicles, however, you can switch methods back and forth from one year to the next.
There are a few interesting provisions that will make it a good option for some people, and a bad option for others. In other words, when preparing your return you will need to analyze the short and long term impacts, and determine which method is best each year. Since the $5 per square foot figure is not adjusted by region or for inflation, individuals living in high cost states like California are at a disadvantage.
If there is more than one person in the house, such as a spouse or roommate, they can each use the safe harbor as long as they are not counting the same space. If one person has more than one office in the home for more than one business, the person can either use actual expenses for all the businesses, or the person must use the safe harbor for all the businesses. However, the maximum deduction allowed is still $1,500 for all the businesses in the home combined, which may have to be allocated pro rata to the businesses based on square footage used by each. If one person has qualified home offices in more than one home, the person can use the safe harbor for one home, but must use actual expenses for the other home.
When claiming the safe harbor deduction, you are allowed to take your property taxes and mortgage interest in full as itemized deductions on Schedule A as well as claiming the safe harbor deduction. On the surface this sounds like a plus, but for self-employed individuals you are effectively converting expenses that used to be on your Schedule C reducing self-employment taxes to itemized deductions which do not reduce self-employment taxes, and perhaps do not even reduce income taxes if you do not itemize.
Another big difference when claiming the safe harbor deduction is that no depreciation expense is allowed to be taken. Traditionally, any depreciation expense taken on your home is required to be recaptured at the time you sell your house, and you must pay tax on it. Even the section 121 exclusion ($250,000 tax-free gain for single/$500,000 for married couples) when living in the house for two out of the last five years will not exempt you from recapture taxes. Occasionally that can produce negative results, but it is usually helpful because it often helps people avoid income AND self-employment tax which are typically higher than recapture rates. Nonetheless, I regularly see tax returns where no depreciation was taken on a home office, to “avoid recapture.” This is incorrect as recapture rules require you to recapture any depreciation “allowed or allowable.” It does not matter whether you took the deduction or not, you are technically still on the hook for the recapture.
One other notable exception in the 15 pages of new rules explaining the safe harbor is that carryover expenses are not allowed for safe harbor years. Ordinarily, if your business produces a loss, you are not allowed to create a bigger loss from business use of home expenses with the exception of the portion of mortgage interest, property taxes, or casualty losses which would have been allowed as itemized deductions even if you had no business. The rest of the expenses get carried over to future years until you make a profit and can use the losses. Using the safe harbor, any loss generated by the safe harbor disappears forever. You would be better off in these years using actual expenses in order to preserve the losses for the future.
At the end of the day, you might as well just continue to track the actual expenses, and let your tax professional figure out which method will give you the best benefit each year.
In two weeks, we will go over the basic requirements in order to claim a home office deduction.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Rental Property Outside of CA: LLC Options and Issues – Part II
Filed under: California | Tags: $2000 penalty, $800, Caliornia, disregarded entities, doing business, Franchise Tax, Franchise Tax Board, liability protection, LLC, non-California, register, registration, Single Member LLC, SMLLC, tax, taxed as a corporation, taxed as a partnership
Leave a Comment Originally published in the Cedar Street Times
July 12, 2013
Two weeks ago, I discussed that LLCs are a popular choice for holding rental property, but that it certainly comes at a cost in California when you consider a minimum $800 annual franchise tax, the cost of filing another tax return each year, having to maintain better accounting records, as well as the initial costs to set it all up. I also advised that if you do setup an LLC, you want to utilize an attorney to set things up instead of a do-it-yourself online approach. I have seen plenty of problems from people using the latter method. It is pretty easy to jeopardize the liability protections of the LLC if you do not have competent legal advice. Since liability protection is one of the main reasons you go to all this continued expense and trouble, you might want to consider the old adage: penny-wise, pound-foolish.
Two weeks ago, I also raised the question and left readers pondering about whether you could save the minimum $800 a year tax by setting up your LLC in another state, which of course would be a natural inclination anyway, if the property is located in another state.
Many Californians are already in this boat, and I would say quite a number of them are unaware that even if they have a non-California LLC holding non-California rental property, they are generally required to register in California and pay California the minimum $800 franchise tax. The franchise tax is levied on you if you are considered doing business in California. So how is your rental property in Arizona, for example, that is held in an Arizona LLC (that maybe even loses money every year) considered doing business in California and subject to a minimum $800 California tax?
California’s position is that the mere fact that a managing member of the LLC lives in California, is enough to constitute that the LLC is doing business in California. More specifically, they say that if you have more than one member, LLCs are taxed under partnership law unless you elect to be treated as a corporation. Partnership law says that the activities of the partnership flow through and are attributed to the partners, and that the partners are therefore, by statute, doing business. If they reside in California, then they are doing business while in California, thus requiring registration of the LLC in California and payment of the $800 minimum franchise tax (and filing of a tax return). Limited partners also have statutory rights to participate so California is not letting them off the hook either.
Single member LLCs (a husband and wife are treated as one member in California) are disregarded entities for tax purposes and are not taxed as partnerships or corporations, but are reported directly on your personal tax returns. For single member LLCs and corporations California will look to facts and circumstances. If you could somehow build a case that your LLC had absolutely no connections with California (such as tax preparation, bank accounts, etc.) and that every time any decision needed to be made with regard to managing your property or LLC, you were out of the state of California (and not on your living room telephone), you might have a shot at not “doing business” in California! It is an extremely difficult threshold, and taxpayers have been losing case after case in court over this issue.
California has also put into place a steep new penalty for anyone failing to register. In addition to the minimum $800 franchise tax, they are now assessing a $2,000 penalty plus interest for every year you have failed to register. At about, $3,000 a year, that adds up quickly. Generally, California does not go back to assess past delinquencies if you start reporting before they discover you. The internet and increased sharing of information between state taxing authorities is making this much easier to detect. So make haste and get compliant if you are not already.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Rental Property Outside CA: LLC Options and Issues – Part I
Filed under: California, Rental Property | Tags: $800, Arizona, CA, California, corporate formalities, double taxation, Franchise Tax, liability protection, LLC, Nevada, New Mexico, rental property, Texas, Wyoming
Comments (1) Originally published in the Cedar Street Times
June 28, 2013
A lot of Californians find themselves with rental property outside the state at some point in their lives. Sometimes it is from a past life in another state, or from an inheritance when a parent passes away. Military folks often jog around the country collecting houses like refrigerator magnets from each state in which they have lived. There are also a lot of people that invest in rental properties in Nevada, New Mexico, Arizona, and Texas because you actually have a shot at a positive cash flow situation right out of the gates, unlike California. And then there is the Hawaiian contingency that buy investment properties that always need at least two to four weeks of maintenance work done by the owners each year – not sure if I want one of those with all that work – it’s funny, I never hear of clients having to go to Phoenix for a month in the summer to work on those properties.
Anyway, the question always arises about whether or not to form an entity such as a corporation or Limited Liability Company (LLC) to hold the real property. An LLC is generally the preferred vehicle to hold real property for many good reasons, including liability protection for your personal assets in the event you are sued, and the elimination of double taxation that can plague corporations. They also have less formalities to follow compared to a corporation and avoid some nasty pitfalls of corporate tax rates and structure that could cause a lot of pain upon sale of the property.
As a result, a lot of people these days do hold property in LLCs. Of course this comes at a price. If you create an LLC in California (or a corporation for that matter) to hold your property, and are therefore granted the privilege of doing business in California, you are also granted the privilege of paying California a minimum $800 franchise tax each year. You also have to pay someone like me to file another tax return every year, and you have to keep better books. Don’t forget you have to hire an attorney to set it up initially for another $1,500 to $3,000.
I would not recommend an online filing company or do-it-yourself approach, as you are not getting any legal advice and have no one keeping you on track with formalities which could completely blow the liability protections and the whole reason you went to all the effort in the first place. Correcting or trying to close ill-formed or mishandled entities can be a real pain as well.
So what if you form your LLC in another state such as Texas or Wyoming to hold your property? Many states have much lower or no annual LLC fee and they have simpler annual filing requirements. (You generally do not have to form the LLC in the state where the property is located.) Could you save some dollars by setting up your LLC in another state? In two weeks we will discuss California’s current position on non-California LLCs and some new rules that are just coming into play. If you have a non-California LLC, you do not want to miss the next installment.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Your MyFTB Account
Filed under: California | Tags: 1099s, access, Account, adjustments, balance owed, California, credit cards, direct bank transfer, FTB, installment agreement, interest, MyFTB, online, pay your balance, payments and credits, Penalties, tax withholdings, www.ftb.ca.gov
Leave a Comment Originally published in the Cedar Street Times
June 14, 2013
Clip this out and save it in your tax file…did you know you (or your authorized tax professional) can get easy, instant, online access to a wealth of information about your California tax account as an individual or a business?
One of the most common issues I use this for as a professional is to confirm estimated tax payments when a client is uncertain how much they paid throughout the year. This can often save a lot of time searching through bank statements or checkbooks. Of course, the best practice is to track the information yourself to make sure the Franchise Tax Board (FTB) posted it to your account, but sometimes life does not fit within a nice, square box. To the credit of the FTB, I have found they do a pretty good job of tracking estimates paid, however, so I feel it is pretty reliable.
You can also see the past four years of your wage and California tax withholdings reported to the FTB by your employers. This would be great if you misplaced a W-2 and could not get access to it for some reason. If the FTB issued any 1099s to you for tax refunds or interest income, you can see that information for the past three years as well. Another feature is the ability to look at a summary of the core information of your tax returns for the past ten years such as total tax liability, taxes withheld, payments and credits, plus any interest, penalties, or adjustments made on the account. The system will also tell you if you have any outstanding balances still owed from the past ten years.
Besides historical tax reporting information you also have the ability to perform a variety of functions. For instance, you can change your address and telephone number, or you can check on the current status of your refund. You can also pay your tax balance or make estimated payments via direct bank transfer, Western Union, or credit cards (a fee applies for credit card payments). So no filling out vouchers and making unnecessary trips to the post office, and you have instant confirmation that the funds have been credited.
There are also quick links to key information on topics like penalties, interest, common fees, etc., as well as links to common forms to fill out and mail in such as applying for an installment agreement if you owe tax. Hopefully, some of these other processes will become automated online in the future as well. Another nice feature is that you can sign up for e-mail reminders to pay your estimates, for example.
To gain access to this information, you can set up an account online at http://www.ftb.ca.gov. Look for the link to “Access MyFTB Account” and click “Register.”
As telephone hold times seem to get longer and longer, having access to more information online is definitely handy. There are a lot of areas I could criticize the FTB about, but I think this is definitely a positive service they are providing. It also functions pretty much like any other commercially designed site online. I only wish the IRS had something as user friendly! They do have an electronic system for tax professionals to gain access to information, but I think it was designed when dinosaurs roamed the earth.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Are You Sure You Have No Foreign Reporting Requirements?
Filed under: Foreign Reporting | Tags: $10, 000, Al Capone, civil penalties, criminal penalties, Form 8938, Form TD F 90-22.1, non-willful neglect, penalty, Report of Foreign Bank and Financial Accounts, Statement of Specified Foreign Financial Assets, terrorism, Treasury Department, willful neglect
Leave a Comment Originally published in the Cedar Street Times
May 31, 2013
My grandfather’s sister once had the opportunity to go toe-to-toe with the 1920s gangster, Al Capone…or so goes the family story. She had ordered a fancy car and Capone sent a couple of his henchmen to convince her that she should allow him to purchase it since he did not want to wait for another one to be built. She politely refused, at which point, they said Mr. Capone would like to talk with her in person. So she drove to his place in Palm Island, Florida to meet the notorious gangster. She was a rather outspoken individual, and managed to come out with her car, and did not even have to dodge bullets on the way past the front gate! Most people know the interesting story about Al Capone is that the Feds could never get him for bootlegging, racketeering, prostitution, or murder, but they nailed him for tax evasion and failure to file tax returns!
Fast-forward the better part of a century and we are battling terrorism. Sometimes it is difficult to prove that a particular individual was involved in an act of terrorism, but there may be other ways to get them. How about the failure to report foreign accounts or even having signature authority over foreign accounts while residing in the United States?
Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts is required to be filled out each year for anyone that has bank or financial accounts (or is an eligible signer on someone else’s foreign accounts) that were established in a foreign country that aggregate $10,000 or more. The form is due to the Treasury Department each year by June 30th (one month away). Note this form does not go with your tax returns to the IRS. The IRS has its own two-year old Form 8938 Statement of Specified Foreign Financial Assets which is more geared towards tax evasion and is filed with your returns. It covers some additional assets and has different reporting thresholds, so you and your tax professional should review that as well.
The penalties for failure to file Form TD F 90-22.1 can be pretty sickening. Willful neglect to file the form is punishable with civil and/or criminal penalties. Civil penalties could be the greater of $100,000 or half of the account value. Criminal penalties could be $250,000 plus five years in prison, or $500,000 and 10 years in prison if you are also violating another law simultaneously. Even non-willful neglect (a.k.a. – your ignorance) carries a penalty of up to $10,000. These are also applicable per year you fail to report!
The IRS was recently seeking six years in prison for a 79 year-old widow in Palm Beach, FL for such issues and related failure to report the income from foreign accounts. I think the key is to just make sure you file the forms as needed, and have a discussion with your tax professional or an attorney if you are unclear if your assets qualify you to file these forms.
Oh, and if you happen to know any terrorists that need to file, please don’t forward my contact information…
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Health Savings Account – Your Tax Friend
Filed under: Healthcare Costs | Tags: 213(d), beneficiary, California, custodian, estate, family plan, Flexible Spending Arrangement, FSA, HDHP, health savings account, healthcare, high deductible health plan, HSA, individual plan, itemized deductions, Medicare, nonqualified expenses, ObamaCare, out-of-pocket, qualified medical expenses, RMD, spouse
Leave a Comment Originally published in the Cedar Street Times
May 17, 2013
Perhaps you remember a time when you thought you would get a nice fat tax deduction because you spent thousands of dollars on health care costs that insurance did not cover, only to realize you got nothing out of the deal? The cause that lead to this depressing realization was either because you did not meet the threshold for medical expenses, based on a percentage of your adjusted gross income, or even if you did, you still did not have enough itemized deductions to get you over the standard deduction.
As of January 1, 2013, that threshold was raised even higher – now 10 percent of your adjusted gross income (7.5% for another three years for people over 65). For most people this would generally mean if you make $100,000, you get no benefit for the first $10,000 of medical expenses.
A health savings account is a fantastic option which basically allows even people taking a standard deduction to effectively get a tax deduction for much, if not all, of their out-of-pocket medical expenses. There is also no “use-it-or-lose-it” clause such as can be found in the less flexible “Flexible Spending Arrangement” (FSA). Qualified medical expenses for HSA purposes used to be a broader definition than medical expenses in IRC section 213(d) used for itemized deductions, but a few years ago it was essentially unified.
Eligibility to open a health savings account is dependent on whether your health plan qualifies as a high deductible health plan (HDHP). For 2013, an individual plan must have a minimum deductible of $1,250, and $2,500 for a family plan, among other requirements. The premiums for high deductible plans are much lower (but shop around!) since you are paying a good chunk of the first-dollar costs – just like car insurance deductibles.
You then open a checking account with a company that provides custodial health savings accounts and contribute money to this account. Any contributions to the account lower your taxable income in the year of contribution, just like contributing to an IRA. Then you in turn use that account to directly pay all your qualified medical expenses (as well as spouse or dependent expenses) with a checkbook or debit card. With the savings created by lower health insurance premiums you should already have some money to contribute to your account. For 2013 you can contribute up to $3,250 for a single plan or $6,450 for a family plan (add a thousand to those figures if you are over 55).
Whatever you do not use stays in your account for the future, and you can keep contributing each year. If you never use it, you can take it out and use it for whatever purpose you want with no penalty after age 65. It would be taxable income, however, if not used for medical purposes. If you use it before age 65 for nonqualified expenses, there is a 20 percent penalty, plus it is taxable income.
Some people even view an HSA as another way to stuff a few more dollars into a “retirement plan,” but without the requirement to have earned income, plus the benefit of not having to take minimum distributions by age 70 1/2. If you are enrolled in Medicare, however, you can no longer contribute. Some custodians also allow you to link the account to an investment firm and then invest the money in stocks, bonds, mutual funds, etc.
If you pass away and your spouse is named as the beneficiary, your spouse steps into your shoes and becomes the new HSA owner. If it passes to your estate, it becomes taxable income included on your final 1040 tax return. If it passes to any other beneficiary, the HSA becomes taxable income to the recipient except for medical expenses paid within one year after death. One other tidbit of information – the State of California does not conform to Federal legislation regarding HSAs, so you receive no deduction for contributing to an HSA account and any income generated by the funds is taxable for California purposes.
Many companies have been switching to these plans over the past five or six years due to the savings in premiums, and many of the companies pass some of the savings back to the employees by contributing to the HSA account.
At this point, it looks like HSAs will still exist under ObamaCare, and could conceivably become even more popular if ObamaCare does not pan out and insurance rates keep rising. HSA plans have been found to lower the consumption of healthcare services since they do place an economic incentive for consumers to find lower cost options since the consumers pay for 100 percent of the care up to the deductible. Plans that shelter the consumer from any cost at all do not provide this incentive.
However long they stay around, HSAs certainly are a great option for many people today.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
When Can I Throw Out My Tax Returns?
Filed under: General | Tags: 1099-B, basis, document retention, FTB, how long should I keep my tax returns, installment sale, IRA, IRS, rental property, save tax returns, statute of limitations, throw away tax returns
Leave a Comment Originally published in the Cedar Street Times
May 3, 2013
It is time to do some spring cleaning! Do not miss your opportunity as summer is coming quickly, at which point you will be required to keep everything for another year. Perhaps you will find that old pair of muddy tennis shoes in the garage – now the home to three indignant spiders as you turn their palace upside down. Or maybe you will find that half-used bottle of hotel shampoo under the sink – a small, but satisfying entitlement for a $300 room charge. Ah, and then there are those tax returns you filed way back in April – is it time to get rid of those too?!
You can do whatever you want, but my advice is to keep them. In fact, I would say you may want to keep every tax return (and the supporting documents) you have ever filed – I know I have. Record retention is always an interesting debate and you hear a lot of people say three, five, or seven years as a rule of thumb for many types of documents. Regarding tax returns, the real answer is unique to each person depending on his or her tax circumstances and risk tolerance.
Someone that works a W-2 job, has no other sources of income, no investments, contributes to no retirement plans, and files the returns correctly would have little risk if discarding the returns after four years. If you do make retirement plan contributions, depreciate any assets, have an installment sale agreement, or a host of other things, it would not really be wise to discard the returns in accordance with a rule of thumb.
The IRS generally has three years from the later of the due date (or extended due date) or the date you file to audit your returns. The California FTB has four years from the later of the non-extended original due date or the date you file in order to audit. You should never throw out returns or source documents until you are outside of these statutes of limitation. If you have understated your gross income by more than 25 percent (even if by accident), then the IRS has six years to audit you. People can get tripped up on this pretty easily if they fail to report stock sales. I have seen this before with people preparing their own tax returns that ignore the 1099-B issued year-after-year because they did not really understand it. If you filed a false tax return or there was any kind of fraud, there is no statute of limitations.
Even if you are outside the statute of limitations, however, you may still need prior tax returns to support positions you are taking on current tax returns that are inside the statute of limitations. Think about someone that has been contributing to an IRA for many years and was unable to take deductions due to income limitations. Each of these nondeductible contributions would have created basis in the IRA which would lower the taxable amount of distributions while in retirement. If the IRS audited your returns in retirement and questioned your basis, having all the past tax returns showing the nondeductible contributions would be a saving grace.
People that have rental properties or home offices may find tax returns from twenty-five years ago helpful in proving the basis in the property when it is eventually sells due to depreciation deductions taken on each past return. I have also had situations where clients had no idea what their cost basis was for a stock sale, and we were able to help recreate and substantiate the cost basis by reinvested dividends reported on tax returns stretching back several decades.
The safest thing to do is just keep them, or at least scan them and maintain the electronic files through the years.
One other pointer – be sure you do not throw out purchase records, refinance documents, or receipts of improvements to any type of property you own as you will likely need this information if you ever sell it.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 