Archive for the ‘miscellaneous itemized deductions’ Tag
Back To Basics Part XI – Form 2106 Employee Business Expenses
Filed under: Back to Basics | Tags: 2%, 2106, 2106-EZ, actual expenses, cell phone, clothing, DMV fees, Gas, insurance, Lease payments, Logo, logoed, miscellaneous itemized deductions, not subject to two percent, overnight travel, repairs, standard mileage deduction, two percent limit, uniform, union dues
Leave a comment Originally published in the Cedar Street Times
March 6, 2015
Looking back over the past four months in our Back To Basics series, we have covered the 1040, Schedule A – Itemized Deductions, Schedule B – Interest and Ordinary Dividends, Schedule C – Profit or Loss from Business, Schedule D – Capital Gains and Losses, Schedule E – Supplemental Income and Loss (i.e. – rental properties), and Schedule F – Profit or Loss from Farming. If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog . We are now going to shift our attention to a few common supporting forms in your tax returns.
Form 2106 – Employee Business Expenses is our topic today. Unreimbursed employee business expenses documented on this form feed into the section near the bottom of Schedule A called Job Expenses and Certain Miscellaneous Deductions. Any expenses you incur that are necessary and ordinary to your profession for which you are not reimbursed by your employer are potentially tax deductible. Note that these expenses do not have to be required by your employer. They can be common and expected expenses in your profession, or they could simply be items that are helpful and appropriate. Clearly there is a lot of judgement in this standard, but it is not a blank check.
Common expenses include the use of your vehicle for work purposes (other than to and from your home), 50 percent of meals and entertainment expenses (often in sales related positions), union dues, educational conferences, trade magazines, books, classes, etc. in your job field. Overnight travel expenditures such as lodging, meals (50 percent), airfare, and car rentals could be deductible. A portion of your cell phone or internet service fees could be deductible. If you have a home office in lieu of a regular office and it is for the convenience of the employer (not for your convenience), then a percentage of the expenses of maintaining your household could be deductible. (This is actually documented on a separate Form 8829.)
There are also areas of abuse that have led to rules that prohibit specific things that might otherwise be deductible. One of these areas is clothing. You might think that your business attire should be deductible, unfortunately it is not if it can be worn in public and not be clearly identifiable as a uniform. Your employer must also require you to wear it. For instance, a nurse or police officer clearly has a deductible uniform, but business people, even if they have to “look nice” for clients and wear suits, for instance, cannot deduct the cost of their clothing. I unfortunately, cannot deduct my bowties, even though it is a bit of a trademark look for me!
If you have logoed clothing with your business name, however, you would likely not have a problem if your employer requires you to wear it. A number of years ago I gave this speech to a client that was a business owner; the next year he came into my office, turned around, and sure enough, he had his business name logoed on the seat of his pants! If you do have a uniform or logoed clothing, you can also deduct the cost of laundering these items.
Logically, to the extent you are reimbursed for your expenses, you cannot deduct them. If, however, your employer includes your reimbursements in your W-2 box 1 taxable wages, you would need to claim the expenses. Also, if your employer has an accountable plan where they will reimburse you for expenses and you simply fail to submit for reimbursement, you are out of luck, and cannot deduct the expense. If the employer will not reimburse you, but you still deem the expense as helpful and appropriate, you can claim the expense.
Calculating deductible vehicle expenses can get quite complicated. The 2106 is a two page form and the entire second page is devoted to figuring out the vehicle expenses. In addition, there are other forms for the depreciation. The simplest method is to use the standard mileage rate (currently 56 cents a mile) and tracking your business miles. You can only use the standard mileage rate if you started using that method in the first year you placed the vehicle into business use. For expensive vehicles or low mileage use, this generally does not pay off. The actual expense method involves tracking all the receipts for gas, repairs, insurance, DMV fees, lease or finance payments, etc. as well as calculating and tracking depreciation expense on the vehicle. But if you have an inexpensive vehicles that you will drive a lot for a long time, you would likely be better off with the standard mileage method.
Form 2106 is the full version of the form, which allows you to not only document hard costs, but also handle vehicle expenses either through standard mileage or actual expense and depreciation. It is also used when you receive partial reimbursements from an employer. The 2106-EZ is a one page form that can be used if you do not have employer reimbursements to report and you do not use the actual expense method for calculating vehicle expenses. If you do not have vehicle expenses at all or reimbursements, you can report the hard costs directly on the schedule A, and you do not need a 2106 or 2106-EZ.
As previously mentioned, these expenses flow into the Schedule A as Miscellaneous Itemized Deductions Subject to 2% along with a few other things such as tax preparation fees and investment expenses. This means they are subject to a two percent of adjusted gross income (AGI) threshold. For example, if your AGI is $100,000, the first $2,000 of these expenses do not even count as an itemized deduction. In addition, you have to have enough itemized deductions to get over the standard deduction (2014 – $6,200 for Single and $12,400 for Married Filing Joint) before they will reduce your taxable income.
Generally, a better strategy is to get your employer to pay for these expenses, even if it means you take a lower salary as a trade-off. You are better off since you will not be subject to a two percent floor!
As with everything there are exceptions. People in the military reserves, for instance, are not subject to the two percent floor. Detailed IRS publications exist on all the rules if you are looking for some more bedtime reading!
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.
Back to Basics Part V – Schedule A Wrap-Up
Filed under: Back to Basics | Tags: 2%, amortizable bond premiums, business miles, casualty and theft, casualty loss, education expenses, employment agreement, Federal estate tax, gambling losses, home office, income in respect of decedent, investment expenses, IRA fee, itemized deductions, job search expenses, legal expenses, meals and entertainment, miscellaneous itemized deductions, not subject to two percent, other miscellaneous deductions, phase-out, Ponzi schemes, reimbursement plan, Schedule A, tax preparation fees, theft loss, two percent limit, union dues, unrecovered investments in annuities, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
December 12, 2014
In this issue, we are finishing our discussion on Schedule A – Itemized Deductions. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
The fifth section of Schedule A is for personal casualty and theft losses. This is designed to help people with major losses. The deduction on schedule A is calculated by taking the amount of the loss, subtracting $100, then subtracting 10 percent of your adjusted gross income. Any amount left over will be an itemized deduction (if any). There are several ways to calculate the amount of the loss but it is generally limited to the lesser of your adjusted cost basis or the decrease in the fair market value. Sometimes appraisals are necessary to establish the decrease, but in all cases, the amount of any insurance proceeds received would reduce the loss. Another salient point is that the loss generally has to be sudden, unexpected, and permanent in nature; it is not the result of degrading over time. For instance, a car accident or theft would qualify; termite damage would not qualify. Losing something does not qualify either. Business casualty losses are not reported on Schedule A.
The next section deals with miscellaneous itemized deductions subject to two percent. This means you take all the deductions in this section, subtract two percent of your adjusted gross income, and the left over amount is your itemized deduction for this section (if any). Some of the deductions here include unreimbursed employee business expenses, union dues, investment expenses, income tax consultations and preparation, legal expenses related to your job or to the extent they deal with tax issues or the protection of future taxable income, job search or education expenses (if they relate to your current field), etc.
Unreimbursed employee business expenses are those which are ordinary and necessary and the employer expects the employee to pay for the expenses. If the employer has a reimbursement plan, but the employee simply fails to request reimbursement, the expense will not qualify. It is best if the employer has a written policy, or as part of the employment agreement, spells out what things the employee is expected to cover. Sales people can often have high deductions in this area through business miles on their vehicles and meals and entertainment for clients. If a company provides no office space for an employee and the person has an office in his or her home, deductions can be taken for that as well.
Investment expenses paid to financial advisors or even IRA fees can be deductible. Financial advisor fees must be prorated if you have taxable investment income and tax free investment income such as municipal bond interest. Only the portion allocated to taxable income is deductible. For IRA fees to be deductible, they must be paid with funds outside the retirement plan. This is preferred anyway so as not to deplete your retirement account by using IRA funds to pay the fees.
The last section of deductions on Schedule A is called “Other Miscellaneous Deductions.” These are NOT subject to the two percent of adjusted gross income floor, and the full amount become itemized deductions. These are less frequently encountered and include things like Federal estate tax on income in respect of decedent, gambling losses up to the amount of winnings, losses from Ponzi schemes, casualty and theft losses on income-producing assets, amortizable bond premiums, unrecovered investments in annuities and other items.
The final part of Schedule A is one more “gotcha.” If your income is over $305,050 for Married Filing Joint or $254,200 Single, part of your deductions begin to phase out. Medical expenses, investment interest, casualty, theft, and gambling losses are not subject to the phase out. The rest of the deductions can be reduced by as much as 80 percent! The amount is determined by taking your adjusted gross income, subtracting the above figure based on your filing status, and multiplying the result by three percent. That is your adjustment capped at the 80 percent maximum.
In two weeks we will continue our Back to Basics series with Schedule B – Interest and Ordinary Dividends.
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.
Back to Basics Part II – Schedule A
Filed under: Back to Basics | Tags: 1040, 2014, charitable deductions, Forms, medical expenses, miscellaneous itemized deductions, mortgage interest, real estate taxes, Schedule A, Schedules, standard deduction, state taxes, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
October 31, 2014
Two weeks ago we discussed a general overview of the Form 1040 – a personal income tax return. The 1040 can be thought of as a two-page summary of your taxes in a nutshell. (I should mention also there are two other shorter forms that could be filed instead: a 1040A and a 1040EZ. These are for simpler returns and have income limits and other restrictions. In practice, however, anyone using tax software does not really have to decide which form to use and the software will generally optimize as appropriate. For our discussion we will focus on the 1040.)
The details for many of the items on the Form 1040 are actually determined on subsequent Schedules and Forms. Schedules are labeled with letters of the alphabet and additional forms are generally four digit numbers. Schedules are generally more major topical areas. For instance, Schedule C – Profit or Loss from Business, which is a summary of all the activity of a sole proprietorship. It may in turn have subsequent forms that support it. Forms are often more narrowly focused and would generally support other schedules or forms. For instance Form 4572 Depreciation, could support the calculation of depreciation expense for a business on Schedule C, a rental property on Schedule E, a farm on Schedule F, etc. I have not counted them all, but I have read the IRS has over 800 forms and schedules. The reality is that most people are covered by 30 or 40 of those 800!
Let’s start at the beginning of the alphabet – Schedule A. (I am sure this saddens you, but we will not be going through all 800 in this series of articles, but we will hit on a number of the most common ones!) Schedule A is for itemized deductions. You probably hear lots of people justify expenses by tossing around the phrase, “it’s deductible.” However, just because something may be deductible, does not mean it will benefit you. This is easily seen with Schedule A. Schedule A covers a host of “expenses” that most people have that our tax code has graced as good behavior and therefore allows a deduction for it. Medical expenses, state and local taxes, real estate taxes, mortgage interest, charitable deductions, unreimbursed employee business expenses, my favorite – tax preparation fees, investment expenses, etc.
Since Congress realized that everyone had some of this, and it would be a pain for people to track it, they decided to allow as an option a “standard deduction” for everyone in lieu of tracking and itemizing all those deductions. The standard deduction was created to generally cover what many people would have on the average anyway. For 2014 this standard deduction is $6,200 if you file as Single or Married Filing Separate, $12,400 if you file Married Filing Jointly or Qualifying Widow(er), and $9,100 if you are filing Head of Household status. If you believe you would have more than this, then you would itemize the deductions using Schedule A.
Mortgage interest and real estate taxes are the two areas that push most Californians into the itemizing zone. In other words, if you do not own a home, there is a good chance you won’t be itemizing. This is not always true: sometimes people don’t own a home, but make a lot of money and pay a lot of deductible state income taxes which would push them over the standard deduction, or maybe they work in sales jobs where they have lots of unreimbursed employee business expenses, or have major unreimbursed medical expenditures, or are perhaps like you dear reader, and have a heart of gold giving away buckets of money to charitable organizations each year! Or it could be a combination of things – paid some income taxes, have a stingy boss that won’t reimburse, and maybe you have a heart of bronze.
Next week we will discuss more specifically the deductions on Schedule A and how they can come out looking a little thin after running the Schedule A gauntlet.
Prior articles are republished on my website at www.tlongcpa.com/blog.
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.
Back to Basics Part I – Overview of 1040
Filed under: Back to Basics | Tags: 1040, above the line, adjusted gross income, adjustments to income, Alternative Minimum Tax, AMT, basics, below the line, charitable contributions, childcare credit, credits, direct deposit, educator expenses, energy efficient upgrades, exemptions, filing status, first-time home buyer credit, health savings account contributions, Household employees, interest, itemized deductions, medical expenses, miscellaneous itemized deductions, moving expenses, other taxes, paid preparer, real estate taxes, retirement plan contributions, self-employment taxes, student loan interest, tax return, taxes, tuition and fees, understanding
Leave a comment Originally published in the Cedar Street Times
October 17, 2014
On Wednesday October 15, the 2013 personal tax filing season came to a close. Or at least it did for most timely filers. People who requested the six-month extension finally had to lay down their cards, or face increased penalties, and being branded delinquent by the taxing authorities. But I am sure you had your returns done long ago!
It is hard to believe that 2014 is rapidly drawing to a close, and soon we will start filing taxes all over again. This coming year, I would like to challenge you to spend some time looking at your tax returns and learning something new. I am a firm believer that everyone should have at least a basic understanding of the flow of a tax return. This document is a linchpin in your financial life. Let’s spend a few minutes talking about the big picture. You may wish to do this with a copy of a 1040 close at hand.
Tax returns can be hundreds of pages long with many supporting forms and schedules, but it all boils down to a two page summary whether you are John Doe or Warren Buffett…this is your Form 1040. Essentially, the first page lists your income, adjusted by a few preferential items leaving you with your all important “adjusted gross income.” “Below the line,” as it is known, is the second page, and lists your deductions and credits, calculates your tax, and determines what you owe or will get refunded.
Looking at page one in more detail, the top section captures your name, mailing address, and Social Security number. There is also a somewhat passe little box to designate three dollars of the tax you are already paying to the Presidential Election Campaign fund. If you want to learn more about this, I wrote an entire article on its history on April 18th. You can find it at www.tlongcpa.com/blog.
The first real section is where you designate your tax return “filing status” – single, married, head of household, etc. This is very important because it determines how much your standard deduction is and how quickly you will climb the tax brackets as your income increases. Your status is determined by rules, not choice. That said, married people do have the choice of the generally unfavorable Married Filing Separate status.
The next section deals with “exemptions.” This is where you list the dependents in your household – generally your children up through college (even if away at college). A parent or someone not even related can qualify, but they have to meet strict limiting rules. You get an exemption from your taxable income of $3,950 (2014 amount) for each of your dependents. Children under 17 may also qualify you for child tax credits which would go on page two.
The income section falls next. Wages from your job, interest, dividends, business income, rental income, sales of stock, money received from retirement accounts or plans, pensions, social security, etc.
After getting your total income figure, you then are allowed certain favorable “above the line” deductions for things like educator expenses, moving expenses, retirement plan contributions, health savings account contributions, student loan interest, tuition and fees, etc. After subtracting these adjustments, you arrive at your AGI (adjusted gross income). AGI is a key figure and is used in a lot of calculations which could affect your taxes in many areas. Above the line deductions are therefore preferable for that reason, but also because they will have a direct impact on taxable income. Below the line deductions such as itemized deductions are less certain and do not impact your AGI.
The taxes and credits section is at the top of the second page. This is where you get to subtract all your itemized deductions listed on Schedule A- things like medical expenses, taxes paid, interest, charitable contributions, and miscellaneous other deductions (like tax preparation fees!). If you don’t have many itemized deductions you get the standard deduction instead (for example – $12,200 for married status) as determined by your filing status from the first page.
Next, the number of exemptions you claimed on the first page is multiplied by $3,950 (2014) and that is subtracted out to leave you with your taxable income. Your tax is then calculated using tax tables and other rules.
With income generally in the $100,000 to $200,000 range ore more, you may also hit alternative minimum tax (AMT). In simple terms, AMT is a parallel tax system that has a different set of rules and allows less deductions. You calculate the AMT system on every return. If the AMT tax calculation yields a larger tax bill than the regular system, you pay the incremental difference as alternative minimum tax. Real estate taxes and miscellaneous itemized deductions subject to two-percent such as unreimbursed employee business expenses are common items that get kicked out in the AMT system.
Next you get to subtract any tax credits you may have. Tax credits are a dollar-for-dollar reduction of tax owed and are therefore more valuable than deductions, which only save you a fraction on the dollar. Depending on your circumstances there are credits for education, childcare, children in general, energy efficient upgrades, etc.
The next section is “Other Taxes.” There are a handful of other taxes people might incur , such as tax on taking money out of retirement plans too early, household employee taxes, repaying a first-time home buyer credit, etc. The most common, however, is self employment taxes. Business owners must pay the employer and employee side of their Social Security and Medicare taxes. After you add these taxes and determine your total tax liability, you then look at the payments section to see was has been paid in or credited to your account, and whether you will end up owing, or getting a refund.
At the bottom of the second page, you can choose things like direct deposit, or applying the payment to the following year. You can also designate a third party such as the tax preparer to be able to discuss the return with the IRS, if the IRS wants to discuss it. At the bottom, a paid preparer also has places to sign and fill out.
In two weeks we will start examining Schedule A – Itemized Deductions.
Prior articles are republished on my website at www.tlongcpa.com/blog.
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.
American Taxpayer Relief Act of 2012
Filed under: General | Tags: $5 million, American Opportunity Tax Credit, American Taxpayer Relief Act of 2012, bypass trust, cancellation of debt, Capital Gains, child tax credit, code section 179, depreciation, estate tax exemption, itemized deduction phaseout, medical expenses, miscellaneous itemized deductions, net investment income, personal residence, Social Security
Leave a comment Originally published in the Cedar Street Times
January 11, 2013
The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013. There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people. I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers. That patch has been kicked down the road for years. The indexing will certainly alleviate concerns of a similar problem down the road. Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.
The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property. In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it. Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust. Family dynamics may of course still dictate a B trust is prudent.
Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.
Quite a few things were extended but not made permanent. A big one was extending the exclusion from income of cancelled debt on personal residences for another year. This could be a lifesaver for those still struggling with mortgages that are “underwater.” Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013. More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs. Enhanced provisions of the child tax credit were also extended through 2018.
Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179. This was slated to return to $25,000, but has been extended through 2013 at $500,000. Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.
Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy. For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%. There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000. Itemized deduction phaseouts have also returned for high income earners.
Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result. Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%. Individuals 65 and up will still enjoy the 7.5% rate for another three years.
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.
Losses on 401(k)s, IRAs, and 529 Plans
Filed under: Retirement Assets, Tax Strategy | Tags: 401(k), 529 plan, basis, Coverdell ESA, Form 8606, IRA, losses, miscellaneous itemized deductions, nondeductible IRA contributions, retirement, Roth-IRA, SEP-IRA, SIMPLE IRA
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
September 21, 2011
The stock market seems like a pinball these days bumping off financial forecasts and being paddled by fiscal policy promises. Unable to stomach some of the lows over the past few years more than a few people gave up the game and pulled money out of investments seeking the “security” of cash. Others may have felt they had no choice, and cashed out their retirement savings to live on; some realizing they contributed more money to the plan than they got back! Perhaps this happened to your retirement or education savings accounts, or will happen at some point. But can you get a tax deduction for the loss in value you have incurred?
Well, it depends. The chief determining factor is whether or not you have basis in your account. Basis in a retirement or education account is created if you make contributions for which you receive no tax deduction when contributed. For example – Roth-IRA contributions are not deductible when they are made, so the original contribution amount each year adds to your basis. Education savings through section 529 plans and Coverdell Education Savings Accounts are the same way. Many employers now offer a Roth contribution option within a 401(k) plan. These contributions also create basis.
Traditional 401(k), SEP IRAs, SIMPLE IRAs, and traditional IRA contributions provide you with an immediate tax deduction, so they provide no basis. However, if you were over a certain income threshold and tried to make traditional IRA contributions, you may have been allowed to contribute to the account, but prohibited from taking the deduction. This is termed a “nondeductible IRA contribution;” it would have created basis; and it is tracked on Form 8606 in your tax returns.
If it is determined you do have basis, and for a strategic reason (or by necessity) you end up liquidating the IRA (all IRAs of the same type must be liquidated for this to work), and the value of the IRA is less than your basis in the account, then you are eligible to take the loss as a miscellaneous itemized deduction subject to the two percent threshold. If you have more than one section 529 plan, the calculation is a little different.
Liquidating your retirement accounts to get a possible tax deduction is not typically an advisable course of action for many reasons, and you would want to discuss this with your tax professional and investment advisor first. However, sometimes, this can be a strategic move. More often, it will have been done out of perceived necessity or by accident. If it happens, however, you certainly want to make your tax professional aware of your losses and take the deduction if you are eligible.
Two quick examples: 1) Melissa, a parent, starts a 529 account (only has one) and contributes $10,000 towards her child’s future education. A year later, the investments have fallen, and the account is only worth $6,000. Melissa could liquidate the account and take a $4,000 loss on Schedule A. Then she could start a new 529 plan putting the $6,000 back into the plan. Melissa has just harvested a $4,000 loss. 2) Joseph opened his first Roth-IRA three years ago and contributed $14,000 over the three years. He received some bum advice from a friend and invested most of it in a penny stock mail-order belly-dancer business that went belly-up. Joseph’s account is now only worth $1,000. He could liquidate his Roth-IRA and take a $13,000 loss on Schedule A.
There may be other circumstances and specific rules that affect you, and you should consult with a qualified tax professional regarding your tax situation. 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. He can be reached at 831-333-1041.
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