Renting Out a Vacation Home
Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.
There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.
Known as the "Master's exemption", because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master's Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.
If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation--as long as it's two weeks or less. And, although you can't take depreciation or deduct for maintenance, you can deduct mortgage interest and property taxes on Schedule A.
In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a "vacation home" is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.
Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
Let's say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused.
The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario 85% of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income on Schedule E. As for the remaining 15% of expenses, only the owner's mortgage interest and property taxes are deductible on Schedule A.
Questions about vacation home rental income? Give us a call. We'll help you figure it out.
Which Moving Expenses are Deductible?
If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses; however, you may not deduct any expenses for meals. If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.
Note: The rules applicable to moving within or to the United States are different from the rules that apply to moves outside the United States. These rules are discussed separately.
To qualify for the moving expense deduction, you must satisfy three requirements.
Under the first requirement, your move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement. Please contact us if you need assistance understanding this requirement.
The second requirement is the "distance test"; your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. For example, if your old main job location was 12 miles from your former home, your new main job location must be at least 62 miles from that former home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.
The third requirement is the "time test". If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability and involuntary separation, among other things. And, if your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.
Note: If you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the "distance or time tests".
What Are "Reasonable" Expenses?
You can deduct only those expenses that are reasonable under the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sight-seeing, the additional expenses for your side trips are not deductible as moving expenses.
You can deduct the cost of packing, crating and transporting your household goods and personal property, and you may be able to include the cost of storing and insuring these items while in transit. You may also deduct costs of connecting or disconnecting utilities.
Tip: You can include the cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home.
Tip: You can deduct the cost of shipping your car and your pets to your new home.
Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. Don't hesitate to call us if you have any questions about which expenses are deductible.
Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.
Travel Expenses - How to Calculate the Deduction
If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either:
- Your actual expenses, such as gas and oil for your car, if you keep an accurate record of each expense, or
- The standard mileage rate is 24 cents per mile for miles driven during 2013 (23 cents per mile in 2012).
Tip: If you choose the standard mileage rate you can deduct parking fees and tolls you pay in moving. You cannot deduct any general repairs, general maintenance, insurance, or depreciation for your car.
You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive. You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. You can deduct expenses for only one trip to your new home for yourself and members of your household; however, all of you do not have to travel together.
Member of Your Household
You can deduct moving expenses you pay for yourself and members of your household. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee, unless you can claim that person as a dependent.
If you're still not sure whether your moving expenses are deductible, please give us a call. We're here to help!
A SIMPLE Retirement Plan for the Self-Employed
Of all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage.
These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE IRA plans work well for small business owners who don't want to spend a lot of time and pay high administration fees associated with more complex retirement plans.
SIMPLE IRA plans really shine for self-employed business owners. Here's why...
Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.
SIMPLE IRA plans calculate contributions in two steps:
1. Employee out-of-salary contribution
The limit on this "elective deferral" is $12,000 in 2013, after which it can rise further with the cost of living.
Catch-up. Owner-employees age 50 or older can make an additional $2,500 deductible "catch-up" contribution (for a total of $14,500) as an employee in 2013.
2. Employer "matching" contribution
The employer match equals a maximum of 3% of employee's earnings.
Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $12,000 as employee, and an additional $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, for a total of $15,700.
SIMPLE IRA plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.
If living expenses are covered by your day job (or your spouse's job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.
A Truly Simple Plan
A SIMPLE IRA plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.
Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.
What's Not So Good About SIMPLE Plans
Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.
Example: If you are under 50 with $50,000 of self-employment earnings in 2013, you could contribute $12,000 as employee to your SIMPLE plus an additional 3% of $50,000 as an employer contribution, for a total of $13,500. In contrast, a 401(k) plan would allow a $30,000 contribution.
With $100,000 of earnings, it would be a total of $15,000 with a SIMPLE and $42,500 with a 401(k).
Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).
It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE IRA must be set up as soon thereafter as administratively feasible.
If the SIMPLE IRA plan is set up for a sideline business and you're already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE IRA plan and the 401(k) combined (in 2013) can't be more than $17,500 or $23,000 if catch-up contributions are made to the 401(k) by someone age 50 or over.
So someone under age 50 who puts $9,000 in her 401(k) can't put more than $8,500 in her SIMPLE 2013. The same limit applies if you have a SIMPLE IRA plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).
How to Get Started with a SIMPLE IRA Plan
You can set up a SIMPLE account on your own, but most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer any other IRAs and 401k plans.
You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1.
Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.
Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.
401k, SEPs, and SIMPLES Compared
|Plan type: Can be defined benefit or defined contribution (profit sharing or money purchase)
||Defined contribution only
||Defined contribution only
|Number you can own: Owner may have two or more plans of different types, including an SEP, currently or in the past
||Owner may have SEP and 401k
||Generally, SIMPLE is the only current plan
|Due dates: Plan must be in existence by the end of the year for which contributions are made
||Plan can be set up later - if by the due date (with extensions) of the return for the year contributions are made
||Plan generally must be in existence by October 1 of the year for which contributions are made
|Dollar contribution ceiling (for 2013): $51,000 for defined contribution plan; no specific ceiling for defined benefit plan
|Percentage limit on contributions: 50% of earnings for defined contribution plans (100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan.
||Lesser of $51,000 of 25% of eligible employee's compensation ($255,000 in 2013). Elective deferrals in SEPs formed before 1997 not subject to this limit.
||100% of earnings, up to $12,000 (for 2013) for contributions as employee; 3% of earnings, up to $12,000, for contributions as employer
|Deduction ceiling: For defined contribution, lesser of $51,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings.
||Lesser of $51,000 or 25% of eligible employee's compensation. Elective deferrals in SEPs formed before 1997 not subject to this limit.
||Same as percentage ceiling on SIMPLE contribution
|Catch-up contribution age 50 or over: Up to $5,500 in 2013 for 401(k)s
||Same for SEPs formed before 1997
||Half the limit for 401k and SEPs (up to $2,750 in 2013)
|Prior years' service can count in computing contribution
|Investments: Wide investment opportunities. Owner may directly control investments.
||Somewhat narrower range of investments. Less direct control of investments.
||Same as SEP
|Withdrawals: Some limits on withdrawal before retirement age
||No withdrawal limits
||No withdrawal limits
|Permitted withdrawals before age 59 1/2 may still face 10% penalty
||Same as 401k rule
||Same as 401k rule except penalty is 25% in SIMPLE's first two years
|Spouse's rights: Federal law grants spouse certain rights in owner's plan
||No federal spousal rights
||No federal spousal rights
|Rollover allowed to another plan (Keogh or corporate), SEP or IRA,
but not a SIMPLE.
||Same as 401k rule
||Rollover after 2 years to another SIMPLE and to plans allowed under
|Some reporting duties are imposed, depending on plan type and amount of plan assets
||Few reporting duties
||Negligible reporting duties
Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE IRA plans.
Job Search Expenses May Lower Your Taxes
September is often a time of transition, when people decide to make major life decisions--such as changing jobs. If you're looking for a new job, then you may be able to claim a tax deduction for some of your job hunting expenses--as long as it's in your same line of work.
Here are seven things you need to know about deducting these costs:
1. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.
2. You can deduct employment and job placement agency fees you pay while looking for a job.
3. You can deduct the cost of preparing and mailing copies of your resume to prospective employers.
4. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.
5. You can't deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.
6. You can't deduct job search expenses if you're looking for a job for the first time.
7. You will usually claim job search expenses as a miscellaneous itemized deduction, but can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.
Give us a call if you have any questions about tax deductions related to a job search.
Tips for Taxpayers Who Travel for Charity Work
Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips you should know about travel while serving a charity.
1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status or call us if you have questions about whether a charity you volunteer for is tax-exempt.
2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can't deduct the value of your time or services.
3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can't deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
5. Deductible travel expenses may include:
- Air, rail and bus transportation
- Car expenses
- Lodging costs
- The cost of meals
- Taxi fares or other transportation costs between the airport or station and your hotel
Questions? Don't hesitate to call us. We're here to help!
Special Tax Benefits for Armed Forces Personnel
Military personnel and their families face unique life challenges with their duties, expenses and transitions. As such, active members of the U.S. Armed Forces should be aware of all the special tax benefits available to them that can make it easier to file their tax returns and possibly lower their federal tax burden.
1. Moving Expense Deductions. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses.
2. Combat Pay Exclusion. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. Some service outside a combat zone also qualifies for this exclusion. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. You can also elect to include your nontaxable combat pay in your "earned income" for purposes of claiming the Earned Income Tax Credit.
3. Earned Income Tax Credit. You can choose to include nontaxable combat pay as earned income to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay remains nontaxable.
4. Extension of Deadlines. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military, including those who serve in a combat zone.
5. Uniform Cost and Upkeep. If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms; however, you must reduce your expenses by any allowance or reimbursement you receive.
6. Signing Joint Returns. Generally, joint income tax returns must be signed by both spouses. However, when one spouse is unavailable due to certain military duty or conditions, the other may, in some cases sign for both spouses, or will need a power of attorney to file a joint return.
7. Travel to Reserve Duty. If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.
8. Nontaxable ROTC Allowances. Educational and subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay--such as pay received during summer advanced camp--is taxable.
9. Transitioning Back to Civilian Life. After leaving the military, you may be able to deduct some of the costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and job outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.
10. Tax Help. We want to make sure you get all of the tax benefits you are entitled to as a member of the armed forces. Please call us if you need guidance or have any questions.
What Income Is Nontaxable?
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
- Child support payments;
- Gifts, bequests and inheritances;
- Welfare benefits;
- Damage awards for physical injury or sickness;
- Cash rebates from a dealer or manufacturer for an item you buy; and
- Reimbursements for qualified adoption expenses.
Some income is not taxable except under certain conditions. Examples include:
Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.
All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering, such as the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.
If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.
Questions? Give us a call. We're happy to help!
QuickBooks' Custom Fields: An Overview
The beauty of QuickBooks is that it can be used for so many different kinds of businesses. Its smart design lets realtors and retail shops, plumbers and plastic surgeons use it to track income and expenses, pay bills and invoice customers, and to run those all-important reports.
But Intuit knows that QuickBooks can't--and shouldn't--tailor itself to individual business types (except in the industry-specific versions). So its structure and tools are somewhat generic and as universal as possible.
That's where custom fields come in. You can simply use them for your own informational purposes, but QuickBooks also lets you create and add fields to your existing customer, vendor, employee and item records and forms, and use them as filters in reports.
A Common Application
Let's say you want to search for your best customers to create a targeted marketing mailing.
Start by opening the Customer Center and opening any customer's record there. Click on the Additional Info tab. In the lower right corner of this dialog box, click on Define Fields. This box (with some fields already defined in this example) opens:
Figure 1: You can create custom fields for your lists of names in this dialog box.
You want to send mailings to customers who order frequently, or who regularly purchase big-ticket items. You can call them your "High-Value Customers." Click in the first field that's available in the Label column and type that phrase, then tab over to the Cust column and click in it to enter a checkmark. Click OK. The Edit Customer dialog box opens with the new custom field included.
This field will now appear in all of your existing customer records as well as any new ones you create. You'll need to open the record for each High-Value Customer, click on the Additional Info tab and enter "Yes" on the corresponding line.
Figure 2: Custom fields appear in this box in your customer records.
Using Custom Fields in Items
If you sell physical inventory, custom fields will probably be needed in your item records. You might want to use them for t-shirt colors or sizes, for example, or to store serial or model numbers. They can be employed for all items types except subtotals, sales tax items and sales tax group items.
The process is similar to the one you used to define custom fields in your contact records. Open the Lists menu and select Item List (or Fixed Asset Item List where appropriate). Click Custom Fields in the dialog box that opens.
Tip: The Custom Fields tool is also available in the New Item dialog box. So you can move directly to that step as you create an item record if you'd like.
Click Define Fields and add your field(s). Be sure to put a checkmark in the Use column, and click OK.
Figure 3: QuickBooks also lets you define and use custom fields in your item records.
Reports and Forms
Custom fields can be invaluable when it comes to using them in forms and reports. Your fields will automatically appear at the bottom of the Filter list within your reports' customization tools, but you'll have to add them manually to any forms where they should appear.
Warning: You should probably enlist our help before you customize forms. QuickBooks provides tools to help you through this process, but you will encounter some potentially confusing messages as you add fields to forms, and you may have to use the Layout Designer, which can present quite a challenge.
Let's say you wanted to find out how many blue coffee mugs Suzanne Jenkins sold in November. You'd proceed like you normally do when you're customizing a report, but you'd have to scroll down to the end of the Filter list to find the Color custom field that you created. You'd enter the word "Blue" in the field supplied. Your Sales by Item Summary report setup would look something like this:
Figure 4: Filtering a report using a custom field.
This report will only run properly if you've added your Color field to your sales forms. Again, we'd be happy to help you with this, and to explore other uses for QuickBooks custom fields.
Tax Due Dates for September 2013
Employees Who Work for Tips - If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.
Individuals - Make a payment of your 2013 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 third installment date for estimated tax in 2013.
Corporations - File a 2012 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension.
S corporations - File a 2012 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.
Partnerships - File a 2012 calendar year income tax return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.
Corporations - Deposit the third installment of estimated income tax for 2013. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.
Copyright © 2013 All materials contained in this document are protected by U.S. and international copyright laws. All other trade names, trademarks, registered trademarks and service marks are the property of their respective owners.